Economists Predict Cutbacks, Tax Increases That ‘Aren’t Even Imaginable’

February 17, 2010

ABC News

By Devin Dwyer

American political and economic leaders have sounded the alarm for years about the red ink rising in reports on the federal government’s fiscal health.

But now the problem of mounting national debt is worse than it ever has been before with — potentially dire consequences for taxpayers, according to a report by the nonpartisan Peterson-Pew Commission on Budget Reform.

“It keeps me awake at night, looking at all that red ink,” said President Obama in Nashua, N.H., on Feb. 2. “Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities.”

Obama will sign an executive order tomorrow that establishes a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how to reduce the country’s debt.

Over the past year alone, the amount the U.S. government owes its lenders has grown to more than half the country’s entire economic output, or gross domestic product.

Even more alarming, experts say, is that those figures will climb to an unprecedented 200 percent of GDP by 2038 without a dramatic shift in course.

“Within 12 years&the largest item in the federal budget will be interest payments on the national debt,” said former U.S. Comptroller General David Walker. “[They are] payments for which we get nothing.”

Economic forecasters say future generations of Americans could have a substantially lower standard of living than their predecessors’ for the first time in the country’s history if the debt is not brought under control.

Government debt, which fuels the risk of inflation, could make everyday Americans’ savings worth less. Higher interest rates would make it harder for consumers and businesses to borrow. Wages would remain stagnant and fewer jobs would be created. The government’s ability to cut taxes or provide a safety net would also be weakened, economists say.

While much attention has been focused on the government’s deficit-spending surge during the recession, many economists agree short-term budget overruns — as ominous as they may seem — are not particularly problematic.

“What threatens the ship are large, known and growing structural deficits,” said Walker, a problem that few politicians seem eager and readily able to fix.

In a recent ABC News poll, 87 percent of Americans said they are concerned about the federal budget deficit and national debt, and most strongly disapprove of how their political leaders are handling the situation.

But public dissatisfaction has not proven enough to compel members of Congress or current and previous Administrations to set aside their partisan differences to achieve a balanced budget.

Most Republicans don’t want to raise taxes; most Democrats don’t want to cut spending. The result is a stalemate on how to put America back in the black.
Partisan Gridlock Stalling ‘Drastic Changes’ Needed
Politicians “don’t have a way to say ‘no’” to their constituents, said Doug Holtz-Eakin, a conservative economist and former director of the Congressional Budget Office, who says unrestrained government spending is the crux of the problem.

John Podesta, former Clinton White House chief of staff and president of the liberal Center for American Progress, says lawmakers need to raise more tax revenue as part of the solution to fund “investments” for the future.

Ultimately, analysts say, solving the debt problem will likely require both tax hikes and spending cuts, along with broader structural reforms of the way government operates.

“Habitually spending more money than you make is irresponsible,” said Walker. “Irresponsibly spending someone else’s money when they’re too young to vote or not born yet is immoral.”

Future generations of Americans will largely foot the bill for the present financial predicament, economists say.

The United States currently owes over $12 trillion to its debtors  that’s more than fifteen $787-billion economic stimulus packages worth of cash. Divided out, each American bears a $40,000 share of the country’s tab.

“The American people today are not remotely prepared for the changes that are necessary,” said former Congressional Budget Office director Rudolph Penner.

He says Americans who have been accustomed to buying on credit and living beyond their means at home may soon face a painful reality as the government tightens its belt further.

“They aren’t hearing about the drastic changes needed, and they certainly didn’t hear about it in the President’s budget,” Penner said.

President Obama’s $3.8 trillion budget request for 2011 represents an increase in government spending by more than $100 billion over last year, yet projects slight decrease in the budget deficit over the year before to $1.267 trillion.

While deficit spending is widely regarded as a necessary evil during times of recession to revive and stimulate the economy, the President has acknowledged it’s time to rein in that practice.

Obama has touted as “steps forward” both a proposed freeze on some discretionary spending in fiscal year 2011 and the creation of a bipartisan fiscal commission to make recommendations for long-term deficit reduction.

“The president has taken a very bold act,” said White House economic adviser Christine Romer on “Good Morning America” today. “He has said we want a non-security dscretionary spending freeze that is pretty unpopular with his own party, but he thought it was important to make one of those tough choices.”

To continue reading this report, click here.

U.S. Wages Falling as Inflation Rises

February 10, 2010

Daily finance

by: Matthew Scott

Salaried employees hoping their 2010 annual raise will provide some relief as they attempt to recover from the worst economic downturn in 80 years are likely to be disappointed: Raises for U.S. workers may barely keep pace with inflation this year.

New projections from The Conference Board show that the average company will budget just 2.8% of its salary pool for wage increases, barely exceeding inflation — the first time in more than two decades that number has fallen below 3%. Furthermore, the business research organization says employers are adjusting their pay scales for all employees downward — in fact, the 2010 salary structure adjustment for all categories of employees is projected to be 2% or less, far lower than the Conference Board’s projected inflation rate of 2.6%.

After months of news about over-sized bonuses being paid to Wall Street employees whose companies were on the verge of bankruptcy last year, word that salaries across the board are in danger of being permanently adjusted lower will come as a heavy blow to the millions of U.S. employees who have been working longer hours to cover for laid-off colleagues.

Companies generally plan salary increases in their budgets to reward great performance during a particular year, allowing wage growth to exceed inflation and moving people into higher salary ranges. Lower budgets for salary increases suggest employers are eliminating higher paying positions or planning to pay less for the same level of work.

“Salary ranges also represent employers’ anticipation of what the job market will require,” says John Gibbons, program director for human capital at The Conference Board. “Projections of near zero percent in real terms mean that employers are making the assumption that the salary market is simply not going to move up, regardless of increases in the cost of living.”

Bad As It Sounds, It’s Better Than 2009

According to the U.S. Bureau of Labor Statistics, total compensation grew by 1.5% while consumer prices rose by 2.7% during the 12 months leading up to December 2009. That means, adjusted for inflation, total compensation fell by 1.3%. By default, the average U.S. worker took a salary cut last year, whether he got a raise or not.

As the rising cost of living continues to squeeze consumers, stagnating wages add another obstacle to the already struggling recovery in progress. Even though there have been five straight months of improving economic numbers that suggest job growth could be on the horizon, Gad Levanon, The Conference Board’s associate director of macroeconomic research, says a recovery in compensation is probably a few years away.

Click here for the full report.

Central Banks Involved With Robbing Middle Classes

January 22, 2010

Zero Hedge

By Tyler Durden

We apologize in advance for the NY Magazine-style headline, but this is a report that has to be read by all Senators who are preparing to reconfirm Bernanke for a second term. When voting for the Chairman, be aware that all of America will now look at you as the perpetrators who are encouraging the greatest inter and intra-generational theft to continue, and as prescribed by Newton 3rd law, sooner or later, an appropriate reaction will come from the very same middle class that you are seeking to doom into a state of perpetual penury and a declining standard of living.

America spoke in Massachusetts, and will speak again very soon if you do not send the appropriate signal that you have heard its anger – Do Not Reconfirm Bernanke.

You have been warned.

We present Albert Edwards’ latest in its complete form as it must be read by all unabridged and without commentary. These are not the deranged ramblings of a fringe blogger – this is a chief strategist for a major international bank.

 
Theft! Were the US & UK central banks complicit in robbing the middle classes?Mr Bernanke’s in-house Fed economists have found that the Fed wasn’t responsible for the boom which subsequently turned into the biggest bust since the 1930s. Are those the same Fed staffers whose research led Mr Bernanke to assert in Oct. 2005 that “there was no housing bubble to go bust”? The reasons for the US and the UK central banks inflating the bubble range from incompetence and negligence to just plain spinelessness. Let me propose an alternative thesis. Did the US and UK central banks collude with the politicians to ‘steal’ their nations’ income growth from the middle classes and hand it to the very rich?

Ben Bernanke?s recent speech at the American Economic Association made me feel sick. Like Alan Greenspan, he is still in denial. The pigmies that populate the political and monetary elites prefer to genuflect to the court of public opinion in a pathetic attempt to deflect blame from their own gross and unforgivable incompetence.

The US and UK have seen a huge rise in inequality over the last two decades, as growth in national income has been diverted almost exclusively to the top income earners (see chart below). The middle classes have seen median real incomes stagnate over that period and, as a consequence, corporate margins and profits have boomed.

Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary people?s earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction? The emergence of extreme inequality might never otherwise have been tolerated by the electorate (see chart below). And now the bubbles have burst, along with central banks? credibility, what now?

Click here for the full report

All Hell Could Break Loose Because of Massive Government Debt

January 5, 2010

Economic Policy Journal

By Robert Rubin

The ultimate insider, Robert Rubin, who is a former secretary of the Treasury (1995–99) and now serves as co-chairman of the Council on Foreign Relations and is a fellow of the Harvard Corporation, in a Newseek opinion piece had this to say:

The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries.

The conventional concern here is that private investment will be crowded out, which would result in a reduction of productivity, competitiveness, and growth. In addition, the very early 1990s showed that unsound fiscal conditions can have a symbolic effect that broadly undermines business and consumer confidence. But finally, and far more dangerously, our bond and currency markets could react with severe distress to fears about imbalances in the supply and demand for capital in the years ahead or about the possibilities of inflation. Those effects have been averted so far by a number of factors: large inflows of capital from abroad into Treasury securities; concerns about other major currencies; the low level of private demand for capital; and the psychological state of the market. But this cannot continue indefinitely, and change can occur with great force—and unpredictable timing.

Of course, he is correct. However, this isn’t the first time an insider has warned about the debt. Obama, himself, has done so.

What I am waiting for is the other foot to drop, i.e., what solutions will be proposed to resolve the debt situation. I doubt it will be any serious attempt at cutting back government spending. It will more than likely, in a panic state, be a dramatic hike in taxes, including possibly a national sales tax or VAT.

Click here for the full report

Federal Reserve Chairman Says Regulation Came Too Late to Stop Housing Bubble

January 5, 2010

Bloomberg

By Scott Lanman

Federal Reserve Chairman Ben S. Bernanke said low central bank interest rates didn’t cause the housing bubble of the past decade and that better regulation would have been more effective in curbing the boom.

“The best response to the housing bubble would have been regulatory, rather than monetary,” Bernanke said yesterday in remarks to the American Economic Association’s annual meeting in Atlanta. The Fed’s efforts to constrain the bubble were “too late or were insufficient,” which means that regulatory actions “must be better and smarter,” he said.

Bernanke said the Fed is improving supervision of banks and has strengthened measures to protect consumers of financial products. Senate Banking Committee Chairman Christopher Dodd, who backs Bernanke for a second term, has called the Fed’s oversight of bank lending before the crisis an “abysmal failure.” Dodd proposes stripping the Fed and other agencies of bank supervision powers and moving them to a new regulator.

Scholars such as Allan Meltzer, a historian of the central bank, have criticized the Fed for helping fuel the housing boom by keeping interest rates too low for too long. The bursting of the housing bubble led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

“It sounds a little bit like a mea culpa,” said Randall Wray, an economics professor at the University of Missouri in Kansas City, who was in Atlanta and didn’t attend Bernanke’s speech. “The Fed played a role by promoting the most dangerous financial innovations used by institutions to fuel the housing bubble.”

Shelby Criticism

Senator Richard Shelby of Alabama, the senior Republican on the Banking Committee, has said Bernanke failed to anticipate the crisis that led to Fed-backed bailouts of financial firms including Citigroup Inc. and American International Group Inc. and doesn’t deserve a second term as Fed chief.

Shelby, at a Dec. 17 committee vote on Bernanke’s nomination to a second four-year term starting next month, said the former Princeton University professor “missed clear signals” when he was a Fed governor from 2002 until 2005. Bernanke still must be approved by the full Senate.

Bernanke didn’t discuss the outlook for the U.S. economy or Fed monetary policy in yesterday’s speech.

Separately, Fed Vice Chairman Donald Kohn said at the conference that tight bank credit and caution among households and businesses may impede spending amid an improvement in financial markets. The Standard & Poor’s 500 Index climbed 23 percent last year, its best performance since 2003.

‘Very Cautious’

“Households and businesses and bank lenders remain very cautious, and the odds are that the pickup in spending will not be very sharp,” Kohn said.

Bernanke said increased use of variable-rate and interest- only mortgages, and the “associated decline of underwriting standards,” were more responsible for the bubble than low rates.

He left the door open to using interest rates for preventing “dangerous buildups of financial risks” should regulatory changes fail to be made or turn out to be insufficient.

“We must remain open to using monetary policy as a supplementary tool for addressing those risks — proceeding cautiously and always keeping in mind the inherent difficulties of that approach,” Bernanke said.

Responding to audience questions after the speech, Bernanke said he wasn’t “particularly concerned” about a possible loss of investor confidence in the U.S. financial system. When financial conditions become more “worrisome,” investors see the dollar as a safe haven and U.S. markets as the deepest and most liquid, he said.

Policy ‘Appropriate’

Bernanke devoted most of his speech to rebutting criticism that the Fed’s rate policy fueled the housing bubble. Monetary policy after the 2001 recession “appears to have been reasonably appropriate, at least in relation to” a formula based on the so-called “Taylor Rule.” In addition, Bernanke said Fed research shows the rise in housing prices had little to do with monetary policy or the broader economy.

John Taylor, a Stanford University economist and former Treasury undersecretary, created a shorthand formula that suggests how a central bank should set rates if inflation or growth veers from goals.

Under former Chairman Alan Greenspan, the Fed lowered its benchmark rate to 1.75 percent from 6.5 percent in 2001 and cut it to 1 percent in June 2003. The central bank left the federal funds rate for overnight interbank lending at 1 percent for a year before raising it in quarter-point increments from 2004 to 2006.

Rates Slashed

Bernanke, 56, joined the Fed as a governor in 2002 and supported all of the interest-rate decisions under Greenspan before being appointed chairman in 2006. After the financial crisis struck, he cut the federal funds rate almost to zero in December 2008 from 5.25 percent in September 2007.

The standard Taylor Rule would have recommended that the Fed raise the rate to a range of 7 percent to 8 percent through the first three quarters of 2008, “a policy decision that probably would not have garnered much support among monetary specialists,” Bernanke said. A variation of the rule used by the Fed focused on anticipated rates of inflation, not actual rates, he said.

Click here for the full report

Dems Plan a Nearly $2 Trillion Debt Limit Hike

December 14, 2009

My Way

By Andrew Taylor

Democrats plan to allow the government’s debt to swell by nearly $2 trillion as part of a bill next week to pay for wars in Afghanistan and Iraq. The amount pretty much equals the total of a year-end spending spree by lawmakers and is big enough to ensure that Congress doesn’t have to vote again on going further into debt until after the 2010 elections.

The move has anxious moderate Democrats maneuvering to win new deficit-cutting tools as the price for their votes, igniting battles between the House and the Senate and with powerful interest groups on both the right and the left.

The record increase in the so-called debt limit – the legal cap on the amount of money the government can borrow – is likely to be in the neighborhood of $1.8 trillion to $1.9 trillion, House Majority Leader Steny Hoyer, D-Md., said Friday.

That eye-popping figure is making Democrats woozy but is what is needed to make sure they don’t have to vote again before next year’s midterm elections. The government’s total debt has nearly doubled in the past seven years and is expected to exceed the current ceiling of $12.1 trillion before Jan. 1.

Democratic leaders say they will try to raise the ceiling to nearly $14 trillion as part of a $626 billion bill next week to pay for the wars in Afghanistan and Iraq and other military programs in 2010. The bill doesn’t include the additional $30 billion President Obama is expected to seek early next year to pay for his 30,000-troop buildup in Afghanistan but it might carry an added $50 billion to pay for a six-month extension of unemployment benefits and health care insurance subsidies for the long-term jobless.

The entire strategy, however, is teetering because of brinksmanship involving moderate Senate Democrats who are demanding a bipartisan deficit reduction task force with special powers to recommend spending cuts or tax increases that would be guaranteed House and Senate votes. That idea is a total no-go with House Speaker Nancy Pelosi, D-Calif.

Playing tit for tat, moderate House “Blue Dog” Democrats announced Friday that their votes for any debt limit increase depend on winning a “pay-as-you-go” budget law aimed at ensuring that new tax cuts or new spending programs don’t increase deficits.

Under a pay-as-you-go regime, if offsetting cuts or revenue hikes are not found to pay for new policies, across-the-board spending cuts would hit selected programs such as farm subsidies and Medicare.

Minority Republicans, meanwhile, are refusing to provide any support for raising the debt ceiling.

“Instead of reducing the size of government and controlling spending, Democrats are planning to raise the debt limit by $1.8 trillion, putting American taxpayers in even deeper debt to countries like China,” said Rep. Todd Tiahrt, R-Kan.

Vice President Joe Biden, Majority Leader Steny Hoyer, D-Md., Blue Dog leaders and Senate Budget Committee Chairman Kent Conrad, D-N.D., were involved in several sets of negotiations Friday in an effort to break the impasse between House and Senate Democrats.

If a deal can’t be found, Democrats might have to move on to Plan B, which would be to have the Senate pass a smaller, $925 billion increase that’s already available to them. That bill passed the House because of a quirky rule that automatically passes debt limit legislation – without an up-or-down vote – when Congress ratifies its annual budget blueprint. That was done last April.

Under the second scenario, the House would adjourn, leaving the Senate no choice but to pass the $925 billion increase in order to avoid a first-ever default on U.S. government obligations.

“We’re going to have to face the moment of truth at some point,” said Sen. Evan Bayh, D-Ind., who is one of about a dozen Senate Democrats pressing for the special deficit task force as the price for voting for an increase in the debt limit.

The debt limit conundrum comes as Congress is wrapping up its annual appropriations bills, including a $1.1 trillion omnibus measure pending in the Senate. A vote to cut off a GOP filibuster of that measure is scheduled for Saturday morning with a final vote likely on Sunday.

The omnibus appropriations bill is opposed by most Republicans. It awards domestic programs and foreign aid considerable funding boosts and also provides money for more than 5,000 home-state pet projects pushed by lawmakers.

The omnibus bill comes on top of an infusion of cash to domestic agencies in February’s economic stimulus bill and a $410 billion measure in March that also bestowed budget increases well above inflation.

The measure survived a test vote Friday that demonstrated it should receive on Saturday the 60 votes needed to overcome the GOP stalling tactics. Three senior Republican members of the Appropriations Committee joined forces with all but three Democrats to keep the measure from effectively being killed.

Click here for the full report

Bank of Israel Governer Says World Must Accept Weaker Dollar

December 7, 2009

Reuters

By Daniel Bases

Bank of Israel Governor Stanley Fischer said on Thursday the world has to accept a weaker U.S. dollar in order to ensure the global economy recovers soundly.

“We also have to realize, what is hard to get across, there has to be a global rebalancing. Either the U.S. runs a very long period of recession, which is a really bad idea, or the dollar has to weaken, so that balance of payments can be straightened out,” Fischer said in response to a question during a business breakfast in New York.

“So we have got to accept, as do other people, there has to be appreciation vis-a-vis the American dollar. Most people have kind of accepted that. It is just that when it gets out of line that people get nervous,” he said.

The Israeli shekel ILS= has recently strengthened against the U.S. dollar, trading at around 3.7750 per greenback. In October it hit its best levels in 10 months, trading as strong as 3.67 per U.S. dollar.

In the August through October period the central was intervening heavily in order to stop the shekel from appreciating rapidly against the greenback which would give relief to Israeli exports.

The U.S. dollar index .DXY, which measures the greenback against a basket of major trading-partner currencies, has fallen roughly 16.75 percent since it peaked in early March of this year when global markets hit bottom and investors were seeking a safe haven.

Fischer acknowledged the strong economic connection with the United States and its importance for the global economy but cautioned that heavily export-oriented countries have to move away from relying on the United States to buy their goods and services.

“So I think we’ve all got to accept the fact that the dollar is likely to be weaker and our currencies relative to the dollar are going to be stronger. The U.S. has to reduce its imports… or we won’t get a prosperous global economy,” he said.

“You have at one end the Chinese just not budging. At the other end the Brazilians have massive appreciation… trying to use capital controls and various things,” he said in reference to measures put in place to limit the real’s rise.

NO GOLD

On the issue of inflation, which he reiterated is likely to rise above the current top end of its 1-3 percent target range in the coming months, Fischer said he would not be a buyer of gold.

As recently as Nov. 23, the central bank increased its key lending rate by a quarter of a percentage point to 1 percent, a level it said was still “accommodative” and would support further economic recovery.

Still, given the rising inflation pressures, he said he was not interested in making a move similar to that of India’s central bank which spent $6.7 billion in early November to buy 200 tonnes of gold from the International Monetary Fund.

Spot gold prices touched another record high on Thursday, rising $1,226.10 XAU= before slipping back to $1,214.

“If you really think that the future is high inflation in the world economy then you hold gold. I don’t think that is the future. I don’t see us in a high inflation environment. Without committing, I don’t think we are going into gold any time soon,” he said.

Click here for the full report

Gold is Quality, Stability, and Safety

November 30, 2009

InfoWars

By Bob Chapman

Investors buy gold when there is inflation and when there is a flight to quality. They buy gold when they no longer trust currencies, due to government or central bank profligacy. Due to those and other reasons gold has broken out to new highs. It could well be that gold may never see $1,000 again. Long ago the world’s central banks set the course for a planned collapse of the world economy to implement world government and there is now no turning back. We have proof stretching back to 1965 that intervention by the Treasury and the Fed was taking place in the gold market. The illegal sale of gold on 10/19/87 was a good example of that. Then came the FOMC memos of the 1980s and 1990s to kill the perception that gold be allowed to reflect a policy of a weak dollar unbacked by gold. It is all there and probably more proof which our government and the Fed hides from us. We have to laugh at the smug who say why would the Treasury bother to rig the gold price? The point is they have and they are still doing it.

The perception now is that the massive stimulus put into international markets, especially US markets, will be withdrawn as interest rates are allowed to float upward. This stimulus was responsible for the stock market climbing from Dow 6600 to 10,500, a 60% leap built on monetization. If the punch bowl is removed the market will return to test 6600. In addition, the deflationary undertow kept at bay by the stimulus, will overcome monetary policy and the nation and the world will slip into monetary, deflationary depression.

The Fed is now forced to allow gold to trade higher and the dollar to fall lower. What else would one expect under current monetary circumstances? This policy will allow both gold and the dollar to play out to their full extent. The Fed’s job has been very difficult considering a fiscal budget deficit of $1.5 trillion not counting off budget items that take it over $2 trillion – a condition we are told that will persist for the next ten years. The solution has been the creation of ever more money and credit. There has been no cooperation. Nothing has worked together. All the problems have gone spinning off into a number of directions. There is no control on fiscal or monetary policy. What the players refuse to understand is that until the system is purged the situation is only going to get worse. There is no recovery. It is only an interlude in an ongoing depression.

The result will be gold at $2,500 by the end of 2010, and perhaps much sooner. The buyers know what we know. Real inflation since 1980 dictates $6,700 to $7,200 gold. Even official inflation demands a $2,400 price. In both instances how much inflation will 2010 bring? We are projecting 14% real inflation and government and the Fed keep telling us inflation is 1.2%. Our figures show 6-1/8%. In addition the fundamentals show us that gold production has been in shortfall to usage by 150 or more tons for years and that situation will worsen over the next ten years. Yes, we have hit peak gold. Interest rates rises won’t come for at least a year, if ever, and 5% growth in aggregates is in the realm of wishful thinking. Less gold is currently produced annually than in 1980 and there are trillions more dollars sloshing about the world financial system, a good part of it for speculative purposes. Without changes in monetary and fiscal policies, gold and silver prices will just keep rising. The further our government, via Goldman Sacks, JPMorgan Chase, HSBC and Citigroup, short gold and silver and the shares, the greater price appreciation will be in the future as they ultimately will have to cover their shorts. We are at the confluence of big things happening. The fiscal debt overhand is so onerous that a ¾% rise in interest rates would mean the Fed would have to monetize another $150 billion and a 5% increase in interest rates would increase debt service interest by $600 billion additional dollars. Yes, gold could reach $3,000 in 2010 and 2011 could bring another doubling as a result of the Fed and government just continuing what they are doing. Will inflation reach 25% or 30% in 2011? We don’t know, but as we reflect on what the Fed has been doing we say that possibility certainly exists. Could that mean $11,000 gold? Perhaps it does, we won’t know until we get there.

Even if inflation abated in 2011 or 2012 and a deflationary depression took command, gold would still be the go to investment. That is because for 6,000 years it has been the only currency that has owed no one anything. Would you really be ready to trade it for a fiat currency? We don’t think so. All bond markets as well as stock markets would have collapsed with the exception of gold and silver shares. Just look at the 1930s and see the gains Homestake had, if you don’t think gold stocks can make fortunes during a depression. Gold and silver are the investments for all seasons as long as you have patience. The banking system may collapse. What better to use than gold and silver coins for barter. This past year we have seen lending by banks fall 16.2% y-o-y or by $600 billion. Just double that figure and you are in depression. Can you imagine what it will be like with little or no lending? Unemployment is 22.2%. Under such conditions the unemployed could be 35% or more. What do we do, let the Illuminati create another world war to cover up their machinations? The dollar is already falling and probably will eventually collapse. Could it be 1-1/2 to 2-1/2 years from now that there will be an official 2/3’s devaluation? The exchange of three old dollars for one new dollar and a 2/3’s default on all debt by all nations with one another and the revaluation and devaluation of all currencies followed by a new international trading unit made up of the top G-20 currencies weighted in an index. That is certainly plausible as the dollar ceases to be the international reserve currency.

These events could push residential and commercial values down 75% or more from their highs. All investments except gold and silver could fall 60% to 95% as they did during the 1930s. The Fed won’t be able to cut interest rates, which will already be at zero. Demand for capital will force real rates higher and bonds lower. All issuers of consumer debt will most likely go broke, as 50% of debtors won’t be able to service their debt.

Real nasty times are just around the corner and nothing can be done to prevent them. The system must be purged. More major layoffs are on the way, real wages will fall and taxes will rise. The Dow will settle somewhere between 1,500 and 4,200. We won’t know where until we get a lot closer. Companies have maintained the bottom line by firing people, offshoring and outsourcing and using illegal aliens. That method of cutting costs is approaching a threshold of diminishing returns. The next big wave of layoffs will be municipal in towns, cities, counties and states that no longer have the reserve to pay employees. Some states, such as Florida has no funds to pay for unemployment benefits and were it not for the stimulus plan they would have stopped issuing checks a year ago. At this rate in many states municipalities will cease to function and schools, fire and police will be disbanded. That is where this is all headed. Americans have to be told the truth about what is really going on and who and what caused it and how we can fix it.

To continue reading this report, click here.

House OKs Plan to Audit Fed

November 23, 2009

Reuters

By Mark Felsenthal

A U.S. congressional panel on Thursday approved a measure to open the Federal Reserve’s monetary policy decisions to government audits, a surprise blow to the central bank’s efforts to shield its independence and a signal of frustration with the central bank.

The provision, co-sponsored by Republican Representative Ron Paul and Democrat Alan Grayson, would allow a congressional watchdog agency to conduct a broad review of the U.S. central bank’s policy and lending. Fed officials have strongly opposed it, saying it would cast doubt on the central bank’s independence from political pressure.

The House of Representatives Financial Services Committee approved the amendment to broader legislation to revamp financial rules. The panel put off a vote on the broader measure.

House Financial Services Committee Chairman Barney Frank, who opposed the Paul-Grayson measure, predicted it would be revisited when financial reform legislation is debated by the House.

“I think it’s going to be seen as weakening the independence of monetary policy with consequent negative implications,” he told reporters after the vote. “I think people will be worried about the impact on the dollar and on interest rates, and I think that one may be revisited when we get to the floor.”

However, Paul’s measure has earned support from more than half of the members of the House.

The amendment is a further congressional slap at the U.S. central bank after a Senate regulatory overhaul proposed stripping the Fed of its regulatory authority. Some lawmakers fault the Fed for failing to anticipate or prevent the financial crisis that pitched the economy into deep recession, while others are angry at its extensive emergency support for financial institutions.

The Fed objected to the provision, saying it could raise financial market questions about its independence and could result in higher long-term interest rates as investors worry about inflation risks.

“History provides numerous examples of non-independent central banks being forced to finance large government budget deficits,” Fed Vice Chairman Donald Kohn said in July. “Such episodes invariably lead to high inflation.”

Paul is an outlier in U.S. politics who advocated abolishing the U.S. central bank well before the financial crisis. He ran for president as a Republican in 2008 and recently published a book called “End the Fed.”

However, the Texas lawmaker was able to tap into widespread congressional frustration with the Fed.

“The Fed currently has no political capital,” conceded Representative Mel Watt, a Democrat who opposed the Paul-Grayson provision. “Everybody would like to beat up on the Fed and call them the bad guy,” Watt said. “(But) are we going to so substantially castrate the Fed so it cannot do what it was set up to do?”

Watt had promoted a compromise amendment that would have allowed audits of the Fed’s balance sheet and lending but would have drawn a clear line at leaving monetary policy alone. Frank, the committee chairman, backed Watt’s proposal.

A Fed representative declined to comment on the vote, and cited earlier comments from senior Fed officials expressing concern that monetary policy audits would undermine the central bank’s independence.

Click here for the full report

Top Eurobank Prepares for Global Economic Collapse

November 20, 2009

Telegraph

By Ambrose Evans-Pritchard

In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.

“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank’s “Bear Case” scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.

SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral”. Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.

Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan’s 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.

SocGen’s case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.

Mr Fermon said his report had electrified clients on both sides of the Atlantic. “Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried,” he said.

Click here for the full report

Next Page »