Party Like It’s 1929

May 11, 2011

Economy Hanging by a Thread

By Mike Whitney

(Editor’s Note: You’d think that governors and state legislators would read the constant flood of information about the American economy and have a mind to avert the tragedy in their own states. But I guess once a leech, always a leech. It doesn’t occur to a leech that he could be anything other than a leech. Leeches are not leaders…they feed off others. They don’t create…they drain. And leeches don’t usually let go of their host voluntarily…right up to and including the host’s death. America is slowly dying from the effect of the government leeches. The American economy will die soon. We can only hope that the leeches will die with it.)

A bleak jobs report sent stocks and commodities tumbling on Wednesday, while new signs of distress gripped the service industries index. An updated report from the ADP showed that private sector hiring slowed more than expected from March to April as companies struggled to meet rising raw material costs and flagging consumer demand. The service industry index (ISM)…which “ranges from utilities and retailing to health care, finance and transportation”…slumped to its lowest level since August signaling widespread deceleration and a progressive deterioration in the fundamentals. The turnaround has forced economists to rethink their projections for 2nd Quarter GDP and to watch more vigilantly for signs of contraction. This is from the New York Times:

“The economy lost steam in the first quarter. Growth in personal consumption — the single largest component of the economy — slowed markedly. Business-related construction cratered and residential construction fell. Exports stumbled. The only unambiguous plus was continued business investment in equipment and software, which is necessary but not sufficient for overall growth.

In all, economic growth slowed from an annual rate of 3.1 percent in the fourth quarter of 2010 to 1.8 percent in the first quarter of 2011….

When lauding the economy, Mr. Bernanke and many other economists and politicians point out, correctly, that the unemployment rate has declined from a recession high of 10.1 percent in late 2009 to 8.8 percent now. That would be encouraging news if it indicated robust hiring for good jobs. It does not.

Over the last year, the number of new hires has been outstripped by the masses who have either given up looking for work or who have not undertaken a consistent job search, say, after graduating from high school or college. Those missing millions are not counted in the official jobless rate; if they were, unemployment today would be 9.8 percent. The rate would be 15.7 percent if it included those who took part-time jobs in lieu of full-time ones.” (“The Economy Slows” New York Times)

So, even the New York Times agrees that unemployment would be nearly 16 percent if the figures were correctly calculated. Those are Depression numbers. 14 million people are out of work and record numbers of people are on food stamps (44 million).

Wednesday’s down-market sent commodities plunging as signs of emerging deflation pushed investors into Treasuries. Gold and silver fell sharply. Troubles in Japan, China and the eurozone have intensified fears of a global slowdown and perhaps another bout of recession. The dollar strengthened for the third straight session, in spite of the Fed’s zero rates and $600 billion bond buying program. Trillions of dollars in monetary and fiscal stimulus have jolted stocks back to life, but debt-deflation dynamics in the broader economy are as strong as ever. Unemployment remains stubbornly high, consumer retrenchment has reduced discretionary spending, and housing continues its inexorable nosedive. The stock market continues to inch higher buoyed by central bank liquidity and margin debt, but investors are increasingly skittish and searching for direction.

The soaring price of gas has shifted consumer spending from retail to energy consumption, the opposite of what the Fed had intended. This from Early Warning:

“I doubt energy prices can go a whole lot higher without triggering another recession, so it depends on whether the world can scrape up a few more mbd of oil to keep growth going without prices rising too much more. We will be watching oil production statistics closely…

…We are in an era where the availability of natural resources is not sufficient to support the wealth levels that the developed world has grown accustomed to, along with the speed of growth with which the developing world is trying to approach those same levels….. the global economy keeps trying to grow in a way that is inconsistent with the resource constraints, and then some part of the system tears and gives way….

I would argue that this data is at least consistent with the narrative that, in the post 1973 era, energy is consistently in somewhat problematic supply, and you can think of many of the recessions as showing a pattern in which energy prices are rising as the world overshoots what can currently be supplied, or what can currently be supplied drops as a result of geopolitical events, and energy prices rise until some pre-existing weakness in the global economic fabric tears in the course of a recession, and prices fall back again….” (“Energy prices and recessions”, Early Warning)

Welcome to Peak Oil; the era of resource scarcity has begun. Today’s troubles will to be a recurrent theme in the years ahead as the economy goes from boom to bust and previous levels of growth become more short-lived and unsustainable. Naturally, our leaders have settled on a strategy for addressing the impending energy shortages; endless war disguised as humanitarian intervention. This is the type of shortsightedness that passes as policy.

The main economic indicators are still turned up, but just barely. The economy is hanging by a thread. Loan demand is weak, wages are flat, and markets are on a knife-edge. Here’s a clip from The Big Picture:

“…the real problem is loan demand (confirmed while speaking to bank organizations in half a dozen states over the past year). Loans have to be repaid, meaning that the money must be used to finance the acquisition of employees or equipment that will “pay back” the loan. Common sense. But record numbers of owners (as high as 28%) have reported that “weak sales” is their top business problem while only 4% reported “financing” as a top problem….. Ninety-three percent reported all their credit needs met in March, including 53 percent who said they were not even interested in a loan. No customers means no need for a loan to finance hiring, inventory purchases or expansion (only survival – not a good bank loan!).

But they don’t get it in Washington D.C. And not understanding the problem produces bad policy, and there has been plenty of that. If lending is picking up, it is because customers are showing up and there is a reason to invest and hire. The reverse doesn’t work – you can’t force feed the credit to owners and have more customers suddenly show up ….That’s “pushing on a string”. Just ask the banks.” (“Loan Demand, Not Credit, Is the Problem”, The Big Picture)

There’s no demand for credit because consumers are in the red and need to balance their accounts. (“93 percent reported all their credit needs met in March.”) It’s pointless to focus on getting the banks to lend, when people are broke and don’t want to borrow regardless of rates. Just like its pointless to dump monetary stimulus into the stock market if it pushes up food and energy prices (headline inflation) reducing consumers ability to spend on other things. This isn’t hard to figure out; it’s Econ 101. So, why is the policy upside-down?

That said, the stock market should continue to trend upward for another couple months until the Fed’s bond buying program ends and investors realize that the real economy is stuck in the ditch. But, for now, it’s “Party like it’s 1929″. Bernanke’s punch bowl is overflowing and there’s still plenty of time to make money. The hangover comes later.

Mike Whitney lives in Washington state and can be reached at: fergiewhitney+at+msn.com


The Truth About Silver And Inflation

April 19, 2011

Courtesy National Inflation Association

Silver futures surged today to a new 31-year high of $42.80 per ounce. Silver is up 146% since NIA declared silver the best investment for the next decade on December 11th, 2009, at $17.40 per ounce. All we need is for silver to rise by another 15.5% and silver will reach its all time high set in 1980 of $49.45 per ounce.

Keep in mind, silver’s high of $49.45 per ounce in 1980 would equal about $140 per ounce in today’s dollars adjusted to the consumer price index and about $400 per ounce in today’s dollars adjusted to the real rate of price inflation. Despite silver’s huge gains in recent months, we have yet to see silver rise by $2 or more in a single day. When we start to see a true “silver mania” with investors around the world rushing out of their U.S. dollars and panic buying silver, we expect to see silver gain by $5 to $10 in a single day on more than one occasion.

Back in February of last year when silver dipped to below $15 per ounce, we sent out an alert saying, “NIA believes this is a once in a lifetime entry point for those wishing to go long silver at a bargain basement price”. NIA suggested silver call options in February of last year that ended up gaining over 1,000%. NIA’s latest silver stock suggestion is currently up 175% from our profile price.

In NIA’s top 10 predictions for 2010, we predicted a major decline in the gold/silver ratio, which was 64 at the time. The gold/silver ratio declined in 2010 down to 46, and in our top 10 predictions for 2011, we predicted another major decline in the gold/silver ratio and projected for it to decline this year to 38. NIA has been the most bullish organization in the world on silver, yet recent gains in the price of silver have surpassed even our short-term expectations. The gold/silver ratio is now down to 35 and we believe it will decline to at least 16 this decade, and possibly as low as 10.

The artificially high gold/silver ratio of the past century will be looked back at as an anomaly caused by the silver price suppression scheme of the Federal Reserve, which was in cahoots with Bear Stearns and now JP Morgan. NIA’s President Gerard Adams exposed this scheme in NIA’s critically acclaimed documentary ‘Meltup’, which has now been viewed by over 1 million people with an overwhelming 96% of its viewers giving it a thumbs up, a world record for an economic documentary. According to Mr. Adams, the Federal Reserve chose to bail out Bear Stearns and not Lehman Brothers, because Bear Stearns was the holder of a massive naked short position in silver that they were on the verge of being forced to cover.

It is not a coincidence that Bear Stearns failed on the very day silver reached its then multi-decade high of $21 per ounce. Bear Stearns was on the verge of being forced to cover their naked short position, which could have sent silver from $21 per ounce to $50 per ounce overnight. By bailing out Bear Stearns and allowing JP Morgan to acquire Bear Stearns’ assets with the promise to cover any losses derived from them, JP Morgan was able to continue managing the silver short position and orchestrate a manipulative take down in 2008 from $21 per ounce down to $8 per ounce.

Only ten times more silver has been produced in world history than gold and from the years 1000 to 1873, a period of 873 years, the gold/silver ratio remained between 10 and 16. In fact, the Coinage Act of 1834 defined a gold/silver ratio of 16. The gold/silver ratio started to rise after silver was demonetized in 1873. Despite silver being demonetized, we saw the gold/silver ratio return to 16 on three occasions during the past century: in 1919, 1968, and 1980.

It was only ten months ago in June of 2010 that the gold/silver ratio was 70. With the gold/silver ratio now at 35, it means that silver investors have seen their purchasing power double over the past ten months, while those with their savings in U.S. dollars have seen their purchasing power decline by 20%. That’s right, forget about NIA’s silver call option that gained over 1,000% and forget about NIA’s most recent silver stock suggestion that is currently up 175%; the simple act of following NIA’s most basic suggestion of getting rid of your U.S. dollars and buying physical silver means that over the past ten months, your purchasing power has doubled while non-NIA members with U.S. dollars lost 1/5 of their real wealth.

The Federal Reserve can claim all they want that there is no inflation, but as we write this article we are eating Ben & Jerry’s ice cream that we just bought at Quick Chek for $5 a pint. Three years ago, the same pint of Ben & Jerry’s ice cream at Quick Chek cost us $3. Three years ago, one ounce of gold would have bought 295 pints of Ben & Jerry’s ice cream and it still buys 295 pints of Ben & Jerry’s ice cream today. Three years ago, one ounce of silver would have bought 5.7 pints of Ben & Jerry’s ice cream and today it buys 8.5 pints of Ben & Jerry’s ice cream.

Americans with their savings in U.S. dollars can today only afford 3/5ths of the ice cream that they could have bought three years ago, but those with their savings in gold have maintained their purchasing power, and those with their savings in silver have greatly increased their purchasing power. NIA is 100% sure that the gold/silver ratio will decline to at least 16 within the next few years, and that will mean those with silver will once again more than double their purchasing power. Considering that the gold/silver ratio overshot to the upside and was as high as 100 in 1991, we fully expect it to overcorrect to the downside and possibly reach a low of 10 this decade. That would mean a more than tripling of ones purchasing power from the current ratio of 35.

When silver rose to $49.45 per ounce in 1980, the government said that the rise was due to the Hunt brothers “cornering” the silver market. The truth is, silver reached $49.45 in 1980 due to the massive inflation that was created by the U.S. government during the 1970s, and the Hunt brothers were used as a scapegoat. The Hunt brothers were accumulating silver in order to protect themselves from a collapsing U.S. dollar, just like NIA has been encouraging its members to do in a countless number of articles and videos over the past two years.

When the Hunt brothers were accused by the U.S. government of “cornering” the silver market and trying to manipulate silver prices higher, they only owned a concentrated long position of approximately 100 million ounces of silver. JP Morgan today has a concentrated naked short position in silver of approximately 122.5 million ounces, but the U.S. government doesn’t seem to have any problem with it.

The problem with the Hunt brothers’ strategy of accumulating such a large concentrated long position in silver is that after silver prices rose, their position was simply too large for them to ever sell without causing silver prices to crash. With silver reaching $49.45 per ounce in early 1980, the world was about to lose confidence in the U.S. dollar, which would have caused an outbreak of hyperinflation. In a desperate attempt to save the U.S. dollar and prevent hyperinflation, the CBOT raised margin requirements and limited traders’ positions to only 3 million ounces of silver futures. The COMEX also limited traders’ positions to 10 million ounces of silver futures. Not only that, but the COMEX and CBOT only had a total of 120 million ounces of silver in inventory, and the COMEX was likely going to default from futures contract holders requesting physical delivery. The COMEX was forced to go into “liquidation only” mode, ending all silver futures contract buying.

Combined with the Federal Reserve rapidly rising interest rates, silver prices began to plunge and the Hunt brothers were hit with massive margin calls. On one single day in March of 1980 when the Hunt brothers were forced to liquidate a large part of their position, silver lost 1/3 of its value, declining by over $5 to $10.80 per ounce. That represented a total decline of 78% from its high two months earlier.

NIA has been receiving a countless number of emails asking if now is the time to sell silver, and if silver could crash by 78% once again like it did in 1980. The fact is, while the Hunt brothers’ 100 million ounce concentrated silver position was on the long side, JP Morgan’s 122.5 million ounce concentrated silver position is on the short side.

While the Hunt brothers’ long position was impossible to sell without causing silver prices to crash, JP Morgan’s naked short position is impossible to cover without causing silver prices to explode to the upside. Being that the CFTC was so quick in 1980 to support the position limits that were then imposed by the CBOT and COMEX, NIA believes it would only be fair for the CFTC to mandate similar position limits today. This is unlikely to occur because the U.S. government believes JP Morgan’s silver manipulation to be a good thing, since it is giving the phony appearance that the U.S. dollar still has purchasing power. The free market will ultimately win in the end and silver prices will soar through the roof to where they belong based on supply and demand fundamentals.

It is important to spread the word about NIA to as many people as possible, as quickly as possible, if you want America to survive hyperinflation. Please tell everybody you know to become members of NIA for free immediately at: http://inflation.us


The Nanny State Can’t Last

April 17, 2011

by Congressman Ron Paul (R-TX)

(Editor’s Note: Take note of Dr. Paul’s fourth paragraph. I want you to think about the real ramifications…the “blowback”…of the existence of millions of people in America that rely totally on government benefits for their survival. When the government benefits faucet runs dry, think about what millions of hungry people will do to find food. The sick and elderly won’t loot and pillage, they will starve to death. Those not motivated by lawful behavior will find food by whatever means necessary. That is the future you face, dear readers.)

Last week, Congress and the administration refused to seriously consider the problem of government spending. Despite the fear-mongering, a government shutdown would not have been as bad as claimed.

It is encouraging that some in Washington seem to be insisting on reduced spending, which is definitely a step in the right direction, but only one step. We have miles to go before we can even come close to a solution, and it will involve completely redefining the role of government in our lives and on the world stage. A compromise was struck at the last minute, but until Democrats agree to rein in entitlement spending, and Republicans back off the blank checks to the military industrial complex, it all amounts to political gamesmanship.

Unfortunately, the compromises always seem to be just the opposite. Instead of the left agreeing to cut social spending and the right agreeing to cut military spending, the right agrees to more welfare and the left agrees to more warfare. In spite of all the rhetoric, we will go deeper in debt, the Fed will print more money, and the value of the dollar will continue to plummet. How long will it be before foreigners stop buying our debt, and hyperinflation arrives? Throughout history, empires have always overextended themselves through conquests and wealth transfers leading to eventual collapse, from the Roman Empire to the Soviet Union. We are headed in the same direction and it seems only the chaos of the collapse of the dollar will stop the spending spree. Arguing over funding for Planned Parenthood and NPR, though important, only shows that leadership in Washington either won’t face reality, or don’t understand how serious the problem is.

Of course, an actual government collapse would create serious problems for many people who have come to depend on government payments for healthcare, retirement income, their children’s education, and even food and housing. However, these so-called entitlement programs are unconstitutional to begin with and have engendered a culture of dependence on wealth transfer payments that is out of control. It concerns me greatly that instead of dealing seriously with our situation, so many in Washington would rather allow the chaos that will ensue when all of the dependent people are suddenly cut off. Better to look reality squarely in the face and tell people the difficult truth that government is simply not capable of managing people’s lives from cradle to grave as was foolishly promised. We face trillions in deficits with any of the budgets under consideration. Keeping those promises is, sadly, just not one of our options in the long run. Better to admit the nanny state is coming to an end and we are no longer working on “compromises” but a transition – to a sustainable way of life, one that respects the constitution, the rule of law and property rights.

Dr. Ron Paul is a Republican member of Congress from Texas.


Gerald Celente On Obama’s Budget: “They’re Bankrupting The Country.”

February 19, 2011

Editor’s Note: This follows yesterday’s “Bullet Train to Oblivion” article. Recently, I urged you to begin looking at The Russia Times for insightful analysis.

Here is a good example. Trendwatcher Gerald Celente opines about the Obama budget and its effect on America.

Is there no colony/state in America besides Texas that is seriously considering secession? If not, why not? Ohhh….I remember now. No state, including Texas, is going to get serious about secession until AFTER Washington destroys this country, destroys the money and destroys the economy. I’m sure glad that Jefferson, Washington, Adams and their friends did not wait until King George had bled them dry before they revolted and seceded. But the Founders seceded with far less provocation from the King than Washington assaults us with today. For the life of me, I cannot really understand why even one state will not opt to save itself and its citizens from ruin before it happens.

Secession……ANYONE?

Secession is the Hope For Mankind. Who will be first?

DumpDC. Six Letters That Can Change History.

Gerald Celente is founder and director of The Trends Research Institute, author of Trends 2000 and Trend Tracking (Warner Books), and publisher of The Trends Journal. He has been forecasting trends since 1980, and recently called “The Collapse of ’09.”

© Copyright 2011, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.


How About Some Nice Hyperinflation?

February 10, 2011

America, poised for a hyperinflationary event?

by Michael Pollaro

It is a long standing proposition of many, supported on both theoretical and historical grounds, that one of the surest roads to hyperinflation is one grounded in a government whose answer to every economic and social problem is to borrow and spend the problem away, supported by central bank able, willing and ready to finance the effort. That support is of course to simply print the money through which to buy the debt so issued by the government – what is euphemistically called monetizing the debt – thereby exploding the supply of money and eventually trashing its value.

We here at THE CONTRARIAN TAKE wholeheartedly agree with this proposition.

So, given the extraordinary borrowing needs of the U.S. government, currently being supported by a Federal Reserve whose QE II asset purchase program is large enough to finance 100% of the government’s funding requirements through at least June, we thought we would take a look at the prospects for a hyperinflationary event in America. And while we think hyperinflation – defined as the total destruction in the value of the U.S. dollar – is a low probability event, a lot, and we do mean a lot more monetary inflation most definitely is not. You see, when you have a government that seems reluctant to change its borrow and spend policies in any meaningful way – a subject we took on here – teamed up with a central bank chaired by a man who thinks that loose fiscal and monetary policies are the springboard for a downtrodden economy, you have a recipe for a whole heap of monetary inflation. Indeed, in the opinion of THE CONTRARIAN TAKE, never has a U.S. central bank been chaired by a man who is more certain that loose fiscal and monetary policies are exactly what an economy mired in excess productive capacity and high unemployment requires to make things right.

Before we discuss the prospects for hyperinflation, some preliminaries…

Preliminaries

First, U.S. government debt is being here defined as the debt of the U.S. Treasury plus the debt of the government-sponsored agencies Fannie Mae and Freddie Mac (popularly called agencies). Inclusion of the latter may appear to be a bit of a stretch, but as we discussed HERE, to us, its inclusion in the U.S. government’s debt footings is obvious. Creations of the U.S. government, these government-sponsored enterprises and their debt obligations have always been implicitly backed in varying forms by the full faith and credit of the U.S. Treasury, a backing made explicitly clear to any and all doubters when on December 24th 2009, in the depths of the credit crisis, the U.S. government gave the government-sponsored enterprises unlimited access to the Treasury essentially until further notice. We wonder why anyone would have thought anything different, that when push came to shove the U.S. government would protect its own, make this implicit guarantee an explicit one and the debt of Fannie Mae and Freddie Mac the defacto debt of the U.S. government.

Second, it is common practice to measure a government’s burden on the economy by comparing the government’s debt to the nation’s productive output or GDP. And while we agree that over the long haul it is a nation’s productive prowess that provides the means necessary to pay the government’s debt obligations, we think it is more instructive to compare those debt obligations to the nation’s savings. You see, it’s a nation’s savings, its willingness to defer consumption that makes the government’s borrow and spend programs possible. All other things equal, an economy that consumes much and saves little is an economy that cannot long afford a borrow and spend government. The crucial question then in any proper examination of a government’s burden on the economy is this… is the nation’s pool of savings large enough to fund the government’s borrowing requirements, for how long and at what rate of interest?

Third, the Federal Reserve is not the only stateside institution that has the power to monetize the U.S. government’s debt. Because of our government protected, fractional reserve banking system, they have a partner – the private banking system – which can and does buy U.S. treasury and agency securities, paying for those securities simply by crediting the bank accounts of the sellers. That’s right, by printing money just like the Federal Reserve.

READ THE REST OF THE ARTICLE

Michael Pollaro is a retired Investment Banking professional, most recently Chief Operating Officer for the Bank’s Cash Equity Trading Division. He is a passionate free market economist in the Austrian School tradition, a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor. He is a columnist on the Forbes blog.

Copyright © 2011 Forbes


Secession and Five Reasons Why Washington Can’t Retreat

January 12, 2011

by Russell D. Longcore

There is a new crop of legislators in Washington right now, bent on bringing Washington’s spending to heel. Let’s consider just a few reasons why Washington cannot retreat from its course. DC is a runaway train that cannot leave its tracks to take a new direction. It must fulfill its destiny to make the fall of Rome look like playtime at kindergarten.

1. Political philosophy

The first consideration for the new Republican House majority is that the Democrats control the Senate and the White House. No substantive piece of legislation has a snowball’s chance in Hades of being enacted in the next two years. All the House majority can do is try to embarrass the other party. Gridlock should not be confused with fixing Washington.

The overarching political philosophy in Washington is that the Federal goverment should be involved in every facet of human action. DC and the entire Power Class believe that the Constitution is irrelevant, and that Washington may do whatever it chooses to do without restriction. If you wish to argue with this statement of philosophy, please send us the name of one person elected that has never voted for some legislation that violates the US Constitution. I do not even think Dr. Ron Paul can measure up to this standard, but I could be wrong.

DC believes that every Federal dollar spent is necessary, or else why would they spend it? And cutting spending is a tacit admission that some Federal spending is not necessary, which betrays the underlying philosophy.

With this philosophy in place, most of the spending done at the Federal level violates the Constitution. So, when the aforementioned philosophy is the air that Washington breathes..the presupposition for all government action, how could they consider cutbacks? That would be tantamount to an admission that they have been committing crimes against the Constitution for decades. Can you imagine that happening?

2. Military spending

The Pentagon and the private industries that supply the military figured out long ago that in order to protect themselves from budget cuts, they would place manufacturing plants and suppliers in every state of the USA. The job base was widely dispersed throughout the country and hundreds of billions were spent everywhere. Consequently, when some Congressional crusader recommended budget cuts for the military, nearly every Congressman would be placed in the untenable position of voting in favor of eliminating jobs in his/her district. Same goes for domestic base closings. Entire economies get developed around a military base, and the closing of a base would mean economic devastation on a local level.

So, if Washington closed military bases on American soil, voters get pissed. If Washington stopped paying for weapons systems we do not now or may never need, voters lose jobs and get pissed. If Washington closes foreign military bases, they have to either bring home the troops to America and house them inside our borders, or they have to release them to be civilians again. One costs money directly, the other creates a spike in unemployment…and the voters get pissed, especially the soldiers now without a job. The US military is being used as a giant jobs program right now, and no one in DC wants to be responsible for cutting jobs.

And don’t forget…war is foreign policy by another means. Washington’s belligerence around the globe promotes our oil industry at the same time we are the world’s largest supplier of military hardware to all the other nations. Washington is not going to change foreign policy voluntarily.

Military spending will not be significantly cut by this Congress or any subsequent Congress.

3. Federal Borrowing

Washington now borrows about 50% of its budget annually. That means that of every dollar DC spends, 50 cents is borrowed. Washington is not ever going to slash its budget by 50% to live within its tax collections. Federal borrowing is entirely out of control. The Federal Reserve has been buying Treasury Debt to artificially prop up DC spending, which is like paying for an IOU with another IOU. Washington cannot even slow down its borrowing, and it will likely get worse because they have to keep rolling over old debt. At some point, Washington’s interest obligation will exceed its tax revenue.

4. The Dollar, banking and the Federal Reserve

The Keynesian economists in Washington have spread the disease of central banks, inflation and fractional reserve banking to every nation on earth. Every financial system, every currency on earth is entangled it the Washington web. There is no way to fix the system and Washington can only keep propping it up and kicking the economic collapse can down the road.

If the Federal Reserve raised interest rates, the dying economy would erode further and faster. If they lower interest rates any more, which are already near zero, they will be in effect paying banks to borrow money. So an interest rate increase is out of the question.

The world is swiftly moving away from the dollar, and moving toward a new world reserve currency. China is poised to use the renminbi yuan as the new reserve. The Federal Reserve and Treasury collude to pump trillions of paper dollars into the world economy, diluting the value of each existing dollar. Washington cannot forsake the dollar, or allow any other form of money to be legal tender. They have to ride this boat over the falls.

5. Entitlement spending

Over the years, most of the big spending programs have been amended to protect them from cutbacks. Many of them, like Social Security, Medicare, etc., have automatic budget increases built into the law. These programs affect a huge percentage of the population, and as the Baby Boomers age, more will be entitled. No politician wants to cut Grandma’s monthly check.

Secession is the only logical solution to these five unfixable problems.

The state that secedes most successfully will carefully craft a system of governance that severely restricts government action.

Secession formally ends any state’s relationship with Washington. Therefore, Washington’s debts cease to be any responsibility of that seceded state.

A seceded state, now a new nation, would have no Federal Reserve mismanaging its money.

A seceded state would have no social programs that steal money from one taxpayer to give it to another taxpayer.

A seceded state would only have a militia to protect itself from invasion.

Conclusion

Washington DC is a disease. It has become a plague upon mankind. Every nation of the earth has become sick with “DC-itis.” And when DC dies, many other nations will die soon thereafter. The effect on populations worldwide will be the worst plague to ever hit mankind.

But Secession is the Last Hope For Mankind. Who will be first?

DumpDC. Six Letters That Can Change History.

© Copyright 2011, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.


Tax Policy For A New Nation

December 9, 2010

We talk secession here at DumpDC.com. And as such, we think about what a newly seceded state, now standing on its own as a new nation, would do to raise money from the citizens to pay for the functions of the new nation.

Washington’s methods of taxation are insane. There are so many methods of taxation…so many assessments, fees, tariffs and penalties…that we cannot keep up with them. Then consider the voluminous IRS tax code. It has been said that there are so many laws in the IRS tax code that every taxpayer is likely violating some tax law at any given moment in their lives. And all of this tax insanity at every level of government robs Joe Taxpayer of about half his income.

The doublethink and mendacity coming out of Washington about taxes is enough to make even a liberty-minded free-market person confused. So today, I’m going to address some fundamental issues about taxation…kind of like “Tax 101.”

First lesson is about money. There is only ONE form of legitimate money, and that is precious metals such as gold and silver. But money is not currency and currency is not money. Currency…paper and coins not made of gold and silver, can easily be counterfeited and passed off as money. Most people think that the greenback paper bills in their wallets or purses are money. But that is just currency.

The word “Federal” would be dropped from the lexicon in a new nation, since the new nation is a single entity, not a confederation of states. The proper term going forward would be “National” to describe the government of the new nation.

A new nation needs to go on the gold and silver money system. For more about this, read Sound Money and Limited Government.

Once the money issue is settled, then the government can begin planning for how to generate revenue of money for its purposes.

“Taxation” is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state (or the functional equivalent of a state) such that failure to pay is punishable by law. That is one method whereby governments collect money to pay for the costs of the government.

All taxation is the ethical equivalent of theft. But taxation has been found, over centuries, as the most workable way for government to collect revenue from its citizens to fund government activities. Most taxation is inequitable, meaning that some pay more, some pay less. Much of taxation is an attempt by government to either reward certain activity or penalize other activity. The disparity of taxation between income earners in America is so great that a large percentage of citizens effectively pay no tax, while other groups of citizens pay the most. So the best that any government could do would be to make the taxation as close to voluntary as possible. The sales tax is the method of taxation closest to voluntary contribution. Think about it. The only time you pay tax is when you spend money.

And what about so-called “fairness?” I’ve said for a long time that “fair” is a place you take your pig to win a blue ribbon. The fairness in taxation ends up being whatever those in power say it is, and that’s certainly not fair. But should not every person pay taxes? Every person enjoys some benefit from the functions of government. Why should the poor be exempt from taxes? More to the point, why should ANYONE be tax exempt? I hold the position that all tax exemptions be ended, no matter if you are a poor individual, a charity or a church. And with a national sales tax as the only method of taxation, all of the other tax exemptions would end as a byproduct of reinventing the tax system. They simply wouldn’t be needed anymore.

Another even more insidious method of taxation is inflation. There is only one source for inflation, and that is a government that devalues its own currency. Inflation lowers the currency’s value. When currency is devalued, it takes more currency to pay for a product or service than before inflation. So it’s easy to look at price increases and think the increase is inflation. It is not. For some excellent information about inflation, go to www.Inflation.us.

I’m going to offer my proposals for generating revenue for the new nation. And when you read these, remember that I am throwing out everything that Washington has done over the last 200 years and starting with a clean sheet of paper.

National Sales Tax

A national sales tax only collects from taxpayers at the point of a retail sale. Every state already has a mechanism in place for the collection of retail sales tax. So any seceding state would have to revise the percentage of sales tax collected but that’s about it.

To fund all operations of the new National government, a sales tax of 15% will be assessed at the point of purchase. This turns national taxation upside down. No longer would the government be able to spend over its income. The new government would be forced to operate within its income, and that income would come from one source…the sales tax. Consequently, the new nation would have to prioritize the services it rendered based upon income, not providing services and then squeezing the citizens for money, borrowing or inflating to pay for it.

If this proposal seems unworkable to you, remember that a new nation, formed from a seceded state, would not have to start with the burdens presently laid upon all of us by Washington. No Social Security, Medicare, big military, and long list of three-letter bureaucracies like HHS, FBI, DOA, FTC, etc. The new nation would start with a very small government, and would be prevented from adding new government burdens unless it could pay for them.

Advantages:

• One tax, no other taxes. No property tax, personal property tax, estate tax, income tax, gift tax, capital gains, tariffs, duties, alternative minimum, Social Security, Medicare, and self-employment taxes.
• The gold standard money could be paid to the new national Treasury through coin, currency or electronic money.
• All government functions, from national down to county, city, village and townships, would be paid from the sales tax.
• All employees earning paychecks would have no government deductions of any kind.
• There would be no exemptions for any individual, business, charity or religious organization.
• No goods or services would be exempt, like food and medicine.
• There would be no tax forms whatsoever for citizens to fill out.
• It would eliminate the need for an IRS-type tax collector. Tax revenues would be forwarded to the Treasury by retailers. Retailers would be paid a service fee for collecting and forwarding taxes to the Treasury.
• No tax breaks, tax deductions, tax credits, tax amnesties, tax returns.
• The sales tax would collect revenue from citizens, aliens, illegals and tourists equally. If you spend money in the new nation, you pay sales tax.
• The national sales tax encourages savings and investment.

The Single Disadvantage:

Those who wanted to avoid the sales tax would sell stuff as a non-retailer, just like people do today when they do personal sales transactions like at yard sales.

There is no way to estimate the revenue that would flow from a national sales tax for any new nation. First, we’d have to know which state it was that seceded. Then, possibly some estimates could be made based upon the economic output of that state at the time of the secession. But a new national sales tax would be a game-changer for this new nation. What individuals or businesses would not LOVE the abolition of all other taxes and the establishment of the sales tax?

I predict that the economy of the new nation would explode with growth and prosperity. Capital from all over the planet would flow into the new nation as individuals and businesses sought the stability of this government and its monetary system.

The national sales tax as the sole method of taxation radically simplifies the taxation process while bringing taxation out into the light of day. It promotes transparency in the new government. Between the sales tax and the gold standard, it affords the new nation the freest economy in North America…arguably the freest economy in the world.

Secession is the hope for mankind. Who will be first?

DumpDC. Six Letters That Can Change History.

© Copyright 2010, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.


Money As Debt

November 29, 2010

We have been receiving comments from a woman named Mona. She is asking deep questions about money. She forwarded a link to a very well done video series named “Money As Debt.” I’ve split this 47-minute video up into 5 sections.

Watch this series and learn about money. Even better…have your children watch this series about money. Then discuss the series with them, and make plans how you and your children will avert the coming financial collapse.

Money As Debt Part 1 of 5

Money As Debt Part 2 of 5

Money As Debt Part 3 of 5

Money As Debt Part 4 of 5

Money As Debt Part 5 of 5


Before You Eat Your Thanksgiving Feast

November 25, 2010

The National Inflation Association has created a riveting little video about how things will likely play out some day soon. I have written scenarios in articles, but NIA’s scenario is done in video and audio. And, best (or worst) of all….it is very likely to happen….ANY DAY NOW!

Don’t enjoy this, but watch it and send it to everyone in your email address book. Who knows? This stuff could easily occur before next Turkey Day.


Hyperinflation Part IV: Great Depression Coming

November 12, 2010

Part IV of IV by Walter J. (John) Williams

Even with the government’s spending, debt and obligations running far beyond the ability of the government to cover with taxes or the political willingness of the government to cut entitlement spending, the inevitable inflationary collapse, based solely on these funding needs, possibly could have been pushed well into the next decade. Yet, the printing presses already are running, and the Fed is working actively to debase the U.S. dollar. Actions already taken to contain the systemic solvency crisis and to stimulate the economy, plus the ongoing devastating impact of a severe economic contraction on tax revenues, have set the stage for a much earlier crisis. Risks are high for the hyperinflation beginning to break in the year ahead; it likely cannot be avoided beyond 2014.

It is this environment of rapid fiscal deterioration and related massive funding needs, the U.S. dollar remains open to a rapid and massive decline and to the dumping of U.S. Treasuries. The Federal Reserve would be forced to monetize significant sums of Treasury debt, triggering the early phases of a monetary inflation. Under such circumstance multi-trillion dollar deficits rapidly would feed into a vicious, self-feeding cycle of currency debasement and hyperinflation.

Lack of Physical Cash. The United States in a hyperinflation would experience the quick disappearance of cash as we know it. In Zimbabwe, there was the back-up of a well-functioning black market in U.S. dollars, but no such back-up exists in the United States. Shy of the rapid introduction of a new currency and/or the highly problematic adaptation of the current electronic commerce system to new pricing realities, a barter system is the most likely circumstance to evolve for regular commerce. Such would make much of the current electronic commerce system useless and add to what would become an ongoing economic implosion. It also could take a number of months to become reasonably functional.

Some years back, I happened to be in San Francisco, having dinner with a former regional Federal Reserve Bank president and the chief economist for a large Midwestern bank. Market rumors that day had been that there was a run on a major bank in the City by the Bay. So I queried the regional Fed president as to what would be happening if the rumors were true.

He had had some personal experience with a run on banks in his region and explained how the Fed had a special team designed to handle such a crisis. The biggest problem he had had was getting adequate cash to the troubled banks to cover depositors, having to fly cash in by helicopters to meet the local cash flow needs.

The troubled bank in San Francisco, however, was much larger than the example cited, and the former Fed bank president speculated that there was not enough cash in the vaults of the regional Federal Reserve Bank, let alone the entire Federal Reserve System, to cover a true run on deposits at the major bank.

Therein lies an early problem for a system headed into hyperinflation: adequate currency. Where the Fed may hold roughly $200 billion in currency outside of roughly $50 billion in commercial bank vault cash, the bulk of roughly $860 billion in currency outside the banks is not in the United States. Back in 2000, the Fed estimated that 50% to 70% of U.S. dollar cash was outside the system. That number probably is higher today, with perhaps as little as $250 billion in physical cash in circulation in the United States, or roughly 1.7% of M3. The rest of the dollars are used elsewhere in the world as a store of wealth, or as an alternate currency free of the woes of unstable domestic financial conditions. Those conditions would change severely in the event of a U.S. hyperinflation.

Given the extremely rapid debasement of the larger denomination notes, with limited physical cash in the system, existing currency would disappear quickly as a hyperinflation broke.

For the system to continuing functioning in anything close to a normal manner, the government would have to produce rapidly an extraordinary amount of new cash, and electronic commerce would have to be able to adjust to rapidly changing prices.

In terms of cash, new bills of much higher denominations would be needed, but production lead time is a problem. Conspiracy theories of recent years have suggested the U.S. Government already has printed a new currency of red-colored bills, intended for some dual internal and external U.S. dollar system. If such indeed were the case, then there might be a store of “new dollars” that could be released at a 1-to-1,000,000 ratio, or whatever ratio was needed to make the new currency meaningful, but such would not resolve any long-term problems — as seen in the multiple Zimbabwe devaluations — unless it was part of an overall restructuring of the domestic and global financial and currency systems and unless the U.S. government could put its fiscal house in order.

From a practical standpoint, however, currency would disappear, at least for a period of time in the early period of a hyperinflation.

Where the vast bulk of today’s money is not physical, but electronic, however, chances of the system adapting there are virtually nil. Think of the time, work and effort that went into preparing computer systems for Y2K, or even problems with the recent early shift to daylight savings time. Systems would have to be adjusted for variable, rather than fixed pricing, credit card lines would need to be expanded daily, the number of digits used in tallying dollar-denominated transactions would need to be expanded sharply. I have had assurances from some in the computer field that a number of businesses have accounting software that can handled any number of digits.

From a practical standpoint, though, the electronic quasi-cashless society of today likely also would shut down early in a hyperinflation. Unfortunately, this circumstance rapidly would exacerbate an ongoing economic collapse.

Barter System. With standard currency and electronic payment systems non-functional, commerce quickly would devolve into black markets for goods and services and a barter system. Gold and silver both are likely to retain real value and would be exchangeable for goods and services. Silver would help provide smaller change for less costly transactions. One individual I met indicated that he had found airline bottles of scotch to be ideal small change in a hyperinflationary environment.

Other items that would be highly barterable would include bottles of liquor or wine, or canned goods, for example. Similar items that have a long shelf life can be stocked in advance of the problem, and otherwise would be consumable if the terrible inflation never came. Separately, individuals, such as doctors and carpenters, who provide broadly useable services, already have services to barter.

A note of caution was raised once by one of my old economics professors, who had spent part of his childhood living in a barter economy. He told a story of how his father had traded a shirt for a can of sardines. The father decided to open the can and eat the sardines, but he found the sardines had gone bad. Nonetheless, the canned sardines had taken on a monetary value.

Howard J. Ruff, who has been writing about these problems and issues since Nixon closed the Gold window, rightly argues that it will take some time for a barter system to be established, and suggests that individuals should build up a six-month store of goods to cover themselves and their families in the difficult times. Such is within the scope of normal disaster planning in some areas of the country (for example, I sit almost on top of the Hayward Fault).

Financial Hedges. During these times, safety and liquidity remain key concerns for investments, as investors look to preserve their assets and wealth through what are going to be close to the most difficult of times. Those who can preserve their wealth and maintain liquidity will have the ability to take advantage of extraordinary investment opportunities after the crises pass.

Gold and Silver. In a hyperinflation, gold and silver would be primary hedging tools that would retain real value and also be portable in the event of possible civil turmoil. At some point, the failure of the world’s primary reserve currency will lead to the structuring of a new global currency system. I would not be surprised to find gold as part of the new system, structured in there in an effort to sell the new system to the public.

Real Estate. Real estate also would provide a basic inflation hedge, but it lacks the portability and liquidity of gold. That could become an issue if the political environment shifted so radically that ownership of private property became impossible.

Currencies. Having some funds invested offshore — outside of the U.S. dollar — would be a plus in circumstances where the government might impose currency or capital controls. I look at the Swiss franc, the Canadian dollar and the Australian dollar as currencies likely to maintain their purchasing power against the U.S. dollar. Any suggestions here in terms of currencies, gold and silver, etc. are for holding same over the long term. Near-term price volatility remains a risk in most markets.

Taking on Debt. Inflation is supposed to be the debtor’s friend, where debtors, like the U.S. government, end up paying off their obligations in cheap dollars. A note of caution is offered here. The current circumstances are extraordinary. Borrowers should consider their ability to carry debt through extremely difficult economic times, including possible loss of employment, etc., before high inflation might kick in. Consider, too, the U.S. government recently has intervened in altering terms and conditions of mortgages. Could a radical political change end up recasting the terms of personal obligations?

TIPS. The U.S. Treasury offers securities where yields and principal get adjusted regularly for the rate of inflation. In a hyperinflation, price changes can be so rapid that the principal and/or yield adjustment would lag enough so as to make the adjustments worthless. The reporting lag in calculating the adjusting CPI index — if it even could be calculated — still would wipe out investors, unless the Treasury became particularly creative and began benchmarking to spot gold or such, but nothing like that is in place.

As to the potential rapidity of price change, consider some anecdotal evidence. One story out of Weimar Germany involved buying an expensive bottle of wine for dinner. The empty bottle was worth more as scrap glass the next morning than it had been worth as a full bottle of wine the night before. Anther story involved negotiating the price and paying for a meal, before sitting down, as the price of the meal would be higher by the time it was finished.

Equities. While equities do provide something of an inflation hedge — revenues and profits get expressed in current dollars — they also reflect underlying economic and political fundamentals. I still look for U.S. stocks to take an ultimate 90% hit, peak-to-trough, net of inflation, during this period. Where all stocks are tied to a certain extent to the broad market — to the way investors are valuing equities — such a large hit on the broad market will tend to have a dampening effect on nearly all equity prices, irrespective of the quality of a given company or a given industry.

The following graph shows the year-end Dow Jones Industrial Average in current terms, as well as adjusted for SGS-Alternate Consumer Inflation. While stocks may rally based on high inflation, in inflation-adjusted terms, a bear market remains a good shot. An early-hyperinflation DJIA at 100,000 could be worth 1,500 in today’s terms.

Closing Comments

Other Issues. A hyperinflationary great depression would be extremely disruptive to the lives, businesses and economic welfare of most individuals. Such severe economic pain could lead to extreme political change and/or civil unrest. What has been discussed here remains well shy of a comprehensive overview of all possible issues, but rather at least has raised some questions and touched upon some likely consequences. No one can figure out better than you the peculiarities of this circumstance and how you, your family and/or your business might be affected. Using common sense remains the best advice I can give.

These matters will continue to be expanded upon in SGS Commentaries, as circumstances and subscriber reactions dictate.

I extend by deep thanks to the various readers who have raised questions and provided ideas and material. As always, please feel free to offer your comments or raise your questions by e-mail to johnwilliams@shadowstats.com.

Copyright 2010 Shadowstats.com


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