‘Death of American Capitalism:’ The 10 final scenes

By Paul B. Farrell, MarketWatch

ARROYO GRANDE, Calif. (MarketWatch) — Good news, Americans are “downbeat about today. Upbeat about tomorrow,” says the latest USA Today/Gallup Poll. “Americans feel battered by hard times, record home foreclosures, stubbornly high unemployment rates and war.”

And yes, we are “fed up with Washington and convinced more than 3 to 1 that the nation is heading in the wrong direction,” yet there’s “confidence that there will be better times ahead, that the classic American dream endures and hasn’t been extinguished. It’s not even at its low ebb.” Why? Because we’re in denial!
Bull market for bonds is ending

Bond investors enjoyed stellar gains for several years but that’s about to end, says Kurt Brouwer, chairman of Brouwer & Janachowski and editor of MarketWatch’s Fundmastery blog. He talks with Money & Investing Editor Jonathan Burton.

Do Main Street’s 95 million investors know something Warren Buffett’s long-time partner, Charlie Munger, doesn’t know? Munger is warning us “It’s Over” for America. Yes, “o-v-e-r,” America’s in decline, at the end-of-days, coming to “financial ruin,” says Munger.

Optimism has always been the enduring spirit that made us a great nation, brought us back from overwhelming challenges and impossible odds — WW II, the Civil War, the 1776 Revolution. Yes, that spirit still burns in our soul, says the poll.

But we also know, as we said earlier in “The Death of the Soul of Capitalism,” that over the long-term, through many centuries, historians give nations an average of about 200 years before they burn out. Why? Because the “blind optimism” that makes a nation great in the early years of its rise to power and glory becomes, paradoxically, its worst enemy in the end-days.

Their arrogance traps them in a self-sabotaging cycle that weakens their resolve, makes them vulnerable to new, unpredictable challenges, ultimately destroying them from within. That happens over and over throughout history, even as their optimistic brains tell them they’re still the greatest.

So for a moment, please set aside your “optimism,” listen to our translation of Munger’s drama as a 10-scene crime-thriller about America on the “road to ruin.”
Plot notes: Warning, America is on a ‘road to financial ruin’

Turns out that like Buffett, whose tales we detailed earlier, Munger’s a good storyteller. His parable, “Basically It’s Over: A parable about how one nation came to financial ruin,” appeared in Slate magazine. Clearly he’s warning about the end of capitalism, the end of democracy, the coming end of America.

In his parable Munger calls America “Basicland … rich in all nature’s bounty.” In our recasting it as a drama, we’ll use “America” rather than “Basicland” in the narrative to drive home the full impact of Munger’s powerful message.
Scene 1: Power and wealth create false sense of invincibility

Significantly, Munger says 2012 is the turning point, a signal, the moment setting up the final crisis scene. We’ve often made a similar timing prediction, one tied to the 2012 election, and a reminder of the warning made by Jared Diamond in “Collapse: How Societies Choose to Fail or Succeed.” In the late stages of a nation’s cycle: A crisis hits. Everyone, leaders and citizens, act surprised. But it’s too late: “Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.” Just 20 short years to ruin?

Munger warns: “Even a country as cautious, sound, and generous as America could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of America had created a peculiar outcome: As their affluence and leisure time grew, America’s citizens more and more whiled away their time in the excitement of casino gambling.” Yes, Main Street “feels battered” while Wall Street gambling casinos generate billions.
Scene 2: Greed consumes America: Gambling replaces real work

In Munger’s brilliant parable “the winnings of the casinos eventually amounted to 25% of America’s GDP, while 22% of all employee earnings in America were paid to persons employed by the casinos” and “many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called financial derivatives.” Yes, the same derivative bets Buffett targeted when he warned against “financial weapons of mass destruction.”

Scene 3: Wall Street’s casinos prosper as Main Street suffers

Munger’s also not talking about just the million or so gamblers working in Wall Street’s “too political to fail” casino-banks. No, “gamblers” are also among Main Street America’s 95 million average investors, though most of the high rollers are the slick pros on casino payrolls where “most casino revenue now came from bets on security prices under a system used in the 1920s.” Think of Goldman’s trading operation that often makes $100 million profits daily, while America has close to 20% underemployed.
Scene 4: America’s side-bet debt to foreign casinos skyrockets

Now comes the crucial turning point in Munger’s crime-thriller: “Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts … They feared big trouble if the gambling-addicted citizens of America were suddenly faced with hardship.” They were right.
Scene 5: Nations in denial rarely prepare for disasters in advance

“Then came the twin shocks,” a plot twist borrowed from “Avatar,” “Wall-E” and Al Gore, the kind of shocks that most “optimists” (especially those hell-bent on voting Obama and the liberals out of office by 2012) always deny. So, “hydrocarbon prices rose to new highs.” Munger must mean a twist like oil hitting a scene-stealing $1,000 a barrel.
Scene 6: In the later stages, get-rich-quick beats real work

America seeks the advice of the “Good Father,” a tall ex-Fed chairman who suggests “America change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees — and former casino patrons — to produce and sell items that foreigners were willing to buy.” Never happen: Not as long as Wall Street’s gamblers can make more in a year trading derivatives than most Americans make in a lifetime. Why “work?”
Scene 7: Wall Street CEOs, economists, lobbyists love gambling

Sounds great, many approved, “but others, including many of America’s prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market — even wild growth in casino gambling — is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when America would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.”
Scene 8: Wall Street gamblers love Reaganomics, hate change

Though Munger and his partner got rich in this bizarre parable, his plot turns dark as America’s “investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father.” Wall Street “came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve” by leaving today’s free market gambling casino operations untouched, so it could quickly return to pre-2008 “greed is very good” reality.
Scene 9: Main Street investors join Wall Street’s ‘Happy Conspiracy’

The endgame now unfolds rapidly. Munger warns that America’s investors, workers and citizens have become so jaded they merge with Wall Street’s self-sabotaging conspiracy: “Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district.” They “saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.”
Scene 10: Politicians love Wall Street’s derivative casino: Game over!

The 86-year-old Munger is himself a metaphor for America’s version of the classic historical cycle: He was an optimist as he and Warren built their $267 billion company over four decades. But sadly, his parable, his vision of America’s future, has no optimistic finale. Rather it’s reminiscent of Diamond’s “Collapse,” Bogle’s “Battle for the Soul of Capitalism,” and so many other recent reminders about how America just went over a cliff and how Wall Street’s casino-banks will soon drive us off a bigger cliff into the Great Depression II by 2012.

Munger’s parable is more than a Hollywood suspense-thriller, it’s another example of the classic historical life-cycle of a nation.

In the final scenes “politicians ignored the Good Father one more time,” the casino-banks returned to gambling in derivative “securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country’s credit was reduced to tatters. America is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.”
Epilogue: Your moral dilemma: a no-win scenario or historical destiny?

Do we really have a choice? Ask yourself, what’s ahead after 2012? Can you see beyond a destructive campaign: Obama at war with Palin and the “Tea Party of No?” What are the long-term prospects of our “civilization.” Do you share Munger’s dark vision?

Or does the USA Today/Gallup Poll tell you guys like Munger, Buffett and Volker do “lack any understanding of important and eternal causes of human progress that the bankers are trying to serve” with their gambling casinos. “Optimists” in those polls are just politicians, bankers and citizens like you, in denial, can’t hear the warnings. So we get no changes, no action, no preparations because at this stage in the long-term historical cycle, optimism has turned into our worse enemy, wishful-thinking.

Solution? Get into action, let’s launch the “Second American Revolution.” Got any constructive, optimistic strategies? Share them. Add your comments.

Happiness in Slavery – REVOLT OF THE PLEBS

By Keith Johnson

Don’t open your eyes
You won’t like what you see
The blind have been blessed with security
Don’t open your eyes
Take it from me
I have found you can find
Happiness in slavery
Nine Inch Nails-Happiness in Slavery

Think you’re free? Think again, slave!

This week the Federal government will attempt to auction off 118 billion dollars in U.S. debt to anyone who thinks the U.S. dollar is a great place to be.   Of course if you ask liars like Fed Chief Ben Bernanke or his young sidekick “tiny” Tim Geithner, they will most certainly assure you that the dollar is strong and that the U.S economy is on a miraculous rebound. But this is fiction.

Lets do our own risk assessment, shall we?   After all, barring any foreign investors stupid enough to take the bait, it’s going to be you and I… and several generations of our descendants left holding the check as the fat gluttons on Wall Street lick their plates before dashing out of the restaurant.   But I warn you; what you are about to read is nothing short of horrifying and should convince you – once and for all – that we are in the final stages of a freefall spiral into outright despotism.

Stewart Dougherty is a specialist in inferential analysis, the practice of identifying historic and contemporary patterns and then extrapolating their likely effects upon the future.   In his recent piece, “America’s Impending Master Class Dictatorship”, Mr. Dougherty crunches some numbers for us and finds:

“According to the Federal Reserve’s most recent report on wealth, America’s private net worth was $53.4 trillion as of September, 2009.   But at the same time, America’s debt and unfunded liabilities totaled at least $120,000,000,000,000.00 ($120 trillion), or 225% of the citizens’ net worth.   Even if the government expropriated every dollar of private wealth in the nation, it would still have a deficit of $66,600,000,000,000.00 ($66.6 trillion), equal to $214,286.00 for every man, woman and child in America and roughly 500% of GDP.   If the government does not directly seize the nation’s private wealth, then it will require $389,610 from each and every citizen to balance the country’s books.”

Sorry, but I don’t have that kind of scratch!   Few of us do!   And though we should feel no obligation to pay this debt, we still must bear some of the responsibility for allowing it to happen. Somewhere along the way our ancestors dropped the ball.   Our fathers failed to heed the warnings of great men.   They allowed their words to echo down the memory hole into oblivion only to be replaced with the words of actors, sportscasters and anchormen. They allowed great texts and historical documents in our schools to be substituted with training manuals and rulebooks for the enslaved.   Their apathy has delivered us into dependence, and from there we are entering back into the final stage of a never-ending fatal sequence: bondage.

Democracy may well be the worst of all forms of government.   We are often told of the virtues of democracy and taught that it was under its principles that this nation was founded. But that is not true.   We were born a Republic; a representative form of government designed to protect the rights of the individual. However, from the day of our nation’s founding, insidious forces within and from without have incrementally caused our government to deteriorate into a democracy.   Where once the center of power was concentrated in our elected representatives in the House and senate, that power has now been usurped by the Executive Branch.   The vast majorities of Americans have considered their vote for the presidency as the single most important elected office, and as a result, have rendered their sovereignty to that single entity.

The office of the President has become a seat of power.   Through signing statements and a self appointed “executive privilege”, the President has become a ruler rather than a servant of the people who acts upon the direction of Congress.

Though the author of the following passage is unknown, it has been quoted as part of a speech given in 1943 by American Industrialist H.W. Prentis though much of what he said has been attributed to late 18th Century writer Andrew Fraser Tytler.   Regardless of who or when it was said, it certainly seems prophetic now in relation to the situation we currently find ourselves in…

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government.   A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury.   From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.   The average age of the world’s greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:

· From bondage to spiritual faith;
· From spiritual faith to great courage;
· From courage to liberty;
· From liberty to abundance;
· From abundance to complacency;
· From complacency to apathy;
· From apathy to dependence;
· From dependence back into bondage.”

That last part, that has come to be known as the “Tytler Cycle”, could be used to chronicle our nation’s rise and fall from the day our ancestors fled the tyranny of King George (from bondage to spiritual faith), the American Revolution (from spiritual faith to great courage), the Declaration of Independence (from courage to liberty), the Industrial Revolution (from liberty to abundance), the signing of the Federal Reserve Act (from abundance to complacency), the Great Depression (from complacency to apathy), the entry into the United Nations (from apathy to dependence) and everything that has happened since: the endless wars, socialism/facism, the CIA, etc., etc., etc. … (from dependence back into BONDAGE!)

Should we accept our fate?  Surely we can adapt.  A frightening number of men and women whom have received long-term confinement in our nation’s prison system succumb to a thing known as “institutionalized syndrome” characterized by a loss of independence and self-confidence, erosion of desire and skills for social interaction and fear of authority.  Upon the prospect of release many prefer to stay in that nightmarish environment rather than face the world alone due to excessive reliance on these institutions to provide food, clothing and shelter.  Could this be where we are headed?

And what of our destiny?  Will we go the way of North Korea, a communist regime that controls it’s population through hunger and fear?   One only needs to read accounts of daily life in it’s largest city, Pyongyang to conclude that this is precisely what our masters have in store for us.   Imagine living in tiny living quarters within towering, drab apartment complexes that siphon intermittent supplies of water and electricity while reliably feeding government propaganda through living room speakers that can never be fully turned down.   A place where no citizen is allowed to drive or even own a bicycle.   A place where rations of food are so miniscual that hunger and starvation are commonplace.

And though I suspect that none of us will live long enough to be forced to live under such harsh conditions, is it acceptable to use that as an excuse to leave that fate to our children?  Perhaps for some of you it is.  Perhaps the work that lies ahead of us is an insurmountable task.  Perhaps the victories of our enemy have caused you to become complacent, even apathetic in your own personal “Tytler Cycle”? If so, then I wish you well.   Hopefully you will find comfort in the distractions provided to you by our social engineers.   And although you may find your liberty in short supply, be comforted in the fact that there will always be an abundance of drugs, sports, music and all manner of entertainment to keep your buzz going through these tumultuous times.

If you accept this conclusion then I offer, in parting, these words from Samuel Adams:

“If you love wealth more than liberty, the tranquility of servitude better than the animating contest of freedom, depart from us in peace. We ask not your counsel nor your arms.   Crouch down and lick the hand that feeds you.   May your chains rest lightly upon you and may posterity forget that you were our countrymen.”

In other words, may you find “Happiness in Slavery”.

Full Article

Former Bank of America CEO Ken Lewis Charged with Fraud; It’s Only a Start

Written by: Michael Shedlock

On April 24, I wrote Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.

You will be pleased to read Ex-BofA chief Lewis charged with fraud.

New York Attorney General Andrew Cuomo said Thursday it was bringing civil charges against senior Bank of America (BAC) executives, including former company CEO Ken Lewis, for their role in the company’s controversial purchase of Merrill Lynch.

Cuomo’s office, which has been aggressively pursuing an investigation into the merger and subsequent bonuses paid to former Merrill employees, said it was charging Lewis and Bank of America’s former chief financial officer Joe Price with fraud.

The lawsuit contends that the bank’s management team understated the losses at Merrill in order to get shareholders to approve the deal, then subsequently overstated the firm’s willingness to terminate the merger to regulators weeks later in order to get $20 billion of additional aid from the federal government.

Full Article

Is The U.S. Economy Being Tanked By Mistake or By Intent? by Bill Sardi

Is The U.S. Economy Being Tanked By Mistake or By Intent?

by Bill Sardi

Recently by Bill Sardi: Who Is Left Holding the Bag on US Debt?

The government wants Americans to believe the greatest economic collapse in history was the result of ineptness and mistakes yet still have confidence in their financial institutions.

Should American bankers be let off the hook because they self-declare, before an investigational panel, that the failure of their newly invented risk swaps and other highly leveraged investment schemes was simply due to “mistakes”? Not malfeasance – just every-day mistakes? Bankers just fell asleep at the helm at a critical juncture in American history. Is that what we are being led to believe?

Oh well, it’s just 18 million American homes that now lay empty in the wake of unprecedented foreclosures, and the bankers have collected obscene bonuses for reckless lending of their depositors’ money. It’s like the captain and crew of a ship saying, not to worry, twenty-percent of the passengers were lost overboard, but this was due to unavoidable mistakes, and then being rewarded with bonuses when they reach port.

FULL ARTICLE

YAHOO: Preparing for the Worst

by Robert Kiyosak

Posted on Monday, August 24, 2009, 12:00AM

“Is the crisis over?” is a question I am often asked. “Is the economy coming back?”
My reply is, “I don’t think so. I would prepare for the worst.”

Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.

The stock market has been going up since March 9, 2009. Talk of “green shoots” fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:

1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.

Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking… and I don’t blame them. A global panic would be ugly and dangerous.

2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.

Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.

In the 1980s, our government’s hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.

While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, “Sometimes the cure is worse than the disease.” I say the government stimulus cure is killing us frogs.

3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.

The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.

4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.

5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they’re concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.

The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.

The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker’s money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares ¬– and pay their pound of flesh.

Demographics show that we are entering a battle between young and old. I call it the “Age War.” The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.

This war is not coming…it is upon us now. This is one of many reasons why I remain cautious and say, “The worst is yet to come.”

REUTERS: U.S. banks to make $38 billion from overdraft fees: report

(Reuters) – Banks in the United States are poised to make $38.5 billion in customer overdraft fees this year, the Financial Times said, citing research by Moebs Services.

A large portion of the revenue is likely to come from the most financially stretched consumers, according to the paper.

It said the research showed that many banks have increased charges on overdrafts and credit cards in order to boost profits.

The median bank overdraft fee rose this year by one dollar to $26, the paper said, citing the Moebs data.

“Banks are returning to a fee-driven model and overdraft fees are the mother lode,” Mike Moebs, the company’s founder was quoted by the paper as saying.

Overdraft fees accounted for more than 75 percent of service fees charged on customer deposits, the paper cited Moebs as saying.

Last year the U.S. Federal Reserve approved credit card rules to curb “unfair” practices such as surprise fees and interest rate hikes, and new mortgage lending rules are expected this summer. It is also mulling rules to give bank customers the chance to opt out of overdraft schemes that can involve fees.

(Reporting by Ajay Kamalakaran in Bangalore; Editing by Greg Mahlich

Letter Re: Wealth Destruction–Real Wealth or Just On-Paper Wealth?

Conversation Thread taken from my favorite site Survivalblog.com (Author of blog is JWR)

Sir:
I followed the link in Thursday’s blog to this I followed this news story: 45 percent of world’s wealth destroyed: Blackstone CEO. It stated: “Between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half.” I don’t see how Schwarzman can be right about that. The factories are still there. the farms are still there. The houses are still there. And there are still warehouses full of everything from Machinery and bar stock to Sponge Bob Squarepants toys.So what has been destroyed are just “on paper” profits, not any real wealth. Please correct me if I’m wrong, but what is to stop us from just revaluating things, and getting along with life? Thanks, – F.T.G

JWR Replies: You are mostly right, but partly wrong. You are correct that there has been very little real tangible wealth that has been destroyed, other than inventory that might be discarded for lack of a market, some half-finished commercial and residential building projects that will eventually get bulldozed, and some perishables that have been delayed in transit and that went to waste. You are also correct that most of what still exists tangibly has genuine value. But consider that an under-utilized factory produces fewer goods than a fully-utilized factory. (OBTW, on that note, we can thank President Obama for at least keeping America’s gun, ammunition, and magazine factories working at a fever pitch.)

So let’s step back and look at the big picture…

What has been destroyed:

1.) Asset Values:
This goes without saying. Reader FTG is correct that facilities and capital equipment are physically intact, but their values have been greatly reduced. I expect to see this process continue for several more years.

2.) Wages and Buying Power:
By cutting out overtime, reducing shifts, idling assembly lines, canceling re-stocking orders, reducing pensions, scaling-back benefits, and laying off employees, there has been a great contraction in wage-earning income and hence buying power–even to the point where people are having trouble making their mortgage payments. This leads to a chain collision of missed house payments, foreclosures, and evictions. Worse yet, it means even more houses will be dumped onto a market that is already flooded with “excess inventory.”

3.) Credit, and the Perception of Credit-Worthiness:
As I’ve described before, the economy is presently in a phase characterized by revaluation–as the various market sectors probe for new market prices.(Economists call this “Price Discovery.”) Simultaneously, lenders are are positively petrified to lend to their heretofore “credit worthy” clients. There has been so much debt re-packaging that has gone on, that it is now very difficult to reliably assess any accurate values of assets and to evaluate loan risk

4.) Consumer Confidence
Much of the consumerism that built up in the US for the past 30 years was a Spendthrift mentality, created by the bygone oceans of “Easy Credit”. Both that credit and the resultant spending are now gone. And I do mean gone. In previous recessions, there had been brief declines in consumerism, but I can foresee that this one one will be different. This will be more like the 1930s, where the nation developed an entire generation of penny-pinchers. Don’t get me wrong–I consider this a good thing! Saving is admirable. Overspending is foolish. But from the standpoint of economic recovery, this could delay recovery by several year, since a large portion of the economy had built up around the concept of women with 25 pairs of shoes, and men with three sets of golf clubs

5.) For Many, the Hope of Retirement at Age 65:
Millions of American that were nearing retirement have lost any hope of retiring. Aside for the holdings of a few crazy “gold bugs” (like SurvivalBlog readers), their IRAs and 401(k)s have been devastated. There are also some company pension plans that have gone “poof” or that will surely be scaled back considerably. I don’t want to gloat, but those of you that took my advice three years ago and sold their dollar-denominated investments and invested in tangibles have come through the credit market collapse virtually unscathed. Some of you even came out ahead. Meanwhile, those that left their money in stock-heavy 401(k) accounts have been devastated. Losses of 30% to 50% have been the norm. Ouch!

6.) Carefree Mobility:
Before the housing bubble burst, people could easily change jobs, sell their houses (at a profit!) and move from coast to coast without much inconvenience. But to do so now constitutes major trial and tribulation. Up to 40% of people with mortgaged homes now have negative equity–meaning that the remaining principal of their mortgage now exceeds the market value of their house. (This is commonly called being “upside down” in a mortgage.) So now, even for someone that can make their mortgage payments, changing jobs to a new locale beyond commute distance means losing their house and starting over. And if they go with the “jingle mail” method, it means starting over with a ruined credit rating.

7.) The Last Shreds of Job Security:
Following the trend set by Silicon Valley, when the “Dot.Com” bubble burst in 2000, many industries are now getting positively ruthless about cost-cutting. There is now a constant barrage of news of layoffs, reduced benefits, and cutting our perks. Don’t expect “normality” to resume to the corporate workplace in our generation. Any vestiges of “job security” have become a thing of the past.

What Will Likely Continue to Be Destroyed:

1.) Further erosion of asset values.
The price of real estate (both residential and commercial) will likely continue to decline until either A.) The economy starts to recover, or B.) Inflation kicks in. If it is the latter, (which is what I suspect, sooner or later), property prices will start to rise only because general price inflation has grown. But this will be a false recovery in real estate. Real property values will continue to decline, while the currency unit itself is being destroyed. Yes, your house may be worth a several million dollars, but what will a million dollars buy you in such times? The same may happen with stocks. In the presence of inflation, news of a “stock market rally” will be nothing but fiction if the currency. Amidst the “Happy Days are here again” hoopla,real values will still be in the dumpster.

2.) More job losses and further-reduced wage-earning hours

3.) More failed pension programs

4.) The dollar itself as a currency unit. This recent news article was a subtle warning: The Swiss central bank has already fired the first shot in the global currency war. I expect large devaluations–both formal and informal–by many nations in the near future. The bottom line is that the US Dollar is doomed.

What will Remain and Gain:

Tangibles, Tangibles, Tangibles! I’ve been harping on that theme in SurvivalBlog for three years. Again, those of you that took my advice are mostly sitting pretty. Silver and gold have doubled, as have ammunition and many full capacity magazines. Productive farm and ranch land has held most of its value, while at the same time suburban real estate has plummeted. If you have not yet transitioned out of dollar-denominated investments, then do so immediately. (The current stock rally is nothing but a sucker rally in the larger context of secular bear stock market So this is a good opportunity to bail out.)

The present-day wave of deflation will likely be followed by a period of sharp inflation. At some point, all those trillions of “magically created out of thin air” dollars that will needed for the Mother of All Bailouts (MOAB) will inevitably catch up with the Dollar. My closing warning: Be ready for some serious consumer price inflation, most likely starting in 2010.

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Goldman Sachs – THE WORLD’S BIGGEST PONZI SCHEME

Taken from a comment by “Calltoaccount”, which was taken from Institutional Risk Analytics, blogged by http://www.cjr.org

Res Ipsa Loquitor: Here’s the real story that’s been conveniently swept under the rug.

From Reuters: QUESTION: Did Goldman do any due diligence on AIG before buying credit default swaps (CDS) from it?

ANSWER: “We do extensive due diligence on all our counterparties.” –  posted 4/2/09 by Karl Denninger

(Credit Barry Ritholtz and Institutional Risk Analytics, the original source)

WHOAH!

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

Read that folks.

Then read it again.

Then read it AGAIN.

More excerpts:

There are two basic problems with side letters. First, they are a criminal act, a fraud that usually carries the full weight of an “A” felony in many jurisdictions. Second, once the side letter is discovered by a persistent auditor or regulator examining the buyer of protection, the transaction becomes worthless. You paid $6 million to AIG to shift risk via the reinsurance, but the side letter makes clear that the transaction is a fraud and you lose any benefit that the apparent risk shifting might have provided.

And finally, the last nail in the coffin:

The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams – with no correlation between “fees” paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations.

Thank you Timmy, thank you Ben Bernanke, thank you Henry Paulson, thank you George Bush and thank you President Obama.

If this is true every one of you needs to go to prison.

After those of you still in your positions are impeached.

Again, for the simple who need it in one sentence:

AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

Distilled to one sentence: The bailout of AIG is equivalent to the US Taxpayer bailing out Madoff’s admitted (and now convicted) Ponzi Scheme.

PS: This isn’t MY analysis, this is the analysis of Institutional Risk Analytics. If you don’t understand who they are, you should – they’re one of the most-respected groups out there when it comes to banking system analysis. If they’re willing to print something this damning….

Posted by Calltoaccount on Sat 18 Jul 2009 at 09:40 AM

H.R. 1207>>AUDIT WILL EXPOSE FED

By Christopher J. Petherick

During a hearing on Capitol Hill in early July, a top official at the Federal Reserve warned Congress to stay out of the bankers’ business and not force the privately owned and operated central bank to submit to a public audit.

On July 9 The Financial Times reported on Texas Republican Rep. Ron Paul’s landmark “Audit the Fed” legislation (H.R. 1207), which would remove any remaining proscriptions on federal authorities investigating the Federal Reserve Bank, which serves not only as the U.S. central bank but is increasingly acting as the top banker to the world. So far Paul’s bill has picked up 261 co-sponsors, well over half the membership in the House.

Since the collapse of economies around the world in the summer of 2008—brought about by Wall Street greed—the Fed, through its various funding arms, has had the printing presses running day and night, churning out dollars. The Fed publicly claims that its balance sheet stands at just under $2 trillion, largely composed of loans to private banks, mortgage holdings and Treasury bills (U.S. taxpayer debt). But some honest economists believe the Fed is not telling the whole truth about its assets and liabilities, fudging the facts to keep U.S. taxpayers in the dark about the state of the central bank. But the truth is few know just how much money is even in circulation today.

Full Article

Remind all your elected servants that ….

they are bound by the Government Code of Ethics….

Code of Ethics for Government Service

House Document 103, 86th Congress, 1st Session – Passed by the Congress of the United States on July 11, 1958.

ANY PERSON IN GOVERNMENT SERVICE SHOULD:

I. Put loyalty to the highest moral principles above loyalty to persons, party, or Government department.

II. Uphold the Constitution, laws, and legal regulations of the United States and of all governments therein and never be a party to their evasion.

III. Give a full day’s labor for a full day’s pay; giving to the performance of his duties his earnest effort and best thought.

IV. Seek to find and employ more efficient and economical ways of getting tasks accomplished.

V. Never discriminate unfairly by the dispensing of special favors or privileges to anyone, whether for remuneration or not; and never accept, for himself or his family, favors or benefits under circumstances which might be construed by reasonable persons as influencing the performance of his governmental duties.

VI. Make no private promises of any kind binding upon the duties of office, since the Government employee has no private word which can be binding on public duty.

VII. Engage in no business with the Government, either directly or indirectly, which is inconsistent with the conscientious performance of his governmental duties.

VIII. Never use any information coming to him confidentially in the performance of governmental duties as a means for making private profit.

IX. Expose corruption wherever discovered.

X. Uphold these principles, ever conscious that public office is a public trust.

More on ethics including instructions for display of the above, at the Defense Systems Information Agency (DISA) site at the Department of Defense.