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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
November 12, 2008
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Governments around the world are all madly pumping new money (which they all borrow) into their financial systems. What they are in fact doing is trying to pump new money into circulation against the deflationary tide rolling over the world. But all credit contractions turn into literal deflations when enough people decide to repay part of their debts. Once they have done so, there is less CREDIT "money" in circulation than before. That is what deleveraging is all about. This lower "stock of money" leaves some prices too high to clear the markets. When these prices break, they often fall below the value of the loans leaning against the economic goods. That is when lenders start taking losses on their books. Enough losses by lenders and they start to go broke, and then whole financial systems start to be torn apart. This is the second stage of deflation - and we are there now.

What governments around the world are trying to do now is to REFLATE their credit system with deficits. The third stage of deflation arrives when governments default on their own unpayable debts.

The US IS Pumping Ever Harder:

The US Treasury said on November 3 that fourth quarter borrowing needs will probably grow to $US 550 Billion from an earlier estimate of $US 142 Billion. Annualise that quarterly figure! The Treasury's present rate of sales of notes and bonds would raise less than one-fifth of the $US 1.95 TRILLION the US government may need to borrow in fiscal 2009. The Treasury has also sold $US 755 Billion in bills this year outside of its regularly scheduled sales to support bank lending programs. This is madness…..

The terrible twins - the US Fed and the Treasury - are clearly out of control. Fighting against a problem that they barely understand, a credit contraction which has veered out of control and which has now turned into an involuntary deflation - both the Fed and the Treasury have returned with full force to apply the old tried and true Keynesian snake oil economic medicine. The Fed has retreated to ultra low official interest rates in the hope that they will enable highly geared and over-leveraged institutions to refinance themselves and lower the burdens of their debts. The hope is that these institutions won't go broke - yet - and default on their debts, tearing further holes in the balance sheets of other lenders. The Fed is also doing this in the hope that the present credit deflation can be halted and then turned around so that a "standard" US credit expansion can be restarted and the US can return to "growth". None of this will happen because the US monetary and financial system is already well into a second stage deflation. In a second stage deflation, it is always the lenders who go broke.

Contrary to the Fed's expectations, if they continue in their present course of action, the rest of the world will inevitably lose its final confidence in the US Dollar's international value. The rest of the world will cease buying US Dollars and seek to open avenues to avoid using the US Dollar in international trade. The next short step is the avoidance of the US Dollar as the official reserve currency.

In sum, the Fed's current policies risk the US Dollar's global standing as a reserve and trade currency.

The US Treasury is running on a parallel track. There are many forecasts that its borrowing needs next year will exceed $US 2 TRILLION. That will require yet another increase (or increases) in the official US debt ceiling. The climbing global risk is that the rest of the world will not only cease funding these ever ongoing US budget deficits, but that they will actually start selling off US Treasury paper.

In sum, the US Treasury's current policies threaten their own global credit standing. If that was to fall much further, the Treasury could be faced with an international call for debt


This Much Is Certain - It Can't Go Much Further:

The process of the Fed creating new credit money at parabolic rates of increase and the US Treasury creating new debts through its budget deficits at equal, if not greater speed is not sustainable. It is a truism, a first principle in the markets, that whenever something rises in a parabolic fashion, the end is nigh and an enormous and violent opposite turn is on the horizon. Both the Fed with its US Dollar and the Treasury with its debts are today in that position. Strategically, that is classically a situation in which one should be entirely out of US Dollars and entirely out of US Treasury paper.

As individuals, there is not much that any of us can do to alter this truly global situation which is so much bigger than any of us. What each of us CAN do is to take good care of our own individual situation. In deflationary times, that means to be OUT of debt. Carrying personal debt in a credit contraction is hard. Carrying debts into a credit deflation can be and usually is economically deadly. Before all else, minimise or eliminate debt. After that, hold cash (yes, actual CASH) enough for 2 to 3 months of normal expenditure. And there is REAL cash - Gold - in bullion coin form. Yes, it is currently very hard to find. But for peace of mind, a holding of 20-30 percent of financial (liquid) wealth in Gold is vital.

Future REVOLUTIONARY Global Changes:

There is a fork in the road straight ahead for the world. A turn will be made either to the left or to the right on this road. To go straight ahead as before will no longer be possible. The old monetary and economic path since 1944 was directed by the US Dollar at the centre of the western world's monetary system. That was quickly spread to the whole world with every monetary system anchored to the US Dollar as the "reserve". That path has run its course. It is no longer viable. The US has become economically addicted to placing its official debts on the balance sheets of the other central banks and its corporate debts inside other nations' financial systems. All of them are, strangely enough, called "investments". The rest of the world holds about $US 12 TRILLION "worth" of these "investments".

In return for these investments, the US federal government had its budget deficits funded by strangers from afar. After that, it offered these same strangers from afar US Treasury debt paper which earned them interest. Then, the US Treasury spent this money which the strangers had returned back into circulation inside the US, after which many of these US Dollars flowed back offshore.

Decades Of Painless US Foreign Debts:

For the US, debt issuance was painless. Instead of servicing the debts owed to foreigners with duly voted taxes, the Treasury borrowed the service payments and added them to the debts already there. This is why Americans have never economically noticed the real burden of their climbing external debts. They were never presented with the interest payments due on their federal tax bills. People in many foreign nations have many times tried exactly this economic route when their own foreign debts had climbed too high and the burdens of making interest payments on them overwhelmed their economies. The IMF was called in, the government's budget was slashed and taxes were raised. A surplus was created and then used to repay foreign official debts. Local interest rates were raised to stop credit expansion in its tracks and deflate the economy. As the IMF induced monetary and credit deflation took hold, internal prices (including wages) fell. That lowered the nation's export prices so its imports contracted and its exports increased, swinging it into a trade surplus. The trade surplus was used to repay its foreign commercial debts. The fundamental difference in these two basic economic cases is that any foreign nation had to earn US Dollars so that they could repay their external debts. The US never had to do that, its debts were denominated in the currency it owned – the RESERVE currency - the US Dollar.

Ó 2008 – The Privateer

(reproduced with permission)


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