TARP = FDIC Default

Private FDIC insurance, plus FDR's promise of an unlimited government backstop if the bank's couldn't pay their insurance premiums, was set up to partially reimburse people when banks lost our deposits in ultra high leverage, wildly risky speculative schemes.

What are the implications of TARP replacing the FDIC?

I believe it will rapidly accelerate deflation. Now it makes sense for banks to increase leverage and place even bigger, more outlandish bets with our money on mega-margin. FDIC closure, while it still insures and rewards banker compulsive gambling, at least forces most bankers into rehab for a year or two.

TARP will give our current Depression much sharper teeth.

TARP may have forestalled 10,000 bank failures for a short time, but now that the U.S. government has defaulted on its FDIC promise to the people and instead paid the people's money to bankers, it makes perfect sense for bankers to squander FDIC cash on hookers and blow.

Golden Opportunity in Depression

After a brief hiatus, I thought I would post a quick update on gold and the state of our depression.

The Depression:

It deepens. All sectors of the economy are under siege from currency starvation. Government safety nets are beyond exhausted and there will be little to no help for the millions-per-month of new destitute. The bankers remain in complete command, securing financing of massive new treadmill programs at vicious interest rates. Congress continues to push and stuff and shove trillions of dollars into the bursting pockets of the world's richest men--in exchange for piddly campaign contributions.

Gold:

Gold has flailed sideways to upward as of late. This is not a bull market push. I maintain the short position I established when I called the gold market top at $985 ($40 too early) and I am adding to my short position in gold on the bumps as gold stumbles up the ladder for the inevitable belly flop. Gold has become routinely prominent in the MSSM (main stream sales media) which, as all long time gold traders know, is a certain sign that the end of the counter rally is near. My near term (several months) target remains mid 5 to 6 hundreds.

Statistical Flaws and Other Government Negligence

Astute readers of The Answer is Simple, Volume understand that price information without volume information is indeterminate. As government stats roll in, I'll go ahead and ask the obvious question that main stream economists don't seem to have the insight to ask, "Who cares?"

Where to start? How about, who cares about the BLS CPI? The BLS homepage purports:

The most widely used measure of inflation, the CPI is an indicator of the effectiveness of government policy. In addition, business executives, labor leaders and other private citizens use the index as a guide in making economic decisions.

Translation: People who do not understand markets look at the CPI. Price alone tells us nothing about "effectiveness" and it gives no useful information to decision makers. The reason is buried in the flawed methodology:

The CPI represents changes in prices of all goods and services purchased for consumption by urban households.

The flaw is the word "purchased." By counting only completed sales, the index becomes price trivia, not price information--the price the last guy paid instead of the price the market will bear.

Imagine the Millionaire Sentiment Index (MSI), it surveys millionaires to determine how many intend to spend more on goods and services in the future. The headline trend looks promising:

Millionaire Sentiment Index (MSI)
Millionaires Intending to Spend More

2007 - 67%
2008 - 72%
2009 - 88%

The economy is booming, right? Wrong. No volume. That is covered by the MI:

Millionaire Index (MI)
Number of Millionaires

2007 - 3.8M
2008 - 3.2M
2009 - 2.1M

By measuring only the purchase price, the CPI leaves out the more critical number of how many things were not purchased. Same reason stock volume generally moves counter-trend during corrections from the primary trend. The price paid in a relatively small number of deal closures is, virtually by definition, the wrong price or more deals would close.

Why do government bureaucrats report on market prices instead of reporting on markets? Because if they understood markets, they wouldn't be bureaucrats.

Then there is propaganda. Sellers hate discounted prices for obvious reasons. They want you to think other people are willing to pay high prices (or they wouldn't hold "sales" in the first place) so the CPI inherits the same agenda:

The prices used to calculate the index are the regular cash prices in effect, including all taxes directly associated with the purchase and use of the items.

As if to compensate for the CPI's failings, we have GDP, which is equally useless because it only considers the flow volume:

GDP = C + I + G + (X − M)

The guy in the middle is scratching his head because academicians and bureaucrats scratch themselves too. Generally speaking, neither group understands markets, which again, is why they are disinclined to participate. What good is measuring the volume of dollars without knowing prices? If we blow the entire money flow on the inflated price of a single paper clip, our entire GDP amounts to a single paper clip, no matter how many dollars changed hands. The opposite happens when prices are low.

To illustrate the flaw, let's examine GDP today vs. the Great Depression. People who study the Great Depression are horrified that GDP contracted 50% over the course of the collapse. The Great Depression was worse than our condition today, right? Not so fast. In the 1920's and 30's the dollar's value was pegged to gold. This mitigated the affects of inflation and deflation in a way that is not in place today. Guess what happened to the gold price during their crash? Of course... nothing, the dollar was pegged.

What about now?

During our so-called "boom years" from 2002-2007, we had the opposite GDP phenomenon. We had a fairly steady GDP, but gold prices tripled. So our "boom" saw GDP contract by about 2/3rds, if measured the exact same way they measured during the Great Depression. If that was the boom, I can't wait to see the bust.

Then there are revisions. Revisions should never be permitted in any reliable statistic (shouldn't that be obvious?). If you discover more of something later, it should fall into the appropriate "later" report. Revisions happen because bureaucrats are risk averse. By allowing revisions they can trail reality instead of reflect reality. 20/20 hindsight allows them to be "right' more often, because they never take a stance in the first place.

During the real estate plunge, heavy handed, consistently revised (always in the same direction, oddly: down) government data killed businesses that foolishly relied on correspondingly tainted computer models. Companies like investment banks routinely made decisions based on rosy data that was later revised way down, it was too late to revise the decision down. Statistics allowing revisions are not helpful, they are harmful.

Then there are the government's black boxes. The Birth/Death model, seasonal adjustments to indexes, unidentified and/or arbitrary assumptions. These are different. These "fixes" are actually designed to spoil the data when it might be accurate. These are the "labor unions" of statistics, they want to curb peaks in value so they can't be held to the same high standard in the future. No one knows exactly what most of these things do, because no one wants to know, you see, if we knew, we would also know when we don't know, and then we would have to know all the time, but we can't know all the time, because we never knew how we found out.

The solution to these recurring statistical fumbles? Cut the Federal propaganda budget to $0.

The Next Deal

Dear FDR.

I would like to hear your views.

I hate the FED. For the reasons we are all too familiar. But Mr Obama has pledged to spend money on programs to update the infrastructure, stuff which never happens in good times. Personally, I find this not only vital, but much more acceptable than spending it on bailouts that go STRAIGHT into the banks pockets without any value given to the public, like improved and updated public services and jobs for the boys.

Assuming these jobs go to USA passport holders, am I being naive in thinking this type of spending is better than "here banks, have some free cash"?

Thank you.

---

Thanks for asking my opinion, it sounds like your opinion is probably better-reasoned, anyway. I've been wanting to spur some discussion on president Obama and what his election means for America, so I decided to post an answer. I am definitely more cynical than you are, sorry about that.

I do not believe that anyone can become president of the USA in 2008 without full vetting from the corrupt stealing-machine that we now call Washington. At the same time, I don't think that means the person is corrupt, although they usually are, it just means that anyone allowed to win the office has been approved by the Money Trust.

President Obama is an interesting choice in this respect. He doesn't have the deep root system one would expect to find in an approved candidate. Personally, I think he was hastily accepted, and maybe begrudgingly so on certain decks of the pirate ship.

I think he won approval based on a few things, which I've tried to prioritize:

1 - Emotional appeal to the electorate. Emotion is incredibly important, all money changes hands on emotion. The money changers are professional swindlers, they instinctively grasp Obama's potential to rally the nation and also to tear it apart. They see dollar signs.

JFK could be viewed as a similar emotion-charged choice who was not in lock step with the thieves. In fact, one thing that worries me is the presence of an LBJ in Obama's VP slot. JRB made no political sense at all, he was the anti-Obama, on change, hipness and young voter appeal, race issues, and he brought nothing to the electoral college. Which leads to #2...

2 - An assurance that monetary policy would be assumed by JRB if Obama went astray.

3 - Obama's existing and/or potential for corruption. Chicago. Not a coincidence.

4 - A genuine disposition towards debt as a solution. The problem is not important.

5 - Malleable foreign policy. War is their biggest prize.

On your question regarding #4, how the debt is used, I honestly don't think it matters much. The money power simply wants debt, debt, more and more debt. As long his solutions generate ceiling-busting debt, Obama will prosper in the media.

Obviously the most effective debt is money borrowed specifically for stuffing the pockets of the super-rich, and so far, Obama is a Grand Slam. But they'll happily take any and all debt. The fact that bankers had to push the their own bailout through congress, at great political expense regardless of what the MSM regurgitates, is a good sign of sorts, because it indicates they are not in full control of the catastrophe they've created. There's hope the criminals will hang themselves by accident. Crooks are generally dim, especially the rich ones. Intelligent people enjoy level playing fields because they know they can win.

From a practical money-making perspective, I think the Money Trust will love the infrastructure idea. One reason is that is can be sold to congress, these mega handouts always generate political favors and a huge potential for more corruption. More importantly, remodeling consumes, rather than creates. I'm not saying it isn't needed, but when you are in crises mode and your job has been axed, taking out a HELOC to redo the kitchen probably isn't going to change your condition for the better.

The ideal solution, from the central banker's perspective, is monstrous new debt with little to no immediate return. That way, more debt is required.

They see you as a mouse in search of a wheel.

Federal Reserve Fails Test

On slide 30 of "Fiat Money for Dummies" (ok, the real name is 'Banking Basics') the Federal Reserve suggests an interesting test:

Today's coins and paper money are backed by the "full faith and credit" of the U.S. government.

If that makes you a little uneasy, try the following exercise. Put a ten-dollar bill and a blank piece of paper on the tabletop, and ask people to choose between the two. Chances are everyone will choose the ten-dollar bill...

...That's because the ten-dollar bill is backed by the promise of the United States government, and to most people, that promise is as good as gold.

So I decided to do the Fed's suggested test. I put a $50 bill on the table next to a one ounce U.S. gold coin worth exactly $50 as legal tender:

I asked 10 people to choose between the coin and the un-backed FRN $50.

Guess what?

The Federal Reserve Note had a 100% failure rate.

Bailouts Will Never End

Congress is rushing to transfer the future wealth of our children to ultra-rich bankers. If we allow them to continue, it will never end. It will NEVER end.

Why?

Follow the money:

The privately held Federal Reserve banks print new cash to buy our government's bonds, our MONEY, future generations' promise to work for them in perpetuity. In return,we get more paper DEBT (cash) to spend on votes, at perpetual interest to the People.

The Federal Reserve banks mark up our money for private profit, and sell it to commercial banks at interest. Those bankers print even more new cash, mark it up with even more interest, and sell it to consumers to spend on home mortgages, credit card purchases, cars, etc. Bank loans account for every single penny of cash in circulation, there is no other source of currency.

The banks print with leverage. That is, they issue up to 40 dollars in loans for every 1 dollar they possess. This is called "fractional reserve banking" and our government encourages it. In fact, we pay the banks to leverage up more, using shady institutions like Fannie Mae and Freddie Mac. With the impending passage of HR 7326, congress will require the FDIC to pay banks to get consumers deeper into even more toxic mortgage debt, then assume the banks loan losses.

The problem is clear. When reckless loans go bad (shown in red) there is no way more government borrowing and spending ('stimulus' which always costs more than it provides) can counter the resulting currency implosion, especially when it is stuffed directly into the pockets of the world's richest bankers. Even if congress was spending the new cash to help citizens instead of paying the richest people on the planet, we would have to hand the Federal Reserve roughly $11T of our money just to counter each red rectangle, shown above.

Why do the banks do this to themselves??

A better question is why not? Why don't they print more?

Remember, our government has agreed to backstop the private FDIC, so the banks take no risk whatsoever. The banks are supposed to fund the FDIC, but they don't. The FDIC's total assets are short of bank deposits by about $15T dollars. By underpaying the FDIC, the banks ensure the government, that means you, will pay them an unlimited amount of money when their loans go bad, and the FDIC is, "shockingly," broke.

The solution is simple:

LET THE BANKS FAIL.
LET THE PRIVATELY HELD FEDERAL RESERVE FAIL.

Use the FDIC to pay defrauded citizens, instead of ultra-rich bankers, and no one is harmed except those at fault.

Obama Duped, Already?

It didn't take long for bankers to take President Obama and our most vulnerable American's to the cleaners. The NY Times is reporting that the Obama administration is on track to increase child debt to bankers by $825B during his first week in office:

Mr. Geithner said the government would have to invest much more before the economy revives. Saying timid action had worsened past crises, he added, “In a crisis of this magnitude, the most prudent course is the most forceful course.”

The $825 billion stimulus plan in the House meets the test, he said. Senator John Kerry, Democrat of Massachusetts, disputed him, saying, “I don’t think the package is large enough.” While some Democrats agree with him, some Republicans are complaining the package is too large.

The Senate’s Republican leader, Mitch McConnell of Kentucky, also said the measure must be revised substantially, but to avoid expanding the government and permanently increasing spending.

The House Appropriations Committee voted, 35 to 22, to send a major component of the recovery package to the House for a final vote, perhaps next week.

If signed, the total national debt, after interest, will increase by a little over $2T, with more than half being pure bank profit. Not a bad initial-stuffing of the pockets of world's richest bankers at the direct expense of our most vulnerable citizens.

This all happened so fast one can't help but wonder who was duped, our new president, or the American People who voted for change?

Four Lies a Minute

The official Federal Reserve indoctrination video is a joke.

http://www.federalreserveeducation.org/f_share_html/fedtoday/thefedtoday.htm

After you finish vomiting, don't forget these private, mostly foreign bankers desperately want to enslave your family and plunder the wealth of the United States.

Let's count the lies and the bold-face lies:

---

1. The world goes around because we trust Federal Reserve Notes.

2. Money is just a piece of paper.

3. Gold backed paper inspires less confidence than un-backed FRNs.

4. The Federal Reserve concept is complex.

5. The Fed mission has remained unchanged (the FRA has been modified over 100 times).

6. The Fed is charged with centrally managing the U.S. economy.

7. People have more confidence in a monopoly than in a system of competition.

8. You can print money.

9. It is bad to choose from sound currencies and to shun weak currencies.

10. People are more likely to lose faith in a system with choices and competition.

11. They had Model T Fords in the early 1800's.

12. Panics haven't closed banks since the passage of the FRA.

13. The Great Depression happened before 1913.

14. A monopoly has a stabilizing influence on markets.

15. There is such a thing as a decentralized central bank.

16. The Fed Governors set policy.

17. You can be independent of the government and be part of the government.

18. The structure provides accountability by preventing government control.

19. Private banks' main goal is a stable economy.

20. The Fed want's a currency monopoly to stabilize prices, not to set them.

21. The foundation of private banks is a sound monetary policy for the country, not profit.

22. Private banks prefer price stability over profit.

23. The FOMC has kept prices stable since 1913.

24. The FOMC creates all the credit available in our economy.

25. The FOMC slithered out from the Great Seal's war claw.

26. The currency supply affects the demand for goods (it only changes prices).

27. Prices result from the supply of goods and from not the supply of currency.

28. Recession is caused by producing too few goods, not too many.

29. The goal of private banking corporations is to stabilize the currency, not profit.

30. The goal of private banking corporations is to prevent inflation, not profit.

31. The goal of private banking corporations is to prevent recession, not profit.

32. Buying a government security without consideration is an investment.

33. The Fed has a pet eagle and they are therefore part of the government.

34. Private banks sell securities to help the economy and not to profit.

35. Inflation and recessions have been prevented by the Fed's pet eagle.

36. The Fed has produced a stable economy with high employment, production, growth, and has kept prices steady since 1913.

37. Creating rules that supervise regulation is the same as regulation.

38. Congess's purpose is to promote the safety of banks.

39. Federal examiners are the same as the Fed.

40. The Fed's aim is to stabilize banks, not profit.

41. The Fed "provides" services, implying there is no charge.

42. Private banks are charged with collecting Federal taxes.

43. There is $500B in total currency in circulation (that is just physical cash).

44. More implications the Fed doesn't charge for services.

45. The Fed is responsible for a strong economy.

46. The Fed's purpose is to instill confidence, not profit.

47. Monopolies are less costly and safer.

48. Private banks do whatever is necessary to foster a healthy growing economy, not to profit.

49. Emerging democracies want private currency monopolies.

50. The job of the Fed is to provide trust in U.S. currency, not profit.

51. The job of the Fed is to keep the economy pumping, but still, not to profit.

---

The New Millionaire Lifestyle

As our two largest banks predictably fail, you can feel the panic crescendo:

Citigroup - down 96%
Bank of America - down 91%

As these monsters are siphoned dry by e-runs, the private, bank-funded FDIC is hardly a source of comfort:



Once considered unthinkable, many banks have decided to check their reputations at the door and beat a path to the lender of last resort, in a desperate gambit to survive:



Result? The U.S. Treasury has become a relief valve for frantic cash, fleeing risky bank accounts and the stock market. Not coincidentally, a wild congressional spending spree, stuffing trillions of dollars of taxpayer money into the pockets of the world's richest bankers, has dumped an unprecedented pile of treasury instruments on the auction block.

Amazingly, short term yields are still pinned near zero, or even negative, as a mob of unsuccessful bidders anticipate the big one. Great Depression yields were not this low; speed-of-light bank runs couldn't blitz the U.S. Treasury all at once:



Yet, January 2009 finds most citizens sedate and happy, awash in a warm flow of U.S. government propaganda. Is everyone else right? Does it even matter? Let's consider at least one implication of our new world:

The New Millionaire Lifestyle

In 2006-7, a liquid millionaire could generate a lifestyle sustaining, guaranteed income. Most erroneously thought a mutual fund basket was a more suitable investment than a 6% quarterly T Bill, but still, the old millionaire figured, even if worst came to worst:

$1,000,000 @ 6% paid quarterly => $60,000/year

That was enough to survive... ...but now it isn't. Today, the same million bucks buys:

$1,000,000 @ 0.10% paid quarterly => $1,000/year

Simply put, single-millionaires are already poverty level paupers. Get used to it, fast, we're only a few months into a soon to seem endless depression. The New Millionaire Lifestyle, someone who desires the same modest $60,000 cash flow, suddenly requires $60M liquid cash. Not the kind of person we used to associate with scraping by.

But today's 0.10% yield isn't completely realistic. For months, we've seen steady 0.01% to -0.05% Treasury yields. Let's ignore for the moment the prospect of a big bank failure causing $trillions to fight for $billions in weekly auctions, potentially causing yields to dive much farther into negative territory. How much liquid cash does the the New Millionaire Lifestyle require at these recent, semi-panic yields? Nearly a billion dollars in liquid cash:

$600,000,000 @ 0.01% paid quarterly => $60,000/year

Do you still think you are wealthy? Still think you'll be drawing a comfortable company or government pension? Think you'll see useful Social Security?

Think again.

Wilshire 5000 by Congress

Marketwatch is comparing previous Presidents to the Wilshire 5000. The article takes a swipe at Bush III, with regard to economic performance.

I happen to dislike the economic performance of Bush I, II, and III, all of whom were disastrous influences on our economy. Still, it is pretty hard to blame Bush III alone for the Y2000 crash.

The whole idea is more interesting when viewed by Congress:

by House
Congress	R	D	Wilshire
111	178	256	-3%
110	233	202	-35%
109	232	201	19%
108	229	205	36%
107	221	211	3%
106	223	211	-11%
105	228	206	55%
104	230	204	56%
103	176	258	7%
102	164	270	42%
101	174	261	11%
100	177	258	7%
99	182	253	49%
98	163	272	16%
	Average	Republican	18%
	Average	Democrat	18%

by Senate
Congress	R	D	Wilshire
98	55	45	16%
99	53	47	49%
100	45	55	7%
101	45	55	11%
102	44	56	42%
103	43	57	7%
104	54	46	56%
105	55	45	55%
106	55	45	-11%
107	50	50	3%
108	51	49	36%
109	55	44	19%
110	49	51	-35%
111	41	59	-3%
	Average	Republican	31%
	Average	Democrat	5%

All in all, the exercise mostly emphasizes how criminally rampant monetary inflation has been over the past several decades. It's no wonder Momma has to work, add the kids soon.

Precious Metals Bubble

Meets needle.

An Elliott Thumbnail

The purpose of this post is to give a little different angle on EW analysis, as well as to show it in conventional form and in real time. For those interested in Elliott Wave analysis, the following Dow wave structure will probably look familiar to you. For those not interested, read on and maybe you will be.

This is one of perhaps several labeling variations on the bear market starting October 2007, it is my preferred view:



Most apply Elliott's observation that Fibonacci ratios are a useful way to anticipate to future wave lengths and coming trend reversals. Here is another method that Elliott never mentions, perhaps because fractals were a complete unknown when he discovered them in the late 1930's - 40's.

A useful thing about EWs, which is impossible using any other form of tech analysis, is that any unfolding structure can tell you where to divide previous patterns in a hunt for fractal equivalents to current conditions. That is, you can look for lower and higher degree blueprints of how human emotions are programmed to react in larger or smaller statistical samples. In my experience, this particular angle of EW analysis is never taught, but likely referenced by more experienced EWavers.

Such equivalencies are clues, and only clues, since the entire EW process is one of natural fractal branching, and as we see in all of nature's branching fractals, lightning bolts to fern leaves, none become perfect replicas as they scale. However, they should look similar, in a perfect world. This is both art and science. A tool in the box.

Shown below, in artistic purple, is one such fractal equivalency between degrees. It is of obvious relevance today:



The completion of this fractal equivalency was but one conforming reason that I called the beginning of next leg down in real time right here. Notice that I didn't bother to analyze the ABC subdivisions of each wave 4, because the fractal equivalency provided my empirical blueprint.

Moving along, one can then extrapolate a precise fractal position, between smaller and larger degrees:



One might notice that our current 5th wave appears to be half complete. If the fractal equivalency holds, and it might, the next Dow low should complete in the low to mid-7K's.

This is a minor disconnect with my near term Dow 6,500 forecast. That is because, in my experience, a 5th wave truncating short of the 3rd wave completion is rare, most likely an anomaly. One thing that was not rare in the initial lower degree 5 wave structure, was the 1 and the 5 waves both equating to a 10% loss. 1 and 5 typically match when wave 3 extends. That is another reason to expect a current bottom in the low to mid-7Ks.

That said, if you look at every other wave 5 in the structure, all of them extend below the end of the preceding 3. This is a strong bear:



And so, life unfolds...

The Almighty Dead Dollar

There is a lot of debate over the fate of the U.S. Dollar as the world economy buckles. I think the key to the hyperinflation vs. hyperdeflation debate boils down to a matter of intent. The Federal Reserve intends to hyperdeflate the dollar.

Once inflated debt is secured and plausible credit exhausted, the Fed wants to make the dollar very rare (deflation), not very plentiful (inflation). In this scenario, the dollar rapidly increases it's buying power, destroying collateral prices (value doesn't change a bit), and generally strengthens creditor positions over debtor positions.

Apart from the central bank's intent, I would add two ancillary reasons to expect a deflationary outcome:

• All U.S. depressions have been deflationary, not counting the American Revolution which was a hyperinflationary event due to British counterfeiting the pewter Continental . This is because the unholy alliance between established government and banks is purely profit driven, not altruistic.
• From a utilitarian perspective, it is hard to imagine a natural market outcome that so handsomely rewards debtors. Hyperinflation absolves all debts.

The reason the Fed intends to cause deflation is explained in a previous post, The Currency Scam. In my opinion, the central banks' intent is barely debatable, the same playbook has been in use for thousands of years. What is questionable is their ability to pull off an event of this magnitude.

There are two outcomes, as I see it:

1. The Fed successfully starves the nation of currency, suffocating her in debt, and the largest transfer of wealth in human history is pulled off in semi-controlled fashion. This is not hard to do, economically, because commercial banks print the vast majority of all currency in circulation, and they won't print more unless it is profitable to do so. That is, if they can find genuinely creditworthy borrowers. But in a recession/depression, printing new bank cash can be a losing proposition. Not only do banks lose the interest on new cash when a high risk borrower defaults, they lose a chunk of the principle.

There is also a deflationary multiplier effect. First, both the bank and the borrower double-account for loan collateral as an asset on their respective balance sheets. That is a linear accounting model, and it doesn't work during a deflation. There is a basic, unrecognized assumption (which is why associated risks are also unrecognized) that the currency itself is of constant value. In fact, constant currency is almost never in play, but during more common inflationary periods this is a cost positive double-mistake of omission, so both parties erroneously chalk up resulting gains to business prowess. There is also unrecognized growth in the value of the debt-collateral differential. Even if a price gap is modeled linearly, the gap is actually accelerating in value, or buying power, as the currency strengthens.

Advantage-squared goes to the creditor of last resort, the Federal Reserve, because only they have no relevant costs associated with lending.

2. There is a possibility that the Fed creates such social havoc that the system fails. Given the magnitude of the crises central banks have created, I think this is more likely than most people want to believe. Closer, too.

How systemic failure unfolds is anybody's guess. The end game of disorganized markets is probably hyperinflation. Not $10,000/ounce gold hyperinflation, but perhaps infinity in an instant hyperinflation. At that point chaos rules the day. We might have no schools, no hospitals, no police, no fire protection, no utilities, no military, no insurance, no pensions, no savings, no anything recognizable. So I say good luck trading scenario #2.

Many ask about gold as a hedge. Would physically possessing some gold help? I don't know. If it did, you probably wouldn't need much at today's valuation. I am all for holding some physical gold and silver as a Hail Mary hyperinflation hedge. But as is the case with all hedges, the plan is to lose that money. If you are making money on your hedges while the mitigated scenario has not developed, then you have no true hedge in place.

That has been my thought process for trading #1 since early 2007, organized hyperdeflation or rapid strengthening of the dollar driving prices lower, much lower, even if #2 is a strong possibility or follows #1.

TARP II

I posted this the day before TARP crashed the stock market from 11,000 to 7,500. It applies equally to TARP II, III, IV...

---

The banks: Bad news, we're broke.

The People: Huuuuh? What? Do you mean we're going to lose everything?!

The banks: Well, yes. Yes, you are. A total meltdown. Well, unless....

The People: Unless what? Tell us, tell us, we'll do anything!

The banks: Unless we get $850B to recapitalize and start lending again. As a down payment.

The People: Ouuuuuh.... hmmmm.... that is A LOT of....

The banks: Washington Mutual failed. The FDIC has no money.

The People: OMG! Here, take it, take it all, just don't hurt my 401K, PLEASE!

The banks: Ok, ok, enough. We're open for business again.

The People: Oh good, because we really need a loan. At 1.5% please. Thank you.

The banks: Well, well, well, ok, let's see... ...uh, no. No way.

The People: What! Why?

The banks: Bad news, you're broke.

The Answer is Simple, Volume

"All the time our customers ask us, how do you make money doing this? The answer is simple, volume."

- FIRST CITIWIDE CHANGE BANK [Click for SNL video]

Beginning stock traders often wonder, what does volume really mean? Why do I care about volume? For every buyer there is a seller and for every seller there is buyer, right? But didn't the news guy just say prices fell because there were more sellers than buyers, or vice versa?

Who's right? Neither of them. And, volume is extremely important, as important as price.

You can have 1, 000 bidders and 1,000 sellers and see 0 transactions. Or, you can have 1,000 bidders and 1,000 sellers and have 1,000 transactions. Or, you can have 1,000 bidders and 1 seller and have 0 transactions. Or you can have 1,000 sellers and 1 bidder and 0 transactions. You can even have 1,000 bidders and 1,000 sellers and have 1,019 transactions.

For some reason, people intuitively understand the importance of trading volume in everyday markets, but they have trouble getting their head around stock trading volume. So let's draw an analogy between an everyday market and the stock market, and volume will make intuitive sense. It's extremely important to understand volume, as the current Dow chart, below, illustrates.

Let's say you live in a town in California that was hit hard by the liquidity drain. In 2005, people were crawling through model homes and paying top dollar. Let's say builders in your neighborhood sold 30 homes a month at high prices.

Then, suddenly, volume fell sharply to just 5 closings per month. Builders thought the slowdown was a blip that would soon reverse, so they held the line on prices and blew up more balloons and baked more cookies.

Then, only 3 closings per month, while prices held up.

Then, just 1 closing, at a 10% premium over the last sale.

The realtors called a meeting. Some were concerned, others were ecstatic. The ecstatic group held up a chart of steadily rising prices. The concerned group pondered a big decline in sales volume. Revenue was down, so the builders sided with the concerned group and decided to lower prices. Immediately, sales volume increased. When prices were lowered more, sales rose more. Soon, builders noticed their charts indicated that as home prices fell, the number of transaction grew, and vice versa.

Why? Because their price is still too high. Because any price sans volume = the wrong price.

Follow the Money (Part 3)

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"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."

- Woodrow Wilson, on signing the Federal Reserve Act

Wilson gold certificates were not Federal Reserve Notes, they served a much more sinister task. Unlike all other U.S. currency, the $100,000 was never circulated among U.S. citizens, the note was and still is illegal for any U.S. citizen to hold. These notes were only deposited directly into Federal Reserve Banks by the U.S. Treasury, from December 1934 into early 1935. As soon as FDR finished confiscating "his subjects" (as he liked to call American citizens) gold , he transferred U.S. wealth directly to central bankers using these nefarious notes. To add insult to injury, he then revalued the bankers' gold +67% with a pen stroke.

[Click for U.S. Treasury FAQ about the $100,000]

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FDR's $100K gold notes, the highest denomination ever printed, bearing the likeness of President Woodrow Wilson who signed the Federal Reserve Act, are the end of this story. The money is gone.

Follow the Money (Part 2)

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[On gold backing] "We should then have quotations at real values, not fictitious ones. Gold would no longer be at a premium, but currency at a discount. A healthy reaction would set in at once, and with it a desire to make the currency equal to what it purports to be. The merchants, manufacturers, and tradesmen of every calling could do business on a fair margin of profit, the money to be received having an unvarying value. "

- Ulysses S. Grant, 7th Annual Message to the Congress

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"The refusal of King George to operate an honest colonial money system which freed the ordinary man from the clutches of the manipulators was probably the prime cause of the Revolution ... The Colonies would gladly have borne the little tax on tea and other matters, had it not been that England took away from the Colonies their money, which created unemployment and dis-satisfaction. Within a year, the poor houses were filled. The hungry and homeless walked the streets everywhere."

- Benjamin Franklin

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"Be it enacted. That the dollar consisting of twenty-five and eight-tenths grains of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard, and it shall be the duty of the Secretary of the Treasury to maintain such parity."

- Gold Standard Act of 1900, signed, William McKinley

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"The words uttered in 1834 by Daniel Webster in the Senate of the United States are true to-day, 'The very man of all others who has the deepest interest in a sound currency, and who suffers most by mischievous legislation in money matters, is the man who earns his daily bread by his daily toil.'"

- Grover Cleveland (also appeared on FRN $20s)

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"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance."

"Since the general civilization of mankind, I believe there are more instances of the abridgment of freedoms of the people by gradual and silent encroachment of those in power than by violent and sudden usurpations."

- James Madison, "Father of the Constitution"

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"My agency in promoting the passage of the National Banking Act was the greatest financial mistake in my life. It has built up a monopoly which affects every interest in the country"

- Salmon P. Chase, Lincoln's Treasury Secretary

In 1864, as Chief Justice of the Supreme Court Justice, Salmon P. Chase ruled that paper money is unconstitutional in the USA.

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See Part 3

Follow the Money (Part 1)

The history of the United States is one of relentless struggle against monarchical financial plunder. With the 1913 reinstatement of the king's bank in America, we've slipped back into financial slavery on behalf of the same faceless money power.

As is the case with swindlers and horse thieves, cowards prefer to blend into the shadows. Heroes are more easily recognized. The Federal Reserve central bank mocks the prominent men who tried to beat them, by trading their heads on the same private paper debt those heroes tried to exterminate.

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"If ever again our nation stumbles upon unfunded paper, it shall surely be like death to our body politic. This country will crash."

- George Washington (likely a paraphrase)

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FDR, arguably the most successful agent of the modern Federal Reserve and limitless national debt, designed the back of the Fed's $1 bill. When he signed off on the design, he scribbled a note to move the Eye of Providence to the more prominent position, even though it is the back side of the Great Seal of the United States. [click here to enlarge]

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"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that grow up around them will deprive the people of all property, until their children wake-up homeless on the continent their fathers conquered."

- Thomas Jefferson

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"I have two great enemies, the southern army in front of me and the financial institutions in the rear. Of the two, the one in the rear is the greatest enemy. The money power preys upon the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes."

- Abraham Lincoln

"I know with certainty the division of the United States into federations of equal force was decided long before the Civil War by the high financial powers of Europe. These bankers were afraid that the United States, if they remained as one block, and as one nation, would attain economic and financial independence, which would upset their financial domination over the world" ... "The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilization. They will not hesitate to plunge the whole of Christendom into wars and chaos in order that the earth should become their inheritance"

- Otto von Bismark, Chancellor of Germany

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"A national debt, if it is not excessive, will be to us a national blessing."

- Alexander Hamilton

Hamilton instated the first central bank in America, but a careful reading of Hamilton reveals he thought a strong but fair U.S. bank was a necessity if we were to ever throw off the moneyed power of the Bank of England. In Treason in America, Anton Chaitkin details how the BoE dispatched Aaron Burr to murder Hamilton, which he did.

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"You are a den of vipers and thieves! I will to rout you out, by the Eternal God, I will rout you out. If the American people understood the rank injustice of our money and banking system there would be revolution by morning."

- Andrew Jackson

"I will kill you before you kill me! "

- Andrew Jackson, to the Second (Central) Bank of the U.S. after a failed assassination attempt

To my knowledge, Andrew Jackson was the only man, ever, to successfully kill a central bank, thereby embarking on a 75 year stretch of booming prosperity where wealth was the property of the people. The Industrial Revolution was born.

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See Part 2

TRADING ALERT - Treasuries Again

I initially issued this alert on the January 6th with the Dow touching 9,100 and gold at $865. Treasury yields are moving higher as a write this, as more supply is dumped on previously-demonstrated insatiable demand.

Another significant blip in the liquidity drain is materializing. Expect virtually all asset classes to sell off.

Right now (9:20 EST), Dow Futures are only showing -6 points, gold has toggled below $830, and the dollar is embarking on another acute leg up, all reflecting stronger USD buying power which directly results in lower asset prices.

All of this is confirmatory for my published Dow target of the mid-6000s in Q1 2009.

Two Debts Never Go Away

If you want to understand our government's most urgent priorities, look at the two types of debt that can never be reduced in bankruptcy. Destitute? Too bad. Pay up.

1) IRS Debt. No surprise, here. Our government has evolved into a heartless machine to transfer money from her people to uber-wealthy Federal Reserve shareholders. Why is IRS debt non-negotiable? Two reasons:

a) Making Federal income taxes irrevocably payable in central bank notes is a sure way to guarantee the bank can never go away. All central banks follow this tenet of power.

b) All IRS collections go directly to Federal Reserve banks. As such, they represent the end-game of all Fed scams. Strange. One could be forgiven for thinking U.S. tax collections might find their way into the U.S. Treasury. Nope. If you've written a check to the IRS, maybe you noticed the endorsement:

"Pay Any F.R.B. Branch or Gen. Depository for Credit U.S. Treas. This is in Payment of U.S. Oblig."

I'll translate:

We the F.ederal R.eserve B.anks have first lien on all U.S. tax revenue. It is ours, not yours.

This oddity led President Reagan's 1984 Grace Commission to report, in their cover letter:

"Resistance to additional income taxes would be even more widespread if people were aware that:

• One-third of all their taxes is consumed by waste and inefficiency in the Federal Government as we identified in our survey.
• Another one-third of all their taxes escapes collection from others as the underground economy blossoms in direct proportion to tax increases and places even more pressure on law abiding taxpayers, promoting still more underground economy-a vicious cycle that must be broken.
• With two-thirds of everyone's personal income taxes wasted or not collected, 100 percent of what is collected is absorbed solely by interest on the Federal debt and by Federal Government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from their Government."

2) Student Loan Debt. One has to think for 10 seconds before realizing that permanently enslaving our best and brightest is a non-negotiable objective of the Money Trust. Get 'em early and put the time value of debt on the bank's side.

Can't find a job after borrowing wildly inflated tuition cash? No relief for you. Get to work. Use those smarts to figure a way to pay.

Predators to the Rescue!

Mr. Mortgage has another excellent essay illustrating the "altruism" of predatory loan modifications.

You can read his commentary as well as I can, so I won't recap, but if there was ever a doubt that those in charge (I'm talking about the Money Trust that owns congress) are wantonly accelerating the downturn to secure defaults and seize assets, then please take another look at the last page of his scanned WaMu loan modification:

[click to enlarge]


Such predatory modifications are aggressively endorsed and subsidized by our government. Our government will pay banks $1,000 for every loan modification agreement they can produce, plus 50% of the total loan default the bank is able to generate:

HR 7326
(a) In General- The Chairperson of the Federal Deposit Insurance Corporation shall establish a systematic foreclosure prevention and mortgage modification program by--
(1) paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and
(2) sharing up to 50 percent of any losses incurred if a modified loan should subsequently re-default.

The "up to 50%" language means a full 50% as long as the loan principle is under the appraisal. There is no limit to the amount of interest and fees the government will reimburse the bank to impose. The bankers running Washington aren't only seizing the foreclosee's assets, they are seizing yours.

On a side note, it looks like the banks' lawyers were careless when they wrote the bill. I'd like to see homeowners claim the 50% provision, as it accidentally omits the word "servicer." The FDIC's charge is to pay injured people, not bankers.

Can the Fed Print Currency to Counter Deflation?

Gorilla dust. When gorillas fight, they throw dust in the air to confuse each other."

- H. Ross Perot, 1986, while resigning from GM for "not building cars customers want."

As a frequent intelligence-gatherer, perusing the Main Stream Media for ideas on what not to do, I have yet to hear a correct explanation of how currency is created in a debt-based monetary system. Strange. It's kind of important right now, isn't it? Is it that "the experts" don't understand a thing about it, or that they don't want others to understand it? I think, the former.

As is always the case with money, the scams are simple and the fog is thick. So here is how the printing press works, or doesn't work, in America. There is no more important set of concepts to grasp given today's currency inferno as bank loans go bad. I know some will say the following is oversimplified, it is, or that I have my buying and selling all mixed up, that is the kind of confusion you can expect in an Orwellian demeritocracy.

Currency creation, step by step:

1) Corrupt or inept politicians ignore, do not understand, or have never read, Article I, Section 8 of the U.S. Constitution.

"The Congress shall have Power To coin Money, regulate the Value thereof" -United States Constitution

2) Moneyed Vultures, to borrow a term from 1913, a collection of the world's richest bankers, collude with (#1) to create a "central bank." The concept is sold on the premise that there is such a thing as good debt and the government needs good debt to prosper. That is a ridiculous notion, all debt is bad debt, but we'll leave that for another day. The ability to take on debt, to run deficits, and the reassurance that it is really a good thing or that "deficits don't matter" is very appealing to politicians, because they can spend without raising taxes. The attractiveness of debt over tax collection is the central bank's primary political hook.

3) The government partners with this strictly for-profit, cartel of private banks to issue its national currency. A legalized currency monopoly is born. The bank gets an exclusive deal to loan cash to a faceless government, and the government gets to spend that cash sans the political burden of taxation. The U.S. central bank is called the "Federal Reserve." Much like "Federal Express" they hope to imply some vague governmental association to gain stature and trust. Not only is this cartel of 12 private banks, headed by the Bank of NY, not part our government, as a "creditor" to our government, the Fed is distinctly above our law. In fact, congress is not allowed to audit their books, nor do we have any say or legal recourse with regard to their actions. They are the USA's exclusive creditor; the creditor owns the debtor.

Normally, we associate a "creditor" with someone with money available to lend. However, this kind of "credit" is derived purely from the cartel's currency monopoly. They don't lend or need actual money, they lend their exclusive, legalized privilege to print more currency.

4) The central bank, which I will now refer to as "the Federal Reserve" or the "Fed" despite the fact that they are not federal, and they keep no reserves, agrees to "buy" all the bonds the government does not sell. During this exchange, trading new paper currency (paper) for a real live Treasury bond (money), the Fed is not really buying anything, they are selling freshly printed cash, at interest. The government is actually buying spending cash, using real money, or our bond, which is a binding promise that our children will toil on the central bank's behalf.

The Fed rents a color printer at the U.S. Treasury to print their private-issue interest bearing Federal Reserve Notes (FRNs), aptly called bills. That's a joke, they don't actually rent the color printer, they charge the Bureau of Engraving and Printing a hefty fee for every dollar they print. Using the U.S. Treasury as a printing service is a careful part of the illusion that our government prints her own currency, it also secures the full resources of the United States to prevent secondary counterfeiting. If the Fed properly reimbursed the government to print FRNs, more people might notice the constitutional violation. Instead, the U.S. Treasury pays the Fed a healthy service charge for printing each note, which is nothing but profitable gorilla dust.

5) Politicians quickly spend the hot new cash to "stimulate" votes--I mean--help the economy. Like all counterfeit money, fresh new currency yields full face value at the point of introduction. As it cools, it dilutes the existing currency pool and we all pay for it via the inflation tax.

Presto! Currency has been printed and promised to be paid for, later, by someone else.

Now, if that was where the orgy of crime ended, then one could argue that the government, by contracting Fed private banks can actually print new currency to counter deflation. Unfortunately, the orgy is only getting started, central bankers aren't even naked yet.

So we've followed the new currency to the point of the crime--deficit spending--now, let's follow the money. All profitable schemes scream for leverage, and when you are in the counterfeiting business, leverage means cutting dealers in for a piece of the action.

6) The bond, our money, is wholesaled to the Fed's primary dealers. The bond ultimately becomes new commercial bank reserves, against which banks offer more loans. And more loans. And more, and more, and more loans. Much more than they have money to lend. They extend as many loans as they can find genuinely profitable borrowers. A profitable borrower is someone they trust will pay them back with interest. The act of lending out more money than they possess is called "fractional reserve banking" because they have promised more than they have in reserve.

Banks used to lend out about 10 times more than they held in reserve. But lately, the government has been actively buying the riskiest loans back from the bank, via fronts like Fannie Mae and Freddie Mac. Now, new loans do not need to pass a profit sanity test. Excessive risk is transferred at a premium, that's right, to the same government who created the underlying bonds. The net result is bank lending up to 40 times reserves.

Banks also take in new reserves from people in the form of customer deposits. They pay a small amount of interest, then lend out 10 to 40 times that deposit at a higher rate. A bank might pay you 3% for the use of your money, then loan it at 6% to 10 to 40 borrowers. Net profit: about 200%/year on money they don't have.

So where does all this extra cash come from? Don't ask. The 97% of loaned money that banks do not possess is simply printed, on the spot. When you take out a bank loan to buy a home, the bank requires you open an account with them. That is because they don't have the money to give to you. The account allows them to make an un-backed accounting entry to affect your balance, at interest, and nobody is the wiser. Well, bank regulators know they are doing it, they allow fractional reserve banking. No, they encourage it; a fringe benefit of colluding with government.

Lending money you do not have is called "fractional reserve banking" by elitists and intellectuals. It's called "counterfeiting" by more sensible criminals.

7) Much more currency has now been successfully created and laundered. That is, placed in someone else's name: yours. You spend the fresh new cash into the economy, and then return the money to the bank, plus interest.

The grand counterfeiting scheme is complete. Maximum leverage has been achieved. The riskiest loans have been sold back to the government, and if it all goes to Hades in a hand basket, the FDIC steps in and pays the account balances.

So let's revisit the headline question:

Can the Fed print currency to counter deflation?

The answer:

No. The Fed can only print more bank reserves which then must be multiplied another 10 to 40 times in phony, un-backed commercial bank notes and paper, or the existing paper supply will deflate when credit runs dry. In order to counter deflation, the central bank first requires an ever increasing number of genuinely profitable borrowers, or some colossal new government agency, hellbent on creating another subprime catastrophe. Newly printed Fed reserves and the corresponding government spending (all of which must be paid back to the Fed at predatory interest rates = a long term net reduction in the money supply) simply cannot counter somewhere around $500T and $750T in existing commercial bank leverage, stacked on top of previous Fed paper, going bad due to poor underlying credit and default.

TRADING ALERT - Treasury Footprints in the Sand

From time to time I will post a TRADING ALERT. Those words will mean that a money making opportunity is rapidly approaching or has arrived. Unlike most financial pages, my goal is always to post ALERTS before they happen or at least while there is plenty of movement left in front of us.

Treasury rates have started to tell us something very important. Let's summarize what we know, first:

1) Treasuries have been pinned at all time low yields for months. The 3 Month T went negative yield for sustained periods of time. Low yields mean that an enomous amount of wealth is willing to accept little return ON capital in order to ensure return OF capital. A 0% yield means they just want to get their capital back after a storm passes. Negative yields mean they are willing to pay or sacrifice some capital just to get the remainder into a storm shelter.

2) These low yields are historically extraordinary. The previous all time low yield occured when Hitler rolled over Poland. We've blown that record away. This is no small feat, a lot of money is moving.

3) A large number of bids on those Treasury instruments did not get filled. Two bids went unfilled for every successfully purchased instrument.

4) We have record government spending bringing a record number of Treasury instruments to auction to fund that spending.

5) The US dollar is rapidly strengthening relative to other major currencies.

Let's analyze what this means, number by number:

1) Big picture - wealth protection is the rage, risk is being shunned.

2) ...like never before.

3) Pent up Treasury demand is waiting. Bidders know more auctions are coming. They've decided not to pay an excessively negative yield and accept the risk of waiting a short time for more supply to arrive.

4) The supply truck has arrived. It is dumping a record number of Treasury instruments on the market place, right now. Note the 3 Month Treasury Yield (^IRX) on my ticker is now above it's long grind at 0% and occasionally negative yields.

5) A strengthening dollar exchange rate implies that the increase in T yields is not because the dollar is being shunned. A more traditional rise in Treasury rates might occur when the dollar is being shunned and Treasury supply is more stable, that means people can pay a lower price to hold dollars, or conversely, the US Treasury must pay a higher yield to attract dollars--that is NOT what is happening here.

The Opportunity: This analysis adds up to a new flow of capital away from risk, occurring right now. That is, out of the venture economy and into hiding. This equates to a large amount of downward pressure on paper assets which are a relatively liquid source of funds. Stocks are in a topping process and about to start another significant leg lower. In fact, any asset with lots of liquidity left buoying high prices is vulnerable to this liquidity drain. I've recently pointed to gold and other PMs as a shorting opportunity, this analysis is supportive of those positions.

The Play: I think we are within a few % of the counter rally high, and I project about a 20% decline during the next leg down. Begin to short liquid assets like stocks and precious metals. Illiquid asset prices like real estate will suffer just as much, as liquidity is absorbed into the protection of Treasuries, but prices will not move as quickly.

Icing on the Cake: Most will misinterpret rising treasury yields as inflationary, and take the opposite positions. They will supply your profits.

See my OPEN MARKET FORECASTS, listed below, for expected price levels.