Friday, April 22, 2011

What is that chewing sound?

I’ve been getting comments from people pointing out that I was “wrong” when I told people not to rush out and buy gold when it was 1200 and now its 1500. First off I don’t give financial advise except to buy canned goods because all advice is wrong eventually. That is it’s like the weather, “if you don’t like it, wait ten minutes”. I’ve always said about gold, if you have extra money and you want some insurance against the worst possible scenario, then sure, buy some. But don’t kid yourself that you know the future price of anything.

When gold was 1200/oz the Fed hadn’t printed a trillion USD and pumped it into the markets by buying Treasuries from rich people. It was their stated intention to create inflation to avoid massive deflation. There was no consensus that it was going to work, we could be looking at 300 dollar/oz gold now instead of a $300 gain.

It’s easy to say we are going to have lots and lots of inflation because hardly anybody can remember anything else, it has been 80 years since 1930. For most people the Great Depression is as remote as the crusades.

I’m going to explain deflation again and I’ll try not to put you to sleep. Drink some coffee or maybe just keep these images in mind to stay awake. Empty store shelves, food riots, mass panic, cities burning and indiscriminate warfare coming to a town near you.

The USD and in fact all modern currency is just an accounting sheet that tallies debt. We call this the fractional reserve banking system where almost all money is created by the issuance of debt. If debtors begin to default in a systematic way like they did after the sub-prime collapse in 2008 it can take so much money out of the system so fast that the system collapses. Most dollars then disappear as they only existed on the balance sheets of the suddenly extinct banks and the remaining dollars must cover more assets and prices plummet uncontrollably searching for equilibrium. (keep in mind the plastic credit/atm card in your wallet is just plastic)

The problem is that our economy has been systematically stripped of all of its productive components that have been sold to China for a quick buck. What economy that we have left is dominated by people making hundreds of billions a year from pushing paper around. In order to maintain the level of income that they have become accustomed to they continue to  hollow out what is left like termites in the wall.

The sub-prime crisis by comparison only represented a small fraction of the loans that are based on inflated asset prices. Most of the rest of the US is similarly leveraged and it will all start coming due in 2012. There are still trillions of sub-prime loans that haven’t hit the balloon payment stage. There are trillions in commercial loans that are all coming due less than 5 years after the crash. Add trillions of corporate junk bonds left from all the mergers and acquisitions that sold 50,000 factories to China. All of this starts coming due in a matter of months.

The majority of US financial assets are controlled by five large banks, there used to be quite a few more banks, in case you don’t remember before 2008.
The ones that were bailed out were called the “too big to fail” banks and they have only gotten bigger and more unsound since then. Giant Termite Colonies would be a better name, six legged Wall Street bankers just nibbling away at the beams that hold everything up. A deflationary collapse could still happen despite all the new money being printed by the Federal Reserve because even the “new“ money is just debt based on collateral of no real value.

The Dodd-Frank Law does in theory give the Obama Administration the tools to step in and take control before everything collapses completely. The Gold Bugs (people who think that gold is the answer to all things) are predicting $8000/oz for gold but deflation could just as easily result in $80/oz gold instead. Do you listen to the Gold Bugs or the Termites chewing in the ceiling beams. Your guess is as good as mine.

Thursday, April 21, 2011

If there are no survivors is it really piracy?

The Dow hit a three year high today reflecting the Fed’s efforts to pump money into the economy to the tune of a trillion dollars. You can also see those efforts play out at the gas pump with new records there as well. Gold and silver are becoming increasingly precious, at least compared to the increasingly less valuable USD.

President Obama announced today the creation of a task at the DOJ to ferret out criminal activity in gas price gouging and speculation as if any of that were illegal. The pirates all got together and made piracy legal so Grand Admiral Obama can parade the fleet all he wants but it’s nothing but show.

Jimmy Carter was the first President to jump on the deregulation band wagon emulating the privatization efforts of Prime Minister Maggie Thatcher who took the “Great” out of Great Britain. Reagan just stopped enforcing the laws pertaining to monopolies and the succession of Presidents that followed signed an assortment of “reforms”, deregulation and the de-criminalization of corporate behaviors that has led to the tragic end we face today.

Obama does have the opportunity to appoint a new member to Commodity Futures Trading Commission replacing a Republican. Will the new member be sporting a peg leg and parrot on his shoulder? The Dodd-Frank law is inching closer to implementation with another batch of rules on “swaps” to come out Wednesday. This pertains to the 600 trillion USD in derivatives that will no longer be traded in the dark at least in theory. Ronald Reagan not only proved that deficits don’t matter but also that laws and regulations don’t matter if no one enforces them.

Rules that came out last week from the CFTC and the SEC require anybody trading derivatives to put up collateral if they aren’t in the actual business of using the commodity being traded like oil companies, airlines and farmers. Republicans in the House are of course attempting to block any of these rules from ever seeing the light of day. One bill simply delays all rule for two years and they been attempting to de-fund regulatory operations and eliminate the salaries of commissioners are some of the things included in the “budget cuts” they have been pushing. We’ve got to save a buck, we’re broke you know.

Tuesday, April 19, 2011

One more BRIC in the wall

Gold spiked above 1500/ounce for the first time ever today as the USD began to weaken against the Euro after strengthening yesterday in the wake of more attacks by Wall Street against Portugal’s credit rating. Oil also continued to go up despite the continued surplus in the supply.

China reacted with “unease” about Standard & Poors suggesting it could downgrade the US credit rating. Japan down played the significance of the report as you might expect since they have real problems. China has repeatedly complained that the US is debasing the USD in order to reduce what it owes to its creditors with China estimated by the US Treasury to be the largest holder at about 1.2 trillion.

China also holds more than 3 trillion in foreign currency with perhaps 2 trillion in USDs but this is all a state secret and so nobody really knows. The US has recently increased dramatically its estimate of China’s ownership of US Treasuries based on surveys of known holders of US bonds. China uses multiple front operations to mask what it does in the financial markets and had been believed to be selling large numbers of US bonds.

China doesn’t ever expect to see the trillions that we owe them as they know full well this was never “real” money. China just doesn’t want their mushrooming empire hindered by the collapse of the American empire and to that end they hosted a meeting of the BRICS countries last week. This is Brazil, Russia, India, China and South Africa which just became the newest member of this economic alliance.

With almost 3 billion people, a quarter of the world’s land mass and a GDP larger than the US they are an economic force to deal with. China is of course the dominate player and they decided that South Africa would join the club and this will give China even more influence on the African continent.

The big news from this latest meeting is that they will no longer use the USD in trade between the “big five” but will use their own currencies instead. This news, if even noticed by conservatives will doubtless result in a “Naw-aa, look at all the dollars they hold! They need us!”

They need us for what exactly? We don’t export anything that the BRICS countries don’t already have plenty of and they have big chunk of the world’s gold bullion in their vaults to back their currencies. They also have more nukes between them then we have, just in case President Trump wants to start flexing his muscle to take oil away from the countries that supply the BRICS. Perhaps Vice President Palin with all her experience “seeing Russia from her house” will advise him not to do that.

Monday, April 18, 2011

Portugal last week, the USA this week

Today (Monday) Standard & Poors came out with an alert suggesting that they might within two years downgrade US government debt. From S&P, "Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,"

This is all being spun for political advantage by the right, be afraid of the debt, be afraid of the government, be afraid of taxes. They don’t want anybody to wakeup to the fact that the US could in fact easily run a budget surplus if it returned to revenue collection rates of ten years ago. Of course this would cut into the profits on Wall Street and they can’t have that, so grandma has to go out on the ice flow, and you should just be glad you don’t with her.

Sunday, April 17, 2011

The Sunday Morning Lies

Disgraced former Fed Chairman Alan Greenspan came on the Sunday talk shows to shill for the IMF and said flat out we need to roll back all of the Bush tax cuts and eliminate all of the loopholes. Raise taxes on the rich, how could that be a bad thing? Because he said “all of” and this is where you see that Alan hasn’t seen the error of his ways and is still an Ayn Rand worshiper.

When the Bush tax cuts were enacted they had almost zero effect on the middle class whose rates didn’t change but in the interim inflation has pushed many of those who still have a job into a much higher tax bracket if the Bush cuts were simply repealed. In fact the big cut in taxes for the rich that came from Bush were from capital gains and dividends being taxed at a top rate of 15% and he didn’t mention changing that, that would be “anti-business”. When he says eliminate the loopholes he means take away tax credits that go to the poor and middleclass.

If you did this it would bring in a lot of money to the Treasury but it would depress the economy further while the parasitic rich would continue to suck the wealth out of everybody else. But this is the regime the IMF imposes on anybody unlucky enough to fall into one of their austerity traps. Great Britain is reeling from cuts to the middle class while the rich and corporations offshore their incomes to avoid taxes.

Portugal is the current target as the crooked rating agencies are downgrading their debt so that Wall Street can drive up interest rates on Portugal’s bond issues. Now forced to go to the IMF for current financing they will be forced to dismantle their safety net and make cuts to everything that makes a middle class possible.

The right wing calls Portugal one of the PIGS countries (Portugal, Ireland, Greece and Spain) because they are “socialist“. (this means they have a middle class) In fact Portugal has no economic crisis, they didn’t have a housing bubble because they didn’t allow the predator banks to move into the market. They have full employment, their economy is doing very well compared to the rest of the world. But the bond vampires have moved in on them and they can’t refinance their debt.

You see bonds are sold at a discount because in effect the interest is paid up front. A one year bond that pays 5% only brings in 95 cents on the dollar when sold (not exactly but you get the idea). If you dramatically increase the interest rate by paying a crooked bond rating agency to downgrade the country’s credit rating then they must sell a great deal more debt to bring the same amount of money (remember existing debt is constantly refinanced and that‘s the trick to it). This in turn is used to downgrade the credit rating further and round and round until you have a debt crisis.

In fact if you can drive down their rating far enough then institutions like pension funds who can’t hold “bad” or low rated bonds must dump them onto the market all at once and the sharks can really feed. Just the threat of this can drive a country into the merciless hands of the IMF for a “bailout”.

An IMF “bailout” amounts to wholesale corporate looting, it’s the sort of thing that pirates and barbarians used to do to isolated towns and lets be clear, I’m referring to the IMF, they aren’t the good guys, they are the pirates. They want to do the same thing here in the US and unless enough people catch on they will.