Yesterday, the Dow lost another 131 points. Another big day down and it will be in the
7,000-range. Oil sank too – down to $62. The dollar, bonds, and gold stayed about where
they were.

Economists are still talking about an “exit strategy.” But in view of what is actually going
on in the economy, they’ll probably want to stay on this highway a lot longer. This is the
long road to ruin, of course. It may be fatal, but it is not – yet – unpopular.
Broadly, what is happening is exactly what should be happening.

The stock market rally is getting old…and may have already peaked out. The consumer is
running out of time, money and credit. He has no choice but to cut back. Savings rates are
rising fast – from zero to about 5% of disposable income.

Naturally, businesses are finding it hard to make sales. Earnings are collapsing…stock
dividends are down sharply…

…and of course, businesses try to cut expenses by lightening up on their payroll.
When the correction began, it was led by losses in the financial sector. Those losses led to
cutbacks throughout the economy. Now, it’s the cutbacks that are leading to financial
losses. The economy followed the markets; now the markets follow the economy.
Investors are realizing that their favorite companies will find it hard to prosper in this
new economic environment.

“US consumers fall behind on loans at record pace,” says a Reuters headline.
Delinquencies are going up on a wide range of household debt. Debtors have never had
such a hard time keeping up with payments. Credit card delinquencies, for example, are
running at 6.6%.

Well…duh.

And no wonder “banks get stingy on credit,” as reported in the USA Today. “Despite
massive government efforts to bolster the credit market, banks are pulling back severely
on card lending,” begins the front-page article.

Once again, we see the feds’ plans failing. They give trillions to the bankers; the
bankers cut back on consumer credit. And why shouldn’t they? They can see what the
rest of us see – the consumer can’t keep up with the debt he’s got already.

“Consumers aren’t going to be able to save the U.S. economy this time,” The
Richebacher Letter’s Rob Parenteau reminds us.

“Total U.S. retail sales have rolled back to levels we haven’t seen since 2005. Imagine if
every single retail shop opened in the last three years shut down overnight. It’s already
that bad.

“A lot of people, from Wall Street to Washington, have a great deal invested in you
believing we can reverse that trend. But, in actuality, the freeze in consumer spending
and the consumer economy could actually take many more years to thaw.”

At least, the consumer has wised up. He’s sick of debt. He’s seen where that road leads.
What he wants is to get out of debt…to be free…to be safe.

It’s the government that remains stuck in deep illusion… The feds know that it was too
much credit that got consumers into trouble. Their solution? Give them more credit!
The banks are issuing fewer credit cards than they did last year – 38% fewer. They’re
pushing credit limits down too – the average limit on a new card is down 3% so far this
year.

Instead of passing money on to customers, the banks are using the feds’ free cash to build
up their own reserves…raise their salaries…and pass out bonuses. Makes sense. What else
could they do with it?

“Uighurs are beasts” shout crowds of Han Chinese in the remote northwest of the
country. Uighurs are the Moslem minority. Han Chinese are the majority. And, judging
from the photos, the Han want to kill the Uighurs.

One thing smart people always do is to underestimate the power of foolishness. It is
wild and reckless to stir up a race war. But that doesn’t stop people from doing it. Any
kind of war is a blow to reason and civilization. But that hasn’t made war unpopular,
even among the most reasonable and civilized people on the planet.

It was within the lifetimes of many people reading this Daily Reckoning that the most
advanced countries on earth began a war of annihilation. At the beginning of the 20th
century, high culture and science were dominated by Germans. German musicians and
composers…German poets and writers…German mathematicians, physicists, painters,
philosophers – even the German economy was a world leader, second in output only to
the United States of America.

Then, the Germans went off their heads – along with the Italians, the Russians, the
Japanese…and many others.

But the Han have it right. The Uighurs are beasts from time to time. So are the Han…the
Teutons…the Anglo-Saxons…and all the tribes on earth. Occasionally, for no apparent
reason, the masks and restraints of civilization give way to mobs…and the old beast starts
howling at the moon.

It happens in markets too. What is a bubble, if not a wild and reckless thing? A kind
of madness? A mass illusion…a foolishness, in which people leave reason and civilization
behind?

What if the United States had to pay its debt in gold?

In the old days, before the monetary reforms of the 20th century…notably, Richard
Nixon’s unilateral decision to renege on America’s promise to pay its bills in
gold…countries had to settle up with each other in the yellow metal. The system worked
well; it was reliable; it prevented bubbles. Edward Chancellor explains:

“A country had to pay for its imports or foreign investments with money gained from a
surplus on trade. If more money was sent abroad than had been earned through exports,
then gold would be packed onto ships to discharge foreign creditors. A declining stock of
bullion would induce the central bank to raise interest rates in order to attract gold from
abroad. Rising rates would produce a credit contraction, unemployment and general
economic misery. The typical nineteenth century was severe, but short-lived.”

Then came the improvements. And the Great Depression. And now we are faced with
another one.

Governments are fighting this one…just as they did the last one…but with much more
money. The cost is in the trillions – most of it in the form of public debt. How will
these debts be paid? We all expect that they will ultimately be eased by inflation – in
full or in part. But suppose the feds had to pay up in real money?

Colleague Simone Wapler compared government debt to government gold. The United
States has gold worth about $241 billion, she reports. Its official national debt is $11.5
trillion. That gives it a debt/gold ratio of 48 – meaning; the feds have 48 times as much
debt as gold.

Britain is even worse. Prime Minister, then Chancellor, Gordon Brown sold much of
England’s gold at the worse possible moment – about 10 years ago. This leaves the island
with only $9 billion worth of gold compared to $1,274 billion of government debt – a
ratio of 1 to 139. But Japan is the worst of all. It has $23 billion worth of gold and $7.3
trillion of government debt, for a ratio of 1 to 323. (Of course, Japan has vast holdings of
dollars too!)

What nation has the best gold/debt ratio? Switzerland. It has only twice as much in
government debt as it has in gold.

Source:The Long Road to Ruin

Generally, we like it like that. It makes us feel special. Instead of pulling up our knee socks and getting out our pompoms along with the mainstream media hacks, we remain ever sceptical about tales of recovery… of so-called “green shoots”… and, above all, of Washington’s empty promises and various boondoggles.

But once in a while, it’s nice to know you have friends… that people far smarter than you share the same opinions as you do.

So it was with much delight that we opened up the latest King Report from honorary underground investor Bill King – a Wall Street veteran of 30 years.

King, an analyst with M Ramsey King Securities, Inc, understands something we hold as a central tenet here at Notes: the inside world of Wall Street is far different that what is disseminated to the masses.

So how does King view the “green shoots” recovery and the recent rally in stocks? Well, some points will be familiar to Notes faithful. King says that:

1. “Green shoots” are just another Bernanke equivocation and Street yearning
2. “Insider” banks have fleeced patsies for necessary capital
3. The dollar, bonds and commodities keep checking the Fed across the big game board. And in order to avoid being checkmated, the Fed has been forced to sacrifice stocks
4. The current “second derivative” rally, which is the latest permabull/Street shill euphemism for “dead cat bounce,” is occurring on very poor technicals. As we pointed out yesterday, volume is contracting, which is contrary to the start of any bull market. And leadership is by the misfits, which is never good.

But King also brings a lot of new insider intelligence to the table. And, boy is he suspicious of the “green shoots”/V-shaped recovery story being churned out by the mainstream media.

King points out that the Prince of Darkness himself, Goldman Sachs boss Lloyd Blankfein, recently stated that this is not a recovery, that the recession will be “long and protracted” and that any recovery would be “shallow.”

As we’ve noted on numerous occasions, Blankfein is the insider’s insider – he certainly has the ear of Treasury Secretary Geithner and former Goldman alumnus Larry Summers, President Obama’s chief economic advisor.

What really caught our eye, however, was King’s assertion that the “deflation trade is back in vogue.” Short term, this means stocks and commodities should fall and bonds and the dollar should rally.

As we said before, the Fed can’t afford to let long-term bond yields to rise too much: this trend, if were it to continue, would push up mortgage rates and kill off even the remotest possibility of a housing market recovery. And with 30-year bond yields pushing 4% yields, it was clear that something had to give.

The problem for the Fed is that massive budget deficits mean a massive increase in supply of Treasurys and the threat of higher yields. And this puts further pressure on the Fed to monetize the debt by buying back bonds. As King puts it:

Although an expansion of Treasury bond purchases by the Fed would have the benefit of lowering long-term interest rates temporarily to stimulate the economy, in the current environment it could be dangerous for two reasons. First, it might suggest that the Fed is willing to monetize Treasury debt. The Fed does not, and should not, want to make it easy for the Treasury to sell its debt and thereby be an enabler of fiscal irresponsibility. Second, if the Fed loses its credibility to resist pressures to monetize the debt it could cause inflation expectations to shift upward… leading to a serious problem down the road.

The Fed, dear reader, is boxed in. If it doesn’t step in to monetize the debt (by buying bonds from the Treasury with freshly printed dollars) the excess of supply over demand in the US Treasury markets will push up yields… and therefore borrowing costs across the entire economy.

If it decides to monetize the debt, it will push up inflation expectations (the more money in the system the higher the likelihood that this will translate into higher inflation rates) – and yields will rise anyway.

The only real solution would be for Congress and the Obama administration to lower federal spending – and as this has a snowball’s chance in Hell of happening. Team Obama is on a spending binge that makes a recently dumped Valley Girl armed with her daddy’s platinum card look thrifty.

We’re sticking to our script – deflation now, (hyper)inflation later. There is simply too much pressure on the US economy to give the authorities – who are largely responsible for the current mess in the first place – room to wriggle.

Of course, the big market movements will happen on the back of the Fed’s upcoming (at the time of writing) policy decision today.

We note with interest that the Dow has risen by an average of 2.5% on each of the past four Fed decision days. Three of those four rallies were followed by sharp declines that erased the gains.

This should speak volumes to those of you who still think we have a free market.

This is important. Because investors who fail to grasp the government’s role in the market will sooner or later get seriously burnt. None of us live – or invest – in a vacuum. So the question is: how much do macroeconomic conditions determine the reward you earn from your efforts?

According to crisis investor James Dale Davidson, macro conditions determine more than you think. In the upcoming issue of James’s investment research service, Crisis Strategy Alert, he hones in on the implications of America’s ballooning unfunded liabilities – and what this means for your financial future.

James’s message is simple: get out now while you still can.

Clearly, US politicians were thinking ahead when they established the peculiar system of taxation that made income taxable by citizenship rather than residence. If the US taxed as almost every other country does, by domicile, the airports and ports would be crowded with people heading for the exits.Even so, I still think there may be a strong argument for getting out. Unless you are convinced that the fiscal and monetary framework, the tax regime and the prospect of monetary disruption are almost completely irrelevant to your prospect of success, you have to recognize that the United States faces dire straits in the years to come. Weimer Republic, the sequel, is almost a best case scenario.

The primary Social Security deficit has already kicked in. Already, less money is being taken in through payroll taxes than is being paid out to retirees. The forecast that the Trust Fund will be depleted in 2016 counts accrued “interest” owed by the Treasury to the Social Security account. This is a noble fiction, much like borrowing money from your left trouser pocket, placing it in your right pocket, and promising to pay interest to your left pocket on the money you proceed to spend.

Equally, almost $90 trillion of the unfunded entitlement debt is owed for medical entitlements to retirees. It is far from obvious that hyperinflation would obliterate these obligations, rather than raising them to a higher nominal value.

The real issue facing the US economy is that it is being bankrupt by the accumulation of social costs. In almost every field, costs in the US have hypertrophied – largely, I believe, as a negative consequence of long-term US stability.

James’s views are not for the fainthearted. And the recommendations in each monthly issue of Crisis Strategy Alert are nothing if not unconventional.

But if you’re interested in learning about profitable alternatives to the status quo and you want to make money from the continuing economic collapse, James’s investment research and macro reports are exactly what you’re looking for.

To take a 60-day risk-free trial of Crisis Strategy Alert, simply click here.