David Stevenson (MoneyWeek, UK):

It’s not been a great week for British bankers.

There’s the ongoing spat between RBS and HM Government over how much the former’s heavy hitters can pay themselves in bonuses. Then there’s the embarrassing yet somehow inevitable revelation that our banks are the ones most exposed to Dubai – with RBS top of the pile, naturally.

Meanwhile, French President Nicolas Sarkozy has been unable to disguise his glee that Europe’s new finance minister is a Frenchman, who he clearly believes will take the City down a peg or two.

But these are just niggles compared to the real dangers the banking system faces.

The cheap money that the UK’s lenders have been enjoying is about to dry up, for one thing. But worse still, while central banks have been flooding the world with money, a dangerous imbalance has been building up in the banking sector…

Click here for the rest of Mr. Stevenson’s insightful article at MoneyWeek, UK.

It’s worth noting that Monday’s auction for 3-year debt was met with ravenous, near-record demand and that Tuesday’s 10-year sale met a bid-to-cover ratio of 2.8… historically high for the 10-year, but not even close to the 3.3 ratio for the shorter dated bonds the day before.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

For the rest of the article, read Ian Mathias at The Daily Reckoning.

But the reality is that this tectonic shift in global finance – and the economic shockwaves that will result – could provide investors with some of the greatest profit plays they’ll ever see in their lifetimes.

No matter which camp you’re in, the China-spawned changes are headed our way.

In 1990, the U.S. banking system was 2.3 to 2.7 times the size of its counterpart in China. Today, however, the situation has been reversed, and there is much more of an imbalance. In fact, China’s banking system has 25 times the reserves of the U.S. Federal Reserve.

At some point, the United States will no longer be able to dictate international monetary policy. Unfortunately, as our monetary policy aptly demonstrates, Washington seems to be the only player involved in this game of high-stakes global finance to not understand just how this is destined to play out.

U.S. leaders continue to employ monetary policy as a weapon – despite the fact that most of the rest of the world views the U.S. dollar as a liability.
At the end of World War II, virtually the entire world functioned on dollars. By some accounts, 100% of the world’s money supply was the dollar. Today that figure has dropped all the way down to 19%, says Rochdale Securities LLC analyst Richard Bove, a noted expert on the U.S. banking system and Federal Reserve.

Now that the federal government has deployed a few trillion dollars more as bailout bucks, it’s clear that the greenback has lost its mojo and the U.S. government has lost its international monetary leverage.

Why is this worrisome? History tells us that the countries with the strongest economies tend to also have the strongest currencies. It may take awhile for the latter to catch up with the former, but the relationship is highly correlated relationship – suggesting that China’s on the rise economically, while its currency is advancing with the unstoppability of a diesel locomotive operating at full throttle.

So if the U.S. dollar gets derailed as the world’s chief reserve currency – as we’ve repeatedly predicted is destined to take place – the world’s next reserve currency is likely to be China’s yuan, known officially as the renminbi.

Washington says that won’t happen, since Beijing takes steps to keep the yuan from being fully tradable. That’s true enough. But Beijing also understands that the dollar is a liability – which is why China’s leaders are going to great lengths to establish the yuan as a viable currency all its own, while simultaneously minimizing the Red Dragon’s dollar-based exposure.

In the last six months, for example, China has signed at least $95 billion in swap agreements, under which it can trade directly with countries for payment in yuan. The countries that sign these deals are getting huge discounts from China in exchange for their participation – and for buying goods from China. And the deals enable China to do an end run around the entire dollar-based currency trading system.

When it comes to this long-term plan to boost the yuan’s importance, China is waging a campaign on multiple fronts. This past spring, for instance, China organized a meeting in Moscow – attended by representatives from Brazil, India and Russia – where the main goal was to supplant the U.S. dollar as the world’s main reserve currency, replacing it with a yuan-led market basket of currencies, one that is simply backed by China’s renminbi, or perhaps even one based on the International Monetary Fund’s so-called Special Drawing Right (SDR).

Created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system, the SDR was redefined in 1973 as a basket of currencies. Today, the SDR consists of the euro, Japanese yen, pound sterling, and U.S. dollar.

My guess is that this gathering in Moscow was merely the first of many such meetings that we’ll see take place around the world in the years to come. Expect the list of attendees to grow, as well.

Given all that we now know, the real question becomes: What happens if China succeeds and the yuan displaces the greenback as the world’s top transactional currency?

The list of potential implications is very long, and includes several scenarios that are almost apocalyptic. But most of the outcomes raise as many questions as they answer.

Let’s consider the Top Five:

• Global Gloom Leads to U.S. Doom: The U.S. dollar goes into freefall for the simple reason that if no country has to hold dollars any longer, they won’t. Instead – thanks to the ragged state of the U.S. government’s finances – many countries will dump greenbacks fast as they can, which will only put additional pressure on an already-strained U.S. financial system, which in turn will further damage our economy.
• Inflation Inflates: Inflation will strike here with a vengeance, as anything bought, sold or priced in dollars will instantly rise in price to offset this fall.
• Repatriation Risk: With the dollar serving as the world’s de factocurrency, U.S. companies bear very little exchange rate risk when the time comes to repatriate assets or make currency-related adjustments. That would change overnight and prices throughout the value chains would rise sharply to compensate.
• Money Costs More: The cost of money itself would rise. If the dollar falls, not only will there be massive selling pressure against it, but the cost of borrowing it will rise dramatically as lenders raise rates to cope with the increased risk of dollar-based transactions.
• Death By Debt: And finally, if there is another reserve currency, other countries will no longer have to buy our debt, and you can guess where that will leave us – especially given the fact that we’ve taken on trillions in new debt to help finance our way out of our current mess.

My best guess is that we won’t see any one of these things in isolation, but will instead experience a blending of several or all of them. To the extent that China continues to absorb our inflationary influences, buy our debt in measured doses and maintain its reserves, we’ll probably have a measured decline in the value of the dollar – but not the catastrophic fall many in the doom, gloom and boom crowd are predicting. At the same time, I also see the IMF change course in the next few years to reflect China’s increasingly substantial influence and monetary power.

On the individual investor level, this clearly provides a new set of influences that most investors have yet to grasp. Most will perceive what I have said as a threat, but I believe the correct way to view this is that there will be a whole new set of opportunities coming our way.

Some of those opportunities will be obvious – like the need to invest in currencies and commodities that are of interest to China. Others, like direct investments in China’s yuan, will require special insight, a good investment guide, or a leap of faith.

The bottom line – and the most important thing to remember – is this: No matter how this plays out, there will always be an upside for investors who are willing to seek it out.

Source:  The Five Financial Shockwaves to Expect When China’s Yuan Swaps Places with the U.S. Dollar

On one side is U.S. President Barack Obama and his plan to expand the authority of the Federal Reserve. In addition to its current powers, Obama plans to give the Fed regulatory authority over large financial institutions that are considered “too big to fail.”

On the other side is U.S. Rep. Ron Paul, R-TX, who has gathered 250 signatures for a proposal to audit the Federal Reserve. This audit, by Paul’s own admission is only a down payment towards his overriding goal of abolishing the central bank.

So who’s right? Should the Federal Reserve have more authority or less? And what will the outcome mean for investors?

The call for greater Fed power comes, as might be expected, from those who think the Fed has done a good job managing the financial crisis. Their view is that the Fed – by swelling its balance sheet by about $1.4 trillion and more than doubling the monetary base in less than a year – prevented deflation from taking hold in the economy and saved the banking system, which was in dire danger of collapse.

To those with this mindset, it makes sense for the Fed to act as the primary regulator of banks and investment banks that pose a systemic risk to the U.S. financial sector.

But the problem with this plan is that any potential rescues would not be carried out on the Fed’s dime, but on that of the Federal Deposit Insurance Corporation (FDIC). That means a collapse in the banking system would actually benefit the Fed by allowing the central bank toramp up its balance sheet to replace all of the banks’ losses and ensure that its chairman makes the nightly news every evening.

Even for those who are not staunch believers in Nobel Prize-winner James Buchanan’s public choice theory, the incentives seem to be wrong. It would make more sense to put banking system regulation firmly under the FDIC, which is responsible for paying up if anything goes wrong.

It’s not likely that an empowered Fed would impose tight restrictions on the big banks. Instead, the central bank’s governance would probably become a prime example of “regulatory capture,” by which spineless regulators exist mainly to do the bidding of the very institutions they’re supposed to be regulating.

Since the rest of us are dependent on the Fed’s monetary policy to survive economically, and need bank regulation that will keep the biggest banks from picking our pockets every few years, we don’t want the Fed to become a subsidiary of Goldman Sachs Group Inc. (NYSE:GS) – something that seems likely under the Obama proposal.

On the other hand, Paul’s bill appeals to those like myself, who believe the Fed has consistently run an over-expansionary monetary policy since the mid-1990s.

The credibility of this theory has been undermined by the fact that inflation has been kept under wraps, but this month’s consumer price index (CPI) and producer price index (PPI) figures – up 0.7% and 0.5% respectively – suggest that another surge in prices may not be far off.

As we go through the fall, the months of price declines in late 2008 that were caused by the collapse of energy and commodity prices will cause year-over-year inflation to trend higher. That, in turn, is likely to raise gold prices and Treasury interest rates, causing bond market panic and inevitably changing the public perception of the Fed’s performance.

So if the Obama administration wants to give the Fed new powers and extend Chairman Ben Bernanke’s term in office (which ends in January 2010) they had better do so quickly.

In any case, Paul’s proposal to audit the Fed would bring central bank operations more under the control of politicians, who supposedly would be able to expose unpopular goings-on and unexpected losses in the Fed’s operations. That’s why it has attracted bipartisan support.

But rather than simply auditing the Fed or abolishing it, as Paul proposes, there is a much better case for giving the central bank a new mandate, whereby its obligation to maintain monetary stability is given precedence over all other obligations.

Under the Full Employment Act of 1978, it has a dual obligation to maintain employment and monetary stability. A new mandate that prioritized monetary stability would force the Fed to follow the policies of former Federal Reserve Chairman Paul Volcker. That would mean keeping interest rates well above the rate of inflation, thereby favoring savers over borrowers.

As investors, we should thus oppose the Obama administration’s plans for the Fed, which seem likely to perpetuate the rent-seeking of Wall Street’s biggest banks. We should also be suspicious of Paul’s bill to audit the Fed, since that would bring it more closely under the control of elected politicians. History has shown that politicians cannot be trusted with the ability to create money out of thin air.

Instead, we should back plans to pass legislation that “Volckerizes” the Fed on a permanent basis, making monetary policy sound, eliminating the risk of inflation, and raising the rates we earn on all of our savings to a level that pays us adequately for providing banks and other borrowers with our money.

In the end, the ability to earn decent returns on savings and keep the result is the most important capitalist freedom of them all.

Source: Choosing Sides in the Fight for the Federal Reserve: Whom Should Wise Investors Align With?

So far, American taxpayers have shoveled out almost $600 billion in Troubled Asset Relief Program (TARP) funding to prime the economic pump and get the banks lending – and people spending – again.

Yet a report by The Wall Street Journal shows the banks are lending less money than they did five months ago. And further research shows no matter how much TARP money the government pumps into the U.S. banking system, American consumers may just not be ready to drink from the trough – a sobering reality that could doom the chances of a quick economic rebound.

Meanwhile, the banks’ perceived reluctance to lend – coupled with their lavish spending on bonuses and management perks, has the the Obama administration on the defensive, sensitive to skepticism about the government’s ability to revitalize the banking system.

Bank Lending Still Anemic

Despite government pronouncements to the contrary, pumping billions of dollars into the financial sector has not had the desired result, meaning lending hasn’t accelerated. In fact, according to the recent Wall Street Journal analysis, initial loans and refinancing outlays at the nation’s big banks dropped by 23% from October to February.

According to the data, 19 financial institutions made or refinanced a total of $226.3 billion worth of loans in October. That figure plummeted to $174.2 billion for February, The Journal reported.  In fact, the total dollar amount of new loans declined in three of the four months the U.S. government has reported the data, and all but three of the 19 largest TARP recipients originated fewer loans in February than they did in October.

For its part, government officials say the current situation could have been a whole lot worse without TARP funding.

Just last week, the U.S. Treasury Department praised “the relatively steady overall lending levels.” Without those capital injections, “lending would have suffered a far smaller total volume of loan originations in February than January,” the Treasury Department said.

But bank executives defended their lending levels by saying the reason behind a decline in new loans, refinancing deals and modifications of troubled loans is the lack of demand from consumers and businesses – and not the banks’ willingness to lend.

JPMorgan Chase & Co. (JPM) showed one of the biggest lending declines, dropping from $61.2 billion in October to $39.7 billion in February – a drop of 35%.  But JP Morgan executives explained the bank made more than $151 million in loans in the first quarter, “despite the fact that loan demand has dropped dramatically.”

Commercial lending slid by about 40% and may have been depressed by a partial thawing of the bond markets, where some corporations raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, according to Thomson Reuters.

The figures show that consumer loans, especially mortgage refinancings, account for a large portion of bank lending. Nearly half of February’s lending went to consumers, up from about one-quarter in October.

But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. And because the United States has accounted for one-third of total growth in global consumption since 1990, any change in U.S. consumer behavior has profound implications, not just for the United States, but for the worldwide economy.

Increased Savings Rate Could Slow Rebound

Consumer spending is the engine of the U.S. economy, accounting for about 70% of gross domestic product (GDP). And in the go-go days of the early 21st century, U.S. consumer spending was in full swing.

U.S. households nearly doubled their outstanding debt to $13.8 trillion between 2000 and 2007, according to the McKinsey Institute. During that unprecedented period, personal consumption accounted for 77% of real U.S. GDP growth and personal liabilities reached an astounding 138% of disposable income.

But a shift occurred as the global financial crisis worsened at the end of 2008: U.S. households reduced their outstanding debt for the first time since World War II by curtailing spending and reducing borrowing.

In fact, recently released U.S. Federal Reserve data shows that outstanding consumer credit dropped from $2.95 trillion to $2.56 trillion in January.

But as consumer spending and borrowing plunged in recent months, the saving rate has rebounded, reaching 5% in January. And each extra point in the savings rate means more than $100 billion less in spending a year, according to a recent McKinsey study.

In fact, the study found that if consumers continue to reduce debt, the increased savings rate would result in $535 billion less consumption a year, a potentially serious drag on a nascent economic recovery.

Banks and Obama Still Not Out of the Woods

Looming over all this is the possibility that banks may need more government assistance in the near future in order to keep lending – even at the current depressed levels.

JPMorgan analyst Matthew Jozoff predicts banks could suffer another $400 billion in losses as a result of continuing credit deterioration, which could force policymakers to deploy yet another round of capital infusions.

Obama administration officials acknowledge that they may still have to ask Congress for more money in the future. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks.

The most immediate expense may come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 largest banks.  The tests are expected to show that at least several major institutions will need to increase their capital cushions by billions of dollars.

That could include Bank of America Corp. (BAC), a bank that many experts say probably should have been liquidated long ago.

In order to avoid another capital infusion, the government might elect to take equity in return for previous loans.  Converting the loans into common stock would increase the capital of big banks by more than $100 billion and give the government a large equity stake in return.

Of course, converting those loans into common shares would turn the government into the bank’s biggest shareholder – a move some critics see as a back door to nationalization. The move would also serve to further dilute the holdings of existing shareholders.

While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into the banks, the administration would no doubt be heavily criticized for displaying such “socialist” tendencies.

[Editor's Note: In this second installment of a two-part look at whether the credit crisis continues to crimp financing for companies and consumers, Money Morning takes a look at bank lending. In Part I earlier this week, we studied venture-capital-investment trends.]

Source: A Look at Liquidity: The Real Reason Banks Aren’t Lending

With the U.S. unemployment rate jumping to its highest level  in a quarter century in February, it’s become abundantly clear that that the U.S. recession is much deeper than President Barack Obama anticipated, meaning it’s likely that additional measures will be undertaken to arrest the slide and restart growth.

Many experts are now calling for the Obama administration to focus on the fundamentals – fundamental economics, that is. They want him to drop some of its ancillary pet projects – such as healthcare reform – and are telling President Obama to focus all his time and the government’s resources on three things:

• Arresting the economy’s slide.
• Hastening its subsequent rebound.
• And fixing the U.S. banking system.

A focus on anything else is just a diversion and is a waste of time – especially because  there are questions about just how bad the economy actually is, says John Ryding, chief economist for RDQ Economics LLC in New York.

The Obama administration “should be focused on stabilization [of financial firms] and stimulus – and that should not only be ‘Job One,’ that should be the only job right now,” Ryding told Bloomberg Television. “The question is: Is it (a) recession or is it something worse than (a) recession” – like a depression?”

There’s definitely a cause for concern: The U.S. unemployment rate jumped to a higher-than-expected 8.1% percent in February, as employers reduced payrolls by 651,000, the U.S. Labor Department said Friday. Job losses have exceeded 600,000 for each of the last three straight months – something that hasn’t happened since the government started collecting jobless data all the way back in 1939.

As if that weren’t bad enough, consider this: Unemployment has already reached the average rate the White House had projected for the entire year, Bloomberg News reported.

Economists and other experts were already calling for the recession to last longer than had been expected; some are even calling for four more years of pain: a longer recession, followed by slow recovery that could have the malaise afflicting Americans until 2013. [For a related report on these revised views that appears elsewhere in today’s issue of Money Morning, please click here].

Experts don’t want the already dire situation to get even worse. But now there’s a growing concern that the Obama administration may be trying to do too much, and focus on too much – when the economy and its related ills should be – as Ryding said – “Job One.”

Market Matters

Just imagine what President Obama’s approval ratings would be if the country weren’t mired in the worst recession since the Great Depression?

With unemployment soaring to its worst level since 1983 and the U.S. Federal Reserve having declared that every sector of the economy is in the doldrums, President Obama moved into the 2nd month of his presidency with 41% of the American people believing that the country “is generally headed in the right direction.”  By comparison, 26% of those surveyed in January (and 12% in November before the election) expressed similar sentiment.

Though the economic data reveals more “challenges” ahead and the markets continue to move to much lower levels, two-thirds of Americans feel “hopeful” about Obama’s leadership.  In a small way, these results may be more telling than any earnings or economic report.  Consumer and business confidence will prove keys in moving the country back in the right direction.  Perhaps, these poll results indicate that such “optimism” may be returning to the American mindset (though ever so slowly)?

Although the administration’s $787 billion stimulus plan is designed to save or create a total of 3.5 million jobs, the American economy has already shed 4.4 million jobs since the recession “officially” began in December 2007. And experts say that more declines are coming.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. (DB) in New York, is one such expert. In a research note to clients, LaVorgna says he now sees the U.S. jobless rate reaching the 10% level by the end of this year. And he’s now abandoned his expectation that growth will emerge in the second half.

“Without any engines of growth, the labor market and the economy are likely to remain depressed for some time,” LaVorgna wrote.
Plunging domestic and overseas demand is inducing such firms as Sears Holdings Corp. (SHLD) and General Motors Corp. (GM) are stepping up their job cuts.

U.S. stocks posted their biggest weekly decline in three months last week after American International Group Inc. (AIG) reported a $61.7 billion loss – the biggest in history – and iconic billionaire investor Warren Buffett said the economy is in a “shambles.”

The Standard & Poor’s 500 Stock Index slumped 7% last week, meaning that broad index has plunged 20% since President Obama took office on Jan. 20. The Dow Jones Industrial Average tumbled below 7,000 and never looked back, hitting levels not seen since May 1997.  Other major indexes followed, with the Nasdaq Composite Index plummeting to a six-year low.

The Obama Administration and the Federal Reserve have rolled out two more measures designed to stabilize the credit markets and provide some much needed relief for struggling borrowers. The Term Asset-Backed  Securities Loan Facility is a $200 billion program that will stimulate lending activity for small businesses and consumers.  The $75 billion “Making Home Affordable” program is supposed  to assist 9 million homeowners with financial hardships to avoid foreclosure by modifying terms of their mortgages.

How long until Citigroup Inc. (C) is listed as a penny stock on the Pink Sheets?  With nationalization talks becoming more prevalent, the one-time banking giant fell below $1 a share last week and its market cap plunged to $5.4 billion (from $270 billion just two years ago).  Speaking of penny stocks, American  International Group Inc. (AIG) posted a $60+ billion quarterly loss, the largest in history, and stands prepared to accept another $30 billion in government funds.

US Bancorp (USB) and Wells Fargo & Co. (WFC) each took measures to shore up their financial positions as both cut their respective dividends by about 85% to a nominal nickel a share. Meanwhile, Wells’ management announced an additional $2 billion in expenditure reductions and claimed that the financial institution experienced “strong operating results” in early 2009.  The news outside of financials was not much better.  Computer shipments are projected to decrease by almost 12% in 2009, the worst level of activity ever reported.  Auto sales in February plummeted again and no one escaped the negativity: GM (-53%), Ford Motor Co. (F) (-48%), Toyota Motor Corp. (ADR: TM) (-40%).  GM also seemed to move a few steps closer to bankruptcy reorganization (and penny stock status).

Volatile oil prices settled above $45 a barrel as traders weighed the dire economic picture against inventory reports that showed an unexpected decline in crude supplies.  Prospects for a new stimulus plan from China brought short-lived optimism, though ultimately the pessimists won out as news about Citi and GM ruled the day.

Economically Speaking

With many countries mired in a global recession, China proclaimed that its $585 billion stimulus plan should produce about 8% annual growth for the world’s third largest economy.  Outsiders had hoped that China’s premier would announce a more robust package, but instead the government has adopted a “wait-and-see” attitude before determining if any further measures are needed.

Both the European Central Bank (1.5%) and the Bank of England (0.5%) reduced their key lending rates by 50 basis points, dropping those benchmarks to their lowest levels in their respective histories.

The Federal Reserve’s Beige Book reported that the prospects for recovery continue to look bleak for the short-term with any “pickup not expected before late 2009 or early 2010.”  Meanwhile, Fed Chairman Ben S. Bernanke confirmed that the recession is worsening as the labor market weakens; he also appeared to support the Obama administration’s stimulus package as the best hope to revive the domestic economy.

This week’s economic calendar is highlighted by the February retail sales report and some analysts are “cautiously” optimistic (which is really saying something in this environment).  The January report depicted the first monthly increase in seven months and the best showing for retailers in over a year.  After a dismal holiday season, perhaps folks are simply antsy to partake in the “Great American Pastime” of shopping again.

Remember, gift cards purchased for the holidays are still being redeemed and may have contributed to some additional activity last month.

And with equities facing their lowest valuations in 12 years, some investors may be becoming just as antsy to jump off the sidelines and take advantage of bargain-basement prices. Could this be the week?  Unfortunately, up to this point, there’s been far more talk than action.

Weekly Economic Calendar

Source: As the Economy Worsens, Experts Call for Obama to Focus on the Fundamentals

…like money just appears by magic in my magic wallet or something, and all I have to do is get it out of my pocket and start handing out twenty-dollar bills to anybody who asks me for one – was (unlike me who was down in cash last week), up another $4 billion last week, taking the 12-month total of new physical currency up another $77 billion, bringing the grand total (“ka-ching!”) to $894 billion, which is not a lot when you consider all the tens of trillions of dollar’s worth of stuff out there all based on this little bit of “real” money! Hahaha!

But it is still a $770 increase in the cash money supply, in one month, for everybody in this country that has a private-sector job, with which to make a profit, with which to pay for everything, including remitting taxes.

And in the week when the Federal Reserve increased credit in the banking system by a big ol’ $76.8 billion, of which the Fed itself bought up $56 billion dollar’s worth of Treasury debt, the Gross National Debt increased by a huge $77 billion, taking the nation’s federal indebtedness to a staggering $10.789 trillion, which is so much, and so bad, that it makes you involuntarily scream out loud in your nightmares and then get up the next day and buy as much gold as you can get your hands on, but it is even worse than that, as the damnable Congress has further indebted us, in the last twelve months alone, by almost exactly $1.5 trillion!

In one freaking year!

I thought that TheBurningPlatform.com was going to comment on this astonishing fiscal irresponsibility of Congress and the Federal Reserve, but instead they commented on the $787 billion, 1,074 page stimulus bill that was just signed by Obama by noting, “The current ‘stimulus’ package of $787 billion is more than the entire National Debt in 1978 ($771 billion).”

I shook my head in bewilderment, and I thought, “What in the hell does this have to do with the national debt and how the loathsome Congress is spending us into the poorhouse by turning the purchasing power of the dollar into Pure Unadulterated Crap (PUC) by spending so much and requiring that the Federal Reserve produce, out of thin air, all the money and credit necessary for their despicable, corrupt profligacy, which is a word that always reminds me of whipping, and now that I think about it, I think that a mere whipping is too good for Alan Greenspan, former chairman of the tyrannical Federal Reserve, without whom all the inflationary spending and grotesque entitlement excesses would not have been possible and we would not be where we are today, economically bust-wise, although we would still be as old and decrepit since you stupid Earthlings put your inventive minds to developing weapons and bleeding-heart excuses to enlarge government entitlement spending instead of creating a youth serum or a pill to give you “six-pack” abs without dieting or exercise.

But it turns out that they are talking about housing prices, and say that “It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued”, which means that “prices need to fall 20%” from here, and maybe more, as “long-term averages are created by periods of overvaluation followed by periods of undervaluation”, by which they mean, and I quote, “could fall 30%” from here, which makes you catch your breath in dismay at the prospect.

The catastrophe of such a thing like that happening kind of dazed me with a sort of petrifying fear, and the next thing I knew they were talking about the federal budget deficit, too, and that the deficit for 2009 “is now estimated at between $2 trillion and $3 trillion, give or take a few hundred billion.”

They go on, “These figures seem incomprehensible to the average person on the street”, and I think to myself, “You said a mouthful there, buddy!” as I am, literally, sitting on the street, having been thrown out of the stupid bar just because I was complaining about how the drinks all cost more these days, and I was blaming the greedy bartender, and he gets right in my face and says the reason that the drinks cost more is that the Federal Reserve creates money and credit, which makes prices go up, which surprised me so much that I blurted out, “This is incomprehensible to me! I always thought you were a  stupid moron lowlife ball of garbage who never listened to me, but I see that you are, at least, not stupid about where we get inflation in prices!”, which I thought he would take as a compliment…but he did not.

And as I sit here, I realize that, thanks to the drinks being more expensive, I am not as plastered as usual, and with rare clarity, I see the need to get a pizza and some more gold because I am going to be very, very happy with some of each very, very soon!

Source:  A Government of Spendaholics

Here are four tightly regulated stocks Mark recommends that are selling at “incredible bargains. ”

The U.S. financial system is a mess – according to the World Economic Forum, the United States ranks 40th among banking systems around the world. Without federal bailouts, the two largest banks in the country, Citibank (NYSE: C) and Bank of America (NYSE: BAC), would be in bankruptcy, and the good ol’ USA would be headed for the Greater Depression, as my friend Doug Casey likes to call it.

But you’ll never guess where the world’s No. 1 banking system is. No, it’s not fabled Switzerland nor booming Hong Kong.

While the central banks around the world are desperately trying to stem the flow of red ink, this country’s red is emblazoned on its iconic mounted police force.

It’s right next door: Canada. The land of hockey and moose has the world’s soundest banking system. While European and Asian banks are collapsing, Canada stands out as an oasis of financial calm.

Canadian Banks Receive Highest Rankings

According to the Global Competitiveness Report, Canadian banks received the highest ranking, 6.8, out of a possible 7.0 (healthy, with sound balance sheets). The lowest ranking of 1 means insolvent and possible government bailout.

Canada’s stock has been rising quietly – the Canadians are known for their modesty and self-restraint – as American financiers and media are astonished to find that their northern neighbors have somehow avoided the subprime lending scandal and the housing market mess.

What’s Canada’s secret? With the exception of oil-rich Alberta, Canada did not have a strong construction surge as the United States did during the boom years. And mortgage interest is not tax deductible in Canada.

Canadian banks are national in scope; the top five banks have branches in all 10 Canadian provinces, making them less susceptible to downturns. They have large numbers of loyal depositors and a more solid base of capital. They are more tightly regulated than their U.S. counterparts, more liquid and less leveraged.

Canadian Banks – 4 of The Top 10 Largest North American Banks

Among the top 10 largest banks in North America, 4 are Canadian banks:

• Royal Bank of Canada (NYSE: RY),
• Bank of Nova Scotia (NYSE: BNS),
• Bank of Montreal (NYSE: BMO),
• and Toronto Dominion (NYSE: TD), which bought Commerce Bank last year.

Canadian bank executives don’t have to be excoriated by Parliament before taking a pay cut. The CEOs of Canada’s three-largest banks have all voluntarily cut their own pay in response to the global economic crisis.

Canada has its share of problems – being linked to commodity prices – but financially it’s done a better job than its southern neighbor. While the Bush administration ran up massive deficits year after year, Canadian officials finally pushed through a stimulus package that resulted in the government’s first deficit in a decade!

Right now, the Canadian banks are selling at incredible bargains. With operating margins exceeding 30%, and dividend yields between 6% and 8%, Canadian banks are selling at only around eight times earnings. Bank of Montreal is my favorite – it’s selling for only six times this year’s expected earnings and is yielding 10%.

During a crisis, the good investments get hit like the bad ones. But when the markets recover, the good bank stocks will skyrocket, especially those across the border.

Source: Canadian Banks: An Oasis of Financial Calm

His hopeful yet empty words caused me to reflect on the progress of government intervention through this crisis so far. And I can come to only one conclusion;

I’m praying that they’re devious.

That their measures are intended to fail. That they’ve got some secret plot…a conspiracy going on. Otherwise it means our leaders – political and economic – are just plain obtuse – complete with dunce caps.

Because there’s no other way to explain the abysmal failure of rhetoric and ‘policy’ over the course of the last year. It’s either deliberate or just thanks to incompetence. And with a darkening future ahead of us, we can only hope that it isn’t the latter.

So I’m done holding it in. I’ve been watching this farce play out for months and it’s time to let loose the broadside on these fools…smashing their misconceptions, half-truths and lies of omission to little bits.

Enough with the talk…it’s time for the fireworks.

The Free Market Didn’t Fail; The Regulations Did

Truthfully, every time I hear some politician talk about how this is an example of the failure of free markets, I want to whack the guy on the head with a rubber mallet.

There’s a fine line between free markets and the deregulation that’s allegedly intended to create a ‘free-er’ market…and that’s a distinction most fail to notice.

And in the last few decades we haven’t had anything even closely resembling a free market. Instead, we’ve had a 21st century banking system that’s governed by a gutted 1940s regulatory structure.

I’m talking about some of more dangerous “free market reforms” of the Clinton/Bush era. The repeal of the Glass Steagall Act – which kept the banking system functional from the Great Depression through the end of the 20th century – and the 2004 decision to lift leverage limitations on American banks.

Were these regulations removed with the intention of creating a free-er marketplace? In my humble opinion; absolutely not.

These were crucial safety nets for our highly-regulated economic system that got in the way of bankers’ profits. Removing them wasn’t a free market initiative, and it didn’t create a free market. It just made the whole situation far more dangerous.

If anything, the massive amounts of lobbyist money that made this deregulation possible prove – beyond a shadow of a doubt – that the U.S. government is too compromised to properly manage the economy.

Meanwhile, the government-mandated ratings agencies continued to stamp their seal of approval on questionable mortgage-backed securities. And the SEC continued to let Madoff and Stanford go about their business, long after they were warned of Madoff’s shenanigans.

You’re probably starting to see that it wasn’t the free market that created today’s problems, but the false sense of security brought on by “strict” government regulations.

So yeah, let’s go ahead and build a bigger safety blanket. One that costs more, makes the market even less efficient, and ultimately proves to be as dodgy and inconsistent as the existing regulatory system. Now that’s genius.

Taking it a step further; the size and scope of this crisis could be pinned directly on the Federal Reserve. That’s right; Greenspan’s ‘liquidity experiment’ and years of rock-bottom interest rates were the lungs blowing up the bubble. But that’s a different story altogether.

Moving on to Lie # 2…

A Novel Idea for Politicians: Quit Lying and Make up Your Mind

This is a big one.

Asking a politician to tell the truth or actually make up his mind…well that’s like asking a teenager to drive 20 miles under the speed limit. It’s just not going to happen.

Generally, that’s because telling the truth is bad for a politician’s business. No problem there…I can respect that. But what about when it’s actually a good thing for the country?

Take right now for instance. The markets are running scared. They’re beaten down and oversold, waiting for a single ray of hope or even just some consistency. What do they get instead?

They get bald-faced lies like the most recent joint statement from the Treasury, FDIC, OTS, OCC and the Fed…one that macroeconomist Mike Shedlock calls “a Purposeful Joint Lie.” A document so filled with puffery and damage control that it could make Ben Bernanke blush.

They get a government that fails to warn them that one of the people’s newest acquisitions – AIG – is set to declare the single largest loss in corporate history. They get a President who tells the press that years of trillion dollar deficits are on the way…only to backpedal a few weeks later and promise deficits half that size by the end of his first term.

Hey government; I’ve got a novel idea. How ’bout you pick a story, and stick to it?

Want another shining example? Look no further than “illiquid assets.” Know why they’re illiquid? Because the government won’t pick a value and stick to it.

The “illiquid assets” aren’t worth face value, and they’d fetch maybe a third of their value in the secondary market (for sake of argument). But ever since Paulson’s “Master Liquidity Enhancement Conduit” (MLEC) in the summer of 2007, the government’s been waffling back and forth with half-hearted promises to pay 75% of face value…perhaps more…perhaps less. They just haven’t made up their minds.

So instead of having the market’s clearing mechanism do its magic, working out deals and determining a fair market value for these securities – so that we can all move on with the lengthy road to recovery – we’ve got the government in there gummin’ up the works.

Faced with the decision of either shaking the rotten apples out of the tree or forcing taxpayers to pay for those rotten apples, they’ve chosen indecision. And the market’s not happy about that.

Paving the Road to Great Depression II

Remember, sequels are always bigger, more violent and less entertaining than the original. Oh, and they also have a knack for rehashing the worst parts of the original.

But seriously folks, let’s set the stage before I’m dismissed as a ‘fearmonger’ by people that don’t know all the facts. It surprises me that so much of the news media has reverted to questioning whether this is even the biggest slump since the Great Depression. Have they been reading the same news I have?

Both George Soros and Nassim Taleb have gone on record as saying that we’re facing a bigger slump than the Great Depression. In a little-known interview regarding his interest rate policy, Greenspan warned that this event could make the Great Depression, “look like a Sunday Picnic.” And at least nominally speaking, you can safely say that this is the biggest asset price bubble in the history of human civilization. So yes, it can be a little unnerving.

And yes; a full-blown Depression is in the range of possible outcomes.

Especially if bumbling politicians and the Fed keep themselves firmly lodged between the economy and a recovery. Just look at 1990s Japan or 1929 America. In both cases, authorities got involved and mucked up the works. Unlike the barely-remembered 1920-21 slump, a deep recession that quickly corrected itself thanks to non-intervention.

Not that they couldn’t be helping if they wanted to. They’d just have to make up their minds, quit pandering to their “sponsors” or just plain get out of the way. But that’s not likely any time soon.

(To learn how you can cut through this mess yourself, read Chairman John Pugsley’s full Lies Report)

Source: The U.S. Government: Devious or Just Plain Stupid…