Bear in mind that each new economic report, earnings statement, news report or trading session represents a new opportunity for fear and uncertainty to reemerge.

Fortunately, next week’s economic calendar remains quite light, although retailers may just weigh in with “doom-and-gloom” holiday predictions.  Earnings season may be weak as well (with even more pessimistic outlooks), so investors should not overreact even if Texas Instruments Inc. (TXN), Halliburton Inc. (HAL), Amazon.com Inc. (AMZN) and others fail to meet expectations.  Volatility should continue and the days of triple-digit index moves (often up and down in the same day) may be here for a while.

So try not to get so overwhelmed with the seemingly never-ending challenges and uncertainties: The credit crisis, weak economy, plunging stock market, presidential election, etc.  Take everything one day at a time. The government actions are starting to thaw out the credit concerns and lending/borrowing should return to a somewhat normal level in due time. Declining energy and commodities prices should improve the inflation picture, which will help the consumer and allow the U.S. Federal Reserve to better focus on the struggling economy. Stocks tend to be leading indicators and often begin to rise even when the economy remains in the midst of a recession. The election (regardless of the victor) represents a new beginning, a new direction, a new attitude, and hopefully renewed confidence.

Market Matters

So much for less government.  With the presidential election at the homestretch, the candidates pushed their respective plans to rescue the economy in an attempt to appeal directly to Main Street folks like Joe the Plumber (basically more tax cuts vs. “spread the wealth”).  The bailout moves continued as U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. (a self-proclaimed free-market capitalist, if there ever was one) announced that the government would invest $250 billion into the nation’s banks to stabilize the financial system.  Proponents refused to label it as”nationalization.” But don’t tell that to the pundits on Fox News this past weekend: Some went as far as to question whether the U.S. government is embracing full-fledged “socialization.”

The Federal Deposit Insurance Corp. (FDIC) will be expanding its insurance program on non-interest bearing accounts, a move designed to assist small businesses. Throughout Europe and Asia, similar moves also were approved, as the global efforts appeared to be well coordinated.  The Swiss National Bank took over about $60 billion of bad assets from UBS AG (UBS), leaving the institution with one of the cleanest balance sheets around.  Morgan Stanley (MS) received a $9 billion investment from Mitsubishi Bank UFJ Financial Group Inc.  (ADR: MTU), giving the Japanese giant a 21% interest in one of the last remaining domestic financial super-powers (and at better terms than initially negotiated).  JPMorgan Chase & Co. (JPM) posted an 84% decline in third quarter profits (which still somehow bested analysts’ pessimistic expectations).  Likewise Wells Fargo & Co. (WFC), Citigroup Inc. (C), and Merrill Lynch & Co. Inc. (MER) (still under its pre-Bank of America Corp. (BAC) brand) suffered through “challenging” quarters, to say the least, and their short-term outlooks do not look any better. (Bring on those direct government investments).

While the technology sector struggles from dire expectations of future corporate IT expenditures, eBay Inc. (EBAY), Google Inc. (GOOG), Intel Corp. (INTC) and International Business Machines Corp. (IBM) all announced relatively strong quarters – IBM even “pre-announced” its strong results – and chipmaker Advanced Micro Devices Inc. (AMD) reported a narrower-than-expected loss.

Intel, IBM and AMD were all three topics of Money Morning’s new “Hot Stocks” feature, which chronicles the prospects of companies that are in the news.

Microsoft Corp. (MSFT) apparently still thinks a deal to acquire Yahoo! Inc. (YHOO) would make “economic sense,” though that $33 a share offer most likely would no longer apply for a stock trading below $13 a share.  General Motors Corp. (GM) intensified its merger talks with Chrysler Corp. and continued to explore sale options for its Hummer unit. But does $70 a barrel oil make those cool gas-guzzlers look attractive again?

Speaking of oil prices, the “black gold” plummeted to its lowest level in 13 months as prospects for a recession – or worse – continued to dampen energy demand.  Goldman Sachs Group Inc. (GS) became the first to predict a decline as far as $50 a barrel, ironically just a few months after its analysts called for $200 oil over the next two years.  The 50% percent slide in prices has prompted a panicking Organization of the Petroleum Exporting Countries (OPEC) to schedule an emergency meeting on Friday in Vienna, Austria. It will be the cartel’s 150th meeting. Gas prices are following in step as they pushed downward – in some areas through $3 a gallon, a 25% drop from the $4.11-per-gallon highs set in July.

Even so, as Money Morning reported, Merrill Lynch sees oil at $150 a barrel and gold at $1,500 an ounce, though its analysts provided no time frame.

Volatility continued as triple-digit-daily moves remain the norm.  Last Monday, the Dow Jones Industrial Average broke its eight-day (2,400 point) losing streak with a 936-point gain, its largest ever recorded.  Profit-taking and hedge fund redemptions followed, though bargain hunters reemerged at week’s end (until the final hour of trading).  The limited investor confidence was a welcome sign after the mass hysteria of the past weeks.

The credit markets seem to be slowly (but surely) recovering with the government actions, though some banks remain hesitant to lend and businesses and consumers have been slow to borrow.  Then again, given time, more government just may work.

Economically Speaking

At this point, there should be no real surprises in terms of weak economic data.  However, when September retail sales was reported as down 1.2% (for the third consecutive month) and the Philly Fed survey plunged to its worst showing in 18 years, investors were surprisingly caught off guard.  While the “official” definition of a recession is two consecutive quarters of negative growth, many analysts claim the country is already mired within one’s midst and the numbers will continue to reflect such weakness well into 2009.  The Fed Beige Book depicted that each region of the country is struggling and U.S. Federal Reserve Chairman Ben S. Bernanke did not rule out an additional rate cut at (or before) the Fed’s late October meeting.  Housing starts fell to the lowest level in 17 years and many believe that any recovery must start with a rebound in this long-suffering sector.  In fact, construction activity has plunged over 30% since September 2007.  (Could the next government intervention involve some direct mortgage relief for ailing homeowners?).

Now for some positive news (for a change).  The inflation picture is starting to look more promising as falling energy and other commodity prices begin to work their way through the U.S. economic system.  The wholesale inflation gauge – known a the producer price index, or PPI, fell for the second straight month, and consumer prices remained flat from August as gasoline prices slowly retreated.  Bear in mind, just a few short months ago, inflation was high on the Fed’s radar screen as Bernanke and friends were forced to tackle a weak economy and rising prices.  While the Fed’s “challenges” are far from over, talks of higher rates have disappeared and policymakers can focus all their energies on repairing the sluggish economy. 

Source: Here’s Why the Stock Market Relief of Late Last Week May Not Last

The tentative plan calls for the federal government to buy the “toxic,” mortgage-backed assets of failing – or failed – financial institutions in a bid to keep the U.S. financial system from melting down. A meltdown would be the penultimate event that would sap investor confidence, setting in motion a series of irreversible events that would wipe out savings, cause a big spike in home foreclosures, and ultimately, cause a major surge in unemployment after thousands of small businesses fail and major companies resort to widespread layoffs.

The Bush administration has made concessions almost daily to demands from both the political right and left from its original three-page proposal, including agreeing to limit pay for executives of bailed-out financial institutions.

Debate has been fierce on such questions as whether to phase in the cost and whether to give taxpayers an equity stake in rescued companies. House Financial Services Committee Chairman Barney Frank, D-Mass., told AP that both would be included in the legislation.

While details of the plan were not immediately provided, the compromise is said to include provisions to curb executive compensation for participating companies, provide more oversight of the Treasury’s actions, and supply the government with stock warrants that let the government share in profits generated by participating Wall Street firms.

“We came to some agreements on a lot of important issues,” Frank told the Los Angeles Times. “We are on track to pass this.”

Source: While Lawmakers Reach Credit Crisis Compromise, Money Morning Bailout Plan Expert Displays Doubt

As you know, the British government charitably stepped forward and, dipping into taxpayers’ pockets, made depositors whole.

Here is another photo of a bank run, this time in the U.S. from earlier this week, as depositors sit comfortably under an awning on chairs thoughtfully provided by the management of IndyMac (IMB).

Now, you have to ask yourself a question or two.

Are these two bank failures members of the species of “black swans” you hear so much of these days? You know, outliers that come from nowhere and are expected by no one until they splash down next to you… and bite your face?

Or are they the first wave in an evolutionary process that will soon darken the skies with flocks of the breed?

The answer to this question is of no small importance.

You see, while the great unwashed of investor-world – those that get their investment ideas from watching Jim Cramer’s Mad Money — can handle a couple of bank failures, even a modest-sized number of same will, almost more than anything else, trigger real panic.

And in times of panic, people run for cover… increasing savings and holding off on discretionary spending… just the sort of thing that can turn a faltering economy into one for the history books.

It is worth noting that, while everyone tends to focus on the stock market crash of Black Monday, 1929, the worst of the bank failures didn’t occur until late in 1930 through 1933, with the Roosevelts’ euphemistically labeled “bank holiday” coming only on March 5, 1933.

With the rally in the U.S. stock markets this week, the financial talkies were abuzz with much speculation that the worst might now be over… and that the skies were bright blue and clear of anything other than swans of the white variety, handsomely offset by a puffy cloud here and there.

It’s a classic bear market trap.

The problems facing the banks are still miles away from being resolved… with the $5.3 trillion commercial real estate market now hanging by its fingertips over the same abyss that residential real estate has already tumbled into, the Fed clinging on its back like a powerless version of Gandalf.

Then there is the darkening picture on credit card delinquencies, which you can see in the graph below.

It is thus clearly in the interest of the banks, desperate as they now are to replace their evaporated capital, that investors not look too closely lest they discover the degenerated conditions and bleak prospects of many of the institutions.

And so this week the banks were pulling out all stops with “news” that could be spun into tidy sound bites such as these…

Citigroup Gains After Posting Smaller-Than-Estimated Loss of $2.5 Billion

Citigroup Inc. (C) rose in New York trading after reporting a smaller-than-estimated loss on fewer mortgage-bond writedowns, lower borrowing costs and job cuts.Citigroup, the biggest U.S. bank by assets, said its second-quarter net loss was $2.5 billion, or 54 cents a share, because of $12 billion in writedowns and increased bad-loan reserves. Analysts estimated the New York-based bank’s loss at $3.67 billion. The shares rose as much as 14 percent.

And this… JPMorgan (JPM) posted earnings of 54 cents, vs. $1.20 a year ago, and revenue fell 2.7%. However, Wall Street was expecting earnings about 10 cents per share lower. The bank took a $540 million hit related to its acquisition of Bear Stearns.The JPMorgan report isn’t the only evidence that some financial firms are avoiding the full impact of the financial crisis. Also Thursday, PNC Financial Services (PNC), the largest bank in Pennsylvania, said its second-quarter profits rose 19%. Earnings of $1.45 per share beat analysts estimates by 29 cents.

On Wednesday, Wells Fargo (WFC) sparked a stock market rally when it raised its dividend and its second-quarter profits impressed investors.Just as I was preparing to let out a long bottled-up Hip! Hip! and all that, a couple of items came across my desk. The first was an article out of Bloomberg…

July 14 (Bloomberg) — At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank’s $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Hey, what’s $1.1 trillion between friends.

Commodity Trend Alert editor Eric Roseman is issuing a stark warning: Your bank could be next.

If you have money in the US banking system, he recommends you put it instead in Treasury bills or exchange traded funds (ETFs) that invest in short-term Treasury securities like SHV or SHY.

IndyMac Bancorp (NYSE:IMB) just became the latest mortgage casualty in the United States this month. More importantly, the headline-grabbing closure officially triggered the first attempted run on a US bank since the 1970s.

IndyMac’s collapse also marks the first time since the advent of the sub-prime mortgage crisis a year ago that a U.S. mortgage thrift has failed.

Last September, Britain’s Northern Rock (PINK:NHRKF) plc, a midsized mortgage lender, collapsed. Even though the Bank of England bailed the mortgage lender out, newspapers worldwide portrayed images of Northern Rock customers scrambling to access their funds for an entire month. It was eerily reminiscent of Depression era breadlines.

On July 14, IndyMac, the nation’s 10th largest mortgage lender, borrowed a page from Northern Rock as major financial newspapers depicted crowds waiting to access their funds.

IndyMac reopened its doors under federal supervision on Monday. They promised homeowners a lifeline from impending foreclosures. The FDIC also stepped in to protect funds up to US$100,000. However, US$1 billion dollars of IndyMac’s roughly US$19 billion in deposits was NOT insured affecting about 10,000 customers. But the FDIC has stated it would seek to return up to 50% of uninsured customer deposits.

If you’re holding the bulk of your savings at a U.S. bank — including the largest money-center banks, I strongly suggest moving those assets to TD Ameritrade. Use those funds to purchase Treasury bills or exchange traded funds that invest in short-term Treasury securities like SHV or SHY.

Also, other discount or full-service brokers will work, but just make sure to invest your funds in Treasury designated securities.

Also, consider mutual funds that offer “Treasury” or Government Securities” money-market funds. These products, offered by low-cost Vanguard Group among others, are safe, liquid and maintain a high degree of credibility since assets are 100% invested in short-term government paper.

The only cash sitting in a bank today should be to pay ongoing expenses, bills, etc. Don’t keep the bulk of your precious savings or liquidity stashed in a bank.

Until financial markets stabilize, head for the relative safety of government designated securities and products. These are uncertain times. Act now.

ERIC ROSEMAN, Investment Director

Source: Northern Rock Comes to America: Will Your Bank Be Next?

The global financial system is falling apart, and the world economy is slowing down. American consumerism is also slowing down – and no one knows what to make of that.

What would happen if Ben Bernanke actually gave it to Americans straight? At the moment, says Bill, the truth is the last thing anyone wants to hear – but they’ll have to face up to it sometime.

Oh dear reader! This morning, we are practically panting…

The world economy is slowing down. The global financial system is falling apart.

The whole situation is a mess…a disaster for investors…a catastrophe for homeowners…a Waterloo for the financial industry. But it is God’s gift to us.

What fun it is to read the paper! So much nonsense! So many clowns! Such drivel…such claptrap…everything is working out just as we expected.

We had to put down our copy of the Financial Times this morning. We were afraid of internal hemorrhage. Besides, our eyes were watering so much we could barely see…

First…there is Ben Bernanke on the cover, looking rather serious, as he appeared before the U.S. Congress yesterday. The poor man was expected to explain what was going on. What could he say, but that the economy was beset by “numerous difficulties?” He had to play the politician, in other words – the cunning dumbbell…avoiding at all costs saying anything useful or true. Of course, it is true enough to say that the economy faces troubles, but that description of it hides so many absurdities…and so many errors…and so many vanities and hallucinations.

Why didn’t he just come right out and explain that Americans have been living beyond their means…and now they’re being forced to cut back? That’s what yesterday’s retail sales figures showed – that consumer weren’t spending so much. What’s surprising about that? Nothing at all…we’ve been talking about it for months…even years.

But the news struck economists and financial reporters like a UFO sighting – they didn’t know what to make of it.

There’s also a photo of a long line in front of IndyMac’s door – waiting to get their money back. Mr. Bernanke might have also explained what was happening in the financial industry. Wall Street banks…Fannie Mae (NYSE:FNM)…Freddie Mac (NYSE:FRE)…IndyMac (NYSE:IMB)…Bear Stearns and the whole lot…made their money by peddling debt to people who already had too much. What did you think…that they could do that forever?

The headman at the Fed would have done us all a service, in our opinion, if he leveled with the nation.

“Look,” he might have said, “the prosperity we have enjoyed for the last few years has been largely an illusion; it was based on debt, leverage, and speculation. We all know you can’t get rich by spending more than you earn. And you can create real prosperity by borrowing money and spending it on consumer items. We’re now paying the price for those mistakes. Let’s just get it over with.”

Those words may or may not have been on call for him. He might have doodled something like that on the back of an envelope on the way to Capitol Hill. Maybe they came to him in a dream.

But when he got in front of the microphone, he realized that the truth is the last thing anyone wants to hear. He wisely avoided it, sticking with the stock phrases and standard wording of economic obfuscation.

Meanwhile, down the street, the U.S. president shifted from soporific twaddle to breathtaking imbecility.

“To the extent that we find weaknesses [in the financial system] we’ll move,” said the president of all the Americans, George W. Bush.

Mr. Bush has a weakness himself – for movement. He has presided over the most fidgety administration since Franklin Roosevelt. Not content to sit still, he spent more, borrowed more, and stirred up more dust than any previous administration. Now, he proposes a vast new expansion of the war against Free Enterprise.

Bailing out Bear Stearns, providing tax refund checks, and nationalizing Fannie and Freddie “signal a weakening of the administration’s ideological commitment to free-market principles,” says the Financial Times.

At this moment, we had to put down the paper. Where has the FT been? This administration has no commitment to any principles, as near as we can see. All it took was a terrorist attack in New York, and it threw over its entire conservative foreign policy in favor of reckless interventionism. And now we have a crisis in the financial industry. Of course, the big lenders, spenders and speculators are only getting what they deserve. Still, the Bush Administration is mounting an invasion.

We predict that it will have roughly the same results. Sweden, of all places, faced a major financial meltdown in 1991. The government hastened to intervene with a bailout. The cost – if translated to an American-scale economy – was more than $1 trillion. Mr. Bush’s intervention will cost that much – we predict. Or more.

Source: Visitors from the Planet Thrift

Minutes after 8:00 a.m., a spirited rally in both metals began which was over at the stroke of 9:00 a.m. Then at 10:30 a.m. we got another waterfall decline in both metals like we had on Tuesday. A short rally in both metals that occurred after the London close met the same fate as a similar rally on Tuesday. Both metals are again under some pressure in after hours Globex trading as I write this.

Open interest numbers in both gold and silver exploded on Tuesday (late reporting of previous day’s o.i.?). Despite the fact that gold and silver prices were hit on Tuesday, gold o.i. was up a stunning 13,332 contracts…and silver o.i. rose 3,254 contracts. It’s a given that virtually all of this action (in both gold and silver) was the tech funds going long in the Non-Commercial category and the bullion banks (’8 or less’ traders) going short against them in the Commercial category.

And judging from the price action starting at the Comex open on Tuesday morning, the top might be in for this rally. After coming within $12 of touching the magic $1,000…I guess the boyz want to remind us that this is supposed to be the ’summer doldrums’…despite the fact that the financial system is coming apart at the seams.

The fight between the longs and the shorts is raging…and it’s too soon to tell what’s going to happen. But with these monstrous increases in open interest in both metals, the bullion banks are sitting on eye-watering losses, since they are the ones taking on all comers on the short side. Are the ‘8 or less’ traders going to get overrun….or can they rig another sell-off and ring the cash register one more time before summer is out…because they sure do need the money. If I had a dollar to bet, I wouldn’t know which way to bet it this time. However, if past history is any sort of guide…!

And don’t forget that options expiry is coming up once again.

Needless to say, the Commitment of Traders report, which will be issued at 3:30 NY time tomorrow, will show how ugly the numbers really are in this big rally we’ve just had…as the cut-off was at the close of business on Tuesday. One can only imagine where the price of gold and silver would be if these bullion banks weren’t blocking every rally. But, hey!!!…that’s why they’re doing it! Don’t forget, there are no markets anymore…only interventions.

A prominent NY gold commentator had this to say about Wednesday’s activity….”Today’s $18 loss saw immense volume: Reuters reports estimated trade of 196,829 (contracts)…Clearly an extremely aggressive and violent seller has been active – with no interest in maximizing proceeds, judging by the suddenness of the declines…

On Tuesday, the ECB statement of condition indicated one captive CB (central bank) sold a total of 1.42 tonnes last week. The previous week’s implied sale was 3.42 tonnes. The ECB banks seem not to want to appear involved in gold’s current gyrations.”

In other gold news, this Yahoo story was posted at Kitco yesterday and is entitled “South Africa’s gold mines hit by strikes”. It’s not a long story…and it’s worth running through. The link is here.

As expected, the CPI numbers yesterday were horrific…biggest rise in 26 years. And I see that Bernanke said that there may be conditions where foreign exchange intervention is warranted. I guess that explains the dollar rally…such as it is/was. Lastly, I see that southern California house prices are down 29.3% in June, compared to June ‘07…and the median price fell a whopping 4.1% in one month…from May to June. The market is crashing. No wonder IndyMac (IMB) went belly up.

Talking about IndyMac…here’s a couple of photos provided by Peter R. and posted in Bill Murphy’s MIDAS commentary at lemetropolecafe.com yesterday. Before this is all over, there will be a lot more line-ups at a lot more US banks before this is all over.

click to enlarge

A couple of stories as usual. The first story today is silver analyst Ted Butler’s latest commentary entitled “Shelter From the Storm”. The link is here.

The second story is from The Telegraph in London. It’s another Ambrose Evans-Pritchard piece entitled “US faces global funding crisis, warns Merrill Lynch”. Evans-Pritchard says “The US treasury is running out of time before foreign patience snaps”. There’s probably a lot of truth in that statement. The link is here.

Well, the boyz finally got the market turned…and a short covering rally started. As the King Report said early this a.m….”The rig finally worked!!! The SEC crafted the mother of all short-covering rallies (financials)!” Oil and the precious metals are temporarily under control, so maybe they can sleep in tomorrow, because I’m sure they haven’t been getting much shut-eye lately. Both Bernanke and Paulson looked haggard on TV on Tuesday. I suppose makeup can only help so much. Then they have to rely on style, because there was no substance to be found in anything they had to say.

I hope your Thursday goes well, and I’ll see you Friday.

Source: And Then There’s This… Thursday July 17, 2008

Platinum’s long slide was prolonged for another day, as the metal skidded from the last hour of NYMEX trading through the Globex to end at $1900/oz., down $60. Overnight, platinum has been flat.

Silver remained above $19 through the mid-morning hours, but faded from there, closing at $18.76/oz., down 13 cents. Overnight, silver is little changed.
(Click here for charts)

The precious metals took a trip south, as would have been expected as the usual suspects lined up uniformly against them, with oil continuing to slide, equities staging a powerful rebound, and the dollar rallying against the euro.

Dan Norcini, writing on jsmineset.com, commented that, “It was amusing reading the wire service commentary attempting to explain the drop in gold this morning.

“One provider stated that gold declined because Bernanke said that inflation is too high and is a top priority for the US government. Oh sure it is! And to show how serious it is, the Fed is going to immediately begin a rate hike cycle in which they will add 100 basis points before the end of the year is out. Of course, they will be sure to do just that while the feds bail out FNM and FRE and while the FDIC attempts to clean up the mess at Indy Mac (IMB). Don’t forget Washington Mutual (WM) whose share price is trading closer to $4.00 than the $44 it was trading at a year ago. Yes indeed, that is just what the financial stocks ordered – a hawkish Fed talkfest! Meanwhile they are forced to print Dollars like candy wrappers to hold things together! I am sure China and the rest of the sovereign wealth funds are thrilled.”

What seems sure is that gold was due for a bit of a correction. “Gold has had an impressive run, so it’s going to take a breather anyway,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. It is currently in “overbought status” and “a pullback is expected,” Zeman said.

But the bulls’ optimism is undented. “While the need for cash prompts some investor liquidation in the short term, we expect the backdrop of geopolitical concerns and financial market jitters to limit price weakness, with the metal well-placed to challenge above $1,000 an ounce,” said James Moore, of TheBullionDesk.com.

Source: Precious Metals Slammed, Rebound in Equities Helps Cue Sell-off

So it’s little wonder that gold has rallied sharply in the past week or so, to more than $970. But what is it about gold that actually makes people want to own it when the financial system is in turmoil? Investors say it’s a hedge against inflation; it’s the anti-dollar; or they just see that everyone else is buying it, so they pile in afterwards.

But what is the point of owning a lump of metal that doesn’t pay a dividend, isn’t edible and actually costs you money to keep safe? To understand why gold is the ultimate safe haven in this financial crisis, we have to get to the root of our current problem. And that’s money…

How it all started: a brief history of money

Why do we need money at all? The barter system had plenty of attractions – it can’t be taxed, for one thing. But it’s inefficient. Say I sell spades, and you sell dressing gowns. For any deal to happen you must want a spade at just the moment I happen to want a dressing gown. So even the most primitive societies developed some kind of payment system, or money, that was accepted by everyone in exchange for goods and services.

Money has to have two qualities. It must be portable and it must have a purchasing power that lasts, so it can be used at a later stage. Shells, cocoa beans, even feathers have been used over the years as money. At one stage Roman soldiers were paid in salt, from where we derive the word, ’salary’. These early forms of money were ‘commodity money’.

Gold and silver were widely used. Their rarity gave them value – a great deal of worth could be stored in a single gold coin – as did their immutability. Gold doesn’t tarnish. You could dig up a gold coin buried in the ground a thousand years ago and it would be more or less intact. And just as gold preserves over time, so does its purchasing power. An ounce of gold would have bought a Roman Senator a jolly decent toga and perhaps a pair of sandals; today the sterling equivalent (£500 or so) would buy your local MP a respectable suit and shoes.

To facilitate trade, gold was turned into coins of a certified weight and purity by goldsmiths. The goldsmiths, who had built vaults to store their gold safely, also began to store the gold of their fellow townsmen, issuing a certificate as receipt for the gold deposited. Over time these certificates were used in the marketplace as if they were the gold itself. World trade had slowly moved from a ‘commodity money’ to a ‘representative money’.

Seeing that very few depositors ever removed their actual gold, instead using their certificates for trade, goldsmiths realised they could make money by lending out certificates against depositors’ gold. Despite the inherent duplicity in the scheme – lending what is not yours to lend – it worked. The depositors did not lose anything. As long as there was no bank run, their gold was all still safe in the goldsmith’s vault.

Depositors, however, soon wanted their share. Rather than taking back their gold, the depositors simply demanded that the goldsmith, now in effect their banker, pay them a share of the interest. The goldsmith paid one rate on deposits and then lent at a higher rate.

But in times of panic some borrowers would demand their real gold back, instead of the paper certificates. Before long, you had the dreaded run on the bank, with the banker not having enough gold and silver to redeem all the paper he had put out. It would have been straightforward to outlaw this new lending practice, but the large volumes of credit the bankers had created had become vital to the success of European commercial expansion, so, instead, the practice was legalised and regulated. The monetary system had moved on from representative to debt.

Bankers agreed limits on the amount of loan money that could be lent out, limits still much larger than the amount of gold and silver on deposit. Usually the ratio was nine loaned units to one actual unit in gold and these regulations were enforced by surprise inspections. It was also arranged that, in the event of a run, central banks would support local banks with emergency gold. Only if there were runs on a lot of banks simultaneously would the bankers’ credit bubble burst and the system come crashing down,

Read the full article

Source: The Root of this Financial Crisis, and Why You Must Buy Gold Now

When Fannie Mae (FNM) and Freddie Mac (FRE) had the wind at their backs they were considered part of the ‘free enterprise’ sector. Their CEOs received pay hikes as the companies laid the groundwork for their own undoing.

Now the mortgage firms’ fortunes have changed the American taxpayer discovers that these were ‘government sponsored enterprises’ all along. They were part of America’s welfare system. And now they’re getting the dig out they always knew would be forthcoming…

It was all very well for the nation’s two biggest mortgage finance companies to be part of the ‘free enterprise’ sector – when the wind was at their backs. Fannie and Freddie were just important parts of the financial sector. They helped “allocate credit” to people who needed it. Mongering credit was good work since the ’80s. Since 2002, it was especially good work – up until about a year ago.

So who could begrudge Daniel Mudd’s $13.4 million 2007 pay package as CEO of Fannie Mae? Or, who would be sour enough to complain about Dick Syron’s $18.3 million wage from Freddie Mac? These guys were just getting rewarded for good performance, right?

Well, not exactly. Syron’s pay went up 25% last year – even as the company went from a $2.3 billion profit in 2006 to a $3 billion loss in ‘07. And Mr. Mudd got a 7% increase, while the company posted a $2.1 billion loss and shareholders took a 33% haircut.

Okay…so maybe shareholders overpaid them a little. But that’s how compensation works in the free market; you get what you can get away with. So, bravo to them! Besides, they were helping the whole great machinery of capitalism make Americans rich. That’s why they gave out all those rich consulting contracts to former members of Congress. And that’s why they spent millions on lobbyists…angling the politicians to protect the mortgage market at all costs.

But what’s this? The wind has whipped around, and now blows a gale into the twin lenders’ faces. Now, we discover that these were “government sponsored enterprises” all along. They were part of America’s social welfare system, it turns out, not part of the free market. They were just performing a public service – helping make sure the poor plebes had roofs over their heads. And now that the two GSEs are having trouble, naturally, the full faith and credit of the United States of America has to be lined up to support them.

Source: God, Guns and Gold

Bush’s comments didn’t do much for investors confidence. Shares in troubled mortgage outfits Fannie Mae and Freddie Mac tumbled, along with most other financial stocks.

The bottom line is the U.S. financial system is now beyond credibility, as James Howard Kunstler puts it. And Dubya and his Republican party will be remembered as the party that broke America.

With the death of the IndyMac Bank (NYSE:IMB) last week, and the GSEs Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) laying side-by-side in the EMT van on IV drips, headed for the Federal Reserve’s ever more crowded intensive care unit, there was a sense of the American Dream having passed through the event horizon that denotes the opening of a black hole.

What would happen if the U.S. government acted to bail out these feckless enterprises (and what if they don’t)? Either way, it’s not a pretty picture. If Mr. Bernanke does start shoveling loans into the GSE black hole, he’ll further undermine the soundness of his own outfit and do nothing, really, to repair Fannie and Freddie’s structural problem of having securitized too many loans that will never be paid back. If instead Fannie and Freddie are flat-out taken over entirely by the U.S. government (and remember the Federal Reserve is not the government), then the national debt will roughly double overnight – which will pound the U.S. dollar down a rat-hole.

Meanwhile, the foreign holders of those decrepitating dollars might not rush to the redemption window, but they certainly would use them to buy up every oil futures contract on God’s not-so-green Earth as fast as possible – they’d be dumb not to – which would leave American Happy Motorists with gasoline prices north of $5 a gallon, and possibly north of $10. (In that case, say goodbye to the airlines. In fact, say goodbye to what passes for the rest of the US economy, including especially the vaunted retail sector that supposedly counts for 70 percent of the action.)

If Fannie and Freddie are left to die out on the desert floor, say goodbye to the housing market, the major investment banks, countless regional banks, the retirement accounts of virtually everyone in America, the viability of all fifty states’ governments, and the day-to-day operating ability of all their municipalities – and very likely the current incarnation of the world banking system.

This process is really out of control now. The bottom line is the comprehensive bankruptcy of the United States. The Republican Party under George Bush will be known as the party that wrecked America (release 2.0). Painful as it is, Americans had better get a new “Dream” and fast. It better be a dream based on the way the universe actually works, which is to say an operating procedure run on earnest effort and truthfulness rather than merely trying to get something for nothing and wishing on stars. We might begin symbolically by evacuating Las Vegas and calling in an air strike on the loathsome place – to register our new reality-based attitude adjustment.

Source: Event Horizon