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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Bill Buckler
August 5, 2008
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The global economic recession is here. Worldwide, the story is nearly the same on every continent as nation after nation reels backwards from suffering a "mere" economic slowdown to actually entering a recession.

World Stock Markets Tell The Story:

All of the 23 developed nations in the MSCI World Index except Canada have made bear market plunges of 20 percent or more since September 2007 as credit losses surged and commodity prices stoked price inflation.

Stock markets discount the future prices of the shares of productive companies into the present prices of today's shares. Lower share prices signal (and in many ways give) a picture of what real economies will concretely look like in future as declining earnings are discounted.

The US second quarter now marks the fourth straight quarter of declining earnings for S&P 500 companies. Earnings have decreased 93 percent at US financial firms, 36 percent at companies that depend on discretionary consumer spending and an average 1.2 percent at commodities producers.

The US Future Price Pipeline:

Prices paid by US manufacturers for crude materials rose 70 percent over the three months ended in June. Prices for the intermediate goods made from those materials rose much less, about 27 percent. Prices for finished products made from those goods rose 14 percent, according to the Bureau of Labor Statistics Producer Price Index. US consumer prices will be next.

US companies cannot raise prices much, so they will start layoffs instead.

In The US - Somebody Always Tells You:

In June, the US saw more mass layoffs than it has in any one month since June 2003, the US Department of Labor said. There were 1,643 instances of mass layoffs affecting 165,697 workers in June. The US financial bloodletting since last summer has torn $US 2.6 TRILLION from the value of shares in the Standard & Poor's 500 Index since Oct. 12, 2007 when it reached a record 1561.80.

Some 9.6 million US homeowners now have mortgages which exceed the market value of their homes. This is up from 4.1 million homeowners with negative equity one year ago and 2.7 million two years ago.

The typical price Fannie Mae received for foreclosed homes sold in the first quarter fell to 74 percent of the unpaid mortgage principal from 93 percent in 2005. This signals DEFLATION on a massive scale.

Too Many US Losses To Count - An Example:

Merrill Lynch lost $US 2.2 Billion in the third quarter of 2007. It lost $US 9.8 Billion in the fourth quarter, $US 1.9 Billion in the first quarter of 2008 and another $US 4.65 Billion in the second quarter.

For Fannie And Freddie - This Is The LAW:

Bailout or no bailout, this is the present law for Fannie and Freddie. The two companies must hold 2.5 percent of capital against their $US 1.5 TRILLION of investments and another 0.45 percent against their guarantees of $US 3.6 TRILLION of securities. Do you feel reassured? With prices paid for foreclosed homes already down to 74 percent of the unpaid mortgage principal at the end of the first quarter, Fannie and Freddie's books are certain to be a shambles. When President Bush signs the bailout bill, it will be the American taxpayers' hard earned money which will be poured down this deflationary sink hole.

Standard & Poor's puts the full cost of a tax-funded bail-out of the two now truly "government sponsored enterprises" - Fannie and Freddie - at between $US 420 Billon and $US 1.1 TRILLION. Woe to US taxpayers! Annual American family incomes adjusted for inflation have grown by just 0.8 percent in the just over six and a half years since the end of 2001. Fannie and Freddie's combined losses over the past three quarters - that's nine MONTHS - reached more than $US 11 Billion.

Who Holds This Stuff?:

Asian institutions and investors hold some $US 800 Billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China had $US 376 Billion and Japan $US 228 Billion as of June 2008. Europe holds approximately $US 72 billion in Fannie and Freddie debt. Investors in Britain hold $US 28 Billion. Russian buyers hold $US 75 Billion. There is $US 3.750 TRILLION of this stuff held inside the US financial system. Clearly, it was these US holders who had to be bailed out.

A Lingering Look At The Past Seven Years:

The US savings rate, which exceeded 8 percent of disposable income in 1968, stood at 0.4 percent at the end of the first quarter of this year according to the US Bureau of Economic Analysis. US mortgage debt stood at $US 10.5 TRILLION at the end of 2007, more than double the $US 4.8 TRILLION just seven years earlier. $US 5.7 TRILLION was borrowed and poured into houses in only seven years!

On top of that, Americans carry $US 2.56 TRILLION in consumer debt, up 22 percent since 2000 according to the Federal Reserve Board. The average household's credit card debt is $US 8,565, up almost 15 percent from 2000. Average household debt has swelled to 120 percent of annual income, up from 60 percent in 1984, according to the Federal Reserve. Americans are peons.

In America - Your Deposit Is "Insured" By Law:

Fannie And Freddie hold 2.5 percent of capital against their "investments" and 0.45 percent against their investment "guarantees". The Federal Deposit Insurance Corporation (FDIC) guarantees all American bank deposits up to $US 100,000 and up to $US 250,000 in certain US retirement accounts. The FDIC has $US 52.8 Billion in "reserve" to cover TRILLIONS of US Dollar bank deposits. As of June 2008, the FDIC insured US 8471 banking institutions which had total deposits of $US 8,575 TRILLION.

NOW do you feel reassured? The FDIC's "reserve" is a whopping 0.62 percent. This gargantuan financial mess has rolled through Congress in the form of a "housing bill" now signed by President Bush. Buried somewhere in the 694-page bill is an $US 800 Billion hike in the US Treasury's debt ceiling, raising it to $US 10.615 TRILLION from $US 9.815 TRILLION. The Treasury's debt "limit" has been raised by $US 1.65 TRILLION (or almost 20 percent) in the TEN MONTHS since September 27, 2007.

The Grossly Misnamed US "Treasury":

If names had any relationship to the entity they describe, the US Treasury should be called the US Debtory. The Treasury is the place where what the US federal government owes is on the record. On July 30, President Bush signed the "housing bill" which included an $US 800 Billion increase in the Treasury's debt " ceiling" to $US 10.615 TRILLION! Let the borrowing and spending roll on.

Once the Senate passed the bill on July 27, the White House sprang into action. On the morning of July 28, the Bush Administration released a revised estimate, putting the new budget deficit at $US 482 Billion for next year. The Bush Administration then had the audacity to blame the sagging US economy and all the "stimulus checks" it sent out earlier in the year for causing the increased deficit!

Piling Debts On Top Of Debts:

The US Treasury - which has just had its credit "limit" raised by $US 1.65 TRILLION in ten months, will now "backstop" Fannie and Freddie, and their $US 5.2 TRILLION of toxic paper. The only way that the Treasury can do this is to borrow even more and then hand all the borrowed money over to the two GSEs! At some point, there is going to be a form of debt revulsion across the rest of the world. When that happens, the Treasury will suddenly find one day that there are few if any foreign buyers for its paper.

The Word From The Top - "Disastrous Consequences":

"The obligations Fannie and Freddie have outstanding, something in the order of $US 5 TRILLION, are so large that there would be a worldwide financial catastrophe should they default. The financial system would seize up." So said former St. Louis Fed President William Poole in a recent interview.

The Wall Street Journal's Own Nightmare:

The Wall Street Journal (WSJ) posted a doomsday scenario should Treasury Secretary Paulson's plan fail:

"Falling house prices and nonpaying homeowners cause the value of the TRILLIONS of US Dollars in outstanding debt held by these government-sponsored enterprises, Fannie and Freddie, to plunge. Many banks have balance sheets stuffed full of this paper. They face huge losses, which some can't survive."

"They and other investors, such as foreign central banks, then dump the GSE paper."

The US Treasury's International Pawn Shop:

As The Privateer goes to press, it is clear that the entire Fannie/Freddie saga is heading toward the doors of the US Treasury. The Congress has finished festooning the Housing Bill with "other items", some of which Mr Bush has been threatening to veto for years. Yet when the 694-page bill arrived on Mr Bush's desk, he lost no time in signing it. He had no choice.

With the bill now law, the REAL crisis begins. The US Treasury is in position as a "captive buyer" of the paper from Fannie and Freddie. If US Treasury baulked even for a moment in front of the necessity to buy this paper, the "value" of the paper would plunge and the WSJ's "nightmare" would become a reality.

There can be scant doubt that right across the world – from central banks to commercial banks to insurance companies and all the rest - there are financial institutions simply itching to sell the Fannie and Freddie paper they currently hold. There was no buyer in sight before. There is now!

That buyer is the US Treasury! And that is why the Treasury could turn into an international pawn shop for Fannie and Freddie's paper. Always remember, the US Treasury can only buy if it borrows first.

A Financial Earthquake From Down Under:

An Australian commercial bank has torpedoed the world's financial system below the waterline. It has had the audacity or the dire necessity to do a massive write-down on its holdings of US Collateralised Debt Obligation (CDO) paper. The National Australia Bank (NAB) has made a debt provision for as much as 90 percent of the value of its portfolio of CDOs, most of which were derived from US mortgages - and all rated AAA! The NAB had already flagged $A 181 million in losses. It increased this by $A 830 million to $A 1.011 Billion. This is a 90 percent write down on AAA rated US paper!

Ó 2008 – The Privateer

(reproduced with permission)


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