August 27, 2009
Who in their right mind would want to own a share of stock in a bankrupt business? Obviously no one. The US Dollar, while instantly redeemable and widely used, is essentially just that, a stock certificate of a bankrupt government. The *instantly redeemable and widely used* aspect is, of course, the main table leg still holding, but this property alone can’t defy basic math forever. The government now spends trillions more than it takes in from tax revenues, which are declining, and has projected $9 Trillion in budget deficits over the next 10 years. Using history as a guide, when government proposes such an outrageous projection as this, it will probably be closer to double that figure. We are most likely looking at close to $20 Trillion in budget deficits over the next 10 years, or 2 Trillion on average per year.
Peter Schiff recently commented on this as well in a recent video blog.
Peter Schiff recently commented on this as well in a recent video blog.
You have to applaud good reporting when you see it, and this clip from Glenn Beck on Fox News, which discusses the website http://www.usdebtclock.org is exactly the issue the United States should be confronting and dealing with. A couple of times in the clip, Beck mistakenly labels Trillions for Billions, but who can really blame him, the numbers are huge and they aren’t getting any smaller. Another reason this clip is key, is because they discuss the ~$650 Trillion derivatives market. This market is not something that is well understood, but these are the financial instruments that recently brought down many of the large financial institutions.
With a current estimated government liability of ~$200,000 per US Citizen, there just really doesn’t seem to be any feasible way to correct the enormous pile of debt without some kind of devaluation or default.
There will always be opportunities in the interim to make money in the markets, but you want to make sure you have appropriate insurance when the music stops.
UPDATE: Audit the Federal Reserve
- H.R. 1207: Federal Reserve Transparency Act of 2009 now has 282 co-sponsors, flat from 282 last week.
- S. 604: Federal Reserve Sunshine Act of 2009 now has 23 co-sponsors, flat from 23 last week.
Digg Dialogg With Timothy Geithner (8/25/09)
8/19/09 Peter Schiff on Fox Business: Warren Buffett is dead wrong on how to fix economy!
http://www.youtube.com/watch?v=F4yfcfNlr_E
Peter Schiff Analogies (Collection of footage from past few years)
Federal Reserve Says Disclosing Loans Will Hurt Banks (8/27/09)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAOhgVw78e3U
- The Federal Reserve argued yesterday that identifying the financial institutions that benefited from its emergency loans would harm the companies and render the central bank’s planned appeal of a court ruling moot.
- The Fed’s board of governors asked Manhattan Chief U.S. District Judge Loretta Preska to delay enforcement of her Aug. 24 decision that the identities of borrowers in 11 lending programs must be made public by Aug. 31. The central bank wants Preska to stay her order until the U.S. Court of Appeals in New York can hear the case.
- “The immediate release of these documents will destroy the board’s claims of exemption and right of appellate review,” the motion said. “The institutions whose names and information would be disclosed will also suffer irreparable harm.”
- The Fed’s “ability to effectively manage the current, and any future, financial crisis” would be impaired, according to the motion. It said “significant harms” could befall the U.S. economy as well.
French President: Dollar Can’t Remain World’s Only Reserve Currency (8/26/09)
- French President Nicolas Sarkozy said Wednesday that the dollar can’t remain the world’s only reserve currency, as the rise of emerging powers such as China and Russia challenge the U.S.’s prominence.
- “The political and economic reality of a multipolar world will have to find sooner or later a translation on the monetary level,” Sarkozy told foreign ambassadors, gathered for a yearly reception at the Elysee Palace. “A multipolar world can’t count upon one currency only.”
- Sarkozy also said that he won’t allow the euro to be the only currency to bear the weight of foreign exchange market adjustments as has happened in the past.
As Budget Deficit Grows, So Do Doubts on Dollar (8/26/09)
http://online.wsj.com/article/SB125122938682957967.html
- The U.S. economy may be showing signs of recovering from the financial crisis, but the jury is still out on the future of the U.S. dollar.
- In a new twist to an old refrain among economists, who have long worried about the effects of growing U.S. debt, they say that the huge liabilities the U.S. is taking on to dig its way out of crisis could ultimately undermine faith in the dollar.
- On Tuesday, the Obama administration added fuel to concerns about the dollar, saying the U.S. will run a cumulative budget deficit of $9 trillion over the next 10 years, $2 trillion more than it had previously projected.
- “That’s going to be negative for the dollar,” says Adam Boyton, a currency analyst at Deutsche Bank AG in New York. President Barack Obama also reappointed Federal Reserve Chairman Ben Bernanke, whose efforts to rescue the economy have won praise, but have also entailed pumping large amounts of freshly created dollars into the financial system.
Senator warns of hyperinflation rivaling the 1980s (8/25/09)
http://briefingroom.thehill.com/2009/08/25/senator-warns-of-hyperinflation-rivaling-the-1980s/
- The economy could spiral into hyperinflation not seen since the early 1980s if the Federal Reserve does not tighten its monetary policy soon, Sen. Chuck Grassley (R-Iowa) warned Tuesday.
- Grassley, speaking about the renomination of Federal Reserve Chairman Ben Bernanke to a second term as head of the Fed, asserted that Bernanke’s ability to reign in inflation would be the metric by which the Fed’s success would be measured.
- “We won’t know for a year if he’s done a good job so far, because he shoveled money out of an airplane to save banks and the financial system,” Grassley said in a conference call with Iowa reporters. “But shoveling money out of an airplane to solve problems can be inflationary – in this case, hyperinflationary – if he doesn’t stop mopping up some of the money that’s out there.”
- Grassley, the ranking member of the Senate Finance Committee, said that inflation as a result from government spending on bailouts could result in inflation rivaling rates in 1980, when it hit a peak of 13.5 percent.
Fed Must Make Public Reports on Emergency Loans, U.S. Judge Says (8/24/09)
http://www.bloomberg.com/apps/news?pid=20601087&sid=afi7TJiJFys0
- The Federal Reserve must make public reports about recipients of emergency loans from U.S. taxpayers under programs created to address the financial crisis, a federal judge ruled.
Federal Reserve loses suit demanding transparency (8/24/09)
http://www.reuters.com/article/ousiv/idUSTRE57O03P20090825
- A federal judge on Monday ruled against an effort by the U.S. Federal Reserve to block disclosure of companies that participated in and securities covered by a series of emergency funding programs as the global credit crisis began to intensify.
- Monday’s ruling comes as lawmakers and investors demand greater disclosure in how the government manages a series of programs designed to lift the economy out of its deepest recession in decades.
- The case arose when two Bloomberg News reporters submitted requests under the federal Freedom of Information Act (FOIA) about actions the Fed took to shore up the financial system in 2007 and early 2008, including an expansion of lending programs and the sale of Bear Stearns Cos to JPMorgan Chase & Co (JPM.N).
- After the Fed resisted the request, Bloomberg sued to compel disclosure.
- Bloomberg News and the Fed did not immediately return requests for comment.
Rise of the Super-Rich Hits a Sobering Wall (8/21/09)
- The United States economy experienced two such bubbles in recent years – one in stocks, the other in real estate – and both helped the rich become richer. Mr. McAfee, whose tattoos and tinted hair suggest an independent streak, is an extreme but telling example. For two decades, at almost every step of his career, he figured out a way to make more money.
- In the late 1980s, he founded McAfee Associates, the antivirus software company. It gave away its software, unlike its rivals, but charged fees to those who wanted any kind of technical support. That decision helped make it a huge success. The company went public in 1992, in the early years of one of biggest stock market booms in history.
- So he sold his remaining stake, bringing his gains to about $100 million. In the coming years, he started new projects and made more investments. Almost inevitably, they paid off.
- Over the last several years, Mr. McAfee began to put a large chunk of his fortune into real estate, often in remote locations. He bought the house in New Mexico as a playground for himself and fellow aerotrekkers, people who fly unlicensed, open-cockpit planes. On a 157-acre spread, he built a general store, a 35-seat movie theater and a cafe, and he bought vintage cars for his visitors to use.
- He continued to invest in financial markets, sometimes borrowing money to increase the potential returns. He typically chose his investments based on suggestions from his financial advisers. One of their recommendations was to put millions of dollars into bonds tied to Lehman Brothers.
- For a while, Mr. McAfee’s good run, like that of many of the American wealthy, seemed to continue. In the wake of the dot-com crash, stocks started rising again, while house prices just continued to rise. Outside’s Go magazine and National Geographic Adventure ran articles on his New Mexico property, leading to him to believe that “this was the hottest property on the planet,” he said.
- But then things began to change.
- In 2007, Mr. McAfee sold a 10,000-square-foot home in Colorado with a view of Pike’s Peak. He had spent $25 million to buy the property and build the house. He received $5.7 million for it. When Lehman collapsed last fall, its bonds became virtually worthless. Mr. McAfee’s stock investments cost him millions more.
- One day, he realized, as he said, “Whoa, my cash is gone.”
- His remaining net worth of about $4 million makes him vastly wealthier than most Americans, of course. But he has nonetheless found himself needing cash and desperately trying to reduce his monthly expenses.
Obama to raise 10-year deficit to $9 trillion (8/21/09)
http://www.reuters.com/article/newsOne/idUSTRE57K4XE20090821
- The Obama administration will raise its 10-year budget deficit projection to approximately $9 trillion from $7.108 trillion in a report next week, a senior administration official told Reuters on Friday.
- “The new forecasts are based on new data that reflect how severe the economic downturn was in the late fall of last year and the winter of this year,” said the administration official, who is familiar with the budget mid-session review that is slated to be released next week.
- Treasury markets have been worried all year about the mounting deficit. The United States relies on large foreign buyers such as China and Japan to cheaply finance its debt, and they may demand higher interest rates if they begin to doubt that the government can control its deficits.
- Many economists think it is unlikely the government can curtail spending, which means taxes would have to go up to cover the rising costs of providing retirement and healthcare benefits to aging Americans.
Whitney predicts more than 300 bank failures (8/21/09)
http://www.financialpost.com/story.html?id=1917263
- Meredith Whitney, the analyst who predicted that Citigroup Inc. would cut its dividend last year, said the number of U.S. bank failures will quadruple as lenders struggle with bad loans.
- “There will be over 300 bank closures,” Ms. Whitney said in an interview with Bloomberg Television from Jackson Hole, Wyo. “The small-business owner on Main Street continues to see liquidity come away.”
- “Many banks may be OK for while, but the real driver for the economy, which is consumer spending, I don’t expect that to come back anytime soon,” she said.
Big banks still hold FDIC captive (8/21/09)
http://blogs.reuters.com/rolfe-winkler/2009/08/21/big-banks-still-hold-fdic-captive/
- With $25 billion and $14 billion of assets respectively, Colonial and Guaranty are the sixth- and 10th-largest failures in the history of the FDIC. Still, they pale in size compared to the biggest banks.
- It’s an unsettling thought if you have money in a bank. Officially, FDIC backs $4.8 trillion worth of deposits. If you include “temporarily” insured deposits, the total is $6.3 trillion. Yet the insurance fund protecting these deposits is going broke. Soon, the FDIC may have to draw on its credit line at Treasury.
- In 1934, the worst year for bank failures during the Depression, the total was 6.4 percent. In 1989, the most expensive year for the FDIC during the S&L scandal, it was 2.5 percent. Last year, the figure was 1.6 percent.
- But the 2008 figure excludes Citi, BofA and Wachovia, which properly should be dumped in the failure bucket. Citi and BofA were goners without bailouts while Wachovia failed and fell into the arms of bailout recipient Wells Fargo. When you include those three, deposits in failed banks jump to 15.7 percent of GDP for 2008.
- The FDIC, which was created to protect society from deposit runs, is no longer able to fulfill its mission because the biggest banks have grown far beyond its grasp.
- That’s why these banks need to be downsized dramatically. A tax on assets is a good idea, but not enough. To break them up, Washington should limit the deposits in any single bank to a threshold far below what the big four currently hold.
Fed buys record $5.6 billion in agency debt (8/21/09)
http://www.marketwatch.com/story/fed-buys-record-56-billion-in-agency-debt-2009-08-21-1215500
- NEW YORK (MarketWatch) — The Federal Reserve Bank of New York bought $5.605 billion in housing-agency debt on Friday, the biggest purchase since it began buying debt in the sector in December in the hopes of capping mortgage rates.
- It bought about half of the $11.209 billion offered to it by bond dealers, which analysts noted was rather high.
- The large purchase is a big switch from recent operations, which have slowly gotten smaller.
- Analysts hypothesized the central bank may have been trying to stretch out its purchases over a longer timeframe to improve the effect.
- “The size of today’s purchase will lead many to pay greater attention to the next pass to see if the Fed is increasing the speed at which it purchases Agencies,” said Dan Greenhaus, chief economic strategist at Miller Tabak.
One In Three Chance You’ll Soon Owe More Than Your House Is Worth (8/20/09)
- Half of mortgage holders means about one-third of American households. Put another way, Weaver forecasts 25 million mortgage holders will be under water by 2011, up from an estimated 14 million currently.
- Aside from the mega-bummer of owing the bank more than your house is worth, underwater mortgages exacerbate another problem: foreclosures. In previous housing busts, being underwater led to a greater likelihood of default, and Weaver believes this the foreclosure problem will be much worse this time around.
- In a recent report, Weaver analyzed all the various kinds of mortgages in the US and estimated that 48% of them would be underwater by 2011. This includes “prime” borrowers, of whom a startling 41% will be underwater.
Great California Garage Sale
http://www.dgs.ca.gov/GarageSale
- Great California Garage Sale
- When: Friday, August 28 (8 a.m. to 6 p.m.) and Saturday, August 29, 2009 (7 a.m. to 12 p.m.) CAR PREVIEW: Thursday, August 27 (8 a.m. to 4 p.m.)
- Location: 1700 National Drive, Sacramento, CA
Highlights from “The International Forecaster” newsletter (8/26/09)
Published and Edited by: Bob Chapman
- The FDIC has delayed their much awaited for report, which tells us they are doctoring the figures. Hopefully we will have something for you in Saturday’s issue.
- The US Postal Service is hoping to save as much as $500 million by offering financial incentives to employees who resign or retire before yearend.
- Eligible employees — members of the American Postal Workers Union or National Postal Mail Handlers Union — will be offered $15,000 to leave. Most of those affected work at mail-processing facilities.
- The Postal Service estimates that as many as 30,000 employees might accept the offer, the first since 1992.
- Mail volume has been slashed by the recession and a shift to e-mail, prompting the Postal Service to institute a nationwide hiring freeze.
- The Postal Service is on track to lose more than $7 billion this fiscal year and is considering other cost-cutting measures such as shuttering some post offices and eliminating Saturday mail delivery.
- “Management has been forced to reduce costs, but unfortunately, the cuts have been applied disproportionally to bargaining-unit employees, especially to those in mail processing,” American Postal Workers Union President William Burrus said.
- The agreement applies to career full-time employees who retire or leave through voluntary early retirement or voluntary separation. Part-time employees who leave may be eligible for small incentive packages.
- About 280,000 employees are eligible for the offer, which is open until Sept. 25.
- He has saved the world but he helped cause the crisis in the first place, writes Ambrose Evans-Pritchard. As a Princeton professor and then a junior Federal Reserve governor, Mr. Bernanke was the intellectual architect of his predecessor Alan Greenspan’s policies that so distorted global finance and pushed debt to historic extremes.
- Indeed, he was picked to join the Fed because he provided academic cover for Greenspan’s view that asset bubbles do not matter. He blamed credit excesses on Asia’s “saving glut”, arguing that reserve accumulation by export nations suppressed global bond yields.
- The economy could spiral into hyperinflation not seen since the early 1980s if the Federal Reserve does not tighten its monetary policy soon, Sen. Chuck Grassley (R-Iowa) warned Tuesday.
