DUMB AND DUMBER
The government’s $850 billion bailout plan props up every useless socialist scheme in America, while doing little or nothing for capitalism and free markets. It gives billions to states, like California, in order to extricate them from the financial mess they’ve made. It lets the politicians in Sacramento and elsewhere off the hook for their runaway spending. It subsidizes wasteful green projects, dubious transit schemes and a mish-mash of social engineering. If billions for education ever improved education or if billions for energy actually saved energy or if billions for health care lowered health care costs, it might be of some value. That won’t be the case.
The stimulus package is financed by tax dollars. If the people who pay these taxes were left with this money, they would save and invest in worthwhile projects. Their savings would finance entrepreneurs and new businesses that create products, services and jobs. The necessary ingredient in our economy today is capital formation and production. Instead, we get capital destruction and economic slippage.
Writer and commodity strategist Ty Andros writes from the Austrian School perspective. "Obama’s ‘Economic Stabilization and Recovery’ plan, which is initially estimated at $850 billion (expect it to climb to over $1 trillion) contains nothing that creates permanent jobs. It is the biggest destruction of precious capital and piece of pork ever proposed. It’s a joke and a disaster rolled into one.… This is ‘make work and consumption’ of the worst sort. Once spent, nothing will be left behind to pay for the borrowing except you, me and our children’s future incomes. Not one item will ‘produce more than it consumes’, create wealth, savings and permanent employment from which the borrowing can be repaid…. Of this money that’s to be spent how much will be lost to waste, fraud, abuse and lack of proper oversight? My guess is well over 50%. The tax rebates go to people that don’t pay taxes and is thinly disguised welfare. In fact, most of the stimulus is welfare…"
Government creates unmanageable deficits by spending more than taxes bring in. That creates another set of problems. How will the U.S. finance their mind-boggling deficits? James Quinn writes, "Foreigners have been buyers of 70% of our newly issued debt in the last few years. Does Ben Bernanke really believe that foreigners will be willing to accept 2% interest for 10 years on bonds while we are printing trillions of new dollars?"
If the government can’t sell its debt (borrow the money), it will have to print money and debase the dollar further. Editor James Grant writes about the possibility of inflation. "If the Fed is going to create boatloads of depreciating, non-yielding dollar bills, who will absorb them? Who will finance the Obama administration’s looming titanic fiscal deficits? Who will finance America’s annual surplus of consumption over production (after 25 more or less continuous years, almost a national trait)? Inflation is a kind of governmentally sanctioned white-collar crime. Every crime needs a dupe. Now that the Fed has announced its plan to deceive, where will it find its victims? Today’s policy makers allow, there are risks to ‘creating’ a trillion or so of new currency every few months, but that is tomorrow’s worry.’"
Portfolio manager John Lee adds this comment. "Helicopter Ben and Mr. Obama have promised to take whatever fiscal and monetary action necessary to revive the economy. And those officials don’t mince with their words as witnessed by the Fed’s purchase of $trillions of bad loans and Obama’s massive fiscal stimulus proposals. All this seals the death fate of the U.S. dollar and will likely invoke imminent panic from dollar holders."
My friend of many years, money manager Ken Gerbino, writes, "The biggest loser from this credit and money creation by the U.S. will be the U.S. dollar and 95% of the population who will be devastated by the coming inflation that will surely follow this monetary binge… We are entering an era where it is now politically acceptable to avoid recessions and higher unemployment by doing the exact things that created these economic problems to begin with. We are entering an era where inflation will be prevalent and relentless. It is an era where gold and precious metals will go up dramatically."
Newsletter editor Clive Maund warns, "They have bought time by creating additional money in vast unimaginable quantities and using it as a life support system for numerous major companies and institutions that would otherwise be declared bankrupt, with the result that these failed entities continue to stumble forward as undead zombies whose consuming objective is to sink their fangs into the taxpayer and bleed him white….
What they have succeeded in doing with their bailouts and throwing money around is to balloon the money supply in leaps and bounds and these vast increases in liquidity are working their way through the system to emerge later this year as hyperinflation. These increases also undermine the dollar, of course, and even though other countries are scrambling to debase their currencies as fast as they can to maintain their competitive edge, they can’t hope to keep up with the U.S. or Zimbabwe."
The Smolski Investment Newsletter give this opinion. "Obama will simply continue doing what actually started this problem and that is, print more money (or the new politically correct term, quantitative easing). The only ideal ‘solution’ at this point, is for current government to successfully create another bubble somewhere."
Andy Sutton of Sutton Associates warns about the duration of the crisis. "Consider for a moment the trillions of dollars that have been thrown at just the banking system. These trillions have not fostered one iota of growth. They have barely unlocked the credit markets with regard to banks. The LIBOR Rate charge has more gaps on it than someone in dire need of an orthodontist, and the banking system requires unknown further trillions just to maintain a semblance of financial order…. This will not go away by printing more money. This will not go away by lowering rates, which are already at zero in the U.S. This will not go away by handing out gift cards to consumers to force them to buy stuff…
"The take home message is don’t expect this to end quickly. It will not. The Depression of 2008 and beyond is here, no matter what we choose to call it. Every week over one half million freshly unemployed individuals are filing for unemployment insurance. Sure that insurance helps them to stay in houses and buy necessities. That’s about it though. I would not count on these people running up credit card debt to over-consume. So every week, one half million discretionary spenders are heading to the sidelines. This is a crisis of consumption, brought on by decades of overconsumption, facilitated first by sending a second wage earner to the workforce, and later by the introduction and rampant growth of consumer credit. These excesses were not created overnight, nor will they be purged overnight."
Analyst Boris Sobolev issued this warning. "We agree with those experts’ predictions which state that the financial system needs about $1.5 trillion more to patch up this deflation bubble. But every week, it seems that there are new problems. For 2008, bank losses related to credit cards were $28 billion. In 2009, as more people lose their jobs and run out of savings, the number is expected to grow to $100 billion.
"A bigger problem yet is the coming mortgage rate reset for hundreds of thousands of homeowners. While the Subprime tidal wave is largely over, the majority Alt-A and the Option Adjustables resets are still to come in 2009 through 2011. And the effect on the economy can be just as large if not larger and more painful than the subprime crisis.
"With enormous job losses experienced over the past few months, homeowners are now in a much worse shape to be able to absorb an increase in mortgage interest rates. Many of these same homeowners cannot take advantage of today’s low mortgage rates since the value of their homes is now less than their mortgage. Seemingly, it is a trap with no way out."
Ty Andros makes this prediction on how the year will unfold. "The U.S. and European banking and financial communities are set for IMMOLATION. Bonds are bombs and paper is ultimately poison, short-term treasuries are only a temporary SAFE haven and will crumble under the relentless printing presses and monetization that is the only escape route for the crooked public servants and their elite supporters. HI HO, HI HO… it’s off to the printing presses they go, as the next great depression has begun."
James West agrees. "The entire worth of the United States dollar is predicated on a confidence that is rapidly becoming ethereal. When that confidence transforms thoroughly into panic, the dollar will collapse so fast it will make the Weimar inflationary period look like so many feathers swirling in a gentle breeze."
TIGHTER PHYSICAL SUPPLY
By Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
There are a number of developments that may point to tighter physical supplies of wholesale silver. The amount of silver flowing into the big silver exchange traded fund (SLV) has been impressive since the first of the year. It looks like index funds have rebalanced their portfolios and this has resulted in the holdings of SLV reaching a new record of close to 230 million ounces, up 11 million ounces since the first of the new year.
Additionally, delivery patterns in the usually quiet January futures contract on the COMEX have resulted in much higher deliveries of over 1200 contracts (6 million ounces). This continues a pattern of delivery in the non-traditional months that started with the October contract last year. Over the past 6 weeks or so, there’s also an unusually large transfer of stored silver in COMEX-approved warehouses from the registered to the eligible category, of some 15 million ounces. The most plausible explanation is that the silver is being transferred into the cheaper to maintain eligible category because it is intended to be held (and not redelivered) for a long time. Interestingly, the amount of silver that has been transferred to the eligible category coincides with the amount (3000 contracts) taken by the raptors (the 9+ commercial traders) in the early days of the past big December delivery. I have never seen the raptors take such deliveries before.
In the "heard it through the grapevine" category, a very reliable source told me that the Central Fund of Canada issued new securities in their gold only fund, as opposed to their balanced gold/silver fund, to avoid the hassles of actually getting hard to find silver. Undoubtedly, this was a suggestion from their underwriters. If this is true (as I believe it to be) it accommodates the silver manipulation, by rewarding bad behavior.
Finally, a reader gave me a heads up on a government web site where citizens can comment on a variety of issues. It’s called the Citizen’s Briefing Book and can be accessed here - http://citizensbriefingbook.change.gov/ The comments concerning the silver manipulation are thoughtful and interesting. Type in "commodity futures trading commission" to read, vote and/or register your own comments.