by Bob Chapman
The International Forecaster
Thursday, 11 October 2007

US MARKETS

As you all know, the government statistics for employment are totally bogus. That said; let’s take an introspective look at the latest machinations.

They tell us that yoy average hourly earnings are up 4.1% and that they are growing at a 5% compound rate for the past few months. We call this simple wage inflation, which was a long-time coming.

Officially 110,000 jobs were created in September compared to a revised gain of 89,000 in July and August. Don’t these massive revisions just warm your heart, 110,000 increases, which is bogus and in and of itself is totally inadequate? The economy needs 150,000 to 200,000 new jobs monthly just to stay in place. Increases over the last three months have only averaged 97,000. In the last four months the ranks of the unemployed have officially risen 400,000. Can you imagine what the real figure is, perhaps 1 million? The BLS has only removed 200,000 from the rolls. That is why we contend the uncounted unemployed are well over 13%. 4.7% is a fairy tale. Of the 73,000 new jobs in the private sector, 58,000 were in healthcare and in the food service industry. Retail and finance supposedly lost 19,000 jobs. 20,000 part-time jobs were lost as well. Why part-time jobs are included we will never know. They should be reported separately. As you can see the private jobs created were all at the lower end of the pay scale. Those jobs are for our fellow citizens who lost their $32.00 per hour jobs to free trade, globalization, and offshoring and outsourcing, so they could take these $10.00 per hour dead end positions.

They expect us to believe that unemployment for 8-19 year old females fell from 14% to 12.4% in one month, which is ridiculous. If they are going to lie at least try to make it believable. Yes, equally as preposterous is the fall in unemployment for women over 55, which fell from 3.4% to 3%. The bottom line is 97,500 of these new phantom jobs were all $10.00 per hour jobs or less in services, bars, restaurants, kitchens, nursing homes, etc., or 89%. Although bogus it is still dreadful. Worse yet the rate of unemployment for all men under 45 is up and that for 18-19 year olds is 16%.

You ask what does all this mean? It means we are already in a recession and have been for some time. Our government lies to us about everything so why should economic matters, such as unemployment be any different?

The FED is creating money and credit at a 14.1% rate or 48% annualized and they cannot readily make the economy grow.

Inflation is over 11% because of the Fed’s policies so we are not gaining- we are losing even if wages are up 5%. Worse yet, next year inflation, real inflation, will be over 15%. Over the last 50 years growth has been 3%. Even with the Fed’s outsized growth of monetary aggregates real growth is running at 1.5%, and it is headed much lower. Payroll jobs growth is only 1.6% and those figures are false. We have had negative job growth for some time. Payroll, real payroll numbers, run parallel to GDP growth. The 4th quarter will be terrible. Lower or no Christmas bonuses and plunging house prices will certainly dampen results. How can real estate prices remain constant when builders sell inventory for 35% to 50% off aggregate prices. Homebuilders are not just losing money many will go under. That is why we are still short suppliers and builders.

Real statistics are mind boggling as the stock market reaches new highs. There are almost three million mortgage holders with ARMs of one kind or another. These subprimes made up $1.3 trillion, or 73% of ARMs in the first quarter and 57% of mortgages in ARMs were unable to refinance loans in August. We still project overall losses at 50% of ARMs for $750 billion to $1.3 trillion, never mind the losses for those holding CDO bonds. Do not forget we projected these figures a year ago while the experts slept. Even they now only project 20% in foreclosures. The do not get it. These people shouldn’t have had loans in the first place. They are unqualified for new loans. They have negative equity and no cash and many, many cannot make the payments. Those payments are going up on reset and interest rates are climbing. Now that Congress is about to reverse the tax liability of debt forgiveness on foreclosed homes, even more homeowners will walk away. Many have seen their neighborhoods deteriorate due to many foreclosures and some see massive numbers of legal and illegal aliens moving into their neighborhoods suppressing prices and destroying the local culture. Most foreigners are here today for the money. They are still Chinese, Koreans, Indians, Pakistanis, Mexicans and Argentineans only in America to make money and leave. One subscriber told us in his development there are many foreign festivals for holidays, but none of the American holidays are celebrated. In real estate you can bypass the early and late 1980s, we are going to the 1930s. The 30 hot area homes are going to correct 30 to 60 percent. Many areas are already off 30%. They will fall for 2-1/2 to 4 more years. We have been right, the experts have been wrong, not only about real estate but everything else. Our next stunner is that 60% of republicans now agree with us that free trade is a loser and that we need tariffs back on goods and services ASAP. Why does it take so long for people to wake up? And, why don’t they listen?

It is important that we note that the dollar has already broken a 26-year support level and that it is headed lower probably to the 72 to 75 area on the USDX. That has been caused in part by lower interest rates. The Fed has effectively abandoned the dollar to rescue Wall Street and the banking and hedge fund industries. Yes, we are in a recession. Now traders and experts believe the interest rates are headed lower. If that is so then the dollar will fall further. The added liquidity will help the aforementioned professionals, but it will do little to help the economy. The Fed has been pouring money and credit into the economy for four years and growth has been slightly above average as inflation has eaten up any gains made in any investments or in wages. The Fed is risking the dollar’s status as the world’s reserve currency, as one country after another begins to sell dollars and unpeg their currencies from the dollar.

The psychology in real estate has been broken. The only event to figure out now is where the bottom in this market is. Real estate is worth $19 to $21 trillion, and in the majority of the market, the former 30 hot areas, prices will fall 40% on average. That reduces the net value to $11.4 trillion or $12.6 trillion. In construction alone this time around we could see 50% unemployment and a 60% drop in home construction. That is 3.3 million people without jobs plus the illegal aliens laid off and all the people in support industries and real estate. The real estate collapse is going to be devastating. We estimate 460,000 have already been laid off if you count the illegals. Thus, the credit crunch and a failing economy, in spite of it being overwhelmed by money and credit, has the Fed, Wall Street and the banks in a state of panic. They know there is no way out. It is no wonder they abandoned the dollar. They are on a sinking ship and they know it. Real estate will fall until the inventory is absorbed and people can again afford to buy homes as places to live and not as investments. Sir Alan Greenspan sees an extraordinary period of disinflation ahead, but he knows the Fed will inflate first until they cannot anymore.

Inflation is coming at us from all angles, but strangely no one at the Fed or Wall Street, in government and in corporate America seems to be able to see it. They should take a look at the Baltic Day Index that over the past year rose from 4,000 to 9,474.

The US dollar is weakening and all major currencies are rising against it. Europe and the UK are slowing down. Their cheap currency days are over. Wait until the world finally realizes that the top 18 of 20 central banks are doing what the Fed is doing in creating massive money and credit. Two and a half years ago gold broke out against every major currency and that is because it is not only the dollar it is all the major currencies that have problems. In time there will be a massive flight to quality from all currencies to gold. It will become the only safe haven.

For now we will have to fight the fed, the Plunge Protection Team and the yen carry trade, but in the end we will win. The Fed can monetize all they want via special deals with other nations, but that will just push gold prices higher and buy some time.

Instead of banks writing loans now a days they originate loans, or warehouse them on their balance sheet for a short time and then circulate, distribute or bundle them to investors using collateralized dent obligations. That means banks require less capital, because they do not hold the loan for the full term. The game is profitable as long as liquidity doesn’t dry up and that is what has happened recently and US banks are stuck with $400 billion in loans. As we said earlier they are lending buyers money and then selling them the CDOs with leverage just to get them off their balance sheets before they are out of capital computation.

What this new money game has brought is elevated risk. As loans are sold off, more loans have to be written and larger volumes are necessary to maintain profitability forcing banks to rely on brokers. As the game goes on volumes increase, which is reduced capital available to absorb risk and the result is lower credit quality. These loans are bought by insurance companies, pension funds, asset managers, banks and private clients. Hedge funds also play in search of higher returns based on leveraged structured credit instruments. These loans have little liquidity and are very risky. Hedge funds borrow from the banks to affect these trades, or they engage in the yen carry trade to raise funds. That is why that trade is so crucial to the US markets. The Japanese fund $1.5 trillion of this action. Our financial markets are debt addicted. This is purely a pyramid scheme. It is no wonder gold keeps hitting new highs. It is only a matter of when before the collapse comes. This is what bank deregulation has brought us. It’s back to the 1930s. The bankers haven’t learned anything more than how to become greedier. They were let loose by the Fed to target the poor and write loans for them that they were entirely unqualified for. As a result of the liquidity perpetuations we saw AAA rated CDOs and ABSs that were really BBB- and the house came trembling down. If you can, get a bid real AAA’s are bid at 80% of face value and AA’s and A’s lower. Most CDOs are bid 15% to 30% on the dollar. The subprime CDO and ABS problems after two months are still frozen and half of the commercial paper has no market.

GOLD, SILVER, PLATINUM, PALLADIUM AND URANIUM

We continue to receive reports of other investment mediums salespeople trying to get people to sell their gold and silver coins and shares. In the final analysis you are going to end up in gold. You are far more vulnerable in other investments. Do not let people talk you out of your gold and silver coins and shares and do not believe the talk of confiscation. It could happen, but probably won’t. Americans do not own enough gold and silver coins or bullion to make it worthwhile. This is not the 1930s and if they want gold and silver they would take the ETF’s assets first. Gold and silver shares have never been confiscated, although for a time markets could be shut down, all markets. Remember, government can take anything it wants from you, including your wife, children and your dog. You are a fool if you are talked out of your gold and silver assets.

Gold ETF’s have set a new high of 759 tons, up 21% since the end of June and valued at $18 billion. Since June the top gold and silver shares are up 28.4% with your AEM, Agnico Eagle, leading the way. The stocks are finally showing leverage to the gold price. Remember, the MS64 Saint Gaudens went from $500.00 to $5,000. This is the time for leverage as we approach $850 and the beginning of phase 2 of 3 or 4 upside bull market phases in gold and silver. Anyone who owns Barrick Gold should sell it. In their hedge book they are still short 9.5 million ounces.

Just as we predicted, the cartel’s rally to wash out protective derivatives is now under way. On Tuesday, after weakening the yen into the 117 handle on Monday and Tuesday morning, they pushed the Dow up 120+ points to a fresh all-time high of 14,164.53, although they also managed to push the XAU to a fresh all-time high of 173.44, which must have ticked them off to no end. The HUI was also pushed to within a few points of its all-time high, closing at 398.39, so it looks like gold and silver will get a lot of PM stock support while the cartel orchestrates its yen-call-destroying, stock-index-short-killing rally of general stock markets by its weakening of the yen to bring in carry trader support. You could see the rally coming after the cartel used the soft holiday, Columbus Day, to hit gold in order to keep it from jumping to new highs on Tuesday when the stock rally was commenced. On Monday they took gold all the way from its Friday close of 741.30 all the way down to 731 before it rallied briefly to 734 and then settled in at 732, still above its 2006 high, while the Dow lost about 22 points. The weakened yen supported the stock markets until the cartel’s jaw-boning, which took the form of minutes of the September 18 Fed meeting at which they agreed to kill the dollar to save Wall Street, a day that will live in infamy, was released to the stock markets on Tuesday. The rate-cut friendly, dollar-killing Fed-talk, together with some typical end-of-day brute force pushing by the PPT, propelled the Dow to new heights, and rallied the general stock markets, including the resource sector as mentioned above. Gold also benefited by the weakened yen and rallying PM stocks as carry traders opted for some safe-haven protection and Indian jewelers took advantage of Monday’s dip which continued in the early going on Tuesday. As the Dow reached new heights on Tuesday, gold almost completely took back Monday’s losses, driving up $14 dollars per ounce all the way to about 740, after receiving a further beating from the cartel which brought it as low as 726+ earlier, before settling in at about 737. Silver has likewise benefited.

After being hammered by the cartel from a high Monday of 13.40 all the way to a low Tuesday of about 13.10, silver had an extraordinary recovery all the way to 13.55 before settling in at 13.43.

We spoke of this coming stock rally in our two previous issues, and warned large specs to get out of any leveraged and/or short-term yen calls and stock index puts and to replace them with un-leveraged, longer-term derivatives. Those who heeded our advice stand to make a fortune when the upcoming follow-up crash occurs, which will happen after the October options expire. To those who did not heed our advice, if the cartel succeeds with their plan, well, all we can say is, we hope your Chapter 11 works out for you, and that its been nice knowing you. The cartel is going to try to wash out the shorter-term protective derivatives which large specs have purchased to protect their PM positions by pushing the Dow to 14,300+ or so by the end of this week and to 14,600+ by the time October options expire late next week in a rally similar to the one they used in July. At least that is their plan. Whether they can pull this plan off is very questionable, given the ongoing credit-crunch and abysmal third crunch-quarter earnings reports which will continue to hit on a daily basis now during earnings season. Also, PM’s and their related stocks could explode from liquidity released to large specs to support the rally which could very well destroy the commercial shorts before the stock rally reaches the cartel’s planned objective. Unlike in July, they will have to weaken the yen to accomplish this since July was pre-crunch and the yen at that time was already at very weak levels, and this will help power PM’s. In addition, in order to help the stock markets to recover after the planned crash, the cartel will have to weaken the yen even further just as they did in July to help the crashed markets recover at that time, providing yet more support for PM’s. Since Monday the yen has hit the 117 yen per dollar handle, a level of weakness not seen since August 15. And now, early on Wednesday morning, the yen has now also weakened against the euro, breaking into the 166 yen per euro handle, a level of weakness not seen since July 24. Both moves in the yen are just as we predicted. Unfortunately for the cartel, the Dow has been down today, Wednesday, by as much as 80 points already as of the time of this writing based on profit warnings and a Chrysler strike while spot gold has rocketed up to the 746 to 747 range, within inches of its all-time high of 747.75, and while the XAU and HUI have already broken their previous all-time intra-day highs like they did not even exist and will probably set new all-time closing highs today as well. OOPS!!!

The reason they are going to try to elevate and then crash the stock markets is because the cartel hopes that this will generate massive margin calls for the large specs after they leverage themselves to the hilt in order to take advantage of the rally. We could see a crash from 14,500+ to just below 14,000 on the Dow before a very quick recovery to 14,200+. Large specs who have had their protective derivatives washed out would then be forced to liquidate their PM positions. We cannot tell how many large specs have heeded our advice. Only time will tell. Large specs might also consider some short-term stock index calls to take advantage of the coming rally. If the large specs are ready for the cartel, gold will blow into the stratosphere as the mountain of shorts created by the commercials does the Mount St. Helens-Mount Vesuvius thing, utterly annihilating the hapless commercial shorts in a short-covering rally without historical precedent. We would like to point out to the non-US members of the cartel and the myriad of other parties who have been screwed and decimated by the fraudulent and diabolical CDO contagion initiated by the US cartel members, that if you were looking for some payback, a chance like this will not happen again in your lifetime. Your participation in the implosion of the US cartel’s gold derivative positions on the COMEX and the TOCOM will provide you with a cherished and most satisfying memory which you can carry with you to your grave. We just thought we would mention this in passing, just in case you were interested.

The cartel’s current objective is to drive PM’s down into the subbasement so they can get out from under their ominous mountain of shorts, which on the COMEX alone has reached new heights as evidenced by the astonishing all-time high in gold futures open interest set on Monday, a mind-blowing 451,753 contracts. If the cartel breaks gold, the Fed will cut rates in October and propel the stock markets higher while they reestablish their mountain of shorts to continue the suppression of gold. If gold breaks the cartel, gold will slash past 850 like a knife through butter and you can forget about rate cuts for the rest of 2007 unless the stock markets threaten to go into a complete meltdown, which very well could happen. So you can see that what happens in the tiny, little gold market is now determinative of what will happen in the much larger stock, bond, currency and derivatives markets. Not bad for a barbaric relic, eh? What few in the world realize is that we are seeing “Clash of the Titans” on steroids in the gold pits right now, and the outcome will influence the future of financial markets like no other event or battle in the world.

The cartel’s desperation is also showing in gold lease rates, which have elevated recently since the credit-crunch to levels not seen in well over a year. This has been caused by both a decrease in supply and an increase in demand. From the supply side, central banks are afraid to loan out more gold as they may never get it back if the bullion banks get blasted in a short-covering rally as their mountain of shorts grows a cauldron and spews out commercial short-annihilating molten gold and silver lava. At the same time, from the demand side, commercial shorts, many of which are also bullion banks, need to get their hands on gold bullion to cover their ever-growing and ever-burdening mountain of shorts without driving up gold prices by purchasing gold in the open market. We believe the commercial shorts are going to be catastrophically decimated, that the gold owed on many gold leases will never be returned to the central banks, that the central banks will then have to write off their phantom paper gold reserves and that this will put the ongoing credit-crunch on steroids and threaten a worldwide meltdown of financial markets. Gold and silver will then become the go-to assets as they blast through the Einstein-DeSitter radius at the outer visible bounds of the universe.

http://news.goldseek.com/InternationalForecaster/1192114980.php

By Robert Morley
October 9, 2007

European, Asian and Middle Eastern corporations are taking advantage of a weak dollar to grab technology and wipe out American competition.

The dollar is taking a pounding. It is sharply down against the euro, pound, Swiss franc, and the yuan—almost every major currency. The dollar is also down against gold and silver, as well as against wheat, corn, cotton and many other commodities.

Nobody seems to want dollars anymore. Consequently, more dollars are needed to convince people to part with their goods. About the only thing in America that is not costing more in dollar terms these days are homes, which are now rapidly falling in price across the nation (though home prices are still much higher than they were five years ago).

Why such an abundance of anti-dollar sentiment? According to Peter Schiff, president of Euro Pacific Capital Inc., it is because the dollar is “a basket case.” He warns that America is “going to pay the piper for years of having the underlying fundamentals of our economy disintegrate beneath our feet.”

Part of that price is the flurry of foreign takeovers that America is experiencing. But who can blame the foreigners? America is home to some of the most technologically advanced and profitable companies in the world. And with the dollar so cheap, many of them are practically a steal.

In July, theTrumpet.com noted that during 2006, foreigners spent $147.8 billion snapping up U.S. businesses—up 77 percent from 2005. At that time, the U.S. Department of Commerce reported that Europeans led the way, spending an astounding $109.9 billion—almost double what they did in 2005.

Nationally, Germany, which spent $22.7 billion, was the largest single buyer of U.S. corporations. Middle Eastern investors, due largely to higher oil profits, spent $12.4 billion purchasing U.S. businesses, more than twice 2005 levels. In Asia, Japanese corporations spent $8.7 billion taking over U.S. rivals.

Now, recent data indicates that foreign entities have spent even more money purchasing U.S. corporations in 2007. In fact, as of October, a whopping $257.4 billion has been spent snapping up U.S. assets. That is more than during any full year since the dot.com boom in 2000, and despite the fact that global credit markets drastically tightened in July.

“We could be looking at the world’s largest tag sale if we continue to see declines in the dollar,” said Donald Klepper-Smith, chief economist at DataCore Partners.

As the U.S. dollar falls, U.S.-based corporations become inexpensive compared to their foreign counterparts. Those holding non-dollar currencies have seen their U.S. purchasing power increase drastically as the dollar has fallen.

“Put simply, the U.S. is on sale,” notes MarketWatch.

The latest large deal aided by a weak U.S. dollar was Canada’s Toronto-Dominion Bank’s $8.5 billion purchase of New Jersey-headquartered Commerce Bancorp, announced on October 2.

In June, Spanish power company Iberdrola bought Energy East, a Maine-based utility supplier, for $4.5 billion in cash. One of Energy East’s subsidiaries provides 80 percent of the power for the state of Maine.

In April, Italian energy company Eni bought a chunk of Dominion Resources natural gas fields for $4.8 billion. During that same month, another high-profile takeover occurred when the German-based Deutsche Boerse announced it would assume control over the New York-based International Securities Exchange Holdings Inc. for $2.8 billion. The New York-based company is one of the largest domestic options exchanges in the United States.

Though Europeans were the dominant foreign investors in the U.S. last year, America will probably experience increased takeovers from China and the Middle East. Chinese and Middle Eastern interests are less affected by the banking credit crunch currently plaguing America and Europe. These countries also hold trillions’ worth of dollar assets, such as U.S. government treasuries and bonds. As the dollar has sunk in value, the pressure on these nations to diversify their holdings has increased in proportion. Today we see these nations dumping their dollars in favor of U.S. corporate assets.

In May, China made what was probably the first of many future U.S. investments when it purchased a $3 billion stake in the private-equity firm Blackstone Group. China holds approximately $1.2 trillion in foreign currency reserves, most of which are U.S. dollars. Word from top Chinese officials indicates further dollar spending is on the way as the nation seeks to diversify its holdings.

More recently, the United Arab Emirates concluded a transaction that landed them a 20 percent stake in the Nasdaq as well as a 28 percent stake in the London Stock Exchange. In a separate transaction, the Abu Dhabi government just purchased a $1.35 billion stake in U.S.-based Carlyle Group.

Some economists are quick to suggest that foreign buyouts of American corporations are a good sign, and just mean the U.S. is an attractive place to invest. But just because foreigners benefit from investing in America doesn’t mean that all foreign investment is favorable for the average American citizen.

It is quite natural that foreign entities want to purchase American companies, says Alan Tonelson, a research fellow at the trade group U.S. Business and Industry Council. “They want leading-edge technology, and the United States is still the technology leader. But when they buy these companies, they’re acquiring control over the most dynamic pieces of the American economy, and they’re acquiring control over America’s future.”

Once U.S. technology is acquired, the incentive to maintain American operations often diminishes, especially in cases where inexpensive off-shore labor can be used. For example, the French telecommunications equipment maker Alcatel bought its U.S. rival Lucent Technologies in 2006. Last month it announced it would cut thousands of jobs. Similarly, the outsourcing provider Caritor, which has its head offices in California but most of its employees in India, said that it would be cutting more than a quarter of the U.S.-based staff from the Boston head office of the technology services company Keane it purchased in June.

Another often unreported downside to foreign ownership is that once the domestic company is sold, its future dividends and profit streams are more likely to then flow outward from America to the home nation. After all, the whole job of these foreign corporations is to invest overseas and repatriate the profits for the benefit of their own shareholders.

With the dollar at lows not seen for more than a generation, the U.S.-asset fire sale will likely continue.

To give an idea of how big the wave of foreign takeovers could become, according to the Daily Reckoning China’s “$1 trillion on hand … is enough to buy a controlling interest in all 30 of the Dow Jones Industrials” (May 29). That includes Boeing, ExxonMobil, Citigroup, General Electric, Microsoft, JP Morgan Chase, Wal-Mart, General Motors, plus 22 more of America’s biggest and best companies.

America may not be fretting the wave of foreign takeovers now, while economic conditions are still comparatively good. In times of peace and prosperity, foreign control of domestic industries and infrastructure may not be an immediate threat. But during major economic recessions—or, worse, times of geopolitical upheaval and war—the loss of ownership and full control of national industries will really be felt. America will yet rue the day that it embraced an economic policy that included giving up its corporate birthright.

Alex’s Notes: Ok fine, so Ron Paul didnt really say what the headline says, thats just there to get your attention.

The reality is, if the government has plundered, ok lets be polite and say borrowed, the Social Security trust and left nothing but IOU’s in place of the money, who has to pay it back? YOU DO.

So in other words, the government can move money around from account to account within the Federal government and buy whatever it wants, leave an iou in its place, without really informing the general public about what it is doing, and then MAKE YOU PAY FOR IT.

Better yet, you dont have to pay for it, YOUR CHILDREN AND GRANDCHILDREN WILL.

I find it absolutely appalling that our ‘leaders’ ae willing to pass legislation that virtualy guarantees my childrens slavery.

——————————————————–

PAUL: Keeping Promises to Seniors
by Ron Paul
October 09, 2007

With our country’s finances stretched thin, our credit limit fast approaching, and our currency inflated to the breaking point, there is no indication yet of any urgency on the part of Congress to rein in spending. The predictable answer to the government’s voracious spending habits is this week’s proposal by some Democratic Congressional leaders for tax increases to pay for operations in Iraq . Here at home, however, there are promises our seniors heavily rely upon. We must keep these promises.

An analysis of the Social Security “Trust Fund” shows we are not doing a credible job of keeping these promises. Official reports show the trust fund having assets of $2.1 trillion. In reality, those dollars are just IOUs the government is writing to itself when it borrows from the fund to spend on unrelated programs. There are no real assets in the Social Security Trust Fund. This is similar to taking money out of your savings account, spending it, then replacing it with an IOU to yourself, and calling that IOU an asset.

In addition, this money we owe to our seniors is not even included in official budget deficit figures. In fiscal year 2006 alone, $185 billion was borrowed from Social Security. The official deficit was reported to be $248 billion. The actual deficit for 2006 would be $433 billion when combining the two. This sort of accounting would land private sector executives in prison for fraud.

Yet this is done every year by the federal government. The truth is that while politicians in Washington differ about what programs to spend Social Security money on, they are united in wanting to spend it on something other than benefits for seniors.

This approach can continue only until Social Security stops running “surpluses” the government can raid. Trustees of Social Security estimate this will happen in 2017. At that time, the amount owed to the Trust Fund will be between $4 trillion and $5.2 trillion, depending on the economy.

When that day of reckoning comes, there will no longer be “excess” payroll tax receipts available to prop up government spending, and the risk of financial crisis will be significant. Instead of forward thinking solutions, politicians are discussing alarming proposals, such as an agreement with Mexico to let their citizens collect social security money intended for our seniors. This would break the bank even sooner. But, current Members of Congress will no longer be in office to face the wrath of seniors and their families when the trust fund goes bankrupt. Instead, they will be retired and enjoying their own plush Congressional pensions.

I have been working to reverse this trend. My Social Security Preservation Act, HR 219 would make sure this Trust Fund has real assets such as certificates of deposit in FDIC-insured institutions so that in 2017 and beyond, Social Security payments would continue for those who are depending on them.

Congress must take action now, so we can keep the promises we made to our seniors.

http://www.house.gov/paul/tst/tst2007/tst100707.htm

Supermarket checkout bills rising
By Associated Press
October 9, 2007

Food inflation at its highest since 1990

NEW YORK – The forces behind the rise in food prices – China’s economic boom, a growing biofuels industry, and a weak US dollar – are global and not letting up anytime soon. Grocery receipts are bulging because the raw ingredients, packaging, and fuel that go into the price of foodstuffs cost more than they have in decades.

It’s the worst bout of food inflation since 1990, but not yet worrisome to the economy, said John Lonski, chief economist of Moody’s Investor Service. While high food prices can cut into consumers’ discretionary spending, the 4 percent rate of food inflation is still far below the crippling double-digit levels of the 1970s.

Still, consumers anxious for relief in the checkout line may have to wait.

Andrea Williams, 32, can track the rise in prices of the food she buys for herself, her husband, and their three children by looking back at the receipts she says she meticulously saves.

“In 2004, I bought a gallon of milk, it was a $1.63,” Williams said before heading into a Wal-Mart in Savoy, Ill.

A gallon of milk cost nearly $3 a gallon last month in her area.

A couple of years ago, Williams would spend about $250 a month on one big grocery trip. Now she says she spends $250 every two weeks.

It is possible to trace the jump in food costs to the commodities markets, where the price of agriculture products and energy have reached multidecade highs this year. Crude oil, which helps dictate the price of gasoline and plastic packaging, hit a record in September. Wheat prices also climbed to a record.

The run-up in commodity prices has as much to do with short-term supply and demand in each market as with long-term shifts in who produces and consumes those products.

China is the juggernaut. Rapid growth there – and in Brazil, Russia, India, and other developing nations – has led to massive demand for raw materials, including energy to run factories and cars, metals to build infrastructure, and beans and grains to feed livestock and people. China will import almost 50 percent of the world’s oilseeds within a decade, becoming the world’s largest importer, according to estimates from the Organization for Economic Cooperation and Development.

Oils made from oilseeds such as soybeans are used widely in packaged foods, while corn is used to make high fructose corn syrup, a sweetener found in everything from soda to bread.

China’s oilseed demand reflects another trend: The world is using more of its food supply to make fuel. Corn in the United States and China is being converted to ethanol, a gasoline additive. Europe is using more wheat for ethanol and rapeseed for biodiesel, a cleaner burning fuel that is mixed with regular diesel. Brazil has bulked up its production of sugarcane to make ethanol.

Demand from the burgeoning ethanol industry in the United States helped drive corn prices to a peak this year, setting in motion a domino effect of price increases through the food chain as livestock raisers, food makers, and retailers tried to recover costs.

http://www.boston.com/business/articles/2007/10/09/supermarket_checkout_bills_rising/

PAUL: Dollar Could Collapse To Absolute Zero
Paul Joseph Watson
Prison Planet
Monday, October 8, 2007

Presidential candidate Ron Paul warns of coming global economic depression

Presidential candidate Ron Paul has made a dire prediction that the dollar could collapse to absolute zero – precipitating hyper inflation, soaring oil prices and a global economic depression if current policies are continued.

“Once they realize the American people have awakened to the con game that’s been going on – I think those people running the banking and monetary system aren’t going to be too happy,” Paul told the Alex Jones Show on Friday.

The Texas Congressman forecasts that if current policies are prolonged, the dollar could crash all the way to nothing and be forced to start over.

“If Bush is foolish enough to start bombing Iran, that might precipitate such a crisis as oil going to $200 dollars a barrel and really dampening the enthusiasm of the whole dollar,” said Paul.

“If they continue what they’re doing, it’s gonna go to zero, we’re gonna have runaway inflation, all paper currencies eventually self-destruct and are ruined, and we’re in uncharted waters right now – this is the first time in the history of man you’ve had no solid currencies around the world and this has been going on for 35 years.”

Paul agreed that elitists would seize upon a global depression by posing as the saviors and offering more control, police state and big government as the solution.

“This was the whole thing that started in the last depression,” said Paul, “Scare people to death instead of blaming the Federal Reserve for the depression and the financial bubble of the 20’s, they said ‘well capitalism failed, it was that stupid gold standard’, therefore we have to have welfare and of course everything they did prolonged the depression.”

Paul said his warnings about the impending collapse of the U.S. economy, which stretch back years, were helping his campaign gain credibility due to the unfolding crises in the market and the credit crunch.

“When the people understand how the Fed screws up the economy and causes all the bubbles and all the changes that have to come from that, I’m getting a lot more calls,” said Paul.

The Congressman also discussed the continued success of his campaign and the establishment’s attempts to stifle its importance.

The presidential candidate said the reason that the Democrats and Republicans are trying to speed up the primaries is because they don’t like competition from third party and grass roots candidates and are trying to prevent them from gaining traction.

“The move right now is to try to close the primaries – do you think they’re sincere when they say they want to have a big tent and invite new people in? They can invite a lot of new people in but they don’t want constitutionalists evidently because they want to make it tough to vote in a Republican primary,” said the Congressman.

“It confirms the fact that the control of this whole system has been one party so to speak, it’s one group of people that control both parties and right now I think the people are getting disgusted with it and they’re starting to wake up,” he added.

The Congressman stated that the popularity of his campaign outstripped even his expectations and slammed the establishment networks for attempting to skew Paul as a fringe candidate.

“It doesn’t discourage our supporters, it enrages them,” said Paul, “They always claimed that there were just a few of us out there that cared and that they were bloggers manipulating the Internet – well you can’t manipulate to the point where you get 35,000 new donors who average about $40 dollars a piece and raise $5 million dollars and outpace many of the other candidates.”

Paul said the other candidates had initially tried to ignore his platform, before ridiculing it, to the point where they are now being forced to adopt constitutionalist rhetoric in order to compete with his burgeoning popularity.

http://www.prisonplanet.com/articles/october2007/081007_dollar_collapse.htm

Federal Government Spending Report
by Michael W. Hodges, Author
Grandfather Economic Report
October 9, 2007

FY 2006 Federal Govt. Spending of $2.8 Trillion Consumed 26% of the Economy, or $9,223 per man, woman and child,or 36% of the economy counting regulatory compliance

The Social Spending portion consumed 56% of total spending, and has increased 14 Times Faster Than The Economy and – individual incomes pay 82% of all federal revenue compared to a 51% share in 1950

Here are a few sample color graphics from the Full Federal Government Spending Report

Today’s economy is 8 TIMES more federal government spending dependent, compared to prior generations.

The left chart shows total federal spending as a share of the economy – growing from 3% of the economic pie prior to the New Deal, to 26% of today’s economy.

Had total federal spending been reduced following World War II, equivalent to reductions of the defense spending ratio, the current federal spending ratio would be about 13% of the economy – - instead of today’s 26% ratio – - resulting in 50% less spending and taxes.

Political leaders chose, instead, to eat up all defense reductions PLUS much more via massive social spending – - much financed by debt.

Who was it that said we are a nation of small government with a predominant free-private sector? Well, we used to be – - but, no longer. Does this impact the future economics and freedom of our younger generation. You bet.

Summarizing: The federal share of the economic pie increased 800%.

A POWERFUL, REVEALING PICTURE – FEW HAVE SEEN

Question: What has caused the explosive growth of federal spending faster than the economy?

Answer: look for the line in this chart that has risen the most over that period.

The BIG CULPRIT (rising red line) is SOCIAL SPENDING, which grew 14 times faster than the economy – - to a new high – - more than eating up the long-term decline of defense spending ratios shown by the black line in the chart. The full report (link below) shows once the social spending ratio rose above 5% of national income in the late 1960s, citizen trust in government plummeted to half prior levels – - and inflation-adjusted median family incomes stagnated for all families and fell for single wage-earner families. Note social spending (red line) stopped rising in the early 1980s as if it hit a brick wall, and then fell – - and other data show trust in government surged, only to fall back later as social spending ratios again climbed. This is a powerful finding that deserves more attention. (the full report contains a link to a special report and chart on citizen trust polling data).

This trend (red line) is unique in U.S. history.

National security was the prime reason our founding forefathers formed a federal government. The declining black trend line is defense spending, which in 2001 had dropped to 3.7% of the economy’s national income, below where it started – following a 5-decade downward slope. The black defense line for 2003-06 increased to 4.9% of national income as shown in the graphic. This multi-decade declining defense ratio camouflaged a new direction for government – - surging social programs and spending.

This trend calls into question our nation’s focus and readiness to detect and deter major national security challenges – - compared to the priority focus outlined by our nation’s founding fathers.

WHERE DOES THE MONEY GO ??

Following is a pie chart showing the major spending components of a Federal Budget – and its huge red cloud

The Government Spending Report and the Government Growth Report show the federal government increased its spending at a rate much faster than growth of the economy (nearly twice as fast) since the end of World War II). Where does the spending go?

Last fiscal year the federal government spent $2.8 Trillion – - or about $9,223 for each man, woman and child in America, up 6% over the prior year.

The left chart displays this $2.5 Trillion as a pie, with each major spending component shown as a percent of the total.

The BIGGIE is that HUGE RED CLOUD in the chart called SOCIAL PROGRAM Spending, which consumes 56% of the budget. (To place this in perspective, in 1948 social spending was but 10% of the federal budget – - prior to the New Deal it was near zero).

This graphic is reviewed in more detail in the full Federal Spending Report – - next link.

Suggest you read the full Federal Government Spending Report
with easy to understand eye-opening pictures

http://www.financialsense.com/editorials/hodges/2007/1009.html

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

——————————————————————————–

“Using this printing press – or even without it, in this modern, electronic age – the feds can create all the dollars they want. But unless they know something we don’t, they can’t create even a single additional ounce of gold.”
——————————————————————————–

by Bill Bonner

“The Comeback Kids,” is this week’s headline at The Economist. On the cover of the latest issue is a photo of Bill and Hillary Clinton…arm in arm…

“Will Hillary be our next president?” we asked a friend who thinks about this sort of thing.

“Yes, most likely,” came the answer. “People don’t really like her…but those Clinton years are looking better and better. And they think that by voting for Hillary, they’ll get Bill Clinton. And with Bill will come the Clinton years again. No subprime debt problem. No housing slump. No war in Iraq.”

In other words, when the comeback kids come back, peace and prosperity come back with them.

Yesterday brought news of comebacks. For example, it almost looked as though the dollar was coming back. Anyway, that was how the financial media described Monday’s bouncing buck.

But wait…it still takes more than $1.40 to buy a pound (GBP). And the yen (JPY) is still trading over 118. And the Australian currency (AUD) just hit a 23-year high against the dollar. So, reports of the dollar’s health may be exaggerated.

Still, oil fell below $80. And gold lost ground too, when measured against the kind of money you don’t have to dig out of the earth.

(Incidentally, Byron King, over at Outstanding Investments, has discovered a way to get gold out of the ground – and into your hands – for just a penny per ounce. Many a long suffering DR reader have taken advantage of this unique opportunity…why don’t you take advantage of gold’s slight decline and join them? But act fast – you only have until October 23rd…

We are still fascinated by the simple observation that the surest bet you could have made 35 years ago was also the most obvious one. When the dollar was cut loose from gold on August 15, 1971, that gold would rise and the dollar would fall was as certain as anything you ever get in the financial world.

“We have a little technology…the printing press…” says Ben Bernanke. Using this printing press – or even without it, in this modern, electronic age – the feds can create all the dollars they want. But unless they know something we don’t, they can’t create even a single additional ounce of gold.

“Gold is the answer,” we keep saying.

The only trouble is: we haven’t quite figured out what the question is.

What will be higher next year? Gold? We don’t know…

What is the safest place for your money? Gold? We don’t know…

What starts with a G and ends with a D and rhymes with ‘old’? Ah, there…

The Clinton Years look like golden years in many ways. Not because of anything the Clintons did. They came in at the tail end of a huge boom – and managed to avoid messing it up.

The boom had begun during the Reagan Administration, after Paul Volcker got control of inflation. Then, interest rates could fall for the next 20 years. Cheaper, more abundant credit had the usual effect; cautiously at first…then recklessly…people threw money around. The U.S. economy boomed. Stocks rose 12 times – so much that people sold their gold to get in on it. Even the central banks sold gold. The yellow metal was out of fashion.

Lately – say, for the last seven years – gold, too, has been making a comeback. It’s come back almost all the way to where it was in January…when Ronald Reagan first took the presidential oath.

Now what? What will it be? Another ‘golden era’ when the Clintons come back? A final, inflationary blowout bubble in the world’s markets? Or the comeback of tougher times…like the stagflation of the pre-Volcker years?

The big question is probably this: can the Fed now save stocks, housing and the economy by destroying the dollar?

Gold is probably the answer to at least one of those questions.

by Darryl Schoon
October 8, 2007

It’s the last day’s last hour of the last happy year
Bob Dylan, lyrics from Cross The Green Mountain

As we collectively move towards the economic disaster awaiting us, the investment community is hoping the world’s central banks will be able to save them from the crisis set in motion by this summer’s credit collapse.

If the truth be known—and someday it will be—central banks are at the very center of today’s problems. Indeed, they caused them. Today’s disintegration of capital markets based on debt-based paper began in 1913 with the creation of the US Federal Reserve Bank, the central bank of the US.

Why Save When Money Is Worth Less And Less

It was the US Federal Reserve Bank that first “fed” debt-based paper money into the previous savings-based economy of the United States. This substitution of credit for savings has led us to where the US is now—the world’s largest debtor along with having a national negative rate of savings.

Central Banks Paper Mills And Effluence

Unsustainable levels of debt and economic cycles of expansion and contraction are now everywhere. The spread of central banking—the paper mills of credit—has also caused the spread of central banking’s attendant problems, mounting debt, inflation, recessions, deflation, etc. The US, and indeed the world, is now addicted to a constant and growing infusion of debt-based paper money provided by the world’s central banks.

The paper money is not gratis; it comes in the form of debt with compounding interest attached. This debt-based paper is then released into the economy by commercial banks which profit by loaning funds they don’t actually have and charging compounding interest on those loans. (see my article How To Make Millions By Loaning Money That’s Not Even Yours That You Don’t Even Have)

Debt-based paper money has led nations and the world down a very dangerous path. Facilitating expansion by encumbering future revenues with compounding debt inevitably indebts individuals, businesses, and governments beyond their ability to repay.

In the beginning, production expands, needs are met and everyone goes home happy. In the end, everyone’s home gets repossessed. This is when the amount of debt has grown so large, governments, businesses, and consumers collapse under its collective weight.

That’s where we are today. We lived off tomorrow and tomorrow has arrived. What a surprise.

The $64 million question What do we do now?

For the United States, it is a $5 trillion question—US government debt now totals $5 trillion. For Japan, it is a $6.5 trillion question—Japan’s government debt is the largest percentage of debt per GDP in the world. These are troubling numbers, for the US and Japan are respectively the world’s largest and second largest economies.

The substitution of debt-based paper money for saving-based money (fully backed and convertible to gold or silver) lies at the foundation of the US and Japan’s continuing and about to worsen economic ills—though for different reasons (reasons discussed in How To Survive The Crisis And Prosper In The Process).

And central banks created money in the image of gold and silver and it was not good.

It was the substitution of debt-based paper money that allowed central banks to inflate their money supply beyond previously conceivable bounds. And, when debt-based economies were released from the need to convert or anchor their currencies to gold or silver, this allowed the US and Japan to further plunder their economies by indebting their citizens to levels of indebtedness beyond their ability to ever repay—EVER.

“The gap between future US receipts and future US government obligations now totals $65.9 trillion, a sum that is impossible for the US to reconcile, which means the US is now technically bankrupt.” St Louis Federal Reserve Review July/August issue 2006 Professor Laurence Kotlikoff

Once, US treasuries were deserving of the world’s top AAA credit rating; but the present US economy bears little resemblance to the US economy that was once the world’s most powerful, the nation’s economy that once owned 75 % of the world’s monetary gold and that had a positive balance of trade with the rest of the world.

That economy disappeared in the 1970s, replaced by one that had so squandered its gold that it could no longer back the US dollar. Now, the US is technically bankrupt, the world’s largest spendthrift, its largest debtor with the world’s largest trade deficit and a negative rate of savings.

But, amazingly the US still has a AAA credit rating on its US Treasury debt. Maybe they know someone at Bear Stearns who knows someone at S&P, Moody’s, and Fitch. Some things never change—until they do.

Subprime US Treasuries Not Yet Here But Perhaps Coming Soon

As autumn approaches, this summer’s credit crisis continues to spread through the global grid created by today’s financial wizards—wizards so adept they do not understand what they have set in motion. That this summer’s credit crisis surprised them the most is the most disturbing news of all.

The financial wizards of Wall Street and The City are hoping this summer’s credit crisis is a bad cold at worst, that perhaps a slight fever and time will heal the illness and they can return once again to the task of carving out billion-dollar bonuses from capitalism’s rotting carcass (sic capitalism, any economic system based on central bank issuance of debt-based paper money).

But the wizards of Wall Street and The City will be wrong this fall. This summer’s credit contraction looks increasingly less like a cold and more like cancer which has metastasized and made its way into the lymph nodes of our global economy.

We wait as the inevitable end of a debt-based paper money system approaches. But have faith, for after the fall a resurrection will occur; albeit, at the end of a long and very hard winter.

Financial Sense

Dubai, UAE

The Road to Perdition
By Bill Bonner

How the middle and lower classes in America and Britain lost it…

Alan Greenspan is widely quoted in the world’s financial media. The former head man at America’s central bank is promoting his book, The Age of Turbulence. We espied the book at Waterstone’s in Piccadilly this weekend, in a huge pile right out in the front lobby.

Thumbing through Greenspan’s oeuvre, the first section appeared rather engaging. The great man recounted the details of his early life in a matter-of-fact way. But when he began to write about economics, the words fattened…the sentences stretched…and the thoughts thinned. Pretty soon, the language was so obese you could barely get around it. And if you did, you found nothing on the other side:

“If my suppositions about the nature of the current grip of disinflationary pressure are anywhere near accurate,” he writes, “then wages and prices are being suppressed by a massive shift to low-cost labor, which, by its nature, must come to an end…”

He then continues, “A lessening in the degree of disinflation suggested by the upturn in prices of US imports from China in the spring of 2007 and the firming of real long-term interest rates as this book goes to the press raise the possibility the turn may be upon us sooner rather than later.”

Speaking to the BBC, he made the same point:

“I’m reasonably confident that the inflation tranquility that we have experienced throughout the world actually for the last 20 years is not something we can hope to readily replicate as we move into the future.”

First, we translate: Low cost Asian labor has been holding down prices. Watch out, because this trend may be coming to an end now.

Second, we add value: If you’re not rich, you’re probably not going to like what happens next.

Rest assured, dear reader, what we are working on here is not a serious quibble with modern macro-economic theory; we rise only to mock and ridicule its most famous theorist.

The former chief of the U.S. Federal Reserve system is right about globalization. It suppressed prices; every sentient being on the planet knew it. Labor at $5 a day was bound to build cheaper products than labor at $50 an hour. He’s right too about it coming to an end. Sooner or later the $5 a day man wants $6. The latest news from the middle kingdom tells us of shortages of labor in the coastal cities. All of a sudden, the Chinese working man has some bargaining power. Now, he also wants a little more butter on his toast. We greet the news like a teenager spotting his first pimple; it is a sure sign of ugliness to come.

While wages in India and China increase about 10% per year, real incomes in America and Britain are mostly stagnant. And now the Asians are getting uppity. They want more than
a few pieces of paper with green ink on it. They want the world’s real resources – the kind a central bank can’t print. Meat, corn, gas and gold – all are at or near record highs. All of a sudden, people in the occidental world are not the only ones using gasoline…and eating beef.

In the United States and Britain, too, the proles increased their standards of living. But not like the Asians, who made things and sold them at a profit. Instead of earning more, they borrowed more. And now, while the skinny Chinese and Indians race along at 10%annual GDP growth, our countrymen stagger under the weight of their own heavy debt. How can they hope to compete with the heaving masses of Asia for jobs, for food, for capital, and for fuel?

The Yank and the Brit could not be less prepared or more poorly positioned. They already live beyond their means. They can expect no wage gains. Their costs are rising. And with three billion Asians hard on their heels, they can’t expect a breather – prices will continue to rise; wages will not.

What’s worse, the street value of their most cherished asset – their houses – is going down. Already, house prices in America are down 3.5%, according to the latest Case/Shiller report; futures indexes traded on the Case/Shiller numbers imply further declines through the year 2010. In merry old England, meanwhile, prices fell in September for the first time in nine months…with much more to come. The English have even more debt than Americans…and are more vulnerable to a fall in housing prices.

How did they get into such a tight spot? Who is to blame?

“What are you looking at me for?” Mr. Greenspan seemed to say last week. As to the charges – that he was spotted at the scene of the crime – the former Fed chief pleaded ignorance and impotence:

“It’s really not something which central banks any longer have control over,” said Mr. Greenspan to the BBC, “…we have never really successfully been able to forecast significant turning points in the economy.”

Alan Greenspan told investors in the late ’90s that new communications technology had created a world of higher growth and more permanent prosperity. Then, panicked by a micro-recession in 2001, he cut rates down to their lowest level in 60 years and held them there for over a year. And then, he urged homeowners in 2004 to take advantage of innovations in mortgage finance, such as the new, subprime ARM. And what was he thinking when he claimed that new collateralized debt obligations made the financial world a safer place, because they spread the risk around?

What got the householders into such a fix was a combination of good luck and bad central bank stewardship. As to the good luck, you can hardly blame Mr. Greenspan or Mr. King if the Asians wanted to work for nothing…save their money…and then lend it back to us. But as to the stewardship…our central bankers might show a little contrition. Maybe they did not force the working man down the road to perdition; but they gave him a little shove.

Monday, October 8th, 2007 at 12:27 AM

Read the following facts at your own financial peril. The truth must now come with a red pill warning label, and I hesitate to give it you. You may best be advised to stay in The Matrix.

First off we have a job report Friday that kicked off another monster rally in stocks and things. At first blush 110,000 supposed new jobs can hardly be construed as much of a big deal, but who’s counting? A glance at the September Daily Treasury Statement data hints that once again even this modest increase is likely to be false and bogus in reality. DTS on wages withheld was 129,269 versus 126,537 year over year, up an almost inconsequential 2%. All the hallmarks of a punk economy, and even more is coming soon enough if the GM pact is any indication. Use this DTS number in lieu of the Ministry of Truth’s concoctions at your gravest peril.

I don’t think it’s any surprise that financial firms are at last being forced to acknowledge at least some of their losses on fictitious capital. Although the dollars involved are looking quite substantial, it appears these “drop in the bucket portfolio revaluations” might be on the order of only 2-3%, see comment 2 below.

Merrill said it expected to lose up to 50 cents a share for the quarter, compared with a profit of $3.17 a share, or $3 billion, for the quarter a year ago. The size of the write-down was second only to one for $5.9 billion taken by Citigroup, which is three and a half times the size of Merrill. Two ratings agencies, Moody’s and Fitch, quickly downgraded Merrill’s long-term debt outlook to negative from stable. Moody’s said the write-down, which had been forecast at about $4 billion, exceeded expectations. “As a result, Moody’s assessment of the quality of risk management at Merrill Lynch has diminished.”

Investors reacted by pushing up the stock, relieved that Merrill had provided information about its problems and a belief that the worst was over. Shares rose $1.89, to $76.67. Mr. Bove questioned that reasoning. “These companies are not going to see their markets jump back immediately,” he said. “The theory that if the company writes off $2 billion it should see its stock price up $1 and if it writes off $6 billion the stock should jump $3 is not one I can embrace.”

Yesterday’s warning was the latest among banks as they try to deal with the fallout from losses in the origination and packaging of subprime loans as well as lending to private equity firms. UBS has announced a $3.4 billion write-down, and Deutsche Bank, $3.1 billion. And Washington Mutual, the savings bank, warned that third-quarter income would decline 75 percent. More bad news is expected. Analysts at Sanford C. Bernstein & Company said yesterday that they expected JPMorgan Chase to write down about $2 billion, and the Bank of America Corporation about $1 billion.

Regular Winter Watch readers should nod knowingly at this one. Just to show how audacious sleazy quasi-criminal behavior has become, they are all but using a variation of my Milky Way term. The Boyz should be hitting my tip jar hard for the concept, surely it’s mine? Use this information cautiously though as some how it might be construed as bullish in the Matrix.

All you have to do is leverage up the leverage, by creating a new vehicle – call it a UFO (or Unidentified Financing Object). These have a standard Collateralised Loan Obligation (CLO) structure but remain private and are controlled by the banks and designed to help shift the catalogue of leveraged loans stuck on their balance sheets from financing deals. Here’s how they work. The bank holding the loans teams up with a hedge fund, or a buy-out group. Together, they create a UFO to buy selective loans at the current market discount, say 96 cents in the dollar, from themselves.

More background on WaMu which may be joining Countrywide in experiencing liquidity problems.

Contrary Investor has an interesting chart you should also look at your own peril. Warning label to ignore as it shows the correlation to PCE (personal consumption expenditures) and the NAHB housing index going back a few decades. Of course the PCE is another bogus Fed created indicator as there is plenty of evidence (for instance the home decor bust) that has already fallen off a cliff, at least outside the Land of Oz.

Read and interpret this chart at your peril, Christmas is coming but Joe Ultra Light Six Pack has no friggin’ money in his demand deposit accounts. Is this what the end of mortgage equity extraction looks like? To make up for the lack of real money, JULS took on $12.2 billion in extra debt, mostly in credit cards and non-mortgage sources.

I’ve always felt gasoline consumption was a good real time consumer indicator. That’s because there is a portion of it that is discretionary: trips to the malls, restaurants, road trips (usually involving more consumption). Lately gas consumption is running about even with last year. When adjusted for new households it’s down. Use at your peril.

More and more signs of fictitious capital being liquidated in big price mark downs. Bloomberg reports on various homebuilder sales and auctions, with prices tumbling 30-40%. Read this fact at your financial peril.

Read this at your financial peril, as it now appears 2007 vintage subprimes are performing even worse than 2006. In otherwords Wile E Coyote just kept making the loans until the music completely stopped. Short of sounds like the stock market now?

Despite the so called strong jobs report, the USD gave up early gains and sold off. This explains why? The truth may be most evident in the foreign central banks custodial report this week showing more lack of interest with purchases of only $1.1 billion in US securities. This is the true message of US liquidity and today is no higher than it was twelve weeks ago. In otherwords a complete FCB buyer’s strike for three months. Read this truth at your financial peril.

Alex’s Notes: I only have two words to add to this amazing article: Holycrap Batman!

———————————-
CHAPMAN: Gold, Silver, Economy & More
by Bob Chapman
The International Forecaster
Sunday, 7 October 2007

US MARKETS

We are sure all of you are anxious to know that the numbers of millionaire households globally grew by 14% in 2006 from 2005, and now control a third of the estimated $100 trillion in wealth. The 9.6 million households, comprising 0.7% of the world’s households, now control $33.2 trillion. Half are located in the US and Canada, 25% in Europe and 1/5th in the Asia-Pacific region.

In non-wealthy households, defined as those with less than $100,000 in financial assets, declined from 2001 to 2006. But, assets held by households with more than $100,000 climbed from $51.4 trillion to $84.5 trillion during the same period. The richest 0.1%, those with more than $5 million in assets under management own 17.5% of global wealth.

Planned layoffs fell nearly 10% in September as the slump in housing continued to hurt payrolls. More than 1/3 of the cuts of 71,739 came from mortgage lenders, construction firms and real estate firms. Thus far this year, about 1/6th is directly related to a collapsing housing market.

IMF data says it is mostly central bank flow of funds that is keeping the world economy afloat despite all the recent attention granted to sovereign wealth funds the central banks of the world’s emerging economies accounted for $320 of the world’s 340 billion in reserve growth in the second quarter and $283 of $303 billion in the first quarter. In the end central banks are financing the entire US deficit.

Twenty-seven percent of hiring managers said they planned to increase their staffs in the last three months of the year, down from 32% who said they expanded their payrolls in the third quarter and 41% in the second quarter. The job market has weakened measurably since the spring and will weaken further through the end of the year. Six percent said they expected to cut staff down from 9%, 63% will leave there staffs as is.

The Street is betting the FOMC meeting this month will bring lower interest rates. That is based on lower economic numbers, a continuing credit squeeze at banks and Greenspan’s comment that the real estate crisis and house prices will fall a lot further than people think. Cheap money is now history. The days of big leveraged buyouts are over because the CLO market is dead. Banks won’t lend to each other for more than a week. The current situation is more systemic than the crisis in 1998. It effects far more institutions and will have a far greater impact on the global economy. Those who believe we will get a recovery as in 1999 are mistaken. We are facing a property collapse and hyperinflation. This is also worse than October 1987. This time the dollar has hit record lows and gold and silver are rallying in spite of official suppression. This is January 2001 all over again or October 1929. The US is the biggest debtor in history with external liabilities reaching 35% of GDP. Foreigners are not buying our Treasury paper and that means the Fed will have to buy the bonds, monetize them, and we will have even more inflation. Dropping interest rates won’t work – only a purge will and the elitists do not want to face that. Thus, they will inflate until they cannot anymore.

What economists and analysts do not want to see or are incapable of seeing is that we are facing a devastating global crash in the US dollar. This isn’t maybe, it is inevitable. Thus far the decline has been orderly, but in time it will get disorderly with grave consequences not only for those in dollar denominated assets, but also for the entire world. This is why owning gold and silver related assets at this juncture is so important, not only for profit but more importantly for the preservation of your assets. The problems we face today had a foundation in the 1960s, were officially kicked off on 8/15/71 and are been experiencing the final results today – the inevitable collapse of the dollar.

American could care less – most do not have any savings. Some 60% of our population is in debt up to their eyeballs. They have little to lose. That is why consumption levels are what they are, some 70% of our economy. That is in the process of coming to an end shortly. Whatever assets Americans have for the most part is in their homes and their values are plunging. The majority of Americans live in the 30 former hot area cities and those cities will experience losses of 30% to 60% off from the peak in real estate prices.

The only other time in modern history that Americans’ saw their personal savings fall below zero was in the 1930s during the “Great depression.” That is when the stock market and banks collapsed and unemployment was 35%. Considering that, you can see how vulnerable Americans are today. They have no idea the position they have put themselves into.

The only reason the US economy hasn’t collapsed is that foreigners who save 10% to 35% of their income have been willing to lend those savings to us, but that lending is in the process of diminishing. The reluctance to lend has been assisted by the subprime – ALT-A mortgage rating fraud that has caused over $2 trillion in losses worldwide. The falling real estate market has expedited a flight from the dollar as well. You should also keep in mind that as of 1/1/07, 64.75% of reserve assets of foreign countries were held in dollar-denominated assets.

What you are about to shortly witness is going to make 2000 and 2001 look like child’s play. This is going to be bigger than the 1930s. No one wants to talk about it. The pros are in denial, but that isn’t going to make it go away.

As open-ended consumption comes to an end we will head into an inflationary recession, into stagflation (stagnation and inflation).

The Fed has again responded to crisis by lowering the prime rate and discount rates and is prepared to lower them further as they increase money and credit by 14.1% or 48% a year. Yet these meatheads at the Fed, on Wall Street and in government and corporate America attempt to tell us there is only 2% inflation, what buffoons. All of America has now become subprime, along with the dollar. There will be a steady exodus from the dollar until it has dropped 30-55%, then as time goes on all currencies will become suspect and the flight to gold and silver will become a stampede.

GOLD, SILVER, PLATINUM, PALADIUM AND URANIUM

In a story reminiscent of the tall tales about Paul Bunyan and his blue ox, “Babe,” the cartel arranged for the greatest phantom creation of nonexistent jobs of all time, and no one believed them. Stocks rose anyway thanks to the PPT’s weakening of the yen, with the Dow gaining about 92 to close at 14,066.01. Stock market traders can kiss their derrieres goodbye as this means rate cuts are not very likely in the near term, so the cuts they have priced in may never happen until much later. Don’t worry yet though, because before the stock markets crash again in a cartel-orchestrated carry trade unwinding aimed at forcing liquidations of PM positions held by large specs to cover margin calls, these markets will be run up by a weakened yen to flush out yen calls and stock index puts purchased by large specs to protect their PM positions, and you can take that to the bank. We can already see them setting this up to happen just before the expiration of October options. This is how every gold rally this year has been stifled by the cartel. It is their MO. Always remember that gold suppression is JOB ONE at the Fed, and the cartel went all out to whip up another jobs phantasm that would have made Pinocchio’s nose grow into a telephone pole. In Wednesday’s IF we wrote, and we quote: “You will likely get some help from Friday’s upcoming jobs report which should put an end to the dollar’s dead-cat bounce, but remember that our government creates jobs out of thin air, so be ready for a disappointment if it comes.” Well come it did, and as we recommended, the currency and gold markets were ready for the beyond-belief jobs report, with gold and silver both gaining and the dollar dropping in an almost immediate reversal of initial dollar gains and PM losses that occurred just after the report came out.

For the totally gullible and monumentally naive among us, the government would have us believe that non-farm payrolls gained 110,000 jobs last month, and they even had the gall to revise the minus 4000 jobs for August to plus 89,000. The Fed finally came to the dollar’s rescue, but they had to lie through their teeth to do it, and the pros don’t believe them. Everyone is sick to death of the colossal falsehoods that are thrust at us daily by our government which lies pathologically, and will now move toward trading activity based on reality and ignore government statistics. Commodities traders could not be happier as they now have the perfect excuse to cause commodities to soar based on our now apparently “vibrant,” “no-recession-here” economy, so inflation will continue unabated as a deluge of money and credit drowns the economy in an attempt to break the credit-crunch and as inflation already in the pipeline comes home to roost. Perhaps even more incredibly, and despite the supposed job gains, the unemployment rate rose to 4.7% officially, which is yet another totally bogus statistic. Our subscribers know that the real rate of unemployment is now around 15%.

In another twist, the government claims they “accidentally” left off government jobs in the previous month’s report which is why the number turned out negative. So, does that mean that the Fed will now take the rate cut back, or does it mean that they left these government jobs out intentionally to justify a big rate cut to save their Wall Street buddies? We’ll let the reader decide.

If the truth were known, and the phantom jobs created by the birth/death model were removed, we would have had negative job growth for virtually every month over the past year or more. If you added in the hundreds of thousands of illegal aliens who have lost their construction jobs, who are not counted in labor statistics, the job situation would be even more negative. You might also note that although many illegal immigrants send some of their money home, a good portion gets spent here in the US and this is bound to have a very negative impact on communities that have foolishly become heavily dependent on the cheap labor provided by, and the consumer spending of, illegal aliens. The southwest especially will get creamed by this illegal alien unemployment situation, which is what they get for exploiting these people for decades.

We ask how there can be any job gains whatsoever what with constant outsourcing and off-shoring of jobs, businesses that are frozen in place due to a deadlocked commercial paper market, banks, investment banks, hedge funds, bond brokers and stock brokers ripped by an ongoing CDO/ABS/MBS/CP/ABCP/SIV debacle of unprecedented proportions which threatens to take down the world economy and financial sector, record losses and layoffs in the automotive industry, an ever-shrinking and now virtually non-existent manufacturing sector, a terrified transportation sector which is being torn to shreds by a relentlessly rising price for oil and fuel, cutbacks in all types of employment due to rising business costs caused by runaway inflation and a tanking real estate market that is devastating our economy with colossal employment losses in construction, real estate sales, mortgage origination, banking, title insurance, home inspections, home appliances, hardware and building supplies and who knows what else as that ripple quakes through our economy.

And of course you never hear about underemployment where people lose $25/hr. jobs and pick up $10/hr. jobs in slave labor camps, which the government calls the service sector. Heaven forbid that we should dare to count the hundreds of thousands out of work who have lost their unemployment benefits and have given up trying to find a decent paying job in our increasingly decimated economy which has been flooded by slave labor in the form of illegal immigrants who our government has intentionally let in to line the pockets of big business which chews them up and spits them out while our citizens live in poverty, unable to compete with people who live 20 and 30 to a house and whose home countries have comparably low costs-of-living, allowing for a much lower living wage level.

Welcome to our new corporatist fascist country, the new United Goldilocks Matrix where the sheople sleep in their pods while the government creates a fantasy world where everything always seems to turn out just right, while in reality the sheople are being eaten alive by the Big, Bad Inflation Wolf and they don’t even know it, because they have been given body-numbing anesthetics in the form of whopping government lies about economic statistics like the Jack-in-the-Beanstalk story we got today from the Bureau of Lying Statistics. You may have noticed our many references to fairy tales, because that is the picture of our economy that the Illuminists and their bought and paid for dingbats, which some refer to as our mainstream media, present to us – a fairy tale. As people are about to find out, the Cinderella story presented by the idiots and morons in the media and by our tall-tale-telling government will soon turn into a Grimm fairy tale.

Well, the large specs did us proud again this week. In fact the message they delivered to the cartel on Friday made our week. The arrogant cartel of course thought that PM’s would buckle and that the dollar would soar on the much-better-than-expected jobs report. They were hoping upon hope that this would allow them to get out from under the commercial-short-annihilating, mountainous wall of shorts which they created in a futile attempt to stop gold, the size of which was accentuated by yet another all-time high in gold futures open interest set on Wednesday with a total of 443,912 contracts. Boy, were they in for a surprise! After digesting the preposterous, egregious lies about jobs data, gold bared its teeth in disgust and lashed out at the cartel, striking its arch foe with a reverberating backhand that knocked its teeth out and left it seeing stars. When the jobs data hit, gold was trading in the 736-737 range, silver in the 13.39-13.40 range, and the spot USDX in the 78.35-78.40 range. The data initially took gold down to the 727-728 range, silver down to the 13.23-13.24 range, and the spot USDX up to a lofty 78.819, all things considered. Then something very strange and wonderful happened. Everyone paused and said, hey, wait a minute, what on earth are we doing? We all know these statistics are being made up by the BLS as they go along like they were writing some fiction novel. Are we out of our minds? Are we going to cave in to the cartel based on a bunch of ridiculous hogwash made up by a bunch of thieving reprobates? No freaking way! After this stunning revelation dawned on traders, gold went ripping like it was shot out of catapult, rocketing to 744 before settling in at 741.30, UP 4.20. Silver did the same, launching itself up to 13.48 before settling in at 13.38, UP .02. The spot USDX plummeted, skydiving to close at 78.308, DOWN .173, and DOWN a whopping .511 from its intra day high. Incidentally, open interest on the USDX has been at the very lofty 39000+ level for 11 consecutive trading days and they have not even managed to attain 79 again before faltering in yet another failed dead-cat-bounce rally. So much for the best-laid plans of cartels and men. The XAU and HUI vaulted forward also, pressing up against their all-time highs, closing at 171.27 and 393.99, respectively.

http://news.goldseek.com/InternationalForecaster/1191791012.php

by Peter Schiff
October 05, 2007

As a contrarian, it is my nature to worry when too many people start agreeing with me. Currently, many of my most vocal critics, who had previously ridiculed my warnings about the dollar, now concede that it will continue to decline. With so many people now on the bandwagon, some currency watchers have asserted that sentiment now has nowhere to go but up, and that the stage is set for a dollar rally. Although I am unnerved by the company, I take solace in the fact that the conclusions that many of these nouveau-dollar bears draw are completely off the mark.

The group is united by two basic assumptions. First is that the dollar’s decline will be orderly, and second is that the decline will actually be positive for both the U.S. economy and the stock market. Therefore, other ways to confound the consensus would be for the dollar’s decline to be disorderly or for it to be negative for both the U.S. economy and the stock market.

For the dollar to register a significant short-term bottom based on negative sentiment, I feel there would have to be a much greater sense of panic associated with its weakness. However such is clearly not the case. The overwhelming consensus is that a weak dollar is good for America. Ironically there is more worry in Europe over the strong euro than there is in America over the weak dollar. My prediction is that before we get any significant dollar bounce this complacency will need to be replaced by outright fear, and that the dollar needs to fall more sharply as investors actually act on those fears by dumping dollars.

Of course should such a run on the dollar commence, it will not be the orderly decline everyone seems to expect. However, I am still not sure why so many feel a declining dollar is not a problem so long as it does so in an orderly manner. If you’re headed to the poor house what difference does it make how you get there? Whichever road you travel, you’re just as broke when you arrive!

In addition to being wrong about how quickly the dollar will decline and how it will impact the economy, most dollar bears are also wrong when it comes to their explanations as to why the dollar is falling in the first place. Whenever benign inflation statistics are released, ensuing dollar weakness is always explained as resulting from increased expectation that the Fed will cut rates. Lower interest rates are seen as dollar bearish as they reduce the returns on holding dollars, making dollars less attractive relative to other currencies.

In actuality, officially benign inflation statistics (which are coming at a time when actual inflation is getting worse) give the Fed further cover to create even more inflation. So the dollar is not weak because inflation is under control as the consensus believes, but because the opposite is true. Inflation is completely out of control and the Fed, hiding behind phony government numbers that purport otherwise, has the green light to add additional fuel to inflation’s fire. It’s the ultimate irony that the lower the official preferred measures of inflation are (core CPI or the core Personal Consumption Expenditure Index,) the worse inflation actually gets.

For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

More importantly take action to protect your wealth and preserve your purchasing power before it’s too late.

Peter Schiff C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.

http://www.safehaven.com/article-8553.htm

Alex’s Notes: Some have argued that there is no risk of countries dropping dollar backed paper, our economy is still the worlds leader.

Isnt it?

I have been saying this for months now, if the countries of the world continue this trend of backing out of dollar backed paper, there will come a time when we are spending more running our government than the world is willing to lend us.

We currenty borrow almost $2B a day just to keep it running right now.

What happens when no one wants to lend the US any more money?

———————-

Dollar’s double blow from Vietnam and Qatar
By Ambrose Evans-Pritchard
Last Updated: 12:12am BST 04/10/2007

Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that Asian central banks with control over two thirds of the world’s foreign reserves may soon join the flight from US assets.

The Saigon Times said this morning that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8pc.

Vietnam, which has mid-sized reserves of $40bn, is seen as weather vane for the bigger Asian powers.

Together they hold $3,575bn of foreign reserves, over 65pc of the world’s total. China leads with $1,340bn, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings.

The concern is that once one or two members of the region jump ship, it could set off a broader scramble. None of them want to be the last one left holding a devalued asset. Vietnam’s central bank said this week that it would move “gradually” to a floating currency.

Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings of its $50bn sovereign wealth fund from 99pc to 40pc, switching into investments in China, Japan, and emerging Asia.

The move is intended to increase long-term returns for future generations, but it can easily be seen as a vote of no confidence in US economic management.

The drastic shift by the Qatar Investment Authority is a warning that petro-dollar powers with some $3,500bn under management may pull the plug on the heavily endebted US economy — which needs to suck in the majority of the world’s savings just to stay afloat.

“OPEC and Asia have been the two blocks funding the US current account deficit,” said Hans Redeker, currency chief at BNP Paribas.

“Vietnam is a relatively small country but it is symptomatic of Asia. The entire region is seeing inflation move up as a result of mercantilist policies of holding down their currencies with ‘dirty floats’, which are designed to help their export sectors. They need to change monetary policy, ” he said.

There have been reports that China is already pulling out of US bonds to fund its new sovereign wealth fund. Foreign central banks slashed holdings by $32bn in the last two weeks of August. We will not know which country was responsible the Treasury’s TIC data is released in November.

Japan also has colossal reserves, now near $914bn, but it is does not face the same inflationary threat as the rest of Asia, and is in any case an intimate military ally of the United States.

It is likely to coordinate its dollar policy very closely with Washington for geo-strategic reasons.

Saudi Arabia set off jitters in the currency markets last month when it decided not to cut interest rates in lockstep with the US Federal Reserve, raising doubts about its commitment to the Saudi dollar peg. But it too has strong political reasons to stick with America.

Kuwait has already abandoned its peg, fearing that its economy would overheat if it continued to import America’s loose monetary policies.

Separately, Iran said it would soon refuse to accept dollars for its oil exports, preferring to be paid in a “more credible currency”.

It already receives 65pc of payments in euros and 20pc in yen, but insisted that the remaining 15pc in dollars entailed an excessive risk of devaluation.

The demarche is largely policitcal, since oil is a fungible commodity and the currency markets are highly liquid.

However, if a number of OPEC suppliers began demand long-term futures contracts in euros instead of dollars, this would have an impact over time.

Telegraph

Alex’s Notes: Interesting trend here. Anyone who thinks the world is not offloading dollar backed paper at breakneck pace perhaps needs another cup of coffee.

But what does that mean?

Could mean a number of things:

1. Continued upwards pressure on gold, silver, oil, and food commodities.
2. If we get to the point where foreign governments are unwilling to continue financing our ridiculous $2billion a day in loans we have to take just to keep operating our government, then of course our government could go bankrupt, and boy wouldnt that be a fun ride.
3. Dollars keep getting shed around the world and all of those $4 Trillion in greenbacks that are floating around the world could come home. For those of you who have spoken to me about this issue you already now what that means. Get ready for $9/gallon for gas.

This is just an excerpt, link for the entire article is at the bottom.

——————-

Another story that caught my eye this morning concerned the diversification of assets by Middle Eastern governments. The Qatar Investment Authority has lowered the amount that its $50 billion fund has invested in the dollar to around 40% from around 99% over the past two years, according to the CEO of the Authority – who is also Qatar’s prime minister. We have been talking about this diversification of currency reserves for some time, and while Qatar’s fund isn’t large enough to move the markets, it further reinforces our views. Foreign governments will continue to diversify their holdings out of the U.S. dollar, putting more downward pressure on the greenback.

The Daily Reckoning

What is a fiat currency?
Why do fiat currencies always fail?
Why will the dollar be the first of today’s fiat currencies to collapse?
What happens when the dollar collapses?
Why will gold go up when the dollar goes down?
Why will gold soar NOW?

——————————————————————————–

What is a fiat currency?

A currency that’s created and controlled by a government. In other words, it exists by government “fiat.” Using the dollar as an example, the U.S. Federal Reserve creates new dollars simply by printing them or injecting electronic “reserves” into the banking system. The supply of dollars thus depends on the decisions of our elected officials and their appointed administrators like the governors of the Fed.

An example of a non-fiat currency would be the gold and silver coins that used to circulate in much of the world. There was only so much of each metal, and the supply only increased when some enterprising miner discovered and dug up more. Governments were unable to create this kind of money out of thin air.

Like the dollar, today’s euro, Japanese yen, and British pound are all fiat currencies. And—here’s the crucial point—every single fiat currency that has existed prior to the current batch was eventually destroyed by its government.

——————————————————————————–

Why do fiat currencies always fail?

Put simply, governments are fundamentally incapable of maintaining the value of their currencies. Every leader, whether king, president or prime minister, serves at the pleasure of two powerful constituencies: Taxpayers irate about what they currently pay and violently opposed to paying more, and recipients of government help who demand vastly greater levels of spending on everything from defense, to roads, to old age pensions. Alienate either group, and the result can be an abrupt career change.

So our hypothetical leader finds himself with two choices, the most obvious of which is to level with his constituents and explain that there’s no such thing as a free lunch. Taxes are the price of civilization, but government largess can consume only so much of a healthy economy’s output, so no one person or group can have all they want. This looks simple on paper, but in the real world it opens the door to challenge from rivals who have no qualms about promising whatever is necessary to gain power.

Not liking this prospect at all, our leader then turns to his remaining option: Borrow to finance some new spending without raising taxes. Then create enough new currency to cover the resulting deficit. The anti-tax and pro-spending folks each get what they want, and no one notices, for a while at least, the slight decline in the value of each individual piece of currency caused by the rising supply. Human nature being what it is, every government eventually chooses this second course. And the result, almost without exception, is a gradual loss of confidence in the value of each national currency, which we now know as inflation.

But a little inflation, like a little heroin, is seldom the end of the story. Over time, the gap between tax revenue and the demands placed on government tends to grow, and spending, borrowing and currency creation begin to expand at increasing rates. Inflation accelerates, and the populace comes to see the process of “debasement” for what it is: the destruction of their savings. They abandon the currency en mass, spending it or converting it to more stable forms of money as fast as possible. The currency’s value plunges (another way of saying prices soar), wiping out the accumulated savings of a whole generation. Such is the eventual fate of every fiat currency. “The Coming Collapse of the Dollar” tells the stories of five of the more spectacular currency crises, but like I said, they all go this way eventually.

——————————————————————————–

Why will the dollar be the first of today’s fiat currencies to collapse?

For the past few decades, the U.S. has enjoyed an historically unique position. As the most powerful nation in an increasingly globalized world, its currency, the dollar, is in demand as a store of value. That is, investors and central banks in other countries want to hold dollars as alternatives to their own, presumably less stable currencies. This insatiable demand for dollars has handed U.S. consumers and governments a virtually unlimited credit card. And we’ve spent the past two decades maxing it out.

The U.S. is now the world’s biggest debtor nation, and our current economic expansion is only possible because Japan, China, and Europe are willing to finance our trade deficit by, in effect, lending us $500 billion a year. They do this by taking the dollars we pay for their Toyotas, French wine and Chinese electronics, and using them to buy U.S. bonds and other financial assets.

Add it all up, and U.S. debt now comes to about $40 trillion, or $600,000 per family of four, a clearly unsustainable burden. When our trading partners figure out that we’re no longer solvent, they’ll stop lending us money (that is, they’ll use their dollars to buy euros or yen or gold rather than U.S. bonds), and the value of the dollar will plunge. The process has already begun, with decreasing demand for dollars sending the value of the dollar down by about a third in the past three years. But this is just the beginning.

——————————————————————————–

What happens when the dollar collapses?

Many things, most of them bad. When foreign investors and central banks stop demanding dollars, U.S. bond prices will fall, which is another way of saying that U.S. interest rates will rise. Mortgage and credit card rates will soar, bursting the housing bubble. Home prices in hot markets like California and New York will fall by 50% or more in a matter of months, bankrupting millions of over-extended homeowners. The U.S. government will respond by opening the monetary floodgates, printing as many paper dollars as necessary to keep the economy from collapsing. This surge in supply will send the value of the dollar through the floor. Prices for most things will skyrocket, and people whose life savings are in cash, bank CDs or dollar-denominated bonds, will be wiped out. Most U.S. consumer finance companies will be ruined, along with their stockholders.

THEN the Dollar Disease will go global. The only reason Japan or Europe have been able to generate their current meager rates of growth is the willingness of U.S. consumers to buy their Hondas and BMWs. As the dollar plunges, Asian and European goods, priced in suddenly-appreciating currencies, will become prohibitively expensive for U.S. consumers, who will respond by buying U.S.-made alternatives or nothing at all. Correctly interpreting this change in buying patterns as a threat to their vital export sectors, European and Asian leaders will respond with the only weapon they have left: monetary inflation. They’ll cut interest rates and buy dollars with their currencies, flooding the world with euros and yen the way the U.S. now floods the world with dollars. The result of these “competitive devaluations” will be a death spiral for all major fiat currencies, in which European and Japanese bonds will, eventually, fare as badly as their U.S. cousins.

——————————————————————————–

Why will gold go up when the dollar goes down?

Until very recently, gold was humanity’s money of choice, for one very good reason: It exists in limited supply, and governments can’t make more of it, so its value tends to be stable. As paper currencies collapse, the world will look for alternatives, one of which is sure to be gold. Massive amounts of global capital will start chasing a very limited supply of gold, sending its value through the roof.

——————————————————————————–

Why will gold soar NOW?

Three reasons:

* Gold’s fundamentals are very positive. The world’s mines produce about 2,500 tonnes of gold a year, while demand for gold is currently running about 4,000 tonnes. And new demand from emerging countries like China and India is soaring.

* The Fear Index is flashing a buy signal. This index measures the financial markets’ anxiety about the dollar and the U.S. monetary and banking system, and in the twenty years since GoldMoney’s James Turk invented it, each of its “buy” signals has been followed by a marked, sometimes spectacular, increase in gold’s exchange rate. Chapter 11 of “The Coming Collapse of the Dollar” explains the Fear Index in detail, but for now suffice it to say that it’s flashing a screaming “buy.” Click on “Latest Charts” for the most recent Fear Index chart.

* Central bank manipulation is about to backfire. The world’s central banks, led by the U.S. Federal Reserve, have been making up the difference between mine production and gold demand by secretly dumping their gold on the market. They do this by lending their gold for a nominal interest rate to “bullion banks” like JP Morgan Chase and Citigroup, which then sell it and invest the proceeds at higher rates. Because the banks are obligated to return this gold to the central banks, they’re “short” the metal. At some point in the future they have to buy this gold back on the open market. If gold’s price is low, they make money, and if it’s high, they lose. Since it’s currently high and rising, these banks are looking at multi-billion dollar losses. And as these losses mount, the pressure grows to bite the bullet and close out their short positions by buying back their gold. When one bullion bank does this, the others will be forced to follow, producing a classic “short squeeze,” in which all the major bullion banks try to buy at once, sending gold through the roof. Chapter 12 of “The Coming Collapse” offers an overview of the central banks’ machinations. For a far more detailed treatment, see Sprott Asset Management’s 70-page report, “Not Free, Not Fair: The Long Term Manipulation of the Gold Price,” available at www.sprott.com.

Add it all up–favorable demand trends, a Fear Index buy signal, and the coming central bank short squeeze–and the year ahead should be a spectacular one for gold.

Financial Times
By Jeremy Grant in Washington

Published: August 14 2007 00:06 | Last updated: August 14 2007 00:06

The US government is on a ‘burning platform’ of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon, the country’s top government inspector has warned.

David Walker, comptroller general of the US, issued the unusually downbeat assessment of his country’s future in a report that lays out what he called “chilling long-term simulations”.

These include “dramatic” tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of US debt.

Drawing parallels with the end of the Roman empire, Mr Walker warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government”.

“Sound familiar?” Mr Walker said. “In my view, it’s time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.”

Mr Walker’s views carry weight because he is a non-partisan figure in charge of the Government Accountability Office, often described as the investigative arm of the US Congress.

While most of its studies are commissioned by legislators, about 10 per cent – such as the one containing his latest warnings – are initiated by the comptroller general himself.

In an interview with the Financial Times, Mr Walker said he had mentioned some of the issues before but now wanted to “turn up the volume”. Some of them were too sensitive for others in government to “have their name associated with”.

“I’m trying to sound an alarm and issue a wake-up call,” he said. “As comptroller general I’ve got an ability to look longer-range and take on issues that others may be hesitant, and in many cases may not be in a position, to take on.

“One of the concerns is obviously we are a great country but we face major sustainability challenges that we are not taking seriously enough,” said Mr Walker, who was appointed during the Clinton administration to the post, which carries a 15-year term.

The fiscal imbalance meant the US was “on a path toward an explosion of debt”.

“With the looming retirement of baby boomers, spiralling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks,” said Mr Walker, a former senior executive at PwC auditing firm.

Current US policy on education, energy, the environment, immigration and Iraq also was on an “unsustainable path”.

“Our very prosperity is placing greater demands on our physical infrastructure. Billions of dollars will be needed to modernise everything from highways and airports to water and sewage systems. The recent bridge collapse in Minneapolis was a sobering wake-up call.”

Mr Walker said he would offer to brief the would-be presidential candidates next spring.

“They need to make fiscal responsibility and inter-generational equity one of their top priorities. If they do, I think we have a chance to turn this around but if they don’t, I think the risk of a serious crisis rises considerably”.
and receive our industry leading reports with our compliments at no charge

It is amazing to think that the dollar has gone so low. There was a time when the dollar was an honored instrument of financial transaction. Today, the world is divesting itself of dollars as fast as it can, and in some places like China, the dollar has been reduced to the status of the next door neighbors garbage.

This chart shows the drop in purchasing power of the US Dollar since the day we created the Federal Reserve in 1913.

Your dollar now has the purchasing power of a whopping (hold on to your seat) .04 CENTS.

The only solution to this is to stop printing money and reduce the amount of inflation we have, take our licks, and move back to sound money. Of course the Fed cant do that right now, as the only method of combating the slumping economy is ‘injecting liquidity’.

The world is moving back to the discipline of hard money (gold and silver), hopefully the US is not the last to catch on.

and receive our industry leading reports with our compliments at no charge

by Robert Kiyosaki

Posted on Monday, June 25, 2007, 12:00AM
During the height of the real estate bubble, I wrote a column saying that the crash was coming and suggested selling any piece of real estate that was overpriced, questionable, or non-performing. As expected, I received angry replies.

Today, I’m predicting the next crash, what I believe will cause it, and why it’ll be a severe blow to the global economy. The signs are already here.

Busts Beat Booms

First of all, it’s no big deal to predict booms and busts. All markets boom and bust. It’s just easier to predict a bust because the signs are so obvious — like excess euphoria, easy access to money, huge profits, and scores of happy amateurs entering the market.

Booms are harder to predict. They start silently, like oak acorns buried in the ground — you don’t notice them until they’re towering trees. For example, few people recognized Microsoft or Google for the giants they were until after they’d become major players and the big profits had been made.

Paradoxically, that means busts are better because we can see them coming. This gives us time to prepare, and makes it easier to capitalize on them.

The Year the Dollar Died

The coming bust started in 1971. That was the year Richard Nixon took the United States off the gold standard, thus converting the U.S. dollar from money to currency — that is, from an asset to a liability, and an instrument of debt. That was the year the dollar died.

After Nixon was forced out of office, the U.S. economy went into a slump under presidents Ford and Carter. We had high inflation and low growth, otherwise known as “stagflation,” before Ronald Reagan and his dedication to supply-side economics — Reganonomics — came along.

Reagan cut taxes and started borrowing money, increasing the national debt. As a nation and as a people, we began borrowing and spending to spur the economy. And the economy boomed until 2000.

A World of Debt

It began to sink after 9/11. We lowered interest rates and began printing more money. In 2003 and 2004, the Bank of Japan created 35 trillion yen to save the dollar and their economy. It was like a loan of $320 billion to the United States, and probably prevented a run on the dollar.

This loan kept interest rates low, which prolonged the boom with easy money from cheap debt. The problem is that interest rates are now beginning to rise, and the mountains of debt will have to be paid back. If interest rates rise and the economy slows, a severe crash could occur — a crash caused by years of accumulating debt in order to spur the economy.

The world has never been in this position before — and the whole world is involved. That’s because Nixon’s actions in 1971 made the United States into a virtual empire. As an empire, we began dictating the terms of world trade: If you wanted to do business with us, you had to accept our new dollar as gold. Unfortunately, the world complied.

The New Money

Today, China ships us products and we ship them dollars. The problem is that the Chinese can’t spend those dollars. If they do, the price of their currency, the yuan, would go up. Why? It’s simply a matter of supply and demand.

So instead of spending their U.S. dollars in China, the Chinese buy our assets, especially U.S. bonds, with them. Because they buy our bonds, interest rates in the U.S. remain low, and low interest rates encourage Americans to borrow more money. This causes bubbles in real estate and the stock market.

The problem is almost as bad in China. The Chinese are using U.S. debt as collateral in borrowing yuan to finance projects within their country. With the Chinese economy booming and in preparation for the 2008 Olympics, the Chinese have gone shopping — they want to look good for the world.

Using Chinese debt collateralized by U.S. debt, they’ve been buying natural resources from all over the world. Consequently, countries that are rich in natural resources — such as Canada and Australia — are booming. Real estate and stock markets in those countries are hot.

But the global boom is clearly built on a mountain of debt.

A Familiar Cycle

This type of boom has happened before. In 1971, Japan was finally emerging from the effects of World War II and becoming a world economic power. The Japanese were exporting cars and televisions to the United States, and because we were importing more than we exported, the Japanese took payment in U.S. gold. In fact, one of the reasons President Nixon converted the dollar from money to a currency was to stop this hemorrhage of gold.

In the 1980s, instead of using gold to finance their economy, the Japanese used U.S. debt as collateral for Japanese debt. This caused the Japanese economy to boom just as the Chinese economy is booming today, and it made the Japanese look like geniuses. Business books and magazines trumpeted the magic of Japanese business management.

Then, in the early 1990s, the Japanese boom busted. Their stock market crashed and the most expensive real estate in the world became cheap. Today, the Japanese economy continues to struggle.

China Isn’t Japan

China’s advantage is that it learned from Japan’s mistakes. That’s why the Chinese stubbornly refuse to revalue their currency — they don’t want to make it more expensive the way the Japanese did theirs.

Currently, the Chinese yuan is pegged at 7.6 yuan to one U.S. dollar. This makes the United States accuse China of being unfair; we’d like to see the yuan float the way the Japanese let the yen float. This would make it easier for us to reduce our balance of trade, as well as pay back our debt with cheaper dollars.

The problem is that the Chinese know from the Japanese experience that we can talk tough but not act tough — they simply hold too much of our debt for us to take measures. And if the Chinese started dumping U.S dollars and bonds on the world market, the world economy might well crumble, just as the Japanese economy crashed nearly 20 years ago.

Time for a New Standard

While it’s tough to predict the future, one thing is for certain: The U.S. dollar will continue to go down in value, and savers will be losers. With people all over the world piling debt upon debt and spending like fools, it might be best to follow the Chinese.

They’ve never trusted banks, but have always trusted gold. Maybe it’s time we started doing the same.

Buy Gold and Silver Bullion