MIKE

Posts Tagged ‘Deflation’

By Jeff Clark
October 5, 2011
BIG GOLD

It may not feel like it after a 12% correction in the past 30 days, but Mike Maloney – founder of GoldSilver.com – is convinced that we’re in a gold bull market that will be life changing for those who participate. I interviewed him for our current edition of BIG GOLD and am sharing some of what we talked about here. You may be shocked at what you read, because he’s devoted a larger allocation to gold and silver than we have. See why he’s convinced a bubble is ahead for precious metals, how high prices will go, and why he stores some gold overseas.

Jeff Clark: For those who don’t know you, why is Mike Maloney such a big believer in gold and silver?

Mike Maloney: Around 1999, my mother needed help with the estate my father had left her. My sister and I interviewed a dozen financial planners and picked the one that had the most glowing recommendations and gave him control of the assets. He lost about 50% of them in the next year and a half. What I’ve found is most financial planners get it wrong. They’re always chasing yesterday’s news. To be fair, there was a market crash, but with 50% of her assets gone by 2001, I ripped everything away from him, moved it to cash, and started studying the economy like crazy.

I discovered that the people concerned about budget deficits and trade imbalances at that time were in the precious metals sector, the hard money advocates. All the rest of the economists and newsletter writers didn’t really care. Concerns about international trade imbalances and how they were going to come back to bite us one day were coming from the hard money analysts. They also wrote about monetary history, something I just fell in love with. The fact that things just repeat over and over again is amazing.

I have hard data from 1918 to today, and anecdotal evidence before 1918, that shows that throughout history a society has a certain amount of real money – gold and silver. Then they either come out with debased coinage, or paper representations of gold and silver and expand the currency supply, which eventually cause prices to rise. People then realize there was something wrong with the currency and they rush back toward gold and silver to protect their purchasing power… and in doing so, they bid up the value of the gold and silver in the country until it matches the value of the circulating medium.

It appears to me this process has been going on since 407 BC, with the first great inflation in Athens. I have charts in my book, Guide to Investing in Gold and Silver, starting in the year 1918, showing the value of the gold held at the United States Treasury compared to the value of all of the base money or paper currency, and it was a 1:1 ratio.

Jeff: So history shows that the value of gold eventually equals the value of all paper money in circulation?

Mike: Yes. Back then, the US dollar was a claim check on real money – gold. Base money was the number of US Treasury gold notes in circulation. Before World War I, base money equaled the value of the gold held at the US Treasury. Then we established the Federal Reserve and did a bunch of deficit spending for WWI, expanding the currency supply, so now there wasn’t enough gold to cover all the dollars they printed. In 1934 the price of gold was changed to $35 per ounce and the values of base money and gold at the Treasury were once again in equilibrium.

Then we expanded the currency supply to pay for WWII, Korea, and Vietnam, and in the ‘70s the price of gold rose until its value at the Treasury exceeded base money. But, for a short time in 1980, the value of gold at the Treasury not only exceeded the base money, it surpassed base money plus outstanding credit card balances. This is important because credit cards are replacing cash in circulation, so you must include it if you want to estimate a price target.

Jeff: So how high do gold and silver go?

Mike: When I finished the book, it required a $6,000 gold price to cover base money plus outstanding revolving credit. I’m not saying that that’s going to happen, but if history were to repeat, that would be the price.

However, since the book was written, Bernanke created a whole bunch of base money to bail out the banks, and now it takes a $15,000 to $20,000 gold price. One caveat is that $1.6 trillion of excess currency is sitting on banks’ balance sheets. It has yet to enter circulation, and if it never does, then this price target changes. My point is that prices are a moving target. Putting a dollar figure on them is an exercise in stupidity, I think, because the dollar is always changing. You can’t use it as a measuring stick.

My target for gold is that it should be equivalent to 1/40 of a single-family, medium-priced home, or two shares of the Dow. So gold will probably buy you about 12 times more stocks and 3 times more real estate in the future than it does now. So those are my prices.

And silver will leverage you to that. There is more gold on the exchanges and with the dealers that investors can buy than there is silver. Their current prices do not reflect this. Gold is way too cheap compared to dollars, and silver is too cheap compared to gold.

Jeff: Sounds like it’s not too late to buy gold and silver.

Mike: No. What investors need to be aware of is that we are on the last legs of our currency system. History shows that the world sees a brand-new monetary system every 30-40 years – and ours is 40 years old. Right now all currencies on the planet are backed by debt. All of the previous transitions were baby steps from something (gold) to nothing (debt). In order to give confidence back to the currencies, we’ll have to go from nothing (debt) to something (most likely gold again) in one big, huge, gigantic leap. This will cause an economic convulsion the likes of which the world has never seen.

The end of this precious metals bull market will be marked by panic buying. Gold and silver will be going into an astronomical bubble one day, probably the biggest bubble in financial history. That is why I think gold and silver are still fundamentally undervalued.

Jeff: Investors reading this might be a little skeptical that a bullion dealer is telling them to buy gold and silver. Do you mind sharing what percentage of your assets is held in gold and silver?

Mike: My personal portfolio is 100% in gold and silver. I have no other investments. I am completely committed to this because I absolutely believe it. I spent 2-1/2 years writing what is now a bestselling book on gold, and I opened a precious metals dealership. There isn’t anything I do, no action I take, that isn’t somehow connected to gold and silver.

Jeff: What separates GoldSilver.com from other bullion dealers?

Mike: Everybody at GoldSilver.com invests in gold and silver. They have all been invested in precious metals since I started the company in 2005. Everyone is absolutely committed and very knowledgeable. So we are all on the same side of the boat as Casey Research. If you become a gold and silver client, you’ll know we’re invested just like you are. We’re walking the walk and talking the talk.

We also have a team of researchers who are constantly analyzing where we are in this bull market. It’s in our best interest to try to find the top of this bull market and sell when the time is right. I believe we can multiply your winnings by letting you know what we’re doing when it comes time to sell. The way I’ve set up my company is that if you don’t win, I don’t win.

Another thing you should know is that I am not a gold or silver bug. I couldn’t care less about these metals. They are just in their cycle right now and will be the best performing asset for the coming years – period – just based on history.

There are these brief moments in history where the safe-haven asset also becomes the asset class with the single greatest potential gains in absolute purchasing power. We’re in one of these cycles right now; as the currency supply gets ramped up and people realize there is something wrong with it, they’ll rush back toward gold and silver and bid the price up until it matches the value of the currency supply.

Jeff: You’re increasing the number of storage facilities outside the US; why should a US citizen consider storing bullion outside the country?

Mike: Some investors are concerned about “confiscation,” which is technically incorrect. The US government never confiscated gold; they “nationalized” it. In 1933, they bought it from US citizens at full face so that the Treasury could hold it as an asset for the entire nation. That’s the very definition of nationalization.

Jeff: Are you saying you don’t think gold could be confiscated?

Mike: It’s possible, but I don’t believe it would happen in the United States. More than half of our currency resides outside the border. We’re the only country in that situation. If Obama passed an executive order today once again nationalizing gold, I believe that banks and brokerage houses around the world would suspect something was wrong with the dollar, and they would immediately dump their dollars and buy gold and silver. That would cause the dollar to fall to zero and send gold and silver to infinity in a matter of weeks. I would hope there is someone in the government smart enough to know this. If so, then it makes nationalization very unlikely.

Jeff: Good point.

Mike: But I do believe that it is good to have some geographical diversity. I think we’re going to see governments trying to limit our financial freedom even more than we’ve seen since 9/11. They’ll do this by instituting such draconian capital controls that today’s IRS will seem magnanimous by comparison. I want to be able to travel freely and have access to my funds no matter what happens. Therefore, I keep some of my gold in offshore storage accounts in several countries.

Jeff: But why go to the hassle and bother with the reporting requirements?

Mike: Because if you’ve got ownership outside the country, you may be able to retain it, even in a nationalization. The point is, we don’t know the future. All we can do is look at what’s happening, try to figure out what governments are going to do, and then protect ourselves with a little bit of diversity. And of all the assets you could own offshore, I believe none are safer than physical gold or silver.

Jeff: Do you think foreign storage puts a target on my back with government officials?

Mike: Well, they want to make sure you’re declaring any capital gain. And I do think that precious metals investors will see some sort of windfall profit tax when the government tries to punish those nasty gold speculators that caused the dollar to crash. They will always point the finger anywhere but where it belongs – which is squarely at the government and the Federal Reserve. People are just trying to protect themselves from government stupidity and the Fed by buying gold and silver.

I think the reason they require the reporting is to make it difficult for people to cheat on their taxes. I don’t think it’s going to make you any more of a target than anybody else if you report everything. If you play within the rules, you’re not a target. I myself walk the straight and narrow. I make sure I comply with everything the IRS and the Treasury require.

Jeff: What about the small investor? Do you have any advice for the person who has limited funds?

Mike: Yes. It only takes $40 to become a silver investor. Regardless of what your income level is, you’re going to come out much better in the end. And once you take the leap and become an investor, your mindset changes and you find yourself starting to plan. A lot of people are not really planning on the future that much – but once you buy an ounce of silver and become educated, you give yourself a tremendous advantage over the rest of the population.

So just buy small quantities of silver. It has such leverage to it. And silver will probably go into some sort of super-spike that you will want to catch, which means you probably need some sort of guidance. That’s where subscribing to newsletters such as yours is very, very important for anybody who’s going to get into this.

Jeff: Thanks for your time, Mike. And we appreciate the discount you’re offering our readers.

Mike: You’re very welcome.

Read the entire article HERE.

by RickAckerman
October 7, 2011 12:47 -0400
ZeroHedge

We can’t recall ever having spoken a kind word about Barack Obama, nor do we even imagine him capable of saying or doing something that might bring us around. However, we do not – repeat, do not – blame him for the terminal state of the economy. It was headed irretrievably into a Second Great Depression long before he took office, and the things he has tried so far to forestall a day of reckoning are, for the most part, the same things that any president, Democrat or Republican, would have tried. Nothing would have worked, of course, because the deflation that the U.S. and the rest of the world have been trying so desperately to counteract is drawing irresistible force from an imploding derivatives bubble valued notionally at nearly a quadrillion dollars. Small wonder, then, that a relatively puny stimulus effort amounting to mere trillions of dollars has bought us only time, not growth, and done so in a way that will burden future generations with more debt than they will be able to service, let alone repay.

To be sure, a solution has always lain well outside the boundaries of political discussion. The best we could have hoped for was a legislative sausage pleasing to the tastes of Harry Reid and John Boehner alike. But nothing those two could conceivably have agreed on would have brought the economy around. Nor would a change at the top have helped. Put someone else in the White House not handicapped by Mr. Obama’s timidity, incompetence and cluelessness – New Jersey Gov. Chris Christie is our idea of the right guy for the job – and even he would have failed to slow the country’s slide into deepest recession, let alone reverse it. For in fact we face 30% unemployment, a wave of bank failures that will rival the 1930s, and a real estate washout that will double the devastation that has already occurred. All of this is coming, and even though a President Christie, in the heat of the banking crisis of 2008-09, might have proffered the only correct answer – i.e., let the banks fail, allowing the markets to clear and the economy to right itself – it is inconceivable that he could have sold this course of non-action to Congress.

What Will Be ‘Money’?

And so, we can only wait nervously for the trigger event that will cause the economy to implode, unsanctioned. There is no predicting when this will occur, but the May 2010 Flash Crash provides strong reason to think that it will be mostly over – at least, the digital-financial part of it – in time for the evening news. The morning after, the desperate concern of nearly every American will be…money. It doesn’t take a rocket scientists to recognize that credit cards will no longer be the coin of the realm at that point. And just what might be? Silver and gold coins would be our guess, along with what little U.S. currency happens to be circulating when the music stops. If you are not prepared for something like this now, you ought to be. We’ll conclude with a link to the best book we’ve read to help you get ready, Sean Brodrick’s The Ultimate Suburban Survivalist Guide.

Read the entire article HERE.

by Brian Sylvester
The Gold Report
July 29, 2011

The Gold Report: You recently wrote that these are not normal times. Perhaps the current macroeconomic picture is the new normal?

Jay Taylor: The new normal is being shaped. We haven’t seen the final product yet. The new normal will be a world in which most Americans do not enjoy the standard of living that they have enjoyed in the past. I think this directly results from a situation in which the people who are able to create money out of nothing wrestle wealth away from those who create it. The miners, the manufacturers, the investors, the farmers—people who actually do things that are good for people—are not getting their fair share because the banking class attached to the politicians has control of the system. This is one of the reasons that I think we should go back to a gold standard. The new normal will be a decline in the general standard of living for most Americans. And I don’t think we’ve seen the bottom of that yet.

TGR: Your Inflation/Deflation Watch (IDW) chart is up about 53% since you launched it on Jan. 31, 2005. However, you believe that the chart’s current neutral direction suggests that the market is running on speculative money, not growth. Can you explain your rationale for that?

JT: By “neutral,” I mean that it is just a momentum gauge. We actually saw a decline in the IDW, or a real deflation, for a few months after the Lehman Brothers crash in 2008. Huge amounts of money, trillions and trillions of dollars of stimulus pumped into the economy, have managed to get it back up to the positive 50%-plus you noted. Now, it seems that we could be topping out. What we’ve seen is a rise in commodity speculation and games played by Wall Street—not a substantial rise in the real economy globally.

TGR: Recently, companies like Apple, Morgan Stanley and AT&T have all posted really strong earnings. That sounds like growth to me.

JT: Look at the economic statistics. Look at the unemployment numbers. I’m not saying that that top 20% isn’t going to do better. They are. Quite frankly, we have a fascist economic system and it’s becoming more and more so because the people who are really calling the shots are getting stronger.

TGR: Do you worry about marginalizing yourself by labeling this system a fascist economy?

JT: Go to the definition of fascism: government and corporate entities in bed together. What about the bankers getting bailed out at the expense of the poor? Is that good for poor people? Is that good for middle-class people? You might think it is. That’s the game. That’s the propaganda that we’ve been fed. I don’t buy it. The top banks, those that are “too big to fail,” know full well that they can enter into the next risky business and always get bailed out.

TGR: You had a conversation with Ian McAvity, the author of the Deliberations on World Markets newsletter, who suggested that we are in a secular bear market that dates back to 2000. He believes the Dow Jones Industrial Average will ultimately fall below its March 2009 lows. What do you make of Mr. McAvity’s projection?

JT: I think we are in a secular bear market. I’m not absolutely sure that we’ll see the nominal lows of 2009. In fact, if you look at what the equity market has done via gold, you’ll see that we are in a heck of a bear market right now in terms of the Dow Jones. In terms of purchasing power, there’s going to continue to be a decline in the wealth of the Dow.

TGR: What will be the impact of all this on gold and silver? There’s certainly been an unusually good run in July.

JT: I focus on the bigger picture. I look at the long-term secular moves. There have been 10 straight years of bull markets in silver and gold. I don’t know how much longer it’s got to run, but I think that it will keep running as long as the global economic picture remains unstable. The whole global system is in disarray right now. We have a system that’s broken. That’s why I don’t care whether the economy goes into a hyperinflation or deflation—gold has to be the cornerstone of a portfolio to preserve wealth. Investors want to own real money. They want to own what the markets have determined to be money over centuries: gold and silver. Fiat currencies have always failed. The U.S. dollar will eventually fail. This is a perfect storm for gold and silver.

TGR: Your model portfolio recently consisted of about one-third speculative mining equities. Why do you dedicate such a large position to one of the riskiest sectors of the market?

JT: I don’t think it is one of the riskiest sectors in this market. During the last 10 years, we’ve had triple-digit gains very frequently in those kinds of securities. Yes, we’ve had a soft patch in gold and silver stocks, which have not kept up with bullion markets. But they will. I remain very bullish on this sector because the majors need the juniors to replenish their resources and reserves. The large companies produce many millions of ounces of gold per year. They are not very good at replacing those ounces.

I caution my subscribers not to back up the truck and buy one or two of these stocks, but to spread out their portfolios and limit their allocation to about 5% of any one name. Taken as a basket, these types of companies will enhance returns very significantly, as they have over the last 8 to 10 years.

TGR: Another financial collapse could force some mining companies lacking adequate cash reserves to go out of business. You suggest searching for companies with plenty of cash, low burn rates and good management.

JT: I prefer companies that are project generators or prospect generators. Riverside Resources Inc. (TSX:RRI), Millrock Resources Inc. (TSX.V:MRO) and Yale Resources Ltd. (TSX:YLL) are very careful about how they spend their money. Yale uses its intellectual capital to find good prospects. Then it lets other companies take those risks and put money in the ground to pull out these deposits.

I like the new producers that are producing cash flow. Dynacor Gold Mines Inc. (TSX:DNG) is a new producer doing custom milling for companies in Peru. It is selling at about three times cash flow, but has lots of growth potential. It also has some exploration potential that looks extremely good.

Among the silver mining companies, Alexco Resource Corp. (TSX:AXR; NYSE.A:AXU) in the Yukon is earning very nice profits with huge upside right out of the gate. It has exploration and production potential.

Great Panther Silver Ltd. (TSX:GPR; NYSE.A:GPL) is also cash flow positive.

TGR: Great Panther is a company that would see immediate benefits from a rise in the silver price. It recently acquired new concessions near its existing mines in Mexico. Do you have any idea how long it might be before it starts drilling those?

JT: I’m not absolutely sure what the company’s plans are right now. I do like the management though. They do a great job of executing and lowering costs. The big things there are underground mines and there are some limitations on how much ore can be pulled out. If the company is able to pull up some more ore in that vicinity, it could bode very well for longer term profits.

Another company that is ready to take off is San Gold Corporation (TSX.V:SGR). It’s a long-term favorite of mine. It has a new management team that is really starting to execute its business plan of under-promising and outperforming.

It’s taken awhile for the company to get the operational side of its business in place, but it is going to drill. The new chief executive, who was a top operating guy at Placer Dome Inc., said that it is the most aggressive drill program he’s ever seen on a single project. The company can finance all this from cash flow, so it doesn’t have to dilute shareholder interest any further.

Timmins Gold Corp. (TSX.V:TMM) is another new producer with good cash flow and the ability to grow; it has great exploration potential.

These are new gold producers that have the opportunity to grow organically.

TGR: Do you know anything about Merrex Gold Inc. (TSX.V:MXI)?

JT: Merrex is a good exploration company. I have a very high opinion of it. The management is outstanding. IAMGOLD Corp. (TSX:IMG; NYSE:IAG) owns about 11% of Merrex’s stock. However, I like the fact that its management owns something like 15% of the stock, too.

Merrex has the Siribaya Gold Project in western Mali. Its latest NI 43-101 resource number is 315,000 oz. (315 Koz.). However, I could see that growing to 500 Koz. with a very extensive drill program; if that is the case, it could have upwards of 5 Moz. Moreover, we’re looking at 3 g/t. I’d caution that this is really forward-looking. Nobody knows until the company drills it out. However, the possibility for a very high-grade, open-pit deposit is certainly what attracted IAMGOLD, which is earning 50% interest by spending $10 million to fund this exploration.

The stock has not done well since I put it in my newsletter. We recommended it at nearly $0.60 and it’s down to $0.49—and there are more shares outstanding than there were before. I just think this is an excellent exploration program. IAMGOLD is very successful. This stock is certainly worth a couple of percentage points of a portfolio because it could come up really big. If the markets were to perceive that possibility of 500 Koz., it could lift share prices considerably.

TGR: Is Siribaya near any other noteworthy gold deposits?

JT: A couple of other properties nearby are in production: the Sadiola Gold Mines and the Loulo Gold Mine. Geologically, they are considered to be very similar to the Siribaya.

TGR: Another company you’ve discussed in your newsletter is Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF). The guidance there for 2011 is between 85 Koz. and 100 Koz. Do you think that it’s going to meet those expectations?

JT: I think it will. Last year was a bit of a disappointment. The share price has come down significantly. I recommended the stock at $1.56, and it’s at something like $0.68 now. It’s not one that I like to brag about. But fundamentally, the company is in a position to grow over the long term. It is a high-cost producer at around $875/oz.–$975/oz., but with gold selling at $1,600/oz., that still creates a pretty nice margin. The company is going into an underground mine with higher grades; that should help them bring their costs down as well.

Crocodile had its wettest rainy season in many decades last year, and that virtually halted its open-pit production. Mother Nature was the company’s biggest enemy last year. It did try to stockpile ahead of time, but no one had any idea that it would be such a wet season.

If the company is able to produce 85 Koz. to 100 Koz. as expected this year, it will generate enough cash flow to possibly allow the company to start producing.

TGR: Are there any other names that you’re excited about?

JT: Northern Gold Mining Inc. (TSX.V:NGM) has the potential to come up with a multimillion ounce, open-pittable deposit. The Garrison Project is in the Timmins Gold Camp, located along the Destor-Porcupine fault system. The Garrcon property within the Garrison claim area is a bulk-mineable target that would definitely appear to have open-pit, multimillion-ounce potential. Its Jonpol deposit is a high-grade underground target. The company has come up with a couple of very spectacular drill intercepts. It has enormous upside potential.

TGR: Vishal Gupta at Dundee Securities thinks the resources at Garrcon and Jonpol could go from about 1.1 Moz. to between 3 Moz. and 5 Moz. Do you agree?

JT: That would seem to be in the cards, but you never know until the truth machine tells you. I think that’s very well within reason, however, and it could possibly be much bigger than that over the long term.

TGR: Any parting thoughts on a macro level?

JT: We are in a bull market of a lifetime for gold mining companies, caused by the macroeconomic situation, the loss of confidence in fiat money, the deleveraging that needs to take place in the credit markets and the need to go back to honest money rather than the fake stuff that we’ve been conned into using by the policymakers. Gold has gone from $250/oz. to $1,600/oz. within the last 10 years. This is probably the sixth major credit-deleveraging episode over the past 300 years, with the first four being U.K.-centric and the fifth being the U.S. in the 1930s. In deleveraging cycles, what an ounce of gold will buy rises dramatically. That’s good news for gold mining profits.

Before Lehman Brothers’ demise, an ounce of gold would have bought 17% of the Rogers International Raw Materials Fund, which is a fund that has all manner of commodities in it. By March 2009, an ounce of gold would have purchased 44% of the Rogers International Raw Materials Fund. Now it’s around 40%. The real price of gold is up dramatically and that is not a fluke. That is the overriding theme that makes me extremely bullish—we are in a secular bull market of a lifetime for gold mining companies.

TGR: That sounds great, Jay.

Read the entire article HERE.

By Chris Martenson PhD
07/28/11
Financial Sense

For the record, I still believe that there will not be a breach of the debt ceiling and no overt default for the US. Things will be worked out in the nick of time, like they always are.

However, the media is full of articles wondering about what ‘investors’ might do in response to a US default and/or credit downgrade. What will happen to Treasury prices? Will they go down as investors dump them en masse in response to a credit downgrade forcing interest rates to climb?

It’s a big question and the most likely answer is “No, not really”. Partly because these so-called investors have been well-conditioned to believe that another bailout is always around the corner, but mainly because they have nowhere to go.

The big money is trapped.

For example, imagine that you are in charge of a money market fund with $100 billion under management and your job is to both cover your expenses and assure a return for your depositors and you are heavily invested in US Treasurys. Or imagine that you are in charge of a public pension with $200 billion under management with the same basic concerns of managing expenses and delivering returns and a heavy exposure to US Treasurys but with a much longer time horizon.

In either case, in light of the possibility of a US default what would you do? Where would you put your money right now if you were suddenly of the mind that the $50 billion you had in Treasurys should be placed somewhere else? In reality there are not that many places to quickly move such large sums of money. Further, there might be fiduciary restrictions that limit your investment options to regions, securities types and/or ratings grades or there might be a minimum liquidity requirement for the investment pool.

So let’s imagine that you have to make very large and important financial decisions and that you have to put your money to work; it’s either an actual fiduciary or operational requirement of yours. An excessive amount of cash is not an option and neither are hard assets such as land, gold or silver. Where would you put it? What realistic options exist?  It turns out there are not that many.

The Treasury market is the largest and most liquid in the world, by far. For many big money funds there really aren’t any realistic options other than the Treasury market, and this present reality will limit the market reaction to any downgrade.

A Foul Choice

With interest rates on ‘safe’ sovereign debt at or near zero on the short end, and well below the rate of inflation on the long end, safe bonds offer a negative real yield (meaning a yield below the rate of inflation). This is a compounding disaster for everyone but especially for pension funds with their longer time horizons. Worse, we now know sovereign debt can no longer be considered safe (even the US is facing a downgrade threat) - which means that on a risk-adjusted basis, the returns are even more unattractive than the negative real yields on offer.

On the surface, the choice that Bernanke has engineered for investors is between guaranteed losses via the miracle of negative real compounding and taking on more investment risk. But he’s managed to combine both negative returns and risk into a very unattractive investment brew.

Most big money funds have opted to take on more risk rather than suffer such low returns (and who could blame them?) and have done so by going to where the yields happen to be. This means buying up corporate paper and European debt, both of which have far more risk than their nominally more attractive yields would imply.  For individual investors, especially savers and those living on small incomes tied to interest rates, the negative interest rates have been especially difficult if not an outright disaster.

Once again, we can thank Ben Bernanke et al for driving interest rates into punishingly-low territory forcing everyone with a desire or responsibility to save and invest to either lose to inflation or to take on more risk.

Part of the goal behind ultra-low interest rates was to drive money back into the stock market, which the Fed has been specifically and openly targeting in both word and deed.  It is a well known fact that low interest rates are supportive to the stock market and so far that strategy has worked.

On the flip side of this success is the fact that a lot more risk has been forced into the system. When prices are artificially distorted to the upside for stocks or bonds, then it is axiomatic that risk becomes mispriced.

Having to choose between mispriced risk and negative returns is truly a foul choice indeed.

The Deficit Theatre

All of this brings us to the current sad state of affairs now put into high relief by the deficit talks in DC, which more properly should be viewed as political theater rather than a legitimate attempt to square the federal budget up with reality. If the talks were truly legitimate, then on the expense side everything would be on the table, especially and including defense spending and a balanced budget amendment would not be a source of contention but a mutually agreed upon goal.

Instead the Democrats are willing to entertain higher spending cuts in the vicinity of $250 billion per year as long as they can have a debt ceiling increase that would get them safely past the 2012 elections. Conversely, the Republicans as represented by Boehner are ready to concede to relatively meaningless spending cuts in the vicinity of $100 billion per year as long as they can force the debt ceiling to be an issue for the 2012 election cycle:

Mr. Reid, the Senate’s top Democrat, was trying Sunday to cobble together a plan to raise the government’s debt limit by $2.4 trillion through the 2012 election, with spending cuts of about $2.5 trillion. He would seek to avoid cuts to entitlement programs, but it was unclear how those savings would be achieved.

Notably, the plan does not currently contain any new or increased taxes, an approach that many in his caucus would probably balk at.

The contours of Mr. Boehner’s backup plan were far from clear, but it seemed likely to take the form of a two-step process, with a short-term increase in the debt limit along with about $1 trillion in cuts, an amount the Republicans said was sufficient to clear the way for a debt limit increase through year’s end. That would be followed by future cuts guided by a new legislative commission that would consider a broader range of trims, program overhauls and revenue increases.

(Source – NYT)

Just looking at the proposed levels of deficit reduction, whether it’s $1 trillion or $2.5 trillion, neither plan will drop the deficit enough to prevent the US from slipping deeper and deeper into the red. The true drivers of the debate, such as they are, center on political advantage and power. Count us among the unsurprised at this turn of events.

It would be nice – essential even – to have enough information to go on to really assess the true dimensions of the deficit reduction proposals but, even for a committed analyst like myself, there’s just too little detail to make a decent analysis of any of the competing packages.

However, we can be almost certain that their baseline assumptions about GDP and revenue growth that undergird the putative future deficit levels are unrealistic. They always are in these sorts of circumstances, which means the amount of future savings being bandied about are unlikely to be as robust as claimed.

For example, the most recent CBO budget projections (the foundation upon which the deficit reduction proposals are most likely built), assume that over the next 5 years (2011 – 2016) that revenue will grow at a compounded rate of 11.4% per annum(!), expenses by 3.9% and GDP by a whopping 4.95%.

Per year.

(Source)

These assumptions are just silly. Costs have risen much faster, and revenue and GDP far slower, over the prior five years, and if these pie in the sky projections do not come to pass then all of the deficit numbers will blow out to the upside in those future years.

For example, if we assume that GDP growth is 2.5% per annum instead of nearly 5% (and that revenues are tied to GDP),adn that revenues will therefore ‘only’ increase by 5% per annum (both completely reasonable assumptions at this stage) then the additional cumulative deficit that will accrue between 2011 and 2016 is $2.7 trillion dollars.

That will completely eliminate all of the projected savings from even the most agressive of the proposals on the table.  Is this unlikely?  No, in fact these are a far more defensible set of assumptions than those currently being put forth by the CBO.

To really make a mockery of the current budget projections, there is absolutely no chance of the government both cutting its share of GDP by 2% per year and having the GDP grow by nearly 5% per year. Implied is a rate of economic growth in the private sector that would be truly extraordinary.  Further, there is no chance of revenues climbing by more than 11% per year over the next five years without an enormous increase in taxes, which neither party is currently proposing.

In short, without knowing the underlying assumptions that are driving the projections, we cannot say much about the proposals themselves. All I can tell you for sure is that for as long as I have been crunching government numbers, taking their rosy projections and cutting them in half has always been a reliable and reasonable starting point.

A Dawning Awareness

What should not be lost on anyone is the degree to which some of the biggest names in the financial world are starting to openly question fiat money and the entire system of debt itself. They’re even doing it on TV, in prime time and on the op-ed pages of the largest newspapers.

Again, by the time we are seeing such open questioning of the very firmament of the entire system, this tells us something about how far along in the narrative we really are. Just a few years ago such talk would have been relegated to the very fringes of the blogosphere.

Here are a few recent examples:

Debt talk damage has already been done

As Washington dithers over raising the nation’s debt ceiling, investor confidence is flowing away.

“The issue is not just whether Moody’s or Standard and Poor’s were to downgrade (U.S. Treasury debt), it’s whether the market decides to downgrade,” said Rochdale Securities bank analyst Richard Bove.

“If they lose faith in the Congress and the government to, in essence, create a solid security for the buyers of that security, then you get the downgrade,” he said.

The sentiment was echoed overseas, where many countries hold U.S. Treasuries as an investment. “An adverse shock in the United States could have serious spillovers on the rest of the world,” warned Christine Lagarde, the managing director of the International Monetary Fund.

“We live in a highly interconnected international financial world that is really based upon confidence,” said financial services industry lobbyist Paul Equale.

“And without confidence, both domestically and internationally — that the United States is mature enough and has a system that can handle making the big decisions — without that confidence we’re going to see things like the dollar becoming less important as the world’s reserve currency.“

Debt-based fiat money relies on multiple levels of confidence. There has to be confidence that the money will not be over-produced in response to every perceived crisis (oops), that its allocation is justified and fair to all parties when it is placed into circulation (oops, again), and there has to be confidence that the future will be exponentially larger than the past to justify ever-increasing levels of debt (this is the big ‘oops’).

We are drawing ever closer to the recognition that endless growth is simply neither possible nor a reasonable expectation. There are even doubts now that growth as we’ve recently know it will return for one last cameo appearance over the next five to ten years.

With the evaporation of that all-important narrative of growth, everything else becomes immediately suspect, especially money itself.

Sometimes you will hear or read someone exclaim that ever since the slamming of the gold window in 1971 that US dollars are not backed by anything. This is not true, they are backed by debt. Debt is an incredible motivator and assures that the person, entity or country under its yoke will dedicate some portion of their productive efforts towards servicing that debt.

Another Big Round Number (and a Nice Symmetry)

On August 15th 2011 we experience the 40th anniversary of the slamming of the gold window back on the same date in 1971. Perhaps we should all bow our heads and have a silent moment to mark the occasion.

Interestingly, that’s almost exactly the date, give or take a few days, on which the US treasury will run out of money here in 2011:

“We don’t think there will be a default,” Ahrens, head of U.S. rates strategy for UBS in Stamford, Connecticut, said yesterday in a telephone interview. He estimates the Treasury has enough cash to make all payments until Aug. 8-10.

(Source)

Forty years between a final abandonment of the last vestige of external restraint on money/credit creation and the dawning recognition that the US has simply gone too far, spent too much, and is now in an enormous fiscal predicament.  In the annals of history that’s just about right for the lifespan of a purely fiat currency.

Mark the date on your calendars: we’ll certainly be observing the anniversary here at ChrisMartenson.com. Forty is a big, round number and therefore important.

So what’s likely to happen to the dollar and key asset classes in the aftermath of the looming August 2 deadline? In Part II of this report: What Should Happen and What Will Happen we analyze the probable future direction of stocks, bonds, precious metals, commodities, real estate and other assets. Additionally, we assess the odds of a resumption of quantitative easing by the Federal Reserve, and what changes to the picture that will cause when/if it occurs.

Read the entire article HERE.

by Tyler Durden
07/27/2011 10:43 -0400
ZeroHedge

Yes, indeed it is. While everyone and their grandmother is foaming at the mouth how both republicans and democrats hiked the debt ceiling for umpteen times over the past x years, the truth is that never before has the ratio of the proposed debt ceiling to the tax receipt ratio been as high as it is now. At nearly 6 times, this means that the top line (forget bottom line) cash inflows into the Treasury are 6 times lower than the current debt ceiling. And following the upcoming $2.5 trillion this number will surge to almost 8 times. So please ignore the next “pundit” who is complaining about the hypocrisy of not agreeing to an outright debt ceiling hike this time around – as usual they have no idea what they are talking about.

(Click Image for Larger View)

There is however one correlation that will continue to trend at 1.000:

(Click Image for Larger View)

Read the entire article HERE.

by Jason Folkmanis
Bloomberg News
Jul 22, 2011 8:47 PM PT

Vietnamese inflation accelerated for an 11th month in July after the central bank cut a key interest rate even as the nation faces the fastest price gains in Asia.

Consumer prices rose 22.16 percent from a year earlier, compared with June’s 20.82 percent pace, data released by the General Statistics Office in Hanoi showed today. Prices climbed 1.17 percent from June.

The central bank reduced its repurchase rate to 14 percent from 15 percent on July 4 after a spate of increases since November to fight inflation, leading the International Monetary Fund to say the cut may confuse investors. The benchmark VN Index of stocks is down 16 percent this year, on concern price gains will hurt the economy.

“The markets were very surprised by the easing,” Prakriti Sofat, a Singapore-based economist at Barclays Capital, said before the release. “It’s too early to go into a full-blown easing cycle given that inflation and inflation expectations remain elevated.”

Vietnam will find it “very difficult” to slow inflation to 17 percent by the end of 2011, Ha Van Hien, head of the National Assembly’s Economic Committee, told the opening of the body in Hanoi on July 21. It may peak as high as 23 percent in August before slowing to 18 percent by year-end, Sofat said.

The VN Index fell 0.9 percent yesterday to 409.2, while the dong weakened 0.1 percent, according to data compiled by Bloomberg. The currency was devalued by about 7 percent in February, the most since at least 1993, risking costlier imports.

Food, Transport Costs

Food, transport and construction-material prices have stoked consumer-price growth, according to Australia & New Zealand Banking Group Ltd. Transport prices rose 21.7 percent from a year earlier in July, today’s data showed. July’s annual inflation rate is the highest in a basket of 17 Asian economies tracked by Bloomberg.

Prime Minister Nguyen Tan Dung in February cut the credit- growth target and ordered a tighter monetary policy to try to tame inflation, revive confidence in the economy and prevent another credit-rating downgrade. This month’s rate cut wasn’t a “policy signal,” the central bank said in a July 8 statement.

“We assume policymakers are again demonstrating their low tolerance for slower growth,” Christian de Guzman, a Singapore- based assistant vice president at Moody’s Investors Service, said in a note on July 11.

The nation’s economy expanded 5.6 percent from a year earlier in the first half of 2011. Moody’s said that a “tight” monetary policy would threaten the government’s full-year target of 6 percent.

‘A Bit Concerned’

“We are a bit concerned that the cut in rates will confuse the market about the government’s commitment to sustaining the stabilization effort under Resolution 11,” Benedict Bingham, the IMF’s senior resident representative in Vietnam, said this month. Resolution 11 refers to the steps Dung took in February.

“A strong commitment to sustaining this effort is essential to re-establishing confidence in the dong and restoring macro-economic stability more generally,” Bingham said.

The State Bank of Vietnam had increased the repurchase rate for the seven-day term from 7 percent at the start of November 2010 before this month’s cut. It appears to have become the benchmark for monetary policy, according to JPMorgan Chase & Co.

Read the entire article HERE.

by Ben Traynor
BullionVault
7/22/11

“How the U.S. and Euro debt crises are making the gold price rise. . .”

Europe and Washington’s debt ceiling squabble has seen the gold price breach $1600 per ounce and €36,500 per kilo.

The financial media’s standard line is that investors are scared and gold represents a “safe haven.” But how? What are investors scared of that’s led some of them to bid the gold price.

First off, a little context. Over the last decade, U.S. national debt has more than doubled, rising 138% in Dollar terms. That doesn’t account for inflation, however—and as we’ll see below, inflation is viewed by some as part of the ‘solution’ to the debt problem.

Yet measured in terms of gold bullion—the nemisis of Uncle Sam’s debt, apparently—U.S. national debt has actually fallen for the last ten years:

Put another way, the average annual Dollar gold price has risen faster than Uncle Sam has been able to write his IOUs. Which is no mean feat!

The U.S. now only owes the equivalent of 340,000 tons of gold—still more than the total sum of gold ever mined (twice as much, in fact, according to best estimates) and way above the 8,113.5 tons the United States Treasury says it holds between Fort Knox and the New York Fed.

But why would gold demand rise—pushing the gold price higher—in response to the growth of national debt?

Like money itself, debt—whether a personal loan or the kind racked up on our behalf by our elected representatives—represents a claim on resources, otherwise known as wealth. At some point in the future, the debtor is expected to hand some wealth back to his or her creditor, ideally the principal plus some level of profit. Trouble is, debtors don’t always follow the script.

Now, when it comes to resolving its national debt, the U.S. government has five options:

#1. Economic growth—The economy produces more real wealth. The government, through taxes, takes a slice of this growing pie, and pays back the bondholders from whom it has borrowed in the past;

#2. Raise taxes—The economic pie doesn’t need to grow. Uncle Sam could simply raise the rate of taxation, and use that bigger sum of cash to repay its debt;

#3. More borrowing—As interest or debt repayments fall due, the Treasury simply goes back to the bond market and borrows from Peter to pay Paul;

#4. Default—Just don’t pay. Tell the creditors to get lost;

#5. Pretend to pay—The U.S. Dollar is the world’s No.1 reserve currency, giving foreign central banks (especially in fast-growing Asia) little choice for where they might store their burgeoning savings. The U.S. Treasury borrows in Dollars. The Federal Reserve has the power to create Dollars. The more Dollars there are, the less each one is worth—but when you’re handing them over to someone else, who cares?

The first option tends to be the one creditors bank on, in order to get back what they lend. Right now, however, the prospects for strong growth look bleak. Check out these scary numbers:

• The Congressional Budget Office reckons this year’s deficit will be $1.5 trillion;
• U.S. national debt was U.S. national debt was an estimated $13.4 trillion in 2010;
• This implies a growth rate for debt of around 11% per year.

Economists may quibble at the margins about the data, the methodology, and so on. But a stark fact remains—the U.S. will need to post some stellar growth rates just to stand still. Unless, that is, its government picks one of the other four options. Besides the highly contentious Option 2 of raising taxes, in fact, this is exactly what America’s been doing for years.

Option 3, more borrowing, has been exceedingly popular, leading to accusations that Washington is running a Ponzi scheme. The problem with a Ponzi scheme comes when you run out of new schmucks to help pay profits (or simply repay the principal) to early investors.

Is $14.3 trillion that point? Clearly not—the debt ceiling is an artificial, political construction, not a reflection of any financial reality. Investors remain willing to hold U.S. sovereign debt, as shown by—and despite—the appalling rates of return it offers. (Bond yields fall when prices rise, and U.S. debt has never paid so little in interest.) This may not always be the case, though, especially if creditors start to fear that Option 4 is on the table and a true default is looming.

One thing the debt ceiling squabble has achieved is to make the once notional concept of a U.S. default frighteningly real. Ratings agencies—never the quickest on the draw, as the subprime disaster proved—have repeatedly issued warnings that they might strip America of its AAA status, the “triple-A rating” which signals no risk of default. Standard & Poor’s even went so far as to say there is a 50-50 chance this downgrade will happen before the end of October.

Newspapers meanwhile have been full of stories of what will happen if the debt ceiling isn’t raised. Will the Treasury refuse to pay bondholders or veterans? Social Security claimants or military contractors? Suddenly we have a much clearer vision of what an America that can’t pay its debts might look like.

The artificial “debt ceiling” aside, a true U.S. default still seems unlikely, at least for now. But bondholders should have perhaps taken fright, and nor should they forget this scare too soon. The fact that they keep backing Uncle Sam—paying such high prices to buy his debt that Washington is paying them record-low interest rates—is nothing unusual, however.

Complacency is the bondholder’s biggest risk, but also his most common trait. August 1914 “came like a bolt from the blue” to Europe’s creditors, despite the loud and clear warnings of war. From 1979, when U.S. price-inflation breached double-digits, it took another two years for 10-year U.S. bond yields to catch up.

Today, several leading U.S. economists repeatedly (and rightly) ask “Where are the bond vigilantes?” The answer is Europe, where they’re driving up bond yields at their own expense by pushing bond prices lower, causing a rise in refinancing costs which will force a change of debt policy—or at least force the issue—in the increasingly less “peripheral” Eurozone states.

Two-year Greek government bond yields this week reached 39% as prices cratered once more. But again, bondholders were late to the game, as yields only began rising 18 months ago, first rising from a decade-long average below 3.5% in January 2010. Athens had long been subject to “special measures” from the European Commission, aimed at forcing it to reduce its annual deficits. Perhaps the fact that virtually every other European state was also in breach of the 3% deficit, 60% total-debt-to-GDP ratios meant Greece’s problems looked unexceptional. But the absence of rising bond yields to date does not mean that there’s nothing to fear in U.S. debt. It simply means, just as in 1914 and 1979, that bondholders haven’t got scared yet.

How long before America’s creditors start insisting on higher interest rates to compensate for the risks that come with lending to the States? If they do, Option 3—more borrowing—may become prohibitively expensive. And Option 5, meantime, is already happening. Lend the United States government $100 today, and you’ll get $100 back when your government bond matures. You’ll also pick up interest in the meantime. Unfortunately, though, at current interest rates this won’t compensate you for inflation in the cost of living.

Official consumer price inflation for June was running at 3.6% for June. Unofficially it could be much higher, as John Williams of ShadowStats suggests. The yield on a 5-Year U.S. Treasury bond, meanwhile, is currently around 1.5%. So the $100 plus interest you get back over five years will buy you less than your original $100 would have if you hadn’t lent it to the government. The purchasing power of your wealth has been eroded—with Uncle Sam enjoying the profitable side of the deal.

The U.S. government’s plan—if you can call it a plan—for dealing with its debt mountain is thus a combination of Option 3 and Option 5. Keep on borrowing, while devaluing the money you plan to pay back. Option 1 is still needed, therefore. Because the burden is not shrinking, and won’t shrink, without the economic growth which the U.S. so clearly lacks.

Which brings us back to the gold price. Ten years or so back, a handful of investors started to realize that U.S. debt was simply getting too big. It could not be paid off via the conventional method (Option 1) of growing real wealth. Option 2 (raising taxes) was then, as now, too hot to handle (indeed, by not cutting spending, Bush’s tax cuts made debt-growth very much worse). But Option 3, many of these gold buyers felt, could not last forever—there comes a time when investors wise up, and even a sovereign nation printing the world’s number one reserve currency loses its access to cheap credit.

This is exactly what is happening right now in Europe, and why bond buyers are demanding higher interest rates for lending to Greece, Ireland, Portugal and even Italy and Spain, the Eurozone’s third and fourth largest economies.

So with Options 1 out of commission, Option 2 at an impasse, and Option 3 looking increasingly shaky, only default and devaluation remain. And gold has traditionally been an excellent hedge against both.

Let’s take default first. For one, gold simply can’t default—you own it. It’s not a promise to pay you, it’s a possession.

Secondly, a U.S. default would be a highly deflationary event. It would introduce unprecedented levels of uncertainty to the credit markets. We saw how they seized up in 2007 as the subprime bubble burst. Any signal from the world’s most powerful nation that it’s okay to not pay your debts would cause immeasurably more damage. And as credit markets seize up, default sucks money out of an economy, lowering prices of everything from labor (wages) to a carton of milk.

In his seminal book of the mid-1970s, The Golden Constant, Professor Roy Jastram—looking at 350 years of economic data—showed that gold has historically gained purchasing power in periods of deflation. This makes gold an attractive portfolio hedge for anyone who fears a U.S. default may one day become too clear a threat to be dismissed as a media scare story.

More likely—and the one the Treasury and the Fed have gone with so far—is the inflationary Option 5, eroding the value of the Dollar. Gold has a historical advantage here too. It has been a recognized store of value for most of human history—not something that can be said for any paper currency. It also can’t be created, and is naturally in limited supply.

So investors looking to preserve what they’ve earned see gold as a convenient, proven way to store their wealth.

Recent analysis by British economic consultancy Oxford Economics, commissioned by our friends at the World Gold Council, suggests that gold would perform well in both deflationary and inflationary scenarios. Today’s national debt problem, just like every other (only more so, since it’s trans-Atlantic) threatens both.

And now the political theater has drawn attention to the gargantuan size of America’s debt, more investors are opting to take money out of the firing line—pushing the gold price to this week’s new record highs.

The fact that gold has risen more than national debt is good news for U.S. investors. Because while you don’t have a say in how big that debt gets, that doesn’t mean you and your children won’t have to pay it. The rising gold price means that those who bought gold will have something left after they’ve picked up the tab.

Read the entire article HERE.

By Paul Dobson
Jul 20, 2011 8:46 AM PT
Bloomberg

European leaders’ efforts to calm the region’s debt crisis will probably pave the way for a rally in higher-yielding currencies before a recession that’s worse than 2008 starts to bite, according to FX Concepts LLC.

Policy makers “are going to kick the can further down the road” at a summit aimed at ending the debt crisis tomorrow, chairman and founder John Taylor, whose firm manages $8 billion, said today in an interview in London. “It looks like we’re going to have a sort of risk rally,” which will lift commodity prices, supporting the Australian and Canadian dollars, he said. Gold may reach $1,900 an ounce by October, Taylor said.

Euro-area leaders are preparing for their second meeting in a month as they strive to resolve a crisis that pushed the 17- member currency to $1.3837 last week, the lowest level since March. Officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the crisis spreading, a person close to the talks said.

While FX Concepts is “back in” so-called carry trades, where higher-yielding assets are bought against lower-yielding currencies, the time frame for the trade is “pretty short” because of a looming recession, which will boost the dollar, Taylor said.

‘Deeper’ Recession

“We’re going into a recession, a really big one, bigger than 2008 — I’ll hang my hat on it,” he said. “It’s descending upon us already. Next year’s going to look worse.”

The recession will be deeper because there’s no other “gimmick” U.S. policy makers are able to use to stave off the slowdown, he said, referring to monetary and financial stimulus measures. Europe is likewise headed for a downturn, he said.

A worsening of Europe’s woes and a rebounding dollar will push down the euro as the recession takes hold, Taylor said, offering a “conservative” estimate for the European currency at $1.15 and the potential for it to trade at parity.

The euro rose 0.4 percent to $1.4208 as of 4:17 p.m. in London and was 0.1 percent weaker at 111.93 yen, while gold traded at $1,596 per ounce.

TheEconomicCollapseBlog
July 18, 2011

Back during the financial crisis of 2008, the American people were told that the largest banks in the United States were “too big to fail” and that was why it was necessary for the federal government to step in and bail them out.  The idea was that if several of our biggest banks collapsed at the same time the financial system would not be strong enough to keep things going and economic activity all across America would simply come to a standstill.  Congress was told that if the “too big to fail” banks did not receive bailouts that there would be chaos in the streets and this country would plunge into another Great Depression.  Since that time, however, essentially no efforts have been made to decentralize the U.S. banking system.  Instead, the “too big to fail” banks just keep getting larger and larger and larger.  Back in 2002, the top 10 banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 banks control 77 percentof all U.S. banking assets.  Unfortunately, these giant banks are also colossal mountains of risk, debt and leverage.  They are incredibly unstable and they could start coming apart again at any time.  None of the major problems that caused the crash of 2008 have been fixed.  In fact, the U.S. banking system is more centralized and more vulnerable today than it ever has been before.

It really is difficult for ordinary Americans to get a handle on just how large these financial institutions are.  For example, the “big six” U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to approximately 60 percent of America’s gross national product.

These huge banks are giant financial vacuum cleaners.  Over the past couple of decades we have witnessed a financial consolidation in this country that is absolutely unprecedented.

This trend accelerated during the recent financial crisis.  While the big boys were receiving massive bailouts, the hundreds of small banks that were failing were either allowed to collapse or they were told that they should find a big bank that was willing to buy them.

As a group, Citigroup, JPMorgan Chase, Bank of America and Wells Fargo held approximately 22 percent of all banking deposits in FDIC-insured institutions back in 2000.

By the middle of 2009 that figure was up to 39 percent.

That is not just a trend – that is a landslide.

Sadly, smaller banks continue to fail in large numbers and the big banks just keep growing and getting more power.

Today, there are more than 1,000 U.S. banks that are on the “unofficial list” of problem banking institutions.

In the absence of fundamental changes, the consolidation of the banking industry is going to continue.

Meanwhile, the “too big to fail” banks are flush with cash and they are getting serious about expanding.  The Federal Reserve has been extremely good to the big boys and they are eager to grow.

For example, Citigroup is becoming extremely aggressive about expanding….

Citigroup has been hiring dozens of investment bankers, dialing up advertising and drawing up plans to add several hundred branches worldwide, including more than 200 in major cities across the United States.

Hopefully the big banks will start lending again.  The whole idea behind the bailouts and all of the “quantitative easing” that the Federal Reserve did was to get money into the hands of the big banks so that they would lend it out to ordinary Americans and get the economy rolling again.

Well, a funny thing happened.  The big banks just sat on a lot of that money.

In particular, what they did was they deposited much of it at the Fed and drew interest on it.

Since 2008, excess reserves parked at the Fed have grown by nearly 1.7 trillion dollars.  Just check out the chart posted below….

The American people were promised that TARP and all of the other bailouts would enable the big banks to lend out lots of money which would help get the economy going for ordinary Americans again.

Well, it turns out that in 2009 (the first full year after Congress passed the bailout legislation) U.S. banks posted their sharpest decline in lending since 1942.

Lending has never fully recovered since the crash of 2008.  The big financial institutions like Goldman Sachs, Morgan Stanley and JPMorgan Chase have been able to get all the cash that they need, but they have not passed that generosity along to ordinary Americans.

In fact, the biggest U.S. banks have actually reduced small business lending by about 50 percent since the crash of 2008.

That doesn’t sound like what we were promised.

These “too big to fail” banks have been able to borrow gigantic amounts of money from the Fed for next to nothing and yet they still refuse to let credit flow to local communities.  Instead, the big banks have found other purposes for all of the super cheap money that they have been getting from the Fed as Ellen Brown recently explained….

It can be very profitable indeed for the big Wall Street banks, but the purpose of the near-zero interest rates was supposed to be to get banks to lend again. Instead, they are, indeed, paying “outrageous bonuses to their top executives;” using the money to engage in the same sort of unregulated speculation that nearly brought down the economy in 2008; buying up smaller banks; or investing this virtually interest-free money in risk-free government bonds, on which taxpayers are paying 2.5 percent interest (more for longer-term securities).

What makes things even worse is that these big banks often pay next to nothing in taxes.

For example, between 2008 and 2010, Wells Fargo made a total profit of 49.37 billion dollars.

Over that same time period, their tax bill was negative 681 million dollars.

Do you understand what that means?  Over that 3 year time period, Wells Fargo actually got 681 million dollars back from the U.S. government.

Isn’t that just peachy?

Meanwhile, the big financial giants have not learned their lessons and they continue to do business pretty much as they did it prior to 2008.

The big banks continue to roll up massive amounts of risk, debt and leverage.

Today, Wall Street has become one giant financial casino.  More money is made on Wall Street by making side bets (commonly referred to as “derivatives“) than on the investments themselves.

If the bets pay off for the big financial institutions, mind blowing profits can be made.  But if the bets go against the big financial institutions (as we saw in 2008), firms can collapse almost overnight.

In fact, it was derivatives that almost brought down AIG.  The biggest insurance company in the world almost folded in 2008 because of a whole bunch of really bad bets.

The danger from derivatives is so great that Warren Buffet once called them “financial weapons of mass destruction”.  It has been estimated that the notional value of the worldwide derivatives market is somewhere in the neighborhood of a quadrillion dollars.

The largest banks have tens of trillions of dollars of exposure to derivatives.  When the next great financial collapse happens, derivatives will almost certainly be at the center of it once again.  These side bets do not create anything real for the economy – they just make and lose huge amounts of money.  We never know when the next great derivatives crisis will strike.  Derivatives are essentially like a “sword of Damocles” that perpetually hangs over the U.S. financial system.

When I start talking about derivatives I get a lot of people in the financial community mad at me.  On Wall Street today you can bet on just about anything you can imagine.  Almost everyone in the financial world has gotten so used to making wild bets that they couldn’t even imagine a world without them.  If anyone even tried to put significant limits on futures, options and swaps it would cause Wall Street to throw a hissy fit.

But someday the dominoes are going to start to fall and the house of cards is going to come crashing down.  It is an open secret that our financial system is fundamentally unsound.  Even a lot of people working on Wall Street will admit that.  It is just that people are so busy making such big piles of money that nobody wants the party to stop.

It is only a matter of time until some of these big banks get into a huge amount of trouble again.  When that happens, we might really find out whether they are “too big to fail” or whether we could get along just fine without them.

Read the entire article HERE.

By Jennifer Ablan
Reuters
NEW YORK | Wed Jun 22, 2011 12:15pm EDT

Jackson Hole is an annual global central banking conference, led by the Fed, which takes place at Jackson Hole, Wyoming. It was at this event last year that Fed chairman Ben Bernanke said the U.S. policymakers were prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly or if the Fed detected deflation — a prolonged drop in prices of wages, goods and assets like homes and stocks.

Gross, the co-chief investment officer of PIMCO, the world’s top bond manager, on Wednesday said on Twitter: “Next Jackson Hole in August will likely hint at QE3 / interest rate caps.”

PIMCO oversees more than $1.2 trillion in assets, mostly in fixed-income. PIMCO confirmed Gross had sent the Tweet on QE3.

Last week, Gross first introduced the idea that the Fed on Wednesday could signal that interest rates could be capped if warranted due to soft economic growth.

Gross said on Twitter last week on Tuesday that: “QE3 likely to take form of ‘extended period’ language or interest rate caps on 2-3-year Treasuries.”

Gross also said on Twitter last week: “Next week’s Fed statement will likely stress ‘extended period of time’ language or even a period of interest rate caps.”

The Fed will issue its policy statement after the close of its meeting on Wednesday.

The recent soft patch of economic data has increased speculation over whether U.S. policymakers will perform a third round of bond purchases, an unconventional monetary measure known as “quantitative easing,” or QE2. The second round of QE2′s $600 billion in purchases will conclude on June 30.

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