Chuck Butler (The Daily Reckoning):
As I checked the currencies throughout the day yesterday, I noticed that as the day went on, the non-dollar currencies were stronger, led by the Big Dog, euro (EUR)… But then late last night, and I mean late last night, I checked them, and those gains had been wiped out.

So, when I arrived here this morning, I had one thing on the top of my list of things to do, and that was to find out what happened… Come on, I said to myself, it had to be more than the “risk on, risk off” stuff that’s been hanging over the markets like the Sword of Damocles! But, when you get right down to the nitty gritty, that’s all it was… For once again, there was some data, or story, or rumor, that spooked the markets into believing the global recovery isn’t going to happen, and the “risk off” came into play.

So what was it that spooked the markets… Well… The only thing I can find was the report yesterday about falling Housing Starts that Chris told you about… Did you know that about 14% of US homeowners were either delinquent on their mortgage or in some stage of foreclosure? That is the highest rate since the group started collecting the data in 1972!

But there was something else that was announced as the day went on, that I think probably spooked the markets more than anything else… And that is a key House panel approved two amendments to a sweeping financial-overhaul bill that would give federal watchdogs new authority to audit the Federal Reserve, and would establish a fund of as much as $200 billion to help dissolve large, troubled institutions. Rep. Ron Paul (R., Texas) offered the amendment seeking to subject the Fed to audits.

The House Financial Services Committee voted 41-28 to approve the amendments, wrapping up weeks of debate but postponing a final vote on the bill until after Thanksgiving.

OK… More deficit spending for sure, and I’m positive that this was “hung on this bill” to audit the Fed as the only way it would get through the gauntlet.
Click here to finish Mr. Butler’s article at The Daily Reckoning.

Good day… And a Happy Friday to one and all! The end of the week… It’s been a tough week for yours truly, as I’ve hobble around in pain all week. But, as I recall, I promised 2 years ago that I would not complain about these things in the future… So! I carry on!

Well… Front and center this morning… The currencies are trading near levels they were when I signed off yesterday morning. They did have a brief rally, after the U.S. Retail Sales data showed some real rot on the “recover is here” vine… But that rally was snuffed out, as the risk aversion campers came back to the markets…

Overnight, the Reserve Bank of Australia’s (RBA) Gov. Stevens, game his semi-annual report on the Australian economy to Parliament, and he was quite upbeat… And not just about the Australian economy. Stevens was quite upbeat about most of Asia, including Australia’s largest export country… Japan. I bet you thought I was going to say China! I thought that Stevens did a fantastic job of putting his thoughts out there for all to hear. Like, talking about how future quarters could show softer growth as the RBA removes “fiscal candy”… Good Show!

One thing is clear, at least to me, from this upbeat report, and that is I believe we can look for the RBA to hike rates aggressively in the first QTR of next year… And, if the future quarters are stronger than Stevens now forecasts, we could very well see a rate hike before we turn the calendar page on 2009!

Speaking of future rate hikes… Since Norway’s Norges Bank moved to a tightening bias on Wednesday morning the Norwegian krone has gained 3.2%! Go krone, Go krone… I’m dancing in my seat. Carlos Santana is playing, dance, sister dance on the radio… It’s all good… OK, I’m sure that’s a sight you didn’t want flashing before your eyes!

OK… So… Here in the U.S. we saw Retail Sales for July, which I told you yesterday was expected to be stronger because of the Gov’t’s cash for clunkers program… U.S. retail sales unexpectedly fell -.1% in July despite the debut of the government’s “cash for clunkers” program meant to jump-start the auto business and help turn around the economy. So… Here we go again… The Gov’t promises something, and it falls short of expectations… Looks like “cash for clunkers” is a Clunker!

That Retail Sales shocker yesterday really makes one stop to think about all the euphoria being exhibited about the end of the recession… So… When Retail Sales printed, you can understand the return of the risk aversion campers, eh? I wonder how this report fits into the Fed’s view that the economy is “leveling”?

Today, we’ll see the stupid CPI report… Just what we need on a Friday! A reminder of how the Gov’t cheats those that are on fixed payments, and those that buy TIPS… Don’t know what I’m talking about here? That’s OK… You must be new to class! No worries! You see the Gov’t began making changes to the way we calculate consumer inflation back in the mid 90’s, and it’s been a huge mess ever since! I’ll just say this… Consumer inflation in this country has been grossly understated for 15 years… It was all done as part of a plan to allow interest rates to remain low, so that housing would become affordable for everyone… Now, that plan sure worked out well, eh? NOT!

So, enough of that! Let’s talk about Brazil! Before I get into this, I must make this perfectly clear… Brazil is an emerging market, and with that moniker, they should be viewed as a speculation investment only, that is unless it’s got principal protection like our BRIC MarketSafe CD! WOW, did you see how I segued right into that? Man… I are so smart!

OK, back to Brazil… I was reading a story on the Bloomie this morning about how a currency strategist at Standard Chartered Bank in New York, has forecast a level of 1.80 for the real by the end of this year, and 155 by the end of 2010… WOW! That would mean that on top of this year’s already top performance of +27%, the real would add another 15% next year… That’s all nice and sweet… But it is just a forecast by someone I’ve never hear of, so take that with how ever many grains of salt you wish!

Now that I have you all pumped up… OK, for a second there the old Hans and Franz Saturday Night skit, “were going to pump you up” flashed before my eyes… OK, were was I? Oh, now that you’re all pumped up, I will remind you of what I said on Wednesday of this week… And that is, that I’m becoming very scared of this stock market run, and if it runs out of steam, the resulting sell off of stocks could adversely affect the currencies, since these two asset classes are being hog tied together, along with commodities!

Oh, and this just in this morning… Brazilian Retail Sales rose 1.7% in June beating the forecasts of a 1.2% gain. You would have to think that given the strength of this report that Brazilian domestic demand is growing and will contribute further to the thoughts that the Brazilian economy is going to rebound faster than most other countries. And when you have some of the highest yields in the world, and an economy rebounding faster than others, you get a ton of foreign investment into the country, which… Will drive up the value of a currency, which in this case is the real!

It’s been a while since I last talked about Gold & Silver… And then I was reading a report written Sean Hyman about Gold, and decided to share with you some of Sean’s thoughts… Sean believes that we’ll see $1,300 Gold by the end of this year, and $2,500 Gold in 2010… He bases this on a number of things, but mostly on the fact that the IMF announced sales of Gold made earlier this year, is being completely offset by Chinese buying. With all the demand for Gold, having this huge IMF selling of Gold offset by the Chinese if HUGE! So… I thank Sean for his thoughts here…

Sean is a regular contributor to the FX University Daily newsletter that the Sovereign Society publishes… I’m a part of FX University, along with Sean. Speaking of FX University… Many of you know how the FX University did what we called “currency tours” last year, visiting 8 different cities to hold one-day classes on Foreign Exchange (FX)… That format is going to change… In February 2010, we’ll hold a 3-day event in Scottsdale Arizona… So… The number of people able to attend these classes will be greatly reduced! I suggest that you visit http://www.worldcurrencywatchfxu.com/main/

OK… Thanks for all the positive notes about abolishing the Fed yesterday… I did receive a few that thought I had lost my marbles, and didn’t have any problem telling me so! But that’s OK… I didn’t think it was going to be met with 100% approval / participation! Quite a few told me to join Ron Paul’s bandwagon… I’ve been on his bandwagon for some time now! But for those skeptics to my call to abolish the cartel, I mean the Fed, I simply suggest you read the book: The Creature From Jekyll Island… But for an appetizer, I suggest you first read William Fleckenstein’s book, The Age of Ignorance at the Fed, Greenspan’s Bubbles…

And… Let me make something perfectly clear… This letter is Chuck’s letter… And therefore it is Chuck’s opinions, not those of the Bank! While I’m sure that I’m loved by one and all at EverBank, they do not influence my opinions, this is all me, folks… Just imagine what my poor beautiful bride has had to put up with for 33 years!

OK… We had some housecleaning to do this morning, I sorry about that, but just some things to get off my chest and out the door…

Before I head to the Big Finish, I wanted to talk a bit about Canada… While the U.S. was posting an increase in their Trade Deficit, Canada printed a narrowing Trade Deficit! Rising exports and falling imports resulted in a HUGE narrowing in Canada’s trade deficit in June which came in at C$55 million, which was much smaller than May’s revised C$1.1 billion trade shortfall… This is a nice piece of data for Canada, and I would love to see this deficit narrow further next month, and get back to the days of surpluses in Canada!

One would think this data to be a feather in the loonies’ cap!

Currencies today 8/14/09: A$ .8435, kiwi .6820, C$ .9205, euro 1.4290, sterling 1.6565, Swiss .9360, rand 8.0550, krone 6.0250, SEK 7.1250, forint 188.50, zloty 2.8875, koruna 18.51, yen 95, sing 1.4425, HKD 7.7505, INR 48.25, China 6.8344, pesos 12.84, BRL 1.8230, dollar index 78.35, Oil $70.75, 10-yr 3.60%, Silver $15.10, and Gold… $958.70

That’s it for today… hope you have a Happy Friday!

Chuck Butler

Source: Cash for Clunkers Is a Clunker!

Our third President and signer of the Declaration of Independence, Thomas Jefferson, long ago stated …”Banking establishments are more dangerous than standing armies”.

He also declared …“If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless.”

Hello.

A second American Revolution is now at least as necessary as the first one was though few citizens have an overall understanding of the problems we face. Anything short of a complete house cleaning will be mostly a waste of time and effort. The elitist banking entities running and ruining this country must be shown the highway. Nothing less will suffice!

Who exactly am I talking about? The Federal Reserve is exhibit one. Their partners in financial crime like Goldman Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM), et al absolutely must be excised like the cancer they are.

“Tea Parties” are once again on the horizon. Lots of citizens are awakening and protesting. How keen is their focus going to be?

Those that put the preponderance of blame on President Obama, ex-President Bush, the Liberals, the Conservatives, the Trial lawyers, the unions or any other distraction will never accomplish anything worthwhile. The rot is deep, systemic and centered on money and the banking system.

Those that demonize Republicans and worship Democrats, or vice versa, have been suckered into a divide and conquer plan. My expectation is to never again vote for a Republican or a Democrat in their present form. The Demopublicans must go.

The Fed is a serial bubble blower. Their funny money products initially line the pockets of their cronies closest to the trough. From there it is directed towards distorting prices in stocks, real estate or the latest manipulated craze. Economies without foundation inevitably collapse. Our central planners need to take an indefinite overseas vacation.

America’s biggest exports over the last decade have been toxic and fraudulent financial products. The creators of this crap are the ones who have brought us to the present disaster – yet they remain in charge of sweeping changes designed to perpetuate their power and imprison us.

All of these Wall Street entities and the lackey politicians who support them must hit the road. Those behind the scenes pulling the strings have to be stripped of their illicit power.

Surely you heard about Goldman Sachs’ record second-quarter earnings of $3.44 billion? Making money hand over fist comes fairly easy when you get to implement official policy. Records follow when front running is the name of the game. They may get their bonuses now but ours will be even larger when tar and feathers once again hold sway.

Congressman Ron Paul has sponsored a bill to audit and put congressional oversight on the Federal Reserve. 261 representatives have so far signed on to this meaningful element of true change. A similar Senate bill is just getting started. Knowledgeable citizens seriously doubt the Fed could withstand an audit because of its shady dealings. This is one bill that holds some promise.

The huge majority of US citizens are really peeved, justifiably so. That anger will certainly play out in the coming months and years. The tea parties could even spill into the streets. You can rest well assured that nothing will be accomplished without a purposeful and focused anger.

Concerned Americans have a critical choice. We can rid the system of all the parasites and malignancies or just stay home and continue to get our reality through television.

You know by now I’m also going to advise you to protect yourself and those you care about. The monetary metals, gold and silver, sniff out economic, financial and monetary chaos. They’ve had a massive snort lately and more is coming. These precious metals have appreciated nicely almost every year of this decade for good reason. They should still be purchased and the speculators amongst you may consider my Resource Windfall Speculator for leveraged gains in the resource sector.

Live Free and Resourcefully,

Rusty

Source: You Say You Want a Revolution?

Not that we know. But they asked us anyway.

We report to you today from the banks of the Potomac. Our old friend, Congressman Ron Paul, organized an off-the-record discussion with several other members of Congress. The subject was the financial meltdown…and the bailout. We were there to talk, of course, but we were more interested in listening.

“You don’t understand,” said a Senate functionary we met later, “these people live in Bubble World. They’re protected from the real world by their staffs and by the system itself. You imagine that they would know what is going on. But they don’t. They know less than we do. And they’ll be the last to find out. They are so busy meeting constituents…dealing with donors…working out deals with their political parties and supporters…and feeling like big shots…they don’t really have any time to study the issues. So they count on staff and party committees to tell them what to say, how to vote…and what to think.”

Waiting in the corridor of the Cannon building, two men in grey suits walked by…we overheard this conversation:

“Did you vote ‘no’ on that last resolution? You we’re supposed to vote ‘yes.’”

“I thought I was supposed to vote ‘yes’ to cutting off the argument… as far as I’m concerned we’ve heard enough about Nancy’s problem with the CIA…”

“But that wasn’t about cutting off the debate, that was just technical…about allowing them to modify the previous vote…”

“What are you talking about…”

“I don’t know…I didn’t think it had anything to do with stopping all this gabbing about Nancy and the CIA…”

We take it for granted that Members of Congress often don’t know what they are talking about. But it is shocking to realize that they often don’t know what they are voting on either. And neither do the voters.

The Economist reports, for example, that the measures put before California voters in a recent plebiscite were challenged…not by the courts, but by a grammarian. She claimed they were worded in such a way that it was impossible for a reasonably intelligent person to understand what they were supposed to mean.

More on our visit to Capitol Hill:

*** Since the meeting was “off-the-record,” we can’t tell you who was there or what they said. We can only report what we had to say.

“Look…economies…and empires…go in cycles,” we began. We thought we ought to start with the basics, since we didn’t know what they thought.

“Growth…maturity…then, decline. That’s just the way it is. So in order to get an idea of what lies ahead you have to figure out where you are in the cycle.

“You never know for sure, but there are tell-tale signs. The credit cycle, for example, has been on an upswing in the US since the Great Depression. First, there was in-store consumer credit as early as the ‘20s. There was some mortgage credit…and some margin credit for investors too. But during the ’30s, the financial strain was so great that most people regretted their debt and paid it down. Or they defaulted.

“You could get a mortgage back then if you put 50% down…and paid it off in full in 3 to 5 years. And then Franklin Roosevelt set up the FHA…along with Fannie Mae. And pretty soon, you could borrow 80% of the house price and pay it off over 15 years.

“Major credit cards – Mastercard (NYSE:MA) and Visa (NYSE:V) – didn’t become widely used until the ‘60s. And then, credit began to rise more steeply. Total debt had been about 150% of GDP in the ‘50s and ‘60s…but it rose quickly after the ‘80s. By the 2000s, you could get a mortgage for 110% of your house price – an inflated price at that. And you could take 30 years to pay it off.

“As for credit cards, hardly a day passed when you didn’t get a new one in the mail….usually with a higher debt limit. Debt rose…and rose…and rose…up to 350% of GDP. And finally, the whole debt bubble blew up.

“You have to remember that the US economy – in fact, much of the whole world economy – came to rely on more and more debt as a way to expand. At first, a fellow could borrow $1.50…he’d spend it and invest it…and it would lead to an increase in GDP of $1. But, as time when by it took more and more debt to produce more GDP. The fellow would borrow a $1.50…but then, part of it would have to be used to pay the interest on what he borrowed before. Eventually, it was taking more than $6 to produce a single ounce of GDP.

“You can see that this won’t work for long. GDP is like national income. You can’t have debt increasing 6 times faster than income – at least not for long.

“But remember, the US economy depended on this debt-fueled growth. Without the extra credit, the economy will slip back…which is what is happening.

“We’ve reached a turning point. The financial industry has blown itself up. It realized that all those credits it had, from people who didn’t have the cashflow to repay their debts, weren’t worth what they were supposed to be worth. We’re now on the downhill slope of the credit cycle…and most likely, the imperial cycle too.

“What everyone wants to know is how long it will take before we have a genuine recovery. And then, everyone…everyone…seems to think that the government can stir up new growth by pushing more debt onto the public…this time, public debt. And get this…the feds are now adding debt to the system at a rate 4 times greater than the previous record.

“They…you…are running a budget deficit of $1.8 trillion this year. Could be higher. How much in extra GDP do you get from all that extra debt? Well, a good question…because GDP is now going backwards. The latest numbers show output going down at a 6% rate in the US. And that’s one of the world’s better rates. Exporters – notably Germany and Japan – are doing much worse. GDP is falling 14% in Germany. It’s going down at a 15% rate in Japan.

“So, the feds are adding trillions in new credit (debt) and getting no GDP growth from it — zero…zilch…nada. In other words debt is growing infinitely faster than GDP.

“How long can this keep going? No one knows. But one thing we do know is that the economy is not going to start up again and deliver good, old-fashioned, healthy growth. We’re in the process of de-leveraging. That is, we’re on the down-side of a credit cycle. We’re getting rid of debt, not adding to it.”

If we’d had today’s newspaper in front of us, we would have pointed at the headlines.

“Recession Turns Malls Into Ghost Towns,” says the Wall Street Journal. Malls are emptying out because they were built for a world that no longer exists. They were built for a world where people increased their debt and their consumer spending far faster than they increased their real incomes. Now that people are cutting back on spending – in order to reduce their levels of debt – they can no longer afford to go to the mall. As a business or an investment, malls have got to be bad places for your money.

“The private sector is not going to take on more debt,” we continued our explanation. “People know it doesn’t pay. And they’ve got too much already. The private sector is not going to begin a new growth period until they’ve paid off, worked out, defaulted on, or shirked a lot of their present debt load. We’ve estimated that they need to get rid of about $20 trillion worth. And that’s going to take time. And a lot of painful decisions by a lot of people. Bad business, investment and spending decisions need to be recognized…and fixed. Debt needs to be reduced.

“And that’s why this downturn is not going to end tomorrow.”

If we’d had the mall example in front of us, we could have explained that a mall represents a kind of bubble-era investment that now needs to be restructured. After America’s industrial age was over, the country found itself with empty factories and warehouses. They were mostly written off and destroyed. Some were converted – into lofts and shopping malls. Now that the retail age is over, we’ll have to find new uses for malls too.

“This is going to take time,” we told them…and then we took a break to listen…and eat some shrimp.

Source: What We Told the Chiefs of ‘Bubble World’

It all started the moment that Sydney closed on Monday afternoon…1:00 a.m. Monday in New York. From that point on, only Hong Kong [and the New York Bullion Banks] is a player. As I’ve said before, the New York banks [or their agents] can, and do, enter the markets whenever they want.

Gold sold off about five bucks with a smallish rally starting shortly after 12:00 noon in London. That lasted until the equity markets opened at 9:30 in New York…and then it was lights out…as gold got hit for $11 bucks. Once London closed for the day, the pressure was on again [both in Globex trading and electronic trading after], and gold closed nearly on its low of the day. June gold finished the floor session at $921.70, down $9.60. Estimated volume was a heavy 130,095 lots. And all things considered…the precious metals equities did surprisingly well. I find that encouraging…fingers crossed!

As egregious as the activity was in the gold market…silver really got it in the neck. As with gold, silver also began selling off at the same time. In the five obvious bouts of selling yesterday, silver lost 30 cents. The first was in the Hong Kong market shortly after Sydney closed, the next at the London open, thirdly…after the London silver fix around noon in London, fourthly…at the opening of the New York stock market…and lastly, in electronic trading on the Globex starting shortly before the equity markets closed. Here’s the Kitco graph…

click to enlarge

The usual N.Y. commentator had the following observations…”UBS notes this morning that they have been surprised by jewelry demand in the past six weeks, observing that ‘this is the first time we have seen any noticeable jewellery demand above $900/oz and in particular, the buying from India suggests that demand later in the year should increase a lot ahead of the Diwali festival…’. Vietnam gold stood at a $26.21 discount to world gold this morning. The unofficial Dong rate continues soft. This level, if sustained, will probably mean exports.

“Friday’s modest $2.90 Comex again saw a substantial increase in open interest. ScotiaMocatta described gold as being ‘well offered’ at $930, which was clearly true. Gold’s friends in the West have once again been reminded that breakouts attract opposition. An interesting account of the Paulson firm’s gold involvement is linked here.”

The breakout to which the N.Y. commentator refers, is the reverse head and shoulders technical pattern that has been building for the last while. The graph below [stolen shamelessly from James Turk over at goldmoney.com] indicates the current situation. It’s obvious the crooks at JPMorgan(NYSE:JPM) et al can read a chart as well as anyone. They would love to break this chart pattern.

click to enlarge

In other gold news, gold open interest rose once again last Friday. It was up another 4,507 contracts to 367,232…on volume of 116,949 contracts. Silver o.i. went the other way, with o.i. down 1,664 contracts to 94,496 on smallish volume of 17,525 contracts. As was mentioned in the first paragraph, volume in both gold and silver yesterday was pretty big…and it will be fascinating to see what happened to the open interest numbers when they become available later this morning.

It was a slow day for Comex deliveries yesterday…only five gold [and four silver] contracts were delivered. Over at the Comex-approved warehouses yesterday, another 479,227 ounces were added. As far as I can tell, there was no action in the GLD or SLV either. It was also a slow week at the ETFs in Zurich, Switzerland…as the Zürcher Kantonalbank reported that during the last week, their gold ETF only added 6,780 troy ounces…and their silver ETF added a smallish 175,543 ounces. Things were a littler busier over at the U.S. Mint, as they added to their update from Friday. One ounce gold eagle mintings increased another 3,500 to 53,500…while silver eagles tacked on a substantial 512,500 to bring May’s total up to 1,602,000.

And lastly in precious metals news, is this story from Peñoles in Mexico. Last week I mentioned that even though the strike was over at their precious metals smelter, the declaration of force majeure had not been lifted. Well, a Reuters story posted yesterday, made it official that it now has. I thank Ted Butler for sending me the piece entitled “Mexico Peñoles lifts force majeure at MetMex plant” and the link is here.

In the ‘other news’ category, I see that Moody’s has lowered Japan’s AAA Foreign Currency Credit Rating to Aa2. [Can a downgrade of U.S. paper be far behind? - Ed] In a piece from the Sydney Morning Herald in Australia, I note that “China is pumping more money into US Treasury bonds, recent data show, despite concerns expressed in Beijing in recent months over the safety of dollar-linked assets.” In a Bloomberg piece filed from Bejing comes this headline…”China’s stockpiles seen as new sovereign wealth strategy”…”China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline, according to the Royal Bank of Canada.” And in another Bloomberg story, it is reported that both LIBOR and the TED Spread are now almost back down to levels they were at when the financial crisis first erupted in August 2007…”People have become a bit more relaxed now because we haven’t had any bad news recently” said a Germany-based financial commentator. [If that isn't a sign that the next down-leg is imminent, I don't know what is. - Ed] And lastly [with my thanks to Bill King over at the King Report] comes this story from The Times of London [Jerusalem]…”America’s spy chief was sent on a secret mission to Israel to warn its leaders not to launch a surprise attack on Iran without notifying the US Administration. As Binyamin Netanyahu, the Israeli Prime Minister, prepares to visit Washington, it emerged yesterday that Leon Panetta, the head of the CIA, went to Israel two weeks ago. He sought assurances from Mr. Netanyahu and Ehud Barak, the Defence Minister, that their hawkish new Government would not attack Iran without alerting Washington.” [Excuse me for thinking otherwise, but this seems like Israel has basically been give then green light for "bombs away!"..."It's OK to bomb the hell out of Iran, but please let the U.S. in on it before the first one hits the ground."...or am I missing something here? - Ed] For inquiring minds, the article is linked here.

Besides the two stories already embedded in this rant, I’ve got five more…and I’ll use the fact that it was a weekend as my excuse for having so many. The first is from Zimbabwe, where Robert Mugabe’s rule has produced a hyperinflation that has destroyed the currency…and the country. Here is a brief report on daily life in that strife-torn country. The piece is entitled “Dust & Rust”…and I thank P.S. for sending it along. The ‘must read’ link is here.

It is with a certain amount of fear and trepidation that I follow the Zimbabwe story with one about California. It may be an outrageous comparison, but I see some similarities. We’ll find out about that in the fullness of time…and not too much of it either…if any of these similarities are realized. The article is from The Economist and I thank Craig McCarty for sending it along. It’s entitled “California: The ungovernable state” and the link is here.

Next comes the latest commentary from Texas Congressman Ron Paul. In his weekly column the heading reads “Audit the Fed, Then End It!” I could not agree more…and the sooner the better! I [once again] thank P.S. for sending me the story and the link is here.

The following is a story in from the businessinsider.com about the Federal Reserve. If further proof of Fed incompetence is needed…it’s right here. All you have to do is listen to “Elizabeth Coleman Inspector General” speak. As the story says…”It’s pretty much a trainwreck.” I thank Casey Research’s own John Grandits for sending it along. The headline reads “Rick Santelli Says: Watch This Video Of A Clueless Fed Inspector General” and the link is here.

And lastly is silver analyst Ted Butler’s latest commentary. In this week’s essay, Ted speaks of the current condition of the Commitment of Traders report and then delves into the bowels of the Silver Institute’s Annual World Survey. Needless to say, he finds it deficient in many respects…and he really pulls his punches in his comments about the Silver Institute, GFMS and CPM…as I have said far worse in my own commentaries regarding these morons. Anyway, the article is entitled “Silver Surplus?” and the link is here.

click to enlarge

Inflation is a disease, a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society. – Milton Friedman

Inflation in one form or another is almost upon us. The downgrade that Moody’s just gave Japan was another shot across the bow for that country…as they are about to monetize their debt on an even larger scale as their economy’s death spiral worsens. Soon, all countries will be forced to face that fact. Then what of their currencies, as they inflate…or die? Friedman also said that “The fate of a country is inseparable from the fate of its currency.” That theory is about to be put to the test…and that’s why you should own all the physical gold and silver you can afford.

See you on Wednesday.

Source: And Then There’s This…Tuesday, May 19th, 2009

Can sound money really bring about peace?  Actually, it plays a big part in peaceful international relationships.  Money based on commodities, rather than paper, is not subject to government manipulation, and is a key component to free and honest trade.  History shows that if countries engage in trade with each other, their governments tend to find ways to get along for the same reason you do not kill your customers at your place of business, even if they occasionally annoy you.  If someone outright cheats you, however, you may engage in “war” by taking them to court, for example, and the relationship will sour.  Governments and central banks with unfettered power to manipulate currency also have the ability to cheat their creditors.  One way they do this is to simply create enough currency to pay off debts.  This devalues the currency and “cheats” the recipient out of what they are owed.  It would not be fair if you watered down your product the way our government waters down its currency, so it is not hard to understand, in these simplified terms, why loose monetary policy contributes so much to ill will and war around the world.

Sound money, on the other hand, simply is what it is.  Removing governmental power to manipulate money, removes the temptation for government to spend, print and cheat.  Sound money ensures that our government’s spending priorities would be brought into sharp focus and reduced to only what we can afford.

Sound money also limits the ability to wage wars of aggression.  Imagine how much more careful Washington would have to be about starting a war if they did not have this financial sleight of hand at their disposal!  Fiat currency allows government do expensive things they should not be doing while paying the bills with cheap money.  The Federal Reserve has lately been auctioning off large amounts of treasury bills as a way to finance the wars in Iraq and Afghanistan, and our crushing entitlement burden.  The resulting devaluation of the dollar is quickly eroding our image as a good trading partner in the world.  As a consequence, there is therefore more talk of economic isolation and war.

This vicious cycle of spending, fighting and inflating is not what Americans want.  It is what the government wants, and it has had to deceive the citizens into allowing and supporting it.  Sound money curbs the government’s ability to engage in these shenanigans and reduces the wars we fight to only truly defensive ones, for which Americans are more than willing to stand and fight.  So in these ways, sound money is very conducive to peace.

Another benefit of sound money is financial security.

Can sound money give you financial security?  There is something very comforting in knowing that what you earn today will retain its purchasing power in the years to come.  Indeed, the same silver dime that bought a loaf of bread in the 1960’s can still buy a loaf of bread with its precious metal content – which is worth about $1.00 today.  An ounce of gold has always been about evenly exchangeable for a finely tailored men’s suit, which these days is roughly $800.  And in these days of fluctuating gas prices, when priced in gold, oil has been stable.  Meanwhile, since the creation of the Federal Reserve, the fiat dollar has lost 94 percent of its purchasing power.  The erosion of purchasing power rapidly accelerated when it was completely uncoupled from gold in 1971.  This sort of fluctuation in the medium of exchange creates a lot of uncertainty in the marketplace and necessitates that you either take extraordinary defensive maneuvers, or face financial ruin.  Trusting in government for financial security in retirement is not a safe option.  Indeed, a recent study by the Consumer Bankruptcy Project shows that bankruptcies among those 75 and older has more than quadrupled since 1991.  This represents wealth and savings that have been eroded by inflation, and trust in entitlement promises that were more fantasy than reality.  Even with the pittance that social security pays to seniors, it is bankrupt and bringing the economy to its knees.  It is no wonder that many in the younger generations want no part of it, and they should not be forced into a failed system.

On the other hand, holding physical gold can defend against aggressive government monetary policies that threaten to inflate away the value of your life savings.  During the hyperinflation in post WWI Germany, what used to be a comfortable nest egg was suddenly the value of a postage stamp.  If one held just a portion of their savings in precious metals, the crisis was greatly softened.   Gold will never be worth nothing, even if the exact price fluctuates.  There is a famous photograph, however, of a German woman during this time period burning piles of tightly bound banknotes to keep warm.

Imagine if the money you earned had honest, stable value, or even appreciated like an investment!  No such special measures, like converting dollars to gold, would be required to ensure that your savings would sustain you in your golden years.  That is the way it could be and is supposed to be.  However, the government’s thirst for power will not be easily, or cheaply, quenched.  Fiat currency is one tool governments have to extract wealth quietly from the working class.  It is time for the people to wake up to this ruse and look to the Constitution to restore sound currency.

Sound money keeps government spending in check, keeps trade fair and honest, which reduces the temptations, and many underlying causes, for governments to wage wars.  It also gives you the peace of mind of knowing that your savings will be able to sustain you in your retirement.

So if sound money is such a good thing, what is stopping people from simply trading with each other in gold and silver?  Why are you still being paid in fiat dollars, and why can’t you pay for gas in gold?  The answer is that the government has enacted policies that provide considerable stumbling blocks to such transactions.

One of the main stumbling blocks is Federal legal tender laws, which state that government-controlled fiat currency MUST be accepted for many kinds of monetary transactions.  In light of this, Gresham’s Law takes effect.  Gresham’s Law states that bad money drives out good money.  Meaning, if someone is forced to accept your bad money, it is to your advantage to pass it off, like a hot potato, in exchange for something of value.  Any good money you have, you will hoard.  Eventually, real money is driven out of circulation and under people’s mattresses, so to speak.  In the absence of legal tender laws, people are free to accept the medium of exchange of their choice, and are likely to insist on payment in something of real value.

Related to legal tender laws, contracts in gold are not enforced.  Meaning if two parties agree to exchange goods or services for gold, and end up in a dispute, the courts will simply settle the dispute in Federal Reserve notes. While gold clauses have been legally enforceable since the late 1970’s the fact remains that disputes over gold clauses might well be resolved in court with a dollar figure calculated in terms of Federal Reserve Notes.  In the recently decided case of 216 Jamaica Ave v. S&R Playhouse, which reversed a district court decision, the court upheld the enforceability of a gold clause, but sent the case back to the district court to decide what obligations the gold clause imposed on the defendant.  It is not inconceivable that this will result in a decision that the value of the “gold coin” referred to could be valued by the court in terms of Federal Reserve Notes, not in terms of ounces of gold.  Furthermore, given the federal government’s actions against Robert Kahre (the Nevada businessman who paid his employees at the legal tender face value of gold bullion coins) it is obvious that the government is still waging a war on gold.  Whether either of these cases establishes a precedent remains to be seen.  Additionally, because 31 USC 5103 establishes Federal Reserve Notes as legal tender, it would likely take a court challenge to determine whether a gold clause or legal tender law takes precedence.

Governments should do very little, in my estimation, but it should enforce contracts and property rights through the courts.  But in this instance it shirks this basic duty, when it comes to gold, as one way to keep control of our economy and the medium of exchange.  One is also expected to pay sales tax on the purchase of gold.  This is as ludicrous as if you paid sales tax at the bank when you converted dollars into quarters!  The IRS also expects you to pay capital gains tax on gold, which is so backwards, since gains on gold really represent decline in the value of the dollar!

Legal tender laws should be repealed at the Federal level.  Congress has the Constitutional duty to protect the integrity of our money.  However, since it has passed this duty off, and the Federal Reserve has only debased our currency, Congress should no longer force Americans to do business in dollars if they would prefer to transact in gold, or silver, or cigarettes or seashells, for that matter.  Free people should be free to associate and do business in ways that benefit them.  Instead they are forced to use the unstable dollar to their own detriment, and the benefit the government.

Source: In Government We Trust?

He put the blame for the current crisis firmly on the shoulders of the “managed economy,” “an inflationary system,” “corporatism” and “a special interest system.”

He also warned that promoting more and more US government intervention would have “disastrous” consequences for the global economy and the US dollar.

See for yourself…

– Meanwhile, McCain’s fellow Republican George W. Bush made a televised appeal for the swift passage the plan. He said the “entire economy is in danger” and warned of a “financial panic” and “a long and painful recession” if Congress didn’t pass the bill soon.

– “Most illiquid assets are illiquid because they’re not worth anything,” said Ron Paul to Fed head Ben Bernanke during testimony in Washington, DC, yesterday. Presumably, this holds true even if the “entire economy is in danger.”

– US stock futures are limp this morning following Bush’s address and news that General Electric (NYSE:GE) cut its earnings estimates and halted its stock buyback. “S&P 500 futures rose 3 points to 1,196.00 and Nasdaq 100 futures added 12.25 points to 1,684.25. Dow industrial futures rose 9 points,” according to Market Watch.

– Bush’s dire warnings on the state of the economy he has been in charge of for the last eight years didn’t exactly help the dollar either. The buck “fell to $1.4686 per euro as of 6:35 a.m. in New York, from $1.4621 yesterday,” according to Bloomberg. “The currency declined to 105.91 yen from 106.11. The euro was at 155.57 yen from 155.15. The U.S. currency dropped to $1.8553 against the pound from $1.8465, and to 1.0836 versus the franc from 1.0916.”

– Yesterday on Contrarian Profits, Rude Awakening editor Eric Fry urged investors to “Sell the dollar, sell the dollar, sell the dollar.” (We think he was being pretty clear on this one.)

The Treasury and the Federal hope that these actions will restore buoyancy to the potential markets.  But we doubt it.  Instead, we suspect that these actions will only add buoyancy to the US inflation rate and, therefore, to commodity prices.

Most of the bad guys who created this mess are gone…although not yet in prison where they belong. And most of the American regulatory agencies are eager to change the rules of the game. These two developments are very helpful. But the process of repairing and reforming the American financial system could be painful. The U.S. Treasury will absolutely, positively increase the money supply to rescue the financial system…Which means investors must try to protect themselves against an almost certain inflation.

So what’s an investor to do?

Sell American stocks, bonds and currencies; buy foreign stocks, bonds and currencies. And, of course, buy commodities.

– Crude oil is down near its three-day low in New York on a report that revealed demand is at its lowest in almost five years. According to Bloomberg, “crude oil for November delivery was at $105.77 a barrel, up 4 cents, in after-hours electronic trading on the New York Mercantile Exchange at 12:45 p.m. Singapore time.”

– Eric Roseman in The Sovereign Society is buying oil stocks, nevertheless. He believes “hard assets” like oil and gold are the best assets to own if you believe that inflation remains embedded in the financial system…

Inflation is not dead and commodities remain in a secular bull market as China and other rapidly growing economies continue to boost domestic consumption and increase trade.

The credit crisis is a Western problem, not an Asian one. Balance sheets across Asia are not restricted by sub-prime losses or other mortgage-related write-downs. So the sooner the U.S. finally tackles the credit crisis, the sooner Asian growth will reaccelerate. That’s when I expect commodities to bottom.

The long-term picture remains bullish for these markets and commodities. Over the next 12 months, I see the greatest reflation trade of the century hitting the markets, courtesy of the United States government and the European Union.

– December-dated S&P 500 futures rallied 13.10 points, Dow futures were up 101 points, and Nasdaq-100 Index futures rose 18 points on the news. Yesterday, US stocks ended the worst two-day rout since 2002.

– The Fed, nevertheless, is upping its effort to juice up the credit markets.. It has set up swap lines that will provide $30 billion to central banks in Australia, Sweden, Denmark and Norway for short-term loans to commercial banks. The Fed has now made a total of $277 billion available for short-term money-market lending in dollars through foreign central banks

– Crude oil prices climbed by more than a dollar this morning. This brings light sweet crude for November delivery to $108 dollars a barrel in New York. Yesterday, oil prices dropped $3 on profit taking following a $25 one-day jump, the biggest ever in history.

– Oil rollercoaster behavior this year appears to have been too much for legendary-oil-investor-turned-wind-energy-activist T. Boone Pickens. His star is waning, reports the WSJ.

[The] downturn in energy has blindsided the industry veteran, leaving one of his hedge funds that focuses on energy stocks down almost 30% through August. A smaller commodity-focused fund is down 84%.

All in, the funds have lost around $1 billion this year, a figure that includes $270 million of personal losses. “It’s my toughest run in 10 years,” said Mr. Pickens, a former geologist who earned billions by building an oil company and investing in energy. “We missed the turn in the market, there’s nothing fun about it.”

– Other commodities were also up yesterday. The Reuters/Jefferies CRB commodity index had its best day in history.

– Hank Paulson’s $700 billion bailout bonanza is still causing controversy. Writing for CNN Republican congressman Ron Paul had this to say about the plan:

Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.

The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.

It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.

The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.

Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride.

– The meltdown on Wall Street has given Barack Obama a clear lead in the polls of over John McCain, reports the Washington Post. Obama now leads McCain by 52% to 43%.

Paul also calls the Fed and “illegal institution” and “an immoral institution.”

For the most part, the mainstream press seems to have decided that the Fed- and Treasury-led bailouts of Wall Street finest are scary but necessary. But the big picture, says Paul, is that the dollar, once backed by gold and then by Treasury bonds, is now backed by junk mortgage securities that nobody wants. And this is a nightmare scenario for the dollar…