It is snowballing
Notice the announcement was made after the market close. I wonder how the traders would have reacted to this news during market hours. Actually, I don’t wonder, I know how: Sell, Sell, Sell…
This is just the beginning. Do you know the FDIC’s infamous watch list has over 100 banks on it? They are preparing for the failure of most of them. Unfortunately they don’t have the resources to take them all over. Could yours be one of those that do not make the cut? If you have not protected yourself, it is getting very late – maybe too late.
FDIC takes over 2 more banks, closing 28 branches
CARSON CITY, Nev. (AP) — The 28 branches of 1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California, were closed Friday by federal regulators.
The banks, owned by Scottsdale, Ariz.-based First National Bank Holding Co., were scheduled to reopen on Monday as Mutual of Omaha Bank branches, the Federal Deposit Insurance Corp. said.
The FDIC said the takeover of the failed banks was the least costly resolution and all depositors — including those with funds in excess of FDIC insurance limits — will switch to Mutual of Omaha with “the full amount of their deposits.” more…
The Dukes of Moral Hazzard
Those dukes, Bernanke and Paulson, are back with reckless abandon. The big news of the day is that the budget busting housing bill cleared the final Senate hurdle and passage is now imminent. It is quite a remarkable event that Congress passed the bill with virtually no debate and accomplished it in exactly one week. That is almost unheard of considering the remainder of the bill has been kicking around for the past six months with no action. You can only begin to imagine how severe the Fannie and Freddie problems are when you see Congress acting with such speed and the president suddenly removing his objections to the overall bill. We continue to believe that foreign creditors strong-armed the government for backing of their investments, because without this bailout foreigners would have been fleeing the dollar like rats from a sinking ship.
We here at the Filter are taking a brief hiatus as we go and visit the Sodom and Gomorrah of the financial world, New York City. So until we return, please chew on the following report thoroughly, as this legislation and its blowback will be utterly staggering and felt by all.
Uncharted Waters
Just as Jack Sparrow relied upon his “broken” compass to navigate the Black Pearl to the mysterious Isla de Muerta, so to does Federal Reserve Chairman Ben Bernanke rely upon his “extensive” knowledge of the Great Depression to steer our economy towards financial prosperity. However, there is one slight difference; Jack’s compass wasn’t actually broken while Bernanke’s knowledge is. Bernanke is famous for being critical of the Fed’s policies during the Great Depression. This is evident in our current expansionist policy of money supply.
The following was published by the St. Louis Fed. As you can see the magnitude of our current situation dwarfs that of even the Great Depression. We are definitely in uncharted waters and headed for a category 5 hurricane of hyperinflation. Captain Barbossa was right when he said “you best start believing in ghost stories missy, you’re in one!”
No Strings Attached?
This week, with the nation’s financial infrastructure crumbling before our very eyes, our nation’s top two economic policy makers made their way through the halls of Congress for an extraordinary episode of political theater. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson offered up radical remedies to cure the terminally ill mortgage giants Fannie Mae and Freddie Mac. Despite the fact that their proposed medication would comprehensively rewrite our country’s supposedly free-market capitalistic pedigree, the moves were presented as wholly inevitable, and in the end, benevolent and costless. Don’t blink, but a new chapter in American history has just begun.
The most memorable moment in the episode came when Paulson explained that the best way to mitigate the inevitable meltdown of Fannie and Freddie would be for Congress to grant the Treasury unlimited authority to lend to the two institutions. His analogy: When the bad guys see a bazooka on your hip, you are less likely to be challenged to a gunfight. Paulson’s argument assumes that Fannie and Freddie’s problems are simply a function of confidence. He believes that if the Treasury signals that it will stand behind both firms to the bitter end, then investors, both foreign and domestic, would have no reluctance in buying their bonds. That’s all well and good, but assuring creditors they will be repaid does nothing to address the root cause of the problem, which is that both institutions are losing money, undercapitalized and overleveraged. What you need to realize is Paulson’s plan actually guarantees that Fannie and Freddie’s losses will be socialized by you, the American taxpayer. You see, the only way for the Treasury to cover Fannie and Freddie’s losses is by printing money. And the more losses incurred the more money they need to print and the more diluted and less valuable your money becomes. So the longer these two entities remain in business, the more bad loans will be made and eventually socialized, and the more money you, the taxpayer, will lose.
So hunker down as the United States finds itself on the express track to state socialism with Paulson’s Bazooka locked, loaded and pointed right at you. When the government pulls the trigger the blast will blow the dollar, and what’s left of our capitalist economy, to smithereens.
“Wall Street got drunk”
Wall Street did get drunk, but the Fed spiked the punch with strychnine. The fancy financial instruments he refers to are more commonly known as OTC derivatives. These derivatives are a toxic waste crippling every bank invloved with them. You can look them up, but they will be explained in a later post.
The Sum of All Fears (2)
Image by Kevin Kallaugher from The Economist
Pakistan has gone from simmer to boiling hot faster than anyone could have expected. Iran is just a sideshow, Pakistan is the ticking time bomb. When that place blows oil and gold will go ballistic.
JIHADIST AGREEMENT IN PAKISTAN LEADS TO SURGE OF VIOLENCE IN AFGHANISTAN
AP reported this week that rival jihadist groups in Pakistan have agreed to work together to fight against NATO and US forces in Afghanistan.
The meeting of some 300 jihadist fighters took place in early June in Rawalpindi — a military garrison city where the headquarters of the Pakistani army is based.
AP correspondent Kathy Gannon tells RFE/RL that most of the militants were from Islamist groups launched years ago with clandestine support from Pakistan’s security services in order to fight Indian troops in the disputed Himalayan region of Kashmir.
Rival jihadists at the meeting agreed to resolve their differences, Gannon says, and, instead, send their fighters into Afghanistan to fight NATO and US forces. more…
The Sum of All Fears
Why are we not hearing about this on our news channels? Is Estelle Getty really that much more important?? Pakistan should be on your immediate concern list. To say there is disruption there is the understatement of the century.
Chief Security Officer of Bilawal House Killed in Pakistan.
Islamabad, July 22 (KUNA) The Chief Security Officer of ruling party President’s house was gunned down by unknown suspects Tuesday in southern Pakistani Karachi port city, said police. more…
Can you wait 8 weeks to eat?
A number of banks are refusing to accept checks from recently federalized IndyMac Bank. Moreover, some of the banks are requiring a 30 to 60 day hold on the checks. Even though the FDIC took the bank over, people still can’t get access to their funds. One has to wonder why other banks are not willing to immediately accept them. Could those banks refusing the checks have cash flow problems of their own? Or perhaps, they are concerned about the FDIC’s credit worthiness. This type of situation has only one way to go, from California to Maine.
WaMu wary of IndyMac cashier’s checks
More strange doings tonight surrounding the failure and federal takeover of IndyMac: some rival banks are refusing to honor cashier’s checks written by IndyMac – even though those checks are backed by the federal government.
John Bovenzi, the FDIC official now running IndyMac, tells the Los Angeles Times today he is “deeply troubled by reports that there are financial institutions that are refusing to honor or are placing excessive holds on IndyMac Federal checks.”
On latimes.com tonight: “Sheryl MacPhee, 46, said she liquidated a certificate of deposit at IndyMac’s San Marino branch Tuesday morning after a two-hour wait. She then took the cashier’s check to a Washington Mutual branch in South Pasadena to deposit.
“MacPhee said a WaMu manager told her that under a new corporate policy, the bank was not accepting IndyMac checks. More…
Dovish Fed May Signal Investors to Take Flight
The Fed recently left rates unchanged at 2 percent. This dovish stance comes at a time when other central banks from Asia and the Euro-zone are indicating more hawkish policies. The increasing spreads between the rates is reducing the greenback’s attractiveness to foreign capital and thus is putting downward pressure on an already distressed dollar. Consequentially, the euro has been gaining more acceptance as a vehicle for international trade and has developed deep and liquid financial markets. These synergies are combining to help it increasingly become more of a rival to the dollar’s status as the world’s reserve currency. This comes at a time when the Fed desperately needs demand for the dollar to remain high. Foreign investment is crucial to the US economy because it gives it the ability to maintain its account deficits. If net inflows fail to balance the trade outflows the dollar will depreciate even more rapidly. Unfortunately, foreign demand is waning. For instance, in the past oil was traded solely in dollars which automatically created huge demand. But recently, major oil producing nations such as Norway, Iran, Russia, and some gulf states have been acccepting euros for thier oil. The slowing US economy and dependence on foreign investment has weakened the greenback against every other hard currency. Central banks around the globe are certainly taking notice. China, Russia, Qatar, and the UAE have all expressed concern and have initiated steps in diversification out of dollars. There are growing and underlying incentives for investors to take flight from the dollar. Bernanke and the Fed have tough decisions to make. It’s a catch 22 for them in that they need to keep rates high enough to attract foreign investment but not so high that it stifles economic activity. On the other hand, lower rates might help spur economic growth but would also stimulate inflation and deter the much needed foreign investment.
Would the Real Money Please Stand?
Is gold the new green? In the fashion industry black became the new white and, according to DHL, in parcel delivery “Yellow is the new Brown” (referring to their ad campaign against UPS). My proposition is that gold is the new green and people should acquire that in their savings accounts rather than green US dollars.
What is money? According to Webster’s dictionary it is a store of value. That value determines purchasing power. I am going to provide concrete, real world examples of how gold has maintained its purchasing power while the dollar has lost most of its.
In 1920 the price of gold was fixed at $20.67 per troy ounce. At the same time a high-end men’s designer suit cost around $40. So for two ounces of gold you could show up to the office in a flashy new suit. Fast forward to 2008 where, depending on where you shop, a hand-sewn designer suit will run you about $1800. Gold this year, since it is no longer fixed to the dollar, has averaged about $900. You would have no problem buying that designer suit today if you had those same two ounces of gold. On the other hand, if you had that same $40, you would be hard pressed to find a nice pair of cufflinks.
Do you need another example? Consider in 1967 when an ounce of gold was fixed at $35. In that same year you could purchase a new VW Bug for $1,600. Using simple arithmetic we discover that it would have taken 45.7 ounces to buy that car. Today those little Volkswagens are a bit more expensive. I recently visited the VW website to find that it will take more than $18,000 to fill your garage with one. Do the calculation and you’ll soon find that the 45.7 ounces it took to buy the car in 1967 will increase your purchasing power to $41,000. That’s enough to buy your Bug and have money left over for 10 years of fuel! Also, the $1,600 needed in 1967 would be about enough in today’s dollars to get a nice mountain bike.
As you can see, these examples are real evidence that gold over the last century has maintained its purchasing power while the dollar has depreciated significantly. Gold has stood the test of time and for that reason is the truer form of money. People with dollars in their savings accounts are quietly losing their purchasing power when gold could be used to preserve it. There are many factors and variables that cause this effect, but for the sake of brevity I will not go into them in this post.
Don’t save… spend!
With savings accounts and money markets yielding around 1-2% and government reported inflation at 4% (way understated!), does it make sense to save? No, you are realizing a negative real return. Instead of socking it away for a rainy day, go out and spend!
But what should we buy?
Food and textile prices are rising at record levels much higher than any current bank yield. Go spend your money on non-perishable goods. Stock up on canned food, motor oil, razors, socks, t-shirts, etc., just about any item you know you will need in the future, because if you decide to save now with plans on buying this stuff at a later date your money will buy you less socks, t-shirts etc. than it could today. Think about it…
Who do you work for??
A while back, Warren Buffett, the world’s most successful investor, said that pretty soon we will all be working for the Chinese. What did he mean by that? Well… you may or may not know, but China has around $1.7trn in foreign reserves (in other words, China’s bank account is $1.7 trillion). What could they do with all this money? What kind of things could they buy?
The following is a list of the market caps (as of 7/13/08) of some prominent US companies (market cap = a measurement of the total value of a company):
- General Motors - $5 Billion
- Microsoft - $235 Billion
- Wal-Mart – $220 Billion
- Bank of America – $96 Billion
- General Electric – $275 Billion
These are some of the worlds most well-known companies and they employ millions of Americans. As you can see, China has more than enough money to purchase them all. So I ask again… Who do you work for?? Food for thought.
Are you safe??
2 Scenarios…
This wasn’t written today, but some time ago…
If current policy continues there are two possible scenarios:
- Several years of continued inflation, then the powers that be wake up, stop the printing press, and fight it. (i.e. Volcker and Reagan in the 80’s)
- Or, it’s too late to stop it. Political forces and unfunded liabilities (i.e. Social Security and Medicare) would prevent the powers that be from ending their money printing process, but grossly accelerate it, resulting in hyperinflation. This eventually would lead to a total dollar destruction. Americans would find their money totally worthless, worse than the great depression (skyrocketing gas, no food on store shelves, etc.)
We are currently on the path to scenario # 2. The current rate of M3 money growth is 17.3%. In the near future, dollar selling should build towards an extreme, with heavy foreign investment in the dollar fleeing the US currency for safety elsewhere. With the domestic financial markets and US treasury so heavily dependent on foreign capital for liquidity, the Fed, now touted as the formal financial market stabilizer, will be forced increasingly to monetize federal debt. That process will build over time given the federal government’s effective bankruptcy. Again the current circumstance will evolve into a hyper-inflationary depression (HID). Such is not likely much before 2010 or after 2018. The financial endgame will come sooner rather than later and will break with surprising speed when it hits. What promises HID this time is the lack of monetary discipline formerly imposed on the system by the gold standard and a Fed dedicated to preventing the collapse of the money supply and implosion of a still extremely overleveraged domestic financial system. The limits to the unlimited abuse of the debt standard are particularly evident in GAAP practices based on financial statements of the US government. If the government abided by GAAP they would show an actual federal deficit at $4T in 2007 alone, with total Fed obligations standing at $62.6T. With no ability to honor these obligations, the government is effectively bankrupt. Although the US government faces ultimate insolvency, it has the same way out taken by most countries faced with bankruptcy. It can print whatever money it needs to create in order to meet its obligations. The effect of such action is runaway inflation, hyperinflation, with a resulting full debasement of the US dollar, the world’s reserve currency. Oil prices are at historic highs, the dollar at historic lows and money growth is at an all time high. The near term outlook for all three is for new record levels and extremely strong upside pressure on US inflation. Gold prices should continue setting new historic highs. From the Fed’s standpoint it can neither stimulate the economy nor contain inflation. Lowering rates has done little to stimulate the structurally impaired economy and raising rates may become necessary in defense of the dollar. By the time hyperinflation kicks in the economy should already be in depression and the hyperinflation should quickly pull the economy into a great depression. Uncontained inflation is likely to bring normal commercial activity to a halt, while the inevitable inflationary collapse based solely on these funding needs could be pushed well into the next decade. Actions already taken likely have set the stage for a much earlier crisis. Given the extremely rapid debasement of the larger denomination notes with limited physical cash in the system, the existing currency would disappear at least for a period of time. In the early period of HID, real assets would retain real value. The failure of the world’s primary reserve currency will lead to the structuring of a new global currency system. I would not be surprised to see gold and silver as a part of the system.
In short there is a current breakdown of the global financial system because the system is based on the dollar. The dollar is falling too much, the government has too much debt and can’t pay their bills. – and they’re currently talking about how to spend more money!
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