Month: December 2008

Prison Profiteering in the Land of the Free

Ironically, the “Land of the Free” has the highest per capita incarceration rate in the world. Another bizarre consequence of the “small government” Republican reign of the last thirty years has been that they have told people that they are going to provide “law and order” by making stuff illegal and locking people up. So much so that the prison population has grown by 500% in the last thirty years. I consider this another example of the hypocrisy of the Republican Party; if you believe in a strong central government to fight terror abroad and ensure domestic order by locking people up in record numbers at home, then please say so and stop hiding behind the “we’ll get government out of your life” persona. 

As is typical in strong government arrangements that are sometimes called Facism and other times a free market economy with an aggressive state sponsor, private corporations will often form symbiotic relationships with the policy of state. Just as Halliburton is there to profit from our operations in Iraq, the Geogroup is a private corporation that runs prisons. Typically these types of symbiotic relationships are one of the major sources of corruption; corporations profit from government action and so have money to spend to elect people who will continue such actions. In the end, its an excellent opportunity for private corporations and public officials to make money off of the taxpayers. 

If that weren’t so bad, typically the government actions that engender profit are otherwise destructive to human lives: in order for Halliburton to get those juicy no-bid contracts, lots of people had to die. It’s the same with the Geogroup. In order for the Geogroup to make money, people have to be incarcerated. That means that laws have to be passed and people have to be put away.

This kind of government-private sector symbiosis is often mistaken by democrats as an example of the abuse of a free market system. Let me assure you that it is not. Free markets are about people being able to freely chose what they want without the government making the choice for them. The prison system and logistics support for our military operations are the ultimate examples of a forced choice on behalf of the government. A company driven to satisfy the consumer has a vested interest in keeping them happy, but in this case, the ultimate consumer are government politicians. As politicians are driven by campaign donations and stock ownership, the result are organizations that are non-responsive to the groups they are supposed to be serving. This results in tainted water being supplied to marines by Halliburton as described in the DVD documentary Iraq for Sale: The War Profiteers.

In regards to the GEO Group, Paul Wright of the Prison Legal News says that “They gain their contracts through lobbying and cronyism and political favoritism. They make their profits once they have the contracts through short staffing their facilities and underpaying their staff.” Who are two of the largest stock holders in the GEO Group? How about Alberto Gonzalez and Dick Cheney. All of this came to light for me because a regular on the Howard Stern Show, Kenneth Keith Kallenbach (who can be seen here in all his Stern show glory) died in prison custody. This single death caused an examination of the GEO Group by the Howard 100 News team that has found that an abnormally large number of prisoners died in GEO Group custody. 

Attempts to use the legal process to investigate this has been problematic as you can imagine. District Attonry Juan Angel Guerra said that prior grand jury investigations into the GEO Group had been broken up by police. He finally held the grand jury secretly and returned an indictment against Cheney and company, only to have a judge throw out his indictment and admonish the District Attorney. Mr. Guerra’s interest in the GEO Group may have also been the reason he was voted out of office in the most recent election. All in all, results that are not too unusual for corrupt Facist governments. 

Welcome to the Land of the Free.

The Liquidation That Stole Our Christmas

December is traditionally a wonderful time for the stock market. It tends to rally strongly towards the end of the year, for some reason. So, it’s unprecedented that we start the month off with a 7.7% one-day drop in the Dow. This after a stronger than expected “Black Friday” sales season.

What gives?

Don’t ask the media. It’s not of much help. “U.S. stocks slid the most since October, wiping out more than half of last week’s rally, on growing concern the global economic slump is deepening and consumers’ access to credit is shrinking.” Media headlines are excellent examples of how markets make opinions.

I can imagine the reporter being told, “The market’s going down. Quick! Come up with a headline as to why!” One of my favorites is why the COMEX price of gold declined as much as it did today. (That’d be 5.6% for those of you keeping track at home.) Why the gold price would’ve declined, I have some suspicions, but the one thing I do know is that it’s not, as Bloomberg said, due to reduced “commodity use.”

How would I know this?

Easy. Just take a look at the latest Gold Investment Digest release from the World Gold Council. The report states:

Gold demand, in tonnage terms, rebounded strongly in Q3 after several quarters of weakness. Identifiable demand totalled 1,133.4 tonnes, up 170.1 tonnes (18%) on the levels of a year earlier. In US$ value terms, this represented a 51% rise to $31.8 billion, an all-time record high and a 45% leap from the previous record set in Q2. The recovery in demand was triggered by a fall in the gold price, which coincided with sharply escalated levels of economic and financial uncertainty.

After briefly testing levels above US$950/oz early in the quarter, the gold price fell back, briefly touching levels under $750/oz in mid-September. Nevertheless, the average for the quarter, at $872/oz, was 28% higher than Q3 2007’s $680/oz.

The biggest contributor to the increase in total identifiable demand in Q3 was identifiable investment, up 137.5 tonnes (56%) relative to year-earlier levels. Jewellery demand rose 45.5 tonnes or 8%, while industrial and dental demand declined 11%.

So, Bloomberg is incorrect in saying that this crisis has caused any sort of reduced demand, because that’s just not the case. I’ll write more about the conspiracy against gold this week, but it appears that I did not get the COMEX short squeeze for Christmas I was hoping for.

In other news, Ben Bernanke has told us that the Fed might need to buy US Treasuries to aid the economy. That’s code for “print money.” You see, the Fed’s reserves are US Treasuries, and it’s recently swapped those for toxic debt to keep banks from failing.

So, where would they get the money to buy up US Treasuries?

Easy, they print it.

As told most clearly in G. Edward Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve, the Federal Reserve Committee creates the money it uses to purchase US Treasuries. So, the Fed is going to be doing a lot of printing. Not only that, they are going to be doing so in an effort to keep interest rates low.

Let’s see here … Printing lots of money,  low interest rates …

Looks like it’s time to buy gold!

Citigroup Memo Predicts Gold at $2000 in Two Years

The investment community has a cliche atmosphere to it that’s reminiscent of high school. Except, instead of the jocks, nerds, and greasers, you have the bulls, bears, and momentum traders. The cliches tend to all hang out together and parrot each other’s advice. The idea of gold being at $2000 an ounce in a couple of years is not new for those of us in the bear cliche, but what is new is that it was the conclusion of a leaked client memo from Citigroup.

According to the news report:

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist.

“The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.

Wow. I’m not certain if Mr. Fitzpatrick realizes the irony of writing about the damage caused by the financial system while being employed by the one of the largest players in the financial system. Furthermore, Mr. Fitzpatrick seems to have abandoned the Macroeconomic hallmark that is a staple of such firms and instead seems to be writing from the Bear Market playbook. Keynesians would never talk about massive inflation being passed on because of aggressive expansion of the money supply. In fact, Keynesians would be quite happy with all the “money they have pushed into the system” because that would have stimulated lagging demand, according to their ridiculous theory.

This memo is one of the most frank and refreshing pieces of writing I’ve seen come out of a major bank. It paints a bleak and specific picture of our future economic calamity and passed around plenty of blame to both the banks and the politicians. It was as if Mr. Fitzpatrick had just finished reading Henry Hazlitt’s “Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics“and was using it as a guide to deconstruct the lies that the likes of Greenspan, Paulson, and Bernanke have been heaping upon us for years. Not to mention, people typically find jobs at large banks by being bullish on the future, not telling everyone that it’s the end of the world as they know it.

It’s always nice to find like-minded people in unexpected places, so on behalf of the rest of the bear market cliche, I wish to extend a membership invitation to Tom Fitzpatrick: may you make lots of money off of the losses of others.