Gold and the Sovereign Debt Crisis

This past week the person, who calls himself President again engaged in extortion by threatening to shut down the government, default on bonds and deprive Americans of their Social Security and Medicare. We all know that is not going to happen unless the illegal alien wants to start a revolution. He can cut costs anytime he wants, but he is more interested in terrorizing the old and the infirm, so he can continue his wild spending. That is what his handlers have told him to do and that is what he will do. Social Security is not an entitlement, because we paid for it and it belongs to us. If politicians have stolen the funds, or these politicians cannot replace the borrowed funds, then the government should issue bonds and have the Fed purchase them, just as they have to bail out the financial sector not only on Wall Street, but also all over Europe. In addition, he might contemplate cutting spending.

His behavior in a congressional meeting this past week, or shall we call it a childish terror tantrum, was truly reminiscent of a deeply disturbed dictator. This was a psyop operation to force opposition politicians to capitulate to his demands, not to cut the budge and spend endlessly until the bottom falls out of the economy.

America is insolvent and has been so for a long time, and these games of massive deficits, stimulus and quantitative easing only delay the inevitable deflationary depression and economic and financial collapse, which has been deliberately created by Wall Street and banking to force us to accept World Government.

The actions of Senator Mitch McConnell were absolutely reprehensible and a disgrace. An effort to continue spending to keep his benefactors behind the scenes happy. His proposal was to allow the President to increase the debt three times before the end of 2012, which would be accompanied by Mr. McConnell’s spending cuts. This would avoid a vote and allow the President to act as dictator. Another scam and no mandated cuts. What this boils down to is political theater and the elections not that far away. They’ll be no cuts if any agenda passes, only cuts of future increases.

The national debt will not be touched and the wild spending will continue including $4 trillion to continue more wars. That means $1.5 trillion annual deficits forever. The climbing debt is 80% consumed by the Federal Reserve, which creates money out of thin air. Are we to believe that the Fed will create $2.5 trillion a year for the next three years and perhaps longer? The answer is yes, and the result will be hyperinflation, which will ruin the value of the US dollar. It is obvious the elites are not really looking for a solution; they simply want to destroy the value of the dollar to extinguish economic and financial stability, thereby forcing Americans, Brits and Europeans to accept World Government.

Europeans are finally realizing they cannot bail out six countries for more than $4 trillion without pushing themselves into insolvency. We pointed this number and possibilities out 1-1/2 years ago. There will be a Greek default followed by five other defaults, which will lead up to the end of the euro and perhaps the end of the European Union, that unnatural association. Such defaults over the next few years would wipe out most European banks and that will spread across the world. The catalyst for world financial catastrophe. The money being additionally loaned by EU sovereigns reaches Greece and does a U-turn and returns to European bankers to service debt. In the meantime via austerity Greece descends into a great dark pit. IMF funds take the same route of which almost 20% comes from US taxpayers. In addition the European bank exposure in Greece in part is covered, or insured, by American banks for $160 billion. The reason the banks do not want a default is that the US banks will have to pay off and they do not have the funds to do so. That event could trigger a world banking collapse, or another bailout via US taxpayers and the Fed. There is now no question that the euro will pass into history as another utopian nightmare. For those who were paying attention Greece and Italy should have been bailed out in 2001, not be admitted to the euro zone.

Contagion is doing its work and it is only a matter of time before the dominoes fall. Italy’s public debt to GDP is world class at about 120% and as interest rates climb servicing gets more expensive. Italy and Spain are the real linchpins. If they default everything in those six nations collapses. As we said previously the financial contagion will not only take down the euro and euro zone, but probably the EU as well.

As a result of onerous debt Greek bonds have lost 50% to 75% of their value and the bonds of the other five insolvent countries are in fact in negative pursuit. In just the first quarter Greek spending has fallen 40% just as salaries have. As a result tax revenues have plunged, as we predicted they would some time ago. This is no way to help an economy.

Greece has $480 billion in debt outstanding and about $160 billion is insured by credit default swaps sold by NYC legacy or money center banks. The same thing is true regarding Ireland. Needless to say, the CDS exposure is a guess because there is no reporting or regulation on OTC derivatives. These banks and others as a result just make arrangements that please them. This is why these instruments of financial destruction should be totally banned.

The writers and users of credit default swaps and other derivatives are aiding in continuing this speculation by forces within governments, prominent people such as Sir Alan Greenspan and the media. A change in derivatives reporting is out of the question, so that they can be bought and sold unhindered. In the end when the writers get in trouble it is the taxpayer who guarantees the bill and gets to pay for it.

As you have seen recently in Europe there has an outcry concerning derivatives and the ratings dispensed by rating agencies. Russia and a number of other nations will no longer accept the ratings of S&P, Moody’s and Fitch, because they are bogus and are politically motivated. What agencies do is write a report on a company or nation. Presently the report and demand the entity pay for the report. If they do not pay more often than not a new report follows that is not so flattering. It is called extortion. Wall Street and banking control these agencies. Look at the fraud and criminal collusion in the MBS-CDO market. Outright criminal fraud and the courts refused judgment. These people, who run these companies, should be in jail. They are not because they are part of those who run the system. The Europeans have known this for years, but for whatever reason they have tolerated it. The ratings given by the raters, and the massive use of derivatives have been responsible in great part for the credit crisis. They prompted massive speculation on a scale previously unheard of. It was used for enrichment as well as to keep the system functioning.

What comes to mind is the recent flurry of credit rater downgrades of weak European countries and their sovereign debt. The problems these countries have were known more than ten years ago and now all of a sudden they become a major issue. If Wall Street and US banking control these agencies and the agencies keep downgrading these sovereigns what can be the motivation? We surmise the problems in Europe serve as a distraction from America’s problems, but there could be a more compelling reason. That could be that the powers in NYC and Washington want to destroy the euro as an alternative to the US dollar as the world reserve currency. There could be a major conflict taking place at the highest levels behind the scenes, as to how the world will be run and finances are at the heart of the conflict. It is something to contemplate. We have already come to that conclusion. In this process lower sovereign debt ratings lead to higher interest rates that put more and more financial pressure on these already crippled countries. You can never fully contemplate what goes on in the twisted minds of these predators. Plots so diabolical and evil that the normal descent mind cannot comprehend them.

As we have pointed out the European Central Bank, ECB, has made many mistakes. This is a central bank, which is a semi-federal institution, which gets pressure from all sides. This state of affairs leads to hesitancy, which becomes incompetence. At the beginning of the credit crisis they had to be backed by the Fed that lent them trillions of dollars just for the ECB and other member banks to stay afloat. That was and is a dreadful state of affairs. It could be that the condition was in large part caused by the bonds rated AAA by raters and Wall Street, which were in reality BBB bonds. Those European institutions lost trillions of dollars and what is very strange is that there were no civil or criminal legal action regarding the fraud. Of course, when elitists are involved cases never reach court and when they do no one goes to jail. It is what we call a criminal culture.

The ECB was the bank that couldn’t sell gold fast enough. Gold as a percentage of assets was 15%, it is now 5%. The ECB is leveraged at about 25 to 1, when 9 to 1 is normal. If assets fall in value 5% the ECB is wiped out. That could very easily happen. They currently hold about $280 billion in Greek bonds that are not worth the paper they are written on. That loss is double their capital base, which means they are insolvent, yet, they go on their merry way deceiving the world. Thus, it is not surprising that the ECB and mostly other central banks and commercial banks want to rape Greece of all its assets at 10 cents to 30 cents on the dollar. As you can see the Greek problem alone can take the euro and EU banks down in a pile of rubble. As a result of this situation the 17 euro zone members would have to recapitalize the ECB, or it could not function. The sovereign banks could contribute and the ECB could sell gold or it could print more money making its euro worth less and cause higher inflation. Even though the US and Japan are in more serious debt load problems the ECB is closer to losing control. Dealing with debt problems is enough for one nation, but having to deal with 17 or 27 nations is daunting.

It is not all that easy for the dollar. Including China foreign reserves kept in US dollars is about 60.5% down from 61.5% just three months previous. As long as the dollar is continually sold it will remain under pressure. If the euro falls by US design then you can understand why. It is because a weaker euro helps the dollar mask its problems. Everyone has to use currencies, but confidence in the euro, dollar, and yen are definitely in retrograde. The US dollar, although it is the world reserve currency, has lost and loses confidence every day because the American system is being looted by Wall Street and banking. As we write a new plan B is going to be discussed this week in regard to the extension of short-term US debt. Thus far the Republicans say they won’t accept tax increases and the President has said he is willing to sacrifice Social Security and Medicare programs the public has paid into for more than 40 years in the case of Medicare and since June of 1935 in the case of Social Security. There has been absolutely no mention of cutting military spending, which has been more than $5 trillion. Thus, perpetual war for perpetual peace will continue and our elderly will starve and go without health care to insure early death, thus relieving government of the burden of having to care for them. Those who call this a political victory for the President are sadly mistaken.

The Constitution says to force default on public obligations of the US is plainly unconstitutional. That includes pensions that should not be questioned. The debate alone is unconstitutional. What we are seeing is an attempt of government to avoid obligations. The Constitution is not optional, it is the law, and the President and the Congress knows that. What should be in process is a discussion of the long-term deficit. That is the way to solve the crisis.

In addition nothing is being done to solve the underlying problem. The banks, Wall Street, banking, insurance and select corporations have had a temporary reprieve, but little has been done to put the economy back on track. Recoveries create tax revenues and reduce debt. That solution to too simple for Washington. They are more interested in cutting paid for benefits then cutting the profits of the military industrial complex.

We all know why Social Security and Medicare were created. They provided health care and income so that the old do not have to survive in poverty. They meet the basic needs of those who cannot help themselves. These programs would be self-sustaining if government didn’t loot their contributions. Are we to all suffer as Congress refuses to come to grips with the real problem and continues to play politics? Are we to suffer because the President refuses to follow the Constitution? Are these players willing to destroy America, as we have known it? We believe that may be the case.

There is little confidence left in government and that is truly understandable

Why China’s New Futures Market is Bullish for Long-Term Silver Prices

Keith Fitz-Gerald writes: If you’re still bearish on long-term silver prices, you’d better reconsider your stance.

Dollar-denominated Chinese silver futures were scheduled to begin trading on the Hong Kong Mercantile Exchange early today (Friday). This development will grant Asian investors direct access to the metal, and will blunt the U.S. dominance in silver-bullion trading.

It’s also highly bullish for long-term silver prices.

Let me explain …

A New Catalyst for Silver Prices
The Hong Kong Merc’s entry into the silver-futures market is a game-changer – for a number of reasons. For one thing, the emergence of a new market player will effectively neuter U.S. elitists like those at the Chicago Mercantile Exchange (CME).

I specifically mention the CME because that exchange unilaterally raised margin requirements on silver by nearly 100% in a mere eight days this spring – after silver prices had roughly 150% between late August and the end of April. The CME action helped cause silver prices to plunge by 30% from its recent highs.

It hasn’t recovered. [ Silver was still trading in the $39-an-ounce range as of yesterday (Thursday), according to Bloomberg LLC .]

Longer-term – and probably even more significantly – this move will help investors in China and India buy into bullion. In fact, this will be the first time Chinese (and many Asians in the surrounding markets) can purchase silver-futures contracts and, by implication, take delivery. Historically, investors in those markets had to purchase CME-based contracts that are standardized and traded through the Hong Kong Futures Exchange – in accordance with the Chicago-based CME.

In case you aren’t familiar with them, futures contracts require the buyers to be prepared to take ownership and delivery when the contract comes due. Like any other “contract,” futures are legally binding agreements for delivery of the underlying asset (in this case silver) at an agreed-upon future date and at an agreed-upon price. Further, they are standardized by futures exchanges with regard to quantity, quality, time and the place of delivery.

Only the price changes, which is why futures contracts can offer more financial flexibility, leverage and financial integrity than trading the underlying physical assets themselves.

Asia is already becoming a bigger factor in the silver market. From 2008 to 2010, silver demand soared 17% globally – including 67% in China alone (reaching 7,495 metric tons), according to the Hong Kong Merc. In fact, China accounted for nearly 23% of global silver consumption last year …

That makes the new futures contracts an even bigger deal than most investors have yet to realize.

•As the U.S. dollar weakens further – and as China’s financial power grows – you can bet that country and its individual investors will escalate their purchases of hard assets. This escalating demand will translate into higher prices for silver.
More than 20 of the Asian region’s most respected and well established financial institutions and brokerage houses are already members of the Hong Kong Mercantile Exchange. And that list will grow as trading volumes expand.

I am expecting volume to grow rapidly. And I believe the Hong Kong Merc has the same expectation. Indeed, the exchange’s own advertising conveys this ambition: The ads talk about the “new force in global-commodity trading” and refer to the allure of “Chinese access, Asian pricing and global risk management.”

The new HKMEx silver-futures contract provides for 1,000 troy ounces (30 kilos), with delivery at specified depository facilities in Hong Kong. This makes it considerably smaller than the 5,000-troy-ounce contract traded on the CME, meaning it could be quite a bit more liquid – which was absolutely the intent.

“The new contract will enable buyers and sellers in China to trade effectively with their counterparts across the world,” said HKMEx President Albert Helmig, “while at the same time, allowing investors to gain exposure to silver-price movements and broaden their investment portfolio.”

The Outlook for Long-Term Silver Prices – And Gold, Too
This is the latest illustration of China’s steadily advancing influence in the world’s capital markets, a trend I’ve been telling you about for several years, now.

And it’s easy to see why today’s development is going to be highly bullish for long-term silver prices. China’s muscle isn’t to be underestimated. It has a staggering $3.2 trillion in currency reserves, and it has to put that money somewhere; investing even 0. 1% of those reserves ($3.2 billion) in silver would move it well beyond current prices and would help propel the “other precious metal” up past the $60-per-ounce target that I’ve forecast. The same is true for gold, which I have noted may reach $2,500 an ounce or more in the next few years.

That’s not all, either.

The Hong Kong Merc plans to introduce yuan-based gold, silver and even agricultural-based futures contracts shortly as a backdrop for the Chinese yuan’s newfound strength. This will allow still more crossover between the dollar-based contracts and the yuan itself, further weakening the stranglehold on precious-metals pricing long enjoyed by the Chicago and New York Mercantile Exchanges. It will also give China more influence on the overall world prices of natural resources products, and will help nurture the yuan’s transition into a legitimate global-reserve currency.

Incidentally, other institutional investors are beginning to see what I’ve known for years – just how important Asia in general, and China in particular, will be to long-term commodity prices. Just this week, in fact, when Newedge USA LLC predicted that gold prices would surge to $1,800 by the end of this year, and that silver would zoom to $70 an ounce by March, the New York-based futures-commission merchant said that climbing physical demand in Asia would be one of the key factors.

And that’s just a start: The outlook for long-term silver prices is even better.

Actions to Take: The Hong Kong Mercantile Exchange’s entry into the silver-futures market is a game-changer. It’s highly bullish for long-term silver prices and in fact, isn’t even the last move we’ll see this exchange make into global commodities markets.

I believe this could help send silver prices up past the $60-an-ounce price target that I’ve talked about – which is more than 50% above silver’s current price in the $39-an-ounce range. Over time, gold, too, will benefit.

So how do you play this important development?

That obviously depends on your individual circumstances and risk tolerances. But investors seeking to ride this trend should be looking at silver and gold-related exchange-traded funds (ETFs), bullion, or even futures contracts on the New York Stock Exchange, Chicago Mercantile Exchange or Hong Kong Mercantile Exchange. They could also purchase y uan, which will be at least partially backed by growing silver reserves if the new futures contracts are half as successful as we expect them to be.

The Great Default, The Feds and Their Mega-Debts

To cheer your day – maybe your year – click through to this chart on tax revenues. The U.S. Government has hit a tax revenue ceiling. It is in the range of 16% of GDP.

The government is spending about 24% of GDP, which is down slightly from 2009, which was the all-time high since 1945.

There is gridlock in the negotiations over the increase in the debt ceiling. The House Republican majority seems unwilling to vote for any increase in the ceiling that includes tax hikes. The Democrats vow that they will not accept spending cuts without getting tax hikes on the rich.

Geithner and Bernanke warn of a disaster if the government has to stop making interest payments to the non-Trust Fund holders of Treasury debt.

Social Security and Medicare are both running deficits, and these deficits will get worse if the government ceases to make interest payments on the debt held in their Trust Funds. So, temporary default is no escape hatch here. The payment of interest is merely an accounting device. The payments from the general fund must continue, whether they are called interest or not, if the two programs are not to be modified to send out less money or else have their respective taxes raised, effective immediately.

The Obama Administration can ignore the debt ceiling and keep borrowing on its own authority, forcing House Republicans to do something about it. But there would be political consequences for such a decision. If the President does this, Republicans will cry “foul,” and take their case to the voters in 2012. The government will not shut down any departments, so the Republicans will not get blamed for the political pain caused by such a shutdown. Meanwhile, they can target Obama as a man who violated what is perceived to be the law.

The Democrats could invoke the 14th Amendment of the Constitution, which forbids any questioning of the debt of the U.S. government. The amendment reads: “4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Which are the key words: “validity of the public debt” or “authorized by law”? Then there is section 5: “The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.” But Congress is in gridlock; it cannot pass such enabling legislation. It therefore cannot authorize the President’s action to keep making payments. Some Democrats are threatening this action.

So, we may be heading into a Constitutional crisis to match the fiscal crisis. That will surely make the election of 2012 even more interesting.

A TAX MORATORIUM

If the Republicans buckle on the issue of not raising taxes in order to get a settlement with Obama, then they will be seen by the swing voters – Tea Party members – as betrayers. The anger of the Tea Party is obvious to Republicans in Congress. These voters will not compromise on taxes. Some of them, especially older ones who are more likely to vote in 2012, are willing to see Republicans raise the debt ceiling in order to keep Medicare and Social Security sending out checks. So, I see the Republicans as more willing to buckle on the debt ceiling than buckle on their resistance to higher taxes. The negative sanctions would be less severe for any capitulation on the debt ceiling in what will be perceived to be an emergency.

The Democrats want to tax the rich. This has been true ever since 1933. This will not change. But they are unlikely to get the House to accept this. So, they will be willing to put on hold their demands for higher taxes on the rich. They want to be able to go to their constituents with this message: “We held the line against the Republicans, who were ready to stop checks going out to old people.” The House Republicans are deathly afraid of being uncaring for the needs of old people.

The fear of negative political sanctions is the greatest fear of politicians. Members of the House want to avoid the systematic, well-organized wrath of any voting bloc in their districts that may have the swing votes in the next election. This is surely the oldsters.

The Tea Party is an “unknown quantity.” It seems to be growing. To the extent that run-of-the-mill voters are tired of taxes, a hue and cry over tax increases offers a threat to the re-election of incumbents. This is why I think that Republicans will take a stronger stand against raising taxes than raising the debt ceiling.

This is very good news for taxpayers.

Any increase in the debt ceiling will send a message to Tea Party voters: this government is out of control on spending. Most voters are becoming vaguely aware that something very big and very bad is on the horizon, but they are not sure exactly what.

Most Tea Party voters are not direct owners of Treasury debt. They do not perceive the degree to which they are indirect owners: pension funds, money market funds, local bank holdings. They will not resist an increase in the debt ceiling with the same ferocity that they will resist an increase in Federal taxes.

ALMOST FULL FAITH IN FULL FAITH & CREDIT

An increase in the debt ceiling is good short-term news for holders of Treasury debt. There will be no default on the debt. But, in the long run, it is bad news for holders of Treasury debt. If the government can dodge the bullet this year on the debt ceiling, this will lead to a decade of huge annual deficits and an ever-greater Federal debt.

An increase in the debt ceiling will send the same negative message to holders of Treasury debt. But these people are overwhelmingly optimistic about the short-term future of U.S. government solvency. They do not care about the long term, because they believe that they can always sell their T-debt positions to willing buyers. They have faith that their personal optimism regarding Federal solvency will be widely held when they decide it’s time to sell and buy some other asset. They think that they can become pessimistic ahead of the masses of holders of T-debt. They think they will be smarter and swifter than the market for T-debt. They think they are very smart indeed

Basically, they think they will be as agile as PIMCO, which has sold Treasury bonds. They assume that liquidity at today’s low interest rates will prevail. They do not fear the consequences of rising long-term bond rates on the market value of the bonds they hold. They believe that there will always be a ready market for their holdings at today’s market prices or close to them. They define Treasury debt as AAA. This has been true for so long that they cannot imagine that there will ever be a default.

This widespread faith in Treasury debt, despite the frightening balance sheet of the U.S. government and the equally frightening balance sheet of the Federal Reserve System, is remarkable. It is widespread. It is the basis of the retirement plans of millions of Americans. It is the basis of the solvency of banks and money market funds.

The problem with this optimism is that it undermines any resistance by voters to a meaningful solution to the deficit, which must begin with massive spending cuts. The voters think that there will always be a market for Treasury debt, irrespective of deficits.

In this sense they are like Democrats and their ideological allies, who say that the debt ceiling may be ignored by the President because of the 14th Amendment. Democrats think that an 1868 amendment is the meaningful reality. They think the free market may safely be ignored. After all, investors have always bought Treasury debt. This will not change, they believe, just so long as the President decides to ignore the debt ceiling. They believe in their hearts that, because it is Constitutionally illegal to undermine the solvency of the Federal government, free market forces will not create interest rate conditions that will undermine the full faith and credit of the United States government.

The same is true of investors in euro-denominated assets. Until 2010, it was true of the highly sophisticated investors who bought Greek government debt. They believed the cooked books of the Greek government. Today, the books are far less cooked, but there is still a market for Greek debt, although at high rates.

These supposed experts were dead wrong in 2009. They did not see the Greek debt crisis coming, any more than they saw the financial crisis of 2008 coming. They see themselves as ever so clever, and then they lose hundreds of billions of dollars. Then they call on governments to bail them out, which (so far) governments have done.

The voters may not like this, but the voters have proven unable to stop their representatives from running up the national bills in the name of the voters. There is no real understanding of the nature of the exponential increase in government debt since 2007. They think someone is minding the store. Someone is: the biggest banks and their dutiful representatives, the politicians.

TAX RELIEF, NOT DEBT RELIEF

Americans are not going to experience any increase in their tax burden this year or next year. The Democrats would have to gain a clean sweep of Congress and the White House in 2012 for taxes to be raised. If the Bush rates are allowed to lapse, we have until 2013 to escape new taxes.

The political case for government deficits has never changed: the ability of politicians to increase spending without facing outraged voters at the next election. Taxes are understood. The pain they impose is understood. The goal of politicians is to conceal this pain, preferably by deferring it. They have done so by the following techniques.

1. Taxing a minority of voters
2. Imposing hidden taxes, including inflation
3. Making payment less painful (e.g., withholding)
4. Borrowing

It is obvious that #4 is the prevailing strategy for politicians all over the West. The central bank of China has made this the path of least resistance. The politicians of China, mercantilists economically and Communists politically, have chosen to tell the People’s Bank of China to inflate the yuan, buy Western currencies, and then buy government debt. This keeps the price of the yuan low, which subsidizes exports from China. The residents of China buy fewer China-produced goods. The central bank buys IOUs from governments that can never repay, in order to subsidize the owners of export industries. The losers are Chinese citizens, who subsidize Western buyers.

The problem is this: addiction. The Communist politicians are addicted to a domestic boom funded by monetary inflation. The Chinese exporters are addicted to Western consumers. Western consumers are addicted to low-cost goods from China. Western politicians are addicted to Chinese central bank purchases of Western government IOUs.

This is all proclaimed by Keynesian economists as sustainable economic growth. Keynes was the great apostle of government debt as a way to increase government spending to stimulate economic growth. The modern economy is a testimony to Keynes’ commitment to government debt. For as long as there is no mass price inflation, no depression, and no government defaults, most voters are content. Economists can continue to draw their salaries in tax-funded and government-accredited universities. They can continue to receive grants from the Federal Reserve, which is the nation’s licensed counterfeiter. All seems safe and sound.

But this illusion of safety is being challenged by the threat of default by governments. This is an immediate threat in Europe. It would be an immediate threat in the United States if the debate over the debt ceiling reflected unyielding intransigence by House Republicans.

Tax relief is more likely than debt relief. The game of “defer the pain” will go on. The politicians will continue to do what they have done for centuries. They will evade the fiscal requirement of raising taxes and then actually collecting them.

They have run out of two alternatives. They cannot make taxes easier to pay (#3). But they can impose the hidden tax of monetary inflation, which redistributes wealth toward those citizens who get early access to newly created central bank money (#2). In the United States, they are not able to collect taxes from the rich (#1). The rich will find ways to evade paying new taxes. This leaves #4: borrowing. So, #2 and #4 are the paths of least resistance.

This is why I think there will be tax relief, in the sense of no increases of tax pain. This will be paid for, as it has for centuries, by an increase in government debt.

This will defer the crisis. That is the #1 function of government debt. It always has been. This is why debt crises hit all nations.

The problem is, they do not hit very often. The voters are not alert to the negative implications of the policies of massive government debt.

The most effective way to eliminate government debt is to lose a major war. The central bank inflates during the war, so all pre-war debts are wiped out. Rising prices are blamed on the war, meaning the bad guys in the other side’s trenches. The loser of the war then defaults. (The only exception, most of the time: Japan.) The citizens on the winning side are now saddled with massive debt. The losers escape.

Historians don’t mention this in the textbooks that are written for citizens in the winning nations. Historians in the losing side also don’t mention it. They know there will be economic recovery. This will create lots of new opportunities to fund new wars that will be funded by massive debt.

The sinews of war are strengthened by central banking. This is why textbooks praise the Bank of England. It let the British fight longer wars and more destructive wars. The message: get a central bank for your nation, so that your politicians can declare war more readily and stay in that war far longer.

The West’s voters have believed this since about 1900. The result: the worst years in history and the worst inflations.

CONCLUSION

There will be no tax increases in the USA before 2014. There will be great increases in Federal debt.

We see that the governments of the West are incapable of reducing massive deficits. There is no significant political resistance to the vast expansion of debt. We are in the final stage of the politicians’ addiction to debt. On behalf of future generations, they are buying votes by buying time.

Future generations will elect new politicians who will stiff the trusting, naive holders of government debt. There will be a Great Default. There is no escape. There is no way to grow our way out of this.

There will be winners and losers. In the transition phase, there will be more losers than winners. But, once the deck has been cleared of unsustainable promises issued by generations of lying politicians, there will be a recovery.

Your assignment, if you accept it, is to be a winner and then participate in that recovery (if you are young), or at least survive the transition period if you are older.

Counterfeit Gold Standards : “Accept no substitutes!”

There is abundant evidence that a well designed, well managed, gold standard is better adapted than a monetary standard managed at the discretion of elite civil servants to maintain price stability and strong economic growth. ~ Ralph Benko

Mr. Benko supports the creation of a government-designed, government-run, and government-enforced gold standard. I do not. This is because there is abundant evidence that such a gold standard always turns into the central-bank fiat money standard that Keynesian economists and monetarist economists insist is the only possible way to maintain long-term economic growth. Fiat money is dishonest money.

Economists want dishonest money. So do politicians. So do central bankers. So do commercial bankers. If you want to know what honest money is, I have written a book on this. You can download it for free.

While I have no doubt that the jerry-rigged gold exchange standard that was cobbled together by government bureaucrats and central bankers at the Genoa conference of 1922 was better than Richard Nixon’s fiat money monstrosity that has plagued the world for 39 years and 11 months, it was a pseudo-gold standard from the beginning. It was not a full gold-coin standard under which anyone could exchange a nation’s currency at a fixed rate for gold coins of a fixed weight and fineness.

The full gold-coin standard that prevailed in the second half of the nineteenth century was itself a doomed experiment. It turned into the fiat money standard (1914), which became the gold exchange standard (1922), which became the Bretton Woods standard (1944), which became today’s fiat money standard (1971). Why? Because the full gold-coin standard relied on government promises. “Yes, we guarantee that we will exchange our currency for gold. You can trust us.” It was not a 100% gold standard. It was a 100% trust your national government standard.

In August 1914, European governments that entered the war broke their monetary promises, confiscated the gold that was on deposit in commercial banks, turned this gold over to their respective central banks, which then inflated to fund World War I. It was the biggest bank heist in history. There was no resistance by the public.

The gold exchange standard of 1922 was Europe’s attempt to maintain the trappings of the pre-war gold coin standard, but without full redeemability. It was a central bankers’ gold standard among themselves. It was never intended to be a gold standard for the masses.

That was the problem. It was a gold standard for the elite of elites: the central bankers. It blocked out the secondary elite, namely, government civil servants.

DON’T TRUST, DO VERIFY

Ronald Reagan was famous for his slogan governing nuclear disarmament: “Trust, but verify.” When dealing with central bankers, it should be, “Don’t trust, do verify.” Central bankers are far less trustworthy than Soviet bureaucrats were at their most duplicitous. They have outlasted the Soviet bureaucrats. They got a free ride until Ron Paul’s 32 years of warnings finally gained traction during the central bank-created financial crisis of 2008.

Any time that you see someone in an Establishment media outlet suggest that we need a return to a gold standard, look carefully at the details of his proposition. Does it involve the reintroduction of gold coins by the national mint? If there is legally guaranteed rate of exchange between the national currency and these gold coins, meaning full redeemability? Can anyone go to his local bank and exchange money in his bank account for gold coins? That would get us back to 1914.

Yet even that gold standard would be fake. Why? Because no one is being charged for a service: storing the gold coins. Any time you find a valuable service being offered for free by any bank, you can be sure that there is a ringer somewhere in the arrangement. The bank is luring you into a deal by means of a promise that cannot be met under all circumstances. In this case, it is free gold coin storage. Somewhere in the bank’s operations there is a liability against the gold coins – a liability superior to any depositor’s claim.

In 1914 in Europe, this liability was to the central banks. The central banks in turn were under the authority of the governments. So, there were two sets of superior claims. A mere citizen, let alone a resident alien, did not have priority. The courts did not enforce his legal claim to full redeemability of the national currency.

The average citizen today has no understanding of either the logic or the operations of a gold coin standard. Neither does the average Ph.D. in economics. Certain topics are not explored in detail by economics departments. One is central banking. Another is the gold coin standard. Central banking is never discussed in terms of the economic logic of cartels, which are government-licensed operations against the public interest. The only textbook-level analysis of fractional reserve banking that does this is Murray Rothbard’s The Mystery of Banking (1983), which was not aimed at a college market, and which has not been adopted by colleges.

MUNDELL’S PSEUDO-GOLD STANDARD

Benko is a disciple of Nobel Prize-winning economist Robert Mundell. Mundell is an advocate of a pseudo-gold standard: central banks only. The peons – the likes of you and me – are not supposed to become a part of this Old Boy Network.

I have been reading Mundell since the early 1970s. I recall speaking at a conference sponsored by the Committee for Monetary Research and Education in 1973 or 1974, where Mundell had spoken before I did, i.e., had read an academic paper to non-economists. In my speech, I described what I was being paid to deliver my lecture: “All the beer I can drink, plus an English-language translation of Dr. Mundell’s lecture.” This got a laugh.

Benko cited Mundell verbatim . . . or so it seemed. This is one of Dr. Mundell’s more coherent statements. This was from an interview on Bloomberg television on May 25.

Pimm Fox: You’ve written about the role of gold in the world economy, Professor Mundell. Do you think that we’re going to see any kind of return to the gold standard?

Mundell: [T]here could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade central banks.

The great advantage of that was that gold is nobody’s liability and it can’t be printed. So it has a strength and confidence that people trust. So if you had not just the United States but the United States and the euro tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese yuan and British pound all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.

Benko skipped over Mundell’s crucial sentence, which preceded what Benko cited: “Nothing like the gold standard that existed before 1914. But there could be a kind of Bretton Wood type of. . . .” This was deliberate on Benko’s part. In academia, when you drop someone’s words, you are expected to add three periods, called ellipses. They look like this: “. . .” This lets the reader know that you have dropped something.

Benko did not deem it important that his readers see the crucial admission that Mundell made. Mundell has made this admission for 40 years: “Nothing like the gold standard that existed before 1914.” He got his Nobel Prize because of this admission. Nobody who has advocated or has even suggested the possibility of a return to the pre-1914 gold coin standard has ever won a Nobel Prize.

Benko waxed eloquent about Mundell.

Mundell is the world’s most distinguished living economist. He is a Nobel Economics Laureate. He was the primary source of the original supply-side manifesto, “The Mundell-Laffer Hypothesis,” which led to the low-tax-rate, strong-dollar policy at the heart of Reaganomics. He has acted as a privy counselor to the Chinese government (which in appreciation has named a university for him). Mundell’s guidance, of course, is one of the reasons why mainland China has had 30+ years of uninterrupted double-digit economic growth. Mundell’s work also laid the foundation for the common European currency, the euro.

First, James Buchanan is the most distinguished living Nobel laureate, if we are talking about free market economists.

Second, Mundell had nothing to do with the strong-dollar policy of the Reagan years. Paul Volcker did, beginning in the fall of 1979, when he took over as Federal Reserve Board Chairman, replacing the incomparably incompetent G. William Miller, who had lasted only 18 months, the shortest term on record. Volcker’s policy of tighter money caused the 1980 recession, which let Reagan win in November. He maintained that policy until Friday, August 13, 1982, when the Mexican government threatened to nationalize foreign banks. On Monday, August 16, the Federal Reserve started to inflate. Mundell had nothing to do with any of this.

Third, the Chinese central bank has had the most inflationary monetary policy of any major nation, inflating M2 at close to 20% per annum for at least a decade. The currency is in no way tied to gold.

Fourth, the euro is a disaster.

Benko is a well-meaning advocate of a fake gold standard. No one in the financial world pays any attention to him, any more than the world’s economists have ever paid any attention to Mundell’s call for a pseudo-gold standard.

The point of a gold standard is to limit central banks. It restricts their ability to inflate. It limits their authority over monetary policy. Central bankers do not want limitations on their authority. They are forced to accept some degree of government authority for brief periods during financial crises – crises that central bank policies have created – but they will never voluntarily surrender to the masses their authority over monetary manipulation, meaning central planning.

The entire economics profession, except for the Austrian School, believes in central banking and fractional reserve commercial banking. This means that economists favor a cartel. In universities, they assign a textbook with a chapter on cartels which argues that cartels are profit-seeking, government-licensed, oligopolies that act against the public interest. But textbooks never extend this analysis to central banks and commercial banks. I have said this before, but it bears repeating. Fractional reserve banking and central banking get a free ride from academic economists. They also get a free ride from financial journalists.

Economists call for their favorite pseudo-market, government-administered limitation on this or that aspect of banking. But they do not call for 100% reserve banking, as Rothbard did. They do not call for free banking, as Ludwig von Mises did.

Why not? Because they do not trust the free market to maintain a money supply limited only by mining expenses and voluntary contracts. They give lip service to free market competition, but not at the center of every economy, the money supply. Here, they want final government authority and central bank administrative authority. They believe in people with badges and guns as reliable central planners.

The gold coin standard removes final economic authority from people with badges and guns and turns it over to the masses.

GOLD IS THE HAMMER

In this life, there are nails and hammers. The battle over final economic authority is the battle over the monetary system, for money is the central institution in a division-of-labor economy. Thus, the battle is over who holds the hammer.

Bankers and politicians refuse to turn final authority over to the masses. The elite wishes to retain power over scarce resources. This can be accomplished only through their power over the money supply.

Gold is the ultimate hammer, because it has long been the favored money commodity. It cannot be easily counterfeited. It is expensive to mine. It is easily divisible. It has high value in relation to weight and volume. It is widely recognized. So, it has historic value – not intrinsic value, which no asset has, but historic value. It has easily predictable value.

Gold coins allow little people to hold the hammer. Through the market process, individuals exercise their choices. They determine market value through a system of auctions. The free market is a gigantic auction.

Gold coins keep the auction honest. No one can legally print money to gain influence in the auction. No one can easily counterfeit his way into great wealth, outbidding others.

Central bankers want to direct the auction. So do politicians. So do commercial bankers. All three elite groups have an incentive to keep gold coins out of the auction process. Gold coins keep the auction honest, and elites maintain their power through dishonesty – above all, dishonest money. They fear honest money.

Gold is described by ignorant journalists as the money of plutocrats. Fiat money Greenbackers like Ellen Brown agree. (On Ellen Brown’s fiat money utopianism, click here.) This reverses the truth. Fiat money is the money of the elites, the plutocrats of all ages. The gold coin standard is the economy of the masses.

Gold coins are mini-hammers. These coins, along with legal IOUs to coins, transfer enormous authority to the masses. The little guy with gold coins or IOUs to gold coins has a veto over the easy money, big-spending, power-centralizing schemes of the government’s central planners and their profit-seeking allies, the counterfeiters: fractional reserve banks.

CONCLUSION

There is chatter on the fringes of the Establishment about the reintroduction of a gold standard. The gold standard they promote is not the pre-World War I gold coin standard. That standard drastically reduced government power over money, but it was always a compromise with government power. The governments of Europe revoked that standard when the war began. They played around with a government-run, central bank-run version in 1922: the gold exchange standard. The final revocations of the gold coin standard took place in 1931, when England went off the gold coin standard, and 1933, when the United States did.

There are gold coins and counterfeit gold coins. Similarly, there are gold standards and counterfeit gold standards. When dealing with gold coins or theories of a gold standard, I suggest that you adopt a slogan from 1950s advertising: “Accept no substitutes!”

Here is the real thing: a free market standard without any government involvement – no mint, no central bank, no legal tender laws, no printing presses, no warehouse receipts, no “free” storage. Just this: laws against fraud and laws enforcing contracts. That system will produce a gold coin standard for large transactions and a silver coin standard for smaller ones. The users can decide what they want to use as money. The ruling elites will no longer be allowed to counterfeit, confiscate, or manipulate money.

When an economist who defends this system wins the Nobel Prize on the basis of his defense, we will know that our deliverance draweth nigh. If the prize is awarded in gold coins, we have entered the Golden Age.

U.S. Dollar Default to Change Gold and Silver Markets

Last Friday we were led to believe that the debt-ceiling crisis would be over by the start of Asia’s business on Monday. The weekend has gone and so the deal. The markets are very nervous and beginning to worry that a deal will not be made. This is merely a political game to earn a name because one or the other gives-in first. But the two leaders represent national parties and not themselves; therefore, the sensitivity needed to back down just in time isn’t there. The structure of politics doesn’t allow it. Not only that, but it takes a few days to implement the ceiling change.

Are we now certain to see a default by the U.S. government? If so just what will that mean to precious metals?

The Overall Consequences
Bear in mind that the U.S. is not the hub of the global gold market. In fact, in terms of jewelry, bar and coin demand, the entire North America is only responsible for 8% of global demand. Europe and Russia is responsible for another 13%. In other words, these markets are not driven by the financial affairs of the developed world.

The developed world is responsible for the provision of the distribution networks and the markets of the gold world. Physical supplies primarily come into London and bullion banks, sent from the refineries that refined gold and silver, which the mines supply. Then the bullion banks -mainly through the London gold Fixing–supply investors, manufacturers, industry and central banks with the gold they want.

The developed world also provides the speculators and traders who are constantly dealing either in gold itself, shares of gold Exchange Traded Funds, or in the financial derivatives that can influence the gold price.

It is the global speculators and investors that have the most dramatic affect on the prices, but their effect is primarily short to medium term. The daily pressures these professional have on the market have a similar effect as the immediate waves do at the seashore. There is a constant ebb-and-flow of prices, because a price rarely, if ever, goes straight up. Where there are seasonal flows of demand and supply these have the same impact as the daily tidal changes on the sea shore. But the most dominant price pressures come from forces similar to the currents in the sea. A look at a long-term price chart shows the sum total of all these pressures on prices. In both the silver and gold markets, these flows are far more complex than a simple commodity.

For instance, the effect of the debt ceiling impasse had on the gold and silver price today had nothing to do with the gold or silver fundamentals, but on the threat to financial stability and the U.S. dollar. Precious metals act as a counter to the main cash and currency markets; therefore, we have to take a look at the sum total of the influences on the gold and silver prices, not just the short-term speculative ones. These are simple and clear -gold and silver prices have been reflecting the uncertainty and instability of the currency worlds and the undermining of the value of paper currencies.

In the Far East there has never been that kind of trust in paper money systems. In the developed world there has been absolute trust in paper money systems; however, this century we have witnessed a decline in this trust, which accelerated from the first point of impact of the credit crunch. This decline has widened and deepened since then, as it progressed from the banking system across to European sovereign debt problems and now is a victim of political ploys in the U.S. The most disturbing aspect of this degeneration is that the problems have not been rectified properly, leaving national economies wallowing in or close to stagflation. With the buying power of currencies waning in the hands of people who cannot do anything about raising their incomes, the loss of confidence is moving towards desperation. With no sight of political or monetary reform, the instability and uncertainty we are witnessing is becoming deeply entrenched.

It is strange that the least sophisticated parts of the world have the greatest appreciation of the value of precious metals. It is also strange that the most sophisticated sides of the world are taking so long to recognize the dangers facing the present monetary system. We are caught up in what is a “normal” money system that we deny the dangers because they threaten our “normality”.

Aren’t we capable enough to put matters right when necessary? So why are they getting worse?

Against this backdrop, we can now see that the main impact of a default by the U.S. would be a further fracture in the developed world monetary system, pressuring investors to seek alternatives over the long term. This damage will not be repairable.

One of these long-term consequences will be the acceleration of the internationalization of the Chinese Yuan, so that China reduces its vulnerability to the undermining of the dollar, internationally.
Another consequence will be the long-term diversification of national assets out of the U.S. dollar to incorporate a broad spectrum of other currencies and government bonds.
Stagflation or worse will be another global consequence.
Over time there may be a far greater fragmentation of the global economy, leading at worse to Protectionism and Exchange Controls.
The Specific Consequences
By specific we mean immediate to medium (up to 1 year) consequences. With the Eurozone crisis so fresh in our minds, the consequences seen there can act as our guide. The main difference is that instead of member nations being the problem, the equivalent of the Eurozone itself is the indecisive problem -the U.S. government itself. The consequences that flow out from the U.S. become more dramatic for that reason.

A significant weakening of the U.S. dollar is the first hard blow to be felt globally.
The second is the impact on the currency world, in total, as currencies whose economies cannot afford to see their currencies strengthen further take action to weaken them. Take the Yen, for instance. Earlier this year, the Bank of Japan intervened to weaken the Yen as its economy reeled from the tragedies that struck it and the diminution of international trade because of the strength of the Yen. The Swiss Franc is in the same boat. Previously it also acted to weaken its currency to support local exports; however, each nation favors one or the other major blocs (Europe or the U.S.) and so manages its currency against that major currency. For instance you will see the South African Rand move against the Euro and not the U.S. dollar. If the euro is strong then the Rand will be strong. Expect a solidifying of these relationships perhaps to the exclusion of others.
The third impact is that interest rates will rise in the U.S. and weaken the bond (Treasury) markets. If this holds then we will see the next major financial crisis in the U.S. Treasury markets just as we saw it in the more dubious members of the Eurozone.
Rising interest rates undermine equity markets, house prices and in turn the overall economy. With such low growth rates in the States already we would expect deflation to take hold.
With energy and food inflation already high, add deflation to the formula and unemployment rates will rise alongside the weakening economy.
Asset values will fall.
The only assets that will rise inside the U.S. are those that act both as cash and assets, internationally, namely precious metals. With emerging nation’s demand for precious metals already rising unstoppably, the addition of developed world safe-haven demand will keep precious metals rising to new levels as the world adjusts to an economic climate that is destructive to the developed world and at the same time will favor the developing world.
We are describing a global economic climate that the world has not seen before. In the past when such pressures have arisen they have led to wars. Today’s pressures cannot be fought over. Where battles can occur is in the financial and economic areas of life. Such battles are called “Protectionism”, “Currency Wars” and there are few winners in such wars. These wars lead to global fragmentation and distrust.

Internationally, precious metals will become the preferred reserve assets, not just an important one. Their prices will then relate more closely to the total volumes of each international currency in the world. As you can imagine, the prices of precious metals will then have to be higher than most people even thought possible. With the gold market being such a small one in volume terms, silver will then become a monetary metal too, at considerably higher prices

What Pushed Anders Behring Breivik Over the Edge?

The Norway Terrorist Attack: “News without Facts”. “Experts” on Jihad and “Muslim Terrorism”

“Jens Stoltenberg på Utøya” (Picture of the Youth at Utøya -2010) by Arneiderpartiet (Labor Party) on flickr

Watching the international media on the web and TV change gears Friday, as information started to fasten to the fact that the worst terrorist act in Scandinavia since the 3rd Reich was perpetrated by a right-wing Christian zealot, was fascinating. This, rather than what Pam Geller, Steve Emerson, Daniel Pipes, Dennis Prager, David Horowitz, CNN, Fox News and many others were touting for hours as most likely an act of Muslim Jihad in a country that is way, way too liberal.

I was keyed into paying attention to how this meme might have to morph fairly early in the afternoon, by an item carried by Michael Rivero at What Really Happened, about the major event at the youth camp the day before the massacre:

During the second day of Labour Youth League summer camp at Utøya got the Labour Party’s young hopefuls visit by Foreign Minister Jonas Gahr Store.
Together with the Norwegian Broadcasting Corporation correspondent Sidsel Wold and Norwegian People’s Aid Kirsten Belck-Olsen, discussed the Foreign Minister of the deadlock between Israel and the Palestinian Authority.

As foreign minister arrived Utøya he was met with a demand from the AUF that Norway must recognize a Palestinian state.

- The Palestinians must have their own state, the occupation must end, the wall must be demolished and it must happen now, said the Foreign Minister to cheers from the audience. [automatically translated from Norwegian by Google translate]

That was an event held Thursday at the summer camp for the children of Norwegian liberals.

As the story developed Friday, almost every news outlet was quick to provide experts on Muslim terrorism and how that might have a growing negative impact on Norway and Europe. On Anderson Cooper, Friday afternoon, as he had his experts on Jihadism on camera, he was being told by another person – a CNN reporter – that the shooter, possibly the bomber, was a blond Norwegian. Cooper seemed to be taken aback, turning back to his Jihad experts, who were dismissive of the new information.

The bombing-shootings took up enormous bandwidth in our media machine until it came out that the alleged perpetrator has more in common with Sarah Palin and Alan Dershowitz than with Rachel Corrie or Furkan Doğan, both of whom have been labelled terrorists by Dershowitz.

As the end-of-the-week-in-midsummer stupor overtakes the media on a hot Friday evening in the USA, will they get around to trying to find out what set Anders Behring off?

The bombing had to be pre-planned, probably for some time. Was the pro-Palestinian event Thursday at the camp where over 70 were killed published on the web, facebook, twitter or somewhere else? Most likely. That may be what pushed this guy’s last button.

And just who created the group that fictitiously took credit for the massacres early Friday?

The ‘Helpers of Global Jihad’ group, of which al-Nasser is a member, made the claims in an email circular issued to various sources. The group does not appear to have any past history.
It is thought that the bombings are a belated response to Norwegian newspapers and magazines republishing cartoons of Mohammed originally published by Jyllands-Posten of Denmark.

I’m not about to go all conspiracy theory on this story. I am bothered, though, that the media was extremely rapid to ramp up the radical Islam run amok meme, yet so unready to deal with what is increasingly appearing to be possible – that the Christian gunman was impelled to kill liberals he may have felt were too sympathetic to Palestinians.

Update – Saturday, 12:30 p.m. PDT:

This diary questions what pushed Breivik over the edge. Phoenix Woman’s diary this morning, He’s Not a Terrorist – He’s a Freedom Fighter! touches upon some of the more pathetic errors in the media on Friday, as accurate information on the shooter-bomber became available. David Dayen’s front page fdl diary, takes this subject further – Norway Terror Reveals Disturbing Assumptions About Muslims.

Glenn Greenwald devoted his Saturday column to yesterday’s pathetic media coverage. His second update links to an Electronic Intifada article that shows how the false meme developed soon after the bomb went off in downtown Oslo. Essentially, it appears one dubious “expert” pushed the global media “over the edge”:

The source is Will McCants, adjunct faculty at Johns Hopkins University. On his website he describes himself as formerly “Senior Adviser for Countering Violent Extremism at the U.S. Department of State, program manager of the Minerva Initiative at the Department of Defense, and fellow at West Point’s Combating Terrorism Center.” This morning, he posted “Alleged Claim for Oslo Attacks” on his blog Jihadica:

This was posted by Abu Sulayman al-Nasir to the Arabic jihadi forum, Shmukh, around 10:30am EST (thread 118187). Shmukh is the main forum for Arabic-speaking jihadis who support al-Qaeda. Since the thread is now inaccessible (either locked or taken down), I am posting it here. I don’t have time at the moment to translate the whole thing but I translated the most important bits on twitter.

The Shmukh web site is not accessible to just anyone, so he is the primary source for this claim. McCants stated from the beginning that the claim had been removed or hidden, and on Twitter he even cast doubt on whether it was a claim of responsibility at all.

snip – EI posted screenshots of several tweets by McCants, then this:

McCants later reported that the claim of responsibility was retracted by the author “Abu Sulayman al-Nasir.” Furthermore, according to McCants, the moderator of this forum declared that speculation about the attack would be prohibited because the contents of the forum were appearing in mainstream media. It does seem more than a little bit odd that genuine “jihadis” would post on a closed forum that a former US official and “counterterrorism expert” openly writes about infiltrating.
EI is highly critical about how easily McCants’ dubious information was spread:

The media also failed. They reported on the claims McCants disseminated because his position and perceived expertise gave these claims credibility. Would The New York Times have required multiple sources and independent confirmation of the existence of the posting and its contents if it had not come from someone with McCants’ supposedly solid credentials?
For hours after McCants posted the update that the claim of responsibility was retracted, BBC, the New York Times, The Guardian, The Washington Post were still promoting information originally sourced from him. The news was carried around the world and became the main story line in much of the initial coverage.

The threshold for a terrorism expert must be very low. This whole rush to disseminate a false, unverifiable and flimsily sourced claim strikes me as a case of an elite fanboy wanting to be the first to pass on leaked gadget specs.

America’s Fatal Disease

Peacock Syndrome –

“There will be, in the next generation or so, a pharmacological method of making people love their servitude, and producing dictatorship without tears, so to speak, producing a kind of painless concentration camp for entire societies, so that people will in fact have their liberties taken away from them, but will rather enjoy it, because they will be distracted from any desire to rebel by propaganda or brainwashing, or brainwashing enhanced by pharmacological methods. And this seems to be the final revolution.” – Aldous Huxley

Researchers at the University of Texas recently published a study about why men buy or lease flashy, extravagant, expensive cars like a gold plated Porsche Carrera GT. There conclusion was:

“Although showy spending is often perceived as wasteful, frivolous and even narcissistic, an evolutionary perspective suggests that blatant displays of resources may serve an important function, namely as a communication strategy designed to gain reproductive rewards.”

To put that in laymen’s terms, guys drive flashy expensive cars so they can get laid. Researcher Dr Vladas Griskevicius said: “The studies show that some men are like peacocks. They’re the ones driving the bright colored sports car.”

Lead author Dr Jill Sundie said: “This research suggests that conspicuous products, such as Porsches, can serve the same function for some men that large and brilliant feathers serve for peacocks.” The male urge to merge with hot women led them to make fiscally irresponsible short term focused decisions. I think the researchers needed to broaden the scope of their study. Millions of Americans, men and women inclusive, have been infected with Peacock Syndrome. Millions of delusional Americans thought owning flashy things, living in the biggest McMansion, and driving a higher series BMW made them more attractive, more successful, and the most dazzling peacock in the zoo.
This is not a attribute specific to Americans, but a failing of all humans throughout history. Charles Mackay captured this human impulse in his 1841 book Extraordinary Popular Delusions and the Madness of Crowds:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

The herd has been mad since 1970 and with the post economic collapse of 2008, some people are recovering their senses slowly, and one by one. The country was overrun by flocks of ostentatious peacocks displaying their plumage in an effort to impress their friends, families and work colleagues. What set the flaunting American peacocks apart was the fact they financed their splendid display of plumage with $0 down and 0% interest for seven years. The lifestyles of the rich and famous miraculously became available to the poor and middle class through the availability of easy abundant credit provided by the friendly kind hearted Wall Street banks and their heroin dealers at the Federal Reserve.

The United States has experienced a four decade long “expenditure cascade”. An expenditure cascade occurs when the rapid income growth of top earners fuels additional spending by the lower earner wannabes. The cascade begins among top earners, which encourages the middle class to spend more which, in turn, encourages the lower class to spend more. Ultimately, these expenditure cascades reduce the amount that each family saves, as there is less money available to save due to extra spending on frivolous discretionary items. Expenditure cascades are triggered by consumption. The consumption of the wealthy triggers increased spending in the class directly below them and the chain continues down to the bottom. This is a dangerous reaction for those at the bottom who have little disposable income originally and even less after they attempt to keep up with others spending habits.

This cascade of expenditures could not have occurred without cheap easy credit, supplied by Wall Street shysters and abetted by their puppets at the Federal Reserve through their inflationary policies. Real wages are lower today than they were in 1970. Coincidentally, the credit card began its ascendance as the peacock payment of choice in 1970. There are now over 600 million credit cards in circulation in the U.S. in the hands of 177 million fully plumed peacocks and peacock wannabes.

Monthly Payment Nation

“Consumerism re­quires the services of expert salesmen versed in all the arts (including the more insidious arts) of persuasion. Under a free enterprise system commercial propa­ganda by any and every means is absolutely indis­pensable. But the indispensable is not necessarily the desirable. What is demonstrably good in the sphere of economics may be far from good for men and women as voters or even as human beings.” – Aldous Huxley

The country seemed to do just fine from 1945 through 1970 with no credit card debt and moderate levels of auto loan debt. In fact, this period in U.S. history was marked by strong economic growth created by capital investment, savings, and the American middle class realizing the American dream of a better life based upon their work ethic. Around about 1970, the intersection of Baby Boomers coming of age, the belief that social justice for all was a noble goal, and Nixon’s closing the gold window, opened Pandora’s Box and the evil released has brought the country to the precipice of ruin. Today, consumer credit outstanding totals $2.43 trillion, or $22,000 per household. It peaked at $2.6 trillion in 2008 and the storyline fed to the masses was that Americans had seen the light and embraced frugality by paying off their debts. As with most storylines spouted by the mainstream media, it was completely false. The Wall Street banks wrote off over $200 billion since 2008, while delusional peacocks continued to finance and lease gas guzzling luxury automobiles, while charging their purchase of an iPad2 and Lady Gaga concert tickets on one of their 13 credit cards.

It seems a vast swath of America refuse to shed their peacock feathers. This explains why you see BMWs, Mercedes, Escalades, and Porsches parked in the driveways of $100,000 houses. Automobiles are the truest representation of American peacock syndrome. Very few people look at a car purchase in a rational long term financial sense. It’s about impressing the neighbors, your peers and your family. Driving a brand new luxury car gives you the appearance of success. The neighbors don’t know you are in debt up to your eyeballs. This explains why 30% to 40% of all luxury cars are leased. A man could buy a $20,000 Honda hybrid with 10% down and finance the rest at 0.9% for three years. His monthly payment would be $500. After three years he would own the car outright, with the added benefit of getting 45 mpg. He could then invest the $500 per month for the next seven years in gold and silver or something else that benefits from Federal Reserve created inflation. In today’s society this would be the act of a doo doo bird.

Why drive a putt putt car when you can drive the ultimate peacock machine – a BMW 528i with 24-valve inline 240-horsepower 6-cylinder engine with composite magnesium/aluminum engine block, Valvetronic, and Double-VANOS steplessly variable valve timing, 10-way power-adjustable driver’s and front passenger’s seat with 4-way lumbar support, and memory system for driver’s seat, steering wheel and outside mirrors, along with high-fidelity 12-speaker sound system, including 2 subwoofers under the front seats, and digital 7-channel amplifier with 205 watts of power. Plus it looks really cool. This materialism machine can be leased for the same $500 per month that the doo doo bird pays for his Honda hybrid. Of course, after three years of renting luxury wheels the peacock has to turn in the 528i and lease an equally luxurious auto because driving an economy car would now harm his reputation. Colorful plumage is everything to a peacock.

Sometime over the years Americans lost their bearings and began to ignore a basic truth. The only way to accumulate wealth is to spend less than you make and save the difference. Over a ten year time frame the peacock will have dished out $60,000 renting luxury cars, while the doo doo bird will have expended $21,000 during the first three years and then invested $500 per month for 84 months, leaving him with a net $25,000 asset, based on a modest investment return of 5%. The doo doo bird ends up $85,000 wealthier than the peacock at the end of ten years. If you peruse the car dealer advertisements in your local paper, the price of the car is rarely even printed, only the monthly lease payment or 0% financing offer. There is a reason why the average American lives paycheck to paycheck, has no emergency fund for a rainy day, and has virtually no retirement savings socked away. Status, reputation and the appearance of success became more important to millions of Americans than living within their means and actually sacrificing and doing the hard work required to succeed. Delayed gratification is an unknown concept in America.

In 1970, 37% of households consisted of 4 or more people and we somehow managed to get by with one four door car per household. Today, only 24% of households consist of 4 or more people. There are 113 million households and over 250 million passenger vehicles, or 2.2 per household. So, even though the number of people in our households has shrunk dramatically, we needed 120% more vehicles to transport our vast quantities of stuff. Not only do we have more vehicles, but the size of these symbols of gluttony has doubled and tripled, with fitting names like: Tundra, Navigator, Titan, Yukon, Suburban and Hummer. Every soccer mom with two kids needed a 20 foot long, 6 foot high Yukon with an 8 cylinder engine, getting 12 mpg to shuttle around little Aiden and Chloe to their ten scheduled weekly activities. It wasn’t only automobiles that Americans went gaga over. The average home size in 1970 was 1,400 square feet (we drive cars bigger than that today). By 2009, the average home size reached 2,700 square feet. God knows we need 12 rooms for our 2.4 person households. The expenditure cascade started as a trickle in 1970 but became a raging uncontrollable waterfall by 2008.

Delusional Americans have been slowly lured into the web of debt and living their lives based upon whether they can make the monthly payment on their debt. I can anticipate the outrage from those who declare it wasn’t them, it was the other guy. Everyone has an excuse for why they aren’t to blame, but the facts speak otherwise:

Non-revolving (auto & education) debt outstanding is at an all-time high of $1.64 trillion.
The average auto loan is now $27,000 with a loan to value ratio of 80% to 90%, down from 95% in 2007.
Auto dealers are now offering $0 down and 0% interest for 72 months on many models. Ask yourself how a finance company can make a profit with those terms.
There are 54 million households with a revolving credit card balance, proving that approximately 50% of Americans are attempting to live above their means.
The average credit card debt per household with credit card debt is $14,687.
The average APR on a new credit card is 15%, even though the banks can borrow from the Federal Reserve for 0.25%.
In 2009, the United States Census Bureau determined there were nearly 1.5 billion credit cards in use in the U.S. A stack of all those credit cards would reach more than 70 miles into space — and be almost as tall as 13 Mount Everests.
76% of undergraduates have credit cards, and the average undergrad has $2,200 in credit card debt. Additionally, they will amass almost $20,000 in student debt.
On average, today’s consumer has a total of 13 credit obligations on record at a credit bureau. These include credit cards (such as department store charge cards, gas cards, and bank cards) and installment loans (auto loans, mortgage loans, student loans, etc.).
Over 90 percent of African-American families earning between $10,000 and $24,999 had credit card debt. What bank in their right mind would issue a credit card to someone making $15,000 per year?
Discussing credit card debt is highly taboo. The topics at the top of the list of things that people say they are very or somewhat unlikely to talk openly about with someone they just met were: The amount of credit card debt (81%); details of your love life (81%); your salary (77%); the amount you pay for your monthly mortgage or rent (72%); your health problems (62%); your weight (50%). I wonder why?
Penalty fees from credit cards added up to about $20.5 billion in 2009, according to R. K. Hammer, a consultant to the credit card industry. Don’t be one day late with that credit card payment. It’s good to be a bank.
The average late fee was found to have risen to $28.19, way up from $25.90 in 2008. Consumer Action reported that late fees reached up to $39 per incident.
The volume of gasoline purchases placed on credit cards jumped 39% last month from a year earlier, compared with a 21% increase in June 2010. Food shopping increased 5% after falling 7% last year. The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities.
After decades of a debt financed contest to display the gaudiest plumage, is the average American happier? Considering more than 10% of all Americans are on anti-depressant drugs, I’d say not. The rat race for status, the appearance of wealth and visible faux displays of success do not increase well-being. If most of our earnings are spent on an empty game of status, we should not expect much improvement in our quality of life. There is something perverse about having more than enough. When we have more, it is never enough. It is always somewhere out there, just out of reach. This is the attitude that drives the criminals on Wall Street and politicians in Washington DC to constantly seek more power and wealth. The more we acquire, the more elusive enough becomes. Much of the debt financed purchases of consumer trinkets, baubles and gadgets is nothing more than an expensive anesthetic to deaden the pain of empty lives.

Based upon the facts, the average American has not benefitted from the decades long materialistic frenzy. They have sacrificed their futures for the fleeting glory of ephemeral riches. In fact, the average American could not have participated in the expenditure cascade had they not been enabled by the financial industry and cheap plentiful money provided by the financial industries’ drug dealer – the Federal Reserve. The financial industry complex used their power and wealth to utilize all means of propaganda and mass media outlets to convince Americans that debt was good and more debt was even better. I’ll address the insidious aspects of the unholy union of debt and propaganda in Part Two – Propaganda Nation Built Upon Delusions of Debt.

Meanwhile, millions of Americans cling to their borrowed peacock feathers as the butcher of reality bears down upon them. The end won’t be pretty. The brave conquerors of strip malls across the land can enjoy their toys, gadgets, and treasures for awhile longer, but they need to remember one thing – Glory is fleeting and death can come suddenly.

“For over a thousand years Roman conquerors returning from the wars enjoyed the honor of triumph, a tumultuous parade. In the procession came trumpeteers, musicians and strange animals from conquered territories, together with carts laden with treasure and captured armaments. The conquerors rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children robed in white stood with him in the chariot or rode the trace horses. A slave stood behind the conqueror holding a golden crown and whispering in his ear a warning: that all glory is fleeting.”

Silver Slam-Epic Fail

It’s the thick of summer now and I’m trying to take it pretty easy this weekend and perhaps another weekend or two while the warm weather is here. The good news about that is that there is so much focus on the debt ceiling debates that you’d hardly know anything else is going on anyhow.

It’s all political childish games though and the debt ceiling will be raised at the last minute and the speech will be a good one.

I can see it now Obama will say something akin to; “We averted a criss of the deepest magnitude that would have cut the worldwide economy to the bone”

I’m not making fun of Obama in particular as anyone is his shoes would be doing the exact same thing. Politics bug me, at least when the politicians lie, delay and pander to the corporatocracy.

On to more fun topics, the US stock markets are holding up very well and continues to build a super pattern which should send us much higher over the rest of the summer.

We’ve been very busy this summer as the markets and leading stocks are doing great and we’ve been doing better than I could have imagined.

That’s why I’m taking the weekends a bit easy since I am having a hard time taking an afternoon off here or there during the week.

Let’s move into the charts and wrap this up as quickly as possible.

Metals review

The S&P 500 has printed a cup and handle pattern and broke out Thursday on massive volume. We should see this move higher continue, but then again we’ve seen many pattern failures in this index this year so far so you have to always be ready to react to a change.

Gold only rose 0.59% for the week but it’s building a beautiful continuation pattern here in the form of a bull flag. Gold had a nice $100 move so far in July and it needs a little time to rest which it is doing nicely.

This flag should be resolved higher very soon, perhaps even Monday. If you’re trying to trade gold then the buy area is new all-time highs, but gold does move slow so trading it isn’t really my cup of tea.

As for buying physical gold I’ve always advocated buying on weakness and this isn’t necessarily weakness here but as I said above it’s looking ready to move much higher from this base area so it should be ok to buy some here.

Even allocating a portion every month to buy is good or try and wait a few months and buy while a small sale is going on.

The GLD ETF saw heavier down volume than up in this pattern which is not great and could be a prelude to this pattern failure and we should soon find this out.

I’m definitely leaning towards the bullish side with gold right now especially with more drama imminent over the debt ceiling. There is also good reason to believe that once the debt limit is raised gold will be hit initially giving investors a great chance to snap up some more cheap gold.

Silver rose 2.64% this past week even in the face of seeing a blatant massive manipulation attempt. We’ve traded silver in the past with some great successes but it’s been a while now.

I tell subscribers it’s just not worth trying to trade that often since it can drop so quickly that I can hardly put in a sell order let alone send one to subscribers as well before the price is several dollars lower.

This past week we saw a sale of 250 million ounces of silver in 1 minute. This is equivalent to 30% of the worlds yearly production. Even the Comex warehouses only have about 100 million ounces in storage.

If you think someone would dump that much silver on the market at once for any other reason than to knock silver down then good luck to you. Nobody even has that much silver to sell, it was all a paper game which worked for the short-term.

The point is as always. Buy the physical silver and don’t worry about it. It will be much much higher and in the hundreds of dollars before this fiasco is through.

If you want something to trade, trade the high-beta leading momentum stocks as we do with a portion of our wealth. With those you have a much better chance as they behave how they should and aren’t such an important bellwether economically so they’re left alone for the most part.

The SLV volume was pretty solid for the week with slight increases in volume on down days. If this were a leading stock I’d say, “look out”, as this is a signal that it’s heading lower but with silver you have much less chance of it moving how it should and the momentum seems to be pushing silver higher for now.

Platinum rose 2.46% for the week in a sweet move into resistance. I mentioned last week that there wasn’t much to stop it from moving up to the $1,800 area where the downtrend line is at this moment.

Now we have to wait and see if platinum has the strength to move higher here or if it needs to rest before surpassing $1,800 once again.

The PPLT ETF volume was nothing to write home about and certainly isn’t telling me we have the strength to blast thorough $1,800 here yet but in reality we need to see massive volume on a move and hold above $1,800. Then we’ll know this move is most likely for real.

Palladium rose 3.39% for the week and remained within this symmetrical triangle pattern. These patterns don’t really have a bullish or bearish bias but once the price moves out one way or another then that is the time to jump on board. But if the pattern breakout fails then sell right away and keep your losses small.

As simple as that sounds it’s a very difficult thing to do. Nobody likes being wrong, but to be a success trader you have to know your going to be wrong often, the good thing is you can make yourself right just by selling and taking a small loss early on.

The PALL ETF didn’t see much volume whatsoever as is normal in a pattern building phase generally. We need to see big volume on a break one way or another.
Well I’m off to the beach with a good book and some good old friends who are in town.

Enjoy the summer for what it is, especially if you live in the areas where snow is common for a good part of the year.

Until next week take care and thank you for reading.

Euro Collapse, U.S. Debt Ceiling Default Armageddon Irrelevant to Stocks Stealth Bull Market?

The financial news is bad, very bad, don’t see how it could get much worse with europe’s debt default contagion spreading to Italy and Spain sending bond yields soaring to Euro life-time record highs, whilst in the U.S. there is talk of imminent debt default on failure to raise the debt ceiling prompting the mainstream press talking heads aided by the BlogosFear to once more iterate a busted flush that the stocks bear market is about to resume (just as has been the case for the past 2+ years).

Remember a month ago with Greece tottering on the brink of default and the Dow down 7% from its bull market high ?

What has happened since ?

The Dow has rallied by 800 points! So yes there has been a crash but it has been to the UPSIDE.

Lets stay with the Euro-zone debt crisis, yes the PIIGS are bankrupt, and they are not alone, so is Japan, Britain and the United States, that is nothing new, it is not news, it is the sovereign debt mega-trend which is driving the INFLATION mega-trend as I wrote about at length over 18 months ago, in that there is only one answer to the sovereign debt crisis of the west and that is INFLATION, to INFLATE the debt away, there is NO OTHER ANSWER, and NOTHING has changed.

The Inflation Mega-Trend will run for this whole decade and I have included some 50 pages of wealth protection strategies in the Inflation Mega-trend ebook that remain just as valid today (FREE DOWNLOAD).

Mainstream Media and BlogosFear

I am going to cut through the BS and tell you like it is. The mainstream press is populated by journalists who think they are economists, but wait its worse, they then regurgitate at length the views of vested interest academics who’s models NEVER match reality. NEVER! EVER! Why ? Because they lack the most fundamental requirement for being able to generate accurate analysis and that is the market forces of profit and loss instead rely on funding to follow schools of thought. If there is no consequences for being wrong then that is all they will ever be for it is far easier to pump out commentary for print deadlines than to take the time to formulate strategies upon which ones hard earned cash is depending.

Another point to consider is that the mainstream financial press most of the time are having conversations with salesmen, be they CEO’s selling their companies stock or, salesmen that just want to pump a service that they are forced to promote as a consequence of being unable to compete in the derivatives and commodities markets. Still worse are the media whores that tend to spend more time in TV make-up rooms than sat in front of market trading screens that they seek to commentate upon, whilst jumping from channel to channel.

FEAR

All of this is further regurgitated at length by the BlogosFear, a phrase that I coined some years ago as a consequence of the perma-doom mindset regardless of the reality of a situation. However the media and the BlogosFear being ignorant of the facts is nothing new, for it is the human condition for those that seek to exert power over others to nearly always be pessimistic of the future which has its roots in Religion Driven Fear of what God will do to you if you do not obey those that purport to have a direct line to him, so we are talking about something ingrained in out genes that goes back hundreds of thousands of years.

Everything is driven by FEAR, Preachers use it (of all faiths), Politicians definitely use it, the mainstream media cannot get enough of it with 9 out of 10 stories being bad news, and off course there are the FEAR driven insane fanatics hell bent on killing as many innocents as they possibly can such as the Norwegian Nazi, though the real secret behind his craziness is probably more to do with him never having been able to get a girl friend and hence needed to find others to blame for his own inadequacies which over time resulted in mental illness and finally evil deeds.

The reality of the real state of the world is that of continuing global economic growth coupled with exponential innovation and technological advancement, 20 years ago few could foresee how the Internet would change the way we work and learn resulting in huge gains in productivity, as will technologies such as BioTech, Artificial Intelligence and Robotics change our world enormously over the next 20 years, resulting in a many fold increase in worker productivity, these good news mega-trends will rarely make it into your gloom and doom mainstream press that only knows how to sell fear, which is why most investors will miss these mega-trends.

The Eurozone Debt Crisis Reality

The bond vigilantes are heavily short illiquid debt markets i.e. Ireland, Greece and Portugal, which goes a long way to explain why Italy has been targeted as shorts are cashing out of illiquid markets and opening positions in Europe’s biggest most liquid bond market, Italy!

This is reflected in recent bond market price action as yields for Italian debt are on the rise whilst yields in the likes of Greece have fallen a little, that is the reason for current price action, and NOT the noise you are hearing in the mainstream press about x,y,z – none of which reflects reality of bond markets price action.

The mainstream press focuses in on just one or two elements without comprehending the reality of the actual situation in that:

a. The PIIGS are NOT the whole they are one small part of the Euro-zone economy that is NOT contracting but growing with Germany literally booming as a weak Euro gives it a great comparative advantage both internally in the euro-zone and externally to the whole world that far out weighs the actual net costs of bailouts, even the FT’s mighty Martin Wolf failed to get it as illustrated below:

Financial Times July 2010, Martin Wolf is worried that the concerted austerity of Germany, Britain and other industrialised countries may “destroy the recovery”.

Germanys economic boom is the flip side of the PIIGS sovereign debt crisis as I have been mentioning since at least early May 2010 – Greece Economic Depression Resulting in INFLATION NOT DEFLATION Surge ) and again 09 Aug 2010 – UK Economy GDP Growth Forecast 2010 to 2015.

Bottom line – The large industrialised export orientated areas of the Eurozone such as Germany are going to BOOM! Therefore the PIGS sovereign debt crisis is old news. The U.S. looks set to experience sluggish growth.

He also failed to get that Britain is stealth defaulting on its debt by means of high inflation during some email exchanges with him over a year ago, I wonder if he has now changed his opinion after a year of high UK inflation?

The bottom line is that the mainstream press is good at looking in the rear view mirror and telling your what has already happened, but because they lack the fundamental mechanism of profit and loss in their analysis they will by wrong at least 80% of the time on any market or economic outlook, think about that, even a coin toss is a 50/50 proposition!

b. That the debt crisis calls for money printing, regardless of what the politicians and central bankers state this is what will follow as we are witnessing with the latest Euro 109 billion bailout of Greece that is a stepping stone towards a Euro-bond with all of the ramifications it will have for the core Euro-zone interest rates.

c. That the PIIGS will default on their debts, infarct Greece and Ireland HAVE defaulted because the borrowers are being forced to except longer terms and lower interest rates than the market interest rates, a so called orderly default is taking place.

The announced orderly default does NOT solve anything, because Greece is still left with a huge and growing debt mountain, so this is just another milestone on the path towards further defaults. All the Euro-zone has done is to buy some more time for Greece.

Therefore depositors need to continue to protect themselves against PIIGS defaults and the Inflation Mega-trend (see my last article of 29th June 2011), as bond holders are being marched towards loss of capital so will ultimately depositors, in one way or another, in the UK it is stealth default by means of high Inflation, in the likes of Greece it is in your face default.

PIIGS Lesson for U.S. and UK on Interest Rates

Central bankers in the US and UK have managed to get away with murder where interest rates are concerned that especially in the UK lag far behind even the highly suspect official CPI inflation rates. However as the soaring PIIGS market interest rates of as high as 30% illustrate that UK and US interest rates of 3% on 10 year debt is NOT sustainable especially as debt to GDP levels continue their inexorable trend to above 100% of GDP even after most of the real debt and liabilities have been excluded from the calculations, therefore official debt is just the tip of the ice-berg much as UK and US bank exposure to PIIGS debt is just the tip of the ice-berg of potential losses as it excludes derivatives positions such as CDS.

The experience of the PIIGS and history before them has shown that failure to get a grip on budget deficits, debt and future liabilities WILL result in sharply higher market interest rates even if the Bank of England and the U.S. Fed remain deaf dumb and blind to their own debt crisis as they point the finger at the likes of Greece today.

The problem is that most people won’t realise how bad the current debt crisis is in the UK and USA until they actually have to face the consequences PIIGS style of soaring market interest rates even if the irrelevant official rates remain stuck at near 0%. This public reluctance to face reality of unsustainable deficit spending is manifesting itself in public sector workers demonstrating and striking against cuts without which the markets WILL force the governments hands who will respond with not 4.2% UK CPI Inflation but panic level of money printing that pushes inflation rates to above 10%.

Therefore the imperative remains for the UK and US government to focus on cutting the budget deficits asap whilst they have it in their means to do so rather than be forced to act by the markets.

U.S. Debt Ceiling Smoke and Mirrors Political Game

The mainstream press is telling you that a US default as a consequence of failing to agree on raising the debt ceiling will be catastrophic, well the only place your seeing this catastrophe being played out is in the mainstream press for it is invisible to the US stock and bond markets, after all the Dow is barely a couple of percentage points away from its bull market high!

As of writing there is no agreement between Obama and Boehner and apparently the deadline is imminent for action to ensure millions of cheque’s do not bounce.

As ever, the name of the gave is managing your risk, and the greatest risk is to depositors who run real risks of loss of capital for a mere pittance in interest that is at half the rate of inflation and does not reflect the risk they are exposed to, so if you have not already done so, go see my last article on what depositors should do to protect their wealth.

Whilst U.S. Bonds may have rallied on the debt woes of others but ultimately bond bulls will lose, because bond holders are betting on deflation instead the opposite is true as you don’t get deflation on a annual budget deficit of 11%, which is why stocks are rising i.e. as a manifestation of the inflation mega-trend NOT deflation mega-trend which would see the opposite to the be true aka early 1930′s wipeout.

I just do not understand why so many people are fixated on a re-run of the 1930′s for these past few years when the opposite has been transpiring as I warned of well over 18 months ago in the Inflation Mega-trend ebook. Instead the early 1930′s chart gets rolled out with an amended start date because it has turned out to be wrong for over 2 years now and some 100% on the stock indices, so yes, this does mean there would need to be a 50% crash in stock prices just for the deflation fools to break even let alone make money on worthless calls such as the Dow falling to below 1000. At the end of the day perpetually shorting of stocks that these bear market fools are engaged in and propose to others to do, is an unlimited liability risk as the upside is unlimited i.e. 100%, 200%. 300%,. demanding perpetual financing of short positions for ever, whereas the maximum Long risk is always limited to 100%. Therefore I am always far more careful in the management of short positions than long positions given the risks, especially when virtually all trading activity is further leveraged by X10 upwards.

The bottom line is that the debt ceiling political show is just that, a show for the electorate and mainstream media talking heads, whatever happens is irrelevant to the long term megatrend’s, and if there is any short-term panic, I will once more be seeking buying opportunities.

In fact if the debt ceiling talks do fail and the US government is forced to balance its books as a consequence of a freeze on spending, then that would be GOOD for the US Economy as instantly the federal spending will be cut by some 50%, so the market may take the opposite view on the future prospects for the US economy than that of financial armageddon being pumped out by the mainstream press and BlogosFear.

Gold and the Inflation Mega-trend

Gold breaking above and holding $1600 is evidence of continuing safe haven buying as capital seeks to escape to precious metals and lower risk emerging market currencies from all of the rampant money printing taking place.

I am no gold bug, for on face value it is not a good long-term investment, i.e. does not generate a return but demands a holding cost in terms of storage and insurance, but the gold bull trend of a near decade is a manifestation of the Inflation mega-trend that encompasses the loss of value of all fiat currencies that looks set to continue at an accelerating pace for the next decade, therefore so could the gold bull run also for for the duration of this decade long inflation Mega-trend. My long standing target as repeated in the Inflation Mega-trend ebook (Jan 2010) remains for gold to target $2,000 having achieved all of it’s interim targets as mentioned in the ebook. I will come back to an in depth analysis of Gold at a later date as I favour investments in other commodities such as Oil over the likes of Gold and Silver, especially as an opportunity appears to be brewing in gold stocks over bullion.

Stocks Stealth Bull Market Update

In my last in-depth stocks analysis (13 Jun 2011 – Stocks Bear Market Rally is Over Mantra About to Get Busted Again?) I concluded in an imminent bottom to be followed by the stock market carving out a base into late June / Early July before trending higher to target a new bull market high during Mid August as illustrated by the original graph.

Subsequent stock market trend continues to support my expectations, with the Dow pending a breakout to a new bull market high by mid August 2011. Basically the stock chart trend illustrates what I have stated earlier in this article in that both the Euro-zone and U.S. debt crisis are irrelevant to the stock market which continues to behave as it should. Current support lies at Dow 12,290 and resistance at 12,755, therefore immediate price action in advance of an ultimate breakout higher looks set to be contained within this tight range, which suggests all news on the debt ceiling front will be good news for the stock market regardless of whether the U.S. defaults or not.

However should panic strike and support fail at 12,290, then the Dow would likely revisit the June 2011 low of 11,860, which would act to just delay the inevitable breakout higher, but would give all you lucky guys and gals another great panic driven buying opportunity.

Bottom Line – The bull market in stocks will continue to lead the Inflation Mega-trend. The Sovereign Debt Crisis Induced Market Volatility such as that afforded by the US Debt ceiling failure default would present Great Buying Opportunities into primarily U.S. and Emerging Market stocks, commodities and UK Internationals, and presumably likewise for other International European stocks. Remember September 2008 and how you could have made a killing out of a crisis by bargain basement buying, in which respect always keep a shopping list of stocks then when others panic – BUY! Though my expectations are that a major panic does not look likely, so your debt crisis buying opportunity looks to have come and gone during mid June.

All The King’s Horses and All the King’s Men Can’t Keep Gold and Silver Down Again

The recent decision to inject 60 million barrels of oil into a market that was already in retreat smacks of outright attempts by U.S. Government to manipulate commodity prices. These actions are reminiscent of the Sunday night blitzkrieg move by COMEX in early May to control silver prices by means of successive margin rate hikes even after silver began declining. These stratagems of manipulating commodity prices lower has not succeeded as both gold and silver are breaking key resistance areas.

For the past several weeks, Gold Stock Trades subscribers have been alerted to the reemergence of quantitative easing by whatever guises necessary. Our economic brain trust is actively committed to a Keynesian solution to the current economic crisis. Commodity investors have just emerged after sailing full speed ahead into the turbulent seas of the oil surprise and margin rate hikes.

Commodity markets were in a state of agitation as the Obama Administration and the members of the International Energy Agency delivered a surprise body blow to commodity investors. This kind of exogenous fundamental development tend to affect technical analysis only for the short term.

Many were keeping an eagle’s eye on the pending announcement by Bernanke and the Federal Reserve concerning the expiration of QE2 on June 30th. When he did speak, he admitted that he did not have “a precise read on why this slower pace of growth is persisting.” This represented a rather sad admission by a highly paid commander of our economic ship of state, who is supposed to be guiding us through our latest economic crisis. All The King’s Horses and All the King’s Men Can’t Put the Economy Together Again. Instead we are reminded of the young boy who cried out, “Look, The Emperor has no clothes!”, while the assembled elders were applauding the magnificence of the invisible garments.

Dare it be asked, do these guys know what they are doing? One fears that they are marching full force naked into a cold night. Investors are being caught off guard. Financial markets are being stood on their collective heads. Traders are now returning to gold, silver and the miners as it regains the lead as the dollar has lost its traditional safe haven bid.

The recent commodity manipulations and subsequent breakouts prove they are only short term, we would not be surprised if silver’s move to the upside to be quite powerful as many long term holders purchased below $35 from the speculative day traders. It is the basic interim and long term health of the markets that concern us and in which we are focussed on.

For the present it is realized that stimulus programs never die, they simply reincarnate in new guises. One can not help but sense a certain desperation to these recent manipulations. Are our leaders playing a form of russian roulette as the world wonders whether a bouncing ball of economic policies will land on the red or the black? We may be witnessing a roll of the economic dice, which we hope will not come up snake eyes.

In this event, The Austrian School may have a valid point, in that attempts to intervene in natural developmental forces, can only result in markets that return inevitably to the direction in which they had been headed. The Keynesians may well be having their day.

The nagging question is, have the interventions really ever worked? Could Von Mises and the Austrian School inevitably be right on the world economic stage?

Returning to the underlying direction of today’s essay, crude oil prices, miners and silver prices being driven downward to their lowest level in four months and thereby giving a rise in the U.S. dollar was only short term in nature. The long term trends have held.

No matter how you cut it, the release of 30 million barrels of oil from the strategic petroleum reserve, is an attempt to stimulate the economy by the policymakers. They are running scared in the face of recent signs of a worldwide slowdown. On top of this we are seeing weaker manufacturing numbers in China, the Eurozone, and a worrisome uptick in U.S. unemployment. Returning to our contention, that these measures are really an attempt by our economists to discover a stimulus that truly works. Well…Professors it doesn’t look like its working as silver, gold and energy resumes their secular uptrends.

At Gold Stock Trades, we have specifically positioned ourselves in the natural resource sectors as being representative of the sound money arena. The waves that have been hitting us this summer, while they may be rough are temporary. We are now returning to a calm sea and a prosperous voyage.

Attempts to influence the natural direction of the marketplace is akin to suppressing a coiled spring that eventually needs to be released. One is reminded of the boy who attempted to dam the North Sea by keeping his finger in the dike, eventually it broke and swept away everything before it.

Are we witnessing the same attempt to control market pressures that eventually explode in a cataclysmic Krakatoa? This oil surprise is in essence a rear door stimulus. Interestingly, this occurred on the eve of the expiration of QE2. This may represent an under the table tax cut for consumers. Sooner or later a disenfranchised middle class and their children will have to pay the piper.