Treasury Ponzi Doomed to Fail

U. S. Securities and Exchange Commission Ponzi Pyramid Diagram

In the early 1980s, a major recession and massive military spending resulted in huge government borrowing. The sale of U.S. Treasury bonds financed all that massive spending.

Many of the long term bonds issued at the time will begin to mature next year, and will continue to do so in large numbers over the next few years.

To pay its bills, the federal government floats its debt, meaning it issues new bonds to obtain the revenue to pay off old bonds as they reach their maturity dates.

Consider that: the federal government – so deeply, perennially, and perhaps terminally in debt – continues to issue Treasury bonds not just to maintain its deficit spending, but to pay back previous bond holders.

So, in essence, our government is literally perpetuating its own Ponzi scheme, whereby it is borrowing from Peter to pay Paul.

The U.S. Treasury Department now conducts more than 200 sales of debt by auction every year. All of it will eventually have to be paid back – with interest.

The US deficit for fiscal 2009 was $1.42 trillion, pushing the national debt to roughly $12 trillion. All that deficit spending has been financed with borrowed money.

According to the Office of Management and Budget, the National Debt is projected to skyrocket in excess of $14 trillion in the current fiscal year.

That will likely exceed GDP. And if it doesn't, any growth will simply be the result of additional government borrowing to finance further deficit spending.

That is not a solution. It is simply more of the same poison that's already slowly killing us.

But that's not the whole story.

The federal government assumed $6.8 trillion in new debt last year—a 12 percent increase—pushing its total debt to a record $63.8 trillion, according to USA Today. That amounts to $545,668 for each household.

The government does not have the capacity to ever repay that debt. Its obligations far exceed its means. And the hole is only getting deeper.

As a result of the recession, tax revenues in FY 2009 fell nearly 17 percent, the biggest decline since 1932. That will only result in even deeper borrowing.

For three decades, foreign governments have facilitated much of that borrowing.

The surplus cash deposits of exporters like Japan, Taiwan, South Korea, the oil exporters of the Middle East, and China – the world’s biggest exporter – have financed the U.S. public debt since 1980.

China alone holds an estimated $1 trillion in U.S. Treasury bonds and other government debt.

These nations liberally purchased U.S. Treasury bonds and left their money in U.S. banks, believing their money was in safe hands. But it now seems that doubts about that course of action are beginning to mount.

The Chinese and other big-time U.S. creditors have expressed concerns that Treasuries are becoming more risky. And they are starting to demand higher interest payments for further bond purchases.

Creditors have reasonable worries that inflation in the U.S. will gain momentum, lowering the value of the dollar and all dollar-based assets, including U.S. Treasuries.

The fear is that these investors might respond by reducing their purchases of U.S. Treasuries, or begin dumping their holdings altogether. That would also cause the dollar's value – already declining – to drop even further. The government would have to start paying higher interest rates to try to attract investors and bolster the dollar.

There are signs that this scenario is already starting to develop.

Driven by inflation fears, bond investors – especially international investors – have slowly begun selling Treasuries, pushing long-term interest rates up and the dollar down. The resulting danger is that bond investors will begin selling Treasury bonds faster than the Fed can buy them.

The Fed will surely continue its futile attempts to print its way out of trouble. Consequently, the huge international Treasury bond market, already trying to absorb a huge supply of new bond issues, could react accordingly and start a selloff. Realistic fears of hyperinflation could create a self-fulfilling prophecy.

The federal government, the biggest borrower in the world, has been the prime beneficiary of today's record low interest rates.

However, in Fiscal Year 2009 (FY09), the U. S. Government spent $383 Billion of your money on interest payments to the holders of the National Debt.

That made it the fourth biggest expense in the entire federal budget. We get nothing for it. It merely pays interest.

Yet, the debt continues to soar.

Interest payments to all bond holders over the past 30 years (the longest term of Treasury bonds) don't begin to payoff the bonds themselves. The government counts on bond holders rolling over their holdings and reinvesting. That is becoming increasingly less likely with each passing day.

Furthermore, bond interest is compounded, meaning that even if the government stopped its deficit spending, the total debt would continue to grow as a result of interest on the portion that already exists.

Despite this, our government's deficit spending continues unabated. Congress continually raises the debt ceiling to accommodate all of this additional debt burden.

Historically, the sale of government bonds makes less money available for private investment. That may not seem like much of an issue right now since much of the private sector is simply unwilling to go further into debt in these uncertain times. Businesses are determinedly paying off debts instead.

But any U.S. business, any entrepreneur, or any average citizen seeking credit will eventually be saddled by higher interest rates as a result of all this massive government borrowing and debt. That will spur higher prices across the economy.

When the government issues new debt, the supply of bonds increases, lowering the price and raising the interest rate. When there is deficit spending, the supply of bonds held by the public increases and interest rates increase as well.

The economy is always retarded by government debt. The larger the debt, the greater the damage.

For years, we've been warned that our government's irresponsible spending and mounting debt would come back to haunt us. It seems that time is finally arriving.

Old debts are coming due. In response, the government will continue to issue new debts to pay them off. We're on a carousel of debt.

The government is attempting to print and borrow its way out of crisis. Yet, it is only making its problems – our problems – interminably worse.

It is not hard to imagine that foreign bond holders will cease renewing. The Chinese have already warned us about this. How can anyone realistically expect us to payoff all our debt?

The jig is up. Get ready for price inflation, higher interest rates, and higher taxes. Get ready for further economic stagnation.

When the other shoe drops, it will feel like a boot in the face.

The Recession is NOT Over

Mainstream economists, and many in the mainstream media, have declared that the alleged 3.5% third quarter growth (the first in over a year) means that the recession is now over.

Did you get that? It's over! Thank God, it's finally over!

How many Americans really believe that? According to this story, there are plenty of disbelievers, and this comes from the mainstream media.

How much do you want to bet that this report will revised in the weeks or months ahead?

Any economic growth was exclusively the result of absolutely massive deficit spending by the federal government – not by US businesses and consumers.

The US deficit for 2009 has reached $1.42 trillion. Adjusted for inflation, it is the largest deficit since 1945. Federal tax receipts are down 17%, while spending is up 18%.

No nation has ever borrowed its way to prosperity. The government is sacrificing our future prosperity for false, contrived, growth.

The recession is by no means over.

Job losses continue to mount and foreclosures will spread through 2010 and 2011. US banks have failed at a rate of 2.5 per week so far this year.

The truth is, we haven't even seen the worst of it yet.

Job creation for this entire decade is negative, resulting from 7.6 million lost jobs that will need to be made up. In addition, the government says that 1.3 million jobs need to be created every year from 2006-2016 just to keep up with the growing labor force.

The hole is very deep. Experts note that it will take years to reverse these massive losses.

Currently, there are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset. That means there will be a massive number of additional defaults over the next two years.

Amherst Securities estimates that 7 million housing units are destined to default, only to be seized by lenders. That number represents well over a year's worth of home sales. When this "shadow inventory" eventually hits the market, prices will be pushed further downward.

Household credit has utterly collapsed, experiencing a year-over-year decline for the first time on record (since 1953). Simply put, we are not going to spend our way out of this recession.

The Consumer Confidence Index now stands at 47.7 on a scale of 100, the lowest level in more than a quarter century. Americans are rightfully worried, even scared.

But the government has to spin the story. They have to control the message. Most of all, they have to control public fear, anxiety and even the possibility of outright panic.

We've seen this movie before. But most Americans are too young to remember it.

However, our government made these same rosy forecasts, completely detached from reality, during the Great Depression.

Does any of this seem familiar, or similar to the present?

"We will not have any more crashes in our time." - John Maynard Keynes, 1927

"There will be no interruption of our permanent prosperity." - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

"There is no cause to worry. The high tide of prosperity will continue." - Andrew W. Mellon, Secretary of the Treasury, September 1929

"Stock prices have reached what looks like a permanently high plateau." - Irving Fisher, Ph.D. in economics, Oct. 17, 1929

"Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board." - New York Times, October 14, 1929

"This crash is not going to have much effect on business." - Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression..." - Harvard Economic Society (HES), November 2, 1929

"The Government's business is in sound condition." - Andrew W. Mellon, Secretary of the Treasury, December 5, 1929

"President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days." - Washington Dispatch, March 8, 1930

"The spring of 1930 marks the end of a period of grave concern... American business is steadily coming back to a normal level of prosperity." - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States - that is, prosperity." - President Hoover, May 1, 1930

"The worst is over without a doubt." - James J. Davis, Secretary of Labor, June 29, 1930

Gentleman, you have come sixty days too late. The depression is over." - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

"We have hit bottom and are on the upswing." - James J. Davis, Secretary of Labor, September 12, 1930

"President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter." - Washington dispatch, October 21, 1930

"I see no reason why 1931 should not be an extremely good year." - Alfred P. Sloan, Jr., General Motors Co, November 1930

"The depression has ended." - Dr. Julius Klein, Assistant Secretary of Commerce, June 9, 1931

"I believe July 8, 1932 was the end of the great bear market." - Dow Theorist, Robert Rhea, July 21, 1932

"All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S." - President F.D. Roosevelt, 1933

Expert: $80/Barrel Oil Could Re-Trigger Recession

Steven Kopits runs the New York office of Douglas-Westwood, an independent energy analysis company.

Kopits has written a new paper on Peak Oil and the economy.

In it, he notes that the worldwide oil supply of has not improved much since the 4th quarter of 2004. Yet, demand has continued to rise.

“And I don’t see anything on the horizon that makes it appear that we’re going to break out into a really new level of production that’s far different than what we have today. So if we’re talking about practical Peak Oil, my view is that it started in late 2004.”

Kopits says that China’s rapid growth will make it difficult for supply to keep up with demand, even if supply somehow manages to grow. But an increasing supply doesn't seem likely.

The International Energy Agency has pointed out that the decline rate appears to have increased to 6-7%.

But the most pressing issue at present is that rising oil prices could worsen the US recession.

This is a concern that Kopits shares with many economists.

“The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.”

Right now, oil is already trading at over $80 per barrel, its highest level this year. Given Kopits’ analysis, that’s reason for genuine concern.

It requires great optimism to believe the US is currently coming out of recession. So that precludes the possibility of “falling back” into one. But, clearly, things can get worse.

Americans have cut oil consumption in response to the recession. The Federal Highway Administration reported that, as of September, Americans had traveled up to 112 billion fewer miles in the previous 13 months.

Yet, the price of oil continues to rise. In fact, prices have surged 25 percent in less than a month.

The plunging US dollar is largely to blame. Oil is traded in dollars, which are dropping in value. That makes oil more expensive in the US.

But rising demand in the developing world, particularly China, is also creating inflationary pressure on oil.

Kopits expects Chinese demand for oil to eventually stabilize at about 50 million barrels per day around 2032-2035. That's more than twice what the US – the world's biggest consumer of oil – currently uses.

But where will all that oil come from?

"If you have a flat—or heaven help us, declining—supply of oil, then the emerging and fast-growing economies will have no choice but to start bidding away the oil from the advanced or slow-growing economies. That is consistent with what we’ve seen in the data starting in about 2006. For China to grow, it will have to take away the oil of Japan, the US and Europe, just as it has in the last three years.

"If I run out the projections, this implies that US consumption is likely to drop by about one-third, from its peak at 21 mb/day before the recession, to about 14 mb/day in 2030. That will potentially be a long and painful adjustment.”

That's a stunning projection. It implies no growth in the US economy over the next two decades, but instead a massive contraction.

According to Kopits, the global economy cannot sustain oil at any price.

“Beyond a certain threshold, the result is likely to be stagflation or recession rather than perpetually increasing oil prices.”

Kopits says that we are in the midst of the first Peak Oil recession. The implications of that reality will be burdensome.

At a minimum, Kopits and other analysts believe that $4 a gallon gas is on the horizon.

Between a declining dollar and increasing Chinese energy demands, the American economy will be additionally impacted by the rising cost of oil.

The fact that it is a finite resource will become abundantly, and uncomfortably, clear.

US Banks Reach Grim Milestone: 100 Closures

Seven more US banks were shut down by regulators on Friday, bringing the total for this year to 106. It's the most closings since 1992, when 122 banks were shuttered.

Yet, it's only October.

The occasion also marked just the 11th time since the creation of the FDIC in 1933 that 100 banks have failed in a single year.

To provide some perspective, just three US banks failed in 2007.

And last year, 25 US banks were closed, which was more than in the previous five years combined.

But this year the problems in US banking have been growing steadily worse; a total of 416 banks were on the FDIC's troubled list as of the end of June.

With more and more mortgages continually going into default, those numbers are expected to steadily rise over the next couple of years, putting ever greater pressure on the entire US banking system.

However, this doesn't even account for the looming fallout in commercial real estate failures.

Investors in commercial mortgage-backed securities are holding assets with a delinquent unpaid balance of $29 billion, up more than five fold since June 2008, according to a report issued by the Congressional Oversight Panel.

Under a worst-case scenario, the panel estimates that commercial real estate and construction loan losses through 2010 may total $81.1 billion at 701 banks with assets of $600 million to $80 billion.

Consider the implications of that scenario; the potential losses could exceed the total assets of the banks involved.

According to Jim Rounds, senior vice president and senior economist at Elliott D. Pollack, the problems in commercial real estate are just getting started and they will hinder any possible economic recovery.

The resulting losses, on top of the already heavy losses in residential real estate, will be devastating.

Veteran bank analyst Gerard Cassidy of RBC Capital Markets expects as many as 1000 banks to ultimately go bust. And the money to cover those losses doesn't exist at present.

As of March 31, the FDIC's deposit insurance fund had $13 billion to cover pending bank losses. However, the agency has shelled out more than $25 billion to pay for all the bank failures so far this year. That meant the insurance fund that allegedly insures your accounts was officially in the red.

As a preventative measure (as futile as it may be), the FDIC's board took an unusual step on September 29, asking banks to pay $45 billion in fees up front. The money was to have been paid over three years. But the FDIC is in dire straights, so it has resorted to rather desperate moves.

The $45 million in fees amounts to putting a band-aid over a bullet wound. The FDIC purports to insure $4.83 trillion in deposits. Does $45 billion seem adequate for the task?

At the end of 2008, the FDIC expected bank failures to cost its insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion. However, its problems have grown continually worse. As a result, the FDIC keeps revising it cost estimates ever higher.

The agency now expects to spend $100 billion on bank failures in the next few years.

However, analyst Andy Laperriere, Managing Director of the ISI Group, thinks that's a lowball number.

"I think the FDIC is going to continue to increase their estimated losses and this short-term measure of having the banks pay their fees up front probably is not going to hold us over through this cycle of bank failures. And I think ultimately, the FDIC is probably going to have to go to the Treasury and ask for a loan."

Due to their massive losses, US banks have a diminished capacity to increase lending, which will affect any recovery. According to the IMF, in both 2009 and 2010, US banks will have a negative lending capacity of approximately 3%.

And bank losses will only worsen.

Nationwide, there are 2.8 million active interest-only home loans, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset. For instance, in 2004, nearly half of all buyers in California took out an interest-only loan.

That means there will be a massive number of additional defaults over the next two years.

And banks will continue to fall like dominoes as a result.

History and context of bank failures:

- In 1930, 1300+ banks failed, 600 in just the final two months of the year.

- During the savings-and-loan crisis (1986-95), 2,377 banks failed.

- In 1989, 534 banks were closed, the most since 1934.

- According to the FDIC, since 1934, the only two years with no bank failures were 2005 and 2006.

- From 2000=2007, only 32 US banks failed.

Dollar's Decline Presents Bernanke With Faustian Bargain

This week it was revealed that the euro and the yen have supplanted the dollar as the currency of choice at foreign central banks.

This is a major development, but one that has been a long time coming.

According to Barclays Capital, over the last three months, banks put 63 percent of their new cash into euros and yen, and just 37 percent into dollars. A decade ago, the dollar's share of new cash in central banks was two-thirds.

The once mighty dollar has fallen considerably as the currency choice.

The IMF says that dollars currently account for about 62 percent of the total currency reserve at central banks -- the lowest on record.

The printing of trillions of dollars by the Federal Reserve – the very definition of inflation – has sparked concerns that the value of the dollar is eroding. That has sparked a worldwide flight to other currencies.

Investors and central banks are also snubbing dollars because near-zero interest rates are keeping the currency too weak.

Those investors and central banks are getting paid back by a currency that is worth 10 percent less in the past three months alone. In a decade, it's down nearly one-third.

The only thing that will stem the tide is for the Fed to raise interest rates – considerably. Some economists think that rates may have to spike to the high single digits to make the dollar attractive once again.

That would kill any economic recovery by halting investment and growth. Stocks would nosedive and housing would be further crippled.

The massive amounts of excess liquidity floating around world markets would also have to be mopped up by the Fed – a considerable task.

According to Peter Schiff, president of Euro Pacific Capital, Ben Bernanke's other choice is equally stark.

"Bernanke's other choice is to keep rates at zero, print even more money and sell more debt, but we'll see triple-digit inflation that could collapse the economy as we know it."

It's hard to decide which is the lesser of two evils. Either choice seems like a Faustian bargain.

Dow 10,000: a Charade

"I think there's a bubble-like atmosphere going on here in the rush back to 10,000. Caution should rule the day. We're not out of the woods yet." – Rich Yamarone, director of economic research at Argus Research

On Wednesday, the Dow Jones closed over 10,000 for the first time in over a year.

Don't believe the hype.

The US economy has suffered a real estate collapse, a banking crisis that led to a near systemic collapse on a global scale, a credit crisis, the worst economic downturn since the Great Depression, and an unprecedented global recession.

Because of all that, the stock market rightly crashed during the winter and spring, bottoming out at 6469 on March 6 — the market's lowest level since November, 1996.

Just eight months earlier, the market had been over 11,000.

But now, despite the fact that the US gross domestic product and consumer spending are declining, the stock market is in the midst of an unfathomable rally. It has soared more than 50% since March, while the economy has remained in a tailspin.

This makes absolutely no sense. Consumers are deleveraging and the flow of credit has slowed. One in five Americans is unemployed or underemployed.

The government's U-6 unemployment figure — the true jobless rate — now stands at a whopping 17%. Yet, the government recently admitted that it has been systematically underestimating job losses for the last three years.

Additionally, one of the President's closest economic advisors, Austan Goolsbie, has noted that roughly 1% to 2% of our population's unemployed are downright unaccounted for on a monthly basis due to a variety of factors. And those who run out of unemployment benefits are no longer counted among the ranks of the unemployed.

With all of this in mind, how could the Dow have possibly surpassed 10,000?

It's due to a herd mentality, not fundamentals. Investors are bidding up the stock market in a delirious frenzy, hoping to recoup previous losses, or get rich buying at what is perceived to be an opportune time. Hey, everyone else is buying, right?

Simply put, lots of new money is flowing into the stock market and pushing up the average. It's not because a recovery is underway. And this means a lot of people stand to get burned.

The relatively strong earnings reports that have lifted the markets in recent days are being driven by cost cuts and layoffs, not strong revenue growth. But that will only put further downward pressure on jobs and wages, and result in weaker economic growth and a deeper downturn.

The merry-go-round will end up right back where it started.

Wall Street is a pretty poor barometer of the economy's performance since it is simply a bet on the future performance of a select group of companies listed on three stock exchanges. Additionally, the majority of the country doesn't have any direct investments in the stock market.

The Dow Jones is currently trading at 28 times earnings. The S&P is even worse; historically, its median P/E is 16,, but is now trading at 139 times earnings. That alone is reason not to invest. It is simply unsustainable.

Yet, the fools have rushed in, enthusiastically.

But the institutional investors, the real market movers, will soon take their profits and quickly pull the escape lever. The herd will try to follow, but not all of them will be able to squeeze out the emergency exit at the same time. There will be a bloodbath.

By some estimates, "high frequency trading" is responsible for close to 70% of all volume in US markets. Computers can track hot stocks and immediately buy up all available shares, subsequently selling them at higher prices. Millions of shares can also be dumped in just milli-seconds.

The markets are manipulated. Sadly, there is a very heavy price to be paid because of this. Billions of dollars will be lost, yet again.

Report: Treasury Misled Public With TARP

The Federal Reserve Chairman Also Misled the Public. The Treasury and Fed Work in Tandem. See a Pattern? A Problem?

Despite critics expressing alarm about the Fed’s immense power during the financial crisis, Ben Bernanke still insists that the Fed should be put in charge of regulating the nation’s biggest financial institutions.

Yes, the Fed Chairman actually favors this extraordinary concentration of power, despite his total inability to thwart, or even foresee, the Great Recession. Not only did Bernanke not foresee the economic storm that was on the horizon, he actually said that things were quite rosy at US banks.

"Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks,” said Chairman Bernanke in 2006.

And...

“Importantly, we see no serious broader spillover to banks or thift institutions from problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits,” said Bernanke on May 17, 2007.

Clearly, Bernanke saw no reason for regulation or oversight. Everything was just fine — until it wasn't.

Perhaps now realizing the Fed's failure to see what many others could, or merely bowing to political pressure, Bernanke says responsibility for monitoring broader risks in the financial system should go to a council of regulators.

But Bernanke says the Fed would be merely one of several players on the new council, and endorses the Obama Administration’s proposal to have the Treasury lead that council.

How convenient, since the Treasury and the Fed are joined at the hip like Siamese twins engineered by Dr. Frankenstein.

Ultimately, the Treasury is no better than the Fed and the two work together hand in hand.

A new report on the bank bailouts says the Treasury misled the public and was the benefactor of the mega banks.

Neil Barofsky, the special inspector general who oversees the government’s bailout of the banking system, says the Treasury may have unfairly disbursed billions to the biggest banks under the Troubled Assets Relief Program.

Nine of Wall Street’s largest players were given billions of dollars of taxpayer money by the Treasury through the TARP.

Barofsky’s office also says that regulators were wrong to tell the public last year that the earliest bailout recipients were all healthy.

On October 14, 2008, Treasury Secretary Hank Paulson said that the banks were “healthy” and accepted the money for “the good of the U.S. economy,” so that they could increase lending to consumers and businesses.

In truth, regulators were concerned about the health of several banks that received that first bailout, the inspector general contends.

On October 5th, the day his new report was released, Barofsky discussed Paulson's bogus claim, and the TARP, with CNBC.

"As we disclose and describe in our audit, this just wasn't an accurate statement," Barofsky told CNBC. "The Treasury and the Federal Reserve had serious concerns about the health of some of these institutions. They didn't really do a test, they didn't really review, there really wasn't a criteria — when they made the decision to give this $125 billion — about the relative health of these institutions. And, as we note in our report, those statements raised expectations and it hurt Treasury's credibility."

Barofsky believes that there is an important lesson to be leaned from all of this.

"It's very important, when we look back, to learn these lessons. And I think that one of the key ones that we learned from this is that transparency, being honest with the American people, it's important — not just for the sake of transparency, but because of the long term, unintended, negative consequences that come when we're not honest, when we're not forthcoming. The bottom line is that the American people saw very shortly thereafter that these were not all healthy institutions and lending didn't increase. So that hurts the credibility of the program... Even in times of crisis — particularly in times of crisis — let's make sure when we're making public statements that they're accurate and that they're truthful."

Citigroup, JP Morgan Chase, Bank if America, and Wells Fargo were among the nine financial giants to receive billions in taxpayer assistance.

When asked by CNBC if he thought it was inevitable that taxpayers would wind up losing some of the TARP money, Barofsky replied, "I think it's extremely unlikely that we're going to have a dollar-for-dollar return. And I don't think the program, as designed, is made to have a dollar-for-dollar return."

So, forced to prop up banks deemed "too big too fail," the taxpayers have been burned once again.

It's said that sunlight is the greatest disinfectant. Both the Treasury and the Fed — especially — need lots of disinfectant.

Let the sun shine.

Shadow Inventory Will Impede Housing Recovery

"The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales. We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary." — Amherst Securities Group

In a September 23 report, Amherst Securities estimates that 7 million housing units are destined to default, and then be seized by lenders. This is a "shadow inventory" that hasn't yet hit the market, but soon will.

That number represents well over a year's worth of home sales. Amherst believes that this housing overhang is the single biggest obstacle to a housing recovery.

To put that into perspective, existing home sales total around 5.2 million units — so the overhang is approximately 1.35X one year of existing home sales.

This shadow inventory has grown measurably in recent years; there were just 1.27 million such units in 2005.

Based on the current pace of existing home sales, Amherst analysts say it would take 1.35 years sell these properties — assuming no other homes are on the market. Naturally, that is a highly unlikely scenario.

Amherst noted that efforts to rework mortgages and avoid foreclosure will not make much of a difference, with perhaps a reduction of 1 million from this shadow inventory. Amherst also noted that "many of these borrowers would default later, if they remain in a negative equity position."

For that estimate to be accurate, Amherst concluded that those 1 million modifications would have to be more successful than historical modifications. That makes such an outcome seem optimistic, if not unlikely.

Amherst is a securities firm specializing in trading and advising investors on home-loan debt.

Earlier this year, Barclays' analysts wrote that once it starts, the housing recovery will be dulled by a “pent-up supply” of homes from owners who have put off sales during the slump. That inventory will further dilute an already weak market.

Banks are loathe to acknowledge this large shadow inventory for fear of what it wold do to their already troubled balance sheets. However, they can't keep this supply hidden indefinitely. At some point it will have to be acknowledged, and the supply will once again begin depressing home prices even further.

According to the Mortgage Bankers Association (MBA) Quarterly Delinquency Survey, about 55.9 million homes in the United States have a mortgage. At the end of Q2 2009, a staggering 13.54% of mortgages in the MBA survey were in some stage of delinquency.

This suggests that some 7 million are already in the delinquency pipeline and will eventually liquidate.

Unemployment Benefits Running Out for Huge Numbers of Desperate Americans

In ordinary times, unemployed workers who've lost their jobs can draw unemployment benefits for up to 26 weeks.

But Congress enacted emergency extensions during this recession, allowing laid-off workers in nearly half the states to collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s.

However, in the other 26 states, the unemployed can only collect for a period ranging from 46 to 72 weeks.

Unemployment insurance, with payments averaging just over $300 per week, is now a lifeline for nine million Americans. But that lifeline is about to run out for many of them.

That's because 1.5 million people nationwide are expected to reach the maximum threshold for unemployment insurance benefits by the end of the year, according to the National Employment Law Project (NELP).

Perhaps they shouldn't worry; Ben Bernanke says the recession is over.

Despite the Fed Chairman's upbeat attitude, U-6 unemployment - the true jobless rate - now stands at a whopping 17%.

Those who don't find work before their benefits run out will be facing a crisis.

According to Lawrence Katz, a labor economist at Harvard, for every job that becomes available, about six people are looking. That creates an enormous amount of competition and leaves many out of luck.

Dr. Katz says that when people exhaust unemployment and health insurance, many of them end up applying for disability benefits, which become a large, unending drain on the Treasury.

So, regardless of whether or not benefits are extended by Congress — yet again — the cost to the already burdened Treasury will be hefty.

Housing Collapse Turning Homeowners Into Reluctant Landlords

Despite mainstream media reports about a recovery in the housing market, the problem is far from over and is in fact getting worse.

More than 15 million homes are mortgaged for more than their value, according to an August report by real estate research firm First American CoreLogic.

If that doesn't seem like an especially large number, consider this; about one in three homes with a mortgage fall into this category.

That means that tens of millions of Americans are now "upside down," with mortgages that exceed the value of their homes.

As a result, many have become reluctant landlords, renting homes they cannot afford to sell. Some homeowners are even renting out rooms in their homes to help cover costs.

Since 2007 about 2.5 million homes have been converted into rentals, according to an analysis by Foresight Analytics. This accounts for about 85 percent of the increase in rental homes.

The rate of home ownership hit a record high in 2004 but has since decreased by about two percent, according to Census Bureau data. It's the lowest homeownership rate since 2000.

Home prices nationally are down 31 percent from their 2006 highs, according to the S&P/Case-Shiller Home Price Index.

The problem is a glut of available housing.

According to Matthew Anderson, a partner at Foresight Analytics, there was a surplus of five million housing units produced between 2001 and 2008 compared to demand. That resulted in too many homes built for too few people.

At present, there are about 4.4 million empty homes for rent, census figures show. The vacancy rate is among the highest ever recorded, according to census data that goes back to 1956.

According to Anderson's analysis, from 2005 to June 30 of this year, 3.2 million homes were converted into rentals.

At the end of 2004, there were about 36.9 million homes either occupied by tenants or empty and available for rent, census figures show. As of June 30, that number increased nearly 11 percent to 40.9 million units. Of that four-million home increase, 3.2 million were conversions into rentals.

The 4.4 million empty homes are creating a glut of rentals, forcing rent prices down, and putting pressure on apartment building owners who now have to compete with single-family homes.

And unless, or until, those homes are sold or rented. they will also continue putting downward pressure on an already depressed national housing market.

Ranks of Jobless Swelling, True Unemployment Reaches 17%

The September jobs report was released on Friday, and it was bleak.

Last month, another 201,000 jobs were lost and the "official" unemployment rate rose from 9.7% to 9.8%.

However, the so-called U-6 employment measure — the figure that includes jobless Americans who have become discouraged and those working part-time but desire full-time jobs — has reached 17%, or a total of 26.5 million Americans.

The average workweek for production and nonsupervisory workers has fallen back to 33 hours, a record low. Those workers will see their hours increase before new jobs are created.

The number of long-term unemployed — workers who have gone jobless for 27 weeks or more rose — by 450,000 to 5.4 million. In September, 35.6 percent of unemployed persons had been jobless for 27 weeks or more.

In the 21 months since the downturn began, there has been a net loss of 7.6 million jobs, wiping out all job creation this decade. This will be remembered as the lost decade of employment.

Advance Realty and Rutgers produced an issue paper last month, America’s New Post-Recession Employment Arithmetic, which noted the following:

As of August 2009, the nation had 1.3 million (1,256,000) fewer private sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.

The U.S. Bureau of Labor Statistics projects the nation’s labor force to grow by approximately 1.3 million persons per year between 2006 and 2016. Therefore, the nation has to add 1.3 million total jobs per year— consisting of private-sector and government payroll employment as well as contract (nonpayroll) employment—simply to accommodate a growing labor force [as consequence of population growth].

Given conservative estimates of further employment declines (even if the recession ends in the third quarter of 2009) and the continued increase in the labor force, the nation’s employment deficit could approach 9.4 million private-sector jobs by December 2009.

Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the jobs deficit!

* Addendum: The Bureau of Labor Statistics later made the largest benchmark revision in at least the past dozen years. From March 2008 to March 2009, the BLS overestimated payroll employment by some 824,000 jobs, or nearly 70,000 jobs per month.

We now know that the government has been systematically underestimating job losses for the last three years. So as bad as the most recent employment report was, in reality it was even worse. The revision will not officially be incorporated into the job figures until February, and could be revised yet again.

U.S.S. Entitlement a Sinking Ship

According to our own government, we're just a decade away from the next two fiscal mega-crises.

"We suffer from a fiscal cancer and if we don't treat it, it could have catastrophic consequences for our country. This is not only an issue of fiscal irresponsibility; it's an issue of immorality."— Former US Comptroller General, David Walker


In May, the trustees of the Social Security and Medicare programs announced some rather bleak news: the Medicare fund is expected to run out of money in 2017, two years sooner than projected last year. And the Social Security trust fund will be exhausted in 2037, four years earlier than previously predicted.

Social Security is the main source of income for more than half of older Americans.

Spending on the two entitlement programs totaled more than $1.4 trillion last year, accounting for more than one-third of the federal budget. Medicare-Medicaid cost $739 billion and Social Security accounted for $700 billion of federal spending.

And those enormous expenditures will soon exceed revenues.

Due to high levels of national unemployment, the government is collecting less of the payroll taxes that finance Medicare and Social Security.

Compounding the problem, unemployed seniors are now choosing to claim early retirement benefits, which will force Social Security to pay out more in benefits than it collects in taxes for the next two years. That hasn't happened in a quarter century.

Applications for retirement benefits are up are 23 percent from last year, while disability claims have risen by about 20 percent. That will result in deficits of $10 billion in 2010 and $9 billion in 2011, all of which will be tacked on to already bloated federal deficits.

Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.

According to the Social Security Administration, applications for disability benefits—including Supplemental Security Income—are on pace to reach 3 million in the budget year that ends this month and even more are expected next year. In a typical year, about 2.5 million people apply for disability benefits.

Social Security is projected to begin temporarily generating surpluses again in 2012 before permanently returning to deficits in 2016 — unless Congress acts to shore up the program again as it did in the early 1980s. That will ultimately result in higher taxes and lower benefits.

A resumption of economic growth is not expected to close the financing gap. The trustees’ bleak projections already assume that the economy will begin to recover late this year. However, future economic growth may be limited and any optimistic projections are highly speculative.

The government claims that the Social Security trust fund — reflecting a $2.5 trillion surplus that Uncle Sam borrowed, spent and promised to pay back — will be tapped out by 2037. Barring any changes, it claims that is the point after which the system would only be able to pay out 78% of benefits promised to future retirees.

However, there is no actual trust fund. The money has already been spent. Recouping that money will require taxing workers all over again, or making drastic cuts to other federal programs in order to return that money to retirees.

The trust fund was callously raided by Congress over the years as it spent future retirees money on other government programs. The fund is now represented by government bonds, or IOUs, that will have to be repaid as Social Security surpluses are permanently exhausted.

The government already owes trillions in bond obligations to public and private investors, including foreign governments. You could say that Uncle Sam's obligations are ocean deep.

And Medicare presents its own pressing, and more immediate, problems.

Last year was the first year in which Medicare collected less in taxes and premiums than it paid out in benefits.

In coming years, the trustees said, Medicare spending will increase faster than either workers’ earnings or the overall economy.

The trustees predict a 30 percent increase in the number of Medicare beneficiaries in the coming decade, to 58.8 million in 2018, from 45.2 million last year.

There are 76 million Baby Boomers at present, consisting of people born between 1946-1964. They represent 25 percent of the US population.

Those born in 1946 will turn 65 in 2011 and become eligible for Medicare for the first time. Many will also begin retiring and subsequently collecting Social Security as well.

The Boomers will continue becoming eligible for both Medicare and Social Security in each of the subsequent 18 years, placing huge demands on both systems.

The shortfall will be so great that years ago our nation's chief accountant foresaw an impending disaster.

David Walker, the former US Comptroller General, urgently sounded the alarm to anyone who would listen; our nation is in deep fiscal trouble and no one is doing anything about it.

But Walker was ignored by the Bush Administration and Congress. He warned about our $53 trillion obligation for entitlements — with zero dollars set aside for them.

Ultimately, Walker quit in frustration in March of last year. No one in government was listening, or responding, to his urgent warnings and pleas.

The problem has only worsened since then. The federal government assumed $6.8 trillion in new debt last year—a 12 percent increase—pushing its total debt to a record $63.8 trillion, according to USA Today. That amounts to $545,668 for each household.

Clearly, our government has obligations that it will never be able to honor. That will be the bitter pill that all future retirees will have to swallow.

"The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon." — David M. Walker, former US Comptroller General

Housing Crash Will Crush Millions of Homeowners

The US housing crisis isn't over — not by a long shot. In fact, federal and state officials are bracing for the next tidal wave of foreclosures — adjustable rate mortgages (ARMs), particularly option payment ARMs.

Option ARMs let borrowers choose to make very low payments for the first five years. During that initial period, borrowers can pick their payment option.

That's where option ARMs differ from other ARMs; borrowers have the option to pay interest only, or a minimum monthly payment that doesn’t even cover the interest. This results in a rising loan principle, or what's called negative amortization.

When the balance of the loan reaches a certain level, or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but can then reset to a new higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, most of these borrowers are eventually overwhelmed. In most cases, borrowers owe much more than their homes are worth, so they cannot refinance their way out of trouble.

According to Fitch Ratings, 94 percent of option ARM borrowers elected to make minimum payments only. That portends the trouble that lies ahead.

We are already in the midst of the worst housing downturn since the Great Depression, and things are about to get worse.

Next year, many option ARM payments will begin to readjust, slamming borrowers with dramatically higher monthly mortgage bills. That will unleash the next big wave of foreclosures.

Option ARMs became widespread starting in 2005, which is why the recasts and higher payments will pick up steam in 2010, five years later.

The bulk of option ARMs recast dates are spread out from 2010 through 2012, meaning the foreclosure waves could drag on for the next few years.

Option ARMs tend to be "jumbo," or for significantly large amounts, making it even harder for borrowers to avoid foreclosure. Even though most option ARMs have not yet adjusted higher, many borrowers are already defaulting anyway. That's an ominous sign of what's to come.

There are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset. California will be particularly hard hit; in 2004, nearly half of all Golden State buyers took out an interest-only loan.

Banks never gave out loans with 10 percent unemployment in mind, and the massive losses will continue to burden their balance sheets.

Nationally, home prices have already declined by nearly one-third, peak-to-trough, since 2006.

However, respected banking analyst Meredith Whitney predicts that high unemployment will result in a further 25 percent drop, resulting a total decline of about 50 percent.

“I think there is no doubt that home prices will go down dramatically from here; it’s just a question of when,” Whitney told CNBC on September 10. “If you look at the drivers for unemployment, I don’t see that reversing very soon.”

There is already a huge supply of unsold homes on the market. Adding a glut of additional foreclosures will likely depress home prices for years to come.

Moody’s now forecasts that some home prices may not return to their pre-recession levels until 2030. This means that hundreds of thousands of Americans may find it impossible to sell their houses without paying off banks for underwater home loans.

At a minimum, Moody's says that many states (i.e. NY, IL, CA, FL) will not recover until sometime between 2018-2024.

If it does indeed take 15-20 years for housing to recover, that amounts to a lifetime for many older Americans.

The new reality is that Americans are going to have to return to a more traditional view of a house; a place to lay your head and make your home.

Houses will no longer be viewed as investments, much less get rich quick schemes.


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Bull Markets or Bull Shit?

The Stock Market Could Aptly be Described as Schizophrenic or Manic Depressive

(Consider the following as you read: Since 1965, U.S. economic growth has averaged 3.2 percent.)


On November 21, 1995 the DJIA closed above 5,000 (5,023.55) for the first time.

On March 29, 1999, the average closed above the 10,000 mark (10,006.78) after flirting with it for two weeks. This prompted a celebration on the trading floor, complete with party hats.

On May 3, 1999, the Dow achieved its first close above 11,000 (11,014.70)

On January 14, 2000, the DJIA closed a record high of 11,722.98; this record would not be broken until October 3, 2006.

March 20, 2001, Dow closes at 9720, the first time since 1992 it closed below the previous year's low.

September 17, 2001, the Dow closes at 8920 after experiencing it's biggest one day fall (685 points).

December 31, 2001, the DJIA closes at 10,021, up 21.7% from September low, but still down 7.2% for year.

By mid-2002, the average had returned to its 1998 level of 8,000.

On October 9, 2002, the DJIA bottomed out at 7,286.27, its lowest close since October 1997.

On October 31, 2002 — just 22 days later — the Dow is back up to 8397.

By the end of 2003, the Dow returned to the 10,000 level.

On January 9, 2006 the average broke the 11,000 barrier for the first time since June 2001.

In October 2006, four years after its bear market low, the DJIA set a new record for the first time in almost seven years, closing above 12,000 for the first time on the 19th anniversary of Black Monday in 1987.

On April 25, 2007, after months of volatility, the Dow closed above the 13,000 milestone for the first time.

On July 19, 2007, the average passed the 14,000 level, completing the fastest 1,000-point advance for the index since 1999. One week later, the Dow fell below the 13,000 mark, down about 10% from its highs.

On October 9, 2007, the Dow Jones Industrial Average closed at the record level of 14,164.53. Roughly on-par with the 2000 record when adjusted for inflation, this represented the final high of the roller coaster market.

On July 2, 2008, the Dow Jones Industrial Average closed at 11,215 — more than 20% below its October 2007 high. Two weeks later, it closed below the 11,000 mark for the first time since 2006. This was soon followed by a 500-point rally.

On November 20, 2008, the index closed at a new six-year low of 7,552. The market proceeded with a modest rise to close the year near the 9,000 level, still its worst annual performance since the early 1930s.

On February 20, 2009, the DJIA closed at a new 6 1/2-year low of 7,365.67.

On February 23, 2009, the DJIA closed at a 11 year low of 7114.78, last reached in October 1997.

On March 2, 2009, the DJIA dropped below 7,000 for the first time since 1997 — more than 50% below its October 2007 high.

By March 9, 2009, the DJIA reached a closing low of 6,547, its lowest close since April 1997, and had lost 20% of its value in only six weeks.

On March 6, 2009, the DJIA closed at 6469, it's lowest level since November, 1996.

On September 18, 2009, the DJIA closed at 9820, more than 50% above its March low.

Irrational Markets, Irrational Investors, Irrational Exuberance

"How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?" - Fed Chairman, Alan Greenspan, 1996

Is the stock market really an accurate measure of the health and strength of the economy? Or is the stock market average often misleading? Might it simply be reflective of irrational bubble economics?

The fact is, the majority of Americans don’t have any direct investments in the stock market.

In its 2002 study, the Mutual Fund Industry group, Investment Company Institute, found that only 21 million households (less than 20%) owned individual stocks outside an employee sponsored retirement plan. Employees in such plans are typically invested in mutual funds that give them no voting control.

In 2004, the Economic Policy Institute reported that the percentage of American households invested in the stock market in any form — either directly or indirectly through mutual funds or 401(k)s — was 48.6 percent.

However, the percentage of households with more than $5,000 in stock was just 34.9 percent.

So Wall St. is not a true reflection of how the average American worker, or the average family, is faring.

In reality, Wall Street is a pretty poor barometer of the economy’s performance since it is simply a bet on the future performances of a select group of companies listed on a few stock exchanges.

Regardless of the health or profitability of various companies, many investors will still buy.

During the tech run-up, people bought stock in unprofitable hi-tech companies with the belief that those companies would one day be quite valuable.

And people futilely bought the doomed stock of Enron and WorldCom, believing they were buying into solid, profitable companies that would continue to deliver great returns.

What about the stock market boom of this decade, you may ask? Much of it was an illusion created by the financial sector, which doesn't actually produce anything — except debt.

From 1948 to 1985, the financial sector accounted for around 12 percent of American corporate profits, never reaching 20 percent nor dipping below 5 percent. After 1985, however, the profits of the sector rose dramatically, going from 19 percent in 1986 to 41 percent in 2000.

That meant that more than 40 cents out of every corporate dollar of profit was paper profit, not created by actual wealth-generating activity, but by corporate gambling and debt creation.

The truth is, the stock market is highly irrational. The buying and selling reactions to quarterly reports are understandable. But there are continual up and down movements between these reports that seem to be tethered to nothing.

The daily fluctuations in the market are not linked to fundamentals, but rather to fear, greed, Wall St. hype, and a herd mentality marked by ignorance and unfounded optimism.

Noted economist Robert Shiller came to the rather obvious conclusion that stock markets jump around a lot more than corporate fundamentals do. He’s considered a genius for his uncanny ability to grasp the obvious.

And renowned MIT economist Paul Samuelson promoted the absurd notion that a rational market is a random one. He’s also considered a genius for advocating this blatant oxymoron.

However, things that happen randomly are by their very nature irrational. And investors can be equally irrational.

Investors often behave like sheep, following the herd, as well as the money. Whereas ideas and investments traditionally chase money, right now, as in most of this decade, money is chasing ideas and investments. That’s a bad development, and a dangerous sign.

Over the past 10 years, stock returns are negative 5.4%. Adjusted for inflation, $1 invested in stocks in March 2000 is now worth just 60 cents.

Despite this, the US stock market is still over-inflated and built on speculation, not fundamentals. As of June, stocks were still selling at more than 20 times their expected earnings for 2009.

Can you say, “bad investment”?

This rampant speculation has led to highly inflated bubbles that have burst one-by-one.

The mainstream media machine — exemplified by CNBC and Fox Business Channel — is a big part of the problem. It helped perpetuate Wall Street's smoke and mirrors act.

The financial news media have served as nothing more than cheerleaders for Wall St. and corporate America. They are the insiders who seek to curry favor with, and access to, the powerful. Far too often, they have fallen short in their role of objective, skeptical, inquisitive outsiders. The media has continually neglected its duty as stewards of the public trust, failing to serve as a genuine, trusted, check and balance on power.

No one in the mainstream media ever seemed to doubt Wall St. or its inflated numbers, the housing bubble, stated-income loans, no-money-down loans, interest only loans, negative amortization loans, adjustable-rate loans, and all of the other collective madness.

As the stock market was continually pumped up with new money this decade, everyday investors were being conned and duped by Wall St. and its financial media cronies.

The stock market is simply a type of Ponzi scheme that relies on constantly luring new investors to inflate the market, not on sales and profits. These new investors pump up the market by continually infusing it with new money, giving it the the false appearance of growth built on fundamentals.

Savvy, professional investors — the biggest market movers — know this and use it to their advantage, taking profits when the market advances. Who would sell their positions in an allegedly strong, profitable company? Only an experienced investor who knows that it's all just the smoke and mirrors of a market being influenced by Wall St. and the herd mentality.

By issuing stock, the nation's biggest corporations are essentially able to print their own money. And they also sell bonds (or debt) to raise additional money. In this sense, Wall St. issues its own fiat currency. Like the dollar, common stock has no physical backing. It's just pure, unadulterated risk.

Many average investors didn't learn a thing from the collapse of the tech bubble, or from the corporate scandals at Enron, WorldCom, Arthur Andersen, Haliburton, Tyco etc. Instead, they just went headlong into the irrational market surge that followed later this decade.

What should have been learned is that corporate America—particularly Wall St.—is perversely corrupt and contemptible.

All confidence seemed to have been lost by March of this year, when the Dow surrendered its euphoric 14,000-point highs of 2007. Stunningly, the market was more than halved, dropping back down to around 6500.

At that point, no one trusted Wall St., government regulators such as the SEC, or the credit-rating agencies.

Market confidence has been ruined because we now know that credit-rating agencies like Moody’s and Standard & Poor’s were in cahoots with Wall Street. Instead of assigning credible, independent grades to securities that are now known as "toxic assets," the agencies were hopelessly compromised by the fees that the securities issuers paid them to issue ratings.

Here’s an actual e-mail exchange between two analysts at S&P about a deal they were examining:

“Btw - that deal is ridiculous. We should not be rating it.”

“We rate every deal. It could be structured by cows and we would rate it.”

The assorted corporate scandals of the past decade, as well as the accounting scandals, had taken their toll; investors couldn't even trust the bookkeepers. Accountants at Arthur Andersen had been paid off to keep quiet and look the other way, or worse, to participate in the massive scams at Enron.

One has to ask, how pervasive is this behavior?

The entire system is based on confidence. So it was little wonder that investors sold off their holdings and stopped putting money in a market they simply didn’t, and couldn’t, trust.

And yet, sensing an opportunity for riches, bottom feeders have swept in and pumped up the market again by purchasing millions upon millions of corporate shares. But none of the fundamentals have changed. American businesses are still struggling and consumers are not spending. And the financial sector is still teetering, despite their recent glowing reports.

Sure, some corporations are becoming more profitable right now by laying off American workers. But is that worth celebrating, or investing in?

Corporations won't solve their problems by dumping human capital. The market is over-inflated and set for another tumble. The fundamentals haven't changed at all. There will be another correction, and millions of investors will be crushed once again.

But the savvy, veteran investors see the writing on the wall, and they will exit quickly, with their portfolios largely intact. That will start the next selloff, and the herd will follow.

But it will too late for most, and their fall will be very painful. Some people just don't learn.

"What we've got here is... failure to communicate. Some men you just can't reach. So you get what we had here last week, which is the way he wants it... well, he gets it. I don't like it any more than you men." — Cool Hand Luke, 1967

Credit Contraction Leads to Diminished Spending: Consumption Won't Drive Recovery

Earlier this year, Meredith Whitney, the prominent banking analyst who foresaw the 2008 Citigroup meltdown, predicted that credit card lenders would cut the lines of credit to borrowers by a total of $2.7 trillion through 2010.

That would amount to a 57 percent reduction in the credit they made available two years ago at the height of the boom.

Aside from being a problem for the banks (who create money through lending it), this significant credit contraction will also be a problem for the rest of us since it will continue to shrink the economy.

How? Whitney puts it this way:

"90 percent of US consumers revolve their credit card at least once a year, meaning that they won’t pay their full balance at least one time a year. So, they think 'I’m using $1,000 of my credit line, but I have an extra $4,000. So my total credit line outstanding is $5,000. And I’ve only used $1,000. That unused $4,000 is my rainy day fund – if my dog gets sick or my kid needs braces or I lose one of my jobs.' With so many Americans relying on their credit cards as a source of liquidity, reduced credit lines would be like a major pay cut."

The latest news backs Whitney's contention, and it should give pause to any suggestion that we will simply "grow our way out of this."

The Federal Reserve just reported that outstanding consumer credit fell by $21.6 billion dollars in July from June, the highest dollar-value decline since tracking of the data began in 1943.

Analysts had forecast a drop of $4 billion, but the contraction was more than 500% worse than predicted.

It continued an ongoing pattern; credit fell for a sixth month, the longest series of declines since 1991.

Consumers, facing job losses, fear of job loss, and declining personal wealth, are saving more and spending less.

The economy has lost 6.9 million jobs since the recession began in December 2007, the biggest drop in any post-World War II economic downturn.

Meanwhile, plunging home values and stock prices have fueled a record $13.9 trillion loss in US household wealth since the middle of 2007.

This latest Fed data is a very clear signal that consumers won’t be leading us out of this recession. And that is obviously a great concern to the government, which can no longer be so reliant on consumer spending to fuel the GDP.

It also provides further evidence that GDP is tumbling.

Count on this; with a limited export base and declining domestic consumption, things will continue to get worse before they get better.

China Syndrome

China Signals Loss of Confidence, Will Move Away From Dollar

The warnings have come in stages, but they have been consistent and clear.

In March, Chinese Premiere Wen Jiabao, worried about his nation's massive commitment to US dollars and Treasuries, sent a warning to the US and shook world markets.

"We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried,” Mr. Wen said at a news conference. He called on the US to, "Maintain its credibility, honor its commitments, and guarantee the security of Chinese assets."

With about $2 trillion invested in the US, China is the world’s largest holder of American government debt. That gives it significant reason for concern.

The US has been printing and borrowing like mad, while setting interest rates near zero. These actions are worrisome to any large holder of US dollars, like China, which surely fears large losses.

With American consumers tapped out and buying much less from overseas, Chinese exports to the US have dropped considerably. That has limited US dollars from flowing into Chinese coffers. It's also left them with less money to buy additional US Treasuries.

However, it hardly matters; the Chinese are finally crying "uncle." China has been seeking ways to limit any further exposure to US dollars for quite some time.

Premiere Wen indicated that China would not be rash in making changes to its massive stockpile of foreign reserves because of the worldwide implications sudden moves could portend.

Wen also noted that China would look out for its own interests, but would "at the same time also take international financial stability into consideration, because the two are inter-related."

That same month, China’s central bank proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

Further, it also condemned the current credit-based system: China’s central bank governor said the goal would be to create a new reserve currency, “That is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.”

This was further indication of China's concerns about the Fed simply printing money—backed by nothing—and the resulting hyperinflation that will eventually follow. It was also a condemnation of fiat currencies in general.

Then, in June, the head of the economic department at China's policy research office said he believed the dollar is poised for a fall. He said that buying land in the US is a better option than US Treasuries. He also urged his government to redirect a huge portion of its foreign exchange assets to buy energy and natural resource assets.

'Should we buy gold or US Treasuries?' Li Lianzhong asked. 'The US is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.'"

China, already possessing the largest gold stockpile in the world, will soon have doubled its gold reserves in the space of six years.

And at a June summit, Brazil, Russia, India and China (the BRIC nations) said they are considering buying each other’s bonds and swapping currencies to lessen dependence on the US dollar. Russia’s top economic advisor reiterated his intention to push for the creation of a “supranational currency” to challenge the US dollar and encouraged China and the other Shanghai group members to use each other’s currencies for trade.

And now the Chinese government has given its clearest signal yet that they have lost confidence and are moving away from the dollar.

Cheng Siwei, a former vice-chairman of the Standing Committee, said point blank that the Chinese central bank was about to actively diversify new reserve assets away from the US dollar and into currencies like the Yen and the Euro, and even gold.

“We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.

Depending on the degree that the Chinese sell dollars and buy gold, Yen or Euros, there can only be further downward pressure on the US dollar.

That makes the China/US relationship a unique and critical one. If China were to dump all their US investments (known as the financial nuclear option) it would devalue their investment and crush the dollar.

Pulling all of its money out of US treasuries would mean that Americans would pay more for goods. But that’s not all.

It would also cause interest rates to spike; mortgage rates to spike; inflation to spike; the dollar to go through the floor; and the stock market to go into chaos.

Essentially, we would be in very big trouble. But the Chinese would also suffer great losses. So they will be cautious and move incrementally.

But it means the US government can no longer count on China to finance its continued deficit spending. In other words, the jig is up

The Fed will now begin printing even more money—out of nothing, of course—because it has no other recourse. Our government has obligations and liabilities that it simply cannot meet in any other way for many years to come.

Regardless of what the Chinese do, the dollar is already falling, currency inflation is spiking, and interest rates will eventually follow.

You can count on significant tax increases, as well as cuts in benefits and services.

Siwei’s comments also suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

That should signal bullishness for gold and bearishness for the US Dollar.

Inspector General: Financial Bailouts May Cost Taxpayers $23.7 Trillion

In July, Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program (TARP), reported that American taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies.

Barofsky was appointed by President Bush last November to represent the taxpayers and oversee the mammoth bailout of the nation's financial system. His role is to scrutinize how the money is spent, and root out graft, corruption, and the potential mismanagement of an absolutely massive amount of taxpayer money.

Last fall, Congress hastily approved the $700 billion TARP in what was deemed an emergency situation. But many legislators, and the public at large, were astonished by the sheer size of the government intervention.

Yet it was a mere fraction of all the public money that has been, and continues to be, used to rescue US banks, investment houses, and other financial institutions including AIG, one of the world's largest insurance companies.

The Federal Reserve alone doled out $6.8 trillion in aid. And Barofsky estimates additional massive government infusions including the following: $2.3 trillion in programs offered by the Federal Deposit Insurance Corporation; $7.4 trillion in TARP and other aid from the Treasury; and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

Taken as a whole, these various undertakings amount to a staggering sum total of $23.7 trillion, which US taxpayers will be responsible for. To put it in perspective, that is more than seven times the current federal budget.

So far, the Treasury has spent $441 billion of TARP funds and has allocated $202.1 billion more for other spending, according to Barofsky. That amounts to just over $643 billion, almost all the money originally authorized by Congress and approved by President Bush last fall.

However, in the eleven months since Congress authorized TARP, Treasury has created 12 programs involving funds that may reach almost $3 trillion, according to Barofsky.

Keeping track of it, and being sure that it is all appropriately spent, is a Herculean task. And it's all the more difficult when the agencies it is monitoring refuse to be cooperative.

Barofsky offered criticism in a quarterly report of Treasury’s implementation of TARP, saying the department has “repeatedly failed to adopt recommendations” needed to provide transparency and fulfill the administration’s goal to implement TARP “with the highest degree of accountability.”

As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report.

Friction between Barofsky and Treasury resulted in Congress complaining that the Obama Administration was trying to interfere with Barofsky's work. Treasury has fought Barofsky each step of the way, dragging its feet, or outright refusing, when his office requested documents.

In fact, Treasury went as far as asking the Justice Department if it actually had to fulfill Barofsky's requests, and if the inspector general's office was instead subject to the Treasury's authority.

Ultimately, last week the Treasury announced that it would not continue to challenge Barofsky and his watchdog agency.

But it shows that the Treasury is disinclined to transparency, scrutiny, and supervision. This begs an obvious question: what is it hiding?

Meanwhile, the Fed is fighting a proposed Congressional audit.

The central bank and the Treasury work in unison, like two perfectly aligned gears. Neither likes any authority— other than their own—and neither likes accountability. Having to answer the inquiries of the inspector general must feel like stooping to the dictatorial duo.

The disturbing reality is that a cavernous hole has been dug by elitist bankers and their enablers which the American people will never get out of. The taxpayers will be paying off these monumental debts in perpetuity.

A sum as large as $23.7 trillion is totally incomprehensible, and the grandest case of larceny in the history of the world has been perpetrated against the American people.

This heist, one of entirely historic proportions, amounts to nothing less than a coup de grace by the Fed and their banking brethren.

We are all now at their mercy.

"Too Big to Fail" Should Mean Too Big To Exist

Fearing a systemic financial failure last year, the federal government pumped hundreds of billions into the US banking system.

America's biggest banks were deemed "too big to fail" and were buoyed with taxpayer dollars, even though the bankers had taken brazen risks that landed them in trouble in the first place.

The primacy of moral hazard was utterly ignored by our alleged government leaders.

Instead, the biggest, most irresponsible, most reckless banks were allowed to get even bigger.

According to a story in last Friday's Washington Post. JP Morgan Chase, Bank of America (partly government-owned due to the crisis) and Wells Fargo each now hold more than $1 of every $10 on deposit in this country.

This means that just three behemoth financial institutions now hold an aggregate of 30% of all US bank deposits.

What's more, according to federal data, those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards.

That clout and market share give them distinct advantages over their competitors.

New data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors falsely assume these large institutions have less risk of failing.

Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.

Does all of this sound like a dangerous monopoly to you? Does it seem that our once sacred anti-trust laws (the ones our government so famously used to break up the monopolistic giant Standard Oil) are plainly being violated?

If you said yes, we're in agreement.

The government is responsible for the arranged marriages of B of A / Merrill Lynch, JP Morgan Chase / Washington Mutual, and Wells Fargo / Wachovia. Most outrageously, the government also provided extraordinarily bountiful dowries too boot, amounting to billions of taxpayer dollars.

And it did all of this despite a blatant violation of existing US law.

JP Morgan Chase, B of A, and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring just such a practice. Federal Reserve documents show that in several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow.

It makes you wonder; what's the point of these laws?

Last October, when the Fed was arranging the merger of Wells Fargo and Wachovia, it identified seven metropolitan regions in which the combined company would either exceed the Justice Department's antitrust guidelines or hold more than a third of an area's deposits. Yet the merger was allowed to proceed anyway.

"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."

"The oligopoly has tightened," he added.

Hooray for capitalism. Hooray for the rule of law.

Government Projects Grim Fiscal Outlook

The latest projections for both federal deficits and the national debt can be described as nothing but grim.

On August 25, the White House Office of Management and Budget and the nonpartisan Congressional Budget Office each predicted exploding federal deficits and mounting debt over the next decade.

Both project the budget deficit for this year swelling to a record of nearly $1.6 trillion.

The White House revised its projected budget deficit to be $2 Trillion higher over the next decade than its previous May estimate. It now foresees a cumulative $9 trillion deficit from 2010-2019.

However, congressional budget analysts put the 10-year figure at a lower $7.14 trillion.

Either way, the news paints a bleak picture of America’s deteriorating debt position.

“If you include the administration’s fiscal plans, this implies a deficit increase way in excess of $10 trillion over the next decade – the numbers are deeply alarming,” said Bill Gale, a senior economist at the Brookings Institution.

The difference in the two government estimates is due primarily to the CBO's assumption that all of the Bush tax cuts will expire as scheduled by 2011, as dictated by current law. Yet, the White House intends to maintain the tax cuts for families earning less than $250,000 a year.

Regardless, 10-year projections can be highly inaccurate; any number of foreign and domestic challenges could make actual deficit figures very different from the estimates.

Beyond the 10-year forecast, the nation will face the additional challenges of rising health care costs and an aging population, the CBO said. "The budget remains on an unsustainable path" over the long-term and will require some combination of lower spending and higher tax revenues, it said.

Both estimates envision the national debt nearly doubling over the next decade. As of August, the total national debt stood at a staggering $11.7 trillion.

Congressional Budget Office director Douglas Elmendorf said if Congress doesn't reduce deficits, interest rates will likely rise, hurting the economy. But, he said, if Congress acts too soon, the economic recovery – whenever it arrives – could be thwarted.

"We face perils in acting and perils in not acting," Elmendorf told reporters.

The White House said the economy would shrink by 2.8 percent this year, more than twice its previous 1.2 percent estimate. It also expects unemployment to pass 10 percent and stay higher than 8 percent until the end of 2011.

White House budget director Peter Orszag said the government will have to spend more on unemployment insurance and food stamps due to the extended recession.

According to Orszag, continuing stresses will increase the cost of the economic stimulus package – most of which will be spent in fiscal year 2010 – by tens of billions of dollars above the original $787 billion.