Instead
of building its full faith and credit, the United States government is
becoming increasingly faithless and is losing credit by the
second while sucking individual Americans into ever-greater debt. Yet,
against all expectations, Americans seem to be waking up
Wealth
cannot be borrowed. For some not-so-unknown reason, Americans seem oblivious
of that fact. The reason: they have been conditioned to view debt as 'money'
for decades on end, while TV commercials showed them since childhood that all
you need for the good life is a credit card from so-and-so bank - and a
golden one, at that.
As
Peter Schiff noted in his recent article, by getting involved in the housing
market, the government achieved the opposite from its stated end of making
housing 'more affordable.' Because of cheap credit and lax lending, housing
prices have doubled and tripled in some areas, while former homeowners
were turned back into home-borrowers by being lured into taking out
'cheap' home-equity loans. Now, the money is gone and the bank owns their
house.
Hungry
for Risk
Rates
were so low that saving became impossible, turning appetite for risk (which
is normal for the well-heeled and well-invested) into a depraved, ravenous
hunger for higher returns shared even by ordinary retail savers. That, in
turn, fueled the hedge-fund boom and the enron-ization of the US
real-estate market.
All
of this has resulted in record-high mortgage default rates, which tumbled the
entire pyramided-loan mess down the hillside and over the cliff. Major banks
are threatening failure, and the government (aka Hank Paulson aka South Park's 'Mr. Hanky') wants to subsidize
their failure with endless taxpayer dollars. George Bush should have left Mr.
Hanky floating in the Goldman-sewer.
The
following St. Louis Fed chart, showing the entire US banking system's reserve
position in historically ultra-deep hock, has been making the rounds, lately,
but it is still instructive:
It's
pure poetry in motion - or poetic justice in action, rather. The banks that
suckered well-meaning (but under-informed and therefore complicit!) Americans
into the debt sewer are now deeply in hock themselves. Remember that
'reserves' are the foundation onto which banks must pyramid their loans. Reserves
are composed of the banks' assets that exceed their liabilities. A percentage
of those is supposed to be kept on account with the Fed. What does it all
mean? The nation's banks have lost their asse(t)s in this bank-designed debt
crisis, and now they have to borrow the difference. Ha!
'Pimping'
Oil
In
the meantime, venerable brokerage houses like Goldman Sucks have perfected
the neat little game of selling their investor-clients CDO's, ABS's, and interests
in SIV's while shorting the very same vehicles behind their customers' backs.
Goldman, of course, the ever-present wheeler and dealer, also had its hands
deep in the creation of the unsupervised (by the US government) ICE or
"Inter-Continental Exchange" where they pimped, uhhm, pumped
oil futures over the counter in ways that inevitably led to exorbitantly
rising prices.
Rumor
has it that they and other investment houses also crammed huge oil tanks into
large warehouses and filled them up with the real deal, ready for resale when
the price would be high enough and which, atan opportune moment, could be
sold into the market at a nice profit - and maybe for some additional
benefits.
That
opportunity recently came when IndyMac went under and Fannie Mae and another
"Mac" named Freddie threatened to follow suit. Both the dollar and
the Dow were seriously taking on water while ripples of fear spread
throughout the world financial system as it was faced with a potential US
financial meltdown.
The
Fed was(is) dead in the water, rendered ineffective by its dual mandate of
high employment and low inflation in the face of falling asset prices and
rising consumer prices. Neither raising nor lowering the federal funds rate
would have yielded any benefits - at least none that would have outweighed
the dangers associated with each: cut the rate, lose the dollar, raise the
rate, lose the Dow.
Oil
As a Policy Tool?
So,
the investment bankers' stashes of oil and their futures/options induced lock
on oil price augmentation was used as a last-ditch policy tool by the
establishment. When the dollar and the Dow tank and even the usual gold
suppression doesn't keep people in US stocks and treasuries, what's a banker
to do? Well, sell oil, of course! That immediately helps the dollar recover
and it gives people hope that 'the worst is over' in the recent oil spike, so
they relax and maybe buy back into paper assets and start believing the
financial press again.
At
the same time, fund manager money flows back out of gold and silver, which
helps as well, and which can then easily be accelerated by some additional
short selling from the cartel. Delivery problems? Bah, who cares? Fund
managers don't want gold. Contracts are just fine. Problem solved.
Naturally,
I have not a shred of evidence that this is what really happened. I just
follow my tried and true strategy of assuming the worst when it comes to how
low the financial establishment will stoop in keeping their economic charade
going for a little longer and in sticking it to even more to the
asleep-at-the-wheel US
investors and taxpayers. Combine that motive with power and opportunity, and
you usually have a sure-fire bet that you're dead-on with your assessment.
Yet,
there may be evidence that Americans aren't quite so dumb anymore.
Are
Americans Wising Up?
There
is one indication that they are, even though it looks like a measure taken in
desperation, but then again, what's wrong with a little desperation when
you've had it way too good and way too easy for way too long? That resulted
in a mental laziness that would lure Americans into letting their government
get away with murder while they spent their kids' inheritances and lived on
phony, borrowed wealth.
I am
talking about a huge, surprising spike in the US personal savings rate as a
percentage of disposable income. I know, that may not mean all that much at
this point because incomes aren't rising - while consumer prices are, often
leaving precious little income to be disposed of in the process).
Here is the chart:
That
spike, achieved during the month of May alone, brought personal savings all
the way back up to the level of 1995 - thirteen years ago! Of course, keep in
mind that we are talking about savings as a percentage of an endangered and
dwindling resource: disposable income.
Looked
at from that angle, at least theoretically, this chart can quite possibly be
interpreted as nothing more than evidence of a huge spike in price inflation
that yanked up the percentage of savings by the mere fact that disposable
income is going zero-bound or even negative. Who knows?
Naturally,
the government (Bureau of Economic Analysis)
has (supposedly real) disposable income growing in 2008. Amazing. With
dwindling employment numbers and rising prices all around, Americans somehow
managed to increase their disposable income. What a feat!
How?
Maybe when they default on their mortgages, they can now use all that free
money for "disposal" purposes? Or, maybe the dollar has become so
worthless in their eyes that they dispose of it by simply flushing it down
the toilet.
Anyway,
here is some more evidence that formerly dormant synapses are beginning to
fire again.
Shaking
the Shackles of (Treasury) Bondage?
This
following chart shows a very healthy (for Americans, not for the system)
trend emerging. American investors don't seem to be buying onto the Treasury
bondage game quite as much anymore.
It
looks like the usual stocks-bonds Yoyo just went kaput this year.
In a
'healthy' economy (where investors don't think for themselves quite so much),
investors who take money out of the stock market put it right back into the
system by buying into the government bond market, and vice versa.
That
now doesn't seem to be happening anymore, at least for the moment.
Treasuries
are in a downward trend even though the top foreign purchasers have
dramatically stepped up their buying, against all expectations.
Here
is a table showing the year-over year change in Treasury holdings by the top
foreign countries according to the Treasury's TIC data for May 2007-2008:
So,
if the top holders have stepped up their buying, why are treasury prices
falling? There is only one explanation: Americans aren't buying into the scam
anymore. They know that, in five ten, or thirty years, they won't get back
anything that has anywhere near the buying power of even today's emaciated
dollar.
Here
is another look at the Dow-10 Year Note comparison chart above, from a closer
point of view, time wise:
On
this chart, the fat vertical line is labeled "point of absolute
failure" because that is the point in time when the normal
closed-circuit system between stocks and bonds has stopped working, even on a
short-term basis.
The
larger trend lines for the Dow, for example, include intermediate up and down
movements during which the old Yoyo relationship has still been working
before that point, i.e., from March 11th, when the Dow bounced until mid May,
the point of absolute failure). Since then, however, the downtrend in
ten-year T-Note prices has continued right alongside the narrow
intermediate-term downtrend channel of the Dow.
That's
scary stuff for the guardians of this closed circuit investment loop. It
means money is escaping their system, and that's bad for them.
Where
Does All the Money Go?
It may
go to foreign stocks, bonds, or gold and silver and their producer stocks. Foreign
stock markets have been taking on water just like the American ones, though,
with the few notable exceptions of the Brazilian BOVESPA and maybe Saudi
stock markets.
Foreign
bond markets are more interesting in that respect because there are some
fairly high-yielding currencies out there, like the Australian dollar, for
example, which at 7.25% yields more than three times what the dollar yields,
or the euro, the yield of which is twice that of the dollar.
Yet,
all of these currencies are falling against gold - so where would you
want to put your money?
And
that's exactly what more and more people (and even fund managers) are
starting to think. It is also the only point of safety for anyone who doesn't
want to spend their retirement in one of those luscious, luxurious tent cities
springing up near major metropolitan centers around the country these days.
Wrap
Up
To
wrap it all up, the enormous spike in the personal savings rate seems to
indicate Americans are saving more than they used to. That maybe bad news for
the economy, which needs them to spend, and the banks, which need them to
borrow, but it is definitely good news for Americans individually because a
'good economy' or rich bankers don't really help you very much when you're
deep in debt and out of a job. Taking care of number one makes more sense,
and it is even good for the economy in the longer run.
It
also looks like Americans are staying off their government's bond market,
which will keep them in good shape years down the road. Now, if they could
only make the final leap of logic that dictates investing in the one thing
compared to which most other assets are destined to fall in the long run -
gold and silver - then there may actually be some hope that Americans might
stop trying to borrow the American dream - and start living in economic
reality again.
We'll
have to wait and see how all this turns out.
Got gold?
Alex Wallenwein
Editor,
Publisher
The EURO vs DOLLAR GOLD-MONITOR
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