The 19th century belonged to Britain, the 20th century belonged to America and in the 21st century, China will rule the business world. Whether you like it or not, this transition is already underway and it will intensify over the coming decades.

Throughout history, no empire has managed to rule forever. Instead, empires rise to power, they prosper and spread their influence. Thereafter, they over-extend themselves and then break down in some fashion. In fact, all the glorious empires of history had one thing in common – a spectacular collapse.

Now, there can be no doubt that America ruled the economic world for the better part of the previous century. However, this powerful nation has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is compelling evidence that the world’s largest economy is well past its prime.

Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America’s federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider the chart below which shows the total obligations of the US government.

Click here to read the rest of Puru Saxena’s article.

This from Eric:

The flaming embers of inflation have already landed atop the thatched roof of American finance. And yet, investors can still buy inflation insurance on the cheap. In the next 1,373 words, we’ll examine a few of these “insurance policies”to assess their virtues and drawbacks.

Since a powerful new inflationary trend is very likely to occur, the prudent investor should probably take steps to guard against it. “But wait a second!” some readers be saying. “What if a powerful deflationary trend occurs first?”

Good question. It might. But we’d begin preparing for inflation anyway. Why not prepare for the near-certain arrival of inflation, rather than the uncertain timing of it.

If an infallible clairvoyant told you that your house would burn down in one of the next five years, would you say to yourself, “Gosh, maybe I should try to figure out which year it will be and not buy fire insurance during the other four years.”

You might actually guess correctly, in which case you would have saved yourself four years worth of insurance premiums. But you might guess incorrectly, in which case you would have lost your house.

Your call.

To this market observer, inflation seems like a near-certainty. Not an absolute certainty, mind, you, just a near-certainty, sometime within the next three years. So why not beat the rush to buy inflation insurance? Why not buy some now?

The nearby chart displays a sampling of inflation hedges, and how they performed during the last eight years of the infamous 1970s. Gold was clearly the standout winner. But we’d put an asterisk next to this result, due to a performance-enhancing assist from the U.S. government. During most of the preceding four decades, the US government had been artificially suppressing the gold price, while also forbidding private citizens from owning it. Therefore, once the government stopped its meddling, the gold price partied like a teenager whose parents had just left town.

Aside from gold, very few assets managed to keep pace with inflation, as measured by the Consumer Price Index (CPI). Hard assets like the CRB index of commodity prices and the Swiss franc did outpace the CPI, but stocks and bonds both lagged miserably.

Skipping ahead about 30 years, we can see that the modern versions of the 1970s inflation hedges have performed quite poorly during the last 14 months. Clearly, inflation is not a widespread concern. But that’s part of the reason it concerns us, and also part of the reason why we’d be inclined to take action now, while inflation hedges remain relatively cheap.

Our contrarian instincts lead us –rightly or wrongly – to distrust the consensus, especially when the consensus trusts in an idea as stupid as deflation…just kidding. We don’t think deflation is stupid, just unlikely. (More precisely, we suspect that deflationary indicia will be seasonal, like daffodils. For a while, they will seem to be everywhere. Then, just as suddenly, you won’t be able to find a single one).

So with that biased and unscientific preface, let’s sweep through a Reader’s Digest review of ETFs that might provide some kind of hedge against inflation:

1. Gold – The “Old Faithful” of hedges. It’s always worked before. Enough said. ETFs like the SPDR Gold Trust (GLD) provide easy access. With a $30 billion market capitalization, this is the “go-to”gold ETF. The next largest entrant is the iShares Comex Gold Trust (IAU) with a market cap of $2 billion. Both ETFs enable an investor to buy gold with a mouse-click. No muss. No fuss. But purists may wish to buy bullion coins like Krugerrands or Maple Leafs. As a gold investment, bullion coins have the advantage of being shiny, pretty and portable. But they have the disadvantage of costing 6% to 10% more than bullion itself, while also being so shiny and pretty that someone might want to steal them.
2. Gold Stocks – The bastard brood of gold and the stock market. As inflation hedges, gold stocks can be somewhat unpredictable and capricious. Over a multi-year span of time, they tend to reflect that gold side of their heredity. But during shorter time spans, gold stocks can behave much more like stocks than like gold…and that’s not always a good thing. That said, ETFs like the Market Vectors Gold Miners (GDX) provides a handy way to buy a basket of gold stocks.
3. Commodities –Like gold, a basket of commodities that includes crude oil, copper, wheat, gold etc. tends to provide a very reliable hedge against inflation. Unlike gold, a basket of commodities provides diversification across multiple assets and therefore, much lower volatility than gold. The largest commodity ETFs available are the PowerShares DB Commodity Index Tracking Fund (DBC) and the iShares S&P GSCI Commodity-Indexed Trust (GSG). DBC holds only six commodities: Crude oil, heating oil, aluminum, corn, wheat and gold. GSC holds a much broader collection of commodities.
4. Commodity-focused stocks. See comments on #2 above. The iShares S&P North American Natural Resources Sector Index Fund (IGE) provides broad exposure to commodity-focused stocks. Alternatively, the DWS Global Commodities Stock Fund (GCS) is a small closed-end fund that holds a similar portfolio. But GCS is selling 12% below its net asset value, which means that a buyer at the current quote controls one dollar worth of resource stocks for only 88 cents.
5. Non-Dollar Bonds – The Swiss Franc performed quite admirably during the last Great Inflation in the United States. But we are hesitant to bet on a repeat performance. Indeed we are hesitant to bet on ANY foreign currency as a way to hedge against US inflation. The Swiss economy, for example, no longer features a bunch of pocket-watch-toting gnomes guarding vaults full of gold bullion. Instead, the modern Swiss economy features pocket-watch-toting gnomes masquerading as hedge fund managers. The predictable result is that Switzerland’s two largest banks have amassed questionable derivatives exposures that exceed the GDP of the entire country. Many other bankers speaking many other languages have achieved equally enormous feats of stupidity. No one knows how these feats of stupidity will influence the values of their native currencies. Not knowing, therefore, we are disinclined to guess. But those readers who suspect that the dollar will be one of the first currencies to go down in flames, rather than one of the last, might be interested in the one of the many ETFs that hold foreign currencies. The CurrencyShares Swiss Franc Trust (FXF), for example, holds Swiss francs. Alternatively, the dollar-phobic investor could purchase the SPDR Barclays Capital International Treasury Bond ETF (BWX) that holds a basket of bonds issued by foreign governments. Its largest allocations include a 23% weighting in Japanese government bonds, 12% in Germany and 12% in Italy.
6. TIPS –No discussion of inflation hedges would be complete without mentioning TIPS, short for Treasury Inflation-Protected Securities. [To learn more about how they work, check out the November 26, 2008 edition of the Rude Awakening]. Investors may purchase a basket of TIPS by buying the iShares Barclays US Treasury Inflation Protected Securities Fund (TIP). In theory, TIPS provide a direct and reliable hedge against inflation. But like so many other seemingly brilliant ideas, TIPS work better in theory than in practice. The first risk is an overt one – deflation might persist for longer than expected (by us). In which case, the principal value of a TIP could decline below par. And even though the holder of the TIP would receive par at maturity, the interest payments that the holder would receive between now and maturity would decline in concert with the declining principal value. The second risk is a covert one: the federal government controls the calculation of the Consumer Price Index (CPI). Therefore, if the CPI, as currently constructed, were to get out of hand and produce very high inflation readings, the government’s bean counters would probably spring into action to create a “new and improved”CPI that would deliver much lower inflation readings. It has happened before.

Thus concludes our review of inflation hedges. We hope all readers will utilize the delightful deflationary interlude we are now enjoying to prepare for what may lie ahead. Hostile inflationary forces may be amassing their forces at the borders of our economy at this very moment. In short, we think it’s a good time to risk being paranoid about the threat of inflation.

Source: Inflation Gestation

At some point in the future, you’ll need to reveal your name, gender, and date of birth when you make a domestic airline reservation. The airline will contact TSA to determine if you’re cleared to board. If you’re on any of TSA’s watchlists (which include such deceased “terrorists” as Saddam Hussein, along with live ones such as Sen. Edward Kennedy), you’ll need to provide an official document acceptable for federal identification purposes in order to travel.

Examples of acceptable identity documents are passports and the “enhanced” driver’s licenses required under the ill-fated “Real ID Act.” If you can’t produce such a document, you can’t board the plane.

This is the first time the U.S. government has restricted the right of sovereign citizens to travel inside the United States since the Civil War. And the TSA is imposing this restriction, despite numerous rulings from the Supreme Court indicating that you have a Constitutional right to travel.

According to the court, the right to travel is “not a mere conditional liberty subject to regulation and control under conventional due process or equal protection standards,” but “a virtually unconditional personal right.” International travel is specifically protected as well, for “Travel abroad, like travel within the country, may be necessary for a livelihood…Freedom of movement is basic to our scheme of values.”

Further, the U.S. government has reiterated in its most recent report to the United Nations Human Rights Committee that, “…[I]n the United States, the right to travel—both domestically and internationally—is constitutionally protected.” Perhaps it’s time the government amend this declaration!

What this amounts to is essentially a reprise of the infamous “internal passport” system in effect in the former Soviet Union. In 1933, Soviet dictator Josef Stalin introduced “internal passports” that prohibited Soviet citizens from leaving their place of residence without permission.

Over time, the internal passport became the prime instrument of Soviet oppression over its citizens.

It’s bad enough needing to ask Uncle Sam for permission to leave the United States, and to reenter it. But an internal passport is a blueprint for totalitarianism.

Source: Big Brother, May I? Soon, You’ll Need Uncle Sam’s Permission to Travel Almost Anywhere

This from Money Morning:

Although the ongoing financial crisis has introduced a new word – bailout – into the lexicon of most investors, a quick tour of history shows us that these big-ticket financial rescue plans are actually nothing new.

And that raises the question: Do they work?

A look back at history shows us that – like most government initiatives – the answer is “it depends.” While some investors might find that reassuring, history also suggests that the final tab for a financial-crisis bailout will be well in excess of what it should cost to fix the problems the crisis actually caused.

A Look Back at Bailouts

Take for instance the very first banking bailout in “modern” history, when Alexander Hamilton, the first U.S. Treasury secretary, told banks to accept bonds as collateral for loans that were then underwritten by the fledgling US government. At that time, a man named William Duer tried – and failed – to corner the market in government bonds, leading to the historically famous “Panic of 1792.” Faced with the potential for an almost-total complete collapse, Hamilton then borrowed money from banks and used it to purchase government bonds. Everybody survived (except for Duer, a one-time member of the Continental Congress, who went bankrupt in the panic and spent the rest of his life in debtor’s prison).

Forty-five years later in 1837, U.S. President Martin van Buren took the opposite approach and refused to involve the U.S. government when it came time to bail out the Second Bank of the United States. Organized under Federal Charter, the bank entered into speculative loans around the country, but was forced to suspend operations and went into liquidation in 1841.

Creditors received payment, and in an eerily similar outcome to today’s bank failures, stockholders received nothing. The depression that followed has been characterized as comparable to the Great Depression. Again, everybody survived, but in a foreboding manner, the damage spread throughout the U.S. economy.

In 1897, faced with a potential collapse of the U.S. Treasury (which was running out of gold to back its currency and its obligations), J. P. Morgan personally created a private syndicate on Wall Street to supply the Treasury Department with $65 million in gold and to float a bond issue that restored the U.S. government’s coffers to $100 million. He survived – as did the U.S. government, but many banks didn’t.

Only a few years later, in 1907, Morgan again rode to the rescue and – in one of the most fabled stories on Wall Street – locked banking executives in his personal library on East 36th St. until 5 a.m., which was when they finally gave in and agreed to backstop yet another financial crisis. This time the damage spread wildly throughout the U.S. market, and jumped across the Atlantic, as well.

The point I’d like to make with this little historical foray is the same one that legendary investor Jim Rogers made to me this past April during an exclusive interview at his home in Singapore: “History,” Rogers told me, “is filled with bailouts,” and their track record is spotty, at best – particularly in recent years as the increasingly intertwined nature of the global financial markets makes them more complicated than ever before.

Clearly that’s problematic.

Especially when a new study by Luc Laevan and Fabian Valencia covering 42 recent bailouts in 37 countries since the early 1970s shows that each time the “tab” was vastly underestimated. And that only reaffirms our oft-repeated contention that the “Bailout Boys” – U.S. Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. “Hank” Paulson Jr. (or, more likely, their successors, as this will be with us for quite some time) – will be back on Capitol Hill, hats in hand, seeking additional money to continue their bailout battle.

The only question in my mind is whether or not we’ll have to pay back what we owe (courtesy of Wall Street) through a bailout plan that’s put together to rescue the current $700 billion bailout should it prove ineffective, or if we’re facing a second Great Depression that will even things out only after a number of painful years pass.

The Laevan and Valencia study suggests that the cost of the current bailout will be high, regardless of which alternative becomes a reality. According to researchers, the average bailout – net of asset recoveries – costs a staggering 13% of gross domestic product (GDP).

Assuming historical relationships hold true and there is no more bad debt uncovered (which seems highly unlikely at this point, particularly given how severe the current crisis has proved to be), that would put the bill at almost $2 trillion, which is more than double current projections.

And the bad news doesn’t stop there. The average public recovery is a meager 18%.

That’s not to say that the current bailout couldn’t beat the averages and end up costing less, which is exactly what Phillipa Dunne and Doug Henwood, writing in the Liscio Report, discovered. They note that the most successful bailouts are those involving recapitalizations, as opposed to the wholesale purchasing of bad assets that Paulson and Co. are pursuing.

The researchers also found that that use of public money to engage in recapitalization is often less costly than the afore-mentioned bailout strategy – on average, it costs about half that of conventional bailouts – and results in an average hit to GDP of roughly 6%, which in the case of the United States works out to roughly $850 billion.

Detractors will no doubt object to the Laevan-Valencia database because many of the countries included are so-called developing nations. We don’t think that objection is merited, particularly since Japan and Sweden are included, and since both provide startlingly divergent experiences.

For instance, in a well-publicized case of foot dragging, Japan engaged in a thorough pattern of denial that ultimately resulted in that nation spending a stunning 24% of its GDP to dig itself out after falling into a severe recession referred to as the “Lost Decade.” Sweden, on the other hand, took immediate and severe action and not only avoided a recession, but spent a mere 3.6% of GDP to get back on its feet.

It’s too early to tell whether the United States will fall into Japan-like slump, succumb to Zimbabwe-style inflation, or even re-enact the Great Depression. But it is clear that the U.S. economy is likely to experience a recession along the way – a possibility we’ve been warning readers about since this financial crisis began. Indeed, a mountain of data suggests we’re already there.
But there is a glimmer of hope.

As noted by researchers Dunne and Henwood, IMF data for Japan, Korea, Norway and Sweden all show generally lower inflation, moderating bond yields, generally stable employment and higher stock prices three years after each of their crises began.

Japan is the obvious exception having fallen into a severe deflationary period by virtue of half-hearted solutions and a full five years of denial that preceded any serious governmental action. 

So what should investors do now?

There’s no question that a properly diversified portfolio with an emphasis on defensive investments is going to be an investor’s best friend right now. Just because stocks are cheaper than they’ve been in years doesn’t mean they’re not garbage.

Fully 50% or more of investable assets should be concentrated in “safety-first” holdings, with balanced funds and municipal bonds high on our list at the moment. History suggests that an exposure to metals and commodities is warranted – as are the use of speculative “inverse funds” that generate profits as they continue to bleed off excess in a process we’ve termed the “Great Deleveraging.”

Such investments are also proper, given that the real danger we face is that of “The Greater Depression.”

Source: Bailouts Are a Mixed Bag – Even When They Work