Truth AND Consequences
Why Bailouts Will Not Stop Market Super-Cycles
Part I: America's #1 Question: "Is My Money Safe?"
Part II: How Will This Bailout Affect The Free Market
Part III: What To Do If This Bailout Does Not Work
CRAIG R. SMITH, Swiss America CEO
DAVID BRADSHAW, Editor, Real Money Perspectives
DR. FRED GOLDSTEIN, Sr. Broker, Swiss America
"The $700 billion bailout package will only prolong economic woes. History shows these plans don't work. What does work is to let the market clean itself out." -Jim Rogers
After weeks of fear-mongering, political debate and frantic deal-making Congress passed a $700 billion TARP last October, the biggest bailout in American history. Since then the TARP has been unfolded to over ten times the original size, setting a dangerous precedent for further government intrusion into free markets.
U.S. taxpayers are now on the hook for $8.5 trillion in government bailouts according to an ABC News report. If pending proposals are granted the figure could zoom another trillion. Economist Paul Krugman estimates the U.S. government may have another $10 trillion cushion for additional bailouts if needed.
* How much is $8.5 Trillion? About $100,000 per U.S. household -- which added to the existing $10 trillion official U.S. national debt -- brings the total to nearly $200,000 per household!
Americans were warned by Bush, Bernanke and Paulson that the entire U.S. financial system would sink into Great Depression-style chaos unless this $700 billion bailout bill become law. Americans did not support this plan by a 2-1 margin, but were convinced by leadership panic that something must be done ASAP.
It is almost a forgone conclusion for both the Democratic and Republican parties that free markets, smaller government and individual responsibility have failed.
"The rescue package and other bailout efforts for Fannie Mae, Freddie Mac, AIG and the auto industry, escalating operating deficits, compounding interest and other factors are likely to boost the tab to $56 trillion or more by the end of this calendar year," writes former U.S Comptroller General David Walker at CNN.
The White House rejected a more free market alternative proposed by House Republicans. The alternative plan, announced Tuesday by Rep. Jeb Hensarling (R-Texas), replaces the $700 billion bailout package aimed at easing the credit crisis with a plan to federally insure mortgages up to 100 percent.
"The Congress ordered the Treasury Secretary to keep the air in what's left of the housing bubble. Here's the language in the bill: 'The purposes of this Act are... (1) To immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and (2) to ensure that such authority and such facilities are used in a manner that -- (A) protects home values, college funds, retirement accounts, and life savings; (B) preserves homeownership,'" reports LA Times.
We believe that type of attitude is a guaranteed formula for a decline in America. Government in its current condition has failed.
The recent financial crisis had the most brilliant minds in D.C. calling for a trillion-dollar bailout of a system run amok. Everyone, from the president and his secretary of the Treasury to the speaker of the House, now seems to think that without this bailout the economy will fall into irreparable disarray.
Is the system truly that vulnerable? If so, failure is inevitable. It is just a question of when unless serious and painful changes are made. There is no easy way out.
"I count total U.S. and ECB temporary lending injections at $3 trillion so far. It's failing to stop deleveraging. It's simple math really, $3 trillion thrown against a deleveraging $1000 trillion is not much, writes Christopher Laird at MarketOracle.com.
The calls for new regulations and multiple layers of bureaucracy were heard across the land. Yet why do the markets need regulation in the first place? Because the regulations currently in place were never enforced. What would make anyone accept the notion that new regulations will perform any better than the old ones?
"Bankruptcy, not bailout, is the right answer: The final legislation will include numerous side conditions and special dealings that reward Washington lobbyists and their clients. The bailout will open the door to further federal meddling in financial markets," writes Jeffrey A. Miron, senior economist at Harvard.
If the average American spent as much time studying and analyzing their investments and savings as they do "American Idol" dials and busy signals, we would not need regulations. Truly free markets would reward well-run institutions. They would punish, and ultimately eliminate, poorly run or high-risk companies that care more about their CEO than they do their customers and investors. We have criminal rules for criminal activities, but we apparently refuse to use them.
Regulations are designed to protect people who either don't have the ability or are too lazy to protect themselves. If I have my money in the bank, a mutual fund, a money market or gold, isn't it my responsibility to make sure I choose a safe institution?
The systematic dumbing-down of America and the lack of respect toward education is frightening. We teach children how to read, write and count. We teach them how to put condoms on bananas. But do we teach them a thing about money or the banking system? How about teaching a kid how to balance a checkbook or the proper use of credit? What about the Federal Reserve System of fractional banking?
Bailouts Will Not Stop Market Cycles
Every economy in the world experiences cycles of expansion and contraction. These cycles are healthy and as regular as the tides. When attempts are made to alter these cycles economies run into major trouble. This time is no different.
There are certain rules of the universe that just cannot be violated. At least for any long period of time.
One can defy gravity simply by flying in an airplane. However if that plane doesn't occasionally land for fuel, the passengers will realize rather quickly gravity's infallibility. So it is always better to land and refuel. And while that refueling may delay arrival at the destination, it sure beats the alternative.
For years in this country we have had times of economic expansion. The expansion is a time when prosperity is the main focus of all the participants. Very few ever take the time to think about what will happen when the expansion slows or even stops as it always does. Imagine a lung that expands and contracts. Just as it is a natural movement for the lung, it is the natural movement of markets.
A continuous expansion ultimately leads to a bursting of a bubble or lung, for the analogy's sake. Thus we have learned that "balloon markets" can be the result of never wanting the expansion to cease. But just as in the airplane it has to be refueled or it will crash.
Dotcom or housing bubble ringing a bell?
Contractions in the economy are never welcome but they are necessary for the long-term health of the economy. Contractions generally cost some jobs. Require a tightening of the belt. But most importantly, a reassessment of expectations. Realistic expectations. Nothing goes up forever.
Those expectations may require an investor to understand that investments carry risk. That as easily as a market can go up, it can go down. Double digit investment returns are not a birthright. Watching the value of our homes increase endlessly is not a realistic expectation. Yet most in America have gotten so accustom to watching their 401K and home equity increase that any drop produces immediate screams of pain in citizens and Wall Street alike.
Bailout ill conceived, reckless, shameful
When those screams are heard on Capitol Hill, 535 elected representatives go into a frenzy attempting to avoid a necessary contraction. The real housing crisis is not on Main Street or Wall Street as much as it is in the House of Representatives. And while they would like the plane to keep flying they cannot legislate fuel into the tank any more than they can legislate confidence into a battered, overdue market.
This bailout bill is ill conceived, reckless in its approach and a shameful display of politics. A simple, albeit worthless, three-page plan has morphed into a 451-page bureaucratic nightmare complete with $105 billion in earmarks and pork to "buy" the votes of those who know how bad this bill is.
This bill will do little, if anything, to stop the arrival of the contraction and recession that is way overdue. As American corporations and citizens alike start to de-leverage, profits will drop and spending will slow. This will mean stocks, bonds, real estate and various other assets will soften until at least the second or third quarter of 2009. Then we will see, just as we have in the past, America start to expand again and prosperity will return.
The 535 politicians and all their misguided motivations will only prolong the pain most Americans are willing to endure. With the knowledge, of course, that a better future for our children will be assured if we do not put further debt on them by increasing the national debt to $11.3 trillion, which this bill will do for sure.
Now that the bill has passed, we will see a stock market rally. We will hear a big sigh of relief across the land from those who believe this Congress knows what it is doing, but it will be only momentary. For the contraction and recession that must take place will. It is as normal as rain and while we all wish to avoid it, we will not.
Cut Spending or Inflate
Unless we want to inflate our way out with additional government spending of money we do not have, which will require taking on more and massive amounts of debt to be passed on to future generations, this is the time to just say no.
If we are serious about adopting the changes necessary to make this contraction produce long-term positive effects on the market we must:
1. Reduce government spending by 15% across the board over the next four years.
2. Reduce corporate taxes from 35% (world's 2nd highest) to 25% with targeted incentives to create new, high paying jobs.
3. Freeze personal income taxes at current levels so proper tax planning can occur.
4. Have a capital gains tax holiday for any company or individual who purchases distressed real estate from a lender to clean up the lender's balance sheet.
5. Ease the "mark to market" rules now in place to provide breathing room for lenders.
6. Ease the capital requirement currently in place at the banks.
Not one of these suggestions requires a dime of tax dollars and thus doesn't have a snowball's chance in Phoenix to be implemented. That does not, however, diminish the effectiveness they would have in setting the stage for future growth and prosperity in America.
Market cycles do and will happen as long as there are markets. One can only hope we as a nation accept that fact and plan accordingly. Then and only then can politicians, who are attempting to play economists, go back to protecting and defending the constitution as their job description outlines.
Politicians will only prolong the pain they wish to eliminate. History and gravity can be ignored temporarily but will never be stopped.
AN ECONOMIC WORLDVIEW WAR
“Imagine for a moment that you have the ability to create any amount of money, without ever having to produce anything. Is there anyone or anything you couldn't buy? Probably not. Sound impossible? It should be, but it isn't. Just ask your local Federal Reserve banker - they do it every day,” we wrote back in 2001 in the book Rediscovering Gold in the 21st Century.
We will either build our own economic worldview or swallow someone else's.
Most people find the study of economics a rather "dismal science", perhaps even boring. The result is that the public is prone to accept “expert” advice without first having a sound, free-market economic foundation or worldview.
This lack trust in the free markets helps explain why the public is intuitively against further government bailouts, rescues or hand outs, despite the pleading of Bush, Bernanke, Paulson, Buffett, etc.
For example, the majority Americans (and mainstream financial journalists) believe 'credit equals money' because both can be created with the stroke of a banker’s pen. Likewise, most believe there's no consequence for abusing this "debt-based" system such as a U.S. dollar or housing crash.
By swallowing the popular, but misguided "debt-based" worldview it helps to fuel the pernicious credit cycle which leads to both booms and busts! Many investors, trying to outrun the credit cycle, are driven toward riskier and riskier investments, undergirded by an over-confidence in paper currencies, Wall Street hype or government bailouts.
However just as hot summer days are now fading into cold winter nights, the economic over-confidence has been transformed into economic under-confidence. What follows could range from a mild to nasty recession... to runaway inflation... to the worst of both: stagflation.
The key to keeping your money safe today is to discern the changing economic seasons and take action right now.
21st CENTURY MEGA-SHIFT
The year 2000 brought with it a very different global change than most expected. Instead of computers driving our nation into a widespread blackouts and chaos, the market cycle began a fundamental shift toward commodities and away from equities for the first time in nearly two decades.
By 9-11 the cycle was already in motion, as energy and metals began to show signs of serving as 'the canary in the coal mine' foretelling of a shift away from stocks and into tangible assets. Since then oil and gold prices have tripled.
The residential real estate price explosion of 2001-2006 served as a powerful example of "asset inflation" -- fueled by artificially cheap money. This asset inflation generated phony collateral for runaway consumer debt and lured the consumer into unprecedented debt excesses, which has now turned ugly.
Today one in 100 U.S. homes are either in foreclosure or headed for it. The housing ‘wealth effect’ of recent years (which has propelled the global economy) has abruptly slammed into reverse. The extreme sellers market of 2005 is now on its way to becoming the extreme buyers market in 2009.
History teaches us that asset deflation usually follows asset inflation in the historical boom-bust credit cycle. The bigger the boom, the bigger the bust. This is just common sense.
Millions of investors are now looking for alternatives to the "priced-for-perfection" U.S. stock and housing markets. Many are now rushing into cash, thinking the U.S. dollar is (and will remain) "king".
But if that's true, why are so many central banks and big investors dumping dollars? Perhaps because the emperor has no clothes, except those on the American consumer's back.
One major reason U.S. gold and silver coins are becoming a popular component in a well diversified portfolio is simply because they are assets that you can own 100%, and the value is not controlled by government nor Wall Street. Instead you alone and the law of supply and demand are in control.
'OWNERSHIP' VERSUS 'LOANERSHIP'
Further adding to the deception of the debt-based worldview is the concept that Americans can really fully own most assets. True ownership mean full control, and neither real estate, stocks, bonds nor even your own car are ever fully yours.
For example, while most home-"owners" hope they can one day "own their own home" once that nasty mortgage is paid off, I would remind you that state and local property taxes will always be due annually. This illustrates that the government is the true final "owner" of all property in this country if you fail to pay your property taxes.
The same is true of stocks or bond gains. Fail to pay the taxes yearly and it becomes clear who really owns your gains. Even your car cannot be wholly owned unless you plan to drive only on your own property... otherwise, the car must be registered and insured or off it goes to government impound.
The point is that most of us are content with hold assets of "loanership", that is, assets which we use for our benefit but at a price -- either for a periodic dollar amount or with a price of some loss of freedom and control.
In the world of modern investment collectibles, such as U.S. gold and silver coins, stand virtually alone as assets of full ownership, full privacy and full control. For this reason alone, they should be included in every portfolio by every investor that seeks to control their own financial destiny.
Loanership assets are always somebody elses’ liability. Loanership assets must be dressed up, you know, 'put some lipstick on' to be made attractive. Not so with precious metals and collectible coins, they are most beautiful in their original state. All that must be done is to certify their authenticity and rarity. The investment and esthetic beauty of numismatic coins shine from within.
MORE CREDIT NOT THE SOLUTION TO CREDIT CRISIS
Imagine if a trillion taxpayer dollars had been injected directly into the housing market, gold market or oil market? Take your pick. That market would have exploded. Yet the Dow ended unchanged after massive government intervention.
The answers we need will not be found in more deficit spending and more debt. Quite the opposite. We need less of both, and we need it now.
An honest analysis of the current crisis will reveal plenty of culpability for both sides of the aisle. So it is time to stop the politics and start the leadership. To watch McCain blame Obama and vice versa is disgusting. To hear Pelosi blaming Bush like a broken record is getting old.
If Wall Street or Main Street need a bailout, we should not allow the politicians to create more money or take on more debt. The recent rhetoric used to instill fear in America must stop. The comparison of our current problems with the Great Depression is ludicrous.
In 1929, unemployment was almost 26 percent. Today it is 6.1 percent. Have you been to a high-end restaurant recently? They are packed wall to wall with young people spending money like it is water, as they text on their $300 Blackberry while their $40,000 BMWs are parked with the $20-a-car valet. Give me a break. We are not even close to a depression. Yet if the politicians spend all this money we don't have, their fear-laced words will become a self-fulfilling prophesy.
ONLY SERIOUS CHANGE WILL INSPIRE PUBLIC CONFIDENCE
If our leaders are serious about change and are willing to implement it, they should immediately reduce government spending. It is the only action that will produce meaningful results. Start by having every department reduce their budgets by 15 percent within four years. Instead of two government employees wasting half the day doing nothing, there will be one. This should be done in all areas of government other than those necessary to keep the population safe against attack.
The departments who cannot make the reductions should either be eliminated or bid out to the private sector. Efficiency is the mother's milk of the private sector and should be demanded at the federal level as well. Free enterprise has proven time and time again the private sector's ability to provide services in a more cost effective way than government.
Corporate tax rates, which are the second highest in the world, should immediately be reduced to encourage American businesses to keep jobs in America while hiring new employees. Entice corporations through tax incentives for implementing training programs and spending capital on infrastructure as was proposed in the stimulus package back in February.
All taxes, personal and investment, should remain at current levels, permanently. This will allow for long-term planning and give all Americans a stationary target on one of the highest expenses in all of our budgets, while at the same time spurring more prudent investments.
Nothing would send a stronger signal that America is serious about the future. We have already witnessed what the world thinks about our panicked "solution" of throwing money at the problem. Foreign investors ran to gold and treasuries last week in unprecedented numbers. Short-term treasuries have not seen these prices since the London Blitz in 1940. Millions around the globe moved money to safe havens.
The system desperately requires a fresh injection of confidence, NOT debt. These steps will restore confidence only as the world can depend on fiscal responsibility from the world’s largest debtor.
Confidence is more important than capital. There is plenty of capital waiting to jump back into these markets if Congress promises to insure any future problems. It must be insurance that will kick in only in the event of a real crisis - not a $700 billion check from the taxpayers.
Everyone wants to see the government get its act together, not saddle the taxpayer with another couple trillion dollars of debt. The market is demanding accountability and transparency, not additional regulation. Our leaders need to walk the talk. Words are cheap. Actions are always more effective.
So this year we have a choice. We can elect the most popular guy and his team, cross our fingers and hope he will get us through another four years. Or we can send a signal that says we are ready to make the sacrifices necessary to get back on track. But only if we have a leader who will reduce wasteful spending, enforce current rules and regulations and keep us safe.
That is the role of government. Nothing more, nothing less. There are no simple solutions to the problems we face in America, but one thing is clear: America must come first, not politics.
America's #1 Question: "Is My Money Safe?"
Today investors are very concerned about the safety and value of their financial assets while Wall Street ponders the fate of its most established brokerage and insurance companies.
The Swiss America strategy to keep your money safe is simple. Proactive investors should go onto their own gold standard, by taking possession of numismatic gold and silver coins and precious metals.
The gold price correction from over $1000/oz. in March 2008 to $850 today gives investors another opportunity to buy undervalued real assets. The country’s economic problems will continue to make headlines for years and into the next decade.
After the recent 1,000-point drop in the Dow, an emergency behind-closed-doors meeting was held with members of Congress, the Treasury, the Fed and the President. Subsequently it was announced that legislation would probably be enacted to transfer the liabilities of bad mortgage instruments from banks and brokerage companies to the government.
It appears we have come full circle since 1980 when we experienced another financial crisis. At the time inflation was double-digits and foreigners were losing confidence in the US dollar. Fed chairman Paul Volcker boldly began raising interest rates up to 20% to squelch inflation and restore confidence. Today investors are once again looking to the government to restore confidence in the financial markets.
The proposed government bailout appears to be a temporary fix and adds to a long-term debt problem. Over the last 25 years we have witnessed the greatest accumulation of debt in world history. We were dismayed when Reagan’s commission scoffed at the return to a gold standard. Those of us involved in the rare coin and precious metals market have warned about excessive debt leading to severe inflation, higher costs of living, and a weaker US dollar. Our antagonists have argued that excessive debt will lead to deflation and hence a stronger dollar.
A PERSONAL GOLD STANDARD
“America’s current problems started with the closing of the gold window, progressed with the unsustainably of Bretton Woods II, and reached the point of insanity via the complete lack of regulatory oversight that epitomized the Greenspan years. That U.S. financial markets are in a state of panic today is not surprising. That the powers that be have been able to keep the game going this long is," reports Fall Street.com.
If closing the gold window back in 1971 is the root cause of today’s crisis, it is just common sense that putting yourself back on a personal gold standard is the fundamental solution to today’s crisis for the average investor.
United States gold and silver coins, the famous 'old world' currency are fast becoming the 'new world' currency because they offer the missing link in all paper currencies: a "benchmark" store of value.
Tangible commodities and high quality collectible investments are not only a safe haven but are also on track to outperform stocks, bonds, real estate and CDs in 2008, just as they have every year since 2001!
The time has come for prudent investors to diversify a portion of their money into hard assets and then relax. We exhort those who've ignored gold's call to financial preparation can take action now before the world officially recognizes gold as the new global monetary benchmark.
“While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities…So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value,” writes Peter Schiff, President of Euro Pacific Capital.
The government’s abandonment of the gold standard and establishment of the Federal Reserve have proven to be disastrous. The result has been unsound monetary policies with trillions in unfunded liabilities, and an overdependence on foreign creditors. Today we are expected to believe the government’s bailout will cure Wall Street’s ills and restore confidence in the economy. We believe the plan will shift the liabilities to the saver and taxpayer while exemplifying moral hazard.
“The President’s new bailout plan to be a Patriot Act for the economy. Both pieces of legislation are being rushed through Congress as emergency actions with little time for scrutiny. Both acts rewrite the rules of how the country operates. Just as the Patriot Act compromised individual political freedom, the bailout compromises economic freedom. Never again will the market determine the big winners and losers; henceforth the government will, in its infinite wisdom decide which firms will live or die. As a political matter, the new structure is unlikely to function well. As Milton Friedman said, ‘If you put the Federal Government in charge of the Sahara Desert in five years there’d be a shortage of sand.’” Reports LeMetropoleCafé.com.
The obvious question one should ask is; where will the hundreds of billions or trillions come from for this bailout? History teaches us when federal government needs immediate cash and has over borrowed; it turns to the printing press. The Federal Reserve buys US bonds and infuses cash into the system. This is called monetization of debt and is the root cause of inflation.
“Today's reported potential infinite bailout of all and any portends, if adopted, is the largest increase in dollars outstanding since the Jurassic Age... It closely models actions undertaken regarding the production of currency liquidity seen in the Weimar Republic," writes Jim Sinclair of JSMineset.com
So today we embark on a new stage in American financial history. It appears the bailout will temporarily calm the markets but mortgage our financial future. This program will weaken the dollar long-term and insure higher costs of real assets such as housing and automobiles. Higher costs of living will be the burden for our children and grandchildren, as well as those looking toward retirement or those on a fixed income.
How Will This Bailout Affect The Free Market
"What I envisage as this credit crisis goes turns into a full-fledged global economic slump is that half the world resorts to currency devaluation in a scramble to stave off recession and cling to market share. This will be very good for gold," reports Ambrose Evans-Pritchard at London Telegraph.
So far in 2008 we have seen, in the dead of night, numberous major government bailouts, none of which had more than a few days' positive effect on the markets. Each was done by powerful men in powerful places in the wee small hours. At the end of the next day, a few were made rich while the many were handed the bill. Each new bailout has further driven the value of U.S. dollar lower.
First there was Bear Stearns. Then IndyMac bank. Fannie and Freddie followed rapidly. Then AIG and finally the mother of all bailouts, Wall Street itself. All were engineered while the markets were closed.
How many more bailouts have to occur before someone asks the questions no one wants to ask? Is this a systemic problem?
It is no surprise to those of us who warned about the drunken credit binge on Wall Street that the day of reckoning would come. What we never anticipated was the reward in store for the gluttons who caused the damage.
Bear Stearns was sold to JPMorgan on March 17; billions of equity was transferred to the balance sheet of one of the top five banks in America while the liabilities were guaranteed by the government (a.k.a. the taxpayers). Through the use of very complicated devices the government moved to save the system. The executives of Bear walked away with bonuses and severance packages. Disaster temporarily averted.
On July 11, IndyMac was taken over by the government due to a "run on the bank" which depleted deposits literally overnight. With $100 million leaving each day, the feds had no option other than to shut the doors. The $52 billion FDIC rescue fund was tapped for $4 billion-$8 billion to pay off depositors and 4,000 employees lost their jobs overnight as IndyMac became runnerup to the largest bank collapse in history (Continental Bank in 1984). Net result: The banking system is saved for the time being.
Fannie and Freddie were seized by regulators Sunday after weeks of speculation that both were suffering losses far beyond their ability to cover. Voices like Bill Gross from PIMCO, with $800 billion in bonds, made clear their intention to stop buying bonds unless the Treasury acted to provide an implicit guarantee for all Fannie and Freddie obligations.
IS THE SYSTEM BROKEN? IF SO, WHO BENEFITS?
If the problems we are now witnessing are systemic and can potentially develop into a far worse crisis than anyone expected, what level of loss should the public be responsible for? Should we the people be on the hook for an unlimited amount of liability while not participating in any of the reward? At its face that seems very unfair, but as I was told at an early age, life is not always fair.
There is an even bigger question in all of this. How many commercial banks, investment banks and mortgage guarantors can the government take over before we as a country are forced to create money to meet all the obligations represented by these takeovers? It is not as if the government has surpluses from which to draw all the needed capital to meet these obligations. We will have to borrow or print it.
What if General Motors, Ford and Boeing need to be bailed out? What about airlines, drug companies, insurance companies ... shall I go on? We cannot and should not adopt a bailout mentality without first considering the long-term ramifications for the country as a whole.
Currently we are running about a $500 billion dollar annual budget deficit. This will be added to the national debt, which currently stands at $9.6 trillion. Will run the national debt to $15 trillion, $20 trillion? And that doesn't even take into account the off-budget debt, reflected in future Medicare and Social Security obligations, which now exceeds $50 trillion. At what point will the U.S. dollar have any value if we can never pay any of it back?
The U.S. dollar has always been the currency the world turns to when there is trouble. The dollar has always represented safety, but can it maintain that trust if we just continue to print, borrow and move dollars around from balance sheet to balance sheet ad infinitum?
We cannot continue employing the broken business model our current financial system represents. It doesn't work. We cannot leverage, inflate and deflate forever. There comes a day of reckoning when people will not tolerate the abuse of a system to enrich a few while decimating many.
For the first time in the post-World War II era, the American dollar is susceptible to competition from a currency based in an identifiable and universally accepted value. A currency that cannot be created out of thin air. Is such a currency available? Not yet. But you know the old saying, "Necessity is the mother of invention."
IS THE DOLLAR RIPE FOR REPLACEMENT?
Right now the world has three very strong and prosperous countries competing on the world stage with huge amounts of capital, natural resources and gold that could easily, if they so chose, create a currency much like Europe did in the euro. But this time it could be backed with oil and gold.
Russia, China and the Arab nations are sitting on an enormous amount of oil, gold and U.S. dollars. What if those nations forged agreements (much like NATO, WTO, etc.) and offered an "ARC" dollar fully backed by gold or oil? (The holder of the currency could actually exchange the currency for a specified amount of gold or oil.)
A note is a promise to pay. For years in America a Federal Reserve Note (currency) was a promise to pay gold and silver at the Treasury. Today it is a note to pay debt. Debt that is exploding and can apparently be wiped away by the Fed overnight or, worse yet, transferred to the backs of American workers in the form of tax on future labor. But what if a group of nations offered a currency that had no recurring liability attached to it but actual "money" in the form of the ultimate currency (gold) or the ultimate natural resource (oil)?
In the past we would view such a prospect as preposterous. Today it may well become a reality. Currently talks are under way with the Gulf Monetary Authority for just such a system.
If we think the government is capable of bailing everything and everyone out of every financial mess that may occur then we are fools. And perhaps we are being viewed as such by very hostile nations that would welcome the deterioration of our position and would not flinch at our total demise.
In short, we have fattened our hearts in the day of slaughter and now is the time to acknowledge and accept that each of us is solely responsible for our own future. Not the government. The time of discussing the problems has come and gone. Now is the time to devise a plan and put it into action.
Understand that the only answer to avoiding a meltdown is either a new currency or runaway inflation. To quote Harry Shultz, "If Bush bails them all out, the die will be cast for inflation unseen in the West since 1923 Germany. If no bail:1929. Gold helps you out either way."
You can either ignore the obvious or act upon it.
Ignorance is produced in ignoring the facts. It makes one ignorant. Acting upon the facts makes one wise, which is wisdom. This will be a time when many will prefer to deny what they see around them and hope against hope that the system will fix itself.
It will not.
Here’s a good analogy: a person (the system) having a massive heart attack, a heart attack resulting from years of abuse of the victim's own body. He is rushed to the hospital where the doctors (the Fed) work feverishly to save his life. They are successful and the patient lives. The doctors then sit the patient down and explain that while they saved his life, without major lifestyle changes the patient will have another heart attack and die. He must immediately stop smoking, eliminate fatty foods and exercise daily. The patient refuses.
Thus is our system. This is not the first crisis. It will not be the last. The system is not willing to do what is necessary to get better, so it is time to diversify assets out of dollars and into tangible assets.
What To Do If This Bailout Does Not Work
"The way to crush the middle class is to grind them between the millstones of taxation and inflation" -Vladimir Lenin
Economists warn that America's debt trap will soon snap shut on millions, but it's still not too late to protect your wealth from the coming financial tsunami. A little known economic malaise from the 1970s is now back: "stagflation" – stagnant economic growth (recession) coupled with a rapidly increasing cost of living (inflation).
In the 1970s, stagflation grew out of the OPEC oil embargo that caused oil prices to quadruple. Inflation surged and economic growth was stunted. Today a similar picture seems to be emerging. Investors are hoping a slowing economy will bring inflation back under control, but we already have a lot of inflation gushing down the pipeline.
Inflation today is rampant in big-ticket items such as health care, utilities, insurance, higher education, food, energy, and until recently, home prices. A historic commodity boom has doubled agricultural and energy prices while wages lag far behind. Factory profit margins are being squeezed by soaring energy, raw material and transportation costs. Trade balances are negative in oil-importing nations like the U.S.
Rising inflation, together with the worst housing market in over a decade, appears to support the stagflation argument. "Stagflation is nothing less than a weapon of mass destruction aimed at the livelihoods not only of the elderly and those on fixed incomes, but also on students, the unemployed, families, and almost everyone who has a job in the producing economy," reports Market Oracle.
Europe is also facing a major slowdown, but their ECB central bank, like the Fed, fears economic recession more than inflation. This has created fresh worries about stagflation and has pushed investors to view the U.S. as the lesser of evils. This explains why the dollar recently strengthened against the euro.
I.O.U.S.A. – AN EMPIRE OF DEBT
Many Americans no longer value the unalienable rights of "life, liberty and the pursuit of happiness" endowed to us by our Creator and affirmed by our nation's founders. They instead value the pursuit of higher credit card limits, mortgages, debt and deficits. Worse yet is the moronic economic worldview that promises we can miraculously spend, rather than save, our way to wealth.
U.S. consumers, as well as the government, are slowly drowning in a sea of debt as a brand new documentary film titled "I.O.U.S.A." details. The film's inspiration comes from the 2006 book "Empire of Debt: The Rise of an Epic Financial Crisis" by William Bonner and Addison Wiggin of Daily Reckoning.
"Empire of Debt" co-author Bill Bonner explains stagflation this way: “The Keynesian economics practiced by governments and central bankers depends on deception. As more money and credit is introduced into the economy – as "stimulus" – it is mistaken for real wealth. Consumers think they have more money to spend; businessmen think they have more customers; investors think they see more profits. Deceived, they happily expand the economy. As time goes on, however, prices catch up to the funny money and the consumer wakes up to the fact that he or she is no better off than before. So, gradually, the old trick stops working. Money and credit may pour in, but no one is fooled. Instead, prices rise, while the economy goes limp.”
Here's what former U.S. Comptroller General David Walker, featured in "I.O.U.S.A.," told the Wall Street Journal: "When the baby boom generation starts retiring, that will bring a tsunami of government spending that we are not prepared for. We are in a $53 trillion hole. And that hole gets deeper $2-3 trillion a year automatically, even if you have a balanced budget."
STOP WALKING UP A DOWN ESCALATOR
With unemployment rising, income growth in today's weak job market is also falling. Investors who rely on fixed income or interest income from T-Bills are also facing negative growth due to the rapidly rising cost of living.
In the 1950s, a single wage-earner could support a family while the wife stayed home and looked after the children. They could buy a house, a car and household appliances, go away on vacation, and send the kids to college. Today both husband and wife must work just to make ends meet. Saving for the future is now a lofty goal.
And yet, there are actions individuals, families and groups can take right now in their own lives to offset the negative effects of today’s uncertain economic environment. Here are a few humble suggestions:
1. Don’t borrow: The U.S. is suffering from a chronic debt addiction of monumental proportion. We've now amassed $1 trillion in bad mortgage debt, $1 trillion in weak consumer credit card debt and nearly $10 trillion in government debt. Debt enslaves us to an economic system in a chronic state of collapse. Learn to live within your means.
2. Own hard money: If you have money, put a portion of it into tangible assets before the dollar’s value is further destroyed by inflation. Precious metal and U.S. rare coin prices recently corrected and today represent an excellent value buy for both safety and long-term growth.
3. Think for yourself: Search for reliable information about the economic and political situation. Read books and turn off the TV and video games. Discuss ideas and issues with your kids, family and friends.
4. Develop new skills: Learn to be more self-reliant. Do your own household repairs. Grow and cook your own food. Shop at thrift stores. Start your own part-time business.
5. Become politically active: Register, vote and demand honest elections. Support politicians with integrity, who favor smaller government, lower taxes and the Constitution. Reread the Constitution as a reminder of your rich American heritage. Demand changes in accordance with your core values.
6. Fear not, God is in control We tend to be overwhelmed by external forces such as government, corporations, banks, credit ratings, the economy, media, armies and technology. In reality, God is the only source of power in the universe. The more we realize God's presence, the less we fear externals. By God’s grace we can reverse the trend from being a bailout nation to being a blessed nation again.
The ultimate form of true wealth beckons wise investors again today. Gold and silver will help provide you with the insurance you need, the growth you seek, and the peace of mind you deserve. But start by getting educated here.
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.