Obama’s Infommercial

I don’t watch a lot of TV, but I heard about Barack Obama’s infommercial that addressed our current economic crisis. Being that our current economic crisis is my main focus on the pages of this blog, I felt I had to go out of my way to give my readers the lowdown on what he said and what he’s promising. I found a copy of the text of the infomercial as well as the video at the LA Times.

In reading through it, I must say I felt moved. Obama has a talent for really speaking in a way that moves people that I must confess being envious of. Certain lines such as:

We measure the strength of our economy not by the number of billionaires we have or the profits of the Fortune 500, but by whether someone with a good idea can take a risk and start a new business, or whether the waitress who lives on tips can take a day off and look after a sick kid without losing her job – an economy that honors the dignity of work.

The line is pure fluff, but it’s moving fluff. Americans have witnessed CEOs getting rich by bankrupting the companies they run and I’m sure they are tired of it. It is a bizarre perversion of the free market system, which is supposed to reward people in proportion to their contributions, to instead reward greedy managers who bankrupt the company they were entrusted to grow. At least when Michael Milken was destroying companies one could argue that he was doing a service by buying them, breaking them up, and selling off the smaller pieces to the interested parties. Simply bankrupting a company serves no useful purpose and is damaging to the country and the economy. But what is Barack going to do about it? How can the President, regardless of how well meaning, somehow restore the economy to where it honors the “dignity of work”? Well, here are some of his specifics:

What happened in the financial markets was the final verdict on eight years of failed policies.  And we’re now going through the worst economic crisis since the Great Depression.

A few weeks ago, we passed a financial rescue plan.  It’s a step in the right direction … and as president, I’ll ensure that you, the taxpayers, are paid back first.

But we also need a rescue plan for the middle class … starting with what we can do right now that will have an immediate effect. 

As president, here’s what I’ll do:

Cut taxes for every working family making less than $200,000 a year.

Give businesses a tax credit for every new employee that they hire right here in the U.S. over the next two years … and eliminate tax breaks for companies that ship jobs overseas.

Help homeowners who are making a good faith effort to pay their mortgages,  by freezing foreclosures for 90 days.

And just like after 9-11, we’ll provide low-cost loans to help small businesses pay their workers and keep their doors open.

None of that grows government.  It grows the economy and keeps people on the job.

He’s basically talking about handing out loans like Santa Claus. If our current financial crisis should tell us anything it’s that easy credit is not the way to prosperity. The other part he’s promising is tax cuts. I never meet a tax cut I didn’t like, and I think he’s on the right track here, but if the Republicans have taught us anything it’s that tax cuts don’t help the economy unless they are accompanied by a reduction in government spending. The typical Republican course of action of raising spending while cutting taxes is not a true tax cut, but rather merely displacing the tax onto future generations… plus interest. 

Sure enough, later in the talk, Barack promises to do just that. 

I’ll also go through the federal budget, line by line, eliminating programs that don’t work … and making the ones we do need work better and cost less.

And one of the biggest savings we can make is to change our policy in Iraq. 

Bingo. You want a method to jump start the economy, here it is. Unfortunately, this is not a new promise coming from a politician hoping to become President. And it does beg the larger question as to why Obama hasn’t already done this. The federal government releases its budget every year, so why hasn’t he already gone through this years budget and outlined some areas of clear waste. You don’t need to be President to do that. 

Of course he did identify one clear area of government spending that he’d like to eliminate in terms of the occupation of Iraq- which is excellent. However, this war has grown unpopular, so it’s not like it’s hard to come out against it. If he were, on the other hand, to come out against some of our other stupid wars, such as the “War on Drugs”, then it’s doubtful the good moral people of this country would actually elect him- which is a shame. It’s a huge drag on the economy that we spend tax money to lock up people just for getting their groove on with substances deemed illegal. 

While we’re at it, let’s talk about another stupid government war: the “War on Poverty.” This is another war where we just need to admit defeat. Social Security has merely been a convenient tax from which the politicians will raid. As it stands, there’s no way we can afford all of our pledged free Medicare and Social Security payments to senior citizens. And unemployment insurance does have a crazy way of subsidizing unemployment. 

Unfortunately, Obama’s not going to touch any of these issues. In fact, he seems to be stating in the rest of his speech that he’d actually like to increase spending in these areas. So, while he may go “line by line” through the federal budget, I’m guessing we’re not going to see any real change. I’m also guessing that this is the reason he doesn’t get into specifics but instead speaks in generalities. 

Oh well. I suppose that’s how politicians get elected. What a crazy system.

Ben Bernanke’s Kick…. It’s Good!

Today the Fed announced that it was lowering the Fed Funds rates to 1%. The market rallied strongly late in the day, and then gave it all back to close at a loss. Barrick Gold, the stock I follow and am an investor in, announced that they were doubling their dividend and rose nicely to close the day up some 12% or so. Combined with a similar rise where Barrick mirrored the entire stock market in a 10% rise and I’ve had a couple of good days. The strange thing is that, outside of the announcement of this dividend today, Barrick has not had any newsworthy events or announcements for the entire month yet their stock has fallen from $37.36 on October 1st to trade at $18.14 on October 27th. When a company with a good balance sheet loses 50% of its value on absolutely no news, you know it’s a volatile market. 

I feel the stock’s going to make it all back though, so I’m not particularly worried. Still, as someone who’s been watching stocks for ten years or so, I’m not used to this kind of volatility. Usually if a stock loses 50% of its value, it’s because it announced it was being investigated by the SEC or something, but in today’s market it seems like anything goes. To try to understand what’s happening, you have to understand that basically the price that a stock trades at is really just a game being played by various players. Everyone comes to the game with money, but they borrow a lot more because that’s how big profits (and loses) get made. When someone in a leveraged position (i.e. they bought stock with borrowed money) takes a big loss they will often face having to liquidate their entire position just to pay off their creditors, and I believe we are seeing some of that happening with Barrick’s gold price.

In Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation he discusses the stock market of the late 1800s- the so-called “Gilded Age of the Robber Barons.” This was back before the days of the SEC; in fact, the SEC was created in part to stop the very activities that these guys would engage in. The market had various players, men like Jay Gould or JP Morgan, and each was playing with plenty of leverage. These men would often take interests in thinly-traded stocks because their stock price was easier to manipulate. Such stocks came to be known as “footballs” because they would be kicked by the various players to almost whatever price was desired. Fortunes where made and lost on these manipulated stock prices of these footballs. 

Fast forward more than a century, and it seems like the rules have changed, yet the game remains the same. Except now, instead of thinly traded stocks, the world market for everything from the price of oil to gold to the stock market seems to be kicked about by the various players of hedge funds, central banks, and governments. So I wasn’t too worried much about the loses I’d taken on Barrick this month. I figured it would only be a matter of time before one player or another would kick the stock back into play, and along came Ben Bernanke to cut the Fed Funds rate to 1%. Thanks Ben! I needed that.

Of course, I’m not sure that was the right now for the American economy as a whole. Fundamentally, we just need to get our house in order. Both our government and our people need to start spending less money than they take in for starters, and I’m afraid your interest rate cut is actually just an attempt to get them to do just the opposite. Making it easier for people to borrow money by lowering the key interest rate just discourages savings, and that’s actually the opposite of what needs to be happening now. But, what’s bad for the US Dollar is good for gold. It also seems to be good for the sales of books related to the collapse of the American Dollar. 

Bush Tells Banks to Stop Hoarding and Lend

In the promotion for Naomi Wolf’s new book Give Me Liberty: A Handbook for American Revolutionaries Ms. Wolf states that the United States has recently been overtaken by a coup. She further asserts that George Bush will not release the presidency but will instead declare martial law.

As someone who loves liberty and distrusts governments (in general) and the Bush Administration (in particular) I have to admire Ms. Wolf’s spirit, but I also have to disagree with her assertions. George Bush will not declare martial law. I believe it’s simply not in his nature.

We’ve never meet, but I feel I’ve come to know George W. Bush over the last nine years or so. I started out disliking him because of his politics, warming to him as a leader who would not hesitate to deliver a good country butt-whopping to Osama Bin Laden, and then watched as he proceeded to use 9/11 as merely another political tool to justify invading Iraq and getting him re-elected. I not the first to doubt the sincerity of our President regarding finding weapons of mass destruction in Iraq, but by his 2004 election campaign I was convinced that the justification for the war had been entirely manufactured. At the time a lot of Republicans vehemently disagreed with me; now they just change the subject. 

I realized that our fearless leader was carrying out the tried and true politics of fascism: praise Americans for their self-perceived virtues, preach fear, make power grabs for increased legal authorities and oversights, and work closely to favor certain corporations. In that way, Ms. Wolf and I do see the President in a similar light, but she takes this to its logical conclusion: surely aggressive grabs for power must come from a power mad figure who will not release control. That is where we disagree. 

I don’t feel that Bush is really all that power hungry. In fact, I think he’s sick of politics. I know it’s strange to try to analyze inner motivations of someone I’ve never met, but I’m not even sure Bush ever wanted to be President to begin with. I think the Bush family and friends thought that he could become President and encouraged him to do so. To my way of thinking,  Bush is merely the puppet for the “advisors” behind the scenes who developed the plans to invade Iraq long before Bush even took office. And so I envision Bush looking upon his Presidency much like his college must have seemed to him: important stuff but really he’d rather be doing something else. Even since becoming a politician, Bush has had to study all over again- except instead of tests he has to study for, its debates, speeches, and press conferences. 

That’s perhaps why Bush’s politics have seemed so fluid. He started out preaching about the power of free markets combined with small governments. Then, much like college, he passed that test and went on to study entirely new material that didn’t necessarily relate much to the past material. It would seem the course curriculum of Bush’s Presidency started with a lot of early testing on small government, then moved on to how to build public support for a war, then spent some time delving into how to build a police state, and is now being tested on Socialism and international coordination to intervene in the function of the marketplace.

I’m certain that all of this has taxed the poor man’s brain. Let’s face, that’s a lot of material to cover in eight years- much less make it seem part of a coherent political agenda that has any consistency at all. So while Ms. Wolf is pointing to Bush’s power hungry politics, I’d like to inform her that that was last year’s material. He’s a Socialist now. Case in point, Bush is now telling the banks how to run the banking business. I suppose in some ways this might be perversely justified. After all, it would seem the government has recently become a major stockholder in the major institutions of banking and it is only natural for large shareholders to feel that they have a say in how the company is run. 

Still, it does strike me as rather hypocritical for a man who bankrupted so many oil companies to tell bankers how to do their job. Ironically, the advice that Bush is giving them (i.e. get out there and lend more money) was exactly the thing that got them into this pickle to begin with. After all, in terms of lending money, once banks have given billions of dollars to people who had no means of repaying it, there’s really no where to go but down. 

I wonder who convinced Bush to be a Socialist. They certainly seem to have been excellent tutors for him. These days he can rattle off rhetoric that would have made FDR and John Maynard Keynes proud. After all, it was in regard to the banking industry that FDR opined “The only thing we have to fear is fear itself.” Bush, like FDR before him, is telling banks to ignore their natural fear of bankruptcy and get out there and lend some of this money the government/Federal Reserve is giving you so that we can start inflating again.

It’s sad that we as a nation have now been reduced to seeing Bush parroting the most influential figures of the school of thought and political party he was supposed to be staunchly opposed to, and I can’t help but think that it must eat at him. I’m sure that he doesn’t like the notion that he’s made a terrible mess of our nation and I’m sure he must be secretly blaming the course instructors who gave him the notes to study to begin with. “Why the hell am I having to give the speeches of FDR?” he must be wondering. 

And as such I’m sure that Bush will step aside when the time comes. He must tacitly admit to himself that things haven’t gone all that well and that it’s time to step aside and let someone else can in and fail spectacularly. As for the voting public, it would seem that fake Socialism just won’t do. “Why buy imitation when you can get the real thing?” might be the thoughts of many people voting for Barrack Obama- a man who has been much more consistent in his Socialism than our current President. As Bush demonstrated in the 2004 election, the American people want consistency. They don’t want Capitalism Warmonger one day, and then Socialist international coalition builder the next. 

So soon it will be Obama’s turn at the wheel and we in the United States will get to see how a real Socialist does things. I can hardly wait.

The Free Market’s Unlikely Champion

In the dark hours of a collapse is when the free market tends to undergo its most radical depredations. Politicians never seem to grasp the complexities of what’s going on, but understand that SOMETHING needs to be done. Like FDR, they just start changing things and hope for the best. Later, a whole generation of economists would praise FDR for his decisive actions. “It’s not that his actions were particularly good,” they might say, “but something needed to be done.” A crisis can not go unanswered. To believe otherwise is sacrilege in macroeconomics. If one believes that an economy can be managed by comparing aggregate supply to aggregate demand, then one has not only the right, but the responsibility to correct the situation.

“With great power, comes great responsibility” were the fictionalized words of Spiderman’s Uncle Ben to Peter Parker, the main character. Peter resisted being called to the role of hero, but in the end, who else had the power to save the world. And this must be how politicians and macroeconomists must feel. They have been given the almost superhuman power to restore confidence in Capitalism by correcting some of the messier elements of the free market system.

And then there’s France. France has always been the butt of America’s jokes; the nation labeled by Homer Simpson as the land of “cheese eating surrender monkeys.” Americans fancy themselves as rugged individualists living by their wits in the dog eat dog world of free market capitalism.  We seem to feel that France is the sissy brother of our western allies: people speaking a strange language in a system so collectivist in their Socialism that it borders on Communist. Like most of America’s fantasies, we seem a bit off base; our system is far more collectivist (and socialist) than we would like to admit and our attitudes regarding France seem unduly harsh. Truthfully, I feel that those two nations have much more in common that either would like to admit. 

Lest we forget, it was France that enabled us to win our independence to begin with. While Americans seem to approach having an empire as a novel idea with grand appeal, France has already gone through their empire phase, complete with an attempt to take over the world through force. And when it comes to fiscal discipline, France seems to have a better understanding of when the game is up than we do. Experience is the best teacher and France has been burned before in the game of holding foreign currencies in the name of global stability. As Murray Rothbard recounted in A History of Money and Banking in the United States: The Colonial Era to World War II France was made a dutiful martyr early in the game of modern finance.

After the aftermath of the first world war, Britain made an attempt to return to the gold standard at their pre-war par. Normally this would have been a very contractionary move, as Britain had vastly inflated their money supply to fight the first world war and therefore there was a far greater ration of paper pounds to central bank gold to back it. One would expect that they would merely have taken the more conventional move of returning to the gold standard at a new par that reflected the vastly inflated quantity of paper notes in circulation. If Britain desired, for whatever reason, to return to valuing the pound at the old par, then one would then have expected for Britain to start contracting their money supply over the years as the United States did in retiring the greenback after the Civil War. But the master planners in Britain, now doubt influenced by the most prominent British economist of the time, John Maynard Keynes. Instead they desired to actually inflate their money supply while simultaneously revert to redeeming their pound in gold. While this scheme might seem absurd to the likes of ordinary mortals like you and I, the British economists felt they could do it.

Part of the plan was that they would not redeem the pound for gold with ordinary citizens, so it was not a true gold standard but rather what became to be called a gold exchange standard. Since the other nations of the world were also in shambles from the first world war (with the notable exception of the United States) Britain felt that no one else would be in a position to present large quantities of paper pounds for redemption as long as the Britain could get the United States to play along. The Federal Reserve, under the leadership of Benjamin Strong, supported this move by the British, for it required the Federal Reserve to expand its money supply even more than the British were doing. Both countries economies underwent a huge inflationary boom in “the roaring twenties”. We all know how that story ended.

What is often lost on those of us not familiar with Rothbard’s excellent history, is that the central bank of France began acquiring large quantities of British pounds as its industries revived and it ran a trade surplus with its British neighbor. The French became nervous as they watched the British and the United States continue their inflationary campaign. They understood that Britain might have a problem redeeming all of the pounds the French possessed should they be ever be presented. But the British central banker, Lord Montagu Norman, convinced the French that Great Britain would stand by their pledge to redeem their pound in gold, even if they had to start raising interest rates and end their inflationary campaign to do it.

So the French played along and held onto their British pounds. As the situation became increasingly untenable, the French began demanding that the British halt their inflationary ways and instead start contracting their money supply. The British were forced to either abandon their pledge to the world to redeem their pounds or they had to stop inflating. Instead of face the pain that might come with higher interest rates, they chose the abandon their gold standard.  France’s central bank had to take a huge loss on the paper pounds it held in it’s vaults.

Fast forward a few decades, and now the players are slightly different, but the story remains the same. Now it is the United States that is maintaining a gold exchange standard, and France is, once again, acquiring a large number of paper dollars. It received similar pledges from the United States that it would stand by its pledge to redeem the dollars in gold, but France once against watched as first LBJ and later Nixon expanded the money supply to increase government entitlements and fight a war in Southeast Asia. As they saying goes, “Fool me once, shame on you, fool me twice, shame on me.” Or, as President Bush shortened it, “You can’t get fooled again.” And so the French didn’t.

Having been burned by their previous experience with England no doubt colored the French decision to continue presenting their dollars to the United States for redemption. And again the leaders of the currency promising to redeem the dollar in gold, were so resistant to the idea of reigning in their spending, that they chose instead to simply make them irredeemable. Yet again, France and the other nations of the world took a loss on their dollar holdings, and today the loss has now spread over to the include debt instruments backed by the dollar as well. 

So now the French are lecturing the world on the benefits of fiscal discipline: Both French President Nicolar Sarkozy as well as Europe’s central banker Jean-Clause Trichet have recently announced a conference in mid-November that will be attended by all of the major western powers including the United States. The topic of this conference is to be a return to the Bretton Woods accord- the accord which Nixon abandoned by ceasing redemption of dollars for gold. 

It’s not hard to figure out the true motive here. Sarkozy and Trichet want to displace the US Dollar from the reserve currency of the world and instead put the Euro in its place. And why not? God has not ordained the US Dollar legal tender for all debts, the US government has; the history of the dollars reign as reserve currency of the world is one ripe with abuse as America has inflated its money supply and forced the other nations of the world to eat the cost. The nations of the world might be ready for a new currency, and Sarkozy and Trichet are certainly ready to make it the Euro. Odds are, this conference may produce little more than lip service, but there is also a chance that Europe may announce a coup by declaring a standard of redeem ability for the Euro in gold. If so, then I would image a stampede of the nations of the world out of the US Dollar and into this newly found hard money. I can only imagine what would happen to the value of the dollar.

Volatility Continues

Well, as Mandelbroit says, volatility begets volatility. The stock market was up a lot on Monday only to give it back again on Tuesday and gold stocks were no different. My actively trading/market timing friends are telling me that I should have sold back when certain trend lines were crossed, and I, if things keep going the way they do, I suppose they are right. Trend following works well when markets all move in one direction, as they are doing lately, but tends to generate lots of trades for small losses when the market drifts from one direction to the next and back again. Once, I used to be a trend follower, but I found I started underperforming the market at large. 

Then there are people like Warren Buffet They don’t really try to follow the market. They just feel that they are going to buy good stocks that will be “weighed” correctly in the long run. Or, as Bill Bonner puts it, “things that are out of whack have a tendency to get back in whack.” And that’s how I feel about gold stocks. Specifically the one gold stock I am invested in is Barrick gold (ticker symbol ABX). I hasn’t been doing to well lately and it’s down another 8% or so this morning, but I’ve found I’m not particularly bothered by its performance. Instead I’ve taken refuge in the slogans that I used to feel described bad investors- specifically that “it’s only a loss when you sell.” 

“What if it keeps going down,” some might ask. Well, in that case, I am prepared to buy more. I have a lot of money in bonds which is maturing in about three weeks, and I wouldn’t mind loading up on more Barrick gold. The company has been around since the 1980s, and is currently trading at the same price it was back in 1994. Since gold was bouncing around in the $200-$300 range around that time, and since its now bouncing around the $750-1000 range, I feel pretty confident that I’m making a good investment. In fact, I doubt I will be able to but it come mid-November for the price its trading at today, since they announce their earnings at the end of this month, but who knows. A recession may be on, but gold is still above where it was a year ago, even on that crazy COMEX market. So the company has been able to sell all the product it produces at prices higher than it did then, and it has expanding capacity coming up next year. So I’m not worried. Things will get “back in whack”.

It does beg the larger question about trading philosophy. In essence, would you rather invest like a Warren Buffet who picks good companies and sticks with them or like a George Soros who made his fortune by being on the right side of particular trades. There is no right answer to that question, its just a matter of personal preference. The advantage of being an investor with a longer time horizon is that you don’t have to monitor the market as much, but you do need to do your homework about the stocks you do like: study their markets, read their literature, listen to their conference calls. 

The one thing I would say though, is that if you are a Warren Buffet style investor, then you need to hang out with others of a similar mindset and vice versa. If a value based investor starts exchanging notes with an active trader, then they’re just going to mix each other up. It’s like a two dancers coming together and expecting each other to do radically different dances. And they tend to mess up each others timing. The value based investor will want to buy when stocks are down because, in comparison to their earnings, that’s when stocks are on sale. The trend following investor will never want to “catch a falling knife” and instead will admonish their friends never to buy a stock when it’s at or near it’s 52-week ago.  So when these two get together and talk one is saying that a stock is a buy based on Price-to-earnings and the other is saying its a sell based on technical analysis of the chart. The result of a collaboration between the two styles leads to the absolute worst kind of stock investing: buy high, sell low. 

I think what happens to the investing public at large is that they would like to be like Warren Buffet but don’t quite understand exactly what that means. They don’t read books like Buffett: The Making of an American Capitalist but instead just jump right in with the sense that they inherently know how this investing thing is supposed to work. So they go out and buy companies they like. When they go up, they feel good and talk about investing for the long term. When they go down, they get scared. “What if this company goes out of business?” they wonder. They talk to their friends about it. Eventually, they end up scared to death, so they sell out at what ends up being the bottom. 

John Maynard Keynes said that “the market can stay irrational longer than you can stay liquid.” I suppose that’s true, but if liquidity isn’t a problem, then you can afford to wait. That’s the way I look at it anyway. Or as Bill Bonner put it, he buys stocks because he “feels bad for them.” That they are so neglected and unloved. Well right now the market is neglecting gold stocks. They are unloved and abused. No one will return their phone calls… except me.

A Day off from the Liquidation

Gold stocks, and the stock market at large, were up nicely today. I asked Dr. Janice Dorn, the trading doctor, why gold stocks were getting particularly hammered last weeks and she said that there was a lot of forced liquidation from hedge funds. A fair number of hedge funds had taken large positions in gold stocks and as that market dropped, many of them were forced to liquidate. That is the problem with massive amounts of leverage: even if you’ve might the correct long term bets, you can still get washed out in a short-term leg down.

Market Technicians, formerly called chartists, like to study the price movement of charts and make predictions based on how the chart is moving. In his book The Misbehavior of Markets Dr. Benoit Mandelbrot said that markets could not be predicted this way; that market data was chaotic but would seem patterned. Doug Wakefield, of Best Minds Inc, has been in the business for years and feels that Mandelbrot is wrong on that particular point.

No one knows the truth. I can tell you that I got a unsolicited email three weeks ago telling me that it was a great time to buy gold. Then last week I got another unsolicited email from the same service telling me to short gold. As I mentioned in a prior post, I believe that the gold market is intentionally manipulated by the central banks in order to discourage people from owning the stuff. They know that people follow trading methodologies based on what the chart looks like, and they are therefore able to knock the gold market around in order to paint a picture that tells the world to sell.

For me, I think that the market is as Warren Buffet said, “A voting machine in the short run, a weighing machine in the long run.” Gold has a wonderful future ahead of it, and I believe that’s why gold stocks rallied over 10% today. I’m crossing my fingers hoping that today marks the end of the forced liquidation of gold stocks but who knows. I was just happy to see a lot of green in my account today. 

I do know that if world leaders keep making noise about going back to some form of the “Bretton Woods” agreement that gold is going to go crazy. For any country to return to Bretton Woods it would have to acquire a fair amount of coin to back it’s currency, not to mention that value of the dollar would fall significantly as it was displaced as the global reserve currency.

Bailout Question from Bill

Bill, a relative of mine that recently got in touch with me through the internet, has started reading my blog and emailed me this question:

HELLO Preston,

    I just ordered a copy of your book. Reading your blog, I really like
your writing style so I’m sure I will enjoy the book.

    I really don’t know very much about economics, I wish I did. I took a
course in Agriculture Economics in college but about all we talked about was
the commodity market. I have been reading everything I can find here lately
about credit default swaps and collateralized dept obligations — OH MY GOD,
Did anyone think this <stuff> would really work??

    I don’t know very much but I recognize a Ponzi scheme when I see one.
How in the world did they get away with it for this long??

    I think our government does one thing better than anyone else. They
play “don’t look over there, look over here”. Every time something happens
that they don’t want to explain they use all their powers to get us looking
in a different direction. They are blaming this on sub prime loans but it
looks like we were headed like lemmings to a cliff even if the loans had
been good.

    In the 1980’s Ronald Reagan sent the Marines to Lebanon and many of
them were killed in a bombing. I remember a politician talking about the
Marines going before the bombing. He said “if they are sending them to fight
they are not sending enough, if they are sending them to die, they are
sending too many”. That always stuck with me. I seems to me that if they are
spending 700 billion to pay off bad loans they are spending to much, if
they are trying to cover the hedge funds and derivatives they are not
spending near enough. Is there enough?????? 


Bill asks a good question. Is there enough money to pay for the bailout. As with all things in our modern economy, questions involving money can be a bit confusing. The simple answer is “Yes there is enough money for the bailout” because, as Ben Bernanke has so astutely observed, “the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” So, as our illustrious central banker has pointed out, the government can simply run the printing press to generate the needed cash to pay for the bailout. Problem solved. 

Or maybe not. For one thing, $700 billion is a lot of money to pull from thin air. And since it’s a purchase from banks, it would show up to the banks as “high powered money” or money that they could then loan against. In a fractional reserve banking system, $700 billion in high powered money could be loaned out to borrowers who then deposit it back into the banking system in the form of checkbook money which can then be loaned out again. In this way, the money can be pyramided many times over. Using the reserve requirement of 10% as a guide (which I believe is the correct figure for the United States) an injection of $700 billion in high powered money would result in $7 trillion dollars of new money injected into the economy by the time all that lending was done.  As you can figure, $7 trillion is a huge wall of money to hit the economy, and it doesn’t take a genius to see that we would see runaway inflation. 

Now, were the US government to borrow the needed $700 billion, then it wouldn’t show up as high powered money so the immediate impact wouldn’t be quite so inflationary. The question is, of course, who exactly is going to loan us this money, and that’s the question few people seem to be asking. Currently the other nations of the world seem to be fighting their own problems in this economic downturn, and I’m not sure how readily they are going to want to part with $700 billion dollars of new US Government bond issues. I’m predicting that the interest rates needed to attract this kind of cash are going to be higher than the government would like.  Higher interest rates will show up in higher mortgage rates, which will further exacerbate the housing downturn. 

All of this ignores your other question as to whether the $700 billion price tag is realistic. The true answer to that is, as you already suspect, unknowable. As we say with Japan, bailing out banks that have lots of bad debts on their balance sheets tends to transform an painful collapse into a long slow death. I sincerely doubt that the $700 billion dollar price tag will be the last we see of this, but that’s assuming that we ever get that far. Raising this these funds is going to be the real test of whether our economy is allowed to suffer on a bit longer or whether we start to see an implosion of value as the dollar loses values and interest rates escalate. 

Should be interesting. I’d say that the next few months will provide you with all the education in economics that you’re going to need.

European Leaders Speak of Return to Bretton Woods

There is a saying on Wall Street that “markets make opinions.” That means that when markets are trending higher, there is talk about how innovation and technology have made us prosperous as a people; when markets are falling, we talk of how we have lost our competitive edge. It’s similar to Vegas gamblers. When they are winning, they have a system. When they are losing, they are unlucky. 

When the inflationary boom is raging, politics love to talk about how the people deserve this newfound prosperity they are experiencing. When the deflationary contraction comes, we talk of lost virtue. The market becomes a drought in everyone’s mind and the politicians become the priests of the Rain God come to tell us we must repent. So I can’t say I’m particularly surprised to see that British Prime Minister Gordon Brown and European Central Bank President Claude Trichet have recently been calling for a return to the first Bretton Woods agreement. As those of you know who have read my book, Bretton Woods was the agreement reached after World War II whereby the United States would redeem gold at $35 an ounce and the rest of the world would use the US Dollar as their reserve currency. 

Ah, the excesses of paper money. I guess when the wheels come off the wagon, it’s suddenly cool for Trichet to say that, what the world really needs is “”discipline: macroeconomic discipline, monetary discipline, market discipline.” That’s akin to a drunk saying in the midst of his hangover that he really needs to stop drinking. Yes, the world does need monetary discipline, but it does not possess the world power to impose it on itself and the central bankers of the world are happy to oblige it along it’s merry way. Although it is possible that there is more here than just giving a nod to virtue in the aftermath of the credit orgy; it is possible that this may be the early murmuring of an actual move away from the US Dollar and towards a new financial order. As I mentioned in this blog on October 13th, a move away from the Dollar is inevitable at some point, and it’s possible that the European leaders would like to stop the death of 1000 cuts that is propping up the dollar. Perhaps they’d like to be rid of the current system sooner rather than later. 

Wouldn’t it be a coup for the Euro if it became redeemable in gold? That would assure it that it would become the next reserve currency in the world. Such a move would spell the end of the US empire, because we could no longer print the money needed to run it and traditionally the Europeans have wanted the US to be strong as a protection from Russia. But they may see the writing on the wall and figure that the US Dollar is going to collapse anyway and that Russia is not nearly as strong as it once was. Perhaps they are considering a move towards become great powers on their own merits once against rather than merely a protectorate of the United States. 

It certainly would be, as the Chinese curse says, “interesting times” indeed.

How I Took On Chase Credit Card — and Won

Currently, I have two checking accounts and a credit card with Chase. That may not seem all that unusual to you, but it came as a surprise to me since I never actually opened any accounts with them.

I had two checking accounts with Washington Mutual, (WaMu) but they went bankrupt after doggedly pursuing a business model of loaning money to people who couldn’t afford to pay it back. That WaMu went bankrupt came as no surprise. I knew it was in trouble a week before the FDIC. See, I was randomly accosted by a stranger who, when spying the WaMu header of my checking account transactions printout, told me, “you’d better take your money out of there. They’re about to go bankrupt.”

I wasn’t worried about the few thousand dollars I had in the two accounts; It was FDIC-insured, and, if the FDIC couldn’t make good on the money, then all my gold investments would suddenly catapult to being worth far more than the electronic dollars I had lost. That’s the nice thing about gold, it gives you security. Gold ownership is a bit like having children: people that aren’t parents can’t understand the joy of parenthood. Likewise, people who don’t own gold don’t understand the simple security that the yellow metal brings.

Needless to say, I just left my money in there to see what would happen. And sure enough, a week later, I was a JPMorgan Chase customer.

Now, the credit card situation was a bit different. I signed up for a Quicken credit card under the mistaken notion that it would somehow simplify my bookkeeping; but, I never mastered how to download the transactions, and eventually stopped using the service altogether. The credit card was issued through Citibank who, back in ’05, made me an offer to loan me money at a locked-in interest rate of 2.99% for the life of the loan as long as I stayed current. At the time, I had a student loan balance of just under $10K from my college days at Southern Methodist University and was paying 8.5% on that. Seemed like a good move to me, so I paid off the balance with a balance transfer check and signed up for automatic deductions from my then WaMu account so I’d never be late. It seemed like a win-win. I got a loan at a rate below inflation and Citigroup immediately bundled up my loan and sold it to investors through Smith-Barney.

Everyone was happy. That was, until Citibank sold the Quicken card to Chase, which immediately discontinued the automatic deductions. I wasn’t paying any attention to the mail I was getting from them because they regularly flood my mailbox with marketing material anyway — often deceptively tagged to look like I had an account with them.

So, you can imagine my surprise in suddenly discovering that, not only did I not have an account with Citibank anymore, but I now had an account with Chase — AND they’ve declared it past due, thus immediately moving my balance up to close to 20% or so, after tacking on a $39 fee

I immediately called Chase and asked them to reset the account to its condition prior to their taking it over. After all, how could they penalize me for not keeping up on an account I didn’t even know I had? Despite what I felt was a strong argument, I got absolutely nowhere. They refused to budge; even refused to refund the $39 late charge. I asked to speak to management. Got someone who told me the same thing. So, I informed her that if this was the official position of Chase that I would take them to court. She would have none of it.

Oh, well. If it was litigation they wanted …

I filed suit in the local small claims court: total cost, including mail service, was $32, and for my $32’s worth of effort, I got everything I asked for and more. My settlement agreement with Chase does not allow me to put the specifics, but I was very pleased with the result. Incidentally, I also have a foolproof section of getting credit cards to refund those pesky $39 late fees that doesn’t involve litigation in my book in anyone is interested. 

I do, however, want to recount here the details of how I did it, in case anyone out there in cyberspace needed the advice on what to do if this kind of thing happens to you.

Now, I know the perception of taking on a large bank is intimidating. I recently learned a story of a friend who had lost $1K out of his checking account (also with WaMu) due to fraud that was in no way his fault. The bank took the position that it was his problem; he decided to just eat the $1K, figuring that there was no way a small individual could fight a mammoth institution like WaMu.

But that’s where he’s wrong.

This is one of the weird places where the small individual has a large advantage over a corporation, and I’m hoping that more people might realize that by reading this story.

Okay. The first step towards bringing suit against a large corporation is to find out their exact legal name. This can be tricky, because there’s no one “Chase Credit Card, Inc.” to go after. Instead, modern institutions are broken up into bunches of smaller, related corporations, so, the first clue is to look at your statement and check for the institution’s name and state where they’re incorporated. Chase was a Delaware Corporation. With that information, I was able to go to the Secretary of State of Delaware’s website. (Insert the name Chase and there are over 500 entries. I narrowed it down by trying different combinations of Chase and either ‘credit’, ‘card’, or ‘bank’.) I then came up with a couple of corporations titled ‘Chase Credit Card Master Trust’, but, while seeming close to the correct company, were actually separate corporations that took the notes from the credit cards and sold them out as CDO bonds: essentially the same things that happened to mortgages, except with credit cards.

By the way, if you’re wondering what the next shoe to drop is in regards to our banking system, I’ll give you a hint.

What actually cinched the corporate name for me was actually the customer service operator for Chase. I called in and told her that I was intent on suing her employer and that I needed to know what the corporate name was. She told me that it was “Chase Credit Card Services”. I searched the State of Delaware’s database for that name, and came up with “Chase Bankcard Services Inc.” It wasn’t exactly the name the operator gave me, but it was close enough.

I took down the address which, for those of you in the audience looking to sue their Chase credit card, is:

The Corporate Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, DE 19801

Note: This is not the actual address for Chase, but rather for the company that they have established as their “agent”- meaning that they’re there for the express purpose of being served for lawsuits.

Next, I had to file the claim.

Small claims are filed at the local Justice of the Peace Court (called JP courts by those in the legal profession). I turned to Google and found the closet JP court, went down and filled out the forms. As previously mentioned, it cost a total of $32. Including the cost of sending the suit certified mail.

About three weeks later, I got a call from a Dallas attorney who had been appointed to represent Chase in my suit against them. There is a natural inclination towards antipathy on the part of many people who are now talking to an attorney who had technically been hired to take the other side, but that’s not my style. My ex-wife was an attorney and I knew that she didn’t particularly agree with the clients she represented, so instead of being spiteful, I was instead very cheerful with her. As fate would have it, she had not yet passed the bar, and couldn’t even represent Chase when the case came to trial. Believe it or not, I actually think I had more litigation experience than she did.

Long story short, I represented my case in a very reasonable tone and emailed her what my terms were to settle the case. She said she’d get back to me after speaking to her client. Well, she got back to me today — and told me that Chase had agreed to settle the case for terms even more generous than I had asked for in writing — which felt good.

Now, if I could just get my gold stocks to go up, my financial life would be in order.

Strange Days in the Gold Market

The Dow and NASDAQ were both down some 7-8% respectively. Today, they’re up roughly 5%.

As I mentioned previously, volatility begets volatility.

One of the most curious developments lately has to be the market for gold and gold mining stocks. The demand for gold bullion’s gone through the roof in the past couple of months as the financial system has fallen apart — so much so, that bullion dealers are simply out of stock on most coins. German bullion dealers have stopped taking orders because they’re so swamped and have no product to offer. The US Mint itself has suspended production on the Gold Eagle and Buffalo coins; they simply can’t get the gold on the open market at a cheap enough price to profitably make the coins at the prices for which they’re currently offered.

Which just begs the question: why doesn’t the US Mint just raise the price on the coins?

I’ve discovered that this is a rabbit hole question — the more you study it, the more questions you come up with. When you finally do manage to piece together an answer that makes sense, you’ve arrived at the conclusion you’re looking at the result of some kind of conspiracy.

Now, I realize that conspiracy theories regarding gold are the stock of Libertarians everywhere — not to mention, the kind of thing that makes traditional people regard us as freaks. But — I’ve come to believe that that is exactly what’s going on.

Here are the facts that are difficult to explain without invoking some form of conspiracy:

  • WHY … has the US MInt suspended the sale of gold coins rather than just raise the prices on the coins they offer?
  • WHY … had the electronic market of gold futures come about with a “spot” price of gold (that’s fallen quite a bit lately — 5.1% today) at a time when gold bullion dealers haven’t been able to keep the stuff in stock?
  • WHY … is Barrick Gold (ticker symbol: ABX), one of the world’s largest gold miners with a solid balance sheet, a good pipeline of new mining projects, and more production coming online next year, trading at a Price-to-Earnings ratio of 11.5 today — down over 10% today alone?

What on Earth is going on here?

Well, the COMEX (Commodity Exchange) is the marketplace where futures contracts for gold and silver, and what is traded are paper claims to the metal. Very little actual metal is delivered in all of this paper trading of gold and silver on the COMEX exchange.

In days of old, a large portion of the paper claims to gold and silver were ultimately backed by “forward selling” based upon mining operations. In other words, there were paper claims floating around to gold and silver that were backed by nothing more than the promise of a mining operation to deliver it at some point in the future. That makes some sense, but given that some mining operations were selling up to 10 years in the future, it’s not hard to see how this could be used to create the illusion of an abundance of gold when the actual precious metals themselves are quite rare.

Consider the recently settled lawsuit brought against Morgan Stanley.

Morgan Stanley was charging clients a service to store physical silver in their vault for them. The problem was, there was no actual silver ever stored. Eventually, the clients caught on and sued them for fraud.

Their defense? That it was merely carrying out “industry standard” practice.

Since the paper claims to gold and silver are for precious metals that are supposed to be stored in bank vaults, Morgan Stanley has since let us know that it’s the banking industry’s “standard practice” to claim they have gold and silver that they actually don’t. Is it such a far fetched idea that the COMEX paper market has attempted to “create” gold out of paper by inflating more physical claims to paper than actually exist? If the COMEX spot prices for gold and silver are truly representative of the actual demands for the physical metal, then why can’t the US Mint buy the gold it needs to fill its orders? Instead, since bullion dealers have stopped taking orders, Ebay has become the main exchange for gold and silver coins — which are trading at far higher prices the COMEX says it should.

This situation represents a vast fraud perpetrated against global investors seeking to protect their wealth against inflation. The Morgan Stanley lawsuit in particular shows how callously “industry standard” practice treats its clients. The fiat money game is all about how the banking industry can pervert the free market system and siphon off wealth to themselves. Apparently, out and out fraud is not against their interpretation of the rules, and that just goes to show you, as far as they’re concerned, this is war — a war they certainly fight aggressively.

Dr. James Conrad wrote regarding this issue:

“At any rate, you initially issue a lot of claims to fake metal, and so many futures contracts are written, in a very short time period, that they flood the market on exchanges like COMEX and the London Metals Exchange, where almost all the transactions are on paper, and real metal rarely changes hands.  Meanwhile, if you are the big bullion bank, you know what you are doing.  You issue just enough subsidized precious metal paper to automatically trigger stop-loss orders.  The price starts going down as the sell orders are filled.  That triggers yet more stop-loss orders, and the process becomes one of dominos, falling one after another, until the price collapses.  If the operation is successful, and the collapse is big enough, market confidence is destroyed, on a wide scale.”

I believe that we are clearly witnessing yet another attempt to destroy confidence in gold and silver as a hedge against inflation.

Further evidence for this: as discussed in the video of the Gold Antitrust’s Gold Rush 21: A Historic Gold Conference Exposing the Manipulation of the Gold Market, the gold market has declined at many times of high political tension, such as when Iraq invaded Kuwait.

Why would the price of gold decline when you would expect people to increasingly demand it except that the banks of the world flood the market with false paper claims in order to drive the price down to discourage people from looking at precious metals as a safe haven at all? The financial market is falling apart and the price of gold fell 5% today. Yet, there’s not enough physical gold to go around?

Beware, dear reader. Something is very rotten in the state of Denmark.