“The expected return/risk profile of the stock market has shifted to hard-negative”

Wall Street Fund Manager John P. Hussman

One of the most respected Wall Street fund managers has confirmed what every hedge fund manager in the world knows. The European Central Bank (ECB) will not keep inflating credit. Italy would need $1 trillion to $3 trillion, Greece $500 billion, Germany is leveraged up to 82% of GDP, France is in worse shape. It all adds up to a $30 trillion bail out by some estimates. The European banks have “rehypothecation,” a practice that occurs principally in the financial markets, where a bank or other broker-dealer reuses the collateral pledged by its clients as collateral for its own borrowing, to the edge of the financial cliff.
The “growth” in the USA last quarter can be summed up as follows. The GDP “increased” 2.0% and the Gross Domestic Income, what we are actually earning, grew at a 0.3% pace. You do the math.
The following appeared in Hussman Funds on 12-12-2011.
With the exception of extreme market conditions (see Warning- Examine All Risk Exposures , and Extreme Conditions and Typical Outcomes ), I try not to wave my arms around about near-term market risks, but I think it’s important to cut straight to the chase here. The present market environment warrants unusual concern, in my view. Based on a wide variety of evidence and its typical market implications over an ensemble of dozens of subsets of historical data, the expected return/risk profile of the stock market has shifted to hard-negative. This places us in a tightly defensive position. This isn’t really a forecast in the sense that shifts in the evidence even over a period of a few weeks could move us to adjust our investment stance, but here and now we observe conditions that have often produced abrupt crash-like plunges. This combination of evidence includes elevated valuations, overbullish sentiment, market internals best characterized as a “whipsaw trap” on the basis of typical follow-through, heightened credit strains, and clear evidence (on reliable forward-looking indicators) of oncoming recession, among other factors.
As always, we try to align our investment positions with the evidence we observe. If the evidence softens, our hedges will soften. While the quickest route to a modest exposure to market fluctuations (perhaps 20-30%) would be a clear improvement in market internals – which could justify a less defensive stance even in the face of recession risks and rich valuations – the most likely route to a significant investment exposure would be a decline to much lower prices and correspondingly higher prospective returns. Presently, avoidance of major market losses takes precedence in our analysis.

Latest Unemployment Rate is 10.6%

The latest official unemployment rate is 8.6%. Everyone knows it is worse but very few have the skill set to find out the truth. Different economist have different methods. I like using “real world” analysis comparing today’s economy where the federal government consumes 25.3% of the GDP to the 1999-2000 economy where the federal government consumed 18.2% of the GDP.

Civilian Labor Force Participation Rate going nowhere but down

I do this because that is when the labor force participation rate peaked at 67.9% in July 1999. The employment-population ratio also peaked at 64.9% that month. Compared that to today’s dismal 27 year lows of 63.9% and 57.6% respectively.
Simply put keeping the 1999 ratios we have 140,580,000 workers today compared to the 148,681,000 we should have with limited federal government and sound economic policies. The civilian labor force is 153,683,000 but under the 1999 criteria it would be 157,278,000. Doing the math the “1999″ unemployment rate would be 10.6%, not 8.6%.

Inflation and Money Creation 101

Since 1913 we have had a monopoly central bank commonly referred to as the Federal Reserve. Before the Federal Reserve we had, more or less, free banking with various federal government interventions, laws, and central planning. US Central Banks (1791-1811) and (1816-1841) were put out of business due to inflation, corruption, and general incompetence.

The First Central Bank of the United States (1791-1811) created inflation, corruption, and scandal

Under the private decentralized system of banking, banks typically loaned out 50% to 83% of their deposits. Today that number is legally 90%. Banks under the Federal Reserve System are MORE leveraged than under capitalism. A typical bank before 1913 loaned out 79% of its deposits in the form of loans. Before 1933 the public could redeem their dollars for physical gold. This prevented banks from printing money not backed by gold, or before 1873, silver.
The Federal Reserve remained on a loose gold standard, called the Bretton Woods system (1944-1971) that allowed selected central banks to exchange dollars for gold. In return for this privilege the central banks generally used dollars as their reserve currency “because it was backed by gold and as good as gold.” In 1971 Nixon removed the United States from the gold standard in part because of the pressures to finance the Vietnam War and increased federal expenditures on programs such as the “Great Society” social welfare programs designed to eliminate poverty.
First the basic principal of printing money is to give the money to your favorite constituencies so they can always be in a position to outbid the peasants for goods and services. The favorite constituencies of the Federal Reserve are the Washington politicians and Wall Street. The game is rigged, how can you compete against an institution that can print money whenever it wants? You can’t.

The second central bank of the US (1816-41) was ended due to inflation, corruption, and scandal

The elites watch you work like a dog creating wealth, and then steal your wealth through inflation and taxes. You always end up broke and the elites remain permanently enshrined in their positions of power and privilege, thanks to the wonders of the central banking system.
The elites want readily available credit and the ability to pay back their loans in cheap paper dollars, not hard gold or silver. The elites also want inflation for the prices of the goods they produce to exceed the wages of the workers. This is the secret to wealth inequality. Most workers do not have the educational background to understand inflation. Prior to 1933 they were protected from greedy bankers and politicians by being able to possess gold, but with a fiat currency backed by nothing they are at the mercy of the central bank that allows politicians and Wall Street to steal workers money by using inflation to disguise the theft.
So what has happened since 1971 as we prepare to march over the fiscal cliff of financial insolvency?
Since the complete transfer from a fiat currency the Dow Jones Industrial Average (DJIA) has increased 1,262% and the Gross Domestic Product (GDP) 1,233% using “nominal” numbers or numbers not adjusted for inflation. More or less in lock step as one would expect.
Total credit market debt owned has increased 2,902%, outstripping GDP growth by a factor of 2.35.
The Federal Reserve monetary base, (coins, paper money, and commercial banks’ reserves with the central bank) has increased 3,658%, outstripping GDP growth by a factor of 2.97.

The third central bank of the US will end its reign soon mired in inflation, corruption, and scandal

Gold, the traditional source of real monetary value, has increased 4,177%, outstripping GDP growth by a factor of 3.39.
What these numbers are saying is there has been a huge creation of credit and cash by the US central bank as well as the European Central Bank (ECB) that is inflationary and not justified. Gold is simply a barometer reflecting the increase in the money supply as well as the justified inflationary fears of investors.
In past times with gold and silver when times were good people demanded to use their money for consumption. This demand for money increased the cost (interest rate) for banking deposits. When the interest rate increased capital users of money stopped expanding (using money), waiting patently for the day when interest rates declined. When the economy slowed down consumers prefer to reduce consumption and save. This saving reduces interest rates and signals to capital users that now is a good time to expand when money is cheaper. This basic interaction between consumers and capital users of money works perfectly when there is capitalism and no central bank or federal government interfering in the market place. Money, gold and silver, are allocated in an efficient manner for the maximum benefit of society.

The Second Bank of the United States Chairman Nicholas Biddle was just as corrupt as Ben Bernanke

When a banker loans out money he would expect to see a return above the inflation rate plus 3%. Prior to 1913 there was virtually no inflation. Deflation was more common because producers found cheaper and more efficient ways to produce goods and services similar to today’s price reductions on electronic products. So a typical banker would loan out $1,000 would expect to see $1,030 paid back in a year.
So why are bankers loaning out the equivalent of $1,000 to get a payout of $425?
Your guess is as good as mine.
That is the essence of why the world is on the verge of a market failure and collapse. The central bankers have inflated the money supply to historic proportions. There is nothing backing this money but the promise to print more money. It is a Ponzi scheme. It will collapse.
The yield on a 10 year US Bond is 2.02%. With an official inflation rate of 3.6% why would anyone hold a 10 year bond till maturity, essentially losing 1.6% per year?
The answer is no one plans on holding that 10 year bond till maturity. They are hoping the economic chaos in Europe, China, and Japan will drive the price of the bond higher and they will be able to sell the bond for cash, and a profit, before the inevitable bust comes. As long as the number of suckers exceeds the number of people cashing out the game goes on.
Someday even the great and mighty central banks will not be able to print enough to keep pace with those cashing out. That day is fast approaching. When the US Treasury Department is bailing out Europe it is only a matter of time before the math catches up with the banking, government, and private sector elites.

World Meltdown Theme Song

This version of the classic song, Come Undone, is, in my opinion, the best version ever performed. Listening to the words about the breakup of a intensely physical relationship mirrors the breakup going on right now between the Western extravagant lifestyle of bureaucrats, central banks, and elites, from decent society.
One partner went horribly into the direction of ethnocentric pursuit of self gratification using deception and trickery to disguise cheating at the expense of the other hard working honest partner. And so it is, our government parasites and followers lived for decades on the hard work and borrowed money of other more productive members of society. When the full impact of the betrayal is known to the hard working people of the world there will never be a safe place for the parasites.

Below is the official version of the song.
“Come Undone” is the second single from the album Duran Duran (The Wedding Album) by British band Duran Duran, and is their twenty-fourth single overall.
With their commercial and critical success reestablished by the previous single “Ordinary World”, “Come Undone” continued to showcase more of the band’s entry into the Adult Contemporary genre. The single proved to be the group’s second consecutive US top ten hit from The Wedding Album. It was also popular in the UK and other international markets.
The group’s guitarist at the time, Warren Cuccurullo, is credited with developing the instrumentation for “Come Undone”, most importantly its guitar hook, which he developed while trying to do a re-interpretation of “First Impression” from their 1990 album Liberty. In 2005, Cuccurullo revealed to author Steve Malins that he and Nick Rhodes had originally planned on using the song for a project outside of Duran Duran with Gavin Rossdale, but had changed plans when singer Simon Le Bon took a liking to the music and began to come up with lyrics on the spot.[1] The song was included as a last minute addition to their self-titled album in 1993, with the lyrics being written by Le Bon as a gift for his wife, Yasmin.
The group’s bassist, John Taylor, did not actually play bass on this track, although he does in the music video. Nick Rhodes and John Jones both contributed synth bass on the track during his absence. Tessa Niles was credited with backing vocals. The song also contains a sample from The Soul Searchers’ song “Ashley’s Roachclip”.
According to John Jones, “at the time we had completed and mastered the Wedding Album and had started the cover album “Thank You”. One day we took the drum loop and bass groove from a demo of mine called “Face to Face” and added the ultra cool guitar riff that Warren had come up with for a new “cover” version of “First Impression”. After a couple of hours of tweaking we played the track over the phone to Capitol in Los Angeles and they loved it and said they wanted it on the Wedding album! When Nick arrived that afternoon the intro was carved into a song that we played to Simon that night. He was back the next day with the lyrics and the melody and I think we finished the vocals the day after that. On the fourth day we finished the track detail and sent it to David Richards in Switzerland to be mixed. “Come Undone” was also a song by Karen Hendrix and myself from the late 1980s. There is a cover version of it out there called “Cloud 9″ by Alan Frew”.

Kyle Bass Give Three to Five Years Before Massive Political Upheaval

Hedge fund manager Kyle Bass has been intimately involved in studying the financial conditions of world governments. His intimate knowledge allows him to correctly allocate his clients assets so they will make money. His comments are brutally honest. The world has gone mad printing money in a effort to sustain a lazy bloated government sector. The private sector has been equally irresponsible. Which brings us to the bottom line, where did these governments and private institutions get all this cash?
Central banks.
The battle for the people is to force bankruptcy and put the too big to fail banks out of business. The battle for the elites is to have one more bail out, one more quantitative easing. Bass give the people hope that our governments will collapse and cease to exist in the near future. Hopefully without the war.
Here is the link to his interview explaining the financial conditions of Europe, Japan, China, and the USA.
http://www.youtube.com/watch?v=5V3kpKzd-Yw

GM Meeting the Production Goals of Comrade Obama

One of the oddities of the current “recovery” has been the performance of the manufacturing sector. One would suspect if the global economy was normal and the dollar dropped in value our exports would be increasing. Simple enough.

GM Vehicle Inventories from 2009 to present

But the world economy is not normal. China is suffering inflation woes from years of a mercantilism economic policies of exporting goods and services and importing cheap dollars. The Chinese Central Bank is reported to be leveraged 1233-1 making the 56-1 leveraging at the Federal Reserve seem downright prudish. Socialist Europe is a basket case set to implode similar to the USSR implosion in 1991. So where is all the GM production going to?
Just like the former USSR where production goals were more important than actually utilizing resources to increase utility consumption for the masses, GM seems to be copying the USSR model in meeting production goals but not selling anything. Inventories at GM dealers have increased 42.4% in the last two years from 438,000 to 623,666 cars sitting on dealer lots.
Funny, the Institute for Supply Management (ISM) Manufacturing: PMI Composite Index (NAPM), Index, Monthly, Seasonally Adjusted is up from 50.8 in October to 52.7 in November. I guess we know why now.

US Set to Bail Out Europe

Here is a statement released by presidential candidate Ron Paul on the subject.

Presidential Candidate Ron Paul

The Fed’s latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed. Under current law Congress cannot examine these types of agreements. Those who would argue that auditing the Fed or these agreements with central banks harms the Fed’s independence should reevaluate the Fed’s supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis.
Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis. Central banks are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis caused by uncontrolled government spending and irresponsible debt issuance. Congress should not permit this type of open-ended commitment on the part of the Fed, a commitment which could easily run into the trillions of dollars. These dollar swaps are purely inflationary and will harm American consumers as much as any form of quantitative easing.
The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending. Citizens the world over deserve better than this. They deserve sound money that cannot be manipulated and created out of thin air by central planners who promise printed prosperity. Fiat money caused this European crisis and the financial crisis before it. More fiat money is not the cure. The global fiat currency system has proven itself a failure, we need real monetary reform. We need sound money.
Please allow me to translate into a more colloquial interpretation;
“We the elites at the Federal Reserve and in Washington DC have decided that our peasants are not contributing enough wealth from their personal wages to sustain the lifestyle the elites in Washington, New York, Paris, Rome, and all of Europe have become accustomed to.
Therefor to sustain the lifestyle of the rich and almost famous government comrades we will impose a tax on the America peasants in the form of inflation of and unspecified amount until such time as to satisfy our European elites, or we can sucker China into bailing out our bail out.”
“You have no right to your money and wealth. The Federal Reserve will steal your wealth to pay the elites as they please. No gold, no silver, no justice. American gave up their right to economic sovereignty in 1913. Shut up and pay up. The Federal Reserve is your master and you should be thankful we do not confiscate all your wealth.”
American are getting what they deserve because they trusted politicians and central bankers with their money. No Social Security, and no means to make and keep wealth. The Federal Reserve has decided they will steal your wealth whenever they damn well please. Shut up citizen and get use to $5.00 a gallon gasoline.

Global Ponzi Scheme Crashing Into Reality

The over the counter, unregulated, market is now $707.6 trillion. One slight problem. The GDP of the worlds economies combined is $63 trillion. So just one market has bet $707.6 trillion on a $63 trillion world economy?
What about the government debt?
What about the corporate debt?
What about the personal debt?
To illustrate our credit bubble here is a graph of the total credit market debt owed (TCMDO).

Total Credit Market Debt Owed, up 3,146% since 1971
The TCMDO is up 3,146% since 1971, when the Federal Reserve went off the gold standard and could print as much money as it wanted to with no consequences.
To the right is a graph of the Gross Domestic Product (GDP), which increased 1,282% in the same time frame.

Gross Domestic Product up 1,282% since 1971
And inflation from 1971 has increased 469%.

Consumer Price Index up 469% since 1971
What we seem to have here is a failure to communicate between the capital markets, world production, and our bankers and politicians. It seems as though our central banks and world politicians have been having a grand time selling the peasants on social justice programs, generational theft, free medical care, and other such frivolities while having quite the global party on the peasants dime. Throw the poor ignorant fools a bone and then rip them off blind politics. Yea we see it.
For the record according to the numbers the GDP growth was, to be generous, 3% from 1971 to today. Debt growth was 6.7% during that same time frame. In other words our politicians and central banking financial wizards have managed to borrow and spend $31.8 trillion more than GDP growth would justify.
Putting yet in another way to comprehend the magnitude of this central banking/Washington blunder in normal times with a gold standard would debt would be about $22 trillion not $52.5 trillion.
There is no way out of this but massive default and deleveraging.
The alternative is taxing the peasants more so the elites can continue their parasitic existence of luxury.
War.
Years of stagnation as the central governments and banks devour more and more private resources.
Default and a end to all central banks and government social justice schemes.
This is a lesson we will all learn the hard way, when you trust other people with your money, they (politicians) rip you off.

Happy Thanksgiving

The Real Meaning of Thanksgiving: The Triumph of Capitalism over Collectivism
This time of the year, whether in good economic times or bad, is when we gather with our family and friends and enjoy a Thanksgiving meal together. It marks a remembrance of those early Pilgrim Fathers who crossed the uncharted ocean from Europe to make a new start in Plymouth, Massachusetts. What is less appreciated is that Thanksgiving also is a celebration of the birth of free enterprise in America.
The English Puritans, who left Great Britain and sailed across the Atlantic on the Mayflower in 1620, were not only escaping from religious persecution in their homeland. They also wanted to turn their back on what they viewed as the materialistic and greedy corruption of the Old World.
In the New World, they wanted to erect a New Jerusalem that would not only be religiously devout, but be built on a new foundation of communal sharing and social altruism. Their goal was the communism of Plato’s Republic, in which all would work and share in common, knowing neither private property nor self-interested acquisitiveness.
What resulted is recorded in the diary of Governor William Bradford, the head of the colony. The colonists collectively cleared and worked land, but they brought forth neither the bountiful harvest they hoped for, nor did it create a spirit of shared and cheerful brotherhood.
The less industrious members of the colony came late to their work in the fields, and were slow and easy in their labors. Knowing that they and their families were to receive an equal share of whatever the group produced, they saw little reason to be more diligent their efforts. The harder working among the colonists became resentful that their efforts would be redistributed to the more malingering members of the colony. Soon they, too, were coming late to work and were less energetic in the fields.
As Governor Bradford explained in his old English (though with the spelling modernized):
“For the young men that were able and fit for labor and service did repine that they should spend their time and strength to work for other men’s wives and children, without recompense. The strong, or men of parts, had no more division of food, clothes, etc. then he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labor, and food, clothes, etc. with the meaner and younger sort, thought it some indignant and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc. they deemed it a kind of slavery, neither could man husbands brook it.”
Because of the disincentives and resentments that spread among the population, crops were sparse and the rationed equal shares from the collective harvest were not enough to ward off starvation and death. Two years of communism in practice had left alive only a fraction of the original number of the Plymouth colonists.
Realizing that another season like those that had just passed would mean the extinction of the entire community, the elders of the colony decided to try something radically different: the introduction of private property rights and the right of the individual families to keep the fruits of their own labor.
As Governor Bradford put it:
“And so assigned to every family a parcel of land, according to the proportion of their number for that end. . . .This had a very good success; for it made all hands very industrious, so as much more corn was planted then otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little-ones with them to set corn, which before would a ledge weakness, and inability; whom to have compelled would have been thought great tyranny and oppression.”
The Plymouth Colony experienced a great bounty of food. Private ownership meant that there was now a close link between work and reward. Industry became the order of the day as the men and women in each family went to the fields on their separate private farms. When the harvest time came, not only did many families produce enough for their own needs, but they had surpluses that they could freely exchange with their neighbors for mutual benefit and improvement.
In Governor Bradford’s words:
“By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God. And the effect of their planting was well seen, for all had, one way or other, pretty well to bring the year about, and some of the abler sort and more industrious had to spare, and sell to others, so as any general want or famine hath not been amongst them since to this day.”
Hard experience had taught the Plymouth colonists the fallacy and error in the ideas of that since the time of the ancient Greeks had promised paradise through collectivism rather than individualism. As Governor Bradford expressed it:
“The experience that was had in this common course and condition, tried sundry years, and that amongst the Godly and sober men, may well convince of the vanity and conceit of Plato’s and other ancients; — that the taking away of property, and bringing into a common wealth, would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed confusion and discontent, and retard much employment that would have been to their benefit and comfort.”
Was this realization that communism was incompatible with human nature and the prosperity of humanity to be despaired or be a cause for guilt? Not in Governor Bradford’s eyes. It was simply a matter of accepting that altruism and collectivism were inconsistent with the nature of man, and that human institutions should reflect the reality of man’s nature if he is to prosper. Said Governor Bradford:
“Let none object this is man’s corruption, and nothing to the curse itself. I answer, seeing all men have this corruption in them, God in his wisdom saw another course fitter for them.”
The desire to “spreading the wealth” and for government to plan and regulate people’s lives is as old as the utopian fantasy in Plato’s Republic. The Pilgrim Fathers tried and soon realized its bankruptcy and failure as a way for men to live together in society.
They, instead, accepted man as he is: hardworking, productive, and innovative when allowed the liberty to follow his own interests in improving his own circumstances and that of his family. And even more, out of his industry result the quantities of useful goods that enable men to trade to their mutual benefit.
In the wilderness of the New World, the Plymouth Pilgrims had progressed from the false dream of communism to the sound realism of capitalism. At a time of economic uncertainty, it is worthwhile recalling this beginning of the American experiment and experience with freedom.
This is the lesson of the First Thanksgiving. This year, when we sit around our dining table with our family and friends, let us also remember that what we are really celebrating is the birth of free men and free enterprise in that New World of America.
The real meaning of Thanksgiving, in other words, is the triumph of Capitalism over the failure of Collectivism in all its forms.

Why the European Central Bank Will Not Print

The following appeared in Hussman Funds on 11-21-2011.
Over the past week, we’ve heard all sorts of propositions that the European Central Bank (ECB) “must” begin printing money to bail out Italy and other countries, because “there is no other option.” There are three basic difficulties with this idea. The first is that ECB buying might help to address immediate liquidity issues of distressed European countries, but it would not address long-term solvency issues, and would in fact make them worse. The second is that the ECB, under existing European treaties, has no such authority, and the prohibitions against it are very explicit. Changing that would be far more difficult than many market participants seem to believe, because it would require an explicit and unanimous change in the EU Treaties that AAA rated countries such as Germany and Finland vehemently oppose. The third difficulty is that even if the ECB was to buy the debt of distressed European countries with printed money, the inflationary effects would likely be far more swift than anything we’ve seen in the United States. This would not “save” the euro, but would simply destroy it by other means.

John P. Hussman of Hussman Funds is well known for his impeccable financial research

Investors are not likely to be treated with a “surprise” announcement that the ECB is going to expand its purchases of distressed European debt. Any significant ECB intervention would likely follow a formal revision of EU treaties that trades greater ECB flexibility in return for more centralized fiscal control.
Let’s cover these points individually.
Liquidity versus Solvency
First, it is important to keep in mind that while ECB buying of distressed European debt can address short-term liquidity problems (the need to roll over maturing debt as it comes due), it does not address the long-term solvency problems in these countries (the fact that they are mathematically unable to make good on it because the debt violates the no-Ponzi condition ).
A central bank works like this. It buys some amount of government debt, and pays for it by printing currency (or bank reserves). That initial purchase essentially represents free revenue to the government, since it gets to buy goods and services in return for costless pieces of paper, and the income from the bonds held by the central bank is transferred back to the government over time. The central bank can exchange maturing bonds new ones, or change the composition of its portfolio in other ways, but if it doesn’t increase the size of its overall portfolio, no new “base money” is created.
Rest of blog here.

Money Velocity at 47 Year Low

The Federal Reserve has done everything it can to stimulate the economy, pouring billions of “liquidity” into the market. Like a junkie looking for one more fix the Fed has been supplying the dope for America and the federal government to get high, the housing boom, and now to dull the pain of our economic collapse. And like the junkie who needs a bigger and bigger fix to get high, eventually the drug loses its potency and/or kills the junkie. And that is where we are at today.

Last time there was this much cash sitting around was 1964, prior to the escalation of the Vietnam War

We are going to have a “mini boom” in the coming months as Europe implodes and billions move from Europe to America, but the underlying economic conditions here are just as volatile or worse. We may be following Europe into the debt abyss in, at best, five years. Most think by the fall 2012 all but the dullest among us will see the enormity of our money/government bubble bursting before our eyes. Economic catastrophes generally take 3 to 5 years to fully reveal themselves.
Fall 2008, 2009, 2010, 2011, 2012…
For those sleeping in economics here is the quick definition of the money velocity;
“The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent in a specific period of time. Velocity has to do with the amount of economic activity associated with a given money supply. When the period is understood, the velocity may be presented as a pure number; otherwise it should be given as a pure number over time. In the equation of exchange, velocity of money is one of the variables claimed to determine inflation.”
What this means is the Fed is pumping billions into Wall Street and nobody is spending. The money is sitting idle, like gasoline in storage, waiting, waiting, waiting, to be spent. When that day comes the potential for inflation rates of 38% from years of zero percent interest rates is all but certain. This is the game plan of the politicians. Inflate the debt away. 15 trillion minus 10% inflation lowers the debt to $13.5 trillion without one tax hike. 38% works even faster to absolve the federal government of its debt obligation.
For the American public this would be a tax hike of 38% with no representation. Washington could care less as long as the bureaucrats are paid and congress continues to get rich. Business as usual for the masters. Bad times for the peasants.
So while the propaganda reads that inflation cooled from 3.9% to 3.6%, and the GDP is a positive 2.5%, the underlying fundamentals have not changed. We are catching a break as Europe falls down. Enjoy it this holiday season.

Newt Gingrich Is No Conservative

This article appeared in CATO on 11-15-2011 by Gene Healy.

CATO scholar Gene Healy

Has it really come to this? Newt Gingrich as the conservative alternative to Mitt Romney? That’s what many in the punditocracy have proclaimed as the former speaker of the House has surged recently in the polls.
Yet a look at his record reveals that Newt is hardly the “anti-Mitt” — he’s Mitt Romney with more baggage and bolder hand gestures.
Every Gingrich profile proclaims that he’s a dazzling “ideas man,” a “one-man think tank.” It seems that, if you clamor long enough about “big ideas,” people become convinced you actually have them.
But most of Gingrich’s policy ideas over the last decade have been tepidly conventional and consistent with the Big Government, Beltway Consensus.
Gingrich’s campaign nearly imploded this summer when he dismissed Rep. Paul Ryan’s, R-Wis., Medicare reform plan as “right-wing social engineering.” But that gaffe was a window into Gingrich’s irresponsible approach toward entitlements.
In 2003, Gingrich stumped hard for President George W. Bush’s prescription drug bill, which has added about $17 trillion to Medicare’s unfunded liabilities. “Every conservative member of Congress should vote for this Medicare bill,” Newt urged.
And in his 2008 book Real Change, he endorsed an individual mandate for health insurance.
In a 2006 piece for Human Events, Gingrich offered House Republicans “11 Ways to Say: ‘We’re Not Nancy Pelosi.’” Point seven proposed a Solyndra-on-steroids industrial policy devoted to “developing more clean coal solutions, investing in a conversion to a hydrogen economy” and more. It’s not clear why the former madame speaker would complain.
It’s also unclear why anybody looking to distance himself from Pelosi would plop down on a love seat with her to call for government action on climate change — as Gingrich did in a 2008 television commercial.

Newt cannot keep his zipper closed and pretends to be a conservitive

It was a season of bipartisan chumminess for Newt. “Kerry and Gingrich Hugging Trees — and (Almost) Each Other,” the Washington Post described a 2007 global warming event Gingrich headlined with Sen. John Kerry, D-Mass.
On foreign affairs, Gingrich’s ideas are a little less conventional, but his apocalyptic saber rattling hardly instills confidence. “We need a calm, reasoned dialogue about the genuine possibility of a second Holocaust,” he told an American Enterprise Institute audience in 2007.
In 2009, he proposed zapping a North Korean missile site with laser weapons. (“Beam me up, Mr. Speaker!” as former Rep. James Traficant, D-Ohio, used to say in the ’90s.)
There’s no denying that Newt is smart, but there’s a zany, Cliff Clavin aspect to his intellect. At times, Gingrich, who’s written more than 150 book reviews on Amazon.com, sounds like a guy who read way too much during a long prison stretch.
The former speaker’s immense self-regard is evident in one of the exhibits to a 1997 House Ethics Committee report on him. In a handwritten 1992 note to himself, he wrote: “Gingrich — primary mission, Advocate of civilization, definer of civilization, Teacher of the rules of civilization, arouser of those who fan civilization, … leader (possibly) of the civilizing forces.” Whew!
When he’s not leading the assembled armies of civilization in a Thermopylae-style battle against “Obama’s Secular Socialist Machine,” Newt does a little consulting on the side.
In 2009, the ethanol lobby paid his firm $312,000, and in 2006, the former speaker scored a $300,000 fee from Freddie Mac, one of the government-sponsored enterprises that helped pump up the disastrous housing bubble.
They sought “my advice as an historian,” Gingrich later explained. (Maybe they were impressed by all those Amazon reviews).
Newt may be a poor fit for the role of “anti-Romney,” but you can say one thing for him: He knows how to play the Washington Game.

How Do Austrian Economists Predict Bubbles?

With the coming financial bubble bursting before our eyes in Europe how is it that some economists, Austrians, always seem to get it right and others, Keynesians, seems to be completely clueless?

Austrian Economist Ludwig von Mises 1881-1973

The short version for why the Keynesians (the 90%) always get it wrong is that they believe in fairy tales. When you believe in propaganda, lies, and are a shrill for the rich elites, it is really difficult to get anything right. Ask Keynesian, 2008 Nobel Prize winner, Paul Krugman. He never gets anything right.
Keynesians serve no other propose than to advocate for the elites who get wealthy on government and the Federal Reserve inflationary policies. They are completely useless for making predictions and advocating any economic policy that would help Main Street USA. They provide cover for our politicians and the Fortune 500 elites, nothing more.
So what is the Austrians secret?
The first secret is they read economic history.
Can this be boring?
For 99.9% of the population yes it is but for a few it is not. Only by reading economic history do you get familiar with what is a fool’s errand, what always fails, and what works. Good books can come from the left and right. “Lords of Finance” by Liaquat Ahamed, “History of Money and Banking in the United States” by Murray Rothbard, “Money, Sound and Unsound” by Joseph T. Salerno. No economist can be worth a damn without a fundamental understanding of sound money, banking, and history.
Maybe this is why banking history it is never taught in our universities?
Learning banking history exposes very unpleasant facts such as;
We have had three central banks in the United States. The first two were killed due to inflation, scandal, and corruption.

1974 Nobel Prize winner and Austrian Economist F. A. Hayek

Since the founding of the Federal Reserve our dollar has been devalued 98%.
The Federal Reserve Bank of New York lowered the stock market reserve requirements to purchase stocks from 100% to 10%, fueling the artificial stock market boom and bust of the 20s. Is this fact in a government text book?
The Federal Reserve intentionally lowered the value of the dollar in the 20s to appease England and England’s pursuit of a strong pound thereby further fueling real estate and the stock market speculation in the United States. Capitalism did not spontaneously “explode” in 1929, the exposition was fueled by the Federal Reserve’s cheap money policies.
Not knowing history leaves economists blind and gullible fools for the official propaganda from the White House and Federal Reserve.
Understanding sound money practices makes understanding “bubbles” extremely easy. Every Austrian economist nailed the housing boom and bust. Peter Schiff of Euro Pacific Capital made a career out of predicting the bust on business shows and at hotel conventions.
How?
The simple version is as follows;
When excess money is created by the Federal Reserve it has to go somewhere. In the 1920s it went into real estate and the stock market. In the 1990s it went into the dot com bubble and bust. In the 2000s it went into housing. The secret is to;
1. Recognize when the Federal Reserve is inflating the money supply.
2. Recognize where the money is being invested onto, what is the “bubble?”

Austrian economist Lew Rockwell can see a money bubble 10 miles away

Usually it is pretty obvious when the Federal Reserve is inflating the money supply. Without boring readers with M1, M2, monetary base, and other numbers the quick easy way is to compare the inflation rate with the Federal Funds rate.
The simple rule good Federal Reserve Chairmen like Paul Volker (1979-87) follow is you put about 3% to 4% distance between the inflation rate and the Federal Funds rate. Volker did this in 1981 even when the inflation rate reached 15%, peaking out the Federal Funds rate at 19%. He understood basic banking principals. If you want to grow the economy you need to save and invest. If the inflation rate is 15% you need to attract savers. To attract savers you need to offer a interest rate ABOVE the inflation rate. Volker followed his principals and the US economy turned around under Reagan and the rest is history. Reagan left office with a 5.4% unemployment rate, in part thanks to Volker’s sound understanding of basic bank principals.
Profitable savings rates is how the banks attract funds that will be invested to grow the economy. Getting paid a return above the inflation rate attracts savers.
This is not the same as printing money and shoveling cheap dollars at bankers. Savers defer their preference for consumption, not using recourses that investors can now use. Printing money means both fight for the same resources creating inflation. This is a big difference between the Austrian economists and the Keynesians.
Allowing bankers to use savers money to make investments into the economy benefits the rest of society with jobs, production of goods, services, and an increased standard of living.
Bankers need to have a little leeway when they make loans. The fudge factor. The spread between inflation and interest rates give bankers some flexibility and freedom to make riskier loans. Not all loans will pay off and a little room for error is needed. Today with a 3.9% inflation rate and a 30 year prime fixed mortgage rate of 4.3% disaster is right around the corner when the inflation rate increases to 5%, 10%.
So what happened in the 2000s that tipped Austrian economist off that there was a housing bubble?

To quote Glen Beck "The Federal Reserve needs to pack up its stuff and go away."
In 2000 the inflation rate was 3.4% and the Federal Funds rate was 6.24%.
In 2001 the inflation rate was 2.8% and the Federal Funds rate was 3.89%.
We had a recession in 2001 and the Federal Reserve was “fighting” the recession with artificially lower rates. Meanwhile the housing Index jumped from 4.2% annual rate from 1990 to 2000 to a 7.6% increase in 2001.
Housing construction actually increased during a recession!
This was misinterpreted by Federal Reserve Chairman Alan Greenspan (1987-2006), Krugman, and the other Keynesians as the easy way out of the recession.
In 2002 the inflation rate was 1.6% and the Federal Funds rate was 1.67%.
The Housing Index increased 6.3% in 2002.
Federal Reserve Chairman Greenspan had clearly abandoned sound banking principals of rewarding savers with SOME profit over inflation. Instead from 2001 to 2004 the M-3 (discontinued in 2006) measure of money growth increased 6.9% annually and the monetary base (coins, paper money, and commercial bank reserves) increased 7.1% annually.
Now both capital users (home builders for this bubble) and consumers were using the same resources, setting the stage for disaster that would inevitably follow.
In 2003 the inflation rate was 2.3% and the Federal Funds rate was 1.13%.
The Housing Index would increase at a astonishing 8.1% annually from 2003 to 2007.
In 2004 the inflation rate was 2.7% and the Federal Funds rate was 1.35%.

Austrian economist and Euro Pacific owner Peter Schiff made his reputation predicting the housing bubble

If Peter Schiff was hesitant in 2002 and 2003 about the housing bubble by the time 2004 came around it was clear to Schiff and any Austrian economist that this was going to be a monumental bust of historic proportions.
In 2005 the inflation rate was 3.4% and the Federal Funds rate was 3.21%.
In 2006 the inflation rate was 3.2% and the Federal Funds rate was 4.96%
In 2007 the inflation rate was 2.9% and the Federal Funds rate was 5.02%.
Alan Greenspan resigned in 2006 and Ben Bernanke finally popped the housing bubble with the standard inflation rate plus 3% difference. The consequences of Greenspan’s actions are 4.2 million unsold homes and another 2 million in the pipeline that have not been foreclosed on.
If sound banking principals were used the Federal Funds rates would have been 5.8% in 2001, 4.6% in 2002, 5.3% in 2003, 5.7% in 2004, 6.4% in 2005, 6.2% in 2006, and 5.9% in 2007. On Main Street these Federal Funds rates would roughly translate into rates of 8%, 7.5%, 8%, 8.5%, 9%, 8.5%, and 8%.

Austrian economist Tom Woods wrote the best seller "Meltdown" explaining the housing boom and bust

Would there have been a housing boom and bust if the going interest rates were 8% combined with a 20% down payment?
No.
Sound banking principals were not followed by Alan Greenspan and the Federal Reserve. Congress and the President compounded the problem with the social justice nonsense Community Reinvestment Act and other crap. Fannie Mae and Freddie Mac further distorted the market by buying up bad mortgages. If the free market was allowed to operate none of this would have occurred.
So how do Austrian economists know there is another bubble occurring today?
Same principals. Federal Reserve creating money, artificially low interest rates, and enormous investment into a selected sector of the economy.
So where is all this money invested?
Government and Wall Street.
The money bubble we are experiencing today is a government money bubble. Unlike housing where we have houses with government we get nothing for our investment. Nothing but a memory of food stamps and cash for clunkers.

Austrian economist Gary North

What is happening with inflation and Federal Funds rates?
In 2008 the inflation rate was 3.8% and the Federal Funds rate was 1.93%.
In 2009 the inflation rate was -0.4% and the Federal Funds rate was 0.16%.
In 2010 the inflation rate was 1.6% and the Federal Funds rate was 0.18%.
In 2011 the inflation rate is 3.9% and the Federal Funds rate is 0.08%.
It certainly looks like Ben Bernanke is doing exactly the same thing Alan Greenspan did.
Do the money supply numbers show a dramatic increase?
Yes they do.
While M-3 was discontinued in 2006 we still have M-2 which has increased 6.7% annually since 2008. The monetary base has increased 54% annually since 2008.

Austrian economist Murray Rothbard

Where is the money going?
During the Clinton years the federal government grew at an annual rate of 3.2%. Clinton reduced the share of the federal government’s consumption of the Gross Domestic Product (GDP) from 22.1% to 18.2%. Inflation averaged 2.6% annually under Clinton.
During the Bush years the federal government grew at a annual rate of 6.6%. Bush increased the federal government share of the GDP from 18.2% to 20.7%. Inflation averaged 2.8% under Bush.
During the Obama years the federal government grew at an annual rate of 7% including a astounding semiannual growth rate of 12.7% in the second half of 2009. Obama has increased the federal government share of the GDP from 20.7% to 25.3%. Inflation has averaged 1.7% under Obama.
Clearly anyway you look at it the federal government is getting the majority of the cheap cash.
And who is the other recipient?
Wall Street.

Fredric Bastiat figured out the government plunder game centuries ago

The Federal Reserve has been pumping billions into Wall Street banks who then use the cheap cash to speculate, buy T-bills, park the money back into the Federal Reserve, buy diamond rings for the mistresses, and squander it if they so desire.
Reserve balances with the Federal Reserve have increased 17,154% since 2007. Wall Street has trillions in “liquidity” that is being squandered or sitting idly.
Before you condemn the banks for holding onto this cash imagine first if, with fractional reserve banking, the banks loaned out, say $15 trillion all at once in a $15 trillion dollar economy. Ka-Boom!
The 3.9% inflation rate we have today is going to be a fond memory soon.
The only thing restraining inflation has been the loss of employment, and purchasing power, by millions of Americas. This is reflected in the 28 year low Employment-Population Ratio, from 64.5% in 2000, to 58.2% today. The 9% unemployment rate grossly misrepresents the severity that the dismal economy is having on employment.
Is the picture beginning to become clear as to the enormous mess the economy is in?
The free market and capitalism did not created this mess. It was the Federal Reserve and federal government.
Combine this with public and private debt of $54 trillion, European banks leveraged at the insane ratios of 50 to 1, Greece, Italy, Portugal, Ireland, Spain, and more printing of money and the enormity of the catastrophe awaiting the economy is beginning to dawn on the average citizen.
There are some Keynesians still out there telling the public not to worry. The same misguided fools like Paul Krugman blowing smoke for the uneducated masses to consume.
Austrian economists understand history, money, and simply put the two together. Nothing fancy or special other that rejecting the dogma of the day that is designed more to protect the elites ripping off the peasants than to provide any real understanding of the subject.
Economics in a typical university consist of hero worship of the federal government and Federal Reserve. Often lies are told to students mixed in with the bogus theories about multipliers and other mythological BS theories. It is very rare to find a professor question the dogma of the day. Most fall in line with the propaganda because they want that big fat government paycheck. There is very little academic honesty in the field of economics. Keynesians, Chicago school, and others pursuing fables and myths dominate the profession. Their job is to pass on these myths to the public. They provide cover for the elites. Is it any wonder we have Wall Street protesters blaming capitalism for economic failures?
To get out of this mess and return to prosperity the federal government needs to reduce its consumption, as a percent of the GDP, to a minimum of 18%. Mitt Romney’s 20% proposal will do nothing to help deficits. It would add to the deficit. Since WWII the federal government has collected more than 20% of the GDP in taxes once, in 2000. This means at a 20% “cap” we would have federal budget deficits 98% of the time.
A better percentage for the federal government would be 11%. This would mean the end of all social justice programs and entitlements. These programs could be administered by state and local governments as the founding fathers intended.
The Federal Reserve should be ended.
A return to free banking would be brutal, but swift. Once the transition was complete a return to normalcy could begin. The boom bust cycle we are all familiar with would be moderated by the free market, adjusting interest rates automatically, and not set by some senile 80 year old man living in a fantasy world.
We will go bankrupt. The federal government will fail. Social Security will be gone.
How do we deal with it?
The sooner the better for our children. It is no longer about the adults. We will take care of our grandparents the old fashioned way, by ourselves. We need to force the politicians to go bankrupt and eliminate all federal social programs so our children will live debt free.
Or we can deny reality and print some more money.

The Incoherent Demands of a Wall Street Protester

From a rich elitist Wall Street protester.

Former KGB Agent Yuri Bezmenov understood brainwashing and how effective it was

“Here are my demands/solutions behind my support of the Occupy Wall Street Movement. I’ve already gotten a lot of feedback, but comments are absolutely appreciated.”
1. “Ending the Electoral College and deferring to a true popular vote.”
The writer does not understand that without the Electoral College, winner take all of a states delegates system, high population wealthy cities New York, Los Angeles, and Chicago would dominate elections. Candidates would find little or no reason to go to Tennessee, Kentucky, Colorado, New Hampshire, and other poorer, less populated states, and cities. Concentrating political power into the hands of a few elites in large metropolitan areas does not help America and I suspect would lead to secession movements very rapidly.
2. “Banning lobbyists from representing private, for-profit interests from influencing any actions of the federal government.”

Fascism, communism, socialism, it all ends up here.

Instead of the Joseph Stalin solution restricting free speech approach how about a flat or Fair Tax?
Eh?
Why are the lobbyists in Washington?
Tax loopholes? Money?
Ya think?
Why not a flat 17% tax (no loopholes) and shrinking the size of the federal government to 18% of the Gross Domestic Product (GDP).
I would bet that would lower the rent on K-Street considerably. Treating the symptoms, banning free speech, and not the problem never solves the problem. Killing free speech would drive the corruption underground.
We have to admit that the bigger the federal government is, the more corruption there will be.
Eliminating all social programs and reducing the size of the federal government to 11% would eliminate trillions of dollars of waste and corruption. National defense, and a few other legitimate functions.
Ending free speech is not a viable solution.
3. “Any corporation with any profitable presence in the US must pay a tax determined by the profit margin and total value of ALL assets affiliated with the corporation.”

Indoctrination sessions in the USSR

Is this guy on the Chinese propaganda payroll? If he is then he is smart, otherwise he is a fool.
Yea America needs Soviet style confiscation of private property, not.
If the people like toilet paper rationing and pretend employment jobs like in the former USSR, this is the economic policy for them. For the rest of us capitalist pigs we prefer buying our own toilet paper.
4. “No longer allowing corporations the rights given to individuals in any US court of law.”
How about we just stop bailing out the banks?
Corporations have a right to their day in court and the day we stop giving them that right is the day we become like Venezuela, Africa, and Cuba.
Rationing toilet paper and poverty is not cool. Having a thug steal your private property is not social justice.
Ask does hippie singer Grace Slick own a house? Why? “All your private property is a target for your enemy.” The people should be able to steal her house?
5. “All individuals that have broken the law or profited from a crime (no matter the scale) be held personally accountable, regardless of the entity they are affiliated with, in any appropriate court of law in the US.”
WTF? I do not have a clue.

Modern fascist Bill Ayers would deny he is a murdering thug but his words tell a different story

6. “Make all private dealings of the Federal Reserve public and accountable to the American people.”
I have an idea, end the Federal Reserve and return to free banking. It worked great. Read all about it on Ludwig von Mises. Mises.org It is brilliant! Those Austrian economists are just sooooo cool. Unlike the Keynesian fools.
7. “All federal funds allotted to private entities and the exact use of those funds must be made public and easily accessible by both the federal government as well as the funding recipients.”
Transparency is always good.
8. “Strictly enforcing corporate tax laws and making the closure of all tax loopholes and the protection from new forms of tax evasion a top priority in government.”
I have a better idea, end all corporate taxes. This would do three things;
1. It would end corruption. No need for a loophole if the corporation pays no taxes. Politicians love high tax rates so they can sell loopholes.
2. It would bring jobs back to America, and the people. Wages for the people would increase. Poverty is not cool.

Did this protester ever think that less government means less corruption?

3. It would end the fallacy that corporations pay taxes. They do not. The people pay the corporate taxes in the form of;
a. lower wages that hurts the people.
b. less research and development that leads to less innovation.
c. lower dividend, profits, and stock prices that impoverishes the people.
Americans rarely see through the accounting gimmicks of our tax code. The government sponsored propaganda has generations of Americans stupefied by the simplest of simple economic understanding. Former KGB agent Yuri Bezmenov nailed it when he described in detail how propaganda renders people incapable of logical thought.
9. “Limiting the amount of time candidates have to campaign (1 or 2) month campaign season at most).”
Why don’t we just be honest about this and say the protesters want the incumbents to win re-election, forever. This is the effect this law would have on elections. Back in the USSR!”
10. “Cap campaign donations at $1000.00 per individual person, no other legal entity such as corporations or unions will be allowed to make political donations of any sort.”
Another law to favor the elites and ruling class. These protesters probably never meet a dictator they didn’t like. Stalin, Hitler, Pol Pot, Roosevelt, Wilson, and the rest of the despots love laws that ensure there is no competition in elections. We want only the socialist, fascist, and communist view expressed in politics. All glory to the state! Rationing toilet paper to commence immediately! Save the trees! Hug a tree!
Reading this socialist rhetoric from a young, rich, prima donna, makes me sick. As one who grew up in poverty, on welfare, with a poor education or no education, I understand how lucky I am to participate in a capitalist system, tarnished by government corruption as it is. When you face the prospect of not eating for days it focuses your mind on what you need to do to survive. Running around begging for food from the government isn’t one of them.
Because of government school propaganda people do not understand government does not produce anything. Government takes, steals, from people who worked to produce items people want to consume and gives them to others. If the government did not steal and take their cut of the loot there would be more for the people to consume. It is a good gig when you steal peoples money, and use that money to educate them with nonsense that they need to allow you to steal their money from them, or they cannot survive. Reminds me of Tony Soprano except bigger! Great work if you can get it.
In closing, please watch the video of Yuri Bezmenov who explains the brainwashing process much better than I do.

GDP Numbers (+2.5%) and Inflation (+3.9%)

The US Department of Commerce announced Gross Domestic Product (GDP) growth of 2.5% in the third quarter of 2011. These numbers are chained to 2005 dollars, or adjusted for inflation. The chained number was $13.3528 trillion or $15.1986 trillion nominal 2011 dollars. The GDP the nominal growth rate was 4.95%, adjusted for 2005 dollars the growth was 2.44% with the DOC using statistical corrections to 2.5%, the number reported to the press.

Is Wall Street the predator or victim?

The DJIA responded and has increased 11% this month making it one of the best performances in years.
But what is the real picture?
What was not reported with such enthusiastic fanfare is the official inflation rate is 3.9%.
How do the two interact?
If we look at the DJIA over a 10 year horizon we can see where the economy is and why investing in stocks instead of gold, silver, or platinum might not be a good idea.
On October 26, 2001, the DJIA was 9,545, and on October 28th, 2011 it was 12,231. One decade later the DJIA has risen 28% or 2.8% a year. The CPI index rose from 178.3 to 226.889 during the same period or 27.3%. In other words even with the 11% rise this last month over the last decade if you invested in stocks you, at best, broke even.

The New York Federal Reserve Bank is hording all the gold, not Wall Street.
During that same decade the Federal Reserve has increased the monetary base 296%. Gold has risen 541%, the federal debt has increased 150%, and federal spending 87%. It seems the Federal Reserve and Federal Government had much better decade than the “greedy capitalist” on Wall Street.
The real profit taking this last decade was the Federal Reserve Bank stealing the modest gains on Wall Street with inflation and the Federal Government stealing the rest. Theft by inflation and borrowing.
Historically before the post 1971 fiat money inflation the federal government and Federal Reserve would not be able to get away with this theft. In 1907 when the federal government printed too much money they almost went bankrupt and had to be bailed out by J.P. Morgan.
When Nixon was printing too much money before 1971 to pay for the Vietnam War European Central Banks could redeem the excess dollars for gold. This acted as a brake on printing dollars and inflation. When this brake was removed prices increased from 5.7% annually from 1913 to 1971 and 11.8% annually since 1971 to today.
What this means is that for a century we have been toiling and having our labor ripped off not by Wall Street but by a few secretive bankers at the New York Federal Reserve.
In the coming months there will be the last gasps of the government money bubble and maybe a stock market rally. What people need to be looking at is the official inflation number as well as the unofficial inflation numbers. Currently some economists calculate the inflation number at 10.4% or negative GDP growth. In Germany in the 1920s during the hyperinflation period the stock market rallied year after year but when the inflation died stocks declined 33% in real terms.
Be careful out there and do not get caught up in the hoopla.

Europe’s Date with Reality

It is no secret that the European Unions days are numbered. “After 19 months of denial, propaganda and phony fixes, the political and finance leaders of the European Union are claiming a “comprehensive solution” will be presented by Wednesday, October 26. There have been any number of insightful descriptions of what’s going on beneath the artifice, spin and lies, for example:

Landesbank of Germany, leveraged 53.04 to 1

FACT #1: Europe’s entire banking system is leveraged at 25 to 1. This is optimistic. According to Hussman Funds many banks are leveraged up to 50-1.
American banks are typically leveraged 12 to 1, which is where they were at in 2008, saved only by our corrupt politicians and the Federal Reserve. Historically, before the Federal Reserve, banks were leveraged 4 to 1 through most of the 19 th century, typically lending out 50% to 83% of their funds depending on how risk adverse the individual bank management was. The average was 21% kept in reserves, and 79% loaned out. With the onset of the large central banks the crazy pyramid schemes are creating some truly historic leveraged numbers as shown here;
To further put this in perspective Lehman was leveraged 30 to 1. This means a drop in asset prices of 4% at a leveraged ratio of 25 to 1 wipes out a bank.
Landesbank leveraged 53.04 to 1 with tangible assets of 1.43%.
Dexia SA (Nationalized due to insolvency) previously leveraged at 52.83 to 1 with tangible assets of 1.49%.
Deutsche Bank – RG leveraged 37.82 to 1 with tangible assets of 1.83%.
Danske Bank A/S leveraged 30.68 to 1 with tangible assets of 1.97%.
And the list goes on, Credit Agricole, ING Groep-ADR, Commerzbank, UBS AG-Reg, Barclays PLC, Nordea Bank AB, BNP Paribas, Credit Suiss-ADR (22.86 to 1), SOC Generale, LLoyds Banking, Roayal BK Scotland, and Fortis Banque in the best financial shape at 17.75 to 1 with tangible assets of 5.61%. A far cry from the days when a renegade bank would leverage themselves 5 to 1.

Socialism always fail's. Europe will become a dictatorship or embrace capitalism in the coming years.

FACT #2: European Financial Corporations are collectively sitting on debt equal to 148% of TOTAL EU GDP.
This is just the financial corporations. No derivatives, personal, or other off balance sheet items. Before you feel sorry for the Europeans please note that we owe 364% of the GDP when total private and public debt is accounted for.
FACT #3: European banks need to roll over between 15% and 50% of their total debt by the end of 2012.
Simply put this represents billions of dollars that the European banks will have to raise in 2012 or become insolvent. Similar to the situation the United States federal government has gotten itself into with short term T-Bill debt that must be rolled over every month. US treasury auctions have become lively affairs of late, just imagine the atmosphere that will consume the boardrooms of European banks in 2012 as they teeter, one after another, on insolvency.
FACT #4: According to Jagadeesh Gokhale, Senior Fellow at the Cato Institute, in order to meet current unfunded liabilities (pensions, healthcare, etc) without defaulting or cutting benefits, the average EU nation would need to have OVER 400% of its current GDP sitting in a bank account collecting interest.
That would translate to $64 trillion dollars for the entire EU. Not going to happen. China will not be riding to the rescue anytime soon. KaBoom!

$779 billion is not $3 trillion

Bail out numbers of 3 trillion euros have been thrown around and the total EU member nation pledges for any attempt at a bail out is, at best, 779 billion euros. Not even close. Remove Greece, Portugal, Italy, Spain, and the number drops to 494 billion euros. Continue removing Ireland, preexisting commitments, and other contingencies and the bail out fund becomes 74.6 billion euros.
Our Federal Reserve is leveraged 56 to 1 and contemplating acquiring additional toxic assets from member banks aka Quantitative Easing III. With the demise of Europe in 2012 the United States banking system will undergo a similar catastrophe.
The European banks will fail, popping the money bubble, with deflation and economic recession or depression.
Best option; kick the can down the road. This has been the option since 2008 and the days of doing this are numbered.
Here is a quote from Clive Maund on the consequences of the crisis;
“If Europe should fail this is what we can expect to happen – European banks will crash and burn and take down major US banks, which are already walking wounded basket cases anyway. We are likely to see a lengthy unscheduled “bank holiday” – banks will slam their doors and if your money is still inside their vaults then you are out of luck. Major disruptions in supply and distribution of food and fuel in particular will trigger general panic, and riots and mob violence will spread rapidly – what we have seen on TV happening in Greece will suddenly happen on the streets of the US and many other countries. Stockmarkets will crash in a manner that will make 2008 seem like a “walk in the park”. Virtually every asset class and investment will crater – especially commodities, stocks and Real Estate. The euro will be vaporized. The tidal wave of funds liberated by this mass panic are going to have to go somewhere and normally we would expect them to go into the US dollar and Treasuries, but with US banks failing even this cannot be relied upon. The one surefire investment category that will shine – provided that is that the markets or brokerage houses etc involved with these transactions don’t themselves fail – is “misfortune securities”, meaning bear Exchange Traded Funds and Puts (one party, the buyer of the put, has the right, but not an obligation, to sell the asset at the strike price by the future date, while the other party, the seller, has the obligation to buy the asset at the strike price if the buyer exercises the option).
The gravity of this crisis is such that we are not simply talking about protecting investments and making opportunistic gains out of the mayhem that will ensue, if Europe should fail, we are talking survival issues as well, as due to the interconnected nature of the global economy things could become very ugly, very fast across a broad front. If you want to learn what life is like when banks suddenly slam their doors, then you should read up on the Argentinian crisis of the early nineties. The middle class suddenly found themselves disconnected from their savings, and as many of them lost their jobs at about the same time, they became instantly destitute, and forced to swap their possessions for food. Crime soared and people who had been used to living relatively cushy lives suddenly found themselves living on the edge in a law-of-the jungle nightmare. If Europe should fail this is what may quickly become reality not just in Europe but in the acutely fragile and vulnerable US and many other other countries as well. Other undesirable consequences will be unemployment rising to incredible unprecedented levels, so that students leaving college will have almost ZERO chance of finding work. The travel industry, much of which is non-essential, will be devastated with airlines slashing flights and going bust and hotels suffering extremely low occupancy rates.”
My best guess is five months, but some are predicting as little as five weeks. Best case scenario, Bernanke prints $3 trillion and nobody notices.

The Bond Crash of the 1930′s. Recurring in 2012?

The first part of this blog appeared in the Housing Time Bomb on 5/9/2009 and the second on Zero Hedge on 10-21-2011.
On a side note I was talking to another “economist” who has no clue about any of them weird bubbles in the economy about to burst. Another clueless Keynesian? Ignorance is bliss.
I am sorry but with all the financial meltdowns blowing up all over the world how could this coming bond market meltdown be a surprise?
“Watching treasuries sell off over the past couple weeks motivated me to take a look back to The Great Depression to see what happened to bonds in the great 1930′s bond collapse. I had always known there was a bond crash during this time, but I really had never focused on the timing of it.
I was able to pick up a great chart highlighting what happened:”

Monetary experts, and the few economist who do not believe in fairy tales, have know for centuries that the standard time for a inflationary crisis to play out is about three years, give or take a few. We appear to be right on schedule with our date with destiny.
The author wrote this in 2009 and was off by a couple of years.
The marketable securities held in accounts by foreign official and international accounts has declined 15.4% annually since August. Slight down ticks in securities have occurred in the past but not with the Federal Reserve simultaneously pumping billions of dollars of “liquidity” into the markets to artificially suppress the interest rate to record lows. Well scratch that, this did occur… in the 1930′s.
The following interview was performed by Zero Hedge on 10-21-2011.
“Paul Brodsky does not trust the bond markets. That position may seem strange coming from someone who has spent most of his professional career trading bonds, but it’s precisely this insider knowledge that has led him to start directing investors to safer harbors.
In fact, he thinks our credit system is so far out of control that it will cause a massive – and largely unavoidable at this point – devaluation of the US dollar (and most other fiat currencies, as well).
In our interview with Paul, we asked him to explain the reasons for his concern and to detail how he sees a bond market breakdown unfolding. At the heart of the matter is the run-up in overnight systemic repurchase agreements among banks that started in 1994, which goosed the ensuing credit-driven buying orgy in our economy and has left the system much more vulnerable to exogenous shocks as a result:”

Securities held by foreigners has dropped at a annual rate of 15.4% since August. Are the Chinese losing faith in US financial instruments?

“All the way through 2006 a monetary aggregate called M-3, which was the only aggregate that included repurchase agreements (which is the process by which banks fund themselves with each other) grew almost 12% a year. It is an enormous amount and that basically tells you that this overnight lending among banks provided the fuel from which all of the term credit, the 30-year mortgages, auto loans, and revolving consumer credit came – which of course has never been paid down from whence it came. So in effect, we knew that the system became highly susceptible to any hiccup.
So the system is levered at least 20 to 1 and there is effectively 20 times more debt than money with which to repay it. And so that is a long-winded way of setting the table for where we come down in our macro views. Clearly, it has great ramifications, negative ramifications for the currency and given that the dollar is the world’s reserve currency, we think it has significant ramifications for the global monetary system in general.”
Add to this the lax oversight from the Fed at the time, which as Paul states seemed primarily focused on making sure “banks could expand their balance sheets”. Along with the repurchase agreements, the practice of “sweep programs” helped the banks gain unfair advantage while technically not breaking the letter of the law. Chris summarizes this process as:”

The politicians will blame the bond market collapse on the free market

“This is a story of leverage which really began in the mid-nineties. So this is not any particular policy disaster that went off the rails in 2000 or even more recently than that. Interestingly, I have never connected the stop before between the overnights, the repos, and something else that really caught my eye in the mid-nineties. Actually, it was ninety-four or ninety-five.
I don’t know if you know about the sweep programs – for the benefit of listeners who may not, what Greenspan did was he allowed banks to essentially dodge the reserve requirements by “sweeping” demand accounts. And what I mean by that is, if you have money in a checking account, that is yours to demand anytime you want: the banks have to hold a reserve against that, by law, of 10%. But banks were allowed through this policy tweak that the Fed had done, to effectively sweep that money out of that account just before the stroke of midnight.

The Federal Reserve will pretend they did not see the collapse coming

So that at midnight when they take the snapshot and say, “How much money do you have to hold in reserve against?” they would sweep the money out of the way. The snapshot would be taken, and the bank would say “Look, there is no money, we get to hold very light reserves here.” And then the money would get swept back in at let us say, 12:01. But during the snapshot period, oops, it would have disappeared.
That is where I had chased back where this credit bubble really got into high gear. And I thought it was due to the fact that banks were allowed to dodge these reserve requirements, effectively running leverage far, far higher.”
“At some point, the growing leverage in the system and the rising amount of new credit and money supply leads to ever larger distortions in market pricing. Paul sees this as leading to inflation.”
“So economics has kind of taken leave of the bond market. The Treasury bond market is no longer we think a true signal of interest rates, where they should be, or a true signal of inflation. It is an interest rate curve that has been distorted by terribly distorted incentives as we see it.

Ben Bernanke is repeating the mistakes of Alan Greenspan, only worse.

So we understand that. We do not think it is right. We would rather have markets be free to adjust to where they should be, but frankly, we do not see that happening. To your question specifically about will we have something similar to what happened in Greece here in the U.S., we do not think we are ever going to get to that point here. And it is not because we are proud Americans and we think that the U.S. is better in every way than every foreign land; that is not the case at all. We think it is not going to happen here because if anything dire happens in terms of interest rates, like the threat of rising interest rates, you would see the Fed’s balance sheet come under severe stress.
I think the Fed is going to have to continue printing. They are going to go to a significant QE3 at some point. I do not know exactly what form it will take but they are going to have to monetize debt. The process of doing that is I am sure your listeners know, is when you buy debt, you print money with which to buy it. That moves new money out, ostensibly into the system but as we have seen it only goes into banks as excess reserves. This process is the exact process of inflation, so if you print a dollar, you are diminishing the purchasing power of that dollar through dilution. And it is a very easy thing to understand that more dollars chasing the same amount of goods and services and assets must drive the price level higher for those goods services and assets. And so what we see happening is, through this process of money printing, we will have rising prices that rise much faster than wage growth or income growth and it is going to make the ability to service debt that much harder.”
“It’s these growing inflationary pressures that Paul sees leading to an accelerating devaluation of paper currencies in the coming years. He sees a revaluation of the US dollar vs gold as a likely outcome at some future point (estimating gold could reach a price in the neighborhood of $10,000 per ounce if it is indeed re-monetized).
Ultimately, he recommends investors concerned with protecting the purchasing power of their wealth today get exposure to hard assets that can’t be so easily inflated away:”
“All of these currencies are baseless and are losing their purchasing power versus the goods and services with inelastic demand properties, such as natural resources and things of scarcity.
Gold should be thought of as cash in the best currency. I would suggest anything scarce with inelastic demand properties, and that is of course how we get energy and how we get agriculture and various other things. They should be considered very strongly.”

Student Loan Bubble To Exceed $1 Trillion

From Zero Hedge on 10-20-2011

Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

While one of the biggest complaints of #OccupyWallStreet protesters, and much of the balance of middle-class America, continues to be the burden of student loans, the paradox is that, as the USA Today reports once again on one of its favorite subjects, student loans are set to surpass $1 trillion in total notional for the first time in history on what appears to be relentless demand and interest for this cheap form of educational financing, making this debt burden the single largest form of consumer debt, well bigger than outstanding credit card debt, and smaller only compared to mortgage debt. “The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year.
Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports.

Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what’s owed on home loans and credit cards.” What explains this insatiable demand for this kind of debt? Well, it’s cheap, it’s easily accessible (the collateral is education), and it is fungible – a student can take out a loan, yet use part or all of the balance for tangential purchases (that iPhone 4S sure would make me cool). But this, like every other debt, comes at a price.

PEW Research Group Findings on Impending Bankruptcy

The PEW Research Center recently published ten charts showing how the United States has gone from a budget surplus nation into a debtor nation facing bankruptcy. Some of the assumptions are debatable, such as the Bush tax cuts costing the federal treasury revenue, but the inescapable facts are plain for every citizen to see. Simply put we have spend beyond our means and we have to choose a long drawn out deleveraging process that could take decades, or bankruptcy and reorganization.

Joseph N. Pew, Jr., founder of the PEW Research Group

The first chart perpetuated the myth that the Bush tax cuts of 2001 and 2003 cost the United States treasury $3.5 trillion in revenue. According to the US Department of Commerce tax collections from July 2001 were $1.8949 trillion and dropped to $1.8274 trillion by July 2003, reflecting the recession after 9-11, but increased to $2.6515 trillion by July 2007. A increase of 39.9% from 2001 or 6.7% annually. Tax collections during this time reflect the overall economy, tax cuts did not “cost” the treasury anything. As has been shown on several occasions when tax rates increase people and corporations change their behavior to avoid taxes.
This is also reflected in the taxes collected as a percentage of the GDP. From 19.5% collected in 2001 there was a drop to 16.2% in 2003 and a increase to 18.5% in 2007. This was not as spectacular as the 2000 tax collection number of 20.6%, under a balanced budget, but federal consumption of the GDP was only 18.2% in 2000. In 2007 that number had increased to 19.6% of GDP, a 7.7% increase. This means that 7.7% of the economic activity was taken out of the private sector that produces economic growth, and tax revenues, resulting in fewer taxes collected and jobs created. PEW fails to take into account this crowding out affect.
18.5% is very respectable when compared to the dismal 14.4% collected with the same tax code under Obama. Federal consumption of the economy as measured as a percentage of the GDP is at 25.3%.
Chart two breaks down the $12.5 trillion shift from 2001 to 2011 into a pie. Brief highlights include $1.262 trillion for the wars in Afghanistan and Iraq, $1.386 trillion on interest on new legislation, and $726 billion on the 2009 Recovery Act.

PEW Chart 1 showing budget projections
The third chart gives the severity of the unemployment problem, the percentage of unemployed out of work longer than a year has hit a post WWII high of 31%, but no explanation as to why.
My simplistic explanation as to why is the size of the federal government. Of course there were free trade agreements, welfare reform, wars, tsunamis, and a infinite amount of other factors affecting unemployment but from the numbers it is plain to see that there is a inverse relationship between the size of the federal government and employment.
In 1993 the federal government consumed 21.4% of the GDP and the Civilian Labor Force Participation Rate (CLFPR) was 66.3%. By 2000 federal consumption of the GDP had fallen to a 34 year low of 18.2% and the CLFPR had risen to an all time high of 67.1% for the year. Since 2000, with the exception of the housing boom years of 2003-07, the CLFPR has declined to an estimated 64% for 2011 and federal consumption has risen to a 66 year high of 25.3% of the GDP. The last time the federal government spent this much of the GDP was WWII.
Why would we expect employment to increase when the federal government removes resources from the productive private sector and wastes the resources on bridges to nowhere and corporate welfare schemes like Solindra. If the $553 million loan was removed from the federal government and given to private investment firms the resources would have been allocated in a much more efficient manner and the workers would be producing products that were profitable, and more importantly, these workers would still be employed. With the federal government misallocating resources to Solindra, and others, the workers at these facilities end up unemployed and producing nothing for society. Some call it crony capitalism and others fascism.

Federal Revenue increased after the 2001 and 2003 Bush tax cuts.

Graph four shows the spending increases and tax collection as a percent of the GDP. These numbers can be obtained from the White House Historical Tables.
Chart five is budget projections through 2021. What should interest seniors is that PEW and others look at publicly held debt or “hard” debt. These numbers dismiss “soft” debt or debt owed between government agencies. This soft debt would include Social Security IOU’s. In other terms when the financial tsunami comes those billions in Social Security IOU’s will be worthless pieces of paper suitable for history lessons and wall paper.
Currently the “hard” debt is 62.3% of GDP in 2010. Generally 60% or below is considered “sustainable.” So if the “soft” debt, Social Security, is added into the equation our 99.2% debt is unsustainable? Pew does not address this.
PEW also ignores our total public/private debt of $54.5 trillion or 364% of GDP. Wall Street investment firms consider anything above 250% as 100% assurance of bankruptcy.

PEW Chart 3 showing long term unemployment at post WWII records

Chart six shows that if federal spending continues to grow with GDP growth rates the debt will exceed the 60% solvency number and climb to 81% by 2021.
Chart seven shows that if entitlement programs are not addressed discretionary programs will have to be cut 46% starting in 2013 to meet the goal of a 60% debt to GDP ratio by 2021.
Chart 8 shows that with the current “Automatic Sequester” law or the super committee of 12 members of Congress will have to cut $454 billion out of defense over the next decade. 70% of the cuts will come from discretionary spending and none from Social Security and no more than 2% per year from Medicaid.
Chart 9 looks at optimistic debt ceilings of $16.4 and $16.7 trillion assuming interest rates remain relatively stable. With a public debt of $14.34 trillion any inflation surge causing the Federal Reserve to abandon its official policy of virtually zero interest on the Federal Funds rate will torpedo these projections. Currently the federal government pays a very reasonable 9% of the budget on interest payments. If interest rates, and inflation, increase this number will increase.

The Civilian Labor Force Participation Rate at a 27 year low while government spending as a percentage of the GDP is at a 66 year high of 25.3%

Chart 10 estimates that with the American Jobs Act the debt ceiling would be reached by October 2012 or August 2013.
Looking at the ten charts in aggregate it is clear that the United States is, at best, facing severe debt deleveraging problems. PEW correctly shows that if current policies and recommendations are followed there is a very real possibility that we will be WORSE off a decade from now with our national debt. This assumes economic growth, inflation stability, and interest rate stability.
The bottom line is Americans need to realize that no matter which group crunches the numbers they all come up bad for today’s young people. We have to come to grips that the federal government, entitlement programs, personal debt, public debt, will destroy America.
Do we go through years, possibly decades of debt deleveraging?
Do we sit down and discuss bankruptcy?
Do we saddle our children with an impossible debt?

PEW Chart 2

How do we humanly end entitlement programs and convert to private accounts?
We need to decide what direction we want to pursue. We can become slaves to debt as our politicians would desire. They, and the rich, own the debt. Getting the people to pay the debt has always been the goal of the elites, a financial form of slavery started by Alexander Hamilton.
Or do we stop playing their game, walk away from the debt, and restrict the power of the federal government to collecting no more than 11% of the GDP in taxes?
The founding fathers made their choice for limited government.
Choose wisely.

Silly Financial Experts

http://www.youtube.com/watch?feature=player_embedded&v=brb8u0WV9ZA

Obama Tax Would Pay for Four Months of Deficit Spending

The inferior (leftist indoctrination) education Obama has received from Columbia and Harvard becomes more apparent everyday. The latest example of, stupidity, from the leader of the free world is the millionaires tax. As can bee seen below in a e-mail from the Congressional Budget Office the tax would raise a grand total of $453 billion dollars or about 35% of the $1.29 trillion deficit.

This assumes that millionaires will not change their behavior and will continue to work the same as before the tax with the same economic conditions. Real world evidence gathered over 60 years plus from the White House Historical tax collection records shows that Americans will not pay more than 20% of the GDP in taxes even with 90% top tax rates. The millionaires subject to the tax will simply defer income or get compensation in other forms of payment bypassing direct income payments. Examples would be longer vacations, less work output, stock options, company benefit increases, and other tricks employed by accountants for generations.
We can assume that the $453 billion figure is under a best case scenario. Realistically, with the exception of a few new money superstars, most businessmen and women will know how to work the system and the $453 billion would become, optimistic projection, $200 billion. This assumes 44% of the millionaires lack the intelligence to hire a good accountant.
The cost to society would be much higher than $200 billion collected in taxes. The $253 billion that would have went into consumption or savings would now be put into less productive uses such as tax shelters or in off shore accounts, possibly invested in China, Brazil, Singapore, or any number of uses that would not benefit Americans. Obama does not understand basic economics and the fact that if rich people are not using their money someone else is. If the money is in the bank it is being loaned out. If it is in the stock market it is being used as collateral to build economic growth. Simply put taking $200 billion out of the savings and investment portion of the GDP equation and putting it into government consumption hurts long term economic growth.
I cannot take much more of this economic illiteracy from our Dear Leader and his Keynesian advisers. We need some hope and a change next year.

Our President is a economic illiterate

Dear Mr. Leader:
As you requested, CBO and the staff of the Joint Committee on Taxation (JCT) have estimated the budget impact of S. 1660, the American Jobs Act of 2011, as introduced in the Senate on October 5, 2011. CBO and JCT estimate that, in total, enacting S. 1660 would decrease deficits by about $6 billion over the 2012-2021 period (see enclosed table). That estimated deficit reduction of $6 billion over the coming decade is the net effect of $447 billion in additional spending and tax cuts in titles II through III and $453 billion in additional tax revenue from the surtax specified in title IV.
S. 1660 is similar to S. 1549, the American Jobs Act of 2011, as introduced in the Senate on September 13, 2011. Provisions in title I, II, and III related to both federal revenues and spending are identical for the two bills. The only difference between the bills is that S. 1660 replaces the provisions in title IV (Offsets) of S. 1549 with a surtax of 5.6 percent, starting in 2013, on a taxpayer’s modified adjusted gross income in excess of $1 million (or $500,000 in the case of a married individual filing a separate return), indexed for inflation. JCT estimates that title IV of S. 1660 would increase revenues by $453 billion over the 2012-2021 period, whereas title IV of S. 1549 would increase revenues by $450 billion over that period.

Friday Night Outrage

This MF is pissed. The Wall Street protesters better hope law and order is maintained. If Red Neck nation ever get the green light to light up the crazy ass communist its lights out. The leftist bastards of America don’t have a clue what they are dealing with.

How out of Control is the Debt Problem?

How bad is our financial situation?

Former Reagan adviser David Stockman thinks the Federal Reserve policies will condemn the United States to 10 or 20 years of substandard economic performance.

Historically nations carry about 1.6 times their GDP in debt. If we are looking at today’s economy that would be $24 trillion for all public and private debt. Our actual debt is $54.6 trillion or 3.64 times our GDP. Wall Street assumes a country will go bankrupt when the debt to GDP ratio exceeds 250%.
What will happen?
Since WWII history shows that episodes of deleveraging fit into one of four types:
1) Austerity, or ‘belt-tightening’, in which credit growth lags behind GDP growth for many years; typically 6 to 7 years.
2) Massive defaults; the US defaulted on WWI Liberty Bonds, paying out less than 50 cents on the dollar to redeem the bonds. It is expected that Greece will agree to pay around 40% of the value of their bonds, which are essentially in default with yields of over 100% on one year bills.
3) High inflation; Zimbabwe 2011, 1920s Germany, and Argentina 1999-2002, are examples of severe inflation.

From $18.92 an ounce for gold to $1621 and ounce. 8,468% increase or the dollar is worth 1.1% of what is was when the Federal Reserve was created in 1913.

4) Growing out of debt through very rapid real GDP growth caused by
a. A war effort. War economies generally consume 37% to 50% of nations GDP. The standard of living can fall dramatically in a short period of time but you most certainly will have a job.
b. A ‘peace dividend’ following war. Bill Clinton took advantage, with the Republican congress, of the collapse of the USSR and cut the federal government consumption as a percent of the GDP from 22.1% to 18.2%. A remarkable accomplishment.
c. An oil boom for oil-producing countries. Technological change related to energy, such as an efficient way to replace gasoline with natural gas, alternative energy breakthroughs, and other productivity gains.
An example would be when the worlds economy switched from a paper society to a computer society.
How did we get here?

Printing money does have consequences

The first step was the creation of the Federal Reserve in 1913. Before the creation of the Federal Reserve prices, and inflation, was virtually zero or negative, with the exception of the civil war period. From 1833 to 1913 gold was $18.92 an ounce.
On April 5, 1933, Roosevelt signed Executive Order 6102, declaring that under the threat of imprisonment for 10 years, a $10,000 fine or both, everyone in America was required to turn in all gold bullion to the U.S. Treasury at payment of $20.67 per ounce. Essentially robbing the public of what little wealth they had left.
The Federal Reserve maintained an informal gold standard from 1933 to 1944 between Europe and America until the Bretton Woods agreement was formally signed allowing an official exchange rate and redemption of dollars for gold by select European central banks. The agreement lasted to 1971.
What happened when we were on the gold standard?

When money dies

The wholesale price index went from 151 to 81 between 1869 to 1889, deflation, gold standard.
The CPI went from 138 to 93 from 1869 to 1889, gold standard.
Wages went from 77 to 72 (urban), 96 to 78 (farm), and 87 to 75 (combined) from 1869 to 1889, gold standard.
Interest rates went from 6.45% to 4.43%, 1878 to 1889.
The GDP (1958 dollars) 1869-78 = 23.2 bn, (1958) $42.4 bn, 1879-88, and $49.1 bn (1958) 1889-98. Pretty impressive 112% growth rate.
Multiply by 7.551 for 2011 GDP numbers if desired.
And here is the key statistic, for the people, per capita income (PCI),
PCI 1869-78, $531 (1958 dollars), 1878-88 $774 (1958), and $795. Did you get that!
Let’s put that into today’s money.
1869-78 an average person’s income was $4,009
1879-88 an average persona income was $5,844, a 45.8% increase.
1889-98 an average person’s income was $6,003, a 2.7% increase.

Monetarist economist Milton Friedman, Nobel Prize winner in 1976, would be flabbergasted at the actions of Alan Greenspan and Ben Bernanke

Labor productivity increased, equipment purchases, capital formation, all on a gold standard. In other words, the bottom line, wages went up and prices went down on a stable gold standard.
Inflation? Why is it bad and who benefits?
From 1913 to 1971 when the United States was on one form or another of a gold standard the Consumer Price Index (1982-84 dollars) increased at an annual rate of 5.3%. From 1971 to 2011 the increase has been 11.7%. Removing the gold standard and having a 100% fiat currency more than double the annual price increases. The goal of the elites, Rockefeller (Democrats) and Morgan (Republicans), of inflating the currency was achieve with spectacular success.
Why do the elites want inflation?
Originally the elites like Rockefeller and Morgan wanted cheap, easy credit for expansion and cheap, devaluing paper money they could pay back the loans with. Paying back loans with devalued dollars would save millions for industrialist borrowing billions. Paying workers in cheap dollars, giving a raise once a year, and having the ability to increase prices many times a year for products shifts the income distribution in favor of the elites.
In recent times the bottom 20% of the populations share of the GDP has declined from 5.3% in 1980 to 3.4% in 2010. The second fifth from 11.6% to 8.6%. The third fifth from 17.6% to 14.6%. The fourth from 24.4% to 23.2 and the richest 20% have increased their wealth from 41.4% to 50.3%.
The standard response from the left is Ronald Reagan caused this when he cut taxes. Democrats perpetuate this lie to divert attention away from the truth and the real culprit, inflation. Since the income tax was instituted tax collections have never exceeded 20.6%, under Bill Clinton in 2000, despite tax rates of 90% or higher. The whole “tax the rich” debate is a dog and pony show. Democrats know their elite friends will never pay 90%. It’s all a scam to divert attention away from the real culprit, the Federal Reserve.
When Nixon reneged on the Bretton Woods gold standard system in 1971, the monetary base and bank reserves in the United States, the part of the overall money supply that the Federal Reserve controls directly, was $69.8 billion. Ten years later it was $147 billion, another ten years later it was $319.7 billion, another ten years later it was $645.1 billion, and last month, exactly 40 years after the dollar was “freed” from gold, it was $2,684 billion. An increase of 3,745% or 93.6% annually. Gold prices have increased 3,891% or 97.3% in that time.
So how bad is it?
Today we have exported an estimated $6 to $7 trillion dollars overseas. We have exported our deficits and inflation overseas. The central banks of Korea, Japan, and China have allowed our politicians to live beyond their means for several decades. It will end, soon.
There is $1.577 trillion in reserves parked at the Federal Reserve today potentially representing $15 trillion in loans in an economy of $14.99 trillion.
Federal Reserve Chairman Ben Bernanke and former Chairman Alan Greenspan have destroyed the capital markets first with cheap housing money and now when saving and investment is most desperately needed, with more cheap money creating massive misallocation of resources by the only player in town to gobble up all that cash, the federal government. A colossal misallocation of resources on special interest groups that will make the eventual crash even harder. Some economist like former US Representative and Director of the Office of Management and Budget under Reagan, estimate stagnant growth for 10 to 20 years.
The problem is that right now we are in the “good days” of this depression. Nothing has occurred other than the massive loss of jobs. When interest rates climb, and they will climb, the federal government will move towards insolvency, inflation will pick up, state and local governments will be squeezed, and there is a very good possibility we will revolt or end up in a world war similar to WWII that ended the Great Depression.
It does not have to end up in violence. If we understand the basic economics we can overcome this monetary disaster in a few years, not decades. We as a nation have to acknowledge that we will go bankrupt. that is the first step. We have to acknowledge that we need to eliminate the Federal reserve bank and return to free banking that existed from 1833 to 1862. We have to acknowledge that we can no longer be the worlds policeman. We have to acknowledge that the proper role of the federal government should be no more than 11% of the GDP, not 25.3% like today.
The first step towards recovery is to acknowledge that yes, we do, have a debt and income inequality problem. This is not a Democrat or Republican issue. It is a issue that desperately needs to be addressed. In the absence of leadership the best we can do is educate people, one person at a time, as to the true nature of our economic demise.