Friday, December 31, 2010

2011 Is No Time To Slack Off

The U.S. Dollar's Prospects in the New Year

As the editors of Sound Of Cannons, we regularly get those "timing" e-mails from readers, asking us for our predictions of when the U.S. Dollar will collapse. We can't provide you a date, but you don't need to be a past recipient of the Nobel Prize for Economics to see some crucial facts and draw some logical conclusions. Consider the following:
The Federal Reserve recently became the largest holder of U.S. Treasury debt, surpassing China and Japan. The neo-Weimar monetization that is dubbed "Quantitative Easing" is wildly inflationary.
The number of dollars in circulation is galloping, and that can only result in inflation.
The government's annual outlay just to pay the interest on the National Debt is nearly half a trillion dollars. The charts show a decline since 2008, but that is illusory. The decrease in interest payment obligations is only because interest rates have been kept artificially low, and because the Federal Reserve is monetizing the debt. (With Quantitative Easing, the government is effectively buying its own debt, with magically created dollars.
The U.S. dollar is has lost 96% of its purchasing power since 1913. The gradual effects of continuing inflation are only noticed by a few. But the Generally Dumb Public (the other "GDP") is oblivious to the fact that they have been robbed by currency debasement and inflation.
The Treasury Department conservatively estimates that the U.S. debt will be $19.6 trillion within four years. (Many private estimates are substantially higher.)
The total long term government obligations including Social Security and pensions are variously estimated at from $48 trillion to $65.5 trillion. That would exceed the gross domestic product of all of the nations on Earth.
Federal government indebtedness is approaching 100% of GDP. The only time that it was ever higher was in the 1940s and 1950s because of the huge debts piled up in fighting World War II, and in funding post-war rebuilding of Europe under the Marshall Plan.
The Federal Reserve banking cartel finally admitted that they lavished $3.3 trillion in new liquidity and in excess of $9 trillion in short term loans. But in doing so, they downplayed the fact that a good portion of those trillions was used bailing out soured or failed mortgage-backed securities (MBS) derivatives contracts.
In essence, the gig is up. Starting in 2011 or 2012, I expect foreign creditors to demand substantially higher yields to justify their continuing to buy U.S. Treasury paper. Once that happens, prevailing interest rates will jump, and that will stifle economic growth, resulting in stagflation. Interest rates jumping to double digits could result in interest payments on the National Debt becoming the largest single annual outlay for the government-- even bigger than even that for the Department of Defense. Meanwhile, the U.S. Dollar will see a sharp degradation as its status as the world's reserve currency. A death spiral for the U.S. Dollar would then ensue.
It is difficult to predict exactly how the end game for the Dollar will play out, and the timing thereof. It is especially hard to predict the timing of a currency collapse because the key triggers are always subtle psychological tipping points. But once enough foreign creditors give up hope for the Dollar, there will be a wholesale rout.
Some Specific Recommendations:
~Watch the US Dollar Index (USDI) closely. A drop below 72 would be a very bad thing.
~Watch for jumps in interest rates.
~Look for announcements of either failed Treasury auctions, or "mystery buyers" that save the day for auctions. The latter will indicate more monetization.
~Watch commodities prices. (In the midst of a global recession, commodity prices should be weak. But they aren't. This indicates that they are being used as tangible safe havens in times of currency and credit turmoil.)
~Monitor international news on the global credit and currency markets.
~You can largely ignore stock market indices, since stocks are manipulated. As a last resort, the government may covertly buy large blocks of stock, or overtly nationalize all IRAs and 401(k)s.
~Get out of the stock market, stock market funds, hedge funds, and municipal bonds,
~Plan ahead for mass inflation. Protect yourself from further declines in the U.S. Dollar by diversifying into tangibles. Common caliber ammunition should be at the top of your list.
~Expect another 20%+ drop in residential real estate. Once a double dip in the economy is confirmed, commercial real estate is likely to also collapse.
~Count on higher taxes (at all levels) and endless bailout schemes.
~Don't count on getting much from your pension fund, whether it is public or private. (And even if it does pay in full, it will be in grossly inflated dollars.)
~Expect continuing bank failures and perhaps some bank runs. Monitor the safety of your own banks.
~Complete your food storage, self defense, home medical supply, gardening, canning, alternative energy, and Alpha Strategy purchasing. Train with what you have.
~Round out your bookshelf with key references that you will need to be self-sufficient.
~Team up with like-minded families. Establish a well-stocked rural retreat with good soil and plentiful water that is well-removed from major population centers. Move there, get your garden in, and plant fruit and nut trees, ASAP!
~Get in shape and lose your addictions. The physical demands of surviving the unfolding multi-decade depression will be tremendous.

Thursday, December 30, 2010

Nicely Said................

"The fabric of American empire ought to rest on the solid basis of the consent of the people. The streams of national power ought to flow from that pure, original fountain of all legitimate authority." - Alexander Hamilton, Federalist No. 22, December 14, 1787

Wednesday, December 29, 2010

Let's Face It, Americans Aren't Too Smart...

One of the hardest things to do as a grown, “educated” adult is to learn from others. The inability to learn from others is what guarantees you will have a very childish perspective of the world. If the only books you’ve read were forced on you by the public education system, then your perspective is skewed. It was only when I expanded my realm of knowledge that I saw the world in a whole new way. I realized that there are recurring themes in history that humans consistently ignore because fundamentally, human nature never changes. No matter how much you warn people about the disaster that’s coming, they won’t listen. Call it what you may- naivete, ignorance, or outright arrogance- but this is just my experience. By definition you must be humble to learn.
There is a psychological phenomenon that explains the human tendency towards disbelief and inaction: the normalcy bias. If people haven’t directly experienced an extreme event before, they are prone to believe that it can’t happen. The normalcy bias explains why people refused to evacuate their homes when Katrina was clearly going to leave a swath of destruction. The normalcy bias explains why most people get destroyed by hyperinflationary events. And the normalcy bias explains why people refuse to get out of their dollars and buy gold. Most people alive never experienced a gold standard or a bond default; hence most people will be caught totally off-guard by the events of the future. However, people really shouldn’t be caught off-guard because governments historically never pay off their debts! They always default in some form.
Americans just can’t think from a global perspective. Sure the Bush tax cuts were extended, but corporate tax rates are still amongst the highest in the world. Do you wonder why industry is moving offshore? In addition, American income is taxed globally, no matter where income is earned. This mode of taxation is not the norm in history; in fact it shows our system badly needs restructuring. By any objective historical standard, current tax rates are “oppressive.”
Some people will argue that we are enjoying a rising standard of living. Ok, then why do both adults in the average household need to work now when only one person had to work before? A lot of our problems have been papered over. When the private sector couldn’t create jobs, the government stepped in as “the employer of last resort.” This is why you’ve seen a concurrent rise in the public sector and the national debt. This shell game can go on for quite some time, especially when demographic trends are on your side. But when demographic trends reverse and the debts are still lingering on your balance sheet, watch out: it is time to pay the piper.
Until events start unfolding more or less as I expect, most people will peruse this blog and think I am extreme. That’s fine, since our profits have been extreme as well. I know what my natural irrational human tendencies are, and I try my best to keep them at bay. The facts are always going to jump out at you if you allow them to. There will be even more political upheaval and social unrest moving forward. Times are changing, but historically, good things come out of times of change. We must go through our birth pains. Until then, you know what to do: buy gold, buy silver, and stay away from anything government.

The Feds have thrown away $5 trillion on wasteful "stimulus"

Has American Military Spending Really Been a Form of Keynesian Stimulus?

This is a major issue—major like a hole in the head: The United States spends over 6% of its GDP on the military—more, if you add the money spent on wars in Afghanistan and Iraq. (And by the way: The self-delusion that keeps those two wars “off the books”? Astonishing—but that’s for another time.)
Since the U.S. is the largest economy in the world, that +6% means that America spends more on the military than the rest of the world combined—with room to spare.Right there, you know something’s gone horribly wrong.
In Falling Forward, I argued that this enormous military created the need to find a new enemy, now that the Soviet Union is no more, and the nations of the former Warsaw Pact are busy trying to join NATO, rather than fight it.
But there’s another thing we should be looking at, when we examine this enormous military spending, especially over the last 20 years: Shouldn’t we really be thinking of it as an enormous stimulus program—a Keynesian stimulus program of the first order?
Military spending as a form of Keynesian stimulus is not an original argument—in fact, it’s been advocated, even by a few non-Keynesians: A couple of years ago, Martin Feldstein wrote a piece in the Wall Street Journal called “Defense Spending Would Be Great Stimulus”—the title pretty much says it all.For his part, Paul Krugman wrote a piece back in September called “1938 in 2010”, where he basically argued that World War II deficit spending got the United States out of the Great Depression, and created the conditions for the Post-War Boom—so wouldn’t it be wonderful if something similar happened today (i.e., like a war). Krugman’s argument was not merely flawed—and not merely immoral—but in fact Krugman’s argument depended on fudged data, as I demonstrated here.David Broder also got on the war-is-good-for-the-economy bandwagon: He wrote a Washington Post editorial for Halloween called “The War Recovery?”, essentially spelling out what Krugman was too slippery and chickenshit to say out loud except through mealy-mouthed, throwing-a-rock-and-hiding-your-hand inference: Wouldn’t a war be great to stimulate the U.S. economy into growing again?These three writers are all saying the same thing: American military spending would be a great way to get the U.S. economy back on track.However, these three writers were all making forward arguments: The American economy that is in the doldrums today would improve tomorrow if the economy was stimulated via more military spending—especially with a war.But what about the past? Consider this chart:

U.S. Military spending as percentage of GDP, 1800–2010. Source and data is here. Looking at the chart, you can see that aside from the War of 1812, the Civil War, and the First World War, military spending in the United States rarely crossed the 2% of GDP threshold—up until the Great Depression.It was during the Great Depression that military expenditures began to steadily rise—long before the threat of Nazi Germany and Imperial Japan were readily apparent. It can be seen in the above chart as a percentage of GDP, but it can also be seen more starkly in the chart below, in nominal terms:

Same source as above.As you can see, the Hoover administration cut military spending with the advent of the Great Depression—but the Roosevelt administration increased it dramatically, even though there was no imminent threat of war.Military expenditures for 1935—the first big bump up—were decided in 1933–‘34: No one would argue in 1934 that world war was even remotely a possibility—especially considering the United States’ isolationist stance following the First World War. No one even in 1939 would have argued that a war involving the U.S. was imminent. After September of ‘39, maybe one could argue that there might be a European war—though the Phoney War/Sitzkrieg of ‘39–‘40 would have severely undercut the argument for an imminent European war. That the United States would be dragged into a possible European war? No way, especially considering the prevalent notion (in 1939) that France was more than a match for Germany.So the only way to interpret the rise in American military expenditure between ‘34 and ‘40 was as part of the New Deal spending to stimulate the economy: In other words, it was Roosevelt who invented the notion of military spending as a way to prop up the economy—Keynesian militarism.There are a number of reasons why I am extremely leery of government spending programs as a way to stimulate the economy: One is, Keynesian stimulus is often as not ham-fisted, misallocating resources so badly that it might as well be thought of as throwing money away. A second is, Keynesian stimulus creates an economic dependence of the private sector on the public sector. In a democracy, this creates the incentive for the dependent private sector to lobby politically, so as to maintain the “stimulus”, which becomes like an addictive drug—a necessary prop for economic survival. A third objection—relevant to the specific case under discussion—is that Keynesian stimulus spending on the military creates a larger military, and a momentum to actually deploy that military; that is, Keynesian military spending stimulus creates the incentive to launch wars of aggression.From a Keynesian perspective, however, a growing military is an ideal way to stimulate the economy: By definition, all military spending is consumption, not investment. Military equipment will either be destroyed in war, or discarded for the sake of newer equipment. Therefore, government spending on the military is a sure-fire way to pump demand into the economy—Keynesians’ idée fixe. (Using the French is so much better than using a good ol’ American word like hobbyhorse, or maybe fixation, or maybe even mania.)If the increase of military expenditure from 1934 to 1940 was nothing more than Keynesian stimulus, then the military spending from 1941 through 1991 was for real. The only way to look at that period of historically disproportionate American military spending was as a byproduct of the United States fighting both World War II and the Cold War (which I will analyze in a future post as a single continuing Long War).I don’t have any objection to the military spending between ‘41 and ‘91, and I don’t think anyone else should, either—it was obviously necessary. Why? Because the war between ‘41 and ‘91 with the Romantic Totalitarian Dictatorships (Nazi Germany, Imperial Japan and Soviet Russia) was a life-and-death struggle—a struggle for the survival of Enlightenment ideals of democracy, secularism, egalitarianism, the Rule of Law, and generalized decency.However, following the end of the Long War in 1991—as I argued in Falling Forward—the United States did not embark on a period of de-militarization. Instead, military spending continued apace—even though there was no imminent need or threat.In other words, since most of the military spending the U.S. carried out between 1991 and 2010—including the entirety of the unnecessary, illegal, immoral war in Iraq—was not strictly necessary in order to preserve the existence of the United States, then that military spending should be thought of as nothing more than government stimulus spending à la Keynesian economics.

Keynesian stimulus, AKA mothballed fighter jets.The key assumption of my argument is that nothing following the collapse of the Soviet Union—including the terrorist incident of Sept. 11, 2001—has come even close to representing a true threat to the existence of the United States. This is an easy assumption to defend—especially in light of the real threats posed by Nazi Germany, Imperial Japan and Soviet Russia during the Long War. Any confused soul who thinks that Islam represents an even remotely comparable existential threat to the United States as the Romantic Totalitarian Dictatorships needs to seriously get themselves to the library.To briefly defend this key assumption: No potential military adversary of the United States has had any military or territorial designs on either American soil, American allies, or American interests since 1991. This includes all of the top ten largest militaries in the world, including the European Union member states, China, post-Soviet Russia, India, or any other nation with a credible military power, including Iraq under Saddam Hussein.Therefore, if we consider that historically, the U.S. has only needed to spend on average about 1.5% of its GDP in order to defend itself, we can think of the difference as the amount of stimulus the Federal government injected into the U.S. economy.To make the math easy, let’s assume an even 2% of GDP is the cost of effectively defending the United States. And let’s assume that a true “peace dividend” would not have begun immediately after the end of the Cold War in 1991, but rather in 1994, when it was certain that the Soviet Union was gone and the surviving nation-states were clearly no military threat.Using the data I sourced above: Subtracting 2% of GDP from the actual figures for the years 1994 to 2010—not including what has been spent on the wars in Afghanistan and Iraq, which are kept off-book—I get a total savings of $4.7 trillion.$4.7 trillion—that’s the amount of Keynesian stimulus the excessive military spending wrought on the American economy between 1994 and 2010.Or think of it another way: If we include the interest on Treasury debt added roughly 20% to the tab, then more than 40% of the total U.S. Federal government debt—$5.6 trillion—is due to the excessive military stimulus spending.Military spending is non-productive consumption—it is waste. So that’s how much the United States has wasted on needless military Keynesian stimulus spending:$4.7 trillion. Plus interest.The next time some Keynesian Klown tells you that what the U.S. economy really needs is for the Federal government to “get serious and put more stimulus into the economy—the last stimulus package just wasn’t enough”—go ahead and mention the $4.7 trillion of military stimulus, and $5.6 trillion of debt.How’s that for some stimulation?

Straw Men? Hollow Men? You Decide......

Exposing the Hollow Men
The hollow men are not here to serve you or me. They are here for their masters. And it has been that way since at least 1913.
Speaking of the Fed and their ilk, my colleague Adam Lass calls them "the gray men."
In a slight twist on that idea, I think of them as "the hollow men," in keeping with T.S. Eliot's 1925 poem. Others have certainly made the comparison before yours truly - but that is because it fits so well:
We are the hollow men

We are the stuffed men

Leaning together

Headpiece filled with straw.

Alas!Our dried voices, when

We whisper together

Are quiet and meaningless

As wind in dry grassOr rats' feet over broken glass

In our dry cellar- "The Hollow Men," 1925

Quiet and meaningless whispers. Voices like wind in dry grass. Rats' feet on broken glass. Is this not an apt description of Washington from the perspective of the average American, the average small-business owner, for whom no help whatsoever has come?

Serving Their True Masters
William Greider is the author of Secrets of the Temple, one of the best books ever written on the Federal Reserve. He is also an active journalist.
One week ago - on Aug. 6, 2010 - Greider published a long piece in The Nation titled "The AIG Bailout Scandal." If you wish to read it, you can do so here.

Via the findings of three government investigation panels - the Committee on Oversight and Reform, the Financial Crisis Inquiry Commission, and the Congressional Oversight Panel (COP) - Greider details, with a focus on the COP report specifically, a pattern of shady dealings and highly questionable intents Taipan Daily first clarified via "The AIG Connection - Far Worse Than You Think" back in April 2009.
The first paragraph of Greider's piece - late to the party though it is - is worth quoting:
The government's $182 billion bailout of insurance giant AIG should be seen as the Rosetta Stone for understanding the financial crisis and its costly aftermath. The story of American International Group explains the larger catastrophe not because this was the biggest corporate bailout in history but because AIG's collapse and subsequent rescue involved nearly all the critical elements, including delusion and deception. These financial dealings are monstrously complicated, but this account focuses on something mere mortals can understand - moral confusion in high places, and the failure of governing institutions to fulfill their obligations to the public.
Bingo. Whether or not one agrees that AIG is the hub of all deception, dirty dealings protruding from it like spokes, the truth of the matter is that the intent of the hollow men - their sense of "obligation to the public" - is nothing like conventional wisdom makes it out to be. Taipan Daily has been pounding that critical message home ever since the crisis began. It is good to see others picking up the thread.
A Century-Old Franchise
To wit, the hollow men are not here to serve you and me. They are not here for the good of the country, or the health of the financial system, or any other justification so sentimental and naïve. Their mission is singular - to serve their true masters. That's all.
When the creators of the Federal Reserve got together on Jekyll Island in the years leading up to 1913 - the year the Federal Reserve act was passed - they represented, by some estimates, a quarter of the world's wealth in just one room.
And while one can never know the deep-down personal influences of those men, it seems safe to say they were not motivated by pureness of heart.
In seeking to safeguard the financial workings of the U.S. economy, the plutocrat fathers of the Fed were likely as unsentimental in their aim as dairy farmers, hoping to secure a herd of cows for the productive value of the milk.
What grew out of Jekyll Island, then, was a sort of brilliant trick. Not only did the Federal Reserve insinuate itself into the very warp and woof of U.S. economic fabric, it did so in such a way that extraction became impossible over time.
And thus now we have to heed warnings of "systemic importance" when dealing with the too-big-to-fail financial institutions, because the warnings are more or less true. The Federal Reserve system was designed to aid and comfort the banks first and foremost. To ensure the permanent longevity of that arrangement, the major banks positioned themselves like a cancerous tumor embedded in the spine - too dangerous to cut out for fear of paralyzing the patient.

Walking Away
What can be done about the hollow men? Not a whole lot, unfortunately.
In addition to parasitic systemic importance, the whole edifice of self-dealing and deceit resides behind an opaque smoke screen of complexity (as William Greider notes). Many Americans struggle with the basic concept of balloon payments on a mortgage, let alone the mathematical hocus pocus used by Wall Street to cover up its tracks. And besides: Who can truly expect the public to keep watch, when they are too busy watching American Idol?
In another theme that has long run through these pages, your humble editor's solution is to focus on the small things, the personal things... to opt out of the system in as many ways as possible.
For yours truly that means no mortgage debt, no credit card debt and no auto loan debt. It means no financial accounts at major banking institutions, instead using independent brokerage houses, smaller local banks, and megabank alternatives like EverBank. It means a readiness to profit from systemic breakdown, via the shorting of exposed financial players and/or the purchase of silver and gold. And, in general, a habit of minimizing accidental patronage of the system to as great a degree as possible.We may not be able to stop the hollow men. But we can recognize them for who and what they are, and we can walk away. And we can encourage others to do the same. Maybe with enough critical mass, fueled by crisis powerful enough to wake the man in the street from his slumber, there can one day be change.

$5/Gallon Gas Prediction May Be Conservative......

Ex-Shell president sees $5 gas in 2012

The former president of Shell Oil, John Hofmeister, says Americans could be paying $5 for a gallon of gasoline by 2012.
In an interview with Platt's Energy Week television, Hofmeister predicted gasoline prices will spike as the global demand for oil increases.

"I'm predicting actually the worst outcome over the next two years which takes us to 2012 with higher gasoline prices," he said.
Tom Kloza, chief oil analyst with Oil Price Information Service says Americans will see gasoline prices hit the $5 a gallon mark in the next decade, but not by 2012.
"That wolf is out there and it's going to be at the door...I agree with him that we'll see those numbers at some point this decade but not yet." Kloza said.
"The demand is still sluggish enough in some of the mature economies."

Gasoline prices have been steadily rising. Last week, gas prices crossed the $3 mark for the first time since October 2008. According to AAA figures, prices are up 4% from a month ago and 16% from the $2.585 average a year ago.
A study from the Oil Price Information Service estimates drivers will spend $305 on gasoline in December. According to the study, fuel prices are up 13.6% from last December and 76% higher from December 2008.
Gas prices eased off last week's gains but still remained around the $90-a-barrel mark, settling at $91-a-barrel. Prices were down 51 cents from Thursday's close after China unexpectedly raised interest rates over the holiday weekend for the second time in two months.
Oil prices settled above $90 a barrel for the first time since October of 2008.

Tuesday, December 28, 2010

All That TARP Money For Naught......Er......NOT!

Nearly 100 bailed-out banks may collapse all the same
December 27th, 2010

More collapsing banks could mean more 'too big to fail' banks
The $700-billion bank bailout, launched in the final months of the Bush administration, was meant to save US financial institutions from a systemic collapse. But an analysis of banks' earnings statements concludes that nearly 100 bailed-out banks are at risk of collapsing all the same.
Despite receiving a total of $4.2 billion in bailout cash, 98 US banks are at risk of failing, the Wall Street Journal reports.
The banks are suffering from “eroding capital levels, a pileup of bad loans and warnings from regulators,” the Journal reports, and the nature of the problem indicates that these banks were in trouble before the 2008 crisis hit -- a sign that the US's regulatory structure for banks may have been insufficient for years or decades before the collapse.
So far, seven bailed-out banks have already collapsed, costing taxpayers $2.7 billion.

Chris Cole of the Independent Community Bankers of America argued to the Journal that the smaller banks at risk of collapse didn't have access to all the same financial instruments that the larger banks had.
For example, the Federal Reserve ran an emergency liquidity program for the large Wall Street banks, giving them short-term loans to keep them stable. Last fall, after pressure from Congress, the Fed released the names of the recipients of $3.3 trillion in emergency aid. Among them were Bank of America and Wells Fargo, as well as a number of foreign banks, including Switzerland's UBS and France's Societe Generale.
But smaller, regional US banks did not have access to this program, and relied on the $700-billion TARP program passed by Congress. That program was never meant to help out banks that were in trouble prior to the crisis -- but as the Journal's analysis shows, many of these banks may have been "in parlous shape from the beginning."
In all, the Journal analysis found that more than 10 percent of the US's 7,760 banks are in financial trouble. Should more banks fail, it will likely result in greater concentration of banking in the hands of fewer banks. Many economists have argued that the creation of "too big to fail" banks through mergers poses a serious hazard for the economy, as these banks can feel comfortable taking on unnecessary risk, knowing they can count on a taxpayer bailout if they fail.
Because many of the larger banks are now in good health and have been able to repay bailout funds, the TARP program may itself not turn out to be as large a burden on taxpayers as once feared. According to the New York Times, the program -- which ended this fall -- could end up costing "a fraction" of the original cost, "and could conceivably earn taxpayers a profit."
But it may not rescue many of today's ailing banks. Arthur Wilmarth, a banking and law expert at George Washington University, told the Journal that many of these banks are saddled with commercial real estate loans that will never pay off.
"A lot of them are in kind of a frozen position," he said.

Oil Headed Up (Regular Readers Are Already Making Money On This Play)

9 Signs That The Price Of Oil In 2011 Will Soar Well Beyond 100 Dollars A Barrel
Tuesday, December 28, 2010
Will we see the price of oil rise significantly in 2011? Unfortunately, that appears to be precisely where we are headed. Despite stubbornly high unemployment and a very sluggish economy in the United States, the price of oil continues to creep upward. Part of it can be attributed to the fact that the U.S. dollar and other major currencies are continuing to lose value relative to all commodities, and part of it can be attributed to the continuing rise in the global demand for oil. But those factors alone do not explain what we are seeing. Expectations are a very powerful thing, especially for financial markets, and right now there is an overwhelming consensus that oil prices are going to rise in 2011. The big oil companies, the big oil exporting nations and the big investment banks are nearly all in agreement that a higher price for oil is coming and the speculators smell money and are starting to jump on to the bandwagon.
Those who “play the game” in the financial markets are always looking for the next big trend. Right now, a whole lot of people are talking about oil being one of those trends. It is considered to be a “hot” investment for 2011, and unfortunately the underlying economic fundamentals seem to support a higher price for oil.
The following are 9 signs that the price of oil in 2011 will soar well beyond 100 dollars a barrel….
#1 Over the last couple of months, a clear trend of rising oil prices has been established. Crude oil futures for January hit a two-year high of $91.51 a barrel at the end of last week. This represents a 13 percent increase in just the last month.
#2 Usually it is the summer months when we see higher prices for gasoline, but right now gas prices are rising aggressively as we start the winter. The average price of a gallon of gasoline in the United States recently crossed the 3 dollar mark for the first time in more than two years according to AAA’s Daily Fuel Gauge Report. The last time that gas was more than 3 dollars a gallon during the third week of December was in 2007 just months before “the greatest financial crisis since the Great Depression” struck.
#3 The worldwide demand for oil just continues to increase. But unlike previous times, now much of the increase in demand is coming from emerging markets. Did you know that America is not the number one consumer of energy in the world anymore? For about a hundred years the United States used more energy than anyone else, but now the biggest consumer of energy on the globe is China.
#4 Much of what we are seeing the price of oil do now is simply the continuation of a major upward trend that was interrupted by the financial crash of 2008. Just check out the chart posted below. Clearly the long-term trend for oil is moving up….

#5 Part of the reason why oil is going up is because the value of the dollar is going down. The rest of the world has reacted very negatively to the quantitative easing program initiated by the Federal Reserve, and as the Fed continues to flood the financial system with dollars it is only inevitable that the price of just about everything, including oil, will continue to go up.
#6 The speculators smell money and they are beginning to pour into the market. Speculative longs currently far outnumber speculative shorts. According to the Commodity Futures Trading Commission, long positions in oil outnumbered short positions by 205,890 contracts at one point in mid-December. That should be a clear sign that investors do not expect the price of oil to go down any time soon.
#7 There seems to be an overwhelming consensus among oil company executives that the price of oil is going to go up in 2011. Joe Petrowski, the CEO of Gulf Oil and the Cumberland Gulf Group, recently told CNBC that “there’s 1 in 4 chance we’ll take out the $147 highs before Memorial Day.” John Hofmeister, the former president of Shell Oil, believes that American consumers could be shelling out 5 dollars for a gallon of gas by 2012.
#8 Many of the OPEC nations are indicating that they will be supportive of a rise in the price of oil in 2011. Mohammad Ali Khatibi, Iran’s representative to OPEC, said on Sunday that he expects to see 100 dollar oil very soon.
#9 The big investment banks are also expecting oil to soar in 2011. Goldman Sachs is projecting that the price of oil will reach 105 dollars a barrel next year, and JP Morgan is projecting that the price of oil will reach 120 dollars a barrel in 2012.
So what will it mean for U.S. consumers if the price of oil increases dramatically in 2011?
It will mean higher prices at the gas pump.
It will mean higher prices at the supermarket.
It will mean higher utility bills for most people.
In other words, millions of average American families that are already being stretched to the limit are about to be stretched even more.
That is really bad news for those families and it is really bad news for the U.S. economy.
Not only that, but many analysts believe that the dramatic rise in the price of oil in the summer of 2008 was one of the major reasons for the global financial collapse that happened a few months later.
Let us hope that such a thing does not happen again, but the truth is that world financial markets are so unstable today that virtually anything can send them tumbling at any time.
Without oil our economy would stop working and our entire society would shut down. The price of oil affects all of our lives every day even if we never realize it.
In 2011, the price of oil could become a really, really big story. It will definitely be something to keep a close eye on. If the price of oil goes too high it is going to start to create some tremendous imbalances in the global financial markets, and when financial markets become highly imbalanced they tend to crash.

Sound Of Cannons Has Warned You About Bonds!

Treasuries' Worst Drop in 2010 Driven by Central Bank Sales
Dec 21, 2010
Central banks outside the U.S. sold Treasuries at the end of November and in December for the first time since June, spurring the biggest monthly loss in a year for the government securities.
The CHART OF THE DAY graphs Treasuries held at the Federal Reserve by foreign central banks and governments. It also shows U.S. 10-year yields climbing in December to a seven-month high. So-called custody holdings rose to a record $2.611 trillion on Nov. 17, according to the U.S. central bank. The figure dropped $2.25 billion in the last week of November, and foreign official holders have sold $1.5 billion of Treasuries in December.
“Foreign central banks have dramatically slowed their buying of Treasuries,” JPMorgan Chase & Co. analysts led by Srini Ramaswamy in New York wrote in a report Dec. 17. “This sharp decline in foreign demand likely contributed to the selloff in Treasuries,” according to JPMorgan, one of the 18 primary dealers required to bid at the government debt sales.
Treasuries handed investors a 2.0 percent loss this month, according to Bank of America Merrill Lynch indexes. The last time U.S. government debt fell more was in December 2009, when it dropped 2.6 percent. Investors outside the U.S. hold about half of the nation’s marketable debt, which has grown by more than 50 percent since the start of 2009 to $8.75 trillion.
“This is quite scary,” said Tomohisa Fujiki, an interest- rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “It was one of the big factors during that massive selloff.” BNP’s U.S. unit is another primary dealer.

The Eye of the Recession's Storm

(This blog and it's editors have always been fans of Robert Kiyosaki, here is his latest posting)
Is the recession really (not just technically) over? Is the economy coming back? Are jobs coming back? Obviously, the answers to those questions depend upon whom you talk with. As the old saying goes, “If your neighbor loses his job, we’re in a recession. If you lose your job, we’re in a depression.”
Here in America, the economic news is still pretty dire. A recent survey of college seniors revealed that 85 percent said they planned on moving back in with Mom and Dad. They simply can’t find jobs. The October 25, 2010, edition of USA Today ran the headline: For Many Over 55, Debt Defers Dreams: Recession Strips Away Savings, Jobs. The article states, “The unemployment rate for Americans 55 and older was 7.2% in September, a major increase from 2.9% in September 2006.”
Overseas, the news isn’t much better. The British government recently announced austerity programs that will cut 500,000 government jobs and cut welfare payments drastically. The French rioted in the streets, protesting the retirement age being raised two years from 60 to 62. Japan is now sending work overseas, which means more unemployment in Japan. The Yen’s strength makes Japanese products more expensive. So they seek lower-wage countries to manufacture their products. Toyota is set to produce 57 percent of its product overseas, up from 48 percent in 2005. Nissan will produce 71 percent overseas, up from 66 percent just last year. Bye-bye, Japanese jobs.
What Does This Mean?
Recently, as I was finishing my dinner at a local Italian restaurant, my waiter asked me, “May I talk to you about my mortgage?”
“Sure,” I replied.
“I haven’t paid my mortgage in over 18 months,” he said. “What do you think I should do?”
“Has the bank been calling you?” I asked.
“At first, but lately I’ve heard nothing,” he said hesitantly. “And I’m not the only one. Three of the cooks in the kitchen have also stopped paying their mortgage.”
“And what are you doing with the money?”
“We’re saving it.”
“And what do you plan on doing?” I asked.
“Wait till they take our houses,” he said. “Do you think this is a good idea?”
“I wouldn’t do it,” I said with a smile. “Why are you doing it?”
“Because the mortgage is more than the value of the house. We’re better off not paying the mortgage and saving the money. Let them take our houses.”
I didn’t agree or disagree with this man…yet, silently, I couldn’t fault his logic. Since he was 18 months behind on his mortgage, he was so far behind that he was actually ahead.
As you probably know, the mortgage mess is only getting worse, not better. Many people aren’t paying their mortgages because they don’t have a job. Yet there are a growing number of people who have jobs but who are also refusing to pay their mortgage.
A medical doctor friend of mine confirmed this growing trend. He said the doctors he works with, doctors who make a lot of money, are buying a lower-priced second home and then defaulting on their primary residence.
If this trend turns into an avalanche, the real estate market will crash again. The only people holding onto their homes are people like me, people who purchased before the bubble and don’t owe much, if anything, on their homes.
If there is another real estate crash, it’s people like me -- people who pay their mortgages -- who might be the biggest losers.
Looking at the chart, it’s easy to see the eye of the storm. The second half of the storm is about to hit.
The leading edge of the storm was the subprime mortgage defaults, the storm that hit in 2007. The trailing edge of the storm will be the defaults of people who are solid citizens, people who have good jobs and good credit.
How severe the second front of the storm will be is yet to be seen. If there are more people like the waiter and cooks in the Italian restaurant and the highly paid doctors who don’t want to pay for a house that is going down in value, the second half of the storm will be very severe.
Good News
The good news is that the Fed and banks are hard at work trying to keep borrowers in place. The Fed and local banks have dropped interest rates, enticing people like me to borrow, borrow, and borrow some more, which I’m happy to do.
Thanks to my latest refinances, my wife and I will save over $7,000 a month in monthly mortgage payments -- that’s $84,000 a year savings. And as far as our rental apartments go, refinancing and saving 2 percent per year on over $100,000,000 in debt is substantial. Even better, since so many people are renting, our apartments are operating at near 97 percent occupancy, even when rents increase.
Bad News
The bad news is that inflation is likely to rise. This will make life even harder for the poor and the middle class. Every time the Fed implements “quantitative easing,” a.k.a. printing more money, two things go up: taxes and inflation. When taxes and inflation go up, more jobs are lost.
Making the situation even worse is President Obama’s Healthcare Reform Bill. In my heart, I understand why he put so much of his term in office to push this bill through. I have relatives who have no healthcare. So for them, the healthcare bill may be a godsend. But for millions of others this bill is their ticket to the unemployment line. The added cost of healthcare is forcing companies to lay off workers.
With Medicare set to go bust in 2019, I wonder how our leaders could pass another program we can’t afford.
So is the recession really over?
For some, the recession has been like Hurricane Katrina. They’ve lost everything in the storm but now the levies are about to break and the flooding will begin. For others, the recession never started. The reality is, unfortunately, that it’s far from over.
What advice do I have?
Over the years, my advice hasn’t changed.
In 1997, in Rich Dad, Poor Dad, I stated, “Your home is not an asset.” Real estate agents sent me hate mail.
In 2007 the first subprime mortgages began to collapse. In 2011, the second wave is about to hit.
In 2002 in Rich Dad’s Prophecy, I stated, “You may have up to the year 2010 to become prepared.”
In 2006 Donald Trump and I wrote Why We Want You to Be Rich, predicting the decline of the middle class. Today the working middle class is slipping into poverty.
For years, I’ve been an advocate for financial education in our schools, and I’ve preached that, as individuals, we must take financial education seriously. Today, my advice remains the same. Until we have comprehensive financial education, we’ll never see the end of our booms and busts.

Quantitative Easing 2 as Projected and Announced

Thu, 23 Dec 2010
With all the rumors since early fall that the Fed would be adding liquidity with Treasury purchases, I developed a projection of what the future Fed balance sheet would hold, and we published the graph below in The Casey Report in early October.
It was a bit complex to develop because the various components of the balance sheet all required estimates to show the whole picture, including the declines in the mortgage-backed securities (MBS) as the mortgages matured. In essence, the Fed told us enough about QEII early on that my projections got it right. Of course, the key point is that the Fed is on a new program of ramping up its issuance of money to buy new Treasuries.

I added an overlay of an arrow and summary of the announcement, both in red. The headline number is the Fed’s $600 billion addition to its balance sheet up to the end of June 2011. You can see that the projection is close to their announced plan. So, by June, the $2.3 trillion on the balance sheet would grow to $2.9 trillion.
This announcement was clever in two ways; first the number is only the amount added half-way through 2011. Hence, it appears smaller than the same number at an annual rate. My projection assumes that it continues for all of 2011, heading toward 1$ trillion for the year. Secondly, the total increase on the balance sheet didn’t explicitly mention that other components were in decline. Each month the other components are declining by about $35 billion; so the actual purchases of Treasuries have to be that much higher to fill the gap (for about another $400 billion for a year). The Fed will buy an additional $600 billion plus the additional $35 billion a month to meet its balance sheet expansion target.
My estimates included this change in structure because I accounted for those declines. The window dressing from the Fed made it sound less extreme, but make no mistake, the Fed is working full time to expand our money supply. That is what the foreign central banks are so upset about because they hold dollars in the form of Treasuries that will be diluted as the dollar weakens from printing money to buy the Treasuries.
The Fed says that it is doing this to help the economy through lower rates intended to increase business borrowing
and to lower unemployment. That is also a deception because evidence shows that such programs will not have much effect on unemployment. The real reason is to bail out the deficit of the federal government – a deficit that is too big to be bought by the traditional buyers, which for many years were the foreigners.

The Latest From Ted Butler

A Show Stopper
For all those who watched the historic CFTC meeting December 16th on position limits, no, your eyes didn’t deceive you – the meeting ended strangely and abruptly. No vote was taken on the staff’s proposal and you should be scratching your head at what actually transpired. As strange as the sudden adjournment to the most important meeting in CFTC history might be, there was a wealth of knowledge and confirmation to be drawn from it. This meeting was perhaps the most significant and positive development towards ending the long-term silver manipulation that I have witnessed in my 25 year involvement. Silver investors should come away from this meeting with a strong conviction of how things will turn out.
I know there are deep differences between the five commissioners on the matter of position limits, even though such limits are now mandated by law. I know that the CME Group (COMEX and NYMEX) is pulling out all stops to prevent, delay and water down any position limits that may be enacted. But I also know that there is one glaring truth that accounts for the dissention and turmoil revealed at the meeting. This is all about silver and its manipulation. If it weren’t for silver, this meeting and the issue of position limits would be a non-event. There is no current concentration problem in any other commodity.
Because of the fact that silver has been manipulated in price and position limits would terminate that manipulation, the CME and JPMorgan want to derail any move towards these limits. Keep this fact in mind, as it is the central issue. When it comes to market regulation and silver the CME Group does not do the right thing. They are only interested in their bottom line and the devil with everyone else. However, the CME is designated as a self-regulatory organization by law, which means they have special responsibilities as a front line defense against market wrongdoing.
This is an issue in which the public has spoken loud and clear and it is downright un-American to solicit public opinion and then to ignore that opinion. My sense is that the CFTC is trying to be as accommodative to the CME exchange as possible, in order to ease the way into new position limits, as required by law. Instead, the CME turned increasingly hostile to any change in position limits. My advice to the CFTC is to stop trying to reason with the CME and take the proper measures to end the silver crime in progress.
Commissioner Bart Chilton, much to his credit, made a number of recent statements that gave me great encouragement. He has confirmed that a single entity controlled 35% to 40% of the short side of COMEX silver earlier this year. (He didn’t identify JPMorgan as the entity, because he is precluded by law from doing so.) Chilton also indicated that he thought a 1500 contract limit for silver to be reasonable.
But it was something that Chilton said in a speech two days before the meeting that rocked me. In essence, Chilton proposed that any time a trader hits the proposed position limit and is holding a hedge exemption from position limits the agency would closely review the details of the underlying swaps that allowed the exemption. Importantly, Chairman Gensler ratified Chilton’s approach at the hearing and directed the staff to initiate this approach immediately. The chairman’s exact words were, “Make it so.” Why was I rocked? Because I thought the agency was already doing this. Then it dawned on me that verifying whether the OTC swaps position that allowed JPMorgan to hold the obscenely concentrated COMEX short position was handled by the CME as part of their role as a SRO (self-regulatory organization). The CFTC never got to examine the details of what swaps justified JPMorgan’s concentrated silver short position, just the CME. In an instant, I knew how the silver scam was allowed to continue this long. The exchange decided what OTC swaps were legitimate, not the CFTC. But with Chilton’s Position Points approach, it would now be the agency doing the verification. Talk about a game changer.
I have to speculate on what I think the CFTC will find when they examine JPMorgan’s swap book. Mine is not a new speculation, but one I had written about before in many article, starting more than 7 years ago. When the CFTC opens JPMorgan’s swap book, I believe they will find it littered with Chinese names. Here’s an article from a year ago that also contains links to earlier articles on this theme
JPMorgan must have some reason to justify the big concentrated COMEX silver short position. If they claim that they are long silver OTC swap positions as an offset to their COMEX short position, it becomes critical that the CFTC inquire who is holding the short side of the OTC silver swaps. My belief is that it will be Chinese interests on the short side of the swap. Such a finding will lead the CFTC to conclude that it is really China holding the concentrated silver short position and they are using JPMorgan and the CME Group as their dupes to carry out the silver manipulation. This wouldn’t absolve JPMorgan or the CME for enabling China to manipulate silver, but actually make it worse. A foreign super power and clear rival to US national interests being aided and abetted in the serious market crime of manipulation in the price of a vital world commodity by leading US financial firms is almost too outrageous to contemplate. Yet that is exactly what I think has occurred.
I did not pick interests in China out of the thin air. As the largest producer of silver in the world (mining plus refining), it would sound plausible for them to be short (but never to the extent it has reached on their surrogate COMEX position held by JPM). More importantly, rogue traders from China have had a regular habit of betting on the short side of world commodities that their country consumes with a ravenous appetite, although that would not appear to make sense. Two examples that come to mind are disastrous bets on the short side of oil and copper five or six years ago.
It made no sense for Chinese traders to have bet the short side big in oil or copper. Yet it happened. Just because it makes no sense for someone from China to have bet big on the short side of silver doesn’t mean it couldn’t happen. Let’s face it – someone is and has been short on silver, all the way up from the single digits. It will go down as the single dumbest trade in history when all is said and done, taking the title away from Barrick Gold and Anglo Ashanti for their dumb short gold trades.
If my premise is correct, not only has the CME looked the other way when examining the offsetting OTC swaps of JPMorgan, it means that they also looked the other way when Bear Stearns held the big concentrated COMEX silver short position and AIG Trading before them. In other words, the CME got into a long term habit of looking the other way. It also explains why they are so opposed to any legitimate reform of the concentrated silver short position. What makes manipulation the most serious market crime possible is because it distorts the law of supply and demand and misallocates capital resources. Were it not for the long-term silver manipulation and the distortion of the price, we would not be on the verge of a physical shortage.

While America Dissolves, Obama Comments On A Football Player

Naked emperor and a conspiracy of silence

America is exceptional - utterly and absolutely exceptional - because the rest of the world depends on American guns, American money and American mediation in a way that no other country or combination of countries possibly might replace. Any other power that suffered the setbacks that America sustained during 2010 under the Barack Obama presidency would have been pushed off the top of the hill. The reason America still has diplomatic currency to spend in Asia as well as actual currency to borrow demonstrates its indispensable role: no one, least of all Chinese Premier Wen Jiabao or Russian Prime Minister Vladimir Putin, wants America to fail. That is why a conspiracy of silence surrounds the observation that the emperor is naked. But the facts are depressingly clear. After one trillion dollars and 5,000 casualties, America will leave

Iraq with nothing to show for its Quixotic commitment to build a nation in the Mesopotamian sand. As Steven Lee Meyers reported on December 18 in The New York Times, "The protracted political turmoil that saw the resurgence of a fiercely anti-American political bloc here is casting new doubt on establishing any enduring American military role in Iraq after the last of nearly 50,000 troops are scheduled to withdraw in the next 12 months, military and administration officials say." The pro-Iranian government of Prime Minister Nuri al-Maliki will eliminate America's role in Iraq after America's scheduled withdrawal. Four years after Lebanon's "Green" revolution, hailed by the George W Bush administration as an exemplar of Middle Eastern democracy, the formerly pro-Western (that is, Saudi-allied) Prime Minister of Lebanon, Saad Hariri, went to Iran as a supplicant in December to endorse Iran's dominant role in that country. Hariri's government includes men who have come under suspicion of ordering the assassination in 2005 of his father, the ex-premier Rafik Hariri. "In contrast with Iran's muscle-flexing, the moderate Arab states, led by Egypt and Saudi Arabia, appear weak while preparing the ground for new leadership as their rulers age. Concurrently, America's influence, as demonstrated in WikiLeaks documents, is on the wane, due to its withdrawal from Iraq, the deepening morass in Afghanistan and its domestic economic woes, " columnist Amos Harel wrote in the Israeli newspaper Ha'aretz on December 17. Russia is holding America's feet to the fire over ratification of the Strategic Arms Reduction Treaty (START) nuclear weapons treaty which - stripped to essentials - forces the world's only first-rate power to deal with a vanquished second-rate power as equals. Russian surface-to-air missiles and other technology remains an instrument of blackmail against the US. As US Senator Richard Luger wrote on his website on December 19, "A rejection of New START would be greeted with delight in Iran, North Korea, Syria, and Burma [Myanmar]. These nations want to shield their weapons programs from outside scrutiny and they want to be able to acquire sensitive weapons technologies." America's capacity to punish Pakistan for its ongoing support of the Taliban as an anti-Indian force in the region has reached the vanishing point. "If America cut off spare parts for Pakistan's
F-16's," an advisor to former Afghanistan commander General Stanley McChrystal observed, "they'd be flying Chinese planes the next day". China wants Pakistan to continue to maintain pressure on India, and has visions of a warm water port on the Indian Ocean linked by rail to China. After years of offering Venezuelan President Hugo Chavez all carrots and no sticks, the South American rogue state is ready to install Iranian medium-range missiles on its territory close enough to reach Washington, the German daily Die Welt reported on November 25. No one offered more carrots than Obama, who went out of his way to shake hands with Chavez at the April 2009 meeting of the Organization of American States. If Iran were to acquire nuclear weapons, it well might be able to hit Washington in a few minutes' flight time. American attempts to contain North Korea collapsed in December when the North shelled a disputed South Korean-held island, killing South Korean civilians - after likely being behind the unprovoked sinking of a South Korean naval vessel. North Korea also presumably is supplying fuel for Iran's nuclear program. And last, but not least, at the Group of 20 meeting in Seoul in November the United States suffered the worst rebuff to its global economic stance since the Europeans forced president Richard Nixon to delink the dollar from gold in 1971. The Federal Reserve's new "quantitative easing" campaign was a buck too far. German Finance Minister Wolfgang Schaeuble described the Fed as "clueless" in a newspaper interview, and Asian nations began to impose exchange controls to stop the septic tide of dollars from creating bubbles in their own economies. It's worse than in 1980, when then Fed chairman Paul Volcker returned from an October meeting of the International Monetary Fund in Belgrade and pushed the fed funds rate into double digits. At least in those days criticism of the Fed was made behind closed doors. Most ominous is that China, long the mainstay of the US Treasury market, became a net seller of long-term US Treasury securities in October. The run-up in US long-term interest rates, which pushed the 10-year Treasury yield almost a full percentage point above its August low, is in large part the result of Asian reluctance to continue to buy America's long-term debt. Never before in the course of strategic events have so few done so much damage to so many in such a short period of time. The "few", to be precise, are Obama and the tiny coterie of advisors through whom he runs the government. Obama was true to his baffling words before the United Nations General Assembly on September 23, 2009: "No one nation can or should try to dominate another nation," Obama told the United Nations on September 23. "No world order that elevates one nation or group of people over another will succeed. No balance of power among nations will hold." In my year-end review for 2009 (Life and premature death of Pax Obamicana) I warned:
History speaks of a PaxRomana, a Pax Britannica, and a Pax Americana - but no other namable eras of sustained peace, for the simple reason cited by Henry Kissinger: nothing maintains peace except hegemony and the balance of power. The balancing act always fails, though, as it did in Europe in 1914, and as it will in Central and South Asia precisely a century later. The result will be suppurating instability in the region during the next two years and a slow but deadly drift toward great-power animosity. Those who wanted an end to US hegemony will get what they wished for. But they won't like it.America's competitors have seen the erosion of American power as if through a time-lapse camera, and they don't like it at all. Obama's self-shrinkage of American influence may give us a civil war in Iraq, a new Israeli-Hezbollah war in Lebanon, a nuclear-armed Iran, a replay of the Cuban missile crisis in Venezuela, an unshackled rogue state in North Korea, an ungovernable Pakistan, and - worst of all - another American recession as the US Treasury struggles to fund a government deficit in excess of 12 percentage points of gross domestic product. Confronted with the consequences of a naked emperor in Washington, the other powers of the world can only avert their eyes and hope he will get some clothes before it is too late. Having renounced hegemony as well as the balance of power, Obama by year-end chose to prop up the power balance in the region with additional American and allied soldiers in Afghanistan. Obama chose the least popular as well as the least effective alternative. The US president's apparent fecklessness reflects the gravity of the strategic problems in the region.

Wednesday, December 15, 2010

7 More Years Of This Depression? Don't Bet Against It!

Depression Lasting Until 2018 Is Worth Exploring

In an era where forecasts by permabears have gotten ample attention and vindication, few are as disturbing as this: a world recession until 2018.
It comes from Eisuke Sakakibara, Japan’s former top currency official. He is known as “Mr. Yen” for his ability to move markets. Because Tokyo’s revolving-door politics often sends a new face to each Group of 20 meeting, he is one of the few Japanese constants in market circles. Traders may not know the latest finance minister’s name, but they know Sakakibara.
Japan is the master of muddling along, decade after decade, with little growth to show for it. And Sakakibara was a key player when Japan faced everything from the Asian crisis to Russia’s default to the onset of deflation to a banking collapse that saw the demise of Yamaichi Securities Co.
So, when an economist with Sakakibara’s background says “the world is set for a long-term structural slump reminiscent of the 1870s” when average global annual growth was about 1 percent, I can’t help but listen. The reason for the slowdown? Governments are putting fiscal austerity ahead of restoring stable growth.
Yes, there’s an eye-rolling quality to a former Finance Ministry mandarin giving economic advice. After all, officials there did Japan’s 126 million people a disservice by punting reform far down the road. They just borrowed and borrowed, leaving Japan with the largest public debt among industrialized nations and no exit strategy in sight.
Global Recession
Yet recent data in the U.S. and Japan and financial turbulence in Europe suggest a fresh global recession is a distinct possibility in 2011. If that happens, what levers are realistically available to revive demand? Interest rates are already at, or close to, zero. That leaves increased government spending as the only real way to stabilize things.
The trouble is, there’s little support for opening the fiscal floodgates in a meaningful way.
One reason is that there’s already loads of public debt out there. As of June, Japan’s $5 trillion economy had 904 trillion yen ($10.8 trillion) in debt outstanding. Too much debt is wreaking havoc in Europe, where Ireland was the latest domino to fall.
The U.S. is starting to rattle bondholders with its borrowing binge. President Barack Obama’s stimulus isn’t working the magic economists hoped. Neither is the Federal Reserve, as it goes the way of Japan with quantitative easing.
1937 Again
Worse, in the U.S. and other major economies, is the risk that it may be 1937 all over again. It was then that President Franklin Delano Roosevelt got stingy with stimulus, assuming that the Great Depression was over. The next year saw the economy in full retreat.
If Sakakibara is right, the global economy is in deep trouble. He envisions a broad slowdown that might drag on for seven to eight years. China can live a couple of years without U.S. and European growth, but eight?
To head it off, governments need to up spending. And, for the most part, they aren’t. Yet the U.S. can, and should, borrow more. To do that, it just needs to become a bit more Japanese, says Richard Duncan, author of the “The Corruption of Capitalism.”
There’s a single reason why Japan’s 10-year bond yields are below 1.3 percent and Asia’s No. 2 economy isn’t being downgraded. Since about 95 percent of Japan’s debt is held domestically, there’s no risk of capital flight. Japan borrows from its companies and people, an arrangement that’s roughly the mirror image of the U.S.
New, New Deal
That so many Treasuries are held in China and elsewhere makes the U.S. highly vulnerable. Duncan, chief economist at Blackhorse Asset Management Pte. in Singapore, says the U.S. needs another FDR-like New Deal to restore growth and competitiveness. Funding one means greater borrowing and the way to do it is by tapping private-sector cash, Japan-style.
Such suggestions are likely to fall with a mighty thud on Capitol Hill, which is moving in the opposite direction. Lawmakers calling for Ben Bernanke’s head forget why the Fed chairman is taking U.S. monetary policy into uncharted territory. It’s because Congress failed to pump enough money into the economy in the first place.
Japan is a cautionary tale. On the surface, the 4.5 percent annualized increase in third-quarter gross domestic product looked promising. The detail, however, showed that deflation is worsening no matter how many yen the Bank of Japan churns into the economy. This is anything but a typical recession, and world leaders are too distracted to see it.
In the U.S., the focus is on China’s currency. While a stronger yuan would be in the best interests of the global economy, it’s not the answer to all the U.S. problems. Japan is even more obsessed with exchange rates. And Europe is linearly focused on convincing investors that the euro zone won’t unravel.
In our time of currency fixation, perhaps a guy called Mr. Yen is the ideal messenger. Too bad his message is one of economic gloom as far as the eye can see. Perhaps even to 2018.

Just Like In "RoboCop" Detroit Is a Mess We Can Learn From...

We've always believed Detroit is a victim of too much government planning and involvement. Mayor Bing is bringing too much too late, but funny how the MSM avoids calling the race riots and government planning as the reason detroit is in ruins.
Detroit Is Halting Garbage Pickup, Police Patrols In 20% Of City: Expect Bankruptcy In 2011
Detroit has been bankrupt for years. It simply refuses to admit it. Detroit's schools are bankrupt as well. A mere 25% of students graduate from high school.
Yet, in spite of hints and threats from mayors and budget commissions, and in spite of common sense talk of bankruptcy, Detroit has not pulled the bankruptcy trigger.
In a futile attempt to stave off the inevitable one last time, Mayor Bing's latest plan is to cutoff city services including road repairs, police patrols, street lights, and garbage collection in 20% of Detroit.
Bing to Cede 20% of Detroit to Gangs and Homeless
City officials suggest this will not shrink the size of the city. Perhaps it won't shrink Detroit on Google Maps. However, Bing's plan would effectively surrender 20% of the city to gangs and the homeless.
Would you want to live in one of the gang war-zones that his plan would create? Would you want to live in a bordering neighborhood or in a bordering city?
Regardless of your answer, Bing's plan cannot and will not work and I believe Detroit will, sometime in 2011, file for bankruptcy. If so, expect massive turmoil in municipal bonds.
Less Than a Full-Service City
The Wall Street Journal discusses Bing's plan in Less Than a Full-Service City
More than 20% of Detroit's 139 square miles could go without key municipal services under a new plan being developed for the city, with as few as seven neighborhoods seen as meriting the city's full resources.
Those details, outlined by Detroit planning officials this week, offer the clearest picture yet of how Mayor Dave Bing intends to execute what has become his signature program: reconfiguring Detroit to reflect its declining population and fiscal health. Yet the blueprint still leaves large legal and financial questions unresolved.
Mr. Bing's staff wants to concentrate Detroit's remaining population—expected to be less than 900,000 after this year's Census count—and limited local, state and federal dollars in the most viable swaths of the city, while other sectors could go without such services as garbage pickup, police patrols, road repair and street lights.
Karla Henderson, a city planning official leading the mayor's campaign, said in an interview Thursday that her staff had deemed just seven to nine sections of Detroit worthy of receiving the city's full resources. She declined to identify the areas, but said the final plan could include a greater number.
"What we have found is that even some of our stronger neighborhoods are at a tipping point with vacancy," Ms. Henderson said. "Vacancy adds to blight and blight is a disease that takes over the whole neighborhood. So the sooner we can get those homes occupied, the better for the city."
Officials bristle when their efforts are described as downsizing, saying their aim is to repurpose portions of the city, not redraw its borders. "We will not be shrinking the city," Ms. Henderson said. "We are 139 [square] miles and we'll stay that way."
Repurpose or Abandon?
Of course the Mayor's office did not say they would abandon sections of the city to gangs. But how the hell can repurposing as described above possibly mean anything else?
What's next? Barbed wire? Oh wait a minute, Detroit already has tried that. Razor-wire too. Here's a picture of Detroit's clearly abandoned repurposed Michigan Central Train Depot.
Image: AP
Image courtesy of the Journal and the AP.
Detroit's Tax Collection Process
The Detroit Free Press points out Detroit botched Packard plant tax collection
The City of Detroit has failed for nearly four years to send property tax bills to the owner of the Packard plant, costing the city badly needed cash.
At 3.5 million square feet, the plant is by far the largest derelict property in Detroit.
It wasn't until the Free Press began making inquiries last week that the city's assessor's office returned the property to the tax rolls -- with an assessed value of nearly $1.6 million. The change came nearly four years after a Michigan Supreme Court decision prompted the city to surrender the century-old plant to Bioresource, a company whose last listed corporate representative is a convicted drug dealer.
Last week, less than 18 hours after a reporter questioned why the property was listed as city-owned, the assessor's office changed its status to "taxable." The property's assessed value ballooned from almost nothing to nearly $1.6 million.
Robin Boyle, professor of urban planning at Wayne State University, said the error underscores "just how challenged the city is in dealing with the fundamental task of title, control, oversight and follow-through" with property throughout the city.
"To me, that is a fundamental problem that leaves Detroit in a consistently weakened position. It can't even do the basics," Boyle said. "This is a huge piece of real estate, and yet, there's still confusion."
Although only one tenant remains on the property, the plant is not entirely neglected. Scrappers prowl it for metal. Graffiti artists decorate its walls. Someone perched TV sets atop pillars standing at least 15 feet tall.
And it can all be yours for $13 million.
David Wax, senior associate with Burger Easton & Co. in Farmington Hills, has listed the property for sale for a couple of years. He said there was a good deal of interest before the world economic crisis and before steel prices collapsed, making the Packard plant less attractive to buy and then demolish for its metal.
"For 13 years it's been vandalized, raped, burned, stripped of anything of value," Wax said. And on any given day, he said, you can hear "people with hammers and cutting torches cutting steel out of the building."
Packard Closeup Images
The Business Insider has fantastic set of images of the beautiful $13 million Packard property. Here are a couple of those images.
Image: flickr
Image: flickr
Now that the building has been put back on the active tax rolls to a convicted drug dealer, this is the sequence of events I imagine would transpire were Detroit to stay on its existing path using Bing's plan as the roadmap.1. Detroit will send a tax bill to Bioresource2. Bioresourse will not pay the bill3. Detroit will reacquire the building in a tax sale with no bidders4. In a couple of years Detroit will realize it once again owns the building5. Detroit will repurpose the Packard plant with the same success as depicted in the Michigan Central Train Depot image.
Detroit Schools Bankrupt
Flashback July 24,2009: The Wall Street Journal reports Detroit’s Schools Are Going Bankrupt, Too
Now’s the time to cast off collective bargaining agreements and introduce school choice.
‘Am I optimistic that they can avoid it . . . ? I am not.” That’s what retired judge Ray Graves said this week when asked whether the Detroit public schools, which he is advising, would be forced into bankruptcy. Facing violence, a shrinking student body, and graduating just one out of every four students who enter the ninth grade on time, the city’s schools have been stumbling for years. Now they face a seemingly insurmountable deficit and are expected to file for bankruptcy protection at about the time that students should be settling down in a new school year.
As embarrassing as such a filing would be, it also may be the only thing that can force the kinds of changes Detroit schools need—as the financial turmoil is just the latest manifestation of a system in terminal decline.
Detroit is like many urban school districts—large, unwieldy and bureaucratic, with a powerful union that makes the system unable to adapt to changing circumstances and that until very recently had an indulgent political class that insulated it from reform. That insulation came in two forms. The first was neglect. Mayor Kwame Kilpatrick spent several years distracted by a scandal stemming from his affair with a staffer. He resigned last year, pleaded guilty to obstruction of justice, and was sentenced to four months in jail. Had he been an effective mayor, he might have also been a powerful advocate for students.
The other insulating force was a conscious decision to wall off Detroit from charter schools. In 1993, Michigan’s legislature made it difficult to create new charters in Detroit by declaring that only community colleges could authorize charters for primary and secondary schools in “First-Class Districts”—defined as those with more than 100,000 students. Detroit was the only First-Class District. In 2003 the state, under pressure from the Detroit Federation of Teachers, turned down a gift of $200 million from philanthropist Robert Thompson that would have established 15 charter schools in the city. Those charters are needed today.
The net result has been a school system that’s been coming apart as the teachers union has dug in its heels. In 2006, the union illegally went on strike, killing a plan to force teachers to take a pay cut to balance the system’s books.
Collective Bargaining has Morally and Fiscally Bankrupted Detroit Schools
Read that again. Under pressure from the Teachers' Union, Detroit turned down $200 Million. That was in 2003 dollars. Wow. No doubt the union "did it for the kids".
For more on the appalling behavior of Detroit's teachers' unions please see Detroit Public Schools (25% graduation rate) teachers unions opposing highly qualified volunteer teachers.
It is time to kill collective bargaining for public unions, every one of them, and nation-wide, not just Detroit.
Detroit Bankruptcy Looms
Flashback April 6, 2010: Detroit Bankruptcy Looms with Deficit of $446 Million in Budget of $1.6 Billion
Detroit has hit the end of the line. It's budget deficit is between $446 million and $466 million (28% to 29%) of $1.6 billion with few ways other than drastic cuts in wages and benefits to address the problem.
If unions will not give in (and they won't), Detroit Faces Bankruptcy.
With that introduction, inquiring minds are diving into the Citizens Research Council report on The Fiscal Condition of the City of Detroit
The Economic Base
The deterioration of the economic base of the city has accelerated. There were an estimated 81,754 vacant housing units (22.2 percent of the total) in Detroit before the recession; that number increased to an estimated 101,737 (27.8 percent of the total) in 2008.
The average price of a residential unit sold in the January through November, 2009 period was $12,439, down from $97,847 in 2003. Remaining businesses and individuals are challenging property tax assessments on parcels that have lost value and, in some cases, cannot be sold at any price.
More than half of employed city residents work outside the city limits; the metro area has the highest unemployment rate of the 100 major metro areas in the U.S.
Detroit Should Embrace Bankruptcy
The only legitimate solution for Detroit is to shed pension obligations, privatize everything it can including the fire department, and dump unions contracts en masse. Since those items can only happen in restructuring, Detroit should openly embrace bankruptcy.
Detroit Warns of Bankruptcy as It Prepares Bond Sale
Flashback March 5, 2010: Detroit Warns of Bankruptcy as It Prepares Bond Sale
Detroit, the largest U.S. city whose debt is rated below investment grade, warned investors of the risk of bankruptcy as it prepares to sell $250 million of bonds to help close its budget deficit.
The city told bondholders in a March 2 preliminary offering statement that while it hasn’t taken steps to reorganize under Chapter 9, it may have few other options if its financial condition worsens. Detroit officials also detailed the steps they would have to take should bankruptcy become necessary.
“If the city’s financial status were to deteriorate further the city’s options to improve its fiscal health may be limited,” Detroit said in the statement. Bondholders “should not expect that their rights to payment and remedies will not be adversely affected by filing under the bankruptcy code.”
“We are still in a financial crisis but insolvency isn’t on the horizon or on the agenda at this time,” Mayor Dave Bing said in an e-mail from his spokesman, Dan Lijana. The total deficit this year is estimated at $280 million.
Bing Still Pretends - How Long Can It Last?
For reasons unknown, Bing just cannot do what is right. He will not come flat out and say what everyone in their right mind knows - that Detroit is fiscally and morally bankrupt and so are its schools.
Instead, on December 10, 2010 Detroit Borrows $100 Million for Police and Fire Headquarters.
Detroit, whose population has dropped by half since 1950, borrowed $100 million to turn the MGM Grand Casino’s former site into a headquarters for the police, fire and emergency-services departments.
The city sold so-called Recovery Zone Bonds authorized under the U.S. economic-stimulus plan, borrowing at 4.55 percent, the city said in a press release today. The bonds, with the longest term maturing in 2035, were sold through the Michigan Finance Authority by investment banks led by Siebert Brandford Shank & Co., according to data compiled by Bloomberg.
“The financial markets believe in what we’re doing to bring fiscal responsibility back to Detroit,” said Mayor Dave Bing, in a prepared statement today.
So-called recovery zone bonds were included in the economic-stimulus package signed by President Barack Obama last year to help expand the economy of areas with poverty and unemployment. They’re a type of Build America Bond that comes with a 45 percent interest subsidy rather than 35 percent rate under the Build America program, which expires Dec. 31.
The bonds were rated A1, or fifth highest, by Moody’s Investor’s Service and AA-, or fourth highest, by Standard & Poor’s.
BABs Set to End December 31, 2010
Note the ridiculous rating of those bonds by Moody's and by Standard & Poor’s. If the Federal government is backing those bonds, then they are AAA. If not, they are junk. There is no in-between.
Thankfully, the extremely ridiculous Build-America-Bond program will expire on December 31. When it does, no one in their right mind will lend Detroit money, and that at long-last will mean "lights out" for Detroit.
A new Republican governor takes over in Michigan next year, complete with a new Republican legislature. I believe Governor-Elect Rick Snyder will be amenable to fixing what ails Detroit and numerous other cities in Michigan.
Should Mayor Bing not seek bankruptcy assistance, I propose for Governor Snyder to force Detroit into bankruptcy. It is the only hope Detroit has. Mayor Bing is clearly in over his head.
Governor Snyder would be a hero if he can turn Detroit around, and outside of bankruptcy that appears impossible.
Thus, forced or not, I believe Detroit will file bankruptcy in 2011, the state will accept it, and public unions will be forced to accept massive concessions in bankruptcy court.
Look for massive turmoil in the municipal bond market as a result.

Nicely Said..........................

"I began to sense faintly that secrecy is the keystone of all tyranny. Not force, but secrecy ... censorship. When any government, or any church for that matter, undertakes to say to its subjects, this you may not read, this you must not see, this you are forbidden to know, the end result is tyranny and oppression, no matter how holy the motives." - Robert A. Heinlein

The Coming Crisis

Nouriel Roubini sees ‘the roots of the next crisis in the current one’
Dec 8, 2010 13:03 EST
Nouriel Roubini is #12 on on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. Over the past few years, the economist at New York University says he’s been thinking most about why financial crises occur and whey they are occurring more frequently than we have expected.
Contrary to the conventional notion that crises are random and infrequent events, Roubini has been arguing for the better part of a decade that financial crises can be predicted based on macroeconomic and policy mistakes. In fact, they occur every few years in some country around the world, he says. Roubini characterizes these financial crises as a “white swan” event. He emphasizes their regularity in his recent book Crisis Economics. Roubini says the pattern of crises is always the same: initially there is an economic boom, which drives up asset prices, leading to an excessive build-up of debt and leverage, which eventually leads to a downturn and then a market crash and bust.
The co-founder of Roubini Global Economics, Roubini credits his 20 years of experience studying financial crises in emerging markets — he published a book about their causes and consequences in 2004 — for enabling him to spot the risks for a crash. He also notes that others who foresaw the crisis, such as Morgan Stanley Asia’s Steve Roach and then-Merrill Lynch economist David Rosenberg, share a global view of economic dynamics, intellectual courage and a certain outsider status, a characteristic that fellow FP Global Thinker Mohamed El-Erian said was vital for his own success.
Looking ahead, Roubini worries about the balance of power in a world in which the U.S. is no longer a superpower. Global governance has shifted to the G-20 from the G-7, which was really a G-1, with the United States playing the role of the global hegemon and provider of global public goods. As America’s power declines, there is no country stepping in to be the world’s leader. Instead, emerging powers like China, Brazil, and India are all free-riding on America’s contributions to international order. Roubini fears that the world will go from a G-20 to a “G-0″, where there will be political and economic disorder.
Foreign Policy says Roubini deserves his high rank on the list “for seeing the roots of the next crisis in the current one”:
Being a global economic Cassandra isn’t a cheerful job, but someone’s got to do it — and Nouriel Roubini acknowledges that he fits the role perfectly. He has even embraced the moniker “Dr. Doom” a name derisively pinned on him before the 2008 crash that showed his pessimism was warranted. And so while everyone’s still trying to figure out how to overcome the last financial crisis, Roubini has his sights set firmly on the next one — which, Dr. Doom assures us in his book, Crisis Economics, won’t latest be too far off.
Roubini argues that the United States is at serious risk of heading back into a recession, and unlike other talking heads, he puts a number on his prediction, saying there’s a 40 percent chance of the United States hitting the dreaded “double dip.” Why? He thinks the root causes of the current malaise have only been covered over and that unhealthy levels of debt are once again piling up around the world — though this time on government accounting ledgers. It’s only a matter of time, he says, until we start seeing national bankruptcies — perhaps even a cascade of them across Europe that sparks the dissolution of the euro. If Roubini has one message, it’s that crises aren’t unforeseeable “black swan” events, but “white swans” — the culmination of long trends that are perfectly intelligible to anyone who takes the time to examine the data. We may not like Dr. Doom’s advice, but we can’t say he didn’t warn us.