Now likely less than $10 billion strong and with more bank failures sure to come, the FDIC faces two choices: Raise their taxes on banks to bolster the fund or tap the Treasury. Given the health of the U.S. banking system and the tendencies of our government over the last decade, you can probably guess which Bair will chose. Here’s another hint… Barney Frank, leader of the House Financial Services Committee, has already publicly opined on what Bair should do.

The FDIC has the authority to borrow as much as $500 billion through 2010.

“Stock market bulls aren’t concerned about the inevitable acceleration in bank failures — at least for now,” Dan Amoss told his Strategic Short Report readers just before Irwin’s failure. “Even though deposits will be insured against loss, the loss of local banks will still have a depressing effect on hundreds of small communities. These communities are going to lose their only access to business credit when their local zombie banks — loaded with toxic construction or commercial real estate loans — are liquidated or merged into other weak banks.

“Meanwhile, the latest monthly figures show that commercial bank balance sheets are shrinking at a fairly rapid rate, due to a combination of several factors: loan charge-offs, older loans being paid back at a faster rate than new loans are being made and regulators pressuring banks to build larger capital buffers.

“So credit-fueled growth in consumption or investment is not occurring. Combine this with stagnant or declining wages and corporate profit margins and it becomes hard to imagine how GDP will rebound on a sustainable basis.”

Source: The Next Big-Gov Bailout

The legislation will also require banks to delay punitive interest rate hikes until bills are 60 days late, provide more disclosure on how rates are raised and issue a 60-day notice alerting credit card holders that rates are about to move higher.

How have the banks responded? According to the New York Times, “Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks…”

What did you expect? Gratitude for the multi-billion-dollar bailouts funded by the taxpayers?

We wonder why long-term mortgages and car loans are treated so differently from credit card debt.

When a person misses their car loan payment, a small late charge is usually tacked on (about $5 to $10). But if someone misses a credit card payment, they have to pay out a $30 fee and then pay another 20% in interest. We’re not sure how someone who just missed a payment is more likely to make a more expensive payment on time.

Banks could avoid many of these punitive fees if they just did one thing well: loaned money to the people most likely to pay it back.

What makes Patterson’s comments particularly interesting is that he’s a TARP insider. He used TARP matching funds to buy Michegan bank Flagstar Bancorp. Patterson’s firm ended up with 80% of the Flagstar shares. The government managed to secure a mere 10% stake.

Patterson reckons Team Obama is only putting off the necessary day of reckoning by pretending the US banking system is still solvent. Speaking at the Qatar Global Investment Forum he had this to say about the government’s handling of the banking crisis:

It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100 billion of the $700 billion TARP funds. They think they’re doing this for the greater good of society.

When market participants like Patterson speak, we listen. First, these guys are not towing the government line. Second, they have skin in the market. This puts them in a different class than the mainstream commentariat. We call these people underground investors. And we do our best to bring you their money-making advice and market intelligence on a daily basis. Don’t bother looking for them on CNNMoney or on CNBC. You won’t find them there.

Patterson doesn’t believe we’re about to see a V-shaped recovery…

This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance.

Alpha hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well.

He also sees the economic crisis ending in a deliberate inflation…

The US government has thrown 29% of GDP at this crisis compared to 8% in the early 1930s. The Fed’s balance sheet has risen from $900 billion to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road.

The assumption up until now was something about the reassuring value of continuity — if we could just prop up an ailing set of banks for a little while, the US public could resume a revolving credit way-of-life within an economy dedicated to building more suburban houses and selling all the needed accessories from supersized “family” cars to cappuccino machines. This would keep everyone employed at the jobs they were qualified for — finish carpenters, realtors, pool installers, mortgage brokers, advertising account executives, Williams-Sonoma product demonstrators, showroom sales agents, doctors of liposuction, and so on.

This was a dumb strategy for such a supposedly bright group of people surrounding Mr. Obama. That old economy was dead on arrival January 20th. Even the kindest physicians don’t put corpses on life support. This particular corpse has been placed in the world’s cushiest intensive care unit, with transfusions running about a trillion dollars a month — not to mention hefty bonuses for the attending nurses. Instead, a fast and furious wake might have been held, with the corpse of the old economy laid out on a granite countertop for all to toast and bid farewell. President Obama might have led this exercise with some aplomb — even while directing his new justice department warriors to round up a host of suspects in the old economy’s suspicious death.

What it comes down to, apparently, is a leadership elite across all sectors — politics, business, academia, media — that is incapable of processing the truth, and then conveying it to the broad American public. Alas, this also appears to be a common theme in history, with a commonly tragic outcome, which is that elites get ruthlessly dumped and replaced by new elites, often composed of zealots, maniacs, nincompoops, and others generally ill-disposed to the able management of complex affairs. It’s called the “circulation of elites,” and in times of crisis it tends to take on a kind of downward spiraling flavor, with each gang of discredited leaders tossed out for a progressively worse one until a kind of exhaustion is reached — whereupon the archetypal man-on-a-white-horse arrives on the scene.

Mr. Obama looked to be the man-on-a-white-horse — on the exhaustion of Reagan-Bush Jesus-Republicanism — but he’s coming off more like Philippe Égalité (Louis Philippe Joseph d’Orléans, duc d’Orléans) in 1793, with perhaps Newt Gingrich waiting offstage to become Robespierre in 2012 — and some obscure US Army captain now toiling in Kirkuk slated to become the American Napoleon of 2015. As you’ve surely heard a thousand times now, history doesn’t repeat itself but it rhymes. The enormities of Wall Street today are a little like those of the French Ancien Régime at Versailles. If America encounters the sort of disruptions of food and energy supplies that are brewing on the horizon, and unemployment keeps arcing up its current trajectory, civil uproars could easily follow. Readers think I joke about the Hamptons going up in flames. But the antics of the bankers, hedge funders, the CEOs, the Madoffs, and even the P. Diddy’s of our time, are liable to attract murderous attention as the public mood moves from sour to wrathful.

So, what people of good intention and progressive predilection want to know is how come Mr. Obama doesn’t just lay out the truth, undertake the hard job of cutting the nation’s losses, and get on with setting this society on a new course. The truth is that we’re comprehensively bankrupt, and no amount of shuffling certificates around will avail to alter that. The bad debt has to be “worked out” — i.e. written off, subjected to liquidation of remaining assets and collateral, reorganized under the bankruptcy statutes, and put behind us. We have to work very hard to reconfigure the physical arrangement of life in the USA, moving away from the losses of our suburbs, reactivating our towns, downscaling our biggest cities, re-scaling our farms and food production, switching out our Happy Motoring system for public transit and walkable neighborhoods, rebuilding local networks of commerce, and figuring out a way to make a few things of value again.

What’s happened instead is what I most feared: that our politicians would mount a massive campaign to sustain the unsustainable. That’s what all the TARP and TARF and PPIT and bailouts are about. It will all amount to an exercise in futility and could easily end up wrecking the USA in every sense of the term. If Mr. Obama doesn’t get with a better program, then we are going to face a Long Emergency as grueling as the French Revolution. One very plain and straightforward example at hand is the announcement last week of a plan to build a high-speed rail network. To be blunt about it, this is perfectly ******* stupid. It will require a whole new track network, because high speed trains can’t run on the old rights of way with their less forgiving curve ratios and grades. We would be so much better off simply fixing up and reactivating the normal-speed track system that is sitting out there rusting in the rain — and save our more grandiose visions for a later time.

I don’t like to be misunderstood. With the airlines in a business death spiral, and mass motoring doomed, we need a national passenger rail system desperately. But we already have one that used to be the envy of the world before we abandoned it. And we don’t have either the time or the resources to build a new parallel network.

But grandiosity is just another way that we lie to ourselves about where we’re at and what is really possible. Surely Mr. Obama knows that hope fades where the light of truth doesn’t shine. He is a charming fellow. I don’t especially want to see Newt Gingrich chop his head off.

The Joker in the Deck

Things come out of the woodwork. All of a sudden it’s a mutant H1N1 swine flu, with bird and human DNA accessories. We don’t know where this is taking us. It could be a media blowover, like SARS, or it could be a big deal, shutting down travel and assemblies of humans. It would be a very big deal if it killed, proportionately, as much of the population as the 1918 flu event — the worldwide toll then was roughly 30 -100-million out of a global population around 1.7 billion. Now the world population is over 6.5 billion. The only thing anyone can predict at the moment is that there will be a lot of very worried health officials and politicians out there in the days ahead.

This flu epidemic comes just as global economy itself lies comatose in the economic intensive care unit, with IV lines of dollars, euros, yen, and renminbis transfusing its hollowed-out carcass. It’s an odd time for attention to be diverted from that awful spectacle. The cash transfusions have sent the Cable TV gang into raptures of “optimism” — meaning they expect debt securitization to resume as before, along with Yuletide-level credit card shopping sprees in the malls, a mass splurging on new cars, and a renewed frenzy of house-building in the Florida buzzard flats. Those “green shoots” and sprouting “mustard seeds” they report seeing may themselves be a flu-like symptom. I don’t know what the so-called Mexican swine flu will lead to, but the global economy as we’ve known it is a goner.

Even if the Mexican swine flu turns out to be something of a false alarm, it will require billions of dollars in unexpected new outlays for prevention operations here in the USA — reinforcing the false idea that the nation has bottomless resources (the same idea that has been driving the bail-out fiesta). My guess is that the fear emanating from the story will be a potent generator of paranoia in the meantime, leading to widespread closures of things, canceling of events, restrictions on travel (official or otherwise), and a sell off in the financial markets. And that’s if the flu turns out not to amount to anything.

If the flu is the real deal, it will surely drive a stake through the faintly-beating heart of that invalid global economy, and possibly even continental-scaled economies like the US, the Euro-zone, and China — any place where things and people have to move long distances to keep life going. The US, obviously, suffers in this instance from its proximity to Mexico, and the fact that so much of our food comes from places that employ casual Mexican labor. A serious flu outbreak would be a short path to food shortages in the US, with our three-day supermarket inventories and just-in-time shipping methods. It would not be such a bad idea now to lay in supplies of beans, brown rice, cooking oil, onions, and toilet paper.

In any case, the banking-and-investments sector has been on autopilot for a few weeks. Lesser banks are crashing around the country (Idaho, Florida, California last week), but the remaining Big Boyz are still lurching through the landscape like so many Frankenbanks, jazzed up on electric surges of digital cash. There are ever more hints of a peasant uprising against the castle of privilege, but no sign just yet of the flaming brands and shaking fists from the village below. This flu thing will put the schnitz on their distempers for a while.

Regards,
James Howard Kunstler

Source: Hope Equals Truth About Our National Bankruptcy

Of course, none of the media morons, even Fox with their vaunted “fair and balanced” reporting, made mention of my press release that read, “The Mogambo, visitor from another world with strange powers and abilities beyond those of mortal men, such as the ability to see pure, unadulterated, low-IQ, moronic lying crap when he sees it (which is pretty much all the time these days), says he is laughing his butt off at such stupidity in general, and Janet Yellen in particular, as she is the same incompetent yahoo that aided and abetted Alan Greenspan, former chairman of the satanic Federal Reserve, to get us into this mess to start with! And now she is trying to arrange a ‘less bad’ result for the USA to suffer, which is roaring inflation? Hahaha! This is insane as she is incompetent!”

To further prove that they don’t care what I think, Bloomberg goes right on and delivers “The Excuse” as to why it is “OK” that so much money is being created by the Fed and spent by the Congress, which is that “At the root of that concern is substantial and growing slack in the economy, which, according to White House chief economist Christina Romer, is operating 5 percent to 10 percent below potential.” Hahahaha!

We are in a recession, and have been for 16 months, and the economy is “operating 5 percent to 10 percent below potential”? Hahaha! No kidding? Hahahaha! Ya think so?

But the last laugh is on me, as they are clever and devious enough that they figure that this means “the economy will have to grow a percentage point above trend – reckoned by the administration to be about 2.5 percent annually – for five or more years before the slack is used up.”

Reflexively, the thought of that much inflation in prices and the sheer economic suicide as a result of deliberately overbuilding, over-producing and over-consuming, much less “for five or more years” to bizarrely try to remove all slack from the economy through heightened demand, makes me leap (“boing!”) to my feet, as I frantically shout, “Get out of my way, you ugly little trolls!” and run pell-mell to the safety of the Mogambo Bunker Of Safety (MBOS), which was kind of unfortunate in that I had to knock a couple of children out of my way to do it.

And even though I shouted back to them, “Sorry, kids!” I thought to myself that it was really their own stupid faults for standing in front of an exit when there was a grown man running at them, shouting, “Get out of my way, you ugly little trolls!”

And besides, a couple of stupid kids being knocked around a little is but an unfortunate inconsequence, a mere trifle, hardly worth talking about, compared to the continual suffering that they, their families, their parents, their friends and everyone they know is going to suffer during the coming Hell Of Price Inflation (HOPI), a tragedy of misery that will be limited in scope and ferocity only by the imagination and vengeful anger of people whose children are starving to death, sort of like the depths of the French Revolution, or the Russian Revolution, only this time in English and without any of those pesky subtitles where if you are looking at some girl’s boobs and neglect to read the dialog, you lose track of what is going on!

I know what you are thinking. You are thinking, “Why am I wasting my time reading this Stupid Mogambo Crap (SMC)?” and, “What in the hell kind of justification can there be for this kind of monetary stupidity?”

Well, it’s funny that you should ask, as I have always wondered why anyone would waste their time reading SMC, and the very next sentence from the Bloomberg.com article contains the argument for destroying us with more money and credit! How handy!

The justification is that the economy will grow faster than “trend” for a long time, which means exponentially-increasing growth, so that all slack in the economy is, magically, used up, prices rise, thus deflation is averted and we are destroyed by inflation, instead! Hahaha!

Well, they don’t put it like that, but they do say, “The Phillips curve – developed by economist A.W. Phillips using Keynesian concepts – posits that such excess will reduce inflation as firms stuck with idle capacity cut prices and workers facing layoffs accept smaller wage hikes.” Gaaahhh! Insane!

Let’s see: The money supply is increasing by an annual doubling, and yet firms are stuck with idle capacity, and workers are accepting lower wages, because they are too damned stupid to see that the economy is growing thanks to all of this unholy mountain of money inundating the world? Hahaha! Businesses and workers are stupider than I thought! Hahaha!

The fact that anyone would believe such crap makes me scream with Predictable Mogambo Outrage (PMO), which (for the first time ever!) must have done some good, because a short time later, Bloomberg followed that up with, “Not everyone at the Fed buys into that argument.”

To be fair to the Federal Reserve, even though they are just a bunch of scummy, incompetent private bankers operating as government henchmen (and acting like it, too!) who do not deserve such consideration, Richmond Fed President Jeffrey Lacker says that he would be “cautious about relying on this correlation”, which I figure he said instead of saying the more direct “That’s stupid and you’re stupid!”

And to be more fair, Laurence Meyer, a former Fed governor (and so he ought to know) admitted to Bloomberg that the Federal Reserve “is ‘running a laboratory experiment’ on what drives inflation: the money supply or the output gap.”

The fact that we already know the answer to this experiment is what makes me stand at the window and shout at passersby that they should “Buy gold, silver and oil right now, you pedestrian morons, because your Congress is spending the ‘too much money’ that is being created by the Federal Reserve just for that sinister purpose, and which will burn you alive in the painful fires of inflationary hell!

“And yes, that includes you, Jimmy, your stupid parents and your whole stupid family, too! And all your little mutant friends in second grade are doomed, too! Hahaha!

“So forget school, but instead go home and say, ‘Thanks for nothing, mom and dad, for voting for the Leftist morons all these years who have now spent us into economic destruction with the help of the evil Federal Reserve creating the excess of money and credit’, and tell them how the Nice Mogambo Man (NMM) told you that if they do not buy lots and lots of gold, silver and oil to save you all from the horrifying inflation in prices that will engulf us as a result of all of this new Federal Reserve money sloshing into the economy via government deficit-spending, then it proves that your parents hate you, and for them to remember that you are still too young to be tried as an adult!”

I hope it does some good!

Source: Monetary Lab Experiments on Inflation

Never heard of him? Neither had we until this morning. But on the front page of today’s Financial Times, we discover two extraordinary things. Topolanek is the Prime Minister of the Czech Republic (and coincidentally, president of the European Union). And, he has a very accurate road map.

“The US is repeating mistakes from the 1930s,” he says, “such as wide-ranging stimuluses, protectionist tendencies and appeals, the Buy American campaign and so on. All these steps, their combination and their permanency, are the road to hell.”

We’ve said so ourselves. Many times. But we are surprised to find the president of the world’s biggest and richest economy – Europe – say so. It made us feel funny…odd…as if we weren’t alone in the world after all…as if we had a friend. And a friend in a high place.

At least, he was in a high place this week. He lost a non-confidence vote in his the Czech parliament on Tuesday…causing a stir in Brussels. No one knows how the European central government functions – certainly not the Europeans.

But as near as we can tell, it’s a healthier system than the United States. The presidency rotates…with each member nation getting a turn. So, when the president of the EU says something, you can ignore him; he’ll be gone before the milk goes bad.

Meanwhile, Europe’s central bank seems to be of the same mind as its president.

While other central banks print up extra currency to help bailout their economies, the European Central Bank hardly seems to notice. Unlike the central banks of Britain, Japan and the United States, it hasn’t cut rates to zero…and it isn’t printing money. The economy will get itself out of the slump faster if the bank remains steadfast in its long term objectives of sound money and stable interest rates, says Trichet.

Well, as we Irish would say, “Tree cheers for Trichet, too!”

In America, the scammy bailouts come faster than European presidents. But each one gets a little cleverer at disguising what is really going on.

The idea behind all the bailout programs is always the same – to stick the losses onto someone who doesn’t deserve them.

Of course, the stickers tell us not to ask questions; it’s a national emergency! But when the stickees – the taxpayers – see what actually is done with the bailout money, they get a little huffy. So, now the stickers have a new plan: a public/private partnership, which makes it sound like Wall Street is helping to bail itself out.

Finally, the feds are going to harness the private sector…and get the people who caused the crisis to help get us out if it. Now, investors and government will be working together, as equals, to solve this problem. But if you believe that…well…you are Tom Friedman. Which is to say, you are a moron.

Inviting investors into the game looks good on paper, but what’s really going on? The losses are the losses. Why would investors want a part of them?

Of course, they wouldn’t…unless they were paid to play along.

The public is fed up with bailouts. So, the feds have disguised this new one as an investment scheme. The lumpen yahoos are invited to imagine that “capitalists are now going to help solve the problem they caused” as it was described in the French press. They delude themselves into believing investors are willingly going to buy into losing positions…and somehow make them winning ones. “Win…win…win…” is what they’d like to believe.

But the game is poker. And for every winner, there’s a loser. And the big fellow who has just entered the game is every poker player’s dream. He is almost infinitely rich and infinitely stupid. Before the night is over, investors are going to clean him out.

And the American taxpayer is getting fed up…knowing full well that none of this bailout money will ever make an appearance in his personal account.

And now some news:

The Dow rose 89 points yesterday. As near as we can tell, the rebound is still going on. For stocks globally, March has been the best month, so far, since 1989.

But don’t mistake a rebound for a real bull market. House prices in California were down 41% last month, over prices from a year ago. Airlines are expected to lose $5 billion this year. IBM announced a further 5,000 job cuts. German business sentiment is at a 26-year low…

In short, this correction has a long way to go before it is over. By that time, most people will have stopped caring.

And now, we turn to Ian in Baltimore for more news:

“The U.S. Treasury auctioned off $34 billion in five-year notes yesterday – barely,” writes Ian in today’s issue of The 5 Min. Forecast.

“Demand for government debt was so low the Treasury had to adjust the bond yields mid auction, from 1.8% to 1.85%. Five basis points might not seem like a big deal, but it certainly turned heads at the Big Board:

“Even more notable,” continues Ian, “this bond fallout happened on the same day the Federal Reserve announced its first series of Treasury bond purchases. Bernanke and company snatched up $7.5 billion of their $300 billion U.S. Treasury purchase program… and investors didn’t seem to care. So much for the trader idiom, ‘don’t fight the Fed’.”

Each day, Ian and Addison bring readers the The 5 Min Forecast, is an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

Back to Bill in London with more thoughts:

If you had stocks in 2000 and held them until now…guess how much you would have lost?

60% – in real terms.

If you went all the way back to 1966…how much would have made if you held stocks all the time until today? Zero!

How about stocks for the long run? Well, maybe…but actual performance depends on WHEN you buy and WHEN you sell. If you’re lucky, you’ll get out when the getting’s good…and back in when it pays.

And right now?

“Everybody I know is getting back in…cautiously,” says a rich friend here in London. “But I’m not so sure…I don’t think there’s any hurry.”

Nope. No hurry. There’s a storm passing over the world’s financial markets. We’d let it blow itself out before we made any major investments.

“But what do you do in the meantime? I’m in cash…and I guess I’ll stay in cash after reading your report yesterday. Inflation seemed like a sure thing. But as you say, maybe it’s not as sure as we think.”

Yesterday, the Fed made history. It made a little step for man, and a big step for mankind, down the road to Hell. The monetary base of the U.S.A. is to be increased 500% over the next few months. More than a trillion dollars’ worth of debt is to be monetized.

Doesn’t this guarantee imminent inflation at much higher levels? Yes…in theory. But there’s a many a slip twixt the cup of theory and the lip of actual financial experience. As our friend James Ferguson pointed out, the Japanese had their cup running over for 10 years. Still, no consumer price inflation arrived to quench their recession-parched lips.

What we take from this experience is that inflation is like a temperamental mistress. Sometimes she will be smooth and serviceable…and at other times, she will be as cold and stiff as brass.

If the world is in the grip of a major correction – which it certainly is – commodity prices should be going down. Instead, they’re going up. Copper is up 40% since it hit bottom in December of last year. Oil has gained more than 50%. In dollar terms, the commodity index, the CRB, has increased 14% from its bottom a few weeks ago. Are these dead cats just bouncing? Or, is this inflation?

And take a look at what has happened in England. Even in the midst of the biggest deflationary meltdown in asset prices in all of history, consumer prices still rose.

Bread is up 11.2%. Meat is 15% more expensive than it was 12 months ago. Fruit is 13% higher. Natural gas up 33% and electricity is at plus 18%

Britain is a special case. Much of the price increases come a result of the falling pound – which makes everything that has to be imported more expensive.

But everything is a special case, isn’t it? Japan was a special case. And now…the whole dollar-based world is a very special case.

And when the Fed monetizes debt, it’s not as if it buys it directly from mom and pop. Who owns the debt? Well, the biggest holder is China. When the Fed buys U.S. Treasury debt from China, the cash doesn’t automatically fall into the U.S. consumer slipstream.

The Chinese could hoard the money. Or they could use it to buy U.S. businesses – big business, such as GM and Caterpillar. In effect, what the Fed is really doing is facilitating a massive transfer of real wealth – from America to foreigners. By holding up the price of U.S. Treasuries (by buying them itself) the Fed is funneling cash to the foreign owners. The foreigners then redeem the cash for major U.S. assets (at low prices).

Maybe that was the deal the feds worked out with the Chinese. Or maybe these are just the collateral and unforeseen consequences of a foolish plan. We don’t know. But it doesn’t necessarily put a lot of extra cash on the street.

And then, even if it were on the street, it may not stay there for long. The feds can put in a lot more money. It doesn’t mean it necessarily chases consumer products and drives prices higher. In fact, in a real depression, people tend to hoard money. They save. The more fearful they are, the more they squeeze their coins and clutch their bills. Instead of circulating freely, money disappears into drawers, bank vaults, and billfolds. Let’s say the feds add a colossal sum – $10 trillion – to the dollar money supply. Even that could quickly be stashed away…in pockets…bank vaults…business holdings. Remember, most of it is in electronic form. What difference would it make to consumer prices if every account holder added a zero or two?

Our old friend John Mauldin sends this comment:

“On the Fed printing money: there is one small thing to watch. What if they print it, put it in the banks and then the banks instead of lending it to each other at 1.25% in LIBOR decide to deposit it at the Fed for .25% because they are worried about security and counter-party risk, which is a lot of the reason Fed reserves have exploded. They could print $5 trillion and if it all goes back to the Fed then where is the inflation? We need to pay close attention to where the money goes.”

Until tomorrow,

Bill Bonner

Source: A Bailout In Disguise

Carefully note that the New York-based U.S. bullion banks can enter the global market for 23 hours and 15 minutes every day…not just in the Far East…but in London trading as well. But I digress…

Once the London a.m. fix was in, gold began a gentle rally that lasted through the Comex open…and until lunchtime in New York. From there it flat-lined until the close of electronic trading on the Globex at 5:15 p.m. Eastern. I was delighted to see such a wonderful looking gold graph when I rolled out of bed yesterday morning. It certainly appears that we are away to the races…but I’m sure that JPMorgan (NYSE:JPM) et al will be riding shotgun on this advance to make sure that it doesn’t show too many signs of “irrational exuberance”.

click to enlarge

Silver’s path was virtually identical to gold’s…however the ‘top’ was in shortly before 11:00 a.m. in New York…an hour before gold’s top for the day. Volume in both metals yesterday was not particularly heavy…which is encouraging…and the shares had another spectacular day.

click to enlarge

Open interest changes on Wednesday’s wild roller coaster ride in both metals was as follows…gold o.i. rose for the second day in a row…this time by 3,594 contracts…and silver o.i. was down for the second day in a row…this time by 312 contracts. It’s difficult to read a lot into these figures…especially gold. Since all the big action happened on a Wednesday…the day after the cut-off for today’s COT report…we won’t see these numbers until they show up in next Friday’s COT on March 27th.

In other precious metals news, there were 90 gold contracts delivered on the Comex yesterday. The two biggest issuers were Prudential Bache [56 contracts] and Fortis Clearing [24 contracts]…and the biggest stopper was the Bank of Nova Scotia [75]. In silver, there were only 56 contracts delivered. The biggest issuer was the Bank of Nova Scotia (NYSE:BNS) [56]…and the biggest stopper was JPMorgan [49]. Comex-designated silver warehouse stocks fell a very small 10,065 ounces. The gold ETF…GLD…had another huge inflow yesterday…up 19 tonnes, almost 610,000 ounces. SLV was unchanged. There were no changes in gold or silver eagle production from the U.S. Mint yesterday either. And lastly, Ted Butler pointed out to me that the backwardation in silver had disappeared.

I have four stories today. The first is from the New York Post and bears the headline “World of Trouble: AIG could be on $1.6 Trillion Hook for Global Swaps” The link is here.

The second story is a commentary by Bloomberg news columnist, Jonathan Weil. From it, you get some idea of how far the accounting industry has sunk…and the title pretty much says it all…”Accounting Brothel Opens Doors for Banker Fiesta”. Weil says…”the FASB ought to change its name to the Fraudulent Accounting Standards Board. It’s that bad.” I thank P.S. for sending me the story, and the link is here.

The next story is posted at Reuters. Its headline reads “China backs talks on dollar as reserve, says Russian source”. “China and other emerging nations back Russia’s call for a discussion on how to replace the dollar as the world’s primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures…”. The link is here.

The last story is a piece that was posted over at Kitco. It’s by Julian Phillips and is entitled “Central Banks are Buying Gold for their Reserves Now!”. Phillips says…”However, after nearly 30 years of opposition to gold by central banks and occasionally governments, it is a remarkable turnaround that tells us that gold is returning to the monetary arena again!” The story is well worth the read and the link is here.

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A black market is a free market operating against the wishes of the state. – Harry Browne

I was not impressed by the U.S. equity market action yesterday. If this is the best results that they could get just two days after they announced $1.1 trillion worth of money printing, then it won’t be too long before we see the next $1.1 trillion of debt monetization. And judging by the price activity of both gold and silver…and their respective shares…I’d say that the market has spoken the words that we at Casey Research have been going on about for years. Buy gold and silver and good quality mining stocks…as this “inflate, or die!” era has just begun.

Enjoy your weekend, and all of us at Casey’s Daily Resource Plus look forward to seeing you here on Saturday.

Source: And Then There’s This…Friday, March 20th, 2009

Then the selling pressure began in earnest. From the small vertical drops in price, it appeared that one or more not-for-profit sellers were pulling their bids…and each time they did…the price dropped vertically. These small waterfall declines are typical of the bullion banks. The bottom was in shortly before lunch in N.Y. From there the price rose slowly. Then at 2:15 the FOMC came forth with their two stone tablets and all hell broke loose. There was a gold price melt-up…as there were bids, but no ask…exactly the reverse of what happened earlier in the day. It made for a few exciting moments…and a great gold graph.

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In silver, the selloff was much more pronounced…with the bids being pulled three distinct times…and a stair-step decline ensued, with the bottom at the close of floor trading on the Comex. As Ted Butler says, this is the metal that’s at the center of the universe for the N.Y. bullion banks.

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If I sound underwhelmed, it’s because the price of both metals are only back to where they were a few days ago…if that. Yesterday was a flash in the pan. It’s what happens from here on in that counts. Yesterday I said that I would be happy if the bullion banks would take both gold and silver below their respective 50-day moving average just to clean out the last of the tech longs. Well… they obliged me…big time! Now, from a technical point of view, the decks should be clear for a major rise in the price of both metals. It just remains to be seen how much opposition this rally will run into. Will the bullion banks [mostly JPMorgan -NYSE:JPM-] take the short side of every trade on the way back up…i.e. the ’same old, same old’…or will they let the metal run a bit before they step in? The price action and the Commitment of Traders report will tell all.

Tuesday’s price action [such as it was] brought an increase in gold open interest of 1,147 contracts…and in silver, o.i. fell a smallish 201 contracts. And it nearly goes without saying that yesterday’s open interest numbers will be something to behold when they’re released shortly after twelve noon New York time today.

In other precious metals news, another 66 contracts in gold were delivered yesterday…with Prudential Bache being the biggest issuer and the Bank of Nova Scotia (NYSE:BNS) being the biggest stopper. In silver, 107 contracts were delivered. The Bank of Nova Scotia was the issuer [107] and JPMorgan [84] and Goldman Sachs (NYSE:GS) [18] were the biggest stoppers. Silver inventories at the Comex-approved warehouses declined 106,180 ounces. The U.S. Mint finally updated its silver and gold eagles tally. One ounce gold eagle mintings are up 11,500 to 67,000 for the month, and silver eagles took a huge jump…up 650,000 to 1,725,000 for March so far. The precious metal ETFs also showed activity, with GLD up another 490,000 ounces and the SLV added a healthy 3.3 million ounces…with probably more to come in both.

The big news yesterday was the announcement after the FOMC meeting. My first story today is about that very thing. It was filed over at yahoo.com…and the headline says it all…”Fed Launches Bold $1.2 Trillion Effort to Revive Economy”…”the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).” At least the reporter is honest when she says “Where does the Fed get all the money? It prints it.” [This is called legalized counterfeiting. - Ed] The link is here.

The second article is a GATA press release entitled “With all that thin-air money, gold alone needs to be sold”. The introductory commentary to this Financial Times story, by GATA’s Chris Powell, is worth the read as well. The link is here.

If you don’t think we’re in la-la-land yet…try this story posted at foxnews.com. The headline reads “FDIC Criticizes Massachusetts Bank With No Bad Loans for Being too Cautious”. Yep, there are such things as solvent, well-run banks…and this is the thanks they get. I thank Craig McCarty for the story…and the link is here.

As if the silver market wasn’t tight as a drum already…here’s a piece that Ted Butler sent me that adds more fuel to the fire. It was posted at hedgemedia.com and is entitled “Silver poised to outperform gold”. “The Hennesse Group, an adviser to hedge fund investors, believes silver is currently under-priced relative to gold and is therefore advising clients to accumulate positions in the precious metal.” The link is here.

And lastly, here is a half-hour interview with Jim Rogers. Like our own Doug Casey…Rogers is never one to mince words…nor suffer fools gladly. He certainly is in fine form for this interview, which I urge everyone to take the time to watch. I thank John Bilo, one of my daily readers, for sending this to me…and now to you. The link is here.

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Men are so simple and so much inclined to obey immediate needs, that a deceiver will never lack victims for his deceptions. – Machiavelli

I remember the day that President John Kennedy was shot. It was a warm late-fall day in Glenboro, Manitoba…and I was playing basketball outside at recess. Yesterday was another day that will probably live “in infamy” as well. It was Ben Bernanke’s “Inflate…or die!” moment. How far are we away from hyperinflation? Good question. But all of us at Casey Research are talking about little else. We’ll keep you posted.

Enjoy your Thursday…and I’ll see you right here at the same time tomorrow.

Source: And Then There’s This…Thursday, March 19th, 2009

Poor Warren. He’s down to his last $25 billion. And Bill Gates can barely hold his head up; his pile has shrunk to barely $18 billion.

And do a Google search of “AIG outrage” and you will get 621,000 hits.

Alas, being rich isn’t as easy or as much fun as it used to be.

The rally paused yesterday. The Dow lost 7 points. It could be over. More likely, it will run for a few months. Gradually, people will come to think that this is the real thing. They’ll begin to imagine that it is 2003 all over again. Of course, it’s not…this market has nothing in common with the Great Rebound of 2003-2007. (More below…)

Oil traded at $47 yesterday; it is slipping toward the $50 level. And the dollar is slipping around too – it is losing ground against the euro, now trading at $1.29/$. But it is mostly steady against gold, which seems to like the $900-$950 range…for now.

AIG is today’s main story. Everyone is appalled, outraged…or apoplectic about it. First, we under-reported the amount in bonuses paid out. The real amount is $450 million, says the Wall Street Journal…and one member of Congress charges that many bonuses were disguised as other things…and that the real total is more like $1 billion.

The average lumpenvoter has no idea how bailouts work. He was willing to believe that giving Wall Street hundreds of billions in taxpayer money would somehow make his house go up in price, but now that he sees how it really operates, he is ticked off about it. He may not understand macroeconomics, but he knows chicanery when he sees it.

Under pressure, AIG revealed what it did with the bailout money. It came as no shock to us to discover Goldman Sachs at the top of the list of recipients. Goldman’s main man was in the room with the feds – the only representative of Wall Street – when the decision was made to rescue AIG. What’s more, the feds’ main man at the time – Hank Paulson – also used to be the top honcho at Goldman (NYSE:GS). So the fix was in. The government gave money to AIG and AIG gave it to a long list of speculators – including Goldman.

This seems perfectly natural to us. If we’d been in on the fix we would have steered some of the loot our way. But the politicians are feigning shock and horror. Senator Grassley even said AIG management should “resign or commit suicide.” He later calmed down and said he didn’t mean it.

But we would have simply edited his remarks, giving the schmucks at AIG a last chance to exit with honor: “Resign AND commit suicide, in that order.”

Barney Frank added that “maybe it’s time to fire some people.” Why not? The feds own 80% of the insurance giant now. Go ahead; fire all the people you want. That’s about the only pleasure a real capitalist has left to him. Reach out…and fire someone today!

Elsewhere in the news, the economy continues to deteriorate. Industrial production fell 1.4% in February. And credit card defaults are at a 20-year high.

Misters Smoot and Hawley seem to still be on the federal payroll. The news this morning is that they began a trade war with Mexico and the Mexicans have already retaliated. That’s all we know about it…

But back to the tribulations of the rich…

First, Mr. Market is downsizing fortunes – fast. In the last 12 months, the average rich person has probably lost half his wealth. Not only did he own millions worth of stocks and real estate…he was also among the privileged few to get into good deals on derivatives, SIVs, hedge funds and private equity. Many of those complicated and conflicted assets have been wiped out completely. Or, maybe he was unlucky enough to count Bernie Madoff as a friend.

Second, what Mr. Market doesn’t take, Mr. Politician is looking at. All over the world, plans are afoot to increase his taxes…and close down his tax havens. President Obama has already revealed his plans to soak the rich. Every other group will come out even…or better…from Obama’s tax proposals. But the rich are going to be saturated…marinated…soaked to the bone.

And third, the poor rich guy has become a pariah. He doesn’t get invited to charity events anymore – or even to join the guys after work for a beer. Europeans have always distrusted rich people. But in America, a rich man used to be respected – just because he was rich. People asked his opinion on politics…on fashion…on art. He was presumed to be an authority on all things and was generally treated with respect…even deference.

But now rich are seen as chumps, losers, incompetents and malefactors. Even Americans look at rich people and think they must be either stupid or corrupt.

“Le secret des grandes fortunes sans cause apparente est un crime oubli , parce qu’ il a t proprement fait.” said Balzac. Which has been paraphrased to “Behind every great fortune lies a great crime.” Of course, he was referring to France, where it is has probably always been true. Money is dirty in France. But in America, money was supposed to be clean…innocent…honest and forthright. The richest man in town always sat in the front pew in church and stood for election to local office.

But come the depression and even the rich suffer. And unlike the starving urchins, unlucky widows and innocent orphans, no one cries a tear for the rich. Here at The Daily Reckoning we always take the side of the underdog…and always support the lost cause. So when we think of the rich…those darling people with their Italian suits…German cars…and Swiss bank accounts…our cheek gets a little moist. For we – and we alone – still admire and respect the rich. Of course, the rich are human beings too – just like the rest of us. And yes, dear reader…we still despise them as much as anyone else. When it comes to intelligence or moral rectitude, they are probably no better than the lower classes, though probably no worse. But we still admire and respect their money. Their money is no better either – but they have more of it.

Now over to Baltimore, where Addison at The 5 Min. Forecast gives a St. Patty’s Day look at the Emerald Isle:

“What’s the difference between Iceland and Ireland? ‘one letter and six months,’ or so goes a joke making its way around the Internet,” writes Addison.

“Aye, on this St. Patty’s day the Emerald Isle is suffering the mother of all hangovers; the embodiment of a boom gone bust.

“With official unemployment now over 10%, GDP shrinking at a 6.5% clip, a proper housing crash and a 10% federal budget shortfall, Ireland has seen it’s glory days crumble into one of the Eurozone’s most beaten down economies.

“Ratings agencies are on the verge of downgrading Ireland’s sovereign debt, which will assuredly make the whole matter even grimmer.

“The opening joke is so pointed,” Addison continues, “Irish Finance Minister Brian Lenihan is now on a global PR tour to help rekindle the world’s love of shamrocks and Guinness. Despite Lenihan’s denials, many expect the IMF to swoop in and become Ireland’s banker of last resort.”

Back to Bill in Paris…

It’s NOT 2003. Just in case you had any doubts.

You remember 2003? After a phony recession in ’01-’02 came a phony boom in ’03-’07. Stocks had driven into a ditch following the crash of the NASDAQ. The Dow had fallen down to about 7500. And then, when it looked like they were going nowhere for a long time…along came Alan Greenspan’s friendly towing service. In a jiffy, he winched the economy back onto the road…and it was soon flying along at the fastest speeds every recorded. The Dow went all the way to 14,000 and beyond…before crashing into a stone wall.

And now the financial media is on “bottom watch.” No, we’re not talking about the kind of bottom watching you do on a Brazilian beach…we’re talking about looking for the end of this bear market.

“Are stocks and oil bottoming,” asks a headline at Seeking Alpha.

“How will we know…” when we hit the bottom? Asks the New York Times.

The answer: we will know when we no longer want to know.

For the moment, we believe we are beginning a classic rebound. The news seems to have turned positive…along with the weather. It’s sunny and warm in Europe this morning. And investors are focusing on the positive.

“IMF poised to print billions in global quantitative easing,” says a headline in London’s Telegraph.

All over the world, the feds are working the pumps. And investors are watching their little boats begin to rock. If history is any guide, this rebound will recover 20% to 50% of what was lost. Then, the bottom – so recently spotted and revered – will fall out.

This is not 2003. In 2003, there was no collapse of the financial sector…banks didn’t fail…major companies didn’t face bankruptcy…consumer spending didn’t fall…house prices didn’t collapse…savings rates didn’t go up…capitalism wasn’t called into question…there were no tax rebates…there were no bailouts…not even a stimulus plan (though the feds did spend much more money…and the Fed did cut rates to 1%).

This time it’s different. This is not a recession. Not even a phony recession. It’s a very real Depression with a capital D…and all that goes with it – including whole industries that go broke, a credit crunch, a big drop in consumer spending, a huge political shift toward socialism, interest rates at zero, falling prices, and widespread bankruptcies – both of households and companies.

In 2003, a quick cut in interest rates – along with a boost in federal spending – produced a fast turnaround. Within months, prices were rising again. Consumers didn’t even pause…they kept spending and borrowing all the time. This time, the world has never seen stimulus efforts of such huge magnitude – and still no real uptick. This time, consumers are running scared…they’re losing their jobs and closing their wallets. This is the real thing. It won’t end quickly…or easily.

Here’s a calculation for you. The amount of excess debt in the United States is about $20 trillion. That’s the difference between the usual level debt – about 150% of GDP – and today’s level – about 350%. That $20 trillion in surplus debt probably has to disappear before a true growth cycle can begin again. The best way is simply to let nature take her course. Much of it would be written off in a few months. But the feds won’t let that happen. They’re doing all they can to prevent assets from getting marked down…and to prevent debt from getting written off. So far, they’ve committed $11.7 trillion to the fight against debt deflation.

So instead of writing it off, it will have to paid off…or ultimately, inflated off.

Currently savings rates have risen from zero to about 3% of GDP. That’s about $420 billion per year put to paying down the debt. Let’s see, at that rate, how long will it take to erase the $20 trillion in excess debt? Hmm….about 47 years!

Until tomorrow,

Bill Bonner
The Daily Reckoning

Source: Where the Bailout Money is Really Going

When the Spanish Galleons came back from the New World with cargoes of gold and silver coins, the Spaniards thought they’d hit the jackpot. All of a sudden, Iberia had plenty of money. Historians report that the Spanish neglected their fields and their manufactures; now they had easy money to spend. Prices rose quickly. Then, when the treasure ships stopped coming, the Spanish were broke. Spain – and Portugal too – went into a decline that lasted four centuries.

In the late 1990s, America got in the habit of getting shiploads of stuff from Asia – and paying for it only with pieces of green paper. Pretty soon, Americans too neglected their own factories – though not their fields. Let the Asians sweat, they said. We’ll think!

Not much serious thinking has taken place in the United States of America for the last 20 years. Instead, people preferred comforting illusions and conceited claptrap. We have the ‘strongest, most dynamic economy the world had ever seen,’ they congratulated themselves.

Of course, you don’t need to think – not when you ship is coming in. But now that the ship is sinking you’d expect people would put on their life jackets and their thinking caps. Nope. Now they look to the government for the free money. Yesterday’s news told us that Congress is now spending away $1 billion per hour.

We’ll come back to that in a minute…

First, some treacherously good news: the Dow rose again yesterday…up 239 points. We’re still withholding judgment, but it looks as though this might finally be the long-awaited rally. Stocks worldwide lost more than half their value without a single major rebound. We’re overdue for one. Maybe this is it.

Oil rose too – to $47. It seems to be getting ready to slide back over the $50 mark.

And the dollar may have topped out. The euro rose yesterday to $1.28…while gold recovered $13 to close at $924.

As near as we can tell there is no good reason for stocks to rally. Unemployment is still rising and sales are still falling. Until those trends flatten out, there is no reason to think business will improve.

Au contraire, business conditions are worsening and companies are cutting dividends faster than any time since the Great Depression. How can stocks go up in price…when sales and earnings are falling? The only possibility would be an increase in P/E ratios. But who wants to pay more for corporate earnings now?

No one we know. Instead, investors are becoming more and more wary. Why? Because even the biggest, strongest companies in the world are reporting problems. The agencies knocked down GE’s rating the other day. “What’s it worth now?” asks a headline. But the same question could be posed to almost any company on the planet – conditions have changed; what’s it worth now?

Last autumn, Warren Buffett commented on the solidity of his own company: “If Berkshire [Hathaway] isn’t Triple A, I’m not sure which company would be.”

But yesterday, Fitch took Berkshire (NYSE: BRK.A/BRK.B)down a notch…noting that the company had financial exposure in its insurance division that could be troublesome. Berkshire is no longer Triple A. And investors have to ask themselves: if you can’t trust the best companies, run by the best CEOs, who can you trust?

We won’t wait around for an answer, because there is none. The fact is the crisis has put a question mark behind all asset values.

Again, you’d expect these question marks to inspire a little serious thinking. If assets aren’t worth what we thought they were worth…well, what are they worth? And what is happening in the economy that makes things so uncertain?

House prices show no sign of reaching a bottom; foreclosures are running 30% ahead of last year. And the press reports that there are 14 million empty houses in the United States. What happened to all the people who lived in them? Below…a partial answer…

Meanwhile, the free money is flowing. Taxpayers got rebate checks from the government last year – even if they hadn’t paid any taxes. According to recent tallies, the feds have committed $12 trillion to freebies, bailouts, and boondoggles.

GM got a few billion. But the banks and Wall Street have been the biggest freeloaders so far. AIG has gotten four bailouts. Freddie Mac (NYSE:FRE) took a big bailout from the government too. But boo hoo…Freddie lost $50 billion last year, says the Washington Post, so it will need a little more help.

Freddie Mac “to tap $30.8 billion in aid as losses deepen,” says the Bloomberg report.

When will the losses stop? Who knows? But chances are…not any time soon.

*** Where have all the homeowners gone…Long time passing
Where have all the homeowners gone…Long time before
Where have all the homeowners gone…Gone to motels everyone…
When will they ever learn? Oh when will they ev-ev-er learn?

There are said to be 14 million empty houses in America. Where did the former tenants go, we wondered?

The New York Times has part of the answer: they’ve moved into motel rooms:

“Greg Hayworth, 44, graduated from Syracuse University and made a good living in his home state, California, from real estate and mortgage finance. Then that business crashed, and early last year the bank foreclosed on the house his family was renting, forcing their eviction.

“Local officials estimate that 1,000 families who live in motels in Orange County, Calif., go uncounted in federal homeless data.

“Paris Andre Navarro, 47, and her daughter, Crystal, 11, have been living at the El Dorado Inn in Anaheim, Calif., for three years. Ms. Navarro said the $241 weekly rent makes it hard to save.

“Now the Hayworths and their three children represent a new face of homelessness in Orange County: formerly middle income, living week to week in a cramped motel room.”

*** Finally, a Dear Reader with a comment:

“I have been reading your comments regularly for a past few years, during which I was a Managing Director at Lehman Brothers and, thereafter, at Deutsche Bank. I am now semi-retired, living in the English countryside and watching the meltdown from afar. In my youth I was drawn to Austrian and Libertarian thinking and, as I progressed in the financial industry, never forgot these roots. Now I feel fortunate to have that grounding as it helps me to better understand what is really going on.

“During 2004-07 I saw the financial industry stacking up the powder kegs that would eventually blow up. I tried on occasion to warn people. But my warnings fell on deaf ears at Lehman and elsewhere, but not for the reasons you might think.

“I recall numerous conversations with senior people at various global financial firms on topics ranging from Fed policy, to the US/UK housing markets, securitisation and its potential pitfalls, the CDS tangle, and so on. One thing that is clear to me is that key people at these firms were aware for the most part what risks they were taking. They knew that it was all going to blow up someday, if not so spectacularly as it now has done. But they all believed that somehow they would be quicker and cleverer than rival firms, that they would effectively hedge themselves and they would get out first, before things got really ugly. As you well know, that sort of collective “greater fool theory” mindset is characteristic of bubbles and, if widely held, almost ensures that liquidity will dry up suddenly as markets turn for the worse.

“Believe me, they knew they were playing with fire to a much greater extent than is currently acknowledged. They blame ‘animal spirits’ and ‘market forces’ when they were, in fact, the most important market participants. No wonder a hedge didn’t work if most major global financial institutions held the exact same hedge! If you are curious I can fill you in on some of the details although I suspect you know much of this already.

“In any event, I admire you and those few who are tirelessly pointing out that it was most emphatically not the free-market, but rather central banking and misguided regulation, that got us into this mess. You are doing the next generation a great service. Sadly, the current generation is probably beyond help at this point. I hope and pray that, like a phoenix, a form of proper, free-market capitalism rises from the ashes of the current conflagration.”

Source: Stocks Rally While Big Companies Fail