If passed, President Obama’s healthcare plan will reduce the quality and increase the cost of healthcare in America. But more importantly, it will severely undermine our already weak economy. To burden a country currently in the throes of a violent recession with such a bureaucratic albatross clearly illustrates the scarcity of economic intelligence in Washington.

In the first place, specifically taxing the rich to pay for healthcare for the uninsured is the wrong way to think about tax policy and is an unconstitutional redistribution of wealth. While the government has the constitutional power to tax to “promote the general welfare,” it does not have the right to tax one group for the sole and specific benefit of another.

If the government wishes to finance national health insurance, the burden of paying for it should fall on every American. If that were the case, perhaps Congress would think twice before passing such a monstrosity.

In the second place, the healthcare bill is just bad economics. For an administration that supposedly wants to create jobs, this bill is one of the biggest job-killers yet devised. By increasing the marginal income tax rate on high earners (an extra 5.4% on incomes above $1 million), it reduces the incentives for small business owners to expand their companies.

When you combine this tax hike with the higher taxes that will kick in once the Bush tax-cuts expire, and add in the higher income taxes being imposed by several states, many business owners might simply choose not to put in the extra effort necessary to expand their businesses. Or, given the diminishing returns on their labor, they may choose to enjoy more leisure. More leisure for employers means fewer jobs for employees.

More directly, mandating insurance coverage for employees increases the cost of hiring workers. Under the terms of the bill, small businesses that do not provide insurance will be required to pay a tax as high as 8% of their payroll. Since most small businesses currently cannot afford to grant 8% across-the-board pay hikes, they will have to offset these costs by reducing wages. However, for employees working at the minimum wage, the only way for employers to offset the costs would be through layoffs.

The uninsured self-employed, or those working as independent contractors, will be forced to buy insurance or pay a tax equal to 2.5% of annual income. Either choice will divert resources from more productive uses into an already out-of-control healthcare bureaucracy.

Sadly, the bill does nothing to restrain or alter the dynamics that have caused healthcare costs to spiral ever higher. In fact, the bill will intensify these pressures.
The simplest explanation of why healthcare costs so much is that demand exceeds supply. Demand is a function of how much people are prepared to pay. Insuring more people will drive demand for healthcare services even higher.

As costs continue to soar, expect additional tax hikes to fund the added expense. As these additional taxes further encumber a weak economy, the diminished tax base will yield lower total tax revenues – despite higher rates. As the politicians attempt to pass higher tax increases to make up for revenue shortfalls, a vicious cycle toward insolvency will ensue.

The worst part of the whole fiasco is trying to imagine the bureaucracy necessary to administer this plan. My guess is that the government provider will mis-price its policies on the low side, pushing employers to dump private sector insurance for the taxpayer-subsidized alternative. Such a system will further distort healthcare pricing and, ultimately, make a bad situation intolerable.

The enormity, complexity, and expense of this bill could well pull the rug out from what many of my cheerleading colleagues believe to be the beginning of an economic recovery. The way I see it, the economy is walking dead anyway, and this measure is the equivalent of a stake through the heart. But even if we manage to escape the grave this time, Congress is working on a few other ideas that will surely keep us buried.

Source: Obama’s Healthcare Plan: A Prescription for Disaster

[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a well-known author and commentator, and is a periodic contributor to Money Morning. Schiff is the author of two New York Times best sellers: "Crash Proof: How to Profit from the Coming Economic Collapse," as well as "The Little Book of Bull Moves in Bear Markets." For a more-detailed look at the United States' ongoing financial problems - and for some strategies that will help you protect your wealth and preserve your purchasing power before it's too late - download EuroPac's brand-new free special report, "Peter Schiff's Five Favorite Investment Choices for the Next Five Years." After one of the most-torrid rebounds on record this spring, U.S. stocks have stalled - once forcing investors to make important decisions against a backdrop of intense uncertainty. However, a a new offerfrom Money Morning seeks to eradicate at least some of that uncertainty, and actually represents a two-part bargain for investors by offering a Schiff best-selling investment book and a subscription to The Money Map Report newsletter. Schiff's new book - "The Little Book of Bull Moves in Bear Markets" - shows investors how to profit no matter which way the market moves, while our monthly newsletter,The Money Map Report, provides ongoing analysis of the global financial markets and some of the best profit plays you'll find anywhere. To find out how to get both, Check out our newest offer.]

When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.

Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits). So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.

Low-skilled workers must compete for employers’ dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.

Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.

There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.

As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won’t be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.

The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.

So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become – had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping – and learning from – the mechanics.

Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher-paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.

The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower-wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?

The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That’s the exact burden the minimum wage places on our poor and low-skilled workers and, ultimately, on every American consumer.

Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?

Source: Why Minimum Wage Represents Maximum Stupidity

[Editor's Note: The federal minimum wage increases to $7.25 an hour on July 24.]

Misguided government policies have already dealt vicious body blows to our economy, but that hasn’t stopped politicians last week from launching two new kicks to the recovery – a national health insurance plan and a carbon emissions regulation system called “cap-and-trade.”

Even if these plans could achieve their desired ends, which is highly unlikely, I would have hoped Washington would refrain from throwing more monkey wrenches into the economy until it shows some signs of resurgence. The last thing we need right now is to further encumber our economy with higher taxes and additional regulations.

The meteoric rise in healthcare costs, which has become an unending nightmare for U.S. businesses and consumers, is not an accident. This painful condition arose from excess government involvement in the system, tax provisions that encourage the over-utilization of health insurance, and government support of an out-of-control malpractice industry. Rather than allowing more bad policy to drive healthcare costs further upward, we should be looking at ways to allow market forces to reign them back in.

If left alone, the free market drives quality up and costs down. Government programs produce the opposite result. Despite the president’s claim that a federal plan will bring costs down, there is no historical precedent for such faith.

Simply providing more widespread health insurance, as the Obama administration plan offers, is not a solution. In fact, it will aggravate the problem. Since consumers no longer pay for routine medical expenses out of pocket, comprehensive health insurance creates a moral hazard for both patients and doctors. To maximize the value of the health insurance “benefit,” most workers opt for low deductibles and co-pays. Therefore, doctors learn that their patients are not concerned with the cost of care, and so they are free to bill insurance companies at the maximum allowable rates.

Given our current tax code, the simplest way to bring down medical costs would be to fully tax healthcare benefits as wages and simultaneously increase the personal deduction by an amount significant enough to neutralize the effect of the tax increase.

This would do two things: First, the uninsured would get a huge pay increase, enabling them to buy reasonably priced catastrophic policies. Second, those currently insured could opt out of expensive employer-provided plans, trading premiums for extra wages, then buy a more economical plan. The savings would go right into their pockets.

The bottom line is that aggregate medical costs won’t come down unless services are rationed more wisely. Rather than being used as a pre-payment plan for routine care, insurance should only cover unpredictable, catastrophic costs.

As a comparison, homeowners often carry fire insurance, but seldom maintenance insurance. You buy fire insurance to guard against a catastrophic loss, which is a low probability but high cost event. As a result, fire insurance is relatively affordable, since premiums paid by all those homeowners whose houses do not burn down more than pay for the losses on those few whose houses do.

On the other hand, no one carries home maintenance insurance to pay for a clogged drain or broken garage door. If insurance paid for the plumber visit every time a toilet overflowed, we would now have a plumbing crisis, and Congress would be looking to reign in runaway plumbing bills with “national plumbing insurance.”

In his press conference, U.S. President Barack Obama claimed that government insurance would not drive private providers out of business. This is absurd. As the government provider will not have to produce a profit or accurately account for its contingent liabilities, it will provide insurance on an actuarially unsound basis.

With taxpayer subsidies, the government provider can run losses indefinitely. If private insurers did this, they would either be shut down or go bankrupt. Therefore, the cost of government provided health insurance will not be confined to the premiums paid, but will include the taxpayers’ bill to continually bail out the government provider.

When Medicare was first proposed back in 1966, it cost $3 billion per year, and the projection was for inflation-adjusted annual costs to rise to $12 billion by 1990. The actual cost in 1990 was $107 billion, and the 2009 estimate is a staggering $408 billion! So much for government estimates on health care.

As if this were not bad enough, the House of Representatives voted to pass the American Clean Energy and Security Act, otherwise known as the “cap and trade” bill. Disguised as an environmental bill, this proposal is merely another gigantic tax.

The lion’s share of the new revenue is already committed to politically connected special interests that will reap windfalls at everyone else’s expense. To make matters worse, the bill before Congress amounts to a blank slate, with the Environmental Protection Agency (EPA) empowered to draft the details in any manner they see fit. If Congress is going to shoot the economy in the knee, they should at least be required to pull the trigger themselves.

“Cap and trade” will do nothing to reduce pollution, yet it will drive up production costs throughout the economy – rendering us even less globally competitive than we are today. In addition to the huge cost of paying the tax, its enforcement involves the creation of an entire new bureaucracy, the costs of which will be borne by American consumers in the form of higher prices.

Years of reckless borrowing and spending have left us in a gigantic hole. Getting out of it requires that we make the most effective use of all available resources. We need labor and capital to operate as efficiently as possible so we can save and produce our way back to prosperity.

Unfortunately, national health insurance and “cap and trade” are two steps in the wrong direction. Rather than getting us out of this hole, they will merely cave in the walls around us.

Source: With National Health Plan and Carbon-Emissions Regs, Administration Aims Two More Punches at the U.S. Economic Recovery ]]> http://www.contrarianprofits.com/articles/with-national-health-plan-and-carbon-emissions-regs-administration-aims-two-more-punches-at-the-us-economic-recovery/18517/feed 0 http://www.contrarianprofits.com/articles/us-bailout-plan-infringes-upon-basic-property-rights/17940 http://www.contrarianprofits.com/articles/us-bailout-plan-infringes-upon-basic-property-rights/17940#comments Tue, 16 Jun 2009 18:02:01 +0000 Peter D. Schiff http://www.contrarianprofits.com/?p=17940 “Crony capitalism” is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law.

What is abundantly clear, however, is that the new administration intends to push spending back up to pre-crash levels and to fill the entire credit void that has disappeared into the black hole of the U.S. financial system. Whether or not the prior levels of spending and lending were justified by market conditions then, or now, appears to be largely unexamined.

In the worldview of Geithner, and other like-minded economists, credit, rather than savings, is the central figure in the economic equation. Therefore, the new Treasury secretary sees anything that eases the process of lending to be an effective economic policy. With such a view in mind, the centerpiece of Geithner’s plan is the commitment of as much as $1 trillion to revive the collapsed market for securitized debt. In the run-up to the Crash of 2008, it was securitization – more than anything else – that permitted Americans to borrow more than they had ever borrowed before.

Developed primarily over the last 10 years, securitization permitted loans of all shapes and sizes to be packaged into investment-ready securities. The system worked, fueling unprecedented levels of lending in the home, auto, student, and credit-card sectors. But in the last few years, as the collateral underpinning these securities collapsed in value, the trillions of dollars of securitized debt now in circulation has become the toxic sludge at the bottom of our financial pit. Geithner is making the false assumption that cleaning up and rebuilding the securitization market is a prerequisite for a healthy economy.

Our nation’s short history with wide securitization has simply shown that the process can lead to a massive mispricing of assets and risk. By artificially rebuilding the securitization market, and committing taxpayer funds as collateral, the U.S. economy will be pushed farther and farther out on a leveraged limb, until no amount of market medicine can prevent a total economic collapse.

In truth, the only vital function provided by securitization was that it offered foreign savers a pathway to lend directly to American consumers (as a Money Morning investigative story underscored), and Wall Street executives a new asset class to over-leverage for massive profits. Our economy must dispense with these gimmicks if it hopes to pursue a meaningful recovery.

After more than a decade of unsustainable borrowing and spending, the private sector is currently attempting to restore balance through reduced consumer and mortgage credit, greater savings, and lower asset prices. With its trillions of dollars of credit injections and stimulus programs, the government hopes to allay this process by force-feeding Americans a diet of more borrowing. Government leaders feel that a restored securitization market will help. It won’t. It will just grease the skids for a quicker collapse.

Credit – securitized or not – cannot be created out of thin air. It only comes into existence though savings, which must be preceded by under-consumption. Since savings are scarce, any government guarantees toward consumer credit merely “crowd out” credit that might otherwise have been available to businesses.

During the previous decade, too much credit was extended to consumers and not enough to producers (securitization focused almost exclusively on consumer debt). The market is trying to correct this misallocation, but government policy is standing in the way. When consumers borrow and spend, society gains nothing. When producers borrow and invest, our capital stock is improved, and we all benefit from the increased productivity.

Consumers default on credit much more frequently than businesses. This is because businesses typically use loans to expand, and then have greater cash flow to repay the debt. In contrast, consumers typically borrow to consume and in the process, do not improve their ability to repay. As a result, one would expect consumer credit to be harder and more expensive to obtain. But that is currently not the case. Government guarantees have altered the playing field, so that now consumers are still being offered credit while businesses are being shown the door.

By shifting credit away from producers, fewer goods and services will be produced for consumers to buy and fewer employment opportunities provided for them to earn money with which to buy the goods.

To restore prosperity, credit (derived from real savings rather than a printing press) must flow to producers. Greater liquidity for business will lead to legitimate job creation, increased production, and rising living standards. By further encumbering the economy with burdensome regulation, and by transferring business decisions to vote-seeking politicians who will bail out the irresponsible, reward failure and punish success, the government will create a society destined for misery.

In an interview following his announcement, Treasury Secretary Geithner stated that government should replace the demand lost by the private sector. However, those with even a marginal grasp of economics know that demand is unlimited. It is the ability to spend that is not.

While Americans still want all the things they wanted years ago, they have made the rational choice that they can no longer afford to buy at the same levels they once did. Using a printing press to replace this “lost demand” will simply cause consumer prices to rise. Printed money does not create new purchasing power, but merely redistributes it from savers to borrowers. And since the plan will severely undermine the real productive capacity of our economy, there will not be much purchasing power left to redistribute!

Is President Obama’s Banking Bailout Plan Destined to be a Dud?

Said Bernanke: “This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt.”

In other words, credit is the lifeblood of our economy, and the continued operation of credit providers is actually an issue of national security.

In truth, not all economies run on credit. But over the last decade, the United States became a bubble economy that needed unlimited credit to keep from collapsing. In a legitimate economy, it is not credit that fuels spending and investment, but simply income and savings. It’s too bad our Fed chairman does not understand the difference.

That American families now routinely rely on credit to make every-day purchases is a habit that needs to be broken – not encouraged. What we need in America is more restraint and less indulgence.

For example, Americans in the current economy should not go into debt to buy new cars. Given the level of debt that weighs down the typical family, Americans should defer such purchases until they have paid down existing debt, or have replenished their savings to the point where they can afford to pay cash. Until that time, Americans should continue driving their old cars. In the meantime, the untapped savings could be made available to local businesses that would use it to finance badly needed capital investments.

But such a drastic reversal in financial culture represents the kind of change that no one in the outgoing or incoming White House administrations appears willing to consider. By providing perpetual support to lenders that have bankrupted themselves through bad loans, the government merely guarantees that bad economic behavior will continue.

Credit is indeed vital to an economy, but it does not constitute an economy within itself. The important thing to remember is that credit is scarce, and is limited by the stock of savings. Obviously, savings loaned to one individual is not available to be loaned to another until it the outstanding debt is repaid. If it is never repaid, the savings are lost.

Loans to consumers not only crowd out more productive loans that might have been made to business, they have a far greater likelihood of ending in default. In addition, while business loans increase our capital stock and lead to greater productivity, loans made to consumers are merely spent, and do not create conditions that will make repayment easier.

When businesses borrow to fund capital investments, the extra cash flows that result are used to repay the loans. When individuals borrow to spend, loans can only be repaid out of reduced future consumption.

One of the reasons we are in such dire straits is that consumers have already borrowed and spent too much. Many did so based on the false belief that ever-appreciating real estate would ultimately provide the means to repay their debts and finance their lifestyles. Now that reality has finally set in, why should the spending spree continue?

The fact that our gross domestic product (GDP) – 70% of which is consumption-driven – is currently contracting should not surprise anyone. In fact, such a contraction is long overdue and the government should not do anything to interfere.

In trying to perpetuate the illusion, the government wants to revive the spending spree that has led us to this disaster. But how can such actions possibly help? How will more debt improve the economy? Wouldn’t our circumstances be vastly improved if we paid off some of our debts and replenished our savings? Wouldn’t we be in better shape if instead of buying more stuff we concentrated on producing it?

The unpleasant reality is that years of bad monetary and fiscal policy have encumbered our economy with debt and undermined our industrial capacity. The sooner we can begin to repair the damages, the sooner we can right the ship. If instead we merely administer more of the same, the ship will sink in a sea of inflation.

Source:  Is the U.S. Bailout Perpetuating the Credit Bubble?

To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of U.S. Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff’s social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of “buy the rumor and sell the fact.”

If it is well known that the Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.

The downside, of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties – only to “flip” them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.

This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the incoming Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices, the Fed will be forced to significantly increase its buying.

However, since the only way the Fed can buy bonds is by printing money, the more bonds it buys, the more inflation the central bank will create. As inflation diminishes the investment value of low-yielding Treasuries, the scenario will become apparent and will kick off a downward spiral. But the more active the Fed becomes in its quest to prop up bond prices, the bigger the incentive to hit the Fed’s bid.

The result will be that all Treasuries sold will be purchased by the Fed.

But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping – such as corporate, municipal and agency debt – to fall through the floor, pushing up interest rates across the board.

In order to “save” the economy from these high rates, the Fed will then have to expand its purchases to include all forms of debt. If that happens, runaway inflation will quickly turn into hyperinflation, and our currency will be worthless and our economy left in ruins.

To avoid this nightmare scenario, the Fed should pull out of the bond market before it’s too late and let prices fall to where real buyers – those willing to hold to maturity – re-enter the market. Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.

The grim reality, of course, is that when the real estate bubble burst, the government was able to “bail out” private parties. However, when the bond market bubble bursts, it will be the U.S. government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyperinflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoff’s clients might finally find some comfort.

Source: The Fed’s Bubble Trouble Will Cause Rates to Spike and Spawn Hyperinflation

Byron King says gold and oil prices are experiencing a correction, not a trend reversal, and that the long-term prospects for these commodities are bullish.

Euro Pacific Capital president Peter Schiff goes even further. He reckons the outlook for gold and oil has never been brighter. That’s because the current dip in commodity prices – and the dollar rally – is a market ‘fake’ that Wall Street has bought into without a rationale. The fundamentals simply don’t support it…

In football, when a running back intends to cut to the left, he often first fakes right.  This move is designed to make the defense commit its resources in the wrong direction.  It is my experience that markets often follow a similar path.

Just prior to a major move in one direction, markets often make a sharp move in the opposite direction first. With respect to the dollar, gold, oil and other commodities, many on Wall Street have bought into the fake – and will soon be watching in amazement as the runner sprints to the end zone.

Over the last few months, as the dollar rose more than 10% against a basket of other currencies – and as gold and oil sank to multi-month lows – many investors concluded that a threshold had been crossed, and that the bearish trend for the dollar and the bullish trends for commodities had finally come to an end.

But rather than representing a sea change, these countertrend moves more likely signify that the previously established trends are about to kick it into a whole new – and much higher – gear.

My take is that if you already thought you had seen a bear market in the dollar and a bull market in gold, oil, and other commodities, well, “you ain’t seen nothing yet.”

Corrections are often vicious, designed to shake loose as many investors as possible prior to a major move.  The best bull markets carry as little excess baggage as possible.  With few speculators on board to sell into every rally, the true believers who remain can receive the full benefit of a fundamental upswing.

Violent downward moves also force out those that were too highly leveraged, or those who showed up late to the party with little understanding of the true fundamentals.  Those who panicked and jumped out too low often scramble to reestablish positions at higher prices, further fueling this next leg of a bull market.

This recent correction saw the most dramatic change in sentiment that I have ever witnessed.  But the fake that caused the market to commit was, in fact, not worthy of a high school benchwarmer.  With absolutely no significant developments that could explain either a top in the dollar, or a bottom in commodities, investors placed their faith in price movements alone.  Once the numbers started to show some retrograde motion, everyone simply assumed that a real change had taken place, and the momentum buying and selling began.

The rapid movement reveals how clueless participants in these trades had become. Even those fund managers who typically seem to understand the market’s fundamentals were fooled by the sharp price movements and the rhetoric that they spawned.

Lacking any real change in fundamentals, such abrupt changes in sentiment following extreme price swings are as bullish a sign as I have ever seen.  There is absolutely no basis for a significant dollar rally, or further weakness in gold, oil, or other commodities.

The United States is the focal point of the world’s financial turmoil. We talked creditors around the globe into loaning us trillions of dollars.  Now that it’s becoming increasingly apparent that we cannot pay the money back, Wall Street has concocted a scenario where our shell-shocked creditors respond by loaning us even more.  More alarming is that many brain-dead investors see this as a likely development.

The fact is that the outlook for the dollar has never been bleaker and the prospects for gold and other commodities have never been brighter.  The rationale for a new dollar bull market, or bear markets in commodities, is just as flawed as those used to justify investments in Internet stocks and subprime mortgages.  Interestingly enough, it’s mostly the same suspects advancing the arguments.

Source: Don’t Let the Market’s Juke Move Fake You Out of the Looming Profits in Gold

Global economies are cooling off not because American consumers spending has slowed but because U.S. homeowners are defaulting on hundreds of billions of dollars of existing loans underwritten by lenders around the world.

This means, although foreign banks are suffering due to lending to the U.S., they can avoid future pain by refusing to lend to America anymore. This will torpedo the dollar. But Peter says this is precisely what must happen…

Economists, who now see American troubles spreading around the world, are predicting that foreign central banks will ignore the gathering inflation threat and follow the U.S. Federal Reserve down the rate-cutting path.

Similarly, they argue that, since the downturn began here, the recovery of the U.S. economy will likely be under way while the rest of world is still decelerating.

These assumptions have prompted a recent rally in the U.S. dollar, and an accompanying sell-off in gold, commodities and foreign stocks, and have cast doubts on the ability of foreign economies to economically “decouple” from the United States.

But investors should not take the bait.

America and the U.S. economy does, indeed, pose a global threat, but not for the reasons these economists suppose. Foreign economies are suffering not because American consumers have slowed their voracious spending, but because they are defaulting on hundreds of billions of dollars of existing loans underwritten by lenders around the world.

The conventional wisdom is that foreign economies depend on American consumers to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. Indeed, in markets such as China, the government is actually taking steps to stoke domestic demand.

In America, however, spending has largely been achieved through a massive vendor-financing scheme.  Foreign-supplied credit has allowed American consumers to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms.

In other words, the global pain is not resulting from a contraction in the U.S. economy, but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the economic decoupling that already has occurred beneath the surface.

The current losses that banks in Europe and Asia are now suffering are real, but future losses can be avoided by suspending lending to Americans.

Shutting off this credit will torpedo the dollar, but that is precisely what must occur.

By allowing the U.S. dollar to drop to its natural, unsupported level, not only will the American caboose be decoupled from the global gravy train, but it also will allow the rest of the cars to move along the tracks much faster.

Outside the United States, there still will be plenty of consumers to buy what is produced, and plenty of investment opportunities for those with savings. Rather than dragging the global economy down, such a development would actually un-tether it.

On the other hand, left to its own devices, the U.S. economy will implode. There will be fewer products for American consumers to buy and very little savings for anyone to borrow.

Some foolishly believe that many of the world’s problems result from the U.S. dollar weakness, and that pushing the American greenback back up would be good for all. For example, the thinking goes, since the weak dollar contributed to the escalation in oil prices, the strengthening dollar should help bring prices down.

However, if foreign governments weaken their own currencies to push the dollar up, they will simply succeed in bringing oil prices down for Americans. Oil prices will go up for their own citizens. This can’t be an attractive bargain for any European or Asian political leader.

The weak dollar is merely a manifestation of substantial structural problems underlying the American economy. Unfortunately for us, the solution to those problems, as well as the global economic imbalances, can only be found in a weaker dollar. Efforts to artificially prop up the U.S. dollar will only exacerbate those imbalances, and make its ultimate fall that much more severe.

Source: Foreign Economies Must “Decouple” from the United States by Suspending Lending to U.S. Consumers

So, it was strange to hear Greenspan, in an interview last week on CNBC, cast his eyes upon the charred landscape that was once the national real estate market and offer high-minded criticisms of the obvious excesses and irrationalities that brought on the devastation.

Greenspan’s attitude was akin to a retired drug dealer lamenting the urban blight caused by rampant addiction. The former Fed chief noted that housing prices were still too high, that too many homeowners were upside down on their mortgages, and that Fannie Mae (FNM) and Freddie Mac (FRE) were accidents waiting to happen.

Methinks the serial bubble blower doth protest too much.

Indeed, the fact that the media still holds this joker in such high esteem is a testament to just how clueless most journalists really are. Rather than fawning over his every word, journalists should be grilling him like they’re interrogators for the CIA.

Though, in his new post-Fed-Chair incarnation, Greenspan does show an increased willingness to speak the truth: Perhaps sharp candor generates higher speaking fees than murky academic jargon. But conveniently missing from his belated admission that home prices are too high is the concession that his irresponsible monetary policies propelled prices to those heights in the first place.

In fact, even as the housing bubble was inflating, Greenspan repeatedly denied its existence. He took every opportunity to talk the real estate market up and went out of his way to justify irrationally high home prices.

His concerns about upside-down mortgages are particularly offensive given his consistent praise, when he was Fed chairman, of the ability of home equity extractions to fuel economic growth. In fact, during the final years of his tenure there was no greater proponent for cash out re-financing than Alan Greenspan.

Greenspan not only commended homeowners for their sophisticated approach to “managing their home equity” on a routine basis, he applauded Wall Street and mortgage lenders for their creativity and ingenuity. Of course, home equity extractions are largely responsible for so many homeowners now owing more than their homes are worth!

However, his most brazen contention was that he had tried to warn us of the dangers that Fannie and Freddie could pose to the entire economy. Excuse me, but when exactly did he sound this alarm?

His points that Fannie and Freddie should not exist, and that the moral hazard of private profits and socialized losses are an accident waiting to happen would have been right on point had he actually made them while still head of the Fed.

It’s just too bad Maria Bartiromo did not remind Greenspan that the accident has already taken place. Fannie and Freddie’s flawed design may have rendered them destined to slip, but it was Greenspan himself who supplied the banana peel.

[Editor’s Note: Peter D. Schiff, Euro Pacific Capital Inc.’s president and chief global strategist, is a regular contributor to Money Morning, and most recently wrote that the U.S. Congress was mortgaging the future and sticking future generations of taxpayers with a big bill - just to bail out Fannie Mae and Freddie Mac. To find out how to get a report on the once-in-a-lifetime profit plays that will emanate from the so-called "SuperCrash" - and a free copy of Schiff’s New York Times bestseller "Crash Proof: How to Profit from the Coming Economic Collapse," please click here.]

Source: Ex-Fed Chief Greenspan Changes His Tune and Blasts the Housing Bubble He Helped Create