The Coming Economic Depression

The Coming Economic Depression is now called the Political Economic and Spiritual Review. Part I can be found here.

December 2005 Update

November 2005

October 2005 Update

September 2005

August 2005 Update

June 2005

May 2005

April 2005 Update

March 05 Update

February 2005 Update

January 2005 Update

December Update

November Update

October Update

September Update

August Update

June/July Update

By Mark S. Watson

This is not what the pundits on TV are telling you. It is not what the newsmen at the nations nationally recognized newspapers are saying, it is not what the FED or the US Treasury Department are saying... publicly.

But they know it just the same. Anyone with access to a computer can find out just how bad things really are. The Federal Reserve has been printing money like there is no tomorrow and yet financial pundits act as though this is simply not important enough to report.

Click Here for Word Document on M1,M2 and M3 From the Fed. (right click save target as)

The Fed's course on the surface seems to be irresponsible, but it really is the only real choice that the Fed has to forestall a major economic downturn in the US that would leave millions jobless and send many of the nations leading banks into insolvency. The Fed knows exactly what is going on, and while Greenspan will never rattle the markets and the American public at large with the whole truth, he must give some hints and allow himself some leeway when he is called before Congress to explain why things are not nearly as rosy as he led the country to believe.

Fiscal problems are being felt in every sector of the economy, except perhaps in law offices. The Governors association announced on 26 November that massive shortfalls in state budgets that totaled 40 billion dollars. With these types of deficits, something has to give. It may be heath care, education, road repairs, unemployment benefits or another essential service but something must give. These deficits were caused by two fundamental things. First, an overly rosy outlook on the nations economic future. This was largely due to the pundits on television, the financial press and the past two US administrations politically motivated economic pronouncements. These forecasts caused state and local governments to invest large amounts of capital in the stock market, eventually costing them billions of dollars. Second, the real effect of the loss of jobs and with it the tax revenues. Today we are seeing the effects of these policies and the real effects of Clinton/Greenspan/Bush economic policies. They have been a recipe for a financial disaster that everyone on the inside knows is coming. If you don't believe me look at the latest personal bankruptcy figures announced on 26 November. They are a clear sign that the economy is not on the mend but is sinking deeper into a recession.

Why Inflate?

The answer to this is simple. Inflation, while bad, is not as bad as deflation. Deflation would be a disaster in two easy steps. With inflation, there are about 10 steps, but each road leads to the same destination; insolvency. Economists, not paid by the US government, large tax-free foundations and the financial press have been warning the American people about the real state of the US economy. The problem here is that no one gets heard in the US mainstream press unless he belongs to one of the three afore mentioned groups. They are increasing becoming an axis of economic disinformation, designed to keep the unsuspecting in the markets to be fleeced by corporate America.

Jobs are still going away at a record pace. Each week new layoffs of at least a thousand persons per lay-off announcement are reported. This is not normal and bodes very ill for any future recovery. These hundreds of thousands of people will not be working, and thus will not be able to purchase things, a key factor of any true forecast of consumer confidence. These jobs are not coming back, and Alan Greenspan knows this. George Bush knows this and it is why he is setting up huge new Government agencies that will eventually employ millions; from homeland security to the proposed new Foreign Aid Department. The President knows that the only way to get out of the economic disaster now unfolding is to inflate the currency, something Greenspan is all too happy to do and to create hundreds of thousands of new federal jobs to keep America employed. This is certainly a bad thing in the long term, but in the short term it may stave off serious social disruptions at least until the next election. The real danger in this path is runaway inflation, foreign disinvestment, and foreign repudiation of the dollar. These are very real dangers as some governments have expressed private concern over the course the US is taking economically. Some have threatened to take their investment elsewhere for both economic and political reasons, still others are seeking a new reserve currency of the world rather than the US dollar. These are the real threats that await any US administration that continues down the road the Bush and Greenspan are now taking us. One day the dollar will become worth less and less until it is finally worthless.

Indeed one of the Federal Reserve Governors has already stated publicly that he will inflate the currency should it become necessary

"The U.S. government has a technology, called a printing press - or today, its electronic equivalent - that allows it to produce as many U.S. dollars as it wishes at essentially no cost," - Federal Reserve Governor Ben Bernanke

Yes, this man is a sitting Federal Reserve Governor and he is saying that he is planning on printing lots and lots of money. Apparently his Harvard and MIT degrees didn't teach him about what happened in the Weimar Republic. The danger of the US currency becoming worthless is increased exponentially with a man like that sitting on the Federal Reserve Board. So yes, you the reader must be warned, the US Economy is in deep trouble that twelve successive rate cuts have not helped and will not help.

A Crash?

Probably not the kind of crash that happened in 1929, and probably not the kind of depression that happened in the '30's. It will be worse in many respects but the effects will not be felt right away by most Americans. The US is still running massive trade and budget deficits. Over 200 billion dollars for our budget deficit this year IF we don't go to war with Iraq, if we do, those deficits will be considerably higher. Indeed, the federal deficits in America are so massive, that America cannot and does not service all of its debt. Indeed the total the credit market debt is rising at an alarming rate.

If it did, It would eat up more than half of all federal revenues. That would send the US government into immediate bankruptcy. These are simple, incontrovertible facts that you simply will not hear on CNBC, MSNBC, Bloomberg or any financial news show. However, credit must be given to CNBC that did for once let the truth leak onto the airwaves in an interview with Paul O'Neill, US Treasury Secretary when asked about these deficits and our ability to service them. He said in essence, that the financial system will fall apart when we can no longer service our debt. And still, very little is heard about America's missing trillions of dollars that no one can account for and no one is investigating. What is happening in America reads like a horror story that is not reported to the people at large who are given large doses of propaganda to keep them content and under control while they are being fleeced on a scale that has never happened before in history. Indeed the Social Security trust fund has been raided by Congress and the Administration in order to pay for the last few years of Government spending and the luxury of lying to Americans by telling them we had a budget surplus. So a crash like in 1929 is probably not in the cards, instead will be something very different and much more destructive. These news is extremely bleak, yet if one listens to the newsmen on TV, one would think everything is just 'coming up roses'. The real barometer of economic health will be the status of the US dollar, and how much foreign investment actually leaves the US in the coming months. Another barometer will be the true state of US employment, how many people will be working for the government in the coming months, how many have taken pay cuts after getting laid off in the private sector and must find work at jobs that cannot support their lifestyles and prior purchasing patterns.

It must be remembered that this is a global problem and no market in the world has been spared. The problems in the US are echoed in Europe, Asia and most importantly in Japan. However, these other nations in the long run are in better shape than the US as none if these other nations have the massive fiscal, trade and consumer debt  that the US carries.  Hence, their economic fortunes will be brighter than America's. The question mark here will be Asia, whose economic might was greatly humbled by the machinations of George Soros and the IMF. Even though some of the Asian Tigers have taken a more defensive stance with regards to a future attack on their economies, real risks remain. The vulnerability of Asia is certainly its dependence on exports to America, its primary market. Should the US dollar fare badly enough, the Asian economies would suffer a correspondingly significant risk.

If the FED continues its course in inflating the currency to keep stock prices high and the banks solvent, the dollar will become far less attractive to foreigners. The fundamental weakness of the US economy is known throughout the world. The problem is that if America goes down the proverbial tubes economically, so does much of the rest of the world, as they are dependent on American markets to sell their goods. The dollars demise will not bode well for anyone anywhere, but if the US cannot manage its own affairs economically and continues to show such continued fiscal irresponsibility, then the rest of the world will have little or no choice but to create a new reserve currency of the world. This is the real issue that any intelligent and open-minded person and or investor should seriously consider. Let it be known that the dollar will not crash overnight. It is not time for 'chicken littles' on the Internet the claim the sky is falling. It is however, time to look at the nation's balance sheets with a cold hard look, without the pie in the sky emotionalism that is the foundation of the American financial media. Our financial health as a nation depends on it as well as our personal freedoms.

The American empire is in a dire state and the debate over the past few months in foreign policy circles has been contentious. The debate appears to be between the so-called hawks (derisively referred to as 'chicken hawks', as many are draft dodgers and evaders) and more moderate elements who mostly reside outside the present administration. The debate centered how to maintain American economic, political and military might on a global scale at the same time its consumer driven economy significantly deteriorates. This was the real debate that took place just before the 911. America's foreign policy has now taken shape. It is now an aggressive, unilateral, and violent foreign policy that some in the administration, Colin Powell in particular, was attempting to prevent. The policy advise of the more hawkish elements of the administration led by Cheney and Rumsfeld were all too conveniently reinforced by the attacks of September 11th and the ensuing war. The US Government and more importantly its policy makers now view the American population as a major impediment to its future geopolitical aims. This is reinforced by economic fundamentals that portend a disaster that no one living has seen before in the US. Hence, the extraordinary measures this administration has taken to repress the civil liberties and with them key provisions in the US Constitution, which many in the American establishment view as an antiquated impediment to their naked imperial ambitions.

The nature of our economic predicament is becoming clearer. All Americans know that the US just recently reissued new currency. But the US is yet again ready to introduce another currency into the mainstream. This is a clear sign of a significant change in America's economic structure. Counterfeiting is the reason we are being told, however it is clear to all who have been following the economy over the past couple of years that something very ominous is going on with the US money system in general and with the dollar in particular.

Pyramiding Risk

If massive budgetary deficits are not enough to bring down our economic prosperity, there is the $50 Trillion derivatives pyramid to consider. America's largest banks are fully and completely exposed to enormous risk. These risks should not be underestimated as the exposure the major US banks have to these complex financial instruments is massive. However, unlike many who predict a disaster, a serious banking collapse because of a derivatives meltdown is, in this authors opinion, somewhat less likely than many predict. Successive derivative related financial crisis over the past few years (Barings, LTCM, and a serious scare with two major US Banks in the recent past), have probably prompted policy makers to make contingency plans to deal with such an eventuality with speed and enough secrecy to avoid a major meltdown and panic that would ordinarily ensue if one of these major Banks became suddenly insolvent because of a massive derivative loss. This does not mean that a major meltdown of such a nature that even the FED and the world's Central Banks cannot fix is not possible, on the contrary, it is quite possible, though not quite as possible as many believe. Nevertheless, such a bailout would only exacerbate America's debt and dollar problem as it would require to FED to further inflate an already overinflated currency.

To get a sense of just how exposed the banking system is to a derivatives meltdown here is a chart and a graph:

Source: US Treasury Department

Dead Broke?

It is becoming apparent that the United States is dead broke and unable to meet is future financial obligations. What is not so apparent is that the United States Government may be at a point in its history that not only are future budgetary considerations in jeopardy, but present fiscal outlays are as well. In short, we at present have no real working budget. We have spent nearly half a trillion dollars in the past 6 months using temporary spending measures. Now foreigners are leaving the US markets. This is an extremely important development that few of the major financial news services are reporting. It boils down to this; The US must attract investors to US securities in order to continue to function. Without massive (in the hundreds of billions of dollars) amounts of incoming capital, the US cannot continue its previous spending patterns. Therefore, some or most of the following will occur if the US cannot obtain foreign capital to finance its debt and budget:

The dollar will tumble to at least 40% of its present value.

Massive (20-50%) spending cuts in federal outlays will ensue.

America's march towards war will be in jeopardy.

Gold's price in dollars will rise sharply and permanently.

Interest rates will have to rise in order to attract foreign investment.

Oil will soar in price to (guesstimate) 40-60 dollars a barrel

Social and economic disruptions will occur in the US as (real) unemployment rises above 30%

Banking Holidays may become commonplace and the new US currency may entail exchanging old dollars for new (devalued) ones.

I know this is now what the pundits are saying on TV. The same pundits that said 'Dow 30,000' and 'there will be no more recessions' and 'techs stocks can only go up'. They lied then and they are lying now. If you listen to them you will be homeless and hungry. That is an absolute certainty as what is happening now is the 'end game' of America's century long dominance in the world. Wall Street knows it, the President knows it and so does the FED. It will be the collapse of the world's greatest economic power and with it the worlds only military super power. These things may not necessarily transpire exactly as stated here. The US has enormous clout and can still strong arm some nations and central banks into investing into US securities and use accounting tricks to stay afloat a (very) little while longer. The main problem is, even if we make such an attempt, will there be enough capital to cover our fiscal needs? The answer is almost certainly not.

Hence the disaster now unfolding will unfold in all of its ugly fury on a completely unsuspecting America.

Out of Bullets (June Update)

Federal and even global policy makers are in a quandary now because they are out of their conventional 'ammunition' to stave off what is becoming and what may have diagnosed, as a global deflationary recession. This has caused some policy makers, including some of the members of the Fed, to call for more unconventional measures to spark growth in the ailing economy. Even the massive tax cut that was recently passed and signed by the President will not assist the US Economy, but rather will certainly cause even larger and more troubling deficits to be accumulated . It is these deficits which are one of the major causes of America's economic malaise. Decreasing taxes for short term political gain is the very sort of thinking that has put America in such a dire economic situation. I must tell you that policy makers in Washington are scared to death. They have no answers and no solutions.

I cannot express just how quickly this economy could collapse. I am not saying that it is just around the corner, although it may very well be. But 13 successive Fed rate cuts as of 25 June, 2003 has not and will not revive this economy. Sooner or later, probably sooner, the US dollar will fall to such an alarming degree that America's economic preeminence will be seriously challenged if not completely undermined. However, another possibility cannot be discounted, that being a banking failure. Let it be noted here that a banking failure will not be advertised as such. The full power of the US government will prevent any such nomenclature from being used. It may be described as a computer glitch or a malfunctioning communications satellite or a computer hacker bringing down a key computer network. Whatever the story will be it will be plausible, it will have major TV News personalities and government pronouncements to support the story. Nevertheless it will be a banking failure. Here are some clues that will tell you that a banking failure has occurred:

If such a collapse were to occur, there would be absolutely no warning. One day, which will be like any other day, the disaster will strike. The American people will finally realize an important fundamental fact, that being you cannot borrow yourself into prosperity. I remind you that there will be no such announcement, but if any three or four of the above mentioned things have occurred, you are living in the midst of the greatest banking and economic collapse in human history.

While a banking collapse is certainly a real possibility, the more likely scenario will be the 'slow bleed' scenario. This will entail a prolonged economic recession, coupled with the Fed continually pumping liquidity into the markets and banks, high paying jobs continuing to be shipped to India, and fiscal and budgetary problems become so acute that essential services get cut at the state and local level. While the economy continues to contract and the better jobs are being shipped overseas, American households are going deeper into debt. Here is a chart from the FED.

Source: The Federal Reserve

In millions of dollars

Notice the household debt rate for 2002 and 2003 in the Federal Reserve chart. Things are not looking so good for American households. Many have lost good jobs but borrowed money on the hopes of better days ahead. They made an terrible mistake that has them in a financial hole. Many people today are using credit cards to stay afloat, many purchased new cars at very low interest rates and others refinanced their homes or took out home equity mortgages. Many will not be able to pay these loans back, because over the next couple of years, they will lose their jobs. This will only cause troubles for the banks and finance companies.

Debt is the poison pill of the American economy. The only way to fix this economy is a two fold attack. First there must be a significant reduction in federal spending, By at least 20% per year, until all federal outlays are less than 50% of their present levels. Second there must be a debt repudiation of some kind. Consumer debt (especially unsecured debt) should be the primary target, coupled with a vigorous and complete reorganization of current credit related policies. Such policies should make the lender more responsible for unwise lending practices and much more careful before lending to customers. If an across the board 50% debt forgiveness were implemented for all unsecured debt and severely reduced interests rates for all remaining outstanding debt, as well as more favorable terms to the debtor, the economy would being to show more signs of life. However, the old way of amassing large amounts of consumer debt should be strongly discouraged in the future. Giving people more breathing room on the remaining debt will assist in rearranging household priorities in the wake of declining individual incomes.

 Of course these things will not happen. The prevailing winds of our leaders are too parochial and unimaginative to propose, let alone implement such a wide ranging solutions. However, given more poor economic performance and the threat of political unrest by large numbers of unemployed Americans, such proposals may not be impossible to bring about in the future. However a general debt forgiveness may not transpire for the following reason. There is a group of international bankers and financiers that may attempt to deliberately crash the system at the proper time in order to bring about a the necessary crisis to bring about a more powerful and global banking institution, a World Central Bank. This can be accomplished by carefully timing a market crash and/or raising real interest rates in order to confiscate the property of the people who can no longer afford to pay their debts. A banking crisis is a real possibility as stated earlier, whether or not the coming crisis will be a real one or one that is a created or planned remains to be seen. Banking collapses are not an historical anachronism, they really happen and the effects are devastating for the average person. Anyone who has studied the history of banking in America during the 1800's will know that banking instability was a constant problem for America. While the financial pundits are telling you that such a thing is only a topic for 'fear-mongers', the reality is that such a collapse is now in progress and that the smart money knows it and is moving to protect itself accordingly. However the crisis that is now upon is is so huge and gargantuan that the effects will be so devastating that no one living has ever seen anything like it, including those older Americans that lived through the great depression.

September 2003 Update

The market has been heading upwards over the past few weeks but at the same time Jobs are still going away. August saw another significant drop in payrolls, almost 100,000 jobs. These numbers are completely inconsistent with the governments claims of 3% growth in GDP. The government fictions are becoming more and more egregious and self-evident. Even though the number of actual jobs in America is shrinking, using its dishonest method of accounting, the government magically reduced the number of workers by ceasing to count those that cannot find work. In doing so, it could claim, using the 'Arthur Andersen' method of accounting, that the jobless rate actually declined, even though there were significantly less Jobs! The Governments fictions are being increasingly less believed by Americans and foreign investors alike. The most important thing to remember is that the truth and government pronouncements are mutually exclusive. These things are happening while many government numbers will pretend an ever elusive recovery. The fact that Mr. and Mrs. America are out of work or working in jobs that do not pay a livable wage is the screaming reality that is starting to hit home in more and more American households. Another looming problem on the horizon is that of a growing pension crisis. Many pension funds are woefully underfunded and years of regulatory loosening have allowed corporations to grow lax in funding their pensions a few outright stealing money from them in order to claim fictitious profitability. Now there is a gaping hole in the Pension Guaranty Benefit Program, a government agency that exists to guarantee payments to pensioners in case their funds go broke. This fund is in deep trouble and it means that one of two things will happen, either; 1) the many people who have paid hard earned money into their pensions will not get any money back or 2) the government will have to pony up billions of dollars in order to make good on those pension plans that will (and have) gone belly up. Even as corporate America claims earnings are better, there are still serious accounting 'irregularities' with the latest figures. Problems with restructuring charges, pension funds, write downs and M&A's are still present and are readily apparent to astute eyes when corporations use the pro-forma accounting that is still fashionable today.

Indeed, the Congress is acting as though the nation does not have any fiscal problems and is voting for funding of Medicare prescription costs that it has not and more importantly cannot fund without pilling up even more debt. The President is asking for more funding for his war in Iraq, to the tune of some 87 billion dollars, money that will only add to our already disastrous debt woes, once again there is no way to fund this without going further into debt. Unfunded liabilities are a serious problem for America. The following figures are cumulative and include total outlays and are not included in our current budget, hence the term unfunded:


Total Debt



Per Capita

Federal Government

$6.7 Trillion


State And Local

$1.4 Trillion


Social Security

$10 Trillion


Medicare (unfunded)*

$7 Trillion


Household Debt

$8.4 Trillion


Business Debt

$7.1 Trillion


Financial Sector

$10.4 Trillion


Other Debt

$.7 Trillion


Total Debt

$51.7 Trillion


These outlays for the future of America are dire, even without these, the Governments imbalance is roughly half a trillion dollars. In order to fund these deficits, the American Government will have to raise taxes. Now any such move will never be characterized as such, it will be advertised as a tax cut. But the government will have to raise taxes because foreigners, especially Asians, are freeing themselves from US Federal debt instruments. That means it will be very difficult for the US to raise capital. The only way it can continue on as before is to do something illegal and keep it a secret. Watch the US Treasuries, watch the Bond markets in particular, this should tell you which way the wind is blowing insofar as America's debt crisis is concerned and make no mistake, it is a crisis. Investors in the bond markets are looking closely to see exactly how the Fed will act during this time of uncertainty.

One major problem that is causing American leadership to make the kinds of decisions that are destroying America is the fact that these decisions are made without the people having the slightest clue as to what is really going on and the real issues. Hence, stupid and destructive decisions are made and the people continue to vote for those who make them. Another note here is that this latest market rally is largely a result of insider selling that has occurred; that is, those on the inside of America's Corporations who are selling their own stock, and while we cannot be certain, it appears that the plunge protection team, (which works closely with the insiders) comes in and buys these stocks at inflated prices, using public funds in order to keep the prices high. Yes, I do believe that this is what is happening though I confess the evidence is scant. Foreigners see this trend are are withdrawing or seriously considering withdrawing from US securities. Reality and the American people's perception of reality are currently divorced. The 'trust' in the US Dollar that has allowed America to live far, far beyond its means is now on notice, the message is clear and it is flashing red, 'Get your financial house in order or your currency and with it your global political, military and economic preeminence will become as extinct as the dodo bird'.

How will it transpire? There are many views and each has and makes some very good points. However it appears to this author that it there are only four basic scenario's that could transpire, barring any external interference from the powers that be. In other words if the politicians and 'men of influence' do not intervene to prevent these scenario via suspicious power outages hitting the number one and number two financial centers as we saw in August, more wars, or another mysterious terror attack. I ask all of you to not discount what are derisively called 'conspiracy theories'. Policy makers must make contingency plans. This is done all the time. I know this from when I served in the government and as a consultant. A global financial meltdown is not a wild eyed-conspiracy theory, it happened in the 30's and it can, and almost certainly will happen again. Contingency plans have been made, these plans will be made with two main goals in mind; 1) to pacify the people (this is the primary concern, to avoid pandemonium and an angry populace) and 2) to give policy makers the time to bring in a solution to the meltdown. This is not conspiracy theory anyone who thinks that plans have not been laid have not read many of the banking regulations now on the books. These laws are some of the most heavily amended acts in US history. The Fed has an interesting document that may help to explain how they view certain types of crisis and the legislative and regulatory thinking that went behind several banking bills in the past; it can be found here. In short, it is a history of legal 'contingency planning'. You may call it 'conspiracy theory', nevertheless these bills are now law. Now Congress the FED or any other government agency is NOT going to run around yelling about such plans at the top of their lungs for fear of sparking the events that they are trying to prevent. Thus, plans for such a monumental collapse that all of the real numbers portend points to extraordinary methods being used in contingency planning. These plan are laid very quietly and sometimes they are classified.  

One or more of these are likely to follow in light of the current economic predicament.

  1. Deflationary recession – Where prices fall and fall, workers continue to get laid off as companies struggle to make a profit. People continually wait for major purchases because prices are dropping rapidly.
  2. An inflationary depression. - High inflation as the Fed counterfeits more and more currency to fund our current account deficits and foreigners flee the dollar and dollar denominated securities.
  3. A combination of both. The price of necessities and staples rise higher and higher (energy, food, compulsory insurance) while luxury and non-essential items become cheaper and cheaper as people have less and less disposable income and importing essentials becomes more expensive because of a falling dollar.
  4. Regionalized Depression – Where certain areas of the nation go into a full blown depression while others the recession is relatively minor in comparison.

These scenarios are all possible and none should be dismissed out of had. Much will depend on the Fed and how it handles this emergency. The recent 14 year re-appointment of Ben Bernanke to the Fed Board of Governors leads one to conclude that he may replace Greenspan. This is the man quoted above who thinks we should inflate our way out of our predicament, leading to result number 2 above. The rest will depend on political leadership and those who wield tremendous power, globally, quietly and behind the scenes.

Asia, Jobs and Bush.

September 28 Update

What is the real situation with regards to the employment in America. How will Americans fare during the coming economic depression? Jobs have been going overseas for the past several years, but since the beginning of the Bush administration the process has only accelerated considerably. One prominent economist stated the problem in this way

In June it was declared that the recession had ended in November 2001. Yet in the 20 months since, payroll employment has declined by a total of about 1 million jobs, or about 8%. In not one of the seven or eight postwar recoveries has there been any employment decline.” - Kurt Richebächer

In addition to the above it must be noted that this governments figures are skewed in that it has statistically eliminated over half a million workers who have given up looking for non-existent jobs. These statistical shenanigans are very significant politically, because honest accounting of joblessness in America would place the real number of unemployed at around 10%, at least. If the number of underemployed (those with masters degrees and Phd's working in Walmart's across America) were counted, a much bleaker picture emerges. Another game the government plays with the employment figures is to play the revision game. The revision game is played by deliberately understating the number of unemployed when the figures are due out and announce them with great fanfare. Then, when the camera's aren't looking and the financial news pundits have painted the rosy picture to the people, the Government then revises the numbers upwards. These are not small statistical anomalies we are talking about but significant differences. These differences can range from 30-50% of the total! These statistical frauds are not accomplished via happenstance but are specifically designed to lull Americans and to a lesser degree the foreign investing public into a false sense of security as to the overall health of the US economy. Other deceptions are also perpetrated including adding fictional jobs to the economy. This practice gained particular favor during the Clinton Administration. In short the jobs situation in America is dismal and the real problem is this; there is positively no let up in sight. The consumer society of America is dying, and not so slowly.

From Asia the message has gone forth to US Treasury Secretary Snow, the US must mend its ways and reduce its fiscal deficits. Asians are currently reconsidering their US debt holdings in light of a falling dollar, a policy that the New US Treasury Secretary is currently supporting. There has been some movement in this area as far as the markets are concerned. Primarily, US Treasuries took a big hit during the week of 22 September. The dollar did as well as it fell to three year lows. A declining dollar offsets any interest paid by the US government on its bonds and securities and thus makes it very unattractive as an investment vehicle. Ordinarily, a weaker dollar would assist America with its exports and aid US manufacturers in selling their goods overseas. However, these are not ordinary times. The US is so far in debt that it must raise capital on the open market in order to keep financing itself. When foreigners stop buying our debt (treasuries) the US government goes bankrupt. What the Asians are doing now is a telling sign as to how perilous our debt situation in America is viewed overseas. Fortunately the slide of the dollar and the administrations support for this policy has not led to a wholesale flight from the dollar, but given the precarious nature of the economic numbers coming out of Washington, such a flight will ensue once America's previous consumption patterns give way to more fiscally frugal households. Indeed the US Census is reporting that poverty in the US is rising at the same time as incomes are falling. There are 1.7 million more Americans living in poverty this year than last. This only confirms the worst suspicions, that the consumer society is dying a slow death. America's factories head overseas, people are out of work and some are being pushed out into the street. This is not good news for foreign investors either because many are very much dependent on American consumption to keep their industries afloat. This has been the real effect of globalization, a race to the economic bottom, bought and paid for by the worlds largest corporations banks and most powerful elite. Does anyone remember the middle ages? You had two classes of people, the landholders and the serf's. The serf's owned nothing and were allowed to live only at the graces and whims of the landholders. Once the middle-class and intellectuals of any society are destroyed, this is the type of society men are left with. Rights are given by the state (read rich and powerful) and the poor have none. This, I believe is the primary goal of todays trends. It is to bring about 'economic democracy' aka Global Socialism where no-one will have the opportunity to better themselves economically and most private property will be held by the elite and it will be illegal or extremely difficult for anyone except the very rich to hold it. All real economic power will rest with a very wealthy economic elite and they will have the power of life and death over the earths serfs. This control will perhaps not be accomplished through outright murder, but by denying critical medical care, impoverishment or other technological means heretofore unseen. Prepare yourself for such a world because unless the foundational principles enshrined in the US Constitution can be resurrected in America, I fear that such a world is our fate.

If all of the above were not enough, bankruptcies continue on despite the lack of news coverage.

2nd Quarter Bankruptcy Figures

Total Filings 440,257

Non-Business Filings - 430,926

Business Filings - 9,331

Chapter 7 - 317,604

Chapter 11 - 2,599

Chapter 12 - 279

Chapter 13 - 119,745

And this graph show the picture of bankruptcies in this so-called 'recovery':

Source ABI World


As stated earlier in this long running and rather popular article, this author believes that it is entirely possible that the succession of massive power outages throughout the major population and financial centers of the world could very well be some kind of preparation for an economic collapse (to be used as a cover story). The American governments ability to finance itself is in serious jeopardy. Now I admit that using power outages as a cover for an economic collapse is far from a forgone conclusion but when one really considers the scope and depth of the current economic situation in America such a possibility should be considered especially in light of Italy's Power outage on the weekend of the 27th of September. Now the cause for Italy's outage seem to be storms, at least this is the 'official' line. Keep your eyes on future power outages. Major occurrences have already been;

New York-Ottowa


Large part's of Scandinavia


I post this only as food for thought and for perhaps a few wise souls will make preparations...just in case.

The GDP (5 November Update)

The markets this week began a interesting ride this week due to a miraculous GDP report that came out the US government. The euphoria emanating from the TV does nothing but obscure the real picture that emerges from the report.

The GDP game in the United States is a massive lie. Consider the following items, which are economically non-productive, but which are buried in the GDP report.

These are all counted as GDP even though the above activities are of highly questionable economic value. In fact, if the Government spending goes up 7% and non-governmental economic activity (companies that actually produce things) goes down by 6% the government could still claim an increase in GDP! The GDP numbers are such a political hot potato these days that the numbers should no longer be believed, except perhaps as a barometer of the the political desperation of the sitting administration.

One must marvel at the way in which Wall Street seems to be complicit in the game as these facts are well known. Yet, on such a day when these government fictions are released, the market still rally's ahead fueled by the phony report. These 'smoke and mirror' activities of the government and Wall Street have a definite psychological effect on the uninformed investing public who are, after hearing these numbers and then seeing the rally are more inclined to borrow more money on their homes to invest in Wall Street's 'investment' scams.

Indeed the recent GDP numbers are more of a result of 'no interest' car loans and 'no interest 'till 2005' financing on household items and appliances and people who borrowed money against their homes to continue their unsustainable consumption, the real GDP is significantly less than the governments transparent attempts to support the market proclaim.

Nevertheless it does seem clear that there are signs of life in the manufacturing sector of the economy with orders up. This is the only real substantial (as opposed to fictitious) signs of life that exist today. This may be partly due to the declining dollar which will assist certain industries competitiveness overseas. Yet even this is not enough to really assist an economy that is shedding hundreds of thousands of jobs a month. Indeed, October's jobs numbers were another facet of an abysmal situation. Last month alone (October 2003) saw employers announce over 174,000 job cuts, the most in a year. Consequently, when the real estate Refi's are finished and the 0% financings are no more, the economy will see more significant convulsions. For now, as long as interest rates are where they are and people are still willing to borrow more money against their homes, the economy will continue to lurch along without much more pain than we are seeing now. The fly in the ointment will be an acceleration of the flight from dollar denominated assets globally or a rise in interest rates.

On another note, I advise my readers to watch what is happening in Russia closely. The entire Khodorkovsky affair is one that has enormous implications for future energy consumption as well as the dollar. It is not a coincidence that his arrest was made during negotiations to sell part of Yuko's, Russia's largest oil concern, to US oil companies. This is all occurring shortly after Putin and the head of the European Central Bank issued public statements on the desirability of Russia selling her oil to Europe in Euro's rather than dollars. This would have been an extremely significant break with the entire international trading system that has only allowed oil purchases in US dollars. It is not clear to this author exactly what is going on with the Khodorkovsky affair and hard information is difficult to come by. It is noteworthy to see how visceral the attacks have been on Putin. Never once have I seen any pundit give Putin the benefit if the doubt that maybe the charges have merit (they almost certainly do). Instead, because Putin has had the 'audacity' to arrest a rich oil man, the entire world press goes on the offensive against him, rather than against corruption; against, 'authoritarianism' rather than for the rule of law for all, rich and poor. Keep your eye on this because the howls of the lap-dog press tells me the results will effect who profits from the world's second largest oil reserves. Russian lawmakers are also looking at another oil company, that being Sibneft. It is controlled by another Oligarch named Abrahmovich. Keep an eye on who gets to profit from Russia's enormous oil reserves by watching the governments moves against the owners.

Getting back to GDP, one good barometer of the economy and the GDP is the amount of money the the federal government receives in taxes, how much is spent by Uncle Sam and how much debt as a percentage of GDP is out there. Below we have a table and a chart that tells the story.

Total Federal Receipts 1990-2003

Federal Receipts Outlays Deficit and Debt as a Percentage of GDP  

  Fiscal Year  



 Deficit or Surplus  




 Deficit or Surplus  



(in billions of dollars) 

(in billions of dollars) 

(in billions of dollars) 

(as a % of GDP)

(as a % of GDP)

(as a % of GDP)

(as a % of GDP)

































































































































































































































































































































































































































































































































































































2003 Figures are before the war in Iraq. Source: Office of Management and Budget, Treasury Dep't, Commerce Dep't
*Latest Estimates from
Office of Management and Budget

Even though we hear the government and media making wild claims of a miraculous recovery, we must ask the question, if this is so, why is the Government, federal, state and local taking in less money...and where are the jobs that go with such a recovery? In the coming election year the governments numbers from the CPI to the GDP; from first time unemployment numbers to the size of the deficit should not be believed. This administration has shown a unashamed propensity to use lies to support its polices (i.e., Iraq war intelligence to the number of US casualties) that its pronouncements, without additional firm and incontrovertible evidence to support its claims, should not be believed.

I'm not buying any 'recovery' talk and neither should you, least not yet.

So what about the latest job numbers coming out of the government (Nov '03)? Well as usual, the latest employment figures were dutifully reported by the major news media. Massive new hirings have been reported for the first time in a while and it seems, according the to the financial media, that there are now no valid reasons to doubt the recovery. Nevertheless, there are some serious problems with the numbers that are largely touted as being indicative of a significant economic upturn. These numbers, while showing some activity in the labor markets does not tell the whole story. For example:

This does not demonstrate any kind of robust recovery, rather it shows a demonstrable downturn in wages and hours worked and with it, living standards. This is borne out by the increase in credit card debt. People are using their credit card to maintain their previous consumption patterns. This is not only unsustainable but very dangerous for the consumers and the banks alike.

Derivatives are on the rise. The continued 'investment' (more like gambling) in derivatives has increased by 20% in the first half of the year to a total of 170 Trillion Dollars. The largest increase has been on interest rate bets that place large amounts of capital in the hopes of a change in interest rates. This market is huge and there is great hopes of profits from it by major investors. But one must ask the question; how 'productive' is betting on the rise of interest rates? What is actually produced by these paper transactions? Who is really benefiting? How much leverage does this market have over Central Bank decisions the world over to stimulate national economies during an economic downturn or tighten when it is necessary? These are questions that go to the fundamental basis of the miracle 'new economy' that is in America and indeed the entire world. Money is increasingly being printed up en-mass and going into unproductive activities like derivatives and highly over priced stocks.

It is this authors firm belief that the entire global financial system is due for a house cleaning. A re-balancing of capital and production needs to occur before any real meaningful recovery will come. This means using capital primarily to be invested into the means of production, rather than as a tool for unproductive speculation. When this occurs and the massive American twin deficits (fiscal and trade)are dealt with in a significant, meaningful, and verifiable fashion, then and only then can we begin to talk of a meaningful economic recovery. In the meantime the growth seen in the American economy looks more like a malignant tumor than economic muscle.

Don’t believe The Hype

January 2004 Update

Three charts to what in 2004

US Dollar To Euro

Us Dollar To Gold

The Dow

America's much vaunted economic recovery has been touted by the media is somewhat less of a reality than we are led to believe.  The GDP purportedly grew at a frantic 8.2%  Yet incomes, adjusted for inflation rose only .8%. Jobs are still a serious issue and while economists are also touting miraculous productivity numbers, these numbers are derived from questionable mathematical methodologies. The measurement of service sector productivity reported, according to Stephen Roach, chief Economist at Morgan Stanley, is very poorly measured and is “hopelessly vague for services”. Many government statistics are far too easily manipulated by government statisticians for them to be readily believed. Take the idea of productivity and the entire idea of ‘downsizing’ a company in order to bring about higher productivity numbers. This is a highly questionable process. Many companies are using outsourcing workers especially from India in order to boost their productivity and corporate bottom lines. This coincides many economists view that productivity led downsizing and a jobless recovery go hand in hand. The more work that can be wrung out of a single person, the less likely a large company is to hire another. The rise in productivity along with the miraculous spurt of GDP growth reported late 2003 seems to bear this out. However, such a high rate of GDP growth as dutifully reported would certainly lead to more jobs. And the anemic job growth we are witnessing simply does not support these wild claims of economic activity. For example, such a high GDP growth rate would mean that the economy would be adding between 200-300 hundred thousand jobs a month. This would quickly offset many of the jobs that have already been lost during the recession. This simply has not happened nor is any responsible economist saying that it has or will. These GDP numbers simply cannot be believed. They seemed too carefully timed for boosting consumer confidence just prior to the holiday shopping season (which turned out to be lackluster). To put it bluntly other than the highly politicized release of these fanciful numbers, there is little empirical evidence to support these GDP numbers. This does not mean there has not been any growth whatsoever. That is not the case. Indeed, the weakening dollar does seem to have provided much needed additional competitiveness in select US manufacturing industries. We have seen clear signs that the manufacturing sector is rebounding. December 2003 saw the manufacturing index rise from 62.8 to 66.2, a 20 year high. Thus the weakening dollar, while troubling and quite possibly, eventually disastrous does have some measurable and tangible economic benefits.

Now we come to the crux of the matter the U.S. dollar is in serious trouble. U.S. current account deficits have ballooned to half a trillion dollars. This has helped keep U.S. consumption very high. These inflows (via foreign investors) have been seriously inhibited over the past several months because foreigners have very recently shunned dollar based securities. This is ominous and as long as foreigners shy away from our markets we must print money to keep ourselves from going bankrupt. Simply put, the more the fed prints the lower the dollar will go. The best that can be hoped for is a slow, measured descent rather than a shock. However in the long run it will mean two things for American consumers.

          Much higher prices for imports which accounts for the vast majority of America’s consumer goods purchases

          Much higher rates of interest for money borrowed.

Thus, this recovery is based more upon the machinations of the Fed (printing money) than in any meaningful economic recovery. America’s balance of payments problem is a serious one and one that will cause serious international trade disruptions in the very near future. If the Euro continues to rise, some economists believe this will help solve America’s payment deficit problem. This is something Europe will fight tooth and nail. In essence, striped away to its fundamental form, what is happening today in the Global financial system is a massive debt default of the US Government. It is a game of economic 'musical chairs' and each nation must protect itself as much as possible from the fallout of an American debt and financial collapse. The simple fact that the US government is having trouble financing its current account debt is the most significant event that transpired in 2004, bar none.

"The main theme continues -- US dollar weakness and continued difficulties faced by the world's largest economy in financing its huge current account deficit," - Mark McFarland, currency strategist at UBS.

What does this statement mean? Once again in the simplest terms, America is broke and cannot go out and borrow like it used to in order to keep itself going. This is not an obscure ‘conspiracy theory’, this is happening now as you read this. The US media has kept the vast majority of this information from you in order to forestall a panic. They do not want you to put two and two together and then protect yourself.

This President’s continued confrontational, unilateral and uninformed decision-making will lead to a serious rift between America’s traditional allies as he continues to fight and war with her traditional enemies. This will only serve to further isolate America. The opening salvo’s of this coming trade war could be seen in the steel quota and tariffs question which was quite a news topic late in 2003. Bush finally had to back down in light of the fact that a serious trade war would undermine his reelection chances, as it would seriously dash any hope of economic recovery.  A Bush reelection would certainly mean serious trade problems with our European and eventually Japanese trading partners. Such a war could actually seriously test or even undermine the WTO. Its rules may become obsolete as nations desperately attempt to protect their currencies, markets and jobs. To add insult to injury, America’s war on terror is a very expensive affair, One that America is now trying to get out of paying for by debasing its currency, thus shifting the burden to America’s trading partners. When currencies are devalued essentially a nation is reneging on its financial obligations by repaying its trading partners with something that is worth less than before. Thus America is trying to get Europe and Japan to pay for this war through a debased currency.

As Karen Lissakers put is so well in her book, Banks Borrowers and the Establishment, “The most common form of sovereign debt default is currency debasement, either directly through devaluation or indirectly with inflation” This is what we have seen with the Greenspan policy over the past several years, a concerted effort to inflate ourselves out of our financial mess. The chickens now come home to roost  in the form of foreign repudiation of the Dollar and a coming debt crisis in America.

The budgetary surpluses left by Bill Clinton have been erased by President Bush’s reckless and myopic economic, military and security policies. In just a three short years this President’s policies have erased a fiscal surplus, launched the nation into two wars and caused its currency to fall by over 30% percent. He has rattled a long term allies and stirred up old enemies as he marches confidently towards an almost assured reelection. It is his irresponsible policies bear much of the blame for America’s economic predicament, though certainly Alan Greenspan bears much of the blame as well.

The dollar’s volatile trading with the European Union , and Japan will be the economic story of 2004. As the German and French economy begin to show marked signs of recovery using far more believable economic measuring methodologies, the appreciating Euro strengthens Europe’s ability in the future to acquire goods and services using its stronger currency. The future of the Global Financial system is at stake. An important tell-tale sign in the future, in my estimation, will be to see how Russia decides to accept payment for its increasingly important strategic oil reserves. As mentioned earlier in this article, Russia and the EU have come to an understanding in principle to sell oil to the EU based in Euro’s rather than dollars. While this is far from a done deal it would appear that the Europeans and the Russians are tiring of the dollar game which consistently puts them at an economic disadvantage and leaves them at the whims of Alan Greenspan whose economic policies are highly questionable. The game leaves the ultimate holder in oil transactions (Russia) holding increasingly worthless US Dollars. However the Russians and the EU will show remarkable restraint over the coming months and even years in pursuing such a policy as it would pave the way for entirely different financial system at which the dollar would no longer be the center point. Each knows that the current United States President, George Bush and his neo-conservative cabinet would never allow Russia and Europe to trade fairly. They would launch an all out war against anyone, including Russia and the EU if they saw their economic and with it political and military preeminence so seriously threatened. This may be one of the reasons that many in the EU have sought to distance EU military security from that of NATO and create a truly pan-European Security policy and with it an effective EU military outside of American interference. It would have been unthinkable just a few short years ago to think that America would launch an invasion against another oil rich nation Iraq under conspicuously false pretenses. American strategists have attempted to drive a wedge between Russia and the EU by proposing US (as opposed to NATO) bases in the Eastern European nations, thus providing a military and economic bulwark against a Russian-EU economic alliance.

This is the dilemma that the Russians and the EU face.  Indeed OPEC well recognizes that there is a madman in the White House who will use any and all means to maintain America’s preeminence. Thus this clear and present danger to world peace, which occupies 1600 Pennsylvania Avenue, is a force to be reckoned with by those nations who wish to conduct free and fair trade among themselves without America’s continued harassment and interference. OPEC is running scared as they are aware that it is all too easy to be put on the Neo-Conservative list ‘Axis of Evil’ states. Each must tread carefully now, because for the moment each OPEC nation must take dollars in exchange for their Oil. If OPEC decided in unison to accept payment in either Euro’s or Dollars or worse yet, in Euro's only, this would create a serious financial crisis for America. As this is published Russia and OPEC are making plans to establish a ‘business dialog’. It is in light of OPEC's desire (and most likely eventual success) in freeing itself from being forced to sell its oil in dollars that one can better understand American unwillingness to leave Iraq. It is this authors firm belief that this was the plan all along. I and many other economists have said that in the near term the Dollars days were numbered. The US Administration knew that finding a source of oil that was under direct US control was essential, otherwise almost all economic activity in the US would come to a screeching halt when the dollar collapsed and oil could no longer be purchased. Remember; there never was any link between Saddam and Islamic terrorist networks. No evidence offered proved or even insinuated any such link. Additionally, time and time again, we accused Saddam of having weapons he did not posses and top policy makers, inspectors and intelligence analysts said for the record that he did not have them. Our 'War on Terrorism' was the propaganda method used to sell our naked aggression to US voters. Oil was the key and still is, because in 2-3 years barring a serious war with key OPEC nations, Oil well be available for purchase in Euro's and or (gasp!) gold.2

OPEC needs the political support of a major military player in order to break the bonds of the US dollar. It does not want to keep taking paper for its oil so until they can garner this support (Russia? EU? China?) they will have to sit still and take it. If China decided to diversify its 400 Billion dollar currency reserves into another currency say, Euros, this too would be a crisis point. Thus, we can better understand how Bush could warn Taiwan (a long standing friend) during a recent high level Chinese visit and coddle Beijing (a wiley fox than has long standing 'bone to pick' with America). He simply has no choice.

These are only two potential crisis points on the world economic scene and they are very, very real. While any move by OPEC will probably not happen in 2004, look for OPEC to make more, quiet moves diplomatically and politically to meet this dollar crisis. China is unlikely to move its assets out of dollars just yet and anger its most important trading partner. Nevertheless, neither will continue to take severely depreciated pieces of paper in exchange for real goods and hard assets.

Recognizing that America may be attempting to solve its twin deficit problem through a currency debasement, super investors such as Buffet and Soros are abandoning the dollar in favor of other more stable currencies. Additionally it will be nearly impossible for America to attract foreign investors for its Treasury Bills and bonds in future Federal Debt auctions. This is the more perilous question in my opinion, because while economists do believe that it is possible for America to shift these deficits over on to other partners through a currency the basement, the real problem will be how to finance America’s budgetary deficit without using the printing press to such a degree that our currency not only declines but declines to such a degree that is becomes worthless. This is an enormous gamble that is being taken on America’s economic future by Secretary Snow and Greenspan. It is a gamble that is almost certainly going to backfire in an uncertain and unexpected way. One way this could happen is through a series of competitive devaluations. This is one way the Europeans and Asians with the exception of China (whose currency is pegged to the dollar) could get out of seeing their markets and production dry up because of a lack of consumption by Americans. The other is through currency controls. This could happen if the Europeans in particular see the dollar becoming worthless. Unless they were being forced to take these dollars through America’s geopolitical strategies (war, cut off of oil supplies to Europe, etc3). This would certainly a cause of violent reaction in the form of currency control by the Europeans. This is not an unlikely outcome and while currency controls may not be formally introduced they may through some bureaucratic or administrative means be implemented nonetheless. Indeed America’s printing press solution is one that is increasingly being seen as a one that offers diminishing returns over time. This can be seen from the M3 Velocity rate versus GDP chart.  

There is clearly a diminishing rate of return on the FED funny money that is pumped in the economy. It’s important here to keep in mind that Europe to Asia and America all recognize that there are serious systemic problems with the dollar, with dollar based securities and the ability of America to finance its deficits and the future method of payment for key commodities in the world most particularly oil.

Make no mistake when the President of the United States tells Taiwan it had better 'behave itself' while cuddling the Chinese dragon you can recognize who is in the driver’s seat today. It is not America. While our financial elite make great pains to appear that they are in the driver’s seat and in control and have a good handle on the situation to the population at large, signs are beginning to to show themselves that this is not only not the case but that there is another battle being waged behind the scenes to see who will have economic preeminence when the dollar fails. China is the largest holdings of U.S. Treasuries and dollar assets in the world today. Nevertheless the threat of the Chinese dumping American securities on the open market in retaliation for its trade policies is not one to be lightly dismissed. And the fact that they  have been cutting their overseas holdings over the past few quarters should give us pause to consider. Japan’s problems are also going to two America's twin deficit problems. It is currently attempting to keep its currency stable against a declining U.S. dollar because such a decline makes Japanese goods in particular automobiles too expensive for Americans to buy. Thus we see the massive currency interventions by the bank of Japan and plans as well as  capital being set aside to continue this policy. The Japanese have set aside nearly $930,000,000,000 for currency intervention. This is a mind boggling sum... it’s stifles the imagination to think that much money is being put aside to prop up the U.S. dollar in order to keep Japanese cars on American highways. Yet the Japanese have no other market other than America to keep buying big ticket items. The system is in its entirety, broken and what is being offered now in by central bankers are not solutions but rather only short term fixes that in essence, fix nothing.

And what does this mean? Simple. There will be at dollar crisis in the near term though probably not next year. There are many factors coming together next year ('04). The simple fact that the FED is offering such low and discounted rates on U.S. Treasuries while at the same time the dollar declines in value is going to lead many investors away. In addition, as foreigners begin to sell the U.S. dollars; this will only cause the dollar’s decline to gain momentum as no one wants to hold anything that is consistently dropping in value. It is my estimation that not much can or will be done to stop the dollar’s decline. I believe that there has been a ‘gentleman’s agreement’ between the Europeans and the Americans has probably been reached to let the dollar decline slowly and steadily which is what we’re seeing now. There’s not much Secretary Snow can do about this despite his earlier policy announcements that this was an intentional policy. Inasmuch as he wants to sound as though he’s in the driver’s seat rest assured market forces are running the show. However, this being an election year, other factors may play a more prominently role, especially in light of America’s elite and their ability to mass manipulate public opinion. It is entirely likely that the Dow will continue to rise that may even top 12,000 just before the election in 2004. However., this will all happen while the dollar declines. Next year look for Fed officials and the Treasury Secretary to go on that national television and pontificate to the mass of misinformed and uninformed Americans that the dollar’s decline is “good for America”. This will all happen while gold prices rise, though gold will probably rise at a much slower rate than the dollar’s fall against the Euro. Americans will drink up the propaganda as usual and reelect George Bush by a comfortable margin. It does appear that America’s financial and political elite are quite pleased with Bush’s performance on the world stage. He has treated financial corruption with kid gloves and allowed the wall street fraud-circus to continue to fleece the American people. While the wars are not going quite as well as they would like, contracts are being awarded to key people and companies and they are quite pleased with the increased revenues. Thus despite the poor performance overall in a war in Afghanistan (the Taliban are back) and the fact that our war in Iraq is going very poorly (11,000 Casualties and daily attacks against US Forces), the American establishment is more than happy to pay this price in American blood for their contracts.

Having said these things the market’s rise lately to over 10,000 is an unwarranted an irrational exuberance that is based on very, very shaky economic grounds. Indeed many of the accounting scandals of the late 1990’s are still with us through the use of pro-forma (more accurately described as voodoo) accounting which allows companies to hide certain types of corporate debt. This has not changed it’s still an endemic problem in America’s corporate reporting. Because of it, once again Americans who are putting their hard earned money and retirement into these funds are once again going to get fleeced. They will get no sympathy here or on the world stage. In closing people should remember the old saying, 'Fool me once, shame on you; fool me twice, shame on me', or as Gordon Gecko said in the movie Wall Street, 'A fool and his money should have never gotten together in the first place'.

Update 1 February 2004

The US government has defaulted on some of its 30 Year US Treasury Bonds. Here is the Government press release. Yes, the US government has defaulted on its sovereign debt. We are witnessing the very first phase of the most massive debt default in human history. Be advised, this will not happen overnight. While the US Government is defaulting on its debt the mainstream media do not think this is worthy of bringing to your attention. This process is in full motion now and it cannot be stopped. The real question that must be answered for those who are really looking to hold on their assets and plan on eating and having shelter over the coming decade is this; will we have 'inflation gone wild' scenario or a deflationary depression. Deflation is where the price of assets goes continually downwards. This is not a good thing as it means that the assets that back up most of the debt America has accumulated becomes worth less and less. Mr. and Mrs. America become upside-down in their house, lose their jobs and walk away from the debt. It also means that the price of goods and services continue on a downward spiral. Once again on the surface it seems good to the consumer but here in lies the trap; as prices fall, people wait and wait to make major purchases because they know if they wait a month or so, the price will only descend. With this economic phenomenon, comes falling profits, layoffs less consumers, more layoffs, etc. This is the Fed's main fear. Yet it appears that this is probably the more likely scenario we will experience. However, deflation will not be seen in key and essential goods and services. These include, gasoline, heating oil, natural gas, auto insurance, home insurance, health care costs, etc. These will see marked increases in price while other artificially inflated assets, such as most paper financial instruments and housing will decrease in price. Indeed, I especially see fossil fuels moving steadily and significantly upwards over the next few years. Even now the first sign of the specter of deflation can be seen. It can be found in the wages of Americans now as opposed to before the recovery

The weak job market is also reflected in today's data on national income.  The final quarter in 2003 saw real labor compensation grow at an annualized rate of only 1.6%, too slow to generate a healthy self-sustaining recovery.  Since the last recession ended two years earlier, labor compensation has crept up by only 1.7%.” - Economic Policy Institute

According to the payroll survey, employment has fallen by 726,000 jobs since the end of the recession in November 2001 and employment has fallen by 2.4 million since the start of the recession in March 2001. In contrast, the household survey indicates that employment has risen by 2.0 million since the recovery began and by 600,000 since the start of the recession”. - Economic Policy Institute

Such anemic job 'creation' does not a recovery make. The Bush administration has sought to eliminate overtime pay for most white-collar workers. This is being done by a revision to the The Fair Labor Standards Act. Bush's revision would render nearly 8 million American workers ineligible for overtime. This may help his large corporate campaign donors to ease their payroll liabilities but it will not assist the overall economy to heal in a way that allows Americans to maintain their lifestyles, which in the view of the globalists (like Bush), is far too lavish. Herein lies the crux of the matter for any and all Americans. America's standard of living is going to decline significantly. This cannot be helped. One way or another the American consumer society is in for a major and long term adjustment. As long as 'Free Trade4' is the mantra of both the Democratic and Republican party as it is today, and as long as Americans do not have enough sense to inform themselves as to the real issues that are causing Americans to lose jobs and incomes, these trends will accelerate. This is because politicians know that if they do not move quickly to remove protections for workers and pass more free trade legislation, they may be discovered for what they really are; men who are funded by foreign interests to push an agenda for foreign agents to the detriment of American citizens.

A deflationary scenario is probably in the cards especially under Mr. Greenspan's inept fiscal leadership. His stewardship of the FED insures that the worst possible scenario plays out. That being a debt default and a complete reorganization of the global financial system. No, this will not happen tomorrow, not before the election though it will probably transpire before the end of the decade. The trick the Central bankers are trying to pull of is a soft landing for the Dollar, the reserve currency of the world, rather than a crash. A crash brings with it too many economic, political and social uncertainties that are difficult to predict and plan for. Thus we will see the continued spiral downwards of the dollar over the next few years. However, a sudden unexpected event could trigger a much quicker decline. Such a decline could be caused by serious political instability in America or other such events such as:

Despite the real risks to the dollar and the US economy, the loss of Jobs and the the US Treasury debt default; somehow, establishment economists, which are almost always wrong, are upbeat about the economy. That is fine, they are paid to be. Should they become too downbeat they would certainly lose their jobs at many of the nations finest establishment financed think-tanks, schools and corporations. So it should behoove the readers not to put too much stock in corporate-paid economists optimism. Such 'optimism' is usually paid for with a good salary and generous benefits and very lucrative speaking and lecture tours.

Interest Rates: To Raise Or Not To Raise

The Fed is certainly in a pickle. As one recent radio commentator put it, the FED is desperately trying to stop a collapse of the dollar or and a second great depression (not recession). The problems facing the FED are really just that serious. The decline of the US dollar, the difficulty in the US finding lenders to fund its current account deficit and the need to attract the lending will almost certainly force the FED to raise rates in the near term (3-6 months). The first increase will probably be very small and almost symbolic to assure the markets that the Fed will act to attract the necessary capital to fund the US governments spending spree. Yet the debt-laden US economy will shudder at a rise in rates. Much of the consumption that is transpiring in the US today is fueled by people pulling equity out of their homes and then going on shopping sprees, buying new cars, boats, vacations, home furnishings, etc. Once rates rise significantly this will no longer be profitable or in many cases even possible. Consumption will drop significantly leading to even more job losses and the deflationary spiral that many economists fear. Future investment into America's ailing industries would become more problematic should rates rise significantly. This the the crux the Fed has put itself into with the loose monetary policies of the 1990's. Is there any answer?

Some believe yes. They seem to think that the asset bubbles in the United States are sustainable and that a falling dollar will not impact the global economy in a very negative way, at least not for a long period of time. As long as we can force others to throw billions of dollars to prop up our currency and buy our debt, they think this can continue indefinitely. Others believe that, even given the possibility that these assumptions are correct, the huge imbalances created by Rubin/Snow/O'Neill/Greenspan's polices are the real problem and that this is where the real trouble lies. Once again I must emphasize that many of the economists who are so optimistic about the global economy hail from the corporate board-rooms are are paid quite handsomely as mentioned earlier, for their bullish sentiments. Does this mean that they are wrong? It is this authors opinion that they are, once again, dead wrong. These economists failed to predict the collapse of the NASDAQ, the fall of the Dow, the massive bankruptcies that followed (Enron/WorldCom/Conesco/Adelphia/Kmart) and this jobless so-called recovery that we must now endure. Most of these so-called economists simply lack the real independence that is required to publicly assess the situation in an honest and straight forward manner. Hence the eternal optimism and bullish-sentiment. Additionally, despite the monotonous repetition that we are in a 'jobless recovery', I submit that there is no such thing, and to be forced to use that kind of 'new-economy' terminology to describe what is happening, shows that what we are experiencing is simply a 'dead-cat bounce' in the stock market that is fueled by Greenspan's irresponsible monetary policies. 'New economy' economists must come up with a positive sounding term to describe the slow motion disaster that is now in motion to keep 'Ma and Pa America' from cashing in the 401K's and battening down their personal economic 'hatches' for the next major wave of bankruptcies, layoffs and social safety-net cuts by state and local governments. In the long term it is likely that the Fed will be able to keep the economy on life-support through the elections. This is not a foregone conclusion but given the adeptness of the FED and the financial media at putting various shades of lipstick on the same old debt ridden pig, it may very well pull it off another year.

It is quite possible that despite the growing antipathy towards this administration and its inept policies, it will be re-elected in November, though probably not by a majority and almost certainly with more sophisticated election fraud techniques than we saw in 2000. The new electronic voting machines appear to be designed specifically to steal as many votes as possible. This is a serious problem on the horizon that I see coming. Even absentee Military votes are now becoming an issue, as many in the military are vehemently anti-Bush. I do not think the people will sit still for another Florida style scenario all over again and I think there is a moderate to high probability that there will be at least some social unrest in November should such an attempt be made. The Bush administration may pull off an 'October Surprise' and suddenly roll out the former CIA asset Osama Bin Laden as war trophy. Some have suggested that he may already have been 'captured', but the release of that information will be timed for full pre-election benefit. Also remember that October is when we will need to go out and borrow yet another half a trillion dollars-plus to keep our economy afloat. Where will it come from? Your guess is as good as mine, but those who hold stock in green ink manufacturing plants and paper mills that contract with the Treasury Department probably won't do too badly come 'round October of this year.

Budgets Of Mass Destruction:

It is amazing to me to see how clueless some of the news commentators on the TV are who so blithely look at America's debt and budgetary crisis. The President has proposed a massive budget with increases in military spending and no one seriously takes the administration to task (seriously) for its record deficits. We clearly do not have the money for these programs and piling up more debt is simply not an answer that will bring prosperity to Americans. Now, if the Presidents real intention is to crash the American economy and bring in some new kind of economic and with it political system, then I would say that his budget is the way that these aims can be accomplished. I am not saying that this is the case, I cannot look into his mind. Nevertheless, when Central bankers around the world, the IMF, the G7 all are issuing warnings to the US Administration on its deficits, this should give us all pause to consider that this President is not interested in the cooperating with our trading partners and certainly is not interested in the American worker. He adds insult to injury by offering amnesty to immigration criminals when millions of Americans are looking for work. This man who grew up in a privileged and pampered world does not seem to care about working Americans or their families. It is difficult to say if this Presidents policies are based on his oft-debated limited mental abilities or spring simply from a small minded malice. What are the real aims of his economic policies? This is not an idle question. This President seems intent on removing wage protections on US workers, allowing Corporations to ship jobs overseas, flood the nation with cheap illegal labor, crashing our currency and saddling Americans with more debt that the next administration will have to deal with. These actions are not only irresponsible but taken as a whole, display a darker side to this Presidents character. Does he hate Americans? Indeed this is the same President who told us that Saddam had Weapons of Mass Destruction that is now telling us that these massive deficits don't matter.

As irresponsible as these budgets are, at least there are some cuts. He is proposing that 65 programs be eliminated all together and other real cuts (as opposed to just slowing the growth of spending) in The EPA and in the National Institutes for Health. These cuts are a good idea, but then he increases spending for the military by 7% and homeland security by 10%. This money will almost certainly go to sweetheart contracts to Bush donors (Halliburton?) and do little to enhance America's overall Security, which increasingly needs to include economic security for the nation in the form or realistic and responsible budgets. More on Bush's cuts can be found here. In light of these meager cuts the media seems to want to let Bush off the hook and not inform Americans where all of this money is coming from. The only commentator on TV that I have seen that has shown the slightest bit of courage in telling the people of America's real economic troubles is Lou Dobbs. He has done a good job of bringing key economic issues into America's living rooms. That last Major TV commentator that tried to do that suddenly and mysteriously left a government funded Television Corporation a couple of years ago after decades of employment there.

Note: I realize that this update was more of a political nature than an economic one. However, one simply cannot look at America's economic predicament without analyzing the political decisions made and the decision makers that are implementing these policies. It would be like trying to give a detailed description of the combustion engine without ever mentioning the word gasoline. Such a description would be incomplete and somewhat deceptive. Therefore, I decided to look at some of Bush's economic policies and since this is an election year, I thought my readers would find it relevant.

27 Feb 2004 Update

The Train Wreck Continues.

Coming to a neighborhood near you - foreclosures. Foreclosures are becoming such a problem in some areas that moratoriums on auctions are being proposed. Predatory lending, default on Second and third Mortgages and unemployment are the primary causes for most foreclosures. While the legality of these moratorium is questionable it does show an alarming trend in the housing, lending and banking sectors of the economy. This will only translate into serious problems for state and county governments as tax receipts for these properties will either not be paid or be deferred. This adds insult to injury as many local governments are already dealing with fiscal shortfalls. Who is going to buy these homes? This is the problem that we will see in the housing markets nationwide. As jobs go to India, no one will have the money to pay a $2000 a month mortgage. Eventually this will drive home prices downwards, at least in certain regions of the nation. It does seem that other parts of the nation (like where I live in the DC area) will not see such declines right away because the entire local economy is based largely on Federal tax receipts and Federal Debt. This is because a sizable portion of the residents are people that are employed by or are contracted to the Federal Government. Thus, this region has been somewhat insulated by what is happening in other parts of the nation. Yet in other parts of the nation housing prices are skyrocketing. Parts of Northern California has a median price for a single family house at half a million dollars. These prices are outrageously high, not so much because people can really afford these homes but lenders are creating new types of mortgages to get people who could never afford these homes qualified. Interest only loans, various creative approaches to financing are also coming to market. Where as the old rule of spending 2- 3 times ones annual income on a home, now the rule is 4-5 times and in some cases even higher. This saddles the homeowners with a huge debt load and when the market heads south as it sooner or later will, these poor souls will wind up upside down on their mortgages. Yet, with the market as hot as it now, with prices in California rising about 20% per year, many buyers see this as a golden opportunity to get 'in' on the boom. As far as foreclosures are concerned, there are real problems underneath the surface. The market euphoria is based on the expectation that Jobs that pay enough to support a high mortgage are being created, but this is patently untrue.

MBA's delinquency rate does not include loans that are in the process of foreclosure. While seasonally adjusted delinquency rates dropped dramatically during third-quarter 2003, the percentage of all loans in the foreclosure process remained flat and the percentage of new foreclosures in the quarter increased. The foreclosure inventory percentage at the end of the third quarter was 1.12 percent, unchanged from last quarter but three basis points lower than the third-quarter 2002 rate of 1.15 percent. - Mortgage Bankers Association

Deciphering the housing market is an important part to solving the puzzle of what is keeping the US economy afloat. Mortgages, debt and refi's are the primary drivers of the economy and as long as rates stay low, it will remain so as lenders are not looking too closely at the creditworthiness of their borrowers. Rather, they see it as just adding another asset (loan) to their balance sheets. Here we can see where the coming economic depression is becoming somewhat regionalized. Debt and the accumulation if it are not being discouraged but rather encouraged by the US government, the FED and lenders. What will happen when these people find their job has been shipped to India? What happens when a Merger and Acquisition makes them redundant? What happens when those who are employed by state and local governments get the axe because of a declining tax base? You figure it out. The housing bubble however is not going to be the first bubble to burst in my estimation. Other problems exist that will probably weigh in first.

As already mentioned in this article the biggest problem is funding the deficit and attracting lenders. This year Japan has set aside $575 Billion for US dollar purchases in order to shore up the dollar to keep their imports from becoming too expensive for Americans. The Chinese have set aside about $150 Billion for the same purpose. That makes about three quarters of a trillion dollars set aside for the sole purpose of propping up Uncle Sam and thus protecting their markets. This has assisted in keeping the rate of inflation in the US for many consumer goods at a moderate rate, however the rate of inflation for other commodities is rising rapidly, from fuel to soy beans, steel to copper, inflation is not only present but rising rapidly.

Corn -

Copper -$COPPER

Natural Gas -$NATGAS

Gold -$GOLD

Soy Beans -

Note: Please do not pay attention to daily fluctuations, but rather, note the long term trend.

The trend is upwards for the prices of key goods and downwards for the US dollar. Indeed it is rather suspicious that the Government has delayed the release of the Producer Price Index report. With the price of many commodities rising so fast the real numbers will certainly be either buried in the report or a new methodology will be created to say that a 140% rise in prices is really only a .05% rise in price.  The policy of Greenspan, The Fed and Congresses' drunken sailor spending are wholly responsible for the predicament that America is in right now, it is disrupting the value of the dollar and will soon begin to disrupt trade. Japan and China cannot continue to dump so much money into the Washington DC 'black hole', not even to protect their markets. Sooner or later they will have to step back in order to protect their own currencies so as not to disrupt trade with other smaller trading partners. Throwing money into the American sinkhole, they realize, is only a short term solution. If America cannot get its fiscal house in order and bring down its deficits, they will be forced to (reluctantly) withdraw their support. Let us remember this; foreign central banks own 1.6 trillion dollars of US treasury debt this is 36% of all outstanding treasuries. In other words, America is accumulating debts at the rate of about one million dollars a minute! America's twin deficits (all the borrowing the government has done in our name, trade and fiscal) have not and will not pay for Social Security, Medicare, Infrastructure, business development or even education. It has only fueled reckless Congressional spending, pork barrel programs, and even some rather substantial theft and corruption (of the criminal nature). If the borrowing had gone into future investment or even investing for future liabilities (Social Security) then perhaps our massive deficits would have some purpose. Instead it fueled mindless consumption and stock market excesses. Where does this leave us?

- Richard Duncan tells us here.

The Consumer is tapped out and any hope for more consumption by American consumers needs to be tempered by the fact that they are already up to their necks in debt. American consumers have now passed the $2 Trillion mark for consumer debt and pays about $2000 in finance charges and fees. Somehow economists think that Americans can go even deeper into debt to fuel more consumption. Delinquencies are already in record territory at 4.09% according to the American Bankers Association. How can anyone think that a real prolonged economic recovery is underway?

Household debt to Disposable Personal Income.

While Greenspan goes up to the Hill and testifies that he is confident of an economic recovery, incomes are declining and debts per household are steadily increasing. This will not bring about any kind of a recovery, as he well knows. However, he simply cannot go up there and say 'no recovery exists nor is it likely to exist for the foreseeable future'. No way! He must sound as confident as he can so as not to rattle the markets. Yet he is becoming bolder and bolder in his official statements (text of Greenspans testimony) warning of a looming budgetary crisis if Congress does not reign in spending. He has also mentioned a looming crisis in the mortgage industry. Freddie Mac and Fannie Mae as they are referred to, have have about $4 Trillion in mortgage debt that they guarantee. These entities are quasi-governmental. While they are not actually guaranteed by the government they do have certain privileges that others do not, such as have a direct line of 'credit' of $2.5 billion at the US Treasury should they need it. Additionally, the markets assume that they are de-facto guaranteed by the Government because of their size and federal supervision. Greenspan sees this as a near term rather than a long term one, here is a statement from his testimony;

"To fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later” Greenspan

Now the heads of both Freddie and Fannie quickly responded saying that a problem was unlikely. Nevertheless, serious accounting irregularities recently discovered show that the problems that exist are not likely to be trumpeted by the heads of these institutions. Let us remember that Freddie Mac recently paid a $125 million fine for misrepresenting earnings. Indeed, the affair reminded one of the cowboy Enron days, Freddie was heavily involved in derivatives and herein lies the risk; if interest rates rise significantly, these GSE's could implode not unlike Long Term Capital Management did. This could and almost certainly would bring down the entire US financial system. Perhaps we can see at least one of the reasons Greenspan has been hesitant to raise rates and why he is sounding alarm bells to congress on these entities. Read between the lines, 'I gotta raise rates in the medium term guys, if I do that Freddie and Fannie are going to go under, fix this problem or there will be hell to pay!'

Greenspan also offered another solution to America's fiscal crisis, cut social security. His suggestion of course is to raise the retirement age. It seems that if they can raise the retirement age to the day after ones death, this would solve the fiscal shortfalls that we are facing. They are so massive that a reorganization of Social security will have to be addressed by the next congress. Therefore be assured that congressional elections this year will be especially important because Congress will be forced to come up with at least a temporary solution in the next couple of years. In short there will only be two things that can be done; raise taxes or cut benefits. One or the other, short and simple. Remember this, President Clinton allowed the trust fund for Social Security to be raided. That was how he balanced the budget and claimed a surplus. Congress allowed it because they could fund their pork-barrel programs on your retirement money. This is one of the reasons that we are in the predicament that we are in. The United States Congress, the Unites States Senate and the President of the United States have perpetrated a massive fraud on the taxpayers. The American people will pay for this deception in a horrible almost unthinkable way. But it is my opinion that Americans are to blame for this predicament. When Clinton stole the social security trust fund, people applauded him and supported him until the day he left office. The same can be said of the Congressmen and Senators who assisted him in this theft. Even today the primary challenger to the Bush administration is another insider that brought you the mess that we are in. How can people expect anything but more fraud, debt and lies? How can they presume to think they deserve more? The people went right back to the polls and put these thieves back in office. Americans have no one but themselves to blame for this mess. Well, no one but themselves will pay for it... and pay they most dearly will.

Now, when the baby-boomers are about to retire (that is, those who have paid into this system their entire adult lives), Greenspan wants to pay them at a later date and perhaps (though this is never said but it is a looming reality) they will not get paid at all. Social Security is an area of concern to Greenspan because its liabilities go to the overall perception of economic health of the nation with foreign investors, upon which we are now completely dependent to maintain our government budgets and fiscal outlays. Thus, their willingness to continue to invest in (prop-up) the American economy is now of paramount importance.

Liars For Dollars

The phenomenon of Cable TV financial news reporting here should be quickly mentioned here. One must remember the rampant conflicts of interest that plagued so many of the nations top financial news networks and the classic 'pump and dump' routines that were common just a couple of years ago. Big names in financial TV were named. The activities of these charlatans makes one wonder if the Gambino crime family moved its operations from the NY Harbor and the sanitation authority into the offices of Wall Street and the financial press. The antics still continue, no mention is made of the dollar crisis, the social security crisis, the Freddie and Fannie crisis, the looming bankruptcy of the State of California. No, it is always good news about some massively overvalued tech-stock or getting 'in' on a questionable merger and acquisition. Spin, spin, spin is all you hear from these networks, spin designed to get Mr. and Mrs. America back in Wall Streets scams and retirement robbery corporations. One network is particularly bad, as it is partially owned by a major defense contractor, its objectivity should be seriously questioned. It is my observation that their advice is not geared to assist the average investor but to drive their money into the stocks that most benefit themselves, their investors and advertisers.

Now another aspect of the economy that I want to cover is the supposed economic boom that we are experiencing now. One of the first things that needs to be remembered very briefly here, especially when we are looking at Corporate earnings, is that they are inflated. Pro-forma accounting is still with us and it's skewed and rosy impressions are deceiving many investors into stocks that will one day, just like Enron, go belly up with seemingly no rhyme or reason. Signs of a stock or company that may be hiding its true situation were listed in John Dorfman's article on Thirteen Tip-Offs That Earnings May Be Inflated published by Bloomberg. He listed tell-tale signs that a company may be in trouble despite a rosy balance sheet. The accounting troubles that brought you Enron, WorldCom, Adelphia and the rest is still very much present and will take your retirement down the same proverbial toilet. It would be wise to remember this when you hear of stunning earnings reports coming from bubble vision's financial charlatans when they trumpet another market rally on Wall Street.

In closing, economists are saying that the economy is strong. There are many positive signs that lead one to come to that conclusion. However, a closer look underneath the surface show many deep problems in the US economy that are not going to go away with a barrel full of hope and cannot be 'grown' out of with even the rosiest of economic scenarios. They require very tough choices and a major readjustment of national priorities if America is to remain a dominant power at the end of this decade, and that is not very far off at all.

1 April Update

Most people will not have a clue as to what is about to transpire. I confess, I do not either, at least as far as exactly how it will all transpire. Rather than looking just at the latest numbers bantered about in the financial news, this update will do a little prognosticating. We will look at exactly how some of these fundamental imbalances could play out in the economy. Despite the rather alarming title, this author does not believe that a depression like 1929 will happen. Long bread lines and people collecting unemployment will not be the order of the day. The depression will have a much different look, and we are just beginning to see its ugly face.

Indeed in many ways it will be uglier than that of 1929. This will be, in my view, because once this things really begin to decline in an even more visible way, there will be no way out. No economic model will exist to bring America back to her former glory and the decline we will experience will be a permanent one. One of the main problems that has been apparent in the world economy has been the fall of the dollar. Its decline in value has not alarmed most Americans yet because it has not really effected their wallets. The trend of a declining dollar is one that will slowly erode the living standards of most Americans. Because Americans are a far greater importing nation than others, it is far more sensitive to currency fluctuations than other nations at least as far as the consumption side of the economic equation is concerned. As far as production is concerned, a falling dollar is very helpful to some industries, however, many of the industries that would ordinarily benefit from a falling dollar have already moved their production facilities overseas and will not only fail to see any benefits, but may be mildly hurt by a falling dollar. Even now the first real effects of a declining dollar can be seen in the price of gasoline, heating oil and natural gas. While the pundits on bubble vision speak of 'tight inventories' and other factors that are often less tangible5, one that is rarely mentioned is the fall in the value of the dollar. Another is that we will soon reach a critical juncture in world oil production known as peak oil.

Soon, it will be too expensive for Americans to drive their cars to work every day. No, I am not a 'chicken little' saying that this is going to happen tomorrow, but in the not too distant future, as gas prices hit 4 and 5 dollars a gallon, it will just be too expensive. Keep in mind that this is the best case scenario. A steadily rising commodity price index, and steadily falling dollar and Americans making the necessary adjustments over time has been the goal of the Fed and American policy makers, in my opinion. This is one way they feel that the massive fiscal imbalances can be dealt with. In the scenario that is now playing out, Japan can be used as a rough example. Japan has endured asset price deflation in key economic sectors. This is slowly happening in America, however a real estate deflationary scenario is one the the FED is very much trying to avoid. This is a primary danger to the US economy because it would bring about a deflationary spiral that would seriously undermine the big banks. It would cause the housing market to tank, and as people lose jobs as they are now doing and taking jobs that pay less, the homes they live in will be worth considerably less this will

  1. Bring to a halt the mortgage refinance based consumption that is helping to drive the economy

  2. Leave the banks with a assets (homes) that are worth considerably less when people are forced to leave because of foreclosure.

  3. Harm big GSE's who guarantee many of the loans and have huge interest rate sensitive derivative positions

Yet the experiences of the Japanese is really not a very good example because the Japanese people are a nation of savers. This is how many were able to get over the 'hump' by using savings through the difficult period. Additionally, in spite of the fact that Japan has had many scandals in its past, its leaders by and large, seem to be genuinely concerned for their people and make policy decisions that are less destructive to the economic landscape (especially when considering future generations) than their American counterparts. In America this simply is not so, our government has already looted Social Security and now is making a mess of Medicare. The US government is far more corrupt that Japan's and any solution that could have been made to heal America's predicament will never be make by the Republican or Democratic parties and any such candidate who makes such an attempt had better decide now what he wants on his tombstone and stay out of airplanes; just ask Senator Paul Wellstone and Senator Mel Carnahan. In addition, the Japanese were not saddled by the massive budgetary, and trade deficits that plague the US. Thus, those who like to make comparisons between the two are somewhat mistaken. It may not be 'apples and oranges', but may be described as 'oranges and tangerines'; similar but certainly not the same. Thus we come to what is most likely to transpire barring the failure of the afore mentioned best case scenario. And let us remember this salient point, US Credit card delinquencies are still running historical record highs.

A financial crisis brought on by a derivatives meltdown or a banking failure is the scenario that is the most frightening and has the real possibility of bringing down the Global economic system. It has long been my personal belief that America has already had two major banks fail in the past 5 years. This may seem like a shock to many because these failures were never reported by the media for what they were. Instead, rather than cause a panic, merging banks when one is very weak and/or failing is done. I cannot state this as a fact, indeed most of the banking mergers we see today are simply an outgrowth of market consolidation and streamlining that is fairly natural in this type of long term economic cycle. Nevertheless, even today you have yet another big bank getting hit by a massive fine (as in an SEC record), and is involved in the largest bankruptcy in Europe's history and has been involved in what can only be described as a cover-up regarding documents on many transactions and then is suddenly merged. Any clear thinking person has to ask some questions. One shotgun bank wedding took place shortly after the Long Term Credit Management derivatives meltdown. We must note here that many very astute commentators recognize that one of the reasons that banks are merging with such rapidity is that big banks want to be 'too big to fail', thus guaranteeing (they hope) a government bail-out. A derivatives meltdown is a concomitant risk that is quite possible should a major bank fail. A big interest rate hike, even spread out over time, could bring down America's GSE's (Fannie Mae, Freddie Mac) this is a danger covered in the 27 Feb update; and remember this, Greenspan has already dropped the hint that rates are going to go up, stating at an insider social event that the current Fed Fund rate ``is inconsistent with general long-term stability''

Jobs are still, very much a problem and only 21,000 jobs were 'created' nation-wide and all of these were public sector jobs; that is the salaries are paid for with tax money. The real economy did not produce any jobs. What is really rather amazing is that Lou Dobbs, who I mentioned in the last update is being vociferously attacked by others in the financial press for bringing to light the fact that Americans are looking for work and want answers as to why we are sending all of our high paying jobs overseas. I must say that the folks in the mainstream financial media are a truly evil lot. Like a rabid dog on a golden leash these foaming-at-the- mouth cover-up artists show a calloused disregard for the average American who has worked hard all his or her life and then must watch his job go to India, while his pension fund is under-funded (or looted) and Congress uses fraudulent accounting tricks to loot Social Security. Yet when someone like Mr. Dobbs shows some real moxy and decided to tell it like it is, he is viciously attacked. Jobs are going to be the perennial issue for the rest of the decade and beyond. The financial pundits of our perverse American society want to make sure that this 'unimportant' fact stays off the airwaves, lest you come to your senses and realize that neither one of the two major parties have any plans to change this trend. Rather, despite their campaign rhetoric, they very much plan on accelerating it with many more NAFTA-like trade agreements. They won't be happy until every American is working in a sweat shop for 16 hours a day for 5 cents an hour. They will hail it as 'increased American competitiveness', while you go hungry.

Inflation is also going to be an issue in certain key 'must have' sectors of the economy this includes energy, most food commodities, insurance and important industrial related minerals and metals. This will be where inflation will show its head first and indeed already has, if one has received their winter heating bills and buys gasoline on a regular basis can attest. This is a trend and not an aberration. Expect it to continue for the rest of the decade, energy will rise for the foreseeable future. This was reflected in the BLS's recent PPI calculation. It showed a marked increase in energy prices, this after a long and rather suspicious delay6 in its release. The PPI is a key inflation indicator as it is the price that producers (manufacturers) must pay for goods. When their costs go up, those increases are reflected in the prices you pay for items not quite yet manufactured. Many have kept a close eye on the PPI, because it was not as much as a political 'hot potato' as the CPI (Consumer Price Index7). The recent delay and puzzling excuses made for the delay in releasing he PPI will probably mean that it too will be a barometer of the whims of Washington rather than economic reality.

Since the last update the following significant financial events/trends transpired. I realize that this page has an inordinate amount of bad news So for a change rather than just recount all of the bad I will relay some of the good that is happening as well. Is there any good news out there? Yes, quite a bit. Those who are investing in key commodities gold, silver, steel, oil, will do well, probably very, very well in the months and years ahead. If you are an investor it would be wise to listen to those who are recommending that you move into commodities. I personally cannot make any recommendations but there are those who do and can. Other than a very few energy related stocks, I am out of the market and plan on staying out of the market for the foreseeable future. What little money I have in the market, I can afford to lose. Here is a short list of some rather good things that have been happening in the past couple of months:

The Good

Auto sales increased by 2.5% (includes Auto parts)

Target and WalMart report increased sales

United technologies raised its revenue forecasts

Carrier Air Conditioner is seeing rising sales

Housing sales surged to the fastest pace since August

Durable Goods Rose 2.5% In February

The Banking Industry showed strong Growth (assets jumped $173 Billion for the First Quarter)

The IRS refunded $86.8 Billion To Taxpayers as of 27 Feb. A 10.% Increase over last year/same period and refund amounts were up 4.4%

So yes, there is good news out there. However, it is like a man who just varnished the sides of this beautiful yacht and says 'man, it really looks good', the problem is this: that coat of varnish is not going to save it from the 90 foot tsunami that is heading his way.

While many out there are predicting a massive disaster just over the horizon (that never seems to arrive), I just don't see it. I think that if a serious derivative nightmare and/or banking failure can be averted, and the dollar does not go below .65 Euro's, what we will see is a long, slow ever descending standard of living for most Americans until their lives look more like a third world nation than it does today. This will happen over the next 5-10 years. In the days ahead look for basic public services to slowly erode, crime to rise, homelessness to become even more of a major problem. As we look at the latest credit card delinquency figures issued in March, we find that a record was set for the fourth Quarter of 2003. The number of people over 30 days late on their payments rose by 4.4%. Not only that, but those people who are looking for work (presumably many of these are using credit cards to stay afloat) had increased to a 20 year high of 20 weeks without work. What kinds of Jobs do they eventually find? Well, a recent story on the rise of the temporary worker is probably a good indication. Look for those with real wealth to either leave the US or live in very exclusive, high security neighborhoods. Look for the poor to be just about everyone you know as they work two jobs and live in two room apartments with 10 people living in it in order to pay rent. Even now the rise of multi-generational households shows this trend is real and accelerating. This will be because the basics, (food, energy, transportation) will be too expensive. This will be the inevitable result of the Democratic and Republican economic policies over the next few years, if left unchecked. That does not mean that banks will not fail and major companies will not go bankrupt during this period; they will. It just means that the media will be strictly controlled and that while all of this is happening people will actually believe that these things are 'normal' and even 'good' and that there is nothing to worry about. The real tragedy is that the vast majority of Americans will believe it. I will close with a quote from an article written by Dennis Chamberland called “It's the Depression Moron”

The truth is, fellow morons, the Emperor of the economy is, at this very moment, butt naked.  He sold his clothing, all of it.  He had to.  And there he stands out on Wall Street, grinning and flashing his wares to everyone who wants to actually open their eyes and see. But the Emperor has managed to print up enough money and pass it around to an army of people who can speak the contemporary financial vernacular.  Working together, this vast sea of conflicted financial professionals have managed to convince an entire population of reasonably intelligent, public school educated, neo-Darwinian evolved humans that this economy that our former President referenced is robust and ready to roll onto new decades of boom and bubble. The fact is, winter is coming and the Emperor is about to freeze his exposed rear off.  The unmistakable signs are all around us, including ice crystals forming on both red cheeks.  We are being systematically lied to by the army of economic prevaricators bought and paid for by the ones who will lose their political and economic shirts and perhaps hung in public ceremonies if (when) the populace ever finds out they have been purposefully duped.

6 April Update

The job situation in America is shaping up to be a key issue in the Presidential election. It appears that the BLS is playing ball with Bush (after all, it is part of his administration) and laying the groundwork for a miraculous jobs recovery...on paper. The recent revelation that the economy created 308,000 jobs is great news, if it is true or perhaps more to the point, if it is telling the whole picture. One of the most important measures of employment that the BLS puts out is its Alternative Measures of Labor Underutilization. It includes total of all unemployed including those who the BLS statistically eliminates from the mass-media announcement. This figure actually increased from 10.3% to 10.4%. You see, the government is really using a smoke and mirrors game to simply not count millions of Americans who cannot find work. The BLS just assumes that if you have not found work after an arbitrary period of time that you should not be counted, thus you have the fantasy numbers of 5.7% unemployment repeated like a mantra on every financial news network. Remember that this number includes temp workers as they are counted as employed. The touted job creations are a massive spin control program using fraudulent and very shady statistics. The real picture can be seen with a very deceptive trick that is often used by Wall Street; that is using news 'distractors'. What I mean is this, the bad news was out there, but it was not released until the headlines were filled with the 'good news' of the (mythical) job creations which was screamed at the top of Wall Streets lungs. Yet the bad news released on the very same day as the miracle job numbers; the bad news was that was Sun was cutting 3300 jobs and Gateway was cutting 2500 jobs and closing all of its stores. This is an old magicians trick, point people in the other direction and do your little trick. This is not said to simply chide the Bush administration for its deceptive practices. Kerry's jobs proposal is another sick joke, he cannot create Jobs in America without renegotiating the free trade agreements that he firmly supports (NAFTA GATT/WTO). Both of these candidates are part and parcel of the problem as to why we cannot create jobs in America that pay a living wage. A vote for either of these Skull and Bonesmen is a vote to ship your job (stop looking around, I really do mean Y-O-U-R job) overseas. Why? Because sooner or later your employer will be forced to ship your job overseas or go out of business. It is really just that simple. Ross Perot was right about 'That Giant Sucking Sound', it just took longer than most believed because Clinton-Greenspan printed up trillions of dollars of paper money, shipped it over to Wall Street and they put it all in stocks to drive the market to lofty heights. This was called called prosperity and the 'New Economy'. You see, ordinarily when you do what Clinton-Greenspan did you get massive price inflation. Well, we did get that price inflation however, they were very, very shrewd. They only allowed the big boys on the street to invest the money in stocks and strongly encouraged Americans to do the same with their retirement money. They called the inflation they created 'prosperity' because instead of the price of milk and bread going up, the price of stocks went up in their place. The people bought that lie hook, line and sinker. Now, like the same proverbial fish, they are being gutted on the table by the same crowd as they line up deals in Indonesia, India and China to build new computer chip manufacturing plants, call centers, automotive plants, textile centers, banking offices and just about everything else except landscaping and barber-shops, which they have not (yet) found a way of exporting. However, if globalization continues on the way it is, you will on day be able to get on the net, order a haircut from a Chinese website and some guy will show up at your house with a pair of scissors and charge you one dollar for a great haircut and scalp massage. However, the barber will live in a shack with 30 other people who got here illegally. He will have to kick back 70% of his earnings to the slumlord who will kick 50% of that back to crooked INS agents. This is the true face of globalization and if it is not changed, this will be the future, like it or not.

When will the people wake up? Not in time for the November elections that is for sure, but slowly, little by little, people are beginning to see what is happening, they just don't know what to do about it. I can offer only this word of advise and I will say it clearly, succinctly and repeatedly. Do not vote Republican; Do not vote Democrat. A vote for them is like handing a gun and a handful of bullets to the guy who just broke into your house to rob you. Only a fool would do that, and there are about 290 million of them in America.

12 April Update


It looks like the jig is just about up in the housing market. It remains to be seen how long the housing boom can continue. Foreclosure rates in Denver are running at 67% above last years rates. Nationally the trend is 14% above last months (Feb) listings. This is an alarming trend that has not been fully explored by the national financial press. This is going to cause even more problems for the housing industry than just a rise in rates. It will be more difficult to find buyers for foreclosed properties at higher rates. This makes it difficult for everyone. Indeed the Mortgage Bankers Association is predicting interest rates to rise to around 6.2% by the second quarter of 2005. One of the good things that these low rates has done is that it has increased the number of people who own their own homes to historically high levels (See Chart). This is good, the bad news is that as job losses continue, many will lose their homes. I frankly see no way these high home prices can continue, outside of a deliberate and massive FED inflationary policy. If Ben Bernanke gets the FED job (this is more than just a slight possibility as Greenspan is up for reappointment in June) then a rampant inflationary scenario becomes more likely. Such an eventuality will cause everything to rise in price including and most importantly housing. Dr. 'Helicopter Money' Bernanke at the Fed would would be like having Rumsfeld at the DOD; with him we have seen military disaster after military disaster (the Taliban are back in Afghanistan and Iraq is truly a quagmire). With Bernanke in control of the FED it would be like having an economic disaster sitting next to his woeful twin brother at defense. It will be the twin pillars of American power in the hands two men with questionable abilities. It is very unfortunate that President Bush chose this man to resume his place as a FED governor. His public statements are very irresponsible. While many have said that he is merely taking some of the heat off of Greenspan, it seems that this is not very likely. It shows those of us who are not swayed by the financial press that the emperor is in a panic and is running out of options.

It is housing that is keeping the economy afloat and it is very much in the FED's interest to keep housing valuations high. How they plan to do this while America's best jobs are being shipped to China and India remains to be seen. It is a trick, however that will eventfully backfire.

Financial Corruption: How Deep is it in America?

New York Sock Exchange Head Richard Grasso meets with FARC Commander, whose primary source of income is Cocaine Trafficking.

One the factors that so many pundits fail to address with any depth and scope, even those who hail from the 'bear-market' and 'alternative' financial media is the level of financial corruption in America. This corruption may seem like a minor aberration in the American financial system. I can assure you that it is not. It is an important, if not primary reason that the American economy is in the dire condition it is in today. Don't let any financial pundit who is afraid of not being 'politically correct' tell you otherwise. Don't let the cowardly financial press try to explain these things away. The corruption is so big and massive that if it were stopped:

So what kind of numbers are we talking about? Just how much fraud is there in the financial system? First let us look at just one very important discovery made at the Defense Department. Internal Auditors at the DOD discovered that unsupported accounting entries at the DOD amount to over one-trillion dollars in the fiscal year 2000! That is over one trillion in just one, single unitary, lone year in unsupported accounting entries. The internal audit report acknowledges long term accounting deficiencies and management problems at the Department of Defense. Now let me ask you a very simple question.

How do you lose a trillion dollars and have no one go to jail?

The short answer is this. You don't. It simply is not possible. What is far more likely is that people in power are stealing this money and have been doing it for years. Many will not like this conclusion because it smacks of 'conspiracy theory'. But that brings us again to the original question. How you lose a trillion dollars a year and have no one go to jail? A million maybe, A billion? It would raise eyebrows. But you are talking about enough money to fund HUD, Education. Transportation for a very long time. Yet no one is investigating this no one seems to care and know this; the money is gone, adios, bye-bye, hasta-la-vista. No one knows where it went and it seems from the extremely strange and reaction from the Federal government that is, those in the Congress, Senate and the President, that they DO NOT WANT TO KNOW where it went. There has been no substantive investigation, no criminal prosecution and none is planned.

As Congress finds new and better ways of spending your tax money and some of our troops go to war without adequate equipment, the DOD has lost more than enough money to fight several wars. Dearest readers, my fellow soon-to-be-dead-broke Americans, no one is that incompetent. Such a level of financial mismanagement is impossible without the highest form of political protection. One of the most intriguing books to come out in many years is Rodney Stich's Defrauding America. It is a book that really delves into this shadowy world of politically well connected financial fraud. It shows clearly that it is not a partisan issue but one that deeply involves both political parties. We are not dealing with isolated acts of fraud by disgruntled or greedy civil servants. But with an organized political machine that has been embezzling the American taxpayer for decades.


No one likes to talk about it, certainly not in the financial press. But drugs are very much part of the equation in keeping the American economy afloat. The picture above is the head of the New York Stock exchange embracing the head of the FARC. A rebel group in Colombia that gets about 65% of its revenue from the drug trade. The FARC is on the State Departments terrorist list. The FARC gets the rest of its money from such high minded activities as kidnapping, ransom and blackmail to name just a few.

So why is Grasso visiting with a terrorist?  I mean lets face it, they didn't meet by chance at a New York coffee shop.

It is very simple really. He flew to Colombia because he wanted the FARC to invest its growing revenue from illicit drugs, and kidnapping in the New York Stock Exchange. You see if Americans take off their partisan blinder long enough they could clearly see that there is no war on terrorism. It is just a facade, a fake, a lie to deceive those that have that child-like trust in the US government. If terrorism were the real issue, Grasso would be in chains in Guantanamo Bay. He isn't. And I have news for you, he will never be.

The real issue is money. If you've got lots of it, the NYSE wants to be your friend. They do not care how you got it. Interestingly, Mr. Grasso is also most curiously unconcerned with US laws regarding consorting with terrorists and drug dealers. Is it because Mr Grasso cannot afford a lawyer to warn him? Mr Grasso made over $30 Million in the year 2001. Now, I may not be the smartest guy in the world, but I think that means that he has the financial resources to afford a decent lawyer.

Why is the financial press not asking hard questions? There are no hard questions. You have the head of the NYSE meeting with terrorists drug dealers, the DOD can't find a trillion dollars and you have drug money from many, many sources flowing into the American financial system. The only real question is this? Where is John Ashcroft? Why is he out chasing down naked women on Cable TV when billions of dollars of drug money is flowing though America's banks and stock exchanges? Why isn't NBC, ABC, CBS, CNN holding the administrations feet to the fire on this? This almost certainly because major defense contractors and these very same banks are major stockholders in these media conglomerates. I could be wrong as to the influence the major stock holders have on their employees; perhaps every single news rooms across America just fell asleep at the same time or maybe the power went out every time they started to write the story, perhaps aliens from another planet told them not to report it. Who knows? (yes,I am being facetious). No, I think that far more down to earth reasons are to blame. That reason is corruption.

Before any of you decide to get upset with me over this sudden change in direction this weblog has taken in this installment just look at the US Senate Report on Money laundering. While it steers clear of naming names it does show the mechanics and scope of this most pressing problem. Over half a trillion dollars a year gets laundered in US banks.

Need more proof of high level influence drug dealers have in America?

Who is that chubby guy with Hillary and Al? He is Jorge Cabrera. He had felony Drug Convictions before those photo's were taken. Since then he was arrested and convicted for smuggling three tons of cocaine into America. Why is he meeting with such high level Democrats? Simple. He gave lost of money to the Democratic party. You see, if you took that kind of money from a drug dealer the laws on the books today would give the Justice Department the right to sell everything you have without giving you any notice or recourse and take note of this most important fact; in many forfeiture cases a persons innocence is not considered to be relevant. The laws on the books are just that draconian. Yet here the people of power take this money, get elected on drug money and there is not even a whiff of scandal from CNN, MSNBC, FOX, ABC, etc8.

Yes, the financial corruption emanating from the those who hold the reigns of power in America is deep seated and, in my humble opinion, immovable. Notice that I did not go into the fraud at WorldCom, or why, after over three years, Ken Lay has not even been charged with a crime when the entire Enron empire appears to have been nothing more than one giant money laundry and ponzi scheme. To go into all of these would require not just a book but an encyclopedia. There is so much fraud and corruption in the US financial system that many foreigners have pulled their money out. I realize that this is not what any of my readers want to hear. But I give you a word of caution here; you should be ever so suspicious of financial news networks and even alternative financial news web sites that never go into the issue of financial corruption with any depth or those that only seem to propose a few accounting rules changes to 'fix' the problem.

The vast majority of the problems that exist today are not accounting or even regulatory problems. They are a problem of criminal prosecution. The laws are already on the books. The Federal prosecutors are not doing their jobs. Today, State prosecutors who try to do their jobs get all kinds of interference and (i'll say it) obstruction from the Fed's9. When they are finished messing up the States case for them or wrest control of the politically connected cases, the well heeled and politically connected crooks get only a slap on the wrist. Some of these Federal prosecutors appear to be simply stooges for the very corrupt elements that are robbing people blind. These prosecutors show great zeal when going into ghetto's and barrio's but always have some excuse as to why they cannot do the same things at the major stock exchanges and the big US banks who launder the proceeds. The only answer that makes the slightest sense is corruption at the highest levels of the US government. One need only look at the fraudulent methods used to fund the Social Security trust fund (they simply put IOU's in it and call it solvent.) to see something is rotten, rancid and unholy in America. Every place in America that has large amounts of money in it, is being systematically looted, the DOD, Social Security, Pension funds, etc., and no one is going to jail over it. Some lie is concocted to tell the people and most believe it and move on. But the chickens are now coming home to roost and the house of fraud that has been ripping off Americans is beginning to show cracks in its foundation.

05 May Update

Well the only thing more dangerously insane than the activities in the financial markets are the things going on in Iraq. Fed Chairman Alan Greenspan testified to the Senate Banking Committee that deflation is no longer a threat to the financial system. This is said clearly to acknowledge the inflationary trends showing up in the economy. Inflation is running at jsut over 6% annually, given the BLS's figures. In real terms it is almost certainly higher. The things that everyday people have to buy are costing considerably more. Milk, Butter and Gasoline just to name a few. So how does this play out for the man on the street? Well it means that while his wages are decreasing because he has had to take a job that pays less, or is scared to death that the job he has will be outsourced. Everything he needs to survive and get to work is costing more. This will mean two things will happen; the first is that he will be forced to borrow to keep his lifestyle. In time however, this will only add to the eventual economic pain he must endure as credit card payments rise due to his increasing balance and interest rates. This reduces his purchasing power over time and contributes to deflation.

Many have asked me how can it be such a dilemma if we have inflation or deflation as the FED's monetary policy seems to clearly indicate an inflationary scenario. Yet this only tells half of the story. In any fractional reserve banking system such as ours, the real problem is not necessarily huge amounts of raw cash floating through the system but large amounts of debts accumulated by the creation of easy credit. The real problem that eventually comes to the forefront is a cash flow problem that reveals itself when the debts must be repaid. This cash flow problem is what causes people to stop making purchases because they must continually service their debt instead. The hard cash (raw purchasing power) comes out of the consumer economy and gets put into the Financial economy (the banks) where it all got started. But the financial community gets exposed as well when the debt cannot be serviced. Thus, the real problem is cash-flow and it is the reason economists wonder and debate about Inflation Vs. Deflation. If consumers do not have the cash to spend on things, then the prices will decline because demand shrivels up. This in a nutshell is the perennial question, just how bad will the cash flow problem be? As if this question were not enough, there are other problems on the horizon that will deeply effect the over all economy.

First let us consider that once the FED begins to raise rates, and the inflation figures that were released in April provide Greenspan with the political cover he needs to do this, a rise in rates, no matter how small will be a 'sell' signal to the stock markets. The dollars loss of purchasing power coupled with troubles in the bond market will give the needed impetus for a broad sell-off. The April drop in 30 year T-bonds is an omen of things to come. This could eventually have a very negative effect on the 'yield carry trade', a key engine used by insiders for flooding the economy with money. When interest rates rise,  these lucrative insider transactions will go away. This coupled with the higher servicing costs that many will pay on their debt will reduce the 'cash-flow' that is needed to drive our economy. This is where, in my estimation, any deflationary threat comes from.

So the threat is real and the insiders know it. That is why insider selling of stocks is reaching historic levels. The jig is up and the insiders are preparing themselves for the aftermath. Cash will be king in the days following the crash as credit may be impossible to obtain, this the primary fear in a deflationary scenario. Another key factor that figures prominently in this is the question of credit quality. A bank that has 30 billion dollars in assets (performing loans) is only strong if the loans perform (make payments) . Here is where many pundits miss a key stress point in the system. While the Fed Chairman extolled the quality of Bank loans in general there are serious questions about many of the loans on the books today, if only looking at the mortgage sector. The rise in housing prices nationwide is cause for serious alarm and the banks have the most to lose when (not if) this bubble bursts. Thus the quality of assets that back up the loans on bank balance sheets is precarious. Cash flow once again will be the issue as people walk away from homes that they are financially 'upside-down' on and no longer can pay for. One need only look at the creative ways finance companies are making loans; 'interest only' loans, 40 year mortgages, etc., this is all evidence of the final stages of financial lunacy.

However there are other issues that are having a very important impact on the American economy, one of which is energy. The cost of energy globally is set to rise from now until oil is no longer the primary source of fuel. What this means is that oil production on a global scale is reaching its peak capacity while demand is rising at a much more rapid pace. Thus, economists' target price of about $30/bbl of oil is fanciful. I look for oil to be selling closer to $40/bbl by the end of next year (at the latest, it is already at $38 at the time of this writing) if there are no large disruptions due to political instability (as in Saudi Arabia), embargo's (Venezuela has threatened the US with one) or terrorism (as in the constant attacks on Iraqi pipelines). Provided these do not become more troublesome, oil will rise to only about $40-42/bbl by the end of 2005. If however any one of these factors begins to seriously harm production or keep oil from being transported to the US, oil prices could begin to really squeeze Americans to the point that availability becomes a serious issue. Oil prices are particularly important to factor in when looking at the prospects for inflation. Why? Because so much of what the US economy does and needs is based on its dependence on oil and natural gas energy. Weather it is plastics, transportation of goods, energy in manufacturing, the price of a barrel of oil resonates throughout the US economy more than any other commodity. Saudi Arabia may soon be moving away from the US diplomatically as recent oil and natural gas contracts they have signed clearly demonstrate. The specter of American soldiers sodomizing Arabs, and killing innocents is more than the tenuous grasp the Saudi Royal family has on power can stand. Our incompetence and insensitivity is costing us allies that we cannot afford to lose. The Saudi's, for many reasons are looking for friends elsewhere:

·        July, 2003 – The Saudi government announces gas agreements with Shell and Total

·        August – State visit to Moscow by Crown Prince ‘Abd’ Allah-al-Saud

·        September – OPEC Minister’s adopt Saudi Arabia’s proposals to reduce quotas in spite of expectations of the maintenance of      the status quo in advance of the meeting.

·        January, 2004 – Saudi Arabia announces gas agreements with Lukoil, Sinopec, Agip, and Repsol

·        February – OPEC Ministers adopt another Saudi proposal to reduce quotas.


Note the complete exclusion of US energy companies in prominent new Saudi energy ventures; this is hardly consistent with an ostensible pledge to flood the market with oil around October to guarantee the election of a President viewed to be fundamentally hostile to Islamic interests by the vast majority of OPEC nations.  It is equally salient that the officially stated OPEC range of $22-$28 per barrel has been largely ignored – not only because higher prices can be sustained in spite of widespread “cheating” on quotas, but also because of growing opposition amongst the members to policies of the US in the Middle East.  - Marshall Auerback - Prudent Bear Fund

Where do we stand globally on the question of oil?

Take special  note of the 'peak' dates.

Source: ASPO Newsletter #40


ASPO does by far the best job of looking at the issue of oil depletion in a scientific and responsible way. Run by oil industry insiders who know the industry one can get a grasp and the real scope of the 21st century's most pressing economic problem. One gets the sense that this problem has no real solution, short of a serious almost certainly debilitating reduction in consumption by the west and most particularly, the US.  Alternative energy is an issue that needs to be brought to the forefront of the public debate now, not ten years hence. While some have invested substantial resources into alternative technologies, these by and large, do not seem to hold the promise that many had hoped. The real issue here (I know I am digressing) is ensuring much more efficient use of fossil fuels coupled with continued exploration of alternative energy technologies. This must be coupled with massive investment in public transportation systems in major metropolitan areas coupled with a system of taxation (penalties) for those who drive high miles with personal auto's when public transportation is readily available. This may be one solution to this pressing problem. This could assist in reducing our economic dependence on oil and give us 'breathing room' to explore and deploy other energy alternatives. Today the emphasis in local governments (my own included) is on spending billions on roads and superhighways for auto's rather than on cheap (or free) public transportation in the form of trams, trains, undergrounds or a BART like above ground system. Even in the extremely unlikely event that we can avoid an economic catastrophe in the financial markets, this other energy problem is lurking just around the corner to seriously challenge our economic health. Sadly the inaction by our leaders to provide effective solutions to either problem will mean that we will probably face both unprepared and suffer greatly in the process.

In the meantime the growing problems in finding, securing and exploiting oil and natural gas will contribute significantly to inflationary tendencies in the economy. Thus, both fiscal irresponsibility and natural petroleum supply constraints will cause prices for most things to increase. Sharp increases in commodity prices are evident today and these increases include steel, lumber, soybeans, and precious metals. These increases are not likely to subside and this is going to give the Fed the needed impetus to raise rates. Yet it seems to this author that a rise in rates will not stem the tide of inflation. The other forces at work in the economy, job-jacking (which may mitigate inflation somewhat), energy crisis, war, declining tax receipts at state and local governments will all play far more important role in determining prices and how much disposable income Americans have left. A rise in rates will help bring under control the massive speculative bubble in the stock market and perhaps end a very lucrative but ultimately destructive practice of the interest rate carry trade, practiced by insider financial institutions.

The dollar crisis has been in a lull for the past several weeks and it has stabilized somewhat against the Yen and the Euro. This is good news for the dollar, but it is news that cannot last given the America's debt levels.  The trouble brewing in China with a full blown banking crisis on the immediate horizon gives us pause to consider the entire global financial system's stability. First, the Chinese are one of the primary lenders to the US government. When we must go out and borrow another 500 Billion dollars in October, China may not be such a willing lender. The other lender, the Japanese, have problems of their own and are unlikely to increase lending beyond current levels. China has been under intense US pressure to un-peg its currency from the dollar. If this happens, it will make Chinese goods more expensive to Americans but should give US companies a more competitive edge.

Increasingly we are beginning to see that the financial system's conundrum of problems belie any conventional solution. Policy makers around the world are making comforting speeches and make grand policy pronouncements as though they were not standing on top of a volcano that is spewing ash and is about to erupt.

The simple results of this, in my estimation are these:

1. America's standard of living is going to decline significantly.
2. A financial collapse/stock market crash/banking failure is very likely in the near to medium term. But the Fed has been very adept at preventing this thus far and may able to stave it off a little longer.
3. America's days as a superpower will wane with its economy.  New and old scores will be settled violently as America's influence declines globally.

War and rumors of wars will be the norm. America's shores, so blessed with peace until now, will become a fertile ground for violence for those who have been wronged and bludgeoned by US foreign policy as they settle scores, real and imaginary with America. The one-thousand mile sieve that runs from California to Texas that is disguised as a border will be the entry point for America's enemies of every stripe. In short, things will get very, very ugly all over our troubled world and as people cry for solutions there will be none. I shutter to say that poverty and violence is what the world is descending into and there is no way to stop it short of radical political change and people as individuals begin taking moral, ethical and civic responsibilities with a seriousness heretofore unseen. They won't, hence my dire predictions.


Click Here For July Update


Mark S. Watson

Disclaimer: The above article is commentary and is notinvestment advice. The author is in no way connected to the wall street gang and therefore cannot dispense financial advise within the parameters set forth by Wall Street and the legal profession, nor will the author attempt to do so. This article is not investment advise nor is should it be construed as such. Please do not e-mail me asking for financial advise. I cannot and will not give it on any investment or financial matter.

1Granted these adjustments are far more important to the Consumer Price Index than GDP, but they are not completely unrelated.

2I realize that this is more political analysis than economic, but these issues will have long ranging and far reaching political effects and thus cannot be ignored. It is like trying to sail a boat without checking the wind direction and speed.

3This is unthinkable now, it will not be when banks start to fail, millions are put out of work and there is serious internal unrest in Western Nations.

4Free Trade, as it is advertised today, is a sham. It is a form of corporate welfare that provides various subsides to large international conglomerates and undermines workers rights, decreases wages and worker protections and often shifts the tax burden from corporations to working people. It is a horribly one-sided policy that has wrecked havoc wherever its polices come to fruition. It is not that the free trade is a bad idea, it certainly is not. It is simply that the way is is being executed around the globe benefits no-one but the very rich and powerful. More can be found here.

5Yes,inventories are tight and yes there are other factors at play that are diving up energy costs but primarily it is the fall in the value of the dollar.

6The delay in its release was because the BLS is using a new methodology for its calculation. Pretty much what I expected and predicted. While it may have been known by some that they were 'recalibrating' their numerical alchemy, it was not known by this author, just suspected.

7The CPI is a political hot potato because everything from COLA adjustments in social security military pay raises, and other Government entitlements are pegged to the CPI and it is always deliberately understated in order to keep the costs of these programs down.

8In fairness Newsweek did finally report the scandal and only the cold light of such publicity did the DNC promise to give back the money

9The vast majority of government employees are honest hard working people who are really trying to do the right thing. This is not written to denigrate their characters or to speak evil of them or the hard work they do. It is the corrupt element that are often in key positions that these criticisms are leveled.