India, like China, understands the virtues of gold. This is why they have snapped up 200 tons of gold from the IMF at around $1,045 per ounce or $6.7 billion. The UK does not understand gold, that is why Gordon Brown sold most of the nation’s gold in 1999 at virtually the low of $250.

Instead the UK has today spent $51 billion on propping up bankrupt banks. Royal Bank of Scotland received another $41 billion today making it the costliest bailout worldwide with a total of $75 billion. Lloyds Bank received another $10 billion. The US is of course also spending printed money on rescuing bank creditors with 115 bank failures so far in 2009.

So who is likely to make the best return on their investment, India with their gold or the UK or US with their bankrupt banks. We certainly know who we will put our money on.

On 22 October we forecast in our report “Final Warning” that starting in November we are likely to see major changes in markets and in the economy. We have barely entered November and gold is already making a new all time high at $1,081. It is interesting that it is happening right after IMF has disposed of half of the planned gold sales. The same event in the 1970’s was the catalyst for the acceleration of the gold price.

But this is just the beginning as we have been discussing in our reports. We would suggest that investors don’t follow the example of the UK and US and throw good money after bad but instead do like India and protect themselves by buying gold.

3rd November

Gold Switzerland – Matterhorn Asset Management

This week opened with the wail of fire engines. The Europeans announced a bank rescue, variously reported to cost 1.3 trillion euros (Le Monde)…1.7 trillion (Liberation) or 1.873 trillion (Financial Times). They ought to get their story straight. But who cared…investors had a bid!

As the Great Fire burned through their capital, investors bowed their heads and said their prayers: ‘Please God, spare me…and I will be happy with what I’ve got.” And lo! A host of smoke jumpers came down from the heavens. Investors turned their faces to the sky and thought they saw angels. And there was the archangels Gordon Brown and Henry Paulson leading the flock. Suddenly, the wind died down…and the fiery furnace calmed. ‘Hallelujah,’ they said…and bought some more stocks!

In the last 100 years there have only been two fires similar to that of today. The first inferno was in 1929, centered in New York. The second was in 1989, when Tokyo went up in flames. In both instances, rescuers took extraordinary measures. And in both cases, they not only failed to save the economy, they scorched it even more. Obviously, few economists share this analysis with us. The few who do are probably either insolvent or insane, or perhaps both. So, the burden of proof is on us.

We begin by calling an expert witness; Murray Rothbard, once professor at the University of Las Vegas, now among the forgotten dead. A properly-functioning economy is balanced, he explains in his classic, America’s Great Depression. One industry enjoys an expansion, another suffers a contraction. But sometimes there is a “cluster of errors” which causes a major boom. Whence cometh these errors? Who is responsible for them? Rothbard identifies the culprit: “monetary intervention in the market, specifically bank credit expansion to business.” If Rothbard were still among the quick, he’d probably be pointing his finger at Alan Greenspan – the arsonist who lowered the key U.S. lending rate to an “emergency” level of 1% and held it there long after the emergency was over. With the Fed’s false signal before them, business, investors and consumers racked up the biggest pile of tinder in history. Then, he’d probably point at Ben Bernanke, who continues to add kindling…and to Hank Paulson, who led Goldman Sachs while it created trillions of dollars worth of asset-backed explosives and sold it to financial institutions all over the world.

“The boom…is the time when errors are made…” Rothbard continues. “The ‘depression’ is actually the process by which the economy adjusts to the wastes and errors of the boom… Far from being an evil scourge, [the depression] is the necessary and beneficial return of the economy to normal… Evidently, the longer the boom goes on the more wasteful the errors committed, and the longer and more severe will be the necessary depression readjustment.”

But here come the rescuers with yet more dry wood! After stoking the flames with easy credit…they bring more. Professor Rothbard, reviewing the record of the post-’29 rescue team came to this conclusion: The authorities “met the challenge of the Great Depression by acting quickly and decisively…[using] every tool, every device of progressive and ‘enlightened’ economics, every facet of government planning to combat the depression.”

Yet, the fire didn’t go out. It intensified. An expected recovery in 1931 went up in smoke, says Rothbard, thanks to government meddling:

“The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy and placed where it properly belongs: at the doors of politicians, bureaucrats and the mass of ‘enlightened’ economists. And in any other depression, past or future, the story will be the same.”

Six decades and half a world away, the Japanese proved him right. In January, 1990, a spark touched off the Nikkei Dow. Soon, Japan’s miracle economy was in trouble. Bankruptcies rose. Profits fell. Banks teetered. But the Japanese had their economists too. And soon, they were doing what Hoover and Roosevelt had done before them. As to monetary stimulus, the Bank of Japan’s key lending rate was cut from 5% down to “effectively zero.” And there were plenty of fiscal stimuli too. Japan’s government did just what Keynes recommended – it spent money. It went on a spree of what Alan Booth calls “state sponsored vandalism” in the 1990s, taking the budget deficit to a remarkable 5% of GDP in 2002. Roads to nowhere, concrete shorelines, bridges and dams…Japan, per square mile of available territory, covered 30 times as much surface in concrete as in America. In 1996, the Shumizu Corporation even announced plans to build a hotel on the moon using specially developed techniques for making cement on the lunar surface.

Once again, these heroic efforts produced nothing more than farcical consequences. The Japanese economy is still barely on speaking terms with prosperity. And the Nikkei Dow closed at 8,276 last week… a level last seen (except briefly in 2003) a quarter of a century ago.

America’s pyromaniacs still have a ways to go. There are 150 basis points between the Fed’s current key rate and zero…and the US budget deficit is expected to quadruple – reaching $2 trillion in 2009. In the resulting roast, we predict, even the devil will sweat.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

I remember when I lived in Brazil the local currency was like confetti and if you wanted to protect yourself against inflation and currency collapse you had to hold U.S. dollars. Holding dollars, if you could get a hold of it, was very worthwhile as every month that went by you could buy a great deal more of cruzeiros, new cruzeiros, cruzados or reais.

The other aspect of the currency market that I always found interesting was what was called the parallel or black market. In the parallel or black market one would always get a much better exchange rate for the U.S. dollar than one would get at a bank. Banks, of course, are under the control of the central bank and as a result the exchange rate was controlled or manipulated by central bank foreign exchange activity.

Travel agencies and other businesses related with foreign transactions dealt in this so called black market in dollars. In reality this was the free market in dollar for the Brazilian holder of dollars. It was called a black market as the banking establishment wanted to disparage this market and make their rapidly depreciating currency look a lot better than it actually was.

Recently in the developed or Western world we have started to see a great disconnect between the inter bank and comex price of gold and silver and the price of gold and silver coins and bars that one has to pay dealers, jewellers and ebayers. Gold sovereigns are being sold in London at anywhere from a 10% to 12% premium while I have heard that krugerrands have been bought, when you can find them, for as much as a 15% premium on the official inter bank price!

We, at forsoundmoney, believe that this disconnect between the official bank price of precious metals and the price for coins and bars or real physical gold and silver is simply a reflection of the manipulation by central banks of the inter bank and comex market. This official market is in reality a fictional paper market for the precious metals and does not reflect the free market price.

Have a look at this one troy ounce krugerrand on ebay! The bid was at £530 or $938 when I wrote this posting! That is a 12% premium over the closing bid of $834.80 on Kitco on Friday the 3rd of October, 2008.

Look at the price of this one ounce of silver bar on ebay ! At the time I wrote this article this silver bar had a bid of £10.99 or $19.45! That is a premium of 74% over the closing price quoted on Kitco for the 3rd of October, 2008!

There we have it! The Western central banks can try to embellish their currencies but the free market is not buying it!

At the time of this writing, the U.S. House and Senate are poised to pass a $700 billion bailout to Wall Street. At the behest of President George W. Bush, the U.S. taxpayers are going to be on the hook for what can only be referred to as the biggest fraud in U.S. history.

President Andrew Jackson to the international bankers: “You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

Virtually our entire financial system is based on an illusion. We spend more than we earn, we consume more than we produce, we borrow more than we save, and we cling to the fantasy that this can go on forever. The glue that holds this crumbling scheme together is a fiat currency known as the Federal Reserve Note, which was created out of thin air by an international banking cartel called the Federal Reserve.

According to Congressman Ron Paul, in the last three years, the Federal Reserve has created over $4 trillion in new money. The result of all this “money-out-of-thin-air” fraud is never-ending inflation. And the more prices rise, the more the dollar collapses. Folks, this is not sustainable.

Already, Bear Stearns was awarded a $29 billion bailout, followed quickly by the bailout of Freddie and Fannie that will cost the taxpayers up to $200 billion. Then the Fed announced the bailout of AIG to the tune of $85 billion. Mind you, AIG is an enormous global entity with assets totaling more than $1.1 trillion. Moreover, the Feds agreed to pump $180 billion into global money markets. And the Treasury Department promised $50 billion to insure the holdings of money market mutual funds for a year. Now, taxpayers are being asked to provide $700 billion to Wall Street. (I hope readers are aware that, not only will American banks be bailed out, but foreign banks will also be bailed out. Then again, at least half of the Federal Reserve is comprised of foreign banks, anyway.) In other words, the Federal Reserve is preparing to spend upwards of $1 trillion or more. Remember again, this is fiat money, meaning it is money printed out of thin air.

All of this began when the U.S. Congress abrogated its responsibility to maintain sound money principles on behalf of the American people (as required by the Constitution) and created the Federal Reserve. This took place in 1913. The President was Woodrow Wilson. (I strongly encourage readers to buy G. Edward Griffin’s book, The Creature from Jekyll Island.) Since then, the U.S. economy has suffered through one Great Depression and several recessions–all of which have been orchestrated by this international banking cartel. Now, we are facing total economic collapse.

But don’t worry: the international bankers will lose nothing–not even their bonuses. They will maintain their mansions, yachts, private jets, and Swiss bank accounts. No matter how bad it gets on Main Street, the banksters on Wall Street will still have the best of it–President Bush and the Congress will make sure of that. This is one thing Republicans and Democrats can agree on.

America’s founders were rightfully skeptical of granting too much power to bankers. Thomas Jefferson said, “If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

Jefferson also believed that “banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

Daniel Webster warned, “Of all the contrivances for cheating the laboring classes of mankind, none has been more effectual than that which deludes them with paper money.”

Webster also said, “We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no, Sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors, and a ruined people.”

Our first and greatest President George Washington said, “Paper money has had the effect in your State [Rhode Island] that it ever will have, to ruin commerce–oppress the honest, and open the door to every species of fraud and injustice.”

If George W. Bush, John McCain, or Barack Obama had any honesty and integrity, they would approach the current banking malady in much the same way that President Andrew Jackson did. In discussing the Bank Renewal bill with a delegation of bankers in 1832, Jackson said, “Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

What President Andrew Jackson said to the bankers in 1832 is exactly what an American President should say to these criminal international bankers today. But what George Bush, John McCain, and Barack Obama want to do is provide amnesty for the international bankers, just as they want to provide amnesty for illegal aliens. I say, No amnesty for Wall Street, and no amnesty for illegal aliens, either. Instead of sending these banksters on extended vacations to the Bahamas with millions of taxpayer dollars in their pockets, we should be sending them straight to jail!

The only way to fix this economic mess that the international bankers have created is to return America to sound money principles, as prescribed in the U.S. Constitution. This means dismantling the Federal Reserve and the Internal Revenue Service, overturning the 16th Amendment and the personal income tax, and returning the American monetary system to hard assets: gold and silver. Anything short of this will only delay and worsen the inevitable collapse that has already begun.

There is nothing more dangerous than when those responsible for a nation’s troubles are believed to be its savior.

The Wall Street Journal had one fact correct regarding Wall Street’s accelerating collapse when on September 20th they wrote: When government officials surveyed the failing American financial system this week, they didn’t see only a collapsed investment bank or the surrender of a giant insurance firm. They saw the circulatory system of the U.S. economy – credit markets – starting to fail.

The Wall Street Journal was correct in that the circulatory system of the US economy was failing. Because the Wall Street Journal is the house organ of Wall Street investment banks and their co-conspirators in government, the Wall Street Journal blamed deteriorating credit markets for America’s troubles, not those responsible – to wit, Alan Greenspan, Ben Bernanke, and their cohorts at the Federal Reserve Banks.

ALAN GREENSPAN’S BASTARD SON

Ben Bernanke, Alan Greenspan’s surrogate successor at the Federal Reserve is using Greenspan’s discredited playbook to hopefully resuscitate America’s economy. But pouring more credit into America’s stalled economy will not restart the US economy anymore than pouring gasoline into a flooded engine will restart an engine.

Excessive credit caused the problem and more credit will only exacerbate it. The US central bank, the Federal Reserve, however is now backed into a corner, a corner from which there is no exit.

After credit markets contracted in August 2007, it was hoped that central bank intervention would reverse the deterioration of global markets that was then only beginning. A year ago, on October 1, 2007, I addressed that hope in my article, The Winter of Our Discontent:

As we collectively move towards the economic disaster awaiting us, the investment community is hoping the world’s central banks will be able to save them from the crisis set in motion by this summer’s [August 2007] credit collapse.

If the truth be known – and someday it will be – central banks are at the very center of today’s problems. Indeed, they caused them. Today’s disintegration of capital markets based on debt-based paper began in 1913 with the creation of the US Federal Reserve Bank, the central bank of the US.

…Debt-based paper money has led nations and the world down a very dangerous path. Facilitating expansion by encumbering future revenues with compounding debt inevitably indebts individuals, businesses, and governments beyond their ability to repay.

In the beginning, production expands, needs are met and everyone goes home happy. In the end, everyone’s home gets repossessed. This is when the amount of debt has grown so large, governments, businesses, and consumers collapse under its collective weight.

That’s where we are today. We lived off tomorrow and tomorrow has arrived. What a surprise.

Although in the past, continuing central bank intervention has proved inadequate, the ignorant, unknowing and desperate are yet again hoping that Paulson’s latest plan will save them. But the collective solutions of Bernanke, Paulson, et. al. will again prove wanting.

Indeed, Paulson’s and Bernanke’s continuing attempts to reverse the accelerating credit contraction will only make the final rendering all the more devastating. What I wrote last year is true today – except, today, we are now one year closer to the inevitable end of this still unfolding crisis.

cont’d, The Winter of Our Discontent October 1, 2007

…As autumn approaches, this summer’s credit crisis continues to spread through the global grid created by today’s financial wizards – wizards so adept they do not understand what they have set in motion. That this summer’s credit crisis surprised them the most is the most disturbing news of all.

The financial wizards of Wall Street and The City are hoping this summer’s credit crisis is a bad cold at worst, that perhaps a slight fever and time will heal the illness and they can return once again to the task of carving out billion-dollar bonuses from capitalism’s rotting carcass (sic capitalism, any economic system based on central bank issuance of debt-based paper money).

But the wizards of Wall Street and The City will be wrong this fall. This summer’s credit contraction looks increasingly less like a cold and more like cancer which has metastasized and made its way into the lymph nodes of our global economy.

The credit contraction of August 2007 was not a cold. It was cancer and since then it has spread with increasing rapidity throughout the US and global economies; and, now, one year later, the ignorant, unknowing and desperate led by the deceitful, selfish and clever are hoping that its only pneumonia.

CHINA’S KEEPING THE PATIENT ALIVE

Some are alleging that the US government’s accelerating bailout of banks, insurance companies et. al. is socialism. Although it is government intervention in extremis, such intervention in the markets does not constitute socialism.

The bailout of investment banks and corporations by the US government is fascism; the control and intervention of government by corporate interests designed to further corporate and state control. The multi-trillion dollar state support of JP Morgan, AIG, Fannie Mae and Freddie Mac and now perhaps soon GM, Ford, and Chrysler is fascism, not socialism.

Fascism should more appropriately be called corporatism because it is the merger of state and corporate power.
Benito Mussolini, fascist dictator of Italy (1922-1943)

What is ironic is that China, a self-described socialist state, is increasingly now responsible for the well-being of the US, a nation rapidly transforming itself into a fascist nation right before our eyes; and, while this might be the ultimate resolution of the two competing ideologies of the 20th century, I don’t think so. Instead, it could be the end of both.

CHINA, PAPER MONEY, AND THE WEST

Paper along with paper money was first invented in China and Ralph T. Foster’s Fiat Paper Money, The History and Evolution of Our Currency, states that “On January 12, 1024, the Sung court directed the imperial treasury to issue national paper money for general use”.

Two centuries later, the Sung Dynasty’s paper money had lost almost all its value due to over printing. Later attempts were made to resuscitate paper money but all such attempts were to end in economic collapse. Foster sums up China’s experiment with paper money as follows:

Over the course of 600 years, five dynasties had implemented paper money and all five made frequent use of the printing press to solve problems. Economic catastrophe and political chaos inevitably followed. Time and again, officials looked to paper money for instant liquidity and the immediate transfer of wealth. But its ostensible virtues could not withstand its tragic legacy: those who held it as a store of value found that in time all they held were worthless pieces of paper. [bold, mine]
Fiat Paper Money, The History and Evolution of Our Currency, Ralph T. Foster 2nd ed 2008, page 29, available email tfdf(at)pacbell.net or by phone 520-845-3015.

In 1661, China formally outlawed the use of paper money and it wasn’t to reappear in China until the 1800s when English traders wanted to pay for Chinese goods with paper bank notes issued by the Bank of England. The Bank of England claimed its paper money was backed by gold and therefore “good as gold”.

The Chinese, suspicious of western ways and rightfully so, demanded instead to be paid in their circulating currency, silver; and, as the British badly wanted China’s porcelains, teas, and silks, this forced the British to buy silver on the open market in order to purchase goods from China.

If the British bank notes were de facto fully backed by gold as claimed by the Bank of England, there would have been little need for England to go to war in order to instead force China to accept British opium. But the British claim of 100 % convertibility to gold was more a public relations gesture than an actual reality, at least in the large amounts demanded by the growing China trade.

BUYERS ALWAYS PREFER PAYMENT WITH PAPER MONEY
SELLERS ALWAYS PREFER PAYMENT WITH GOLD OR SILVER

The subjugation of China, first by the England and the West and then by Japan, continued until the Chinese Communists forced out the Japanese who had previously forced out the Russians, the British, the Germans, the French and the Americans.

But in the intervening years, between the British invasion in the 1840s and the Chinese Communist victory one century later, the Bank of England with the aid of the US Federal Reserve had instituted the universal acceptance of central bank issued paper money everywhere in the world and China was no exception.

Wikipedia recounts the long experience of China with paper money and hyperinflation:

As the first user of fiat currency, China has had an early history of troubles caused by hyperinflation. The Yuan Dynasty (1271-1368) printed huge amounts of fiat paper money to fund their wars, and the resulting hyperinflation, coupled with other factors, led to its demise at the hands of a revolution. The Republic of China went through the worst inflation 1948-49. In 1947, the highest denomination was 50,000 yuan. By mid-1948, the highest denomination was 180,000,000 yuan. The 1948 currency reform replaced the yuan by the gold yuan at an exchange rate of 1 gold yuan = 3,000,000 yuan. In less than 1 year, the highest denomination was 10,000,000 gold yuan. The highest denomination by a regional bank was 6,000,000,000 yuan issued by XinJiang Provincial Bank in 1949. After the renminbi was instituted by the new communist government, hyperinflation ceased with a revaluation of 1:10,000 in 1955.

Although China first outlawed the use of paper money in the 17th century, it now possesses over a trillion dollars worth of fiat paper money here in the 21st, the majority in the form of recently issued US paper dollars.

Now, the problems of hyperinflation may soon again affect China – because if the US continues to print its way out of its increasing problems, hyperinflation of the US dollar will destroy the value of China’s “monetary” reserves.

Although China has a much longer history than does the US, both the world’s oldest civilization, China, and the relative newcomer, the US, will face a dangerous economic future if the US continues to accelerate the growth of its money supply. But no one can control the US in this regard, not even the US.

Flooded by the West’s paper money
China has joined the West’s game against its will
How long will the game continue?
How long before China can reassert its will?
Heaven moves in its own time

EARTHQUAKE, FIRE
& FULFILLMENT OF THE PROPHECY

The August 2007 credit contraction was like a financial earthquake that unexpectedly shook global markets. It began as a series of crises that have continually escalated demanding greater and greater taxpayer resources.

Now, the house itself is on fire but the cause and the proposed solution are always the same. The cause is always investment bank greed. The proposed solution is always more taxpayer money to bailout out more investment banks. This is not a solution. This is societal blackmail.

When the US handed over the issuance of its money to the Federal Reserve in 1913 it did so in violation of the US Constitution. It illegally gave the right to issue US currency to a private bank and set in motion forces that would lead to today’s extraordinary crisis.

Today’s extraordinary banking crisis was not unexpected – as private bankers claim and we believe. Today’s crisis was inevitable and was in fact prophesized long before it happened. We were warned about this very occurrence two hundred years ago by no less than a founding father of the American republic, Thomas Jefferson.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

Jefferson’s prophecy has now come true and, yet, we act surprised; and, if we are, it is because the corporate controlled media has effectively misled Americans about the cause of their problems.

Double-dipping welfare moms? Illegal immigrants? Muslim terrorists? It’s anyone – except, of course, the bankers and the Federal Reserve – or so say again and again America’s corrupt corporate media in whose interest it is for Americans to mistakenly blame others for the real cause of its woes.

Otherwise, Americans, left on their own, might wake up.

THE BUTLER DIDN’T DO IT
THE BANKERS DID

It is bankers such as Henry Paulson who are responsible for America’s disintegrating and imploding economy. Since 1913 America has allowed private bankers to control the issuance of America’s money and now, in the very midst of the problems they themselves created, the bankers through Paulson’s plan are seeking unsupervised control over America’s economy complete with immunity from any future criminal prosecution.

This is because the bankers not only want America to bail them out, they are planning to steal their assets back in the process.

TREASURY SEEKS ASSET-BUYING POWER UNCHECKED
BY COURTS (Update2)
By Alison Fitzgerald and John Brinsley

Sept. 21 (Bloomberg) — The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.

Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world’s largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority. [bold, mine]

“He’s asking for a huge amount of power,” said Nouriel Roubini, an economist at New York University. “He’s saying, ‘Trust me, I’m going to do it right if you give me absolute control.’ This is not a monarchy.”

The investment banks are even now intending to violate the law in Paulson’s proposed government takeover and redistribution of bank assets. It is in the redistribution and sale of bank assets where the crimes will occur – crimes which will be granted pre-existing immunity from judicial prosecution under Paulson’s proposal.

This same caveat – immunity from subsequent criminal prosecution – was also written into the authorization of the original Resolution Trust Corporation which disposed of government seized property after the Savings & Loan crisis.

The reason no one remembers the hundreds of billions of dollars of seized property from Savings & Loans listed for sale by the RTC is because it never happened.

The greatest wealth transfer in recent history happened when taxpayer money was used to liquidate S&L properties which were then “sold” to well-connected insiders in transactions immune from criminal prosecution for literally pennies on the dollar.

The soon-to-be owned bank assets under Paulson’s plan will not be sold to the highest bidders in an open and fair auction, they will be disposed of again to pools of the wealthy and well-connected at highly discounted insider valuations. The people will pay, the rich will profit.

QUI CUSTODIAT CUSTODES
WHO WILL GUARD THE GUARDIANS

No, this isn’t a monarchy. This is fascism.

THE FOX IS IN THE HENHOUSE

Today, investment banker Henry Paulson, former CEO of investment bank Goldman Sachs is US Secretary of the Treasury. This is no coincidence. Thomas Jefferson would not be surprised.

Paulson’s plan to bail out the banks is being presented to American citizens as a fait accompli, as a necessary step to prevent the complete meltdown of our financial system. Paulson’s plan is exactly what every venal, opportunistic and self-serving banker would propose as a solution to America’s problems in such circumstances.

INVESTMENT BANKERS
DON’T NEED TO BE BAILED OUT
INVESTMENT BANKERS NEED TO BE THROWN OUT

The answer to America’s problems is clear. Thomas Jefferson said it two hundred years ago.

The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Let’s do what has to be done, America – or do you still want to blame Muslim terrorists and illegal immigrants for America’s problems; or maybe you are still hoping that somehow maybe somehow Paulson’s proposed trillion dollar government bailout of the rich and well-connected will somehow trickle down to you and save you and your family from being tossed out onto the streets when your house is foreclosed on by the banks he is going to save.

The majority will always willing pay the price of fascism

When this is all over – and someday it will be – it is my hope that we will have learned the lessons that we have now forgotten. That bankers, like vicious dogs, must always be kept on short leashes for the public safety and public good (neutering should also be a requirement); and, that gold and silver, not credit and debt, are the only foundation of sound money.

PREDICTIONS

(1) Paulson’s bailout of investment banks giving bankers total control over America’s economy will be rushed through Congress and quickly signed into law damaging international perceptions of US creditworthiness which will lead to further uncertainty in the markets. US Treasuries and the US dollar will ultimately bear the long term consequences of Paulson’s self-serving short term “solution”.

Conclusion: Even greater financial disaster will result from Paulson’s taxpayer bailout of his wealthy Wall Street friends.

(2) Written into the investment banking bailout law will be provisions expanding the police powers of the state, e.g. Congressman Ron Paul noted the recent passage of the housing bill contained the requirement that by 2009 “every credit card transaction will be reported to the IRS”.

FASCISM IS ALWASY SOLD AS NECESSITY IN THE NAME OF THE PUBLIC GOOD

Conclusion: Fascism is the new zeitgeist.

This, too, shall pass.

By Ellen Brown

“I can calculate the movement of the stars, but not the madness of men.”

– Sir Isaac Newton, after losing a fortune in the South Sea bubble

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”

Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?

The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.

The Anatomy of a Bubble

Until recently, most people had never even heard of derivatives; but in terms of money traded, these investments represent the biggest financial market in the world. Derivatives are financial instruments that have no intrinsic value but derive their value from something else. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets.

“The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing.”1 They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services. In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling. But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.” Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked. But the cost was an increase in risk to the financial system as a whole.2

Since then, derivative trades have grown exponentially, until now they are larger than the entire global economy. The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars.3 How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in.

Credit default swaps (CDS) are the most widely traded form of credit derivative. CDS are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes. In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims.

And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down. Players who have “hedged their bets” by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets.

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.” It is also why the banking system cannot let a major derivatives player go down, and it is the banking system that calls the shots. The Federal Reserve is literally owned by a conglomerate of banks; and Hank Paulson, who heads the U.S. Treasury, entered that position through the revolving door of investment bank Goldman Sachs, where he was formerly CEO.

The Best Game in Town

In an article on FinancialSense.com on September 9, Daniel Amerman maintains that the government’s takeover of Fannie Mae and Freddie Mac was not actually a bailout of the mortgage giants. It was a bailout of the financial derivatives industry, which was faced with a $1.4 trillion “event of default” that could have bankrupted Wall Street and much of the rest of the financial world. To explain the enormous risk involved, Amerman posits a scenario in which the mortgage giants are not bailed out by the government. When they default on the $5 trillion in bonds and mortgage-backed securities they own or guarantee, settlements are immediately triggered on $1.4 trillion in credit default swaps entered into by major financial firms, which have promised to make good on Fannie/Freddie defaulted bonds in return for very lucrative fee income and multi-million dollar bonuses. The value of the vulnerable bonds plummets by 70%, causing $1 trillion (70% of $1.4 trillion) to be due to the “protection buyers.” This is more money, however, than the already-strapped financial institutions have to spare. The CDS sellers are highly leveraged themselves, which means they depend on huge day-to-day lines of credit just to stay afloat. When their creditors see the trillion dollar hit coming, they pull their financing, leaving the strapped institutions with massive portfolios of illiquid assets. The dreaded cascade of cross-defaults begins, until nearly every major investment bank and commercial bank is unable to meet its obligations. This triggers another massive round of CDS events, going to $10 trillion, then $20 trillion. The financial centers become insolvent, the markets have to be shut down, and when they open months later, the stock market has been crushed. The federal government and the financiers pulling its strings naturally feel compelled to step in to prevent such a disaster, even though this rewards the profligate speculators at the expense of the Fannie/Freddie shareholders who will get wiped out. Amerman concludes:

“[I]t’s the best game in town. Take a huge amount of risk, be paid exceedingly well for it and if you screw up — you have absolute proof that the government will come in and bail you out at the expense of the rest of the population (who did not share in your profits in the first place).”4

Desperate Measures for Desperate Times

It was the best game in town until September 14, when Treasury Secretary Paulson, Fed Chairman Ben Bernanke, and New York Fed Head Tim Geithner closed the bailout window to Lehman Brothers, a 158-year-old Wall Street investment firm and major derivatives player. Why? “There is no political will for a federal bailout,” said Geithner. Bailing out Fannie and Freddie had created a furor of protest, and the taxpayers could not afford to underwrite the whole quadrillion dollar derivatives bubble. The line had to be drawn somewhere, and this was apparently it.

Or was the Fed just saving its ammunition for AIG? Recent downgrades in AIG’s ratings meant that the counterparties to its massive derivatives contracts could force it to come up with $10.5 billion in additional capital reserves immediately or file for bankruptcy. Treasury Secretary Paulson resisted advancing taxpayer money; but on Monday, September 15, stock trading was ugly, with the S & P 500 registering the largest one-day percent drop since September 11, 2001. Alan Kohler wrote in the Australian Business Spectator:

“[I]t’s unlikely to be a slow-motion train wreck this time. With Lehman in liquidation, and Washington Mutual and AIG on the brink, the credit market would likely shut down entirely and interbank lending would cease.”5

Kohler quoted the September 14 newsletter of Professor Nouriel Roubini, who has a popular website called Global EconoMonitor. Roubini warned:

“What we are facing now is the beginning of the unravelling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank-like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank.”

The risk posed to the system was evidently too great. On September 16, while Barclay’s Bank was offering to buy the banking divisions of Lehman Brothers, the Federal Reserve agreed to bail out AIG in return for 80% of its stock. Why the Federal Reserve instead of the U.S. Treasury? Perhaps because the Treasury would take too much heat for putting yet more taxpayer money on the line. The Federal Reserve could do it quietly through its “Open Market Operations,” the ruse by which it “monetizes” government debt, turning Treasury bills (government I.O.U.s) into dollars. The taxpayers would still have to pick up the tab, but the Federal Reserve would not have to get approval from Congress first.

Time for a 21st Century New Deal?

Another hole has been plugged in a very leaky boat, keeping it afloat another day; but how long can these stopgap measures be sustained? Professor Roubini maintains:

“The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure. . . . [P]lugging and filling one hole at [a] time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.”6

We may soon hear that “the credit market is frozen” – that there is no money to keep homeowners in their homes, workers gainfully employed, or infrastructure maintained. But this is not true. The underlying source of all money is government credit – our own public credit. We don’t need to borrow it from the Chinese or the Saudis or private banks. The government can issue its own credit – the “full faith and credit of the United States.” That was the model followed by the Pennsylvania colonists in the eighteenth century, and it worked brilliantly well. Before the provincial government came up with this plan, the Pennsylvania economy was languishing. There was little gold to conduct trade, and the British bankers were charging 8% interest to borrow what was available. The government solved the credit problem by issuing and lending its own paper scrip. A publicly-owned bank lent the money to farmers at 5% interest. The money was returned to the government, preventing inflation; and the interest paid the government’s expenses, replacing taxes. During the period the system was in place, the economy flourished, prices remained stable, and the Pennsylvania colonists paid no taxes at all. (For more on this, see E. Brown, “Sustainable Energy Development: How Costs Can Be Cut in Half,” webofdebt.com/articles, November 5, 2007.)

Today’s credit crisis is very similar to that facing Herbert Hoover and Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s ploy failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.

The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the Pennsylvania provincial government, which originated the money it lent, the RFC had to borrow the money first. The RFC was funded by issuing government bonds and relending the proceeds. Then as now, new money entered the money supply chiefly in the form of private bank loans. In a “fractional reserve” banking system, banks are allowed to lend their “reserves” many times over, effectively multiplying the amount of money in circulation. Today a system of public banks might be set up on the model of the RFC to fund productive endeavors – industry, agriculture, housing, energy — but we could go a step further than the RFC and give the new public banks the power to create credit themselves, just as the Pennsylvania government did and as private banks do now. At the rate banks are going into FDIC receivership, the federal government will soon own a string of banks, which it might as well put to productive use. Establishing a new RFC might be an easier move politically than trying to nationalize the Federal Reserve, but that is what should properly, logically be done. If we the taxpayers are putting up the money for the Fed to own the world’s largest insurance company, we should own the Fed.

Proposals for reforming the banking system are not even on the radar screen of Prime Time politics today; but the current system is collapsing at train-wreck speed, and the “change” called for in Washington may soon be taking a direction undreamt of a few years ago. We need to stop funding the culprits who brought us this debacle at our expense. We need a public banking system that makes a cost-effective credit mechanism available for homeowners, manufacturing, renewable energy, and infrastructure; and the first step to making it cost-effective is to strip out the swarms of gamblers, fraudsters and profiteers now gaming the system.

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her eleven books include the bestselling Nature’s Pharmacy, co-authored with Dr. Lynne Walker, and Forbidden Medicine.

——————————————————————————–

1 Quoted in James Wesley, “Derivatives – The Mystery Man Who’ll Break the Global Bank at Monte Carlo,” SurvivalBlog.com (September 2006).

2 “Killer Derivatives, Zombie CDOs and Basel Too?”, Institutional Risk Analytics(August 14, 2007).

3 Kevin DeMeritt, “$1.14 Quadrillion in Derivatives – What Goes Up . . . ,” Gold-Eagle.com (June 16, 2008).

4 Daniel Amerman, “The Hidden Bailout of $1.4 Trillion in Fannie/Freddie Credit-Default Swaps,” FinancialSense.com (September 10, 2008).

5 Alan Kohler, “Lehman End-game,” Business Spectator (Australia) (September 15, 2008).

6 Ibid.

www.webofdebt.com/articles/its_the_derivatives.php

Last weekend started early for Timothy Geithner, President and CEO of the New York Federal Reserve. At 6 pm, Friday, Geithner called an emergency meeting to discuss the possible collapse of Wall Street investment bank, Lehman Bros.

The troubles of Lehman Bros had worsened during the previous week and the current Fed playbook dictated a solution be found on the weekend to calm financial markets opening Monday; but, this weekend, the Fed playbook came up empty, Lehman Bros. declared bankruptcy.

It’s official. The storm is here. In How To Survive The Crisis And Prosper In The Process, I predicted a global financial crisis would happen where real estate prices would fall 40-70%, stock markets would crash and a Great Depression would result.

Eighteen months later, the median price of housing in California is down 40 %, global stock markets are in disarray and although another depression has yet to begin, this weekend’s failure of Lehman Bros combined with the pressured sale of Merrill Lynch and the prospect of an AIG collapse are clear signs that we are now that much closer to the predicted end.

This is the end of a system. It is not a cyclical correction. It is not a market pullback and it is not a repricing of risk in an otherwise resilient marketplace. We are witness to the end of an economic system based on credit-based paper money that began 300 years ago in England. All beginnings have endings—and that we didn’t expect it to end doesn’t mean that it wouldn’t.

THE BANKERS’ BEGGING BOWL

Because Lehman Bros.’ CEO Richard Fuld received a $22 million bonus for his “work” in 2007 or perhaps because Fed officials had been openly criticized at their annual Jackson Hole soirée for their continuing bailouts of US investment banks, last weekend US officials unexpectedly informed Wall Street bankers that a government bailout of Lehman Bros. was not possible.

There is no political will for a Federal bailout…

Timothy Geithner, September 12, 2008

Geithner’s statement really means that Wall Street no longer possesses the requisite political muscle to extract more US dollars from a bankrupt electorate. Last weekend, Wall Street bankers finally understood that their privileged position in the welfare line of US government largesse had come to an end. This time, the banker’s begging bowl would remain empty.

With their co-conspirators in the US government no longer able or willing to provide additional US guarantees, the position of investment banks has now become increasingly fragile; and their newly hatched liquidity plan concocted by the bankers over the weekend is another indication of just how fragile their system is.

THE BANKERS’ NEW PLAN

Last Saturday when the bankers realized they could no longer depend on government money to bail them out, they came up with a plan. Granted, they did so with only one night’s sleep but nonetheless there appears to be a significant flaw in their thinking.

This is the plan:

Sept. 14 (Bloomberg) — A group of banks including Bank of America, CitiGroup and JPMorgan Chase & Co. are putting up $70 billion for a borrowing fund aimed at providing liquidity… Each participating financial firm will provide $7 billion to establish the fund and have the ability to borrow up to a third of the total. Other banks include Barclays Plc, Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and UBS AG. The pool could expand as other companies join.

Now, let’s get this straight. Ten banks put up $7 billion for a total of $70 billion. Because any bank can withdraw up to $23.3 billion, if three banks take $23.3 billion each, there will be nothing left for the others. Am I missing something?

There is nothing wrong with the plan, per se. The flaw lies in the flawed character of the participants. These are investment banks and if investment banks can exploit a situation, they will do so. That’s what investment banks do for a living, they exploit situations for their own advantage in order to maximize profits.

Last year when two Bear Stearns highly leveraged funds were in danger of failing, Bear Stearns came to the “rescue” of one of its funds and lent it more capital, albeit with the caveat that Bear now had first claim on the fund’s assets. Then, when the fund collapsed shortly thereafter Bear Stearns exercised its now first-in-line rights to all the assets.

Since self-serving behavior is common among investment bankers, it will be interesting to see how the bankers’ $70 billion fund will fare. After the first withdrawal, there may be a “bank run” on the remaining assets by the remaining banks—a real life version of what will be “the Banker’s Dilemma”.

A FRACTIONAL RESERVE SAFETY NET

The investment banks’ $70 billion liquidity fund is predicated on much the same premise that fractional reserve banking is based. While it is understood there may not be enough in the fund to cover all needs, it is assumed that not everyone one will need their funds at the same time.

This thinking/sic assumption is the basis of today’s fractional reserve banking system; because, as in the banker’s “liquidity plan”, there is not enough money in US banks in the event of significant withdrawals by savers.

There is $6.84 trillion on deposit in US banks; but US banks have only $273.7 billion cash on hand. The banks cannot possibly pay back depositors all their money as only 4 % of depositors’ funds are actually available. The rest has been loaned out, i.e. to real estate developers, etc.

The safety net of both bankers and depositors may prove inadequate in the days ahead. Be forewarned.

INVESTING IN CHAOS

Investing in these times is investing in a time of chaos; and gold and silver, traditional havens, appear to have failed in that role, both having sustained significant losses of late. But don’t dismiss gold and silver so quickly. Their day is coming.

The recent correction of gold and silver was not unexpected. In my book, I noted that in 2006 UBS had predicted a commodities sell-off—an avalanche sale of all commodities—could occur and take down gold in the process.

Page 48, from How To Survive The Crisis And Prosper In The Process:

In the June 5, 2006 article, UBS also warned that while the long term outlook for gold was decidedly positive, there was an intermediate risk of a global economic downturn that would drag “gold down in an avalanche sale of all commodities”; an avalanche that gold would ultimately survive before embarking again on a strong upward path.

The global turndown predicted by UBS in 2006 is underway; and the current sell-off of commodities, an avalanche sale of all commodities, may well be the event predicted by UBS. That such is occurring means we are now entering what I call the third and final stage of economic-collapse.

No one knows how long this stage will be. It is clear, however, from the recent takeovers of Fannie Mae and Freddie Mac, and the collapse of Bear Stearns and Lehman Bros. that there has been a seismic shift recently in the global financial landscape.

This stage is the last period in which investments can be profitably re-allocated to take advantage of what will soon happen, a financial tsunami the likes of which have never before been seen. A deflationary collapse with hyperinflation is only one possibility. There are more.

To all; we are now entering uncharted territory. The government seizure of FNM and FRE opens up the next and terrifying chapter of the credit crunch. As I have posited many times before, this has NOW ENDED UP IN THE LAP OF THE U.S. TREASURY! The Treasury is now the backstop to all things paper. This will be a real life “Atlas shrugged”. There are huge implications to this step. The Treasury will now have between $5-6 Trillion of mortgage loans added to its balance sheet. The Treasury is in a huge deficit already to the tune of $10 Trillion of funded liabilities and over $70 Trillion of unfunded future liabilities. It is over. The U.S. Treasury is broke. This will take the entire banking system with it. The banking system will need to writedown $36 Billion of Fannie and Freddie preferred stock that is carried as core capital. This means at a 6% reserve ratio, that another $500 Billion of credit must be withdwrawn to keep capital ratios from collapsing. The Treasury stimulus plan was $140 Billion [remember those $600 checks]. Now 3 times that amount will have to be withdrawn from the credit pool unless Treasury doesn’t magically credit these banks with $36 Billion.

There is no telling how much the carried loans are really worth in todays market as even prime loans are only fetching .80 cents on the Dollar. This will cost at least $1 Trillion at a minimum for starters. It will all be printed. The credit rating of the U.S. will be downgraded, the interest rates the Treasury will now have to pay will increase substantially. This is so Dollar negative it goes beyond words to describe it. The borrowing ability of the Treasury is now being hamstrung by the same credit crunch that we were assured last Sept. was “contained”. I’m sorry but the ruse is over. A government running a deficit can only do two things to cover the gap, borrow more or print. They can’t raise taxes because that will implode the economy even worse than it already is. They will find it more and more difficult to borrow the sums needed until the auctions begin to fail. Then the “black helicopters” will be out in full force spreading freshly printed Dollars. The dilutive effect to the Dollar will be astonishing. We are entering the Weimar Republic phase. The Treasury will be crushed under debt and the Dollar [Fed] will be crushed through overissuance of new currency used to buy the Treasury debt.

Basically look at it this way, Fannie and Freddie were both having difficulty borrowing in the credit markets, they have a huge sum to refinance between now and Oct. 1, something aproaching $200 Billion. That debt could not be raised. If an auction failure occured, a panic would be immediate. So Treasury steps in to save the day. Now it is only a matter of time before the market place disciplines the Treasury by requiring higher interest rates. Once rates start to rise, questions start to arise. Questions about the credit worthiness of the Treasury, questions about how much added money supply was used [remember two years ago the Fed discontinued reporting M3 money supply]. Questions that no one would ever ask before. Real questions!

The game of chicken that foreigners have been playing with their $ reserves will come to an end. Someone will flinch. The worlds banking system primarily uses Dollars for its reserves. The other currencies used as reserves, Yen, Pounds, Euros, etc. also use Dollars as reserves. Countries are using each other as reserves in a never ending circle of falsely created values. Think of it this way, it is like two people trying to hold each other up off the ground at the same time without either touching the ground. There is no backing or foundation to any currency nor to any banking system worldwide. The last semblance of support was knocked out from under the system back in Aug. 1971 when Nixon closed the Gold window. Who will be first to sell Dollars? Who will be next? Who will be the first to flinch in this game of chicken? I have no idea, but when the $ selling starts it will snowball. It will probably destroy the entire worldwide banking in less than two weeks time once it begins. Markets will close for unspecified amounts of time, distribution, trade, travel, will all cease for unspecified amounts of time. Foodstocks will be wiped out in a week or less. This will change the world as we know it.

This is it. This is what everyone knew all along had to happen. This is what no one ever wanted talk about. We always knew that we couldn’t spend more than we produced forever. This is what has happened to EVERY country and EVERY society that used FIAT paper for CURRENCY since the beginning of time. Unbacked pieces of paper never, ever, worked in the past. We as a society have made the same mistakes all over again, only this time it is not just a country or a region. It is the entire world! It is the entire world, and the world is now a bigger place than ever before.

The fiat/debt pyramid grew through the clouds until no one could see how high. There is no telling how far and wide this pyramid grew, the only thing for sure is that it was constructed upside down and is resting on its point. That point is Fort Knox. That point is in reality all the Gold stored in Ft. Knox, Denver, West Point, etc.. Even if the Gold that is supposed to be there, is actually there, the pyramids foundation is like the point of a needle. If the Gold is not there as many suspect, the foundation might as well be air. We have not had a Gold audit in over 50 years. The U.S. will have its poker hand called shortly as to whether or not the Gold is there. I believe that if the Gold IS there, you can add one zero to its Dollar price to balance the books. If it is NOT there as I suspect, pick a number. Pick a number of how many zeros will be necessary to add to Gold’s Dollar price to entice a holder of one ounce of Gold to make exchange for the pieces of paper called Dollars.

We will witness the mother of all inflations and the mother of all deflations at the same time. At this point in time I guess the debate over whether markets are manipulated or not is now MOOT. The government did it’s best over the last couple months to rally the Dollar and discredit Gold. The bluff that all was well and the Treasury would not have to step in to rescue the GSE’s has been called. “Real” money will rise from the ashes of the banking system and will finally seek its true value. The only question now is “how many zeros?’.

Bill Holter
P.S. and what becomes of the $1Quadrillion worth of derivatives outstanding…..?

Dear Friends,

Haven’t we all had enough?

Isn’t it insulting to you when major publications carry reports that Lehman nicknamed their corporate garbage can either Spinco or BadBank?

Bad banks are a product of OTC derivatives. Spin is how black is made to look like white.

Is this simply bad humor or is Lehman giving us all the middle finger salute?

So here we have a major international investment company rubbing both spin and weak banking conditions in our face as they are bailed out via the Federal Reserve Begging Bowl window.

Illegal attacks on our gold shares are costing billions of dollars in damage and there is no Begging Bowl loan window offering us or the company’s full recovery through 28 day perma-loans. In a sense the people who appear to be giving us the bird are more than likely the brokers for those that seek to injure the gold gang. Of course they think with impunity.

These power trippers seem to be intoxicated with themselves because they have recently bit the hand that feeds them. Raids of Fannie, Freddie and Bear Stearns (amongst others) is an act of turning on their benefactors. We shall see.

Let’s not forget about Mr. Gross of Pimco, who called upon the US Treasury to bail out all financial entities that made enormous profits on OTC derivatives.

They make money and the US Treasury/Fed covers the losses. They make massive money and your children and their children bail them out.

We are attacked by the financial equivalent of Highway Men and nobody gives a damn.

Haven’t we all had enough?

Another affront of one’s intelligence, and of course part of the “Hold the Hill” strategy, is the argument being broadcast by all media (and all the Hill’s friends) that spins the story that CURRENCY VALUE IS DETERMINED BY COMPETITIVE ECONOMIC ACTIVITY.

When push comes to shove, what determines a currency’s value will be the degree of financial failures and size of the financial bailouts because these events cause the volume of paper money to increase substantially.

The value of currencies, when written off by the history of this time, will not be a function of competitive levels of economic activity but rather who held the most OTC derivatives.

The USA is the eye of this hurricane of financial weapons of mass destruction already acting true to their name.