Homeland Security Trying To Shut Down Air Travel?

November 16, 2010

by Paul Joseph Watson

(Editor’s Note: Last week, I had to be in Fairfield, New Jersey to meet with a client. But I was not willing to either go through a radiation body scan or body grope. I knew that I couldn’t go through a body search without speaking up and getting in trouble with the TSA. So I drove to New Jersey. What is normally a two hour flight from Atlanta to Newark took me 15 hours in my car…both ways. So, the TSA’s criminal searches took me out of air travel. How about you?

State’s rights…mentioned in the article…or secession would stop this foolishness.)

Could there be another purpose behind invasive airport security measures that have caused national outrage and led to large numbers of Americans refusing to fly? By making air travel more and more uncomfortable, authorities are killing two birds with one stone – training people to submit to tyranny while also restricting air travel, something the climate change lobby is aggressively pushing for.

With a new Reuters poll showing that some 96 per cent of Americans are now less likely to fly because of full body scans and pat downs, the agenda to reduce living standards by restricting CO2 output in the name of global warming is being achieved through the back door.

Comments on the poll suggest that Americans are taking trains or choosing to drive thousands of miles in some cases in order to avoid naked body scanners and invasive groping techniques at airports which have caused a massive backlash against the TSA.

Others reveal how they have cancelled thousands of dollars worth of airline tickets and holidays as a response to the huge controversy generated by the new TSA measures over the last few weeks.

For the past few years there has been a creeping effort to create a system within which people will have their travel restricted by government decree. Indeed, as of last year Homeland Security bestowed upon the TSA the power to force Americans to obtain government permission before they could travel.

Under the Secure Flight program, the TSA demands that passengers submit personal information before being cleared to fly. While on the surface, this is justified by invoking the threat of terror, as we have seen from the MIAC report and others, the federal government now considers politically active Americans as potential terrorists, meaning that travelers could find themselves on a watch list and barred from flying.

Leading agitators in the global climate change lobby are pushing for carbon taxes to “constrain air travel demand,” by making flying more and more unaffordable.

By simultaneously discouraging people from traveling via degrading pat downs and dangerous radiation firing body scanners, the feds are creating a perfect storm that will restrict air travel and result in millions of lost dollars from the US economy. The country has already lost an estimated third of all tourists since 9/11 primarily as a result of unpopular and pointless security measures like forcing people to take off their shoes.

But for people like White House science czar John P. Holdren, killing the economy in the name of saving the planet, when in reality the man-made climate change movement has nothing to do with the environment and is about limiting personal freedom and lowering living standards, is a good thing.

Since the entire raison d’être of big government is about restricting personal choice and mobility, the feds won’t concern themselves about Americans who refuse to fly because of the TSA controversy.

What will keep them awake at night however is a potential states rights’ confrontation where local authorities take it upon themselves to abolish the TSA and make naked body scans and invasive pat downs illegal.

Paul Joseph Watson is the editor and writer for Prison Planet.com. He is the author of “Order Out Of Chaos.” Watson is also a fill-in host for The Alex Jones Show. Watson has been interviewed by many publications and radio shows, including Vanity Fair and Coast to Coast AM, America’s most listened to late night talk show.


Dr. Bernanke Gets A Phone Call

November 15, 2010

by Dr. Gary North

(Editor’s note: I’ve been telling you that Treasuries
held by foreign nations are one likely cause of the meltdown
of the dollar and the collapse of the American economy. Gary
North weaves a plausible scenario in this article.)

Zhou Xiaochuan is the Governor of the People’s Bank of
China. Imagine that the following phone call were to take

Zhou: Hello. Dr. Bernanke?

Bernanke: Yes.

Zhou: I wanted to let you know about the decision that our
board has taken, after consulting with the Premier and the
Politburo’s Standing Committee. We hope you are sitting

Bernanke: I get it. A little Oriental humor.

Zhou: You could say that.

Bernakne: What can I do for you?

Zhou: You can abandon your plan to purchase $600 billion of
Treasury bonds.

Bernanke: The Federal Open Market Committee voted ten to 1
for this policy. I cannot change it now.

Zhou: We think it is an unwise policy. It will lower the
value of the dollar. Americans will then buy fewer goods
from China.

Bernanke: That is not how we see it. We think the policy
is required to put Americans back to work. They will buy
more goods from China and everywhere else when they are
once again working.

Zhou: You will increase the supply of dollars, which will
lower the dollar’s price internationally. Imported goods
will cost Americans more. An increased supply of dollars
will mean a lower price for dollars. It’s supply and

Bernanke: That is the old economics. That is the logic of
Adam Smith and Milton Friedman and those kooks from Vienna.
We are committed to the new economics.

Zhou: Who teaches it? Where?

Bernanke: I taught it for years at Princeton.

Zhou: Where Paul Krugman also teaches?

Bernanke: Yes.

Zhou: We see it differently here. We prefer the older

Bernanke: Adam Smith’s economics?

Zhou: No, even older.

Bernanke: Mercantilism?

Zhou: That is what you call it. We call it the export-
driven Asian miracle.

Bernanke: But mercantilist governments wanted to hoard
gold. Your nation does not hoard gold. Your bank holds
U.S. Treasury debt.

Zhou: That is the purpose of my call.

Bernanke: Gold?

Zhou: No. U.S. Treasury debt.

Bernanke: What about it?

Zhou: There is too much of it.

Bernanke: You sound like Ron Paul.

Zhou: Ah, yes. Congressman Paul. I understand that he is
likely to be the next chairman of the Monetary Policy
Subcommittee. You and he should have some interesting

Bernanke: I prefer to talk about Treasury debt.

Zhou: We have determined that an increase of $600 billion
in your purchases of Treasury debt will lower the rate of
interest on the debt.

Bernanke: That is our thought, too.

Zhou: We hold almost $1 trillion in Treasury debt.

Bernanke: You ought to buy more.

Zhou: We will be losing money on our holdings if rates

Bernanke: You ought to buy more.

Zhou: The value of the dollar will fall. That will lower
the value of our holdings.

Bernanke: Nevertheless, you ought to buy more.

Zhou: We have decided to own less.

Bernanke: How much less?

Zhou: $600 billion less.


Zhou: Dr. Bernanke?


Zhou: Are you still there?

Bernanke: I am still here.

Zhou: We have decided that every time the Federal Reserve
purchases its monthly total of $75 billion, we will sell
$75 billion.

Bernanke: Are you serious?

Zhou: You sound like Nancy Pelosi.

Bernanke: But that would raise interest rates on Treasury

Zhou: That is our conclusion, too. But remember: we own
lots of Treasury debt. We could use a better rate of

Bernanke: But higher rates might cause a recession in the
United States.

Zhou: That is our conclusion, too.

Bernanke: But that will mean fewer imports from China.

Zhou: We think it will mean more bankrupt manufacturing
facilities in the United States. Then Americans will come
back to our manufacturers.

Bernanke: But this could cause unemployment in China if you
are wrong.

Zhou: We are willing to risk that.

Bernanke: That is a big risk on your part.

Zhou: No bigger than the risk on your part by inflating the
monetary base by 30%. That could raise prices in the
United States.

Bernanke: We don’t think so.

Zhou: Why not?

Bernanke: Because our bankers are so frightened of
recession in 2011 that they are not lending. They just
turn the money over to the FED.

Zhou: Then you do not expect inflation?

Bernanke: Only a little. Maybe 2% to 3%.

Zhou: You sound like Milton Friedman.

Bernanke: Around here, we say, “Better 2% inflation than
9.6% unemployment.”

Zhou: We think it is better for us not to hold onto
Treasury debt that cannot be paid off.

Bernanke. Don’t worry. We owe it to ourselves.

Zhou: On the contrary, you owe it to us.

Bernanke: It’s only a figure of speech.

Zhou: We can figure. We are going to be left holding the
bag, as you say. All we have is a pile of IOUs.

Bernanke: They’re as good as gold.

Zhou: Since they pay zero interest, we think gold is

Bernanke: It’s only a figure of speech.

Zhou: We can figure. Gold is over $1,350 an ounce. The
dollar has been falling. We think the older mercantilism
was right. We want to own more gold.

Bernanke: You can’t eat gold!

Zhou: We can’t eat T-bonds, either.

Bernanke: But if you sell dollars, their price will fall.

Zhou: Why?

Bernanke: It’s supply and demand.

Zhou: Gotcha!

Bernanke: You speak English very well.

Zhou: You see, I was educated in your country at UCRA.

Bernanke: Really?

Zhou: Not really. But I love those old Richard Loo World
War II movies. He made a great Japanese officer.

Bernanke: But if you sell Treasury debt, that could start a
fire sale. Central banks all over the world might start
selling T-bonds.

Zhou: That is a possibility.

Bernanke: But that would make your holdings worth even

Zhou: That is true. So, if Japan starts selling, we will
dump all of our holdings in one shot. We might as well get
out before the rush.

Bernanke: But that could crash the dollar!

Zhou: That is a possibility.

Bernanke: You’re bluffing!

Zhou: That is a possibility.

Bernanke: But this is not the way that central banks

Zhou: How do they operate?

Bernanke: They inflate.

Zhou: Always?

Bernanke: Of course always. That is the only policy tool
we have.

Zhou: You could deflate.

Bernanke: Are you serious?

Zhou: You really have Nancy Pelosi down pat.

Bernanke: There is no way we can deflate.

Zhou: What about your exit strategy? That is deflation.

Bernanke: In theory, yes. But we don’t intend to execute

Zhou: That is not what you told Congress. You told
Congress you have an exit strategy. Several, in fact.

Bernanke: We do have them. We just don’t intend to
implement them.

Zhou: Do you think you can fool Congress?

Bernanke: Are you serious? Congress doesn’t know horse
apples from apple butter.

Zhou: You mistake Barney Frank for Ron Paul. You will now
have to deal with Ron Paul.


Zhou: Hello.


Zhou: Are you still there?

Bernanke: Yes, I’m still here.

Zhou: We are not asking you to deflate. We are asking you
not to inflate.

Bernanke: But we must inflate.

Zhou: Why?

Bernanke: Because we have 9.6% unemployment.

Zhou: What has that got to do with your decision to

Bernanke: We must lower interest rates.

Zhou: For Treasury bonds.

Bernanke: Yes.

Zhou: What does that have to do with unemployment?

Bernanke: When mid-term rates are lower, businesses will
start new projects and hire people.

Zhou: Mid-maturity T-bond interest rates are the lowest
ever since what you call the Great Depression and what we call
the old normal.

Bernanke: You can never have low enough T-bond rates.

Zhou: But, as Treasury bond investors, we don’t like low
rates. We like high rates. We hold lots of T-bonds. If
we get very low rates, we might as well own gold.

Bernanke: But you will like all that increased demand for
made-in-China goods when all those unemployed Americans go
back to work.

Zhou: But rates are lower than they have been in 80 years.
You still have 9.6% unemployment.

Bernanke: But if the 10-year T-bond rate goes from 2.6% to
1%, American businessmen will hire millions of workers.

Zhou: Do you have evidence for this in one of those dozen
Federal Reserve bank monthly bulletins? Or maybe in the
“Federal Reserve Bulletin”?

Barnanke: Not really. But it’s the thought that counts.

Zhou: I don’t think we are getting anywhere. So, just to
remind you. We will sell enough Treasury debt each month
to match any net increase in the amount you buy.

Bernanke: Dollar for dollar?

Zhou: Dollar for dollar. But, I’ll tell you what. Buy them
from us, and we’ll give you a discount for volume

Bernanke: You guys never miss a trick, do you?

Zhou: We’re really not inscrutable. We just offer
discounts for volume purchases.

Bernanke: I will discuss this with the FOMC.

Zhou: Do that. Shalom!

Bernanke: That’s my middle name.

Zhou: You Americans have a saying for everything.

Bernanke: No. I mean it. That really is my middle name.

Zhou: If you start buying Treasury debt, you’ll have an
honorary middle name over here.

Bernanke: What’s that?

Zhou: Paper Tiger.

Copyright 2010 Gary North.

The GOP Wins: Now What?

November 14, 2010

“A little knowledge is a dangerous thing. So is a lot.” ~ Albert Einstein

The GOP and some Tea Party candidates have just won big in the November elections but as always little will actually change on the Washington political scene. The elites only care that the establishment party win and this includes either the Democrat or Republican Parties. America today is a one party state much like the Soviet Union, China or Nazi Germany and both nominal political parties are just façades presented to the public to create the illusion of competition and choice. The establishment leadership in both the GOP and the Democrats represent the goals of the same similar special interests.

Yes, different special interests will benefit to a greater or lesser degree on the controlling party but the growth toward a more powerful Washington continues unabated. Still there is a big difference this year due to the growth of the Tea Party movement and the success of candidates like Rand Paul. There is a growing voice of outrage, anger and disillusionment at all American elites and institutions and this could help prepare the way for real political change in the near future.

Traditional Political Action Will Never Restore Your Liberty

Yes, voting has historically been a waste of time and worse as this act conveys a degree of legitimacy and support for the despotic rule of the Anglo-American Axis of wealthy interests which has manipulated and controlled America using our two-party monopoly system since 1860. Here at the Foundation and with Freedom Matters we intend to actively promote alternative political and educational actions to weaken the legitimacy of those institutions established to advance their agenda and halt the restoration of limited government and free market thinking in the United States and around the world.

While our freedoms and liberties will never be restored from the top down by Congress, more candidates and elected officials will promote our message after this election because politicians will do anything to get elected and reelected, and even on occasion do what is right. Pro-freedom candidates can use the bully pulpit of leviathan elections to promote our vision for America and there is no better successful example of this than the 2008 Ron Paul candidacy. Second, there may come a day when our votes will count at the state level when freedom forces are able to get a majority in legislatures to use their rights and power to nullify federal laws and even threaten the right of peaceful, legitimate state by state secession. Both actions could help to repudiate the federal debt and maybe return to America’s first legitimate government, the Articles of Confederation where personal and limited state sovereignty could prevail.

The Internet Is Bringing Real Change to the Political Process

Before the internet, the establishment news and opinion propaganda makers did control and manipulate the political process and there was little access to alternative news, opinion and history until the recent advent of the internet. Today the power of the establishment news and all other institutions designed to secure their control is collapsing all around us. Statist institutions ranging from the judiciary, public education, the Federal Reserve, Wall Street and even the dollar are increasingly held in low regard along with Congress, the President and all government institutions.

Therefore voting one party in or out of power changed little as we have seen in the last two elections. 2008 was a referendum on the presidency of Bush and the earlier GOP control of Congress and there was total repudiation at the polls resulting in Democrat majorities in Congress and the election of Obama as president. 2010 was a referendum on Obama and the Democrats and again the public has repudiated them although their loathing of Congress and both establishment parties is at record levels. Neither party establishment can continue with business as usual due to the watchdog effect of the internet.

The Tea Party Movement

The growth of the Tea Party does provide an excellent educational and teaching opportunity for the real freedom movement aimed at concerned Americans who have already lost faith in our corrupt institutions and both political parties. They are all mad as Hell and looking for answers. If we seize the opportunity now and combine an educational effort with a national Ron Paul presidential campaign in 2012, then we do have a chance to make real progress toward a free, prosperous and peaceful society.

Many libertarians are rightly concerned about the growth of the Tea Party faction as the original ideas of Ron Paul are being somewhat diluted and watered down by the influx of traditional social conservatives. Yes the GOP is attempting to take over this anti-Washington effort by only presenting part of the message and solutions we face as Americans today.

Yes the Tea Party growth has been fueled by many millions of dollars in advertising and cable programming by Neocons and moderate GOP elites. While all new Tea Party supporters oppose big government, many have at best a limited background in Austrian economics, the free market or the benefits of a non-interventionist foreign policy but I view this as an opportunity rather than a threat to the freedom movement.

At last, we have a real educational opportunity with our domination of the internet and websites like The Daily Bell, Mises.org, Lew Rockwell and others. Today these new advocates of limited government have access to so much more information and scholarly research than even a decade ago. The real danger to the GOP establishment is a little knowledge on philosophy, economics and history creates a thirst for more answers. Our ability to provide the answers and education is terrifying the GOP leadership who prefer to keep the new Tea Party activists dumbed down, docile and dependent on the Republican leadership to be used when necessary at election time.

The Real Battle Now Begins After the Election

Both the GOP and the Tea Party Movement have of course claimed victory in the 2010 elections but I believe the real victory is with the real freedom movement. First the caveats, yes the Tea Party movement was born out of the Ron Paul 2008 presidential campaign with some major help along the way from Rick Santelli during the economic collapse and subsequent bailouts by both political parties. Second, the movement has certainly grown way beyond our original libertarian and Austrian economics components and many fear this is a cause for concern. Today following the 2010 election, polls show that 7% of Republicans support Ron Paul for President and 14% support Sarah Palin while the rest of the GOP establishment support a wide range of GOP presidential hopefuls.

Finally, although Sarah Palin, Glenn Beck and the Fox News/Neocon GOP establishment have spent a fortune in time and money attempting to co-opt and takeover the movement, we are the real benefactors of their efforts. Millions of social conservatives angry at Washington are joining the Tea Party and looking for answers and we have the answers.

If this had taken place 20 years ago before the advent of the internet and alternative news, history and opinion, then the Tea Party would be just another conservative or populist movement absorbed and rendered ineffective by the GOP establishment. Every election year, they would take the message out of the box, broadcast it to the appropriate targeted audiences and then after the election, forget the rhetoric until the next election cycle.

Our ability to “throw the bums out” every two or four years has been just a release valve built into the political system which guarantees the continued elite control of our political process. Although there are some patriots in national politics in both parties, they never will be permitted to take control of either party or the closed political system.

We believe that even before the summer of 2011 is over, the new Tea Party supporters and others will already become angry and disappointed as the GOP elites will maintain the status quo and there will only be empty rhetoric rather than political action to control spending, curtail the deficits and limit government and this is our opportunity.

But Times Have Changed!

Of course the GOP establishment has tried to take over the Tea Party but it is so decentralized they have failed so far. Actually I would submit their attempted control and takeover has dramatically speeded up the growth and brought hundreds of thousands more Americans into this decentralized Tea Party effort and this is positive for the freedom movement.

The most frightening aspect of this for the GOP elites is most of the new supporters have lost all confidence in and support for the controlling monopoly two party system. This now threatens the establishment control of the GOP and rather than being taken over, the Tea Party now threatens the GOP Neocon elites far more than the Democrats.

Half the Truth in History Is Better Than None At All

Consider Glenn Beck’s very successful social conservative message which is the first major reeducation of the American public away from the mainstream “fairy tale” propaganda history to take place in our national history and it is on the leading establishment news network, Fox News.

Now critics will very accurately counter that Glenn Beck begins his partial history lesson 50 years too late with the Progressive Era and Woodrow Wilson. Yes, he totally whitewashes the impact of Lincoln’s War and police state excesses in the Union as well as the price of mercantilism in destroying the original American Republic. Also he skips how Lincoln birthed an empire and honed the tools of conquest and wealth confiscation with the first introduction of the income tax. There is of course no mention of how Lincoln by conquering and laying waste to the South, opened the door for a banking elite and 1913 central banking takeover along with the income tax and an all-powerful central government.

My view is what would you expect from Neocon Fox News but we should celebrate Beck’s attempt at presenting at least a partial honest history of the United States and what we lost when we transcended from the republic of our patriot founding fathers to the Washington Empire of the 20th and 21st centuries. Once freedom and truth loving Americans discover we have been lied to and how our real history has been propagandized into an adulterated worship of Washington, do you think these new patriots will stop with only part of the story?

I don’t really care why Beck only tells part of our history. Whether because of coercion from Fox News, contract agreement or personal belief, his efforts and others like him are nailing the coffin shut on 200 plus years of misinformation the media, political and education establishment have used to control the American people.

Freedom Loving Americans Will Get the Rest of the Story

They have and will continue to discover Ludwig von Mises and the Austrian School of economics, read Tom DiLorenzo and Tom Woods books and articles on our real history. Most will learn about Lincoln’s coup d’état and how two republics based on the premise of dedication to the liberty and limited government of our founding fathers even if when flawed by slavery etc. were lost when Robert E. Lee surrendered at Appomattox.

They will learn about George Washington’s vision of a neutral, non-interventionist American foreign policy to the dismay of the Neocons. Then many will compare this to the aggressive empire building of the Neocons which have stolen and made Republican foreign policy as alien to our founding fathers as the policies of Stalin and Hitler. Polls show that over 65% of Americans are upset about the direction Washington elites and their special interests are leading our nation domestically and economically. Today because of internet based news and opinion, increasingly our foreign policy of conquest, plunder and occupation are questioned and debated even by traditional conservatives.

Watching the Death Of Old Style Politics & the Establishment Media

I really enjoy watching establishment publications shutting down and selling for a token dollar. The immediacy and growing strength of the alternative freedom press combined with the decline of the old style media which existed only to protect and defend the political and financial establishment will make it impossible for the socialist Democrats or the special interests of the GOP to put the genie back in the bottle. This is so positive for the freedom movement and our ability to educate Americans.

I believe many of the Tea Party people are so angry that they are already rebelling against the false recommendations from the GOP establishment to vote for only Republican candidates. What is needed is more education and true history about our founding fathers and the War Between the States but also more recent history showing how an Anglo-American elite have completely ruled our government since the beginning of the 20th century. Together these wealthy elements have hijacked US foreign policy as well as our financial and economic institutions. All to finance their one world agenda and Wall Street profits at the expense and bankruptcy of our nation and people.

2010 will mean a few more Tea Party members in Congress, some with enough philosophical awareness and courage to stand with Ron Paul and others to show opposition to the elites. But on a sobering note, history also shows us how some GOP winners will quickly shed their Tea Party mantles of fiscal responsibility and dedication to restoring liberty and limited government. For many, it will be politics as usual as they get down to business making friends, contacts and secret alliances and combinations with the special interests which have controlled our nation for decades.

What they will likely miss is the world has changed. The media establishment will propagandize as usual treating the great unwashed masses of Americans with the same old fare of titillating sexual escapades and side stories with a modern-day Roman Circus like component. But while many Americans might be entertained and maybe even briefly seduced by the same old news and propaganda, they now have other news and opinion options on the internet.

Every American which switches from believing all the establishment cable news propaganda and print garbage to alternative press and freedom websites will likely become new advocates for the freedom movement.

I believe 2010 will be the year of Tea Party victories followed by more principled opposition by some elected officials and a wholesale revulsion by other fair weather tea party patriots in name only who quickly revert as always before back to business and thievery as usual. The internet will be filled with a backlash as the fickle public discovers how establishment Republicans lie just like the Democrats and the people will be ready for a leader of principle with sound policies rather than angry with empty phrases coined by public focus groups.

Maybe Ron Paul Will Again Run for President in 2012?

It will be time for a grandfatherly man with real integrity from Texas who warned all of us during the 2008 campaign about what was to befall America and he was laughed at and taunted by the other GOP candidates. We all saw how he was attacked, reviled and spit upon by the GOP establishment who tried with all their might to destroy this champion of freedom, liberty and free-markets.

May he return to the campaign trail and use the bully pulpit of the GOP designed to control us but we turn the tables using their controlled two [arty monopoly to give the American people the rest of the story. They will educate Americans about the truth and history of our nation, restore the principles of our Founding Fathers and help to educate the public about how today these principles still ring true and can propel our nation back to peace, prosperity and personal liberty in the 21st century.

The Revolution begins the day following the November 2010 elections. I’m ready for the battle are you?

Reprinted with permission from Freedom Matters.

Ron Holland is a contributing editor to the Swiss Mountain Vision Newsletter and Freedom Matters published by Appenzeller Business Press.

Copyright © 2010 Freedom Matters

Where are you on the War on Drugs?

November 13, 2010

It’s Not A Matter of ‘Should We Legalize Marijuana’ — It’s A Matter of ‘How We Legalize’

By Paul Armentano

Following Tuesday night’s defeat of Prop. 19, I made the following statement to the press:

“Throughout this campaign, even our opponents conceded that America’s present marijuana prohibition is a failure. They recognize that the question now isn’t ‘Should we legalize and regulate marijuana,’ but ‘How should we legalize and regulate marijuana?’”

A just-released, comprehensive post-election poll of California voters strongly supports this sentiment, and further points towards the likelihood of passing a successful marijuana regulation measure in 2012.

Among some of the polls findings:

* Fifty percent of California voters, regardless of how they voted on Prop. 19, “think the use of marijuana should be made legal.”

* Further, of those voters who rejected Prop. 19, more than 30 percent believe that “marijuana should be legalized or penalties … should be reduced.”

* A majority of Californian voters (52 percent to 37 percent) believe “laws against marijuana do more harm than good.”

* Finally, the poll reaffirms that victory at the ballot box comes down most of all to voter turnout. The survey reports, “If youth had comprised the same percentage of the electorate on Tuesday as they do in Presidential election years, Prop. 19 would have been statistically tied.”

You can read more here:

Despite rejecting Prop. 19, Californians lean toward legalizing marijuana, poll finds
Via The Los Angeles Times

California voters rejected Prop. 19, but a post-election poll found that they still lean toward legalizing marijuana for recreational use and, if young voters had turned out as heavily on Tuesday as they do for presidential elections, the result would have been a close call.

The survey, conducted by the polling firm Greenberg Quinlan Rosner, suggests that California voters had qualms with this initiative, but remain open to the idea. A majority, 52%, said marijuana laws, like alcohol prohibition, do more harm than good.

“There’s a fair amount of latent support for legalization in California,” said Anna Greenberg, the firm’s senior vice president. “It is our view, looking at this research, that if indeed legalization goes on ballot in 2012 in California, that it is poised to win.”

Voters think marijuana should be legalized, 49% to 41%, with 10% uncertain, the poll found, but were evenly split over whether they thought it was inevitable in California.

“The question about legalizing marijuana is no longer when, it’s no longer whether, it’s how,” said Ethan Nadelmann, the executive director of the Drug Policy Alliance. “There’s a really strong body of people who will be ready to pull the lever in the future.”

… The poll also found that a quarter of those who voted on Proposition 19 had considered voting the other way, suggesting that a different initiative or a different campaign could change the result.

“We have fluidity,” Greenberg said. “The issue does not have the kind of hard and fast kind of polarization that we’ve seen with other so-called moral or social issues.”

Among voters who opposed Prop. 19, 31% said they believe marijuana should be legalized or penalties reduced, but they objected to the some specifics of the initiative.

The poll did not probe what it was about the measure that did not appeal to these voters. “Among the no votes, we’re seeing a significant proportion who we believe will ultimately support marijuana legalization in the future,” Nadelmann said.

Prop. 19 would have allowed adults 21 and older to grow up to 25 square feet of marijuana or possess up to an ounce. But it also included a provision to protect marijuana users from discrimination that opponents, including the Chamber of Commerce, ridiculed. They claimed it would allow nurses and bus drivers to come to work stoned, which the campaign disputed.

The poll found some evidence that this issue may have cut into the initiative’s support. Voters said by 50% to 44% that employers should have the right to fire workers who test positive for marijuana even if they arrive sober and ready to work.

The initiative was the brainchild of Richard Lee, a medical marijuana businessman in Oakland who paid professionals to draft the measure and made the key decisions on its approach.

Lee chose to give cities and counties the power to approve marijuana sales, not the state Legislature, a system that would allow a patchwork approach much like medical marijuana. The poll suggested that voters prefer that local control approach, finding that 44% trust city and county governments more to control marijuana, while 38% trust state government more.

Greenberg Quinlan Rosner surveyed 796 voters who participated in the election by phone between Oct. 31 and Nov. 2. The poll has a margin of error of plus or minus 3.5 percentage points.

In short, the key now isn’t to convince voters that marijuana prohibition is a failure, but to find a consensus among voters regarding what is the best alternative.

Paul Armentano is the deputy director of NORML and the NORML Foundation. He is also the co-author of the new book “Marijuana Is Safer: So Why Are We Driving People To Drink?” (Chelsea Green Publishing, 2009).

Copyright © 2010 Paul Armentano

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


November 11, 2010

by Walter J. (John) Williams

Historical U.S. Inflation: Why Hyperinflation Instead of Deflation

Fire and Ice

Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.

– Robert Frost

As to the fate of the developing U.S. great depression, it will encompass the fire of a hyperinflation, instead of the ice of deflation seen in the major U.S. depressions prior to World War II. What promises hyperinflation this time is the lack of monetary discipline formerly imposed on the system by the gold standard, a fiscally bankrupt federal government and a Federal Reserve dedicated to debasing the U.S. dollar. The Fed’s efforts at liquefying the system have been extreme, yet broad liquidity is in monthly — soon to be annual — decline. Where the Fed’s systemic actions have generated temporary apparent systemic stability, the weakening annual growth in the broad money supply, and continued extreme Fed efforts at systemic liquefaction, suggest that the systemic solvency crisis is far from over.

The following two graphs measure the level of consumer prices since 1665 in the American Colonies and later the United States. The first graph shows what appears to be a fairly stable level of prices up to the founding of the Federal Reserve in 1913 (began activity in 1914) and Franklin Roosevelt’s abandoning of the gold standard in 1933. Then, inflation takes off in a manner not seen in the prior 250 years, and at an exponential rate when viewed using the SGS-Alternate Measure of Consumer Prices in the last several decades. The price levels shown prior to 1913 were constructed by Robert Sahr of Oregon State University. Price levels since 1913 either are Bureau of Labor Statistics (BLS) or SGS based, as indicated.

The magnitude of the increase in price levels in the last 50 years or so, however, visually masks the inflation volatility of the earlier years. That early volatility becomes evident in the second graph, where the CPI history is plotted using a logarithmic scale. Seeing such detail is a particular benefit of using such a plot, although the full scope of what is happening may be lost to those not used to thinking log-based.

The logarithmic scale was used here at reader request. The pattern of the rising CPI level, however, still looks rather frightening even in the modified form. Further, since inflation ideally is something that is flat over time — not compounding like the population and related series that grow with it — I do not have any issue with using a non-log scale for the visual impact of what is happening.

Persistent year-to-year inflation (and the related compounding effect) did not take hold until post-Franklin D. Roosevelt. Additionally, the CPI level reflects purchasing power lost over time for those holding dollars, which is cumulative, and which has reached extremes (as will be discussed shortly) due to the late-era compounding effect. If my assessment is correct on where this is headed, the log-based graph shortly will look like the arithmetic-based graph, as was seen the latter months of the Weimar circumstance.

Indicated by the newly visible detail in the second graph are the regular periods of inflation — usually seen around wars — offset by periods of deflation, up through the Great Depression. Particular inflation spikes can be seen at the time of the American Revolution, the War of 1812, the Civil War, World War I and World War II (which lacked an ensuing, offsetting deflation).

The inflation peaks and the ensuing post-war depressions and deflationary periods, tied to the War of 1812, the Civil War and World War I, show close to 60-year cycles, which is part of the reason some economists and analysts have been expecting a deflationary depression in the current period. There is some reason behind 30- and 60-year financial and business cycles, as the average difference in generations in the U.S. is 30 years, going back to the 1600s. Accordingly, it seems to take two generations to forget and repeat the mistakes of one’s grandparents. Similar reasoning accounts for other cycles that tend to run in multiples of 30 years.

Allowing for minor, average-annual price-level declines in 1949, 1955 and likely 2009, the United States has not seen a major deflationary period in consumer prices since before World War II. The reason for this is the same as to why there has not been a formal depression since before World War II: the abandonment of the gold standard and recognition by the Federal Reserve of the impact of monetary policy — free of gold-standard system restraints — on the economy.

The gold standard was a system that automatically imposed and maintained monetary discipline. Excesses in one period would be followed by a flight of gold from the system and a resulting contraction in the money supply, economic activity and prices.

Faced with the Great Depression, and unable to stimulate the economy, partially due to the monetary discipline imposed by the gold standard, Franklin Roosevelt used those issues as an excuse to abandon gold and to adopt close to a fully-fiat currency under the auspices of what I call the debt standard, where the government effectively could print and spend whatever money it wanted to.

Roosevelt’s actions were against the backdrop of the banking system being in a state of collapse. The Fed stood by twiddling its thumbs as banks failed and the money supply imploded. A depression collapsed into the Great Depression, with intensified price deflation. Importantly, a sharp decline in broad money supply is a prerequisite to goods and services price deflation. Messrs Greenspan and Bernanke are students of the Great Depression period. As did Mr. Greenspan before him, “Helicopter Ben” has vowed not to allow a repeat of the 1930s money supply collapse.

Where the Franklin Roosevelt Administration abandoned the gold standard and its financial discipline for the debt standard, twelve successive administrations have pushed the debt standard to the limits of its viability, as seen now in the continuing threat of systemic collapse. Now the Obama Administration has to look at abandoning the debt standard (hyperinflation) and starting fresh.

The effect of the post-Roosevelt policies has been a slow-motion destruction of the U.S. dollar’s purchasing power since the gold standard was abandoned in 1933. The magnitude of purchasing power lost over the decades can be lost again in a matter of days.

Please note in the above table that gold and the Swiss franc were held constant by the gold standard versus coins in 1914 and 1933. The data are from the Federal Reserve Board, Bureau of Labor Statistics and from SGS data and calculations.

“Helicopter Ben” on Preventing Deflation. Federal Reserve Chairman Ben Bernanke picked up his various helicopter nicknames and references as the result of a November 21, 2002 speech he gave as a Fed Governor to the National Economists Club entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” The phrase that the now-Fed Chairman Bernanke likely wishes he had not used was a reference to “Milton Friedman’s famous ‘helicopter drop’ of money.”

Attempting to counter concerns of another Great Depression-style deflation, Bernanke explained in his remarks: “I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States …”

As expounded upon by Bernanke, “Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.”

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” The full text of then-Fed Governor Bernanke’s remarks can be found at: Fed Report

Bernanke initiated his anti-deflation actions back in 2008, but they have not worked fully as advertised. While the systemic solvency crisis has been contained at least temporarily in key areas, and depositor funds have not suffered heavy losses, the broad money supply now is in monthly decline, soon to be year-to-year decline, but not yet in collapse. Back in September 2008, the Fed started dropping cash from helicopters, as shown in the graphs of the monetary base. As shown in the two graphs of level and year-to-year change, Bernanke’s spiking of the monetary was extraordinary and was without precedent. As seen in the recent renewed spike in the monetary base to historic levels, the Fed has been panicking anew. The fall-off in year-to-year growth is just due to year-ago comparisons where growth also was spiking sharply. Despite a still active fleet of choppers, systemic liquidity and solvency remain in deep trouble.

The monetary base remains the Federal Reserve’s primary tool for impacting money supply growth. As has been the case for the bulk of the extraordinary expansion of the monetary base since late-August 2008 — an increase of 129% — the monetary base growth, however, has not been reflected meaningfully in money supply growth. Such remains due to banks placing high levels of excess reserves with the Fed, instead of lending the funds into the normal flow of commerce.

The SGS-Ongoing M3 estimate (the Fed abandoned reporting its broadest money supply measure, M3, back in March 2006) has been contracting month-to-month for five months through November 2009, with annual growth slowing as shown in the M3 graph. M3 appears destined to turn negative year-to-year in December 2009, on both a nominal (as displayed in the graph) and inflation-adjusted basis. Such would be a leading indicator for an economic downturn in normal times and would foreshadow a significant turn for the worse in the current, severe economic contraction during first-half 2010. As discussed in the Money Supply Special Report, the Fed always can drive the economy into a downturn, with contracting money supply, but the reverse does not always work.

Inflation and Slowing/Contracting Money Growth. The Fed’s efforts at currency debasement have been reflected in a weakening of the U.S. dollar’s value in foreign exchange markets. In theory, though, slowing or outright contraction in broad money supply growth should be reflected in slower inflation or outright deflation. As with most economic theories, however, there often are simplifying assumptions that may not be appropriate under certain circumstances. Money supply, for example, works best as a predictor of inflation in a closed system, as was seen with Zimbabwe.

In the case of the United States, however, significant dollars are held outside the country, where shifting dynamics may have significant impact on U.S. inflation. To the extent that foreign holdings of U.S. dollars are in stasis, with demand and supply in balance, then the circumstances of the simplified money supply model tend to work. The dollar’s global position, though, is not in balance, particularly with the Fed working to debase the U.S. currency: to create inflation.

One distortion up front is in the U.S. currency in circulation, as reported in the narrowest money supply measure, M1. More than half of the $860 billion reflected in recent M1 reporting is physically outside the United States in “dollarized” countries and elsewhere.

Separately, as reported by the Fed in its second-quarter 2009 flow-of-funds analysis, foreign holders of U.S. assets have something in excess of $10 trillion in liquid dollar-denominated assets that could be dumped at will into the global and U.S. markets. In perspective, U.S. M3 is somewhat over $14 trillion.

Helping to fuel those holdings, the Fed has been using the excess reserves deposited with it by U.S. banks to buy troubled mortgage-backed securities from financially stressed institutions, and some of the institutions benefitting likely are located outside the United States.

As excess dollars get pumped into the global markets, a shift in the tide against the U.S. dollar gets reflected in a weakening exchange rate, which in turn spikes dollar-denominated commodity prices, such as oil. That effect has been seen in recent months, with the result that U.S. consumer inflation has started to resurface, not from strong economic demand and a surging domestic money supply, but from distended monetary policies and a global glut of dollars encouraged by the U.S. central bank.

Demand and supply affect the U.S. dollar. Supply soars and demand shrinks with the increasing unwillingness of major dollar holders to continue holding the existing volume of U.S. currency and dollar-denominated assets, let alone to absorb new exposure.

Therein lies a significant threat to near-term U.S. inflation. Heavy dumping of the U.S. dollar and dollar-denominated assets would be highly inflationary to U.S. consumer prices. It also likely would activate heavy Fed intervention in buying unwanted U.S. Treasuries. When the Fed moves to buy Treasuries as the lender of last resort — to monetize U.S. debt well beyond anything seen to date — that also would tend to trigger renewed growth in the otherwise flagging broad money growth.

In order to get the broad money supply to grow, the federal government has to spend and borrow more money, where the Fed will have to buy large quantities of the Treasury’s securities, monetizing the federal debt. The liquidity action to date has been primarily buying otherwise illiquid mortgage-backed securities off the balance sheets of troubled banks. The domestic banks in turn have leant substantial excess reserves back to the Fed, rather than lending into the normal stream of commerce, which would spike the money supply and otherwise be something of an economic positive.

The Fed remains the U.S. Treasury’s lender of last resort. Panicked dollar selling and dumping of dollar-denominated paper assets — particularly U.S. Treasuries — likely would force the Fed’s hand in a rapid monetizing of Treasury debt.

Early Impact of Dollar Debasement. The currency, oil and gold markets have seen extreme volatility in the last year or so. After seeing significant selling, the dollar soared during the breaking solvency crisis, due to massive manipulation and largely covert central bank intervention, position liquidations that required U.S. dollars and some surviving safe-haven status of the U.S. currency. In tandem with the dollar’s strength, oil and gold prices fell sharply.

Now, as reflected in the monthly average value of the U.S. dollar in Swiss francs, gains seen since the historic dollar low in early-2008 have evaporated. In turn, oil prices have rebounded from their recent lows, though they still are well shy of last year’s historic high. Reflecting the inflationary pressures from a weaker dollar and higher oil prices, ongoing solvency issues for the United States, and continued dollar debasement efforts by the Federal Reserve, the price of gold has recovered recent losses and is pushing new highs. Irrespective of any near-term volatility, both dollar weakness and gold strength remain solid long-term bets.

U.S. Government Cannot Cover Existing Obligations

The U.S. Treasury publishes annual financial statements of the United States Government, prepared using generally accepted accounting principles (GAAP), audited by the General Accountability Office (GAO) and signed off on by the U.S. Treasury Secretary. The 2009 statements, originally scheduled for publication this month, have been delayed to February 2010.

GAAP-accounting is what major U.S. corporations use. Such statements usually include liabilities for retired employees’ pensions and health care obligations. Yet, the Bush Administration (as likely will continue to be the case with the Obama Administration) argued that unfunded Social Security and Medicare obligations should remain off the government’s balance sheet, claiming that the government always has the option of changing the Social Security and Medicare programs. That said, there still is no political will in Washington to go public with the concept of eliminating or substantially cutting those programs.

The federal government’s GAAP-based financial statements show the actual annual fiscal deficit careening wildly out of control. Including the annual changes in the net present value of unfunded liabilities, the fully-GAAP-based annual 2008 deficit was $5.1 trillion dollars, versus the official cash-based $455 billion. The 2009 actual shortfall likely was around $8.8 trillion, instead of the official cash-based $1,417 billion. Again, the largest portion of GAAP-based versus the cash-based difference is in accounting for the net present value, and the year-to-year changes in same, for unfunded Social Security and Medicare liabilities, etc. The results are summarized in the accompanying table, showing various deficit, debt and obligation measures.

The government’s finances not only are out of control, but the actual deficit is not containable. Put into perspective, if the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis. In like manner, given current revenues, if it stopped spending every penny (including defense and homeland security) other than for Social Security and Medicare obligations, the government still would be showing an annual deficit. Further, the U.S. has no potential way to grow out of this shortfall.

As shown in the first of three graphs following the table, U.S. federal obligations are so huge versus the national GDP that the country’s finances look more like those of a banana republic than the world’s premiere financial power and home to the world’s primary reserve currency, the U.S. dollar. Total federal debt and obligations at the end of the 2009 fiscal year on September 30th, likely were close to $75 trillion, or more than five times total U.S. GDP. The $75 trillion includes roughly $12 trillion in gross federal debt, with the balance reflecting the net present value of unfunded obligations.

If not for the special position the United States holds in the world, its debt — U.S. Treasuries — likely would be rated as below investment grade, instead of triple-A. Major rating agencies have hinted at possible longer-term rating issues on Treasury securities.

A downgrade, though, is not likely, as long as U.S. Treasuries are denominated in U.S. dollars and as long as they are used as the benchmark for the triple-A rating. Such ratings usually are an opinion as to the risk of default. Treasuries denominated in U.S. dollars are not likely to face actual default, so long as the Treasury and Fed can create dollars to pay off the face amounts of the obligations. While a three-month Treasury at the moment may be safe, I would not want to bet on receiving anything close to full value on a 10-year Treasury note or 30-year Treasury bond.

As shown in the second of the three graphs, most U.S. Treasury issuance of recent years, thorough 2007, has been purchased by investors outside the United States. Not only have these investors been taking a hit in terms of the value of the U.S. dollar, but also they face meaningful devaluation risk in the near future.

As issuance has increased along with rising hesitancy in holding U.S. Treasuries, post-crises, the portion of new issuance covered by foreign investors has started to drop off sharply. Again, the Fed remains the buyer of last resort for U.S. Treasuries, and it has the ability to operate through surrogates at home and abroad.

The graph above gives some scope of as to the size of foreign held assets issued by the U.S. Treasury, or questionably guaranteed by it. They are among a pool of over $10 trillion dollars that could be dumped in a panicked dollar selling environment.

Part IV published tomorrow.

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


November 10, 2010

by Walter J. (John) Williams

Current Economic and Inflation Conditions in the United States

Economic Activity and Inflation. Before examining how the current circumstance can evolve from a severe recession, with a recent short and shallow bout with formal deflation, into a hyperinflationary great depression, it is worth defining the nature of the current economic and inflation conditions in the United States and likely near-term developments.

As discussed in the regular SGS Commentaries, the U.S. economy remains in a structural recession/ depression, where recession recognition as of December 2007 became official following the prior hyperinflation report. At the same time, due to extreme fluctuations in oil prices, where an oil-price collapse eliminated oil-induced inflation pressures building at the time of the prior report, consumer inflation experienced a brief and shallow dip into official (year-to-year) deflation, through the October 2009 CPI. The November CPI will resume positive annual inflation, partially due to a renewed upturn in oil prices.

The current downturn, as reported, already is the longest and the deepest business contraction since the first downleg of the Great Depression in the early 1930s. Such is reflected in payroll employment and GDP growth plotted in the following graphs. The payroll graph adjusts for the size of the recently announced pending benchmark revision to the series. The quarterly GDP numbers are published only back to 1947. If one counts the war production shutdown at the end of World War II as a normal business cycle, then the current downturn is the deepest since then, but still the longest since the early 1930s. The respective depths of the Great Depression and post-war production contractions are based on annual data available back to 1929.

While the official peak-to-trough contraction in the current downturn, per official real GDP is 3.8% (second-quarter 2009), most of the better economic series are showing contractions of greater than 10% (depression range), such as retail sales and industrial production, while others are showing contractions of greater than 25% (great depression range), such as new orders for durable goods and various statistics indicating the level of housing activity. Revisions to the GDP over several years eventually should show the current level of GDP activity to have been at depression level. The evolving depression quickly will move to great depression status, at such time as the hyperinflation hits, since that will be extremely disruptive to the conduct of normal commerce.

Net of gimmicked methodologies that have inflated GDP reporting over the decades, the U.S. economy has been in recession since late-2006, entering the second down-leg of a multiple-dip economic contraction, where the first downleg was the recession of 2001, which actually began back in late-1999. The current downturn may evolve into a further multiple-dip circumstance. The Great Depression was a double-dip contraction.

The current economic downturn has been so protracted and severe that regular year-to-year comparisons and the seasonal adjustment process have forced new types of analyses and have led to major warping of regular economic reporting. Where a number of series, again, such as retail sales and industrial production, have leveled off at low-level plateaus of economic activity, year-ago comparisons have become less negative, but there has been no meaningful pick-up in economic activity.

Economic activity has sunk to such lows that regular measures of change that are followed closely by the financial markets — such as new claims for unemployment insurance — are not signaling economic recovery, as they turn less negative, only that activity is beginning to plateau at an unusually low level. With stimulus packages having had their initial impacts, with broad domestic liquidity (see money supply discussion) contracting at a pace that would promise an economic downturn in the best of times, and with consumers’ liquidity problems intensifying, the contraction in U.S. economic activity likely will accelerate anew in the early months of 2010.

Consumer Liquidity Structural Problems. The U.S. economy is in a deepening structural change that has resulted from U.S. trade, social and regulatory policies driving a goodly portion of the U.S. manufacturing and technology base offshore. As a result, a large number of related, high paying jobs have disappeared for U.S. workers. Accordingly, U.S. consumers have found increasingly that their household incomes fail to keep up with inflation. Without real growth in income, there cannot be sustained economic growth. Growth driven by debt expansion, as encouraged by the Fed in recent years, ultimately is not sustainable, as has become painfully obvious to many in the current systemic solvency crisis. Greater detail on these and related comments are found in the Consumer Liquidity Special Report.

As shown in the next graph, the U.S. trade deficit has narrowed in the current downturn, with lowered U.S. consumption and with a brief collapse in oil prices. There has been, however, no fundamental shift in circumstances to suggest a healthy move in U.S. economic activity towards a fundamentally improved trade balance or a shift towards reinvigorating the U.S. manufacturing base.

The deterioration in median household income has resulted in greater variance in income, as shown in the second graph, which has negative longer term economic implications. A person earning $100,000,000 per year is not going to buy that many more automobiles that someone earning $100,000 per year. The stronger the middle class is, generally the stronger will be the economy. Historically, extremes in income variance usually are followed by financial panics and economic depressions. Income variance today is higher than it was coming into 1929 and 1987, and it is nearly double that of any other “advanced” economy.

The next two graphs show official weakness in inflation-adjusted income. The top plot of the solid line shows real average weekly earnings, as reported and deflated by the Bureau of Labor Statistics (BLS) using the regular CPI-W. Real wages never have recovered their pre-1973 to 1975 recession peak. As wages dropped over the decades, the number of people in an average household that had to work, in order to make ends meet, increased.

The second graph reflects median household income over the years. The thicker line shows income deflated by the regular CPI-U, a measure somewhat broader than the CPI-W. Those inflation-adjusted numbers show that median household income, as of 2008, never recovered its pre-2001 recession peak and stood below its level of 1973. Deflated by the CPI-U-RS (current methods), discussed below, the pre-2001 recession peak also still has not been recovered.

In the last several decades, the BLS introduced a variety of new methodologies into the calculation of the CPI, with the effect of reducing the level of reported CPI inflation. The general approach has been to move the CPI away from its traditional measuring of the cost of living of maintaining a constant standard of living. The lower the rate of inflation used in deflating a number, the stronger is the resulting inflation-adjusted growth. The CPI-U-RS is the CPI with its history restated as if all the new methodologies had been in place from day one. The impact of the changes is evident in the two lines, with the thinner CPI-U-RS deflated line showing stronger relative growth. It would run higher than the top line if the years set equal were 1967 instead of 2008.

The broad point on income is that it is inadequate to sustain positive, inflation-adjusted economic activity. In the absence of income growth, debt expansion can act as a short-term prop for the economy, but that is not available at present. The system is in the throes of a solvency crisis, with banks reducing lending to consumers.

The broad point on the inflation measure is that by reverse-engineering the CPI-U-RS, current inflation reporting can be estimated as though it were free of the inflation-dampening methodologies. Such has been done with the SGS-Alternate Consumer Inflation Measure. In the plot of the real average weekly earnings, the dotted line reflects the series deflated by the SGS-Alternate CPI, and that shows the consumers’ liquidity squeeze to be more severe for those hoping to maintain a constant standard of living, than as indicated otherwise by official reporting.

Inflation. Inflationary pressures have started to surface from the Fed’s efforts at dollar debasement. A weakening U.S. dollar has placed upside pressure on dollar-denominated oil prices, which in turn have begun pushing annual inflation higher. This is not inflation generated by strong economic demand, but rather inflation driven by Federal Reserve efforts to weaken the dollar.

Though still well shy of the peak levels seen in 2008, oil and gasoline prices have soared since their near-term lows at the end of last year. The relative collapse, in latter 2008, of gasoline and oil prices triggered a period of year-to-year decline — formal deflation — in the CPI-U. Now with relatively high prices going against falling prices in year-ago comparisons, annual CPI inflation will turn positive, once more, as of November. As reported by the BLS, annual CPI-U inflation for October 2009 was not statistically distinguishable from zero; the SGS-Alternate Consumer Inflation Measure was about 7.1%.

For all of 2009, CPI-U average annual inflation should be less than a 0.5% contraction (deflation), with the SGS-Alternate at something shy of 7%. As measured December 2009 over December 2008, official annual CPI-U inflation should be close to 2% with the SGS-Alternate around 9%. A strengthening pick-up in official annual CPI inflation should be evident in early 2010.

The recent annual declines in CPI inflation were the biggest since 1949 to 1950. CPI reporting methods used in then, however, would have generated current inflation rates that did not drop below 5%, at worst, in the current cycle. The brief and shallow formal deflation that now is at an end — based on official CPI-U reporting — appears to have been about half the depth and half the length of the negative inflation bout in the 1949 to 1950 circumstance.

The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact, not otherwise published by the BLS.

Political Considerations. What lies ahead for the economy and inflation will have significant impact on the U.S. political process, as recent economic woes did on the 2008 election. Historically, the concerns of the electorate have been dominated by pocketbook issues. Prior to gimmicked methodologies making the reporting of disposable personal income largely meaningless, that measure was an excellent predictor of presidential elections.

In every presidential race since 1908, in which consistent, real (inflation-adjusted) annual disposable income growth was above 3.3%, the incumbent party holding the White House won every time. When income growth was below 3.3%, the incumbent party lost every time. Again, with redefinitions to the national income accounts in the last two decades, a consistent measure of disposable income as reported by the government has disappeared. Yet, even with official reporting, 2008 annual growth in real disposable income was 0.5%, well below the traditional 3.3% limit. As was suggested would be the case in the prior report, such contributed to the Republicans losing the White House in 2008. Where I always endeavor to keep my political persuasions separate from my analyses, for purposes of full disclosure, my background is as a conservative Republican with a libertarian bent.

A wide variety of possibilities would follow or coincide politically with a hyperinflationary great depression, but the political status quo likely would not continue. Times would be financially painful enough to encourage the development of a third party that could move the Republicans or Democrats to third-party status in the 2012 presidential and congressional elections. Present economic conditions are bleak enough to impair re-election prospects severely for incumbents in the 2010 mid-term election.

Untenable Positions for the Federal Government and the Federal Reserve. The effect of the structural income problems on the economy has been that most consumers have been unable to sustain adequate income growth beyond the rate of inflation, unable to maintain their standard of living. The only way that personal consumption — the dominant component of GDP — can grow in such a circumstance is for the consumer to take on new debt or to liquidate savings. Both those factors are short-lived and have reached unsustainable extremes. Debt expansion and savings liquidation both were encouraged by the investment bubbles created by Alan Greenspan; he knew that economic growth could not be had otherwise. Part of what is happening today is payback for those policies.

This circumstance places both the federal government and the Federal Reserve in untenable positions, where they cannot easily or rapidly address the underlying problems, even if standard economic stimuli would work. From the standpoint of the federal government, traditional fiscal stimulus in the form of tax cuts or increased federal spending have reached their practical limits, with the actual annual budget deficit running out of control at roughly $9.0 trillion per year. Yet, that likely will not keep political Washington from pushing its deficit spending until the markets rebel. After all, there is an election in 2010. It is that market rebellion, however, that will set the hyperinflation stage.

From the Fed’s standpoint, it can neither stimulate the economy nor contain inflation. Lowering rates has run its course and done little to stimulate the structurally-impaired economy, and raising rates may become necessary in defense of the dollar. Similarly, raising rates will do little to contain a non-demand driven inflation, such as seen developing in the current circumstance so heavily affected by oil prices. Continued efforts to debase the dollar should be successful, but not in stimulating economic activity, only in triggering an accelerating pace of inflation.

With the economy in depression, hyperinflation kicking in quickly should pull the economy into a great depression, since uncontained inflation is likely to bring normal commercial activity to a halt.

Part III will be published tomorrow.

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.

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