Friday, April 29, 2011

When O'Reilly and Obama are on the same page, you know you're being had.

So now our would-be “master of all things energy related” has decided it’s time to take on the “corrupt speculators” in the oil market. I’d say this was hilarious but unfortunately he’s serious. But what are we to expect from a neophyte whose depth of understanding of how markets and economies function is about as deep as a mud puddle after a quick spring rain. What’s even more disturbing is seeing populist pundits of the so-called “fair and balanced” kind carrying his water and providing political cover by spouting the same garbage.

This is what happens when ideologically driven politician and pundits listens to a bunch of ideologically driven economists who have no more of a clue than they do. Pundits, Presidents and economists have no more influence on the state of the economy than the weather man on the six o’clock news has influence on what tomorrow’s weather will be.

We’re in this mess because politicians and economists think that all that is needed is just one more government intervention, one more tweak to the system is all that’s needed to fix a particular problem or aspect of the economic landscape. Too bad for these self-important and self-proclaimed experts, economics operates in a vast interconnected world of supply and demand, and reacts in direct correlation to actual and/or perceived value of the currency of exchange.

Both the Obama administration and O’Reilly are engaged in a pernicious little game of either denial of reality or deliberate obfuscation in order to keep the public from casting a critical eye upon actual cause of rising energy and food costs, namely a weak dollar policy, endless spending by Congress and endless printing at the Federal Reserve.

Where O’Reilly’s reasons maybe simply be to further his populist reputation, Obama’s, being a politician, are far more cynical. All the rhetoric about allegedly wanting to defend the consumer aside, his focus is on getting himself re-elected and the “record profits” and speculation make for a convenient scapegoat for his dismal failure on the economy.

In the meantime this false narrative will be played for all its worth by the media and campaigns. None of which will do anything to change the underlying spending and printing problems or slow down the unraveling of the economy by but a fraction. O’Reilly and the like will use their stance to try and apply pressure to the Republican candidates to if not endorse, at least not oppose the continued kicking of the can down the road.

Both sides are making the bet that our fractured economic system can be held together long enough to ensure that the next President whoever it may be will not be someone who will challenge the corruption of the existing incestuous relationship between Wall Street, the Treasury Department and the Federal Reserve.

A lot of things can change of course between now and the nominating conventions and the election, and it would be my bet that they will. During the first two years of this administration the big “inflation is under control” con job has held together. One of the factors helping this has been the American family, those that still have jobs anyway. In the face of what they better recognize than our so-called political leaders as economic uncertainty at best and disaster at worst, they have cut back on spending, added to savings, paid off consumer debt and some have even made extra payments on the principle of their mortgages. All this has had the definitive effect of decreasing the velocity of money through the economy. But now the cumulative effect of decades of growing spending, growing debt and just plain bad monetary policy have triggered a growing political instability in the Middle East and are exacerbating the all too predictable and inexorable beast of inflation.

With these responsible and frugal families seeing the evidence spreading all around them, higher prices at the gas pump, higher prices and smaller packages at the grocery store, lower interest on their savings and higher charges for using their credit cards, we can fully expect a shift in the mindset of these formally frugal families. With a growing sense of futility for all their efforts, and seeing that each new pay check is able to buy less and less, therein lays the danger of a paradigm shift in their attitude towards money itself.

Why postpone on spending on the everyday things they need to survive, when they know full well that by the time the next paycheck arrives things will be even more expensive? Why try to save when it’s buying power shrinks exponentially against any interest payments they may earn and the anticipated price for whatever they are saving for? When this change in attitude sets in look out! When the acceleration rate of money through the economy goes up, the already increasing inflation rate will be placed on steroids. Throw in another economic or political shock event and the breaking point will be reached and all confidence will be lost in the viability of the Dollar. That will be when bad inflation will tip over into hyperinflation. When that happens, all bets on the existing system will be off, violence will rear its ugly head and people will listen to any demagogue that comes along and makes the promises they want to hear. Fear will become the driving motive of politics.

Tuesday, April 19, 2011

The Suckers Bet.

Far too many Americans are confusing high inflation and hyperinflation. The most frequently sited example of hyperinflation is Weimar Germany. Most renditions of the story lay the blame for it on the Versailles treaty. Actually that was only one of the sources of Weimar Germany’s inflation problem. It started with German monetary policy during the war. Faced with the costs of the war they printed large quantities fiat currency. At the end of the war the further burden reparations exacerbated the already existing problem.

In short high inflation comes from bad governmental monetary policy in response to debt, regardless of the source. Hyperinflation comes when the public loses confidence in the national currency and acceleration rates grow exponentially.

Germany in the 1920’s is only the most extreme example. Look also at the hyperinflationary events in Chile and Argentina. Same story high debt addressed by excessive money printing followed by loss of confidence in the currency and then rapid acceleration rates.

The underlying source or causes of the debt are always the same, high government spending coupled with bad central banking policy that only profits the banks and saddles the public with the debt.

How is this any different from what we face today? Well it is, we have the added complication of a rigged game. Anyone who thinks that the Federal Reserve Bank is either independent or Federal is ignorant, delusional or both. The FED is a private bank owned by the very banks it purports to regulate. What a joke.

Look at the revolving door between Goldman Sachs, the Treasury Department and the FED Board; collusion of the first order. Look at the POMO process since the collapse in 2008. Before 2008 the FED bought between 10% and 15% of US Treasury offerings. Now post collapse through the POMO process the FED ends up holding 70% of US Treasury offerings because no one else wants anything to do with US debt paper, and in the process the primary dealers (the banks that own and control the FED) make a killing on every step of the process.

First the PDs (Goldman Sachs, JP Morgan, BofA etc. borrow money from the FED at essentially 0%. They then use these funds to buy US Treasury Bonds for which they receive a transaction fee from the Treasury Department. After holding these Bonds for as little as two weeks they then sell them back to the FED for 3% to 4% more than they paid for them, depending on the term of the Bonds. If this weren’t bad enough, the scam doesn’t end there. They then take their ill-gotten proceeds, the transaction fees and profits from the re-sale of the Bonds and park them back into their accounts at the FED as “excess reserves” where they are draw 4% interest on the deposit! Well now guess whose money funds these transaction fees, re-sale profits and deposit interest payments? Look in the mirror, its you, the US taxpayer.

If this doesn’t make you mad enough look at that 1/10 of 1% these same banks are paying you on your savings deposits, and then compare it to the $4,200,000,000,000 ($4.2 Billion) in taxpayer funds the primary dealers will pocket just from the QE2 program. All for doing nothing more than moving electronic digits from one ledger book to another and then back again. Oh and also keep in mind that BofA and these other PDs don’t pay a single dime in income tax on any of it!

Again far to many Americans want to defend this kind of criminal fraud for nothing more than partisan political reasons. The banks will thank them for it and laugh in their faces as they pay out their massive bonuses funded by the tax payers while they pay them that luxurious 1/10 of 1% on their savings and then charge them 1-1/2% for managing what ever they have left in their IRAs or 401Ks.

So yeah we should bitch at Congress for massive spending but we should also bitch at them for lining their coffers with campaign contributions paid out of the pocket change of these same banks, for which they return the favor by structuring the tax code that lets them get away with paying no taxes on this pernicious scam. The taxpayers are being played for suckers and are paying for the privilege. Sadly there are far to many people too blinded by this fools a errand of left vs. right to see the game, and they never will until its far too late, and hyperinflation destroys everything they have.

Before anyone claims I simply hate banks, let me just say that I hate the theft and fraud they perpetrate and the so-called regulators and politicians of both parties that let them get away with it, and I have nothing but contempt for fools who think they are out to do anything but enrich themselves with the taxpayer’s money. I have found that those who would defend them either work for a bank, which makes them nothing more than shills, or they don’t know any more about the functioning of currency than what they were told was true in high school. There’s an old saying; “a fool and his money are soon parted.” These are just the fools the banks and politicians are looking for. If they think the Congress “has its thumb on the FED” they are not just fools, they an idiots as well.

Friday, April 8, 2011

Why I Buy Gold and Silver.

Gold and silver values (not prices) are only a reflection of the rapidly evolving new reality.

There will always be those who will deny that the entire western financial system is F.U.B.A.R. You know the term, denying it, finger pointing or making excuses for how we got here won’t change the facts. There is no intention from any of the politicians or bankers of doing anything to fix the problems at their root cause, OTC derivatives. The European Union has outlawed naked CDSs (credit default swaps) which is at least an indication that they are trying to do something. Whether it will prove too little, too late or not, time will tell. The chances of anything like that happening in the US are absolutely ZERO.

To say it is very late in the game is a gross understatement.

The times of any kind of normal conditions, however you might want to define them, are gone and they’re not coming back any time soon. One needs only look at the FACT that before the crisis of 2008 the Federal Reserve was buying between 10% and 15% of US Treasuries, now they are virtually the only buyer and by this action alone they are consigning the Dollar to its doom.

Only by adjusting our attitudes and actions to this new reality is there any hope for getting to the other side with any semblance of intact wealth and security. This applies at both the individual and societal level

The system has already failed, act accordingly. There are no political champions waiting in the wings with the will or ability to fix it. Even if there were, there exist no means that could be applied that would not in the short term cause an even more severe economic dislocation than we are already faced with. Even if there were some practical solutions left (and there aren’t), neither the banks nor the politicians would allow them to be applied because it would diminish their power.

We have embarked on a third war in the Middle East and it will be impossible to disengage as the chaos spreads. Kind of reminds one of the Uncle Remus story of the Tar-Baby. It is utter madness and no good can come from it. The revolutions and wars in the Middle East are not pro Western and not pro democracy, they are anything but.

Look back at what the price of commodities were 2 years ago and what they are today. By the time we reach the next election they will look like bargains by comparison.

If you are holding physical bullion and food stocks hold on to it as it will be the only insurance you will have and you’re going to need it. Show some pity for those who would deride you for holding insurance, they will be the first victims of their own hubris, but be careful, for as the rug is pulled out from under them they will blame you for their situations and many of them can and will resort to violence.

It is not a question of if the prepared will prevail. We already have prevailed. Our holdings will be the only discount to the hyper-inflation that is already written on the pages of history, nothing can or will stop things from being turned to that particularly ugly page. But we have to get to that page before we can move on to the next chapter.

For those of you who remain skeptical, get a clue, neither the Democrats nor the Republicans have the courage to admit what’s really going on, even if they do, nor do they have the slightest inkling of what to do about it. Their loyalists will be the first to be abandoned when the S.H.T.F. One more thing to keep in mind as things unravel: Ideological purity and political loyalty are the first things dissolved in the churning acids of an empty stomach.

Wednesday, April 6, 2011

Are We Living in an Old Joke?

There’s an old joke we are all familiar with: Everybody complains about the weather but who really does anything about it.

So what can actually be done to actually improve the economic situation? Well here’s a suggestion just for starters.

Reform the corporate tax code to create two-tiered system.

Level one: If your business income is derived from the manufacture, transport or sales of real physical goods you get taxed on that income at a very low rate. This would apply from the top to heavy industry all the way to the bottom where the mom and pop shop is selling gas and potato chips. There could be differentiations within this group depending upon what percentage of components or raw material goods are derived domestically and what percentage are imported. This would encourage the expansion of on shore business to produce or procure components or raw materials here at home rather than importing them. In other words a tariff by other means.

Level two: If your business income is derived from speculation, i.e. just moving money from one pile to another and not actually producing any real goods as exemplified by the FOREX carry trade, commodity speculation, stock and bond trading, you get taxed at a much higher rate and have severe restrictions on what are allowable deductable expenses. This would not include the individual who trades within small accounts or their 401K or IRA to try and make a few extra bucks to put their kids through school or make their retirement a little easier. We’re talking large institutional speculators. Can you hear me Goldman Sachs, JP Morgan etc. etc. etc. This would not include the transactions wherein they make loans to businesses or mortgages or car loans and the like, provided they keep those loans on their books so as to maintain a real interest and indeed risk in how well you do. The very minute that they bundle those loans into CDOs (collateralized debt obligations) all previous and future income becomes taxed at the tier one rate.

Item three: Over a set period of time phase out and then ban all OTC derivative trade or at least tax them at such a rate as to make them completely unprofitable. Ban the issuance of CDSs (credit default swaps) to anyone other than the primary risk taker. Ban financial and securities firms from taking out CDSs on the securities they have sold to their customers.

Don’t hold your breath waiting to hear any of our politicians talking such common sense as long as the revolving door between Wall Street and the Treasury Department remains in operation. Even suggesting it would unleash a pestilence of lobbyists and under the counter campaign contributions to kill it like nothing that has ever been seen.

We have been suckered into believing the fixed pie theory. It’s a fallacy perpetrated by the left and the banks. The money exists, government policy, and in this case tax policy, must be changed to pull it out of speculative none productive applications and into manufacturing where real wealth and jobs are created, the economy expands and the pie gets bigger.