How Did We Get Here?
Although our government is the largest business in the world, what many Americans are unaware of or unwilling to face is that our government, and therefore our nation, is now officially bankrupt. The last 40 years has seen our government’s indebtedness grow beyond comprehension. At the time of this writing, our country has gone from being the largest creditor nation to being the largest debtor nation in the world all within a time span of less than 50 years! Today, we have total national debt of over 13.5 trillion dollars (national deficit and debt are one of the same), which equates to $43,000 per person or $215,000 per household of five. Already, the interest payment on the national debt is the largest item on the federal budget by far. Yet, this is only the tip of the iceberg. At the time of this writing, (10/2010) we can add another….
1) $1 TRILLION needed to bankroll the new Obama healthcare plan
2) $1.36 TRILLION from the U.S. Federal deficit
3) $4.12 TRILLION owed to foreign investors (for example, we owe $2.1 trillion
to the Chinese in treasury bonds that they have cumulatively purchased)
4) $6.27 TRILLION in cumulative deficits projected over the next 10 years.
5) $110 TRILLION of unfunded liabilities in Social Security, Medicare, Prescription Drug benefits that will need to be paid out in the very near future.
Today, America’s total debts and liabilities equals 136 TRILLION DOLLARS! This amount is so staggering, so overwhelming and so shocking that it literally defies comprehension. Worse, we do not even have the assets available to liquidate this debt. If we took the value of all personal wealth of Americans (houses, cars, savings accounts, etc), corporate assets, small business assets, commercial real estate, and even non-profits, we would come to a total of approximately $74 trillion. Subtracting out the difference, we would still be in the hole for $62 trillion dollars! Each man, woman and child in our country would have to give $199,845 to eradicate this deficit! In other words, a family of five would have to give the government $736,249 to liquidate this debt. So, if the taxpayer where ultimately required to pay the total due, the typical American household family of five would have to cough up over $951,249, nearly a MILLION DOLLARS! And mind you, this is for every such household in America! By the time you read this chapter, it will easily be over $1,000,000!!
When will America arrive at a point of no return regarding repayment of the national debt? The answer to this question is TODAY. When this occurs, bankruptcy is the bottom line. As Larry Edelson of the Real Wealth Report states, “Throughout history there has never been a civilization that has managed to survive the levels of indebtedness now facing the United States. Every civilization, from the Roman Empire, to Byzantium, to the British Empire, and more – have either collapsed, waged wars to try and survive by plundering others’ resources, defaulted on either domestic debts, foreign debts, or both, and largely disappeared as a major player on the world stage.”
It is practically impossible to believe that in less than 50 years, we were the largest creditor and richest nation in the world. One cannot help to ask the question, ‘How in the world did we ever get to this place?’ A little history is in order to help answer this question. Let’s turn the clock back approximately fifty years ago.
Following the 1963 assassination of President Kennedy, Vice President Lyndon B. Johnson was installed into the White House. At that time the U.S. government had accumulated a total national debt of only 310 billion dollars. It was not until the Johnson administration that our government begin to enact a continued “policy” of borrowing based on the largest public works program ever launched since Franklin D. Roosevelt. Known as the Great Society program, entitlement programs against poverty by way of public housing, hunger, ADC (Aid to Dependent Children), Medicare, Medicaid and other similar programs led America into becoming financially entrapped by these socially popular programs. For the first time, Johnson purposefully had the Pentagon send low spending figures to conceal increased government spending because of the Vietnam War. This was coupled with lying to the American public about the magnitude of government deficit spending. Also, military expenditures increased an average of 18% yearly, yet taxes did not go up to compensate for the increased spending. At the end of Johnson’s term, the deficit increased by $44.8 billion. Small by today’s standards, but then again, don’t all cancers start this way?
Between Johnson’s and Reagan’s administrations, from Nixon to Ford, the federal debt had escalated to $909 billion - almost three times the amount from the time Johnson stepped into office. What took America 183 years to accumulate in federal debt now just tripled in twelve years. Yet, in comparison to our total present debt of nearly $14 trillion, this amount is mere pittance. Today we are over 1,400 times the debt that existed during the Reagan years!
Reagan and Congress had the opportunity to reverse the blight caused by deficit spending because government revenues increased by 76% between 1980-1988. Sadly, our governments spending wasn’t controlled or curtailed in response to the increased revenues. Worse yet, for every dollar the government took in, it spent $1.21. During that time, the largest program of waste and fraud occurred in defense spending. Hammers which normally would cost Joe Public five dollars would cost the American taxpayer over $400 each. Nuts and bolts that would cost you and I pennies at the local hardware store would cost the military $15 or more, each. The net result of all this is that the military-industrial complex became the second largest business in the world, followed by our own government, and escalated our national debt as never before. Also, most elected officials realized at this time that their re -election to office depended on their perpetuating a system that encouraged waste and fraud through a system of entitlements and pork barrel spending.
During Ronald Reagan’s administration, our country had an opportunity to reverse the trend of uncontrolled/illicit spending by passage of the Gramm-Rudman-Hollings Act in 1985. Passage of this law was simply to stop the federal government from spending money it did not have. It was intended to prohibit the ever increasing federal deficits from becoming economically unmanageable. It is a known fact that every year since its passage, our presidents and legislators have broken this law and are actually guilty of a criminal act. Sadly, this criminal act continues on a greater and more severe scale every year. The results of such acts are best quoted by Dr. Ron Paul, who states, “The end of an empire always comes when the currency is destroyed.”
The frustration of former U.S. Senator Warren Rudman is voiced by his quote, “For the past twelve years, I have fought the fight for debt reduction. I co-authored the Gramm-Rudman-Hollings balanced budget law in 1985, which worked where it was allowed to, but was stonewalled where it could have done the most good (entitlements). I have been and remain today, terribly frustrated with the unwillingness of our government to address this issue.”1 Even with the latest talk of passing a constitutional amendment for enacting a balanced budget, if our government could not adhere to the Gramm-Rudman-Hoilings Act, who would ever believe that it would adhere to any other amendment or bill passed? It is obvious today that this has not been done and the consequences of it will be disastrous.
After seven years of Reaganomics, the national debt tripled again, now up to 2.6 billion dollars. By 1992, the Bush administration racked up the largest gap between revenue and spending ever recorded in the history of our nation. Even after breaking the promise of “read my lips-no new taxes” in 1990, the Bush administration in collusion with Congress tallied the highest budget deficit in American history, a whopping $1.04 trillion dollars (with an already exisiting $2.6 billion + $1.04 billion = $3.64 billion). At the end of Bush’s administration, the American national debt became the number one issue raised by Republican contender for president, Paul Tsongas. This also became the major issue for Independent candidate Ross Perot, who became the “spoiler” for the Republican ticket in the election of 1993. The outcome of the 1993 election is that all three; Bush, Perot and the national debt lost to Bill Clinton.
Our national debt will grow to a point when our country will no longer be able to make interest payments on the total debt this country owes. For example, our Gross Domestic Product (GDP) is a total of all final goods and services our country produces. In effect, it is the total salary our country makes. A nations (or individuals) debt can be expressed as a percentage of this amount. So, if you earned $100,000 a year and had $50,000 in debt, your debt to income percentage would be 50%. Typically, individuals are qualified for loans and mortgages by banks in a similar fashion. Generally speaking, a 36% to 42% debt to salary ratio is the rule of thumb for credit worthy individuals who, at the same time, must also fund collateral for a loan of 10% to 20% down. In the case of a mortgage, besides the downpayment, the real estate becomes the collateral for the lending institution. From 1946 to 1964, the debt to national income percentage stood around 35%. But since 1982, it has increased dramatically. In 1991 it was 64%. Then in 1992 it dramatically increased to 70% and by 1996 it was projected to be over 100%. When this occurs we will be officially bankrupt. Sadly, today (in 2011), U.S. public and private debt now amounts to over 400% of GDP. Normally, under circumstances of this nature, any business of which the government is one, will no longer be able to sign paychecks. If it were to do so, they would be worthless. Foreign governments will no longer want to buy our Treasury bills, Federal Reserve notes, and U.S. Savings Bonds, because if they do so, they will be worthless. Even today, foreign governments are no longer purchasing our government securities for this very reason. Because of it, MarketWatch recently reported that the cost to buy insurance against U.S. sovereign debt has surged by a factor of seven as compared to a year ago and is 60% higher than at the end of 2008, giving us an indication of how indebted we truly are.
Former Senator Warren Rudman predicted that the American dollar would be worthless by 1997. To date, this has not occurred. Many wonder how this has been possible. As Henry Figgie, the Grace Commission and so many others have pointed out, the dollar has been the world’s reserve currency since the Bretton Woods agreement was signed by the world leaders. Essientially, it has given our country, i.e. the dollar, an unprecedented degree of faith and confidence when none in fact exist. It as though the world is living in a financial Disney World, a veritable fantasy land where our dollar is still considered to have value when in fact, it’s actually worthless. Talk about playing "make believe". For this reason, numerous world leaders have recently called for the replacement of the dollar as a reserve currency. Even without Rudman’s prediction, the coming collapse of America’s economy is still destined because of the consequences of our national debt. I predict that when this occurs, and it will, America will become absorbed into the worldwide single economic-currency system spearheaded by the New World Order. Other nations, such as those in the Pacific Rim (Japan, Taiwan, China, Korea, etc.) will voluntarily join in this new global economic system. Ultimately, this “New World Order” structure will eventually give rise to the establishment of the Antichrist economic order. Proof of this system already being put into place is evidenced by the use of Antichrist’s number -666- in product identification, banking and other financial systems as is explained in Chapter VI, “The European Connection”.
Sadly, our government has entered into a level of budgetary deception as never before. Our government is now shifting and deleting accounts from the federal deficit. For example, in 1989 the accounts of the U.S. Postal Service were deleted, hoping to “save” our government 1.8 billion dollars. Then in 1990, the independent Postal Service conveniently ran its first deficit of $1.6 billion followed by a $1.3 billion deficit in 1991. Now we know the real reason why the Postal system was separated out of our government - to eliminate it from the budgetary deficit process. Also, the cost of the 1991 Persian Gulf war was omitted completely from the budget-as though it never happened! In another case, the bail-out of the savings and loan debacle clearly nestles itself squarely in the middle of the deficit, supposedly to be paid by the American taxpayer at some unknown future date. One of the greatest scams yet to be realized has to do with Social Security. The U.S. government has borrowed against the Social Security fund with specially created non-marketable Treasury Bonds. They are nothing more than IOU’s. Since 1992, the government has borrowed more than $1 trillion from this fund which the government counts as revenue! Instead of a $1 trillion retirement fund that all Americans have paid into for their retirement needs, this account is in effect well over $1 trillion in the hole! Finally, the government routinely inflates revenue estimates and deflates expense estimates. For instance, they will paint the rosiest picture possible of anticipated tax collections by overestimating national economic growth for the upcoming budget year. Overstating economic growth and predictions thereof have become a commonplace tactic to appease the public into believing all is well. Although news reports abound with the demise of major U.S. corporations in regard to significant quarterly losses which in turn causes major layoffs, the government would have us believe otherwise. The labor department is known to deliberately miscalculate unemployment figures not only for the sake of elections but make unemployment statistics appear the most optimistic. Moreover, it fails to include those who have been dropped from the unemployment ranks and thereby are not even counted in the statistics. Most absurd, it even includes part-time employees who are tallied in as having full-time positions. With all these shenanigans, if they were counted, the U.S. unemployment rate would swell well above 22% as reported by ShadowStatistics.com.
Harry Figgie, Jr., a member of the Grace Commission and author of Bankruptcy 1995 states, “Washington D.C. is intent on destroying our nation. If not, they would have followed the Grace Commission’s recommendations in 1982. They would have maintained the law passed by the Gramm-Rudman-Hollings Act in 1985. Or the two revisions thereafter in 1987 and 1990. They have both broken the law of America and the promise to its people2 One of the most exasperating characteristics of our problem, however, is that our so-called leaders started us down this road knowing exactly where it would take us.”3 Mr. Figgie mentions a friend who tried to warn the Bush administration about the national debt. Mr. Figgie writes, “I have a very highly placed friend in the government in Washington who, at the start of the Bush administration explained to the Treasury Secretary and the Budget Director the fiscal crisis toward which the country was rapidly moving. They ignored him. He then went to the Republican leaders of Congress, and they ignored him. He tried the Democratic leaders and got the same result. He told me of his attempts and failures to get someone – anyone – in Washington to listen to a few facts and acknowledge the conclusion to which these facts clearly pointed. I advised my friend to go directly to the President because I knew my friend had the stature to be admitted to the Oval Office. He had tried, he said, but couldn’t get past then Chief of Staff John Sununu. ‘Even if I could, my by-now-despondent friend said, it would be a waste of time. Bush is only interested in things international. He has no interest in things national. He has no interest in domestic issues.”4 With such evidence in hand, what is the reason our leaders continue to shun and continue to turn a deaf ear to this most pressing problem? Why are some not even willing to admit it exists and those who do, never act on legislation that at one time could have reversed this debacle? How could our leaders act as saboteurs to the foreknowledged destruction of our country and if they were tried in a court of law, would be found guilty of treason?5 Is it possible that we can truly smell "conspiracy" lurking about or are we just all just a bunch of right-wing intolerants that should be branded as bigots and worse "terrorists"?
Now you know a little of the story why our leaders have taken us down the path of economic demise and destruction and where it will all end. It is no wonder that the Lord has told His people to get out of debt. The major thrust for this has to do with preventing a creditor from prematurely calling in your debt (loan), which most loan agreements allow. For this reason, all short term debts should be eradicated as soon as possible unless you have other viable assets that would allow you to liquidate this debt if per chance it would be prematurely called in. It is for this reason that every Christian should be on track to be financaily solvent this day.
I don't believe that the Lord is commanding His people to get out of debt, but He is strongly admonishing all His people to do all they can to achieve financial independence. If you have questions or problems regarding on how to handle your budget or debt, I highly recommend you speak with a financial counselor (Christian preferred) so that if we may still be here, we will be prepared to meet this financial storm and the coming of our Lord without debt or obligation. Although I do not believe that we, as His children, would miss the Rapture because of impending debt, it is His desire that we be good stewards of all He provides and that we do not owe no man anything.
The Coming $1.4 Trillion Commercial Real Estate Collapse
If you think a 50% market correction and a 10.6% unemployment rate are bad, just wait until 2013. By then, we could see a deep depression worse than the one we’re supposed to be recovering from.
Dr. Elizabeth Warren may be the most important figure in America today. She holds the answers to some of the most difficult questions of our time. Unfortunately you probably won’t like her answers...
Dr. Warren is the chair of the Congressional Oversight Panel. This panel oversees the distribution of TARP funds. But it also deals with broader issues in the banking industry. On Feb. 10, 2010, Warren’s panel released one of the most honest and devastating reports we have ever seen: the February oversight report: “Commercial Real Estate Losses and the Risk to Financial Stability.” In it, Warren and her colleagues tear down the notion of our so called “recovery”. Instead, they argue that nearly $1.4 trillion of at-risk commercial mortgages are about to trigger a slew of delinquencies, defaults and foreclosures — creating a severe credit crunch even worse than 2008. Elizabeth Warren’s commission concludes….....
This “wave of commercial real estate loan failures,” as the panel calls it, is already forming. Yet no one is willing to acknowledge it. It’s as if economists, investors and politicians alike refuse to face a second bubble bursting while they are still busy working through the first one.
Here’s how this new crisis breaks down:
While the housing bubble was in full effect and the economy was charging full speed ahead, credit and consumerism were getting out of control. We saw a huge hike in demand for places to spend this money/credit. Of course, retailers and property developers were more than happy to supply consumers with brand-new store storefronts, malls, hotels, office buildings, warehouses and even condominiums and apartment buildings (at bubble prices - part of the cost now having to be dealt with).
At the time that these new commercial properties were built and financed, demand was high. Almost no one expected it was all built on a lie — a bubble that would eventually burst. Neither developers nor the lenders thought there was very much risk here. Fast-forward to today. Now many of these properties are vacated, abandoned or even unfinished. But that’s not even the worst part.
Delinquencies, Defaults and Foreclosures Galore
Along with fewer consumers in demand of these buildings, the equities on these properties have deteriorated and in many cases, went negative - meaning commercial real estate prices plummeted, leaving borrowers upside down on their loans (just like many in the residential real estate sector).
We’re seeing a spike in loan delinquencies. Borrowers just cannot, and in some cases will not, continue making loan payments as their revenue falls or disappears. Just take a look at what happened to Stuyvesant Town. Stuyvesant Town is a 110-building, 11,000-plus-apartment, 80-acre “village” in the heart of Manhattan, formerly owned by MetLife Inc. In 2006, at the top of the bubble, MetLife sold the complex for $5.4 billion. On Jan.. 24, 2010, Tishman - Speyer Properties and BlackRock Realty - the borrowers - decided to release the complex back to their lenders, instead of filing for bankruptcy. This represented one of the largest property turnovers in commercial real estate history. While it was the biggest failure, Stuyvesant wasn’t the only failure in the past few years. There has been a huge influx of these voluntary foreclosures.
Of course, after delinquency comes default. At this stage, lenders reassess the ability of borrowers to repay the loan. If the lending bank or investor determines the borrower cannot repay the loan, it goes into “non-accrual status.” Remarkably, the number of loans in non-accrual status is astronomical and still climbing. Once in non-accrual status, or in default, the lender - usually a bank - has to write these bad loans down, much like the slew of bad mortgage write-downs big banks just experienced with residential mortgages.
While there are plenty of similarities between the residential and commercial markets, there are some very significant differences...for starters, many home loans were immediately bundled and sold away to investment banks. Commercial loans, however, are typically held by the originating banks. Those that aren’t held are bundled, but not sold and divided up between Wall Street firms. Roughly two-thirds of all commercial real estate debt is held by either the originating bank or immediate asset-backed security investors. This creates a serious problem for small and mid-sized banks that hold these loans as assets. Instead of speculators on Wall Street facing the onslaught of foreclosures, it’s the regional banks. These are the banks that also supply the majority of small business loans in the U.S. And over half of those still employed in this country work for small businesses.
Instead of a shock to housing, this will be a shock to employment. If nothing is done, we may look back at today’s 10.6% unemployment number with nostalgia. Even if the economy does “recover” enough to save some of these properties, there’s a second problem with commercial loans that residential ones don’t have.
Home mortgages last up to 30 years and are fully amortizing. Commercial borrowers, however, refinance their loans every five thru ten years. You see, unlike residential mortgages, most commercial loans are not fully amortizing. Instead, a majority of the principal is left due at maturity. In a properly functioning real estate market, the borrower can easily refinance this leftover principal, and the cycle starts over again. But as you know, we don’t currently have a properly functioning real estate market.
These are the current standards in the refinancing business. With tighter credit, many institutions have made their requirements even stricter. With nearly $1.4 trillion worth of maturities coming due in the next three years, and another $1 trillion more in the following five years, we can safely expect a massive spike in foreclosures.
And with political turmoil in Washington these days, it’s unlikely we’ll see a second trillion-dollar TARP - like bailout for the small banks left covering these loan losses. So where does that leave us? 6
Based on just this specific set of financial criteria, we see a formation taking place that will bring forth a significant “financial challenge” to the so-called “economic recovery” supposedly taking place. In fact, this coming commercial real estate crisis could even be worse than the housing collapse of 2008-2009. However, the next financial concern might put more than a few holes in the hoped for “economic recovery”.
The $592 Trillion Phantom Economy
While the powers that be would love you to think that they’ve got everything under control, you’ll soon see that once the next wave of the global derivatives disaster hits, no amount of Fed fiddling will be able to contain the crisis this time.
While we originally warned that JP Morgan rnight be ground zero for the global derivatives disaster, Jamie Dimon (who’s been called the world’s greatest banker) was soon employed to unwind their giant derivatives portfolio and reduce their exposure and risk. Although he managed to do this with some success, other players took up the slack and the derivatives bubble continued to grow unchecked and unregulated.
We later sent out warnings of a new demon derivative that had begun to proliferate like wildfire which threatened to take down banks like Wachovia, Merrill Lynch, Morgan Stanley, Deustche Bank, and hundreds of other hedge funds and financial institutions.
Authors note: Since the time of this article, written in February of 2009, history has proven that Wachovia, Bear Stearns, Lehman Bros. and numerous hedge funds became victims of the financial credit collapse and went belly -up. Most of these were crushed by their astronomical holdings of derivatives which could not be neutralized. Even Morgan Stanley was absorbed into Chase – Manhattan to help dilute it’s derivatives losses. Yet, as this article will demonstrate, it’s far from over.
Bill Gross, the legendary bond investor, called this particular type of derivative one of the banks’ most “egregious concoctions” to date! It’s the now infamous investment, which goes by the name of the subprime CDO (Collateralized Debt Obligation). This investment derives its value from the subprime mortgage markets. These investments were basically bets on whether or not the average American homeowner with a poor credit rating could make his monthly mortgage payment on his inflated home. For bankers and mortgage brokers, loan applicants who previously would have been considered bad risks suddenly became great clients. That’s because the higher risk these borrowers represented, the higher the lender could charge for interest rates and fees and then quickly sell the loan off to unsuspecting institutions.
Authors note: Again, history proves this assertion dead-on with Goldman-Sachs being accused of foul play in the trading of these securities, selling the CDOs to unsuspecting customers all the while it knew full well that this “fairy land” sale could not hold water. Worse, they even bet against these failures by short sales and option put purchases to make billions, which later translated to million dollar bonuses for each employee working for the company. To add insult to injury, Goldman-Sachs also held out their other hand to receive the Obama’s stimulus packages, which you and I will eventually be responsible for).
And in a world of low interest rates, low inflation and easy credit they were a effortless way for banks and hedge funds to reach for yield. The risk was low (they thought) and the reward high….at least until everything started to go wrong….and these “miracle bets” began to rapidly unwind.
Pop Goes the Largest Credit Bubble in History
You see, as we mentioned before, these derivative bets have brought on an enormous amount of leverage. For example, any wealthy individual can go to a broker these days and put down $1 million, and then leverage this amount 3 times. The resulting $4 million ($1 million equity, $3 million debt) can be invested in a fund of funds that will in turn leverage this $4 million another 3 or 4 times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them another 3 or 4 times and buy derivatives like subprime CDOs, which are often themselves leveraged 9 or 10 times!
At the end of this long credit chain, the initial $1 million of equity can become a $100 million investment, out of which $99 million is debt (leverage) and only $1 million is equity. So we get an overall leverage ratio of 100 to 1. It was this kind of new super-leverage which helped create the largest asset and credit bubbles in the history of humanity, including a global real estate bubble, a mortgage bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge fund bubble and the mother of all economic bubbles: the global derivatives bubble. It’s how global stock markets grew from $25 trillion to $50 trillion in just 5 years, and how the global derivatives market leapt from $100 trillion to almost $600 trillion. In economic terms, these bubbles grew in the blink of an eye.
And now they’ve all begun to bust at the same time - plunging us into the deepest deleveraging since the Great Depression. (authors note: this truly is the crux of the problem. This monster derivative market has racked up an astronomical level of indebtedness that still exists today. I contend that this debt alone is impossible to defuse! The world market and currency systems will only be able to hide/bury this truth for so long. It will eventually have to be unwound. This will be the undoing of the present world’s global economic/currency crisis which will eventually lead to a “New World Economic” order.) When you have this kind of monstrous amount of leverage built into the system, a mere 1% fall in the price of the final investment (the CDO) can wipe out the initial equity, and create a chain of margin calls. And here’s where the real problem lies: The one at the very core of the credit crisis. The amount all these traders have to put down (capital in the form of margin – i.e. downpayment) in order to place their derivative bets is based upon their credit rating. The stronger their credit rating, the less they have to put down.
Now if their credit rating is downgraded, they have to put up more money to cover the bet. In order to do that, the bank, hedge fund, money market fund, private equity fund, etc. must sell its investments. Problem is, it’s unable to sell many of its investments (like CDOs) - because nobody wants them, so it has to sell its good investments (like its stocks). And naturally when things sell, prices drop, which causes further selling, and further downgrades and soon the whole system implodes, quickly. And that’s what we have seen happening in global markets recently. It’s why stocks, investments and markets that seem far removed from the subprime mortgage meltdown are being affected by it. But the worst is yet to come.
The Catalog of Crisis
It’s not only that we have a financial crisis, we also have a banking crisis, a credit crisis, a food crisis, an energy crisis and a commodity crisis. We’ve already seen $10 trillion wiped off global stock exchanges in just a month. And that was after trillions of dollars had been injected into the system from central banks the globe over. And now the next demon derivative is about to whip down Wall Street and wipe another $20 trillion off global exchanges, spinning the world into what might end up being a global deflationary collapse.
We’ve covered the subprime CDO (the derivative at the core of the real estate induced credit crisis). Now another kind of demon derivative is about to take the spotlight. It’s called the CDS (Credit Default Swap). And you’ll soon understand why, no matter what central banks do, it will deal the final blow to the global financial system.
At its very simplest a CDS is an insurance contract. And it’s made between two parties, one of whom is giving insurance to the other in hopes that he will be paid in the event that a financial institution or corporation, fails. However, Wall Street big-wigs have been very careful not to call this investment an insurance contract because if it were insurance, it would be regulated. So instead they use a magic substitute word called a ‘swap,’ which by virtue of federal law is deregulated.
And this is where we run into trouble. Because what was originally intended as insurance has now often become once again a highly leveraged speculative bet. Now in a typical CDS deal, a hedge fund will sell protection to a bank, which will then resell the same protection to another bank, and such dealing will continue, sometimes in a circle. And this practice has the potential to put investors into webs of relationships which are not transparent. Since the U.S. Treasury has not classified these derivatives as “insurance,” they trade free of any government regulations. Because of that, the firm selling the CDS is not required to set aside any reserves from the premiums received to insure against possible future claims. This obviously makes the sale of the Credit Default Swaps potentially very profitable. But if the bet goes sour, and the company defaults or goes bankrupt, then that small bet can get very expensive.
This new CDS market now stands at a size exponentially larger than the entire capitalization of all the world’s stock markets combined. And since these bets are all based on the future credit worthiness of a country, company or consumer (basically a bet on the ability of a party to repay his debts), they’re all about to go horribly wrong.
In a global economy made up of thousands of corporations and institutions, many of which borrowed 10-100 times their capital in the past few years, most will be unable to repay their future* debts - meaning these new demon derivates are going to unwind at a rapid rate…. with fall-out so large it will dwarf the current damage caused by the crisis so far.
Why Bailout Band-Aids Won’t Work
Governments and central banks around the globe have already injected trillions of dollars into the system (mostly by printing fiat money, which is only providing an illusion of protection. Soon, the market will see that the emperor is not wearing any clothes). And while these bailout band-aids have helped, the problem is too big now. A band-aid might be good to cover a blemish or an abrasion, but we now have a gaping hole in the financial system: One that is growing larger every day.
Plus the government’s ability to deal with a crisis of this magnitude is limited. Over 700 banks are already in critical condition...150 of them (with a trillion dollars in assets alone) have Texas Ratios of 1:1. (A Texas ratio is a measure of the banks’ credit troubles. And historically when banks have reached 1:1, they fail.)
While the Fed does have the ability to bail out banks, how many more will they have to bail out before investors start to lose faith in the whole American financial system. But even if they were to take the unlikely action of bailing out every bank, it still wouldn’t be enough. They’d need to bail out the hundreds of non-banking institutions too, including all the hedge funds, money market funds and private equity funds that are also on the brink. And they’d need to bail out the thousands of crashing corporations and the millions of already bankrupt mortgage holders. That’s what is needed to save the system…..to prevent a tsunami of foreclosures, an implosion of the corporate sector, not to mention the coming torrent of defaults on credit cards, auto loans and student loans.
And the tragic reality is it can’t be done. These kind of non-banking bailouts lie beyond the abilities of the Fed. Nothing will be able to stop the coming catastrophic implosion of the Credit Default Swap market. Even if the Fed could inject funds into every hedge fund, money-market fund and corporation (which they can’t), the sums needed would be so large that it would destroy the very fabric of the American financial system anyway.
Once the CDS market starts to implode, there will be a run on the banks... and a run on stocks. And expect the coming CDS - driven global stock market crash to dwarf the last crash, which saw $10 trillion wiped off global exchanges in a matter of weeks, as investors priced in a global recession. This time they’ll be pricing in a severe recession and maybe a depression. Expect at least another $20 trillion to get wiped off. And because of the lack of transparency in the CDS market, everyone will hoard cash, making the credit crunch even worse - leading to a complete systemic financial collapse. The curtain will have finally fallen on the Wall Street era.7
The Next Housing Bust is Around the Corner by Chris Mayer
We have mountains of debt to work through yet. The last bubble was one for the ages. We’ve all heard stories of one kind or another like the glass cutter who earned $5,000 per month, pretax ($60,000/yr). WaMu gave him a $615,000 home loan with payments of $3,600 per month (the essence of what was spoken of earlier, banks and financial houses making bets on people who had little or no chance of maintaining a 30 year mortgage and all of its derivative teaser loans).
Then, there was a house — a shack, really — that appraised for $132,000 and got a mortgage of $103,000. The owner hadn’t worked in 13 years. Upon foreclosure, a neighbor bought the house and paid $18,000 just to tear the thing down. And the most eye-popping of all: A house in Fort Myers, FL that sold for $399,600 on Dec. 29, 2005 — only to sell for $589,900 on Dec. 30, 2005, a day later. America, it seems, just went crazy — borrowers, lenders, nearly everybody. These anecdotes and others are told in a new book titled More Mortgage Meltdown by money managers Whitney Tilson and Glenn Tongue.
“If the problems in the mortgage market were limited to subprime loans, then the carnage would be mostly behind us,” the authors note. Subprime loans were the riskiest mortgage loans. Prime loans were where the borrower made a substantial down payment and had good credit history. Subprime loans, by contrast, were to borrowers of poor credit quality and spotty job histories.
The bigger problem is that the mortgage bubble infected a number of areas beyond just subprime. The subprime crisis was the first to drop, like a marathon dancer that falls to the floor exhausted. But there are still other dancers on the floor ready to topple over too (and this is where we will see the next phase of the real estate debacle implode).
Subprime is only one slice of low-grade bologna. It sits at the bottom. Alt-A is the next riskiest slice of mortgages above subprime. Alt-A are mortgages to people who are better credit risks than subprime, but still not prime. Documentation is still spotty as far as verifying income, and loan to values (LTV) are high. Plus, about a quarter of these mortgages went to non-owner occupied homes — which were subject to even greater speculation. The scary thing is that this mortgage market is 50—100% bigger than subprime. Unlike subprime, Alt-A loans typically have five-year resets — meaning, the interest rates adjust to higher rates. The Alt-A reset surge doesn’t really get started until 2010! It continues through 2012.
There are also “option ARMs” that need to be looked at. These loans usually have ultra-low teaser rates and often were interest only. Again, the reset surge for these loans starts in 2010. And you’ll also see something called “jumbo prime.” These are big loans — on average about $750,000. These were common in the most inflated bubble states, such as California and Florida, and were often made to poor credit risks. Just this market alone comprises $ 1—1.5 trillion — about as big as subprime.
Then there are home equity lines. As Tilson and Tongue write, home equity lines funded “30% of new car purchases in California and 20% in Florida in 2007.” These loans are second loans, behind all the garbage I mentioned above. That means that many home equity loans will be a total loss for the lenders, as housing prices have collapsed and can’t support the junk loans in first position, much less junior liens like home equity lines.
Moreover, the pattern for all of these loans was the same. You see rapid growth in the bubble years, roughly from 2000—2007. In fact, the riskiest loans grew the most during this time. You also see skyrocketing delinquency rates beginning in 2007 and continuing today — and massive losses for banks. Subprime was only the first wave.
Through March of 2009, banks had taken only $1.1 trillion in write-downs to date. Even the most conservative estimates put total credit losses at $2.2 trillion. Tilson and Tongue make a convincing case that the losses will be far worse than that — more like $3.8 trillion. And these numbers seem only to grow over time. I remember sitting at a Grant’s conference over a year ago when John Paulson, the fund manager who saw all this coming and profited mightily, tossed out $1 trillion as the number for total losses. That number induced gasps at the time.
So I think Tilson and Tongue will be closer to the mark. It may well be even more than that when it is all said and done. The fallout from all of this is that the banks will have to raise a lot more capital. They’ve raised only $1 trillion so far — yes, only. Given the high leverage in the banking sector, they may yet need to raise at least another $1 trillion. I don’t see how that is possible in today’s market. Where is the money going to come from? (Authors guess: the governments printing of bogus dollar)
As banks’ assets got riskier with subprime, Alt-A and all the rest — they actually borrowed more to hold these assets. The typical bank has only 4 cents of tangible equity for every dollar of assets. That means a 4% drop in asset value wipes out the equity, making the bank insolvent. And this, answers the great fundamental question that seems to baffle so many market commentators. Why aren’t the banks lending? People point to the trillions of dollars the government pumped into the economy, including on bank balance sheets.
The answer is that the bankers know they will need the money to cover losses from their toxic loan portfolios. The banks are clearly not lending. Banks are cutting lines of credit to consumers and to businesses, too. New loans in various business categories are down 60 - 80% from where they were a year ago.
It is hard to imagine any economic recovery when the banking system has such gaping funding holes it needs to fill. As it is, banks are failing and the losses are severe — on average, the losses amount to more than 40% of assets. The data coming in on foreclosure recoveries are bleak. In California, recovery is often less than 35 cents on the dollar. It’s not supposed to happen like this. It’s like the hogs broke free and skinned the butchers. If this crisis is anything like previous cycles, we’ve got a long way to go on bank failures.8
The Nightmare Begins by Porter Stansberry
We started out this year with one prediction:
For the first time since just after World War I, we have serious sovereign debt problems in all of the major currencies. And for the first time in the history of man... we have a global monetary base that’s not anchored to any real asset. In fact, the largest reserve assets of the world’s monetary system are obligations of a bankrupt nation (the U.S.) that must print money to afford its own annual deficits. (Authors note: this is absolutely key to the present reality. Washington D.C. and the European Central Bank's showering of paper money, that in reality is absolutely worthless, will one day be exposed for what it really is. When that day comes, the entire house of cards which this present economy has been built on will come crashing down. Please understand that even as the global cardplayers are adding new cards (worthless mind you) to the house, a semblence of recovery is conveyed. However, because these are totally worthless cards, at some moment of time, the entire house will come crashing down. And with most earthquakes, there will be no warning when it happens. Jesus expressed this situation so well as recorded in Mathew 7: 24-27
This is a recipe for disaster. I believe the entire system of paper money - globally - is coming unglued. The result will be a kind of volatility and disruption to the global economy the world hasn’t seen since WWI, when the gold standard ended in 1914.
The World’s Paper Currencies are Falling Apart
I firmly believe my two-year-old son, Traveler, will be astonished to learn his father once earned, saved, and invested with paper money. By the time he is old enough to know what money is, the entire paper money system will have collapsed. Historians will study the paper-standard period (the global monetary system from 1971-2010) with awe. How, they will wonder, could the entire world fall for such an obvious con?
In Europe, you’ve got a paper money system that’s not backed by anything — not even a political union. As my friend Doug Casey likes to explain: The U.S. dollar’s intrinsic value is zero, therefore, the dollar is an “I.O.U. nothing.” But the euro is a “who owes you nothing?” Nearly all of its members’ economies are debt-laden, socialistic shambles.
Consider Italy. Even though it collects 43% of its GDP in taxes(!), the country can’t run a balanced budget. Its total debt to GDP is now 103% (remember, America with its present deficit and future unfunded obiigations is at 400%). The same is true for Greece, Spain, and Portugal. Even the so-called healthy economies, France and Germany, have huge structural problems with enormous welfare obligations and aging populations.
In Japan, you’ve got an ongoing, multi-decade economic decline with a government sector that’s bankrupted the nation while suffocating all private capital. Japan has an enormous debt to GDP ratio - 170%. That’s second only to Zimbabwe. Imagine historians trying to explain why the world’s creditors allowed one of the three major economies in the world to become as debt -laden as the most backward African dictatorship. There’s really no way to explain it.
And with the U.S., you have an acute short-term funding crisis that could spark a global run on the dollar at any moment. This is by far the most serious problem because the dollar isn’t just another major currency. It is the world’s reserve currency, the foundation of the entire system. Unfortunately, our government’s finances have begun to look like a giant banana republic on the eve of devaluation.
The annual funding costs of our national debt are approaching $4 trillion per year - that’s $1.5 trillion in new annual deficits, plus $2 trillion - $3 trillion a year in short-term obligations coming due that need to be refinanced. Foreigners hold roughly half of this debt. Thus, we have about $2 trillion a year in foreign debt that must be repaid or refinanced each year. This is dangerous because we only have about 25% of the reserves needed to cover our short-term foreign debt. This is clearly a violation of the Greenspan-Guidotti rule.
It’s tough to understand the size of a $2 trillion annual obligation. It’s so large it’s meaningless to most people. I could tell you $2 trillion is 20% of our GDP, but even then, you probably won’t understand just how much money this is. So think of it this way...
If you spent $1 million per day from the time of the founding of Rome — roughly 2,700 years ago — until today, you would have accumulated about $1 trillion in debt*. Now, double that amount. And that’s the size of our annual foreign borrowing obligation. [* Thanks to Eric Margolis for the trillion dollar metaphor. See his essay, Spending America Into Ruin,” here: http://www.lewrockwell.com/ margolis/margolis 179.html.]
A Critical Weakness: The End of America
If our foreign creditors stop funding our debts, we will have a currency crisis. Not one mainstream economist in 100 thinks this is possible. This doesn’t bother me. These same guys told me I was crazy for thinking General Motors would go bust - the government would never allow it, they said.
You don’t have to rely on their naïve opinions or my warnings. Just look at the numbers and ask yourself one simple question: How could our government replace the $2 trillion we’re borrowing from foreigners with domestic savings? It can’t. We don’t have the money. Our total domestic savings only come to about $600 billion. If you add together ALL of our domestic savings and currency reserves, you only end up with about half of our annual foreign funding requirement. This puts us completely at the mercy of our foreign creditors. And here’s the bad news: Our foreign creditors have begun abandoning the Treasury market.
Here are three facts you need to memorize. Write them down. Tape them on your refrigerator:
1) The U.S. Treasury announced this week China - formerly our largest creditor - sold $34.2 billion worth of Treasury obligations in December 2009.
2) Total foreign holdings of U.S. Treasury obligations fell for the year in 2009. This is a reversal of a 30-year trend.
3) Central banks were net buyers of gold for the first time since the end of the Bretton Woods monetary system in 1971.
This is a shot across the bow to America’s empire of debt. It’s a wakeup call to everyone who believes, like former Vice President Dick Cheney infamously said, “deficits don’t matter.” Deficits don’t matter?....up until the minute they do. That minute arrives when your creditors won’t roll your debt forward (authors note: this is exactly the crux of the problem and the only reason we are still surviving. Just like a loan or bank mortgage, the lender is giving you the privilege of borrowing from them. However, a typical clause -small print, of course - in your loan or mortgage agreement allows the lender to demand full payment of the loan at any time it desires, and if you don’t close your loan/mortgage for the full amount then they can legally foreclose on it. Since our government won’t foreclose on itself, it will only print fiat money to cover its debt obligations). If the Chinese stop buying our bonds, the only way to close America’s funding gap is with massive inflation....and the Chinese have stopped buying our bonds.
We’ve been papering over the funding gap through Federal Reserve purchases of Treasury bonds and so -called agency securities, which are Treasury -guaranteed obligations of Fannie and Freddie. You can see this for yourself by looking up the results of the weekly U.S. Treasury auction.
You’ll see a large buyer called “SOMA,” an acronym that stands for “System Open Market Account.” That’s the Fed’s account. For example, at last week’s auction of 30-year Treasuries, SOMA accounted for 11% of all purchases, just shy of $1.8 billion worth. Since Lehman fell in October 2008, the Fed has spent around $2 trillion on these purchases.
Printing up trillions to finance the government’s deficit is dangerous. It leads to inflation and ruins the credit of the government by showing the world we can’t legitimately finance our debts. And consider this: U.S. Treasuries and agency securities make up about 60% of the world’s banking reserves. When we inflate the U.S. dollar, we inflate the world.
It’s not hard to imagine what comes next: soaring hard commodity prices....a big reduction in available credit.....sharply higher interest rates......and massive economic disruption. The Chinese know what’s coming. They have been buying hard commodities, particularly gold, oil, and copper. And China isn’t the only big seller of U.S. Treasuries. Total foreign holdings of Treasury obligations fell by $53 billion in December '09, the largest monthly reduction ever. What are central bankers buying in lieu of the U.S. dollar? Gold. Central banks were net buyers of gold for the first time since the U.S. abandoned the last vestige of a gold standard (Bretton Woods) in 1971. That’s how the dollar standard ends - central banks flee to gold. Gold is the only traditional reserve asset that isn’t someone else’s liability. It’s the ultimate form of savings.
Who else is buying gold? Elite hedge-fund managers. Just after I wrote my November issue, George Soros began buying massive amounts of gold. He bought more than $600 million worth of the gold ETF (GLD), becoming its fourth-largest owner. Gold is now Soros’ single largest investment position. Probably no one else in the world has more experience trading successfully around bankrupt governments. If Soros is buying that much gold, it means he knows the U.S. dollar is going to collapse.
These trends are troubling. They prove America doesn’t have an unlimited capacity to fund its deficit spending. We can’t simply get away with printing our way out of debt because our trading partners and our creditors have at least one option: gold. I’ve been warning about the probability (not the possibility) of this “doomsday” scenario, where the U.S. dollar collapses and loses its status as the world’s reserve currency for several years. I call this scenario “The End of America” because without the privilege of controlling the world’s reserve currency, our standard of living will crumble. I’ve seen currency collapses firsthand in places like Argentina. The middle class is wiped out because it can no longer afford its debts. People lose their assets in the midst of soaring inflation. It’s horrible.
Turning Good Credit to Bad
I know that for most of you this outcome is simply unthinkable. That could never happen here. The goal of all currency and credit manipulation is to create credit where none actually exists. If you study the history of John Law — the original promoter of paper money in the West — or any other credit bubble, you discover they were all paper-shuffling schemes designed to give bad credit the appearance of good credit.
John Law, an 18th century Scottish economist, turned a horrible credit risk (the bankrupt government of France) into the most desired financial asset in the world, simply with promotion.
Law launched the first paper money bank in France — The Royal Bank. Its notes were legal tender and could be used to pay taxes since the French crown owned the bank. Using the bank’s “capital” — which was nothing more than paper claims on a bankrupt country — Law bought the Mississippi Company, which held a monopoly on trade with France’s colonies. Of course, this was all a show — the crown owned the bank, and it already owned Mississippi. No title had changed hands. But it wasn’t hard to convince people - Mississippi was worth more than the rest of France combined.
To raise real capital, Law began exchanging publicly held French debt for notes in the Mississippi monopoly. He kept increasing the dividends paid and adding new monopoly companies to the bank’s portfolio — all of which drove investors to distraction. The price of the bank’s shares soared from 500 livres in 1719 to more than 18,000 livres by 1720. But the entire scheme collapsed in 1721 when investors came to their senses and realized they had been buying the assets of a bankrupt nation the entire time.
Now.., think for a moment about the sub-prime crisis. The financiers engineered a way to turn subprime mortgage credits into securities that resembled triple-A-rated bonds. In reality, it was all just paper shuffling. Most of the “buyers” of subprime real estate didn’t put any money down. Nor did a large percentage of these “buyers” have any real capacity to meet these obligations. Nevertheless, investors came to believe these sub-prime loans were as good as the highest - rated corporate and sovereign debt.
What happened? By improving the appearance of the credit, the investment banks and the mortgage brokers lowered their borrowing costs and expanded the amount of credit they could obtain on subprime real estate. Lending boomed. Housing prices soared.
Unfortunately, as with John Law’s bank notes, none of this actually improved the creditworthiness of subprime loans. The prosperity manufactured by paper shuffling didn’t last. It never does. Sooner or later, the reality of the poor credit is always exposed. The newly created “wealth” disappears. Credit disappears (because no credit was due). Interest rates soar. Asset prices collapsed. A bust follows the boom.
The same thing happened in the emerging markets in the early 1990s. The Asian “Tigers” decided to peg their currencies to the U.S. dollar. Almost overnight, weak currencies, like the Indonesian rupiah, were considered nearly as reliable as the U.S. dollar, merely because the central bank of Indonesia promised to support the currency. In the early 1990s, Indonesian interest rates plunged. Available credit soared. Asset prices soared. The finance minister was hailed as a national hero — he’d created an enormous amount of prosperity almost instantly. But of course, the Indonesian rupiah wasn’t as reliable as the dollar. Holders realized the Indonesian central bank couldn’t meet its promise to hold the rupiah exchange rate to a fixed dollar value. The exchange rate fell from around 2,400 rupiah to the dollar in July 1997 to less than 14,000 rupiah to the dollar by mid-1998. Inflation soared to 60% annually, and interest rates went to more than 80%.
Financial history is unanimous on this point: Sooner or later, the real quality of the borrower is revealed. (Authors note: as written earlier, the masses finally saw that the emperor had no clothes on).
Now, consider the euro. Prior to the creation of the euro, a crisis like the current one in Greece would have sent interest rates on the debt of other shaky economies rocketing. Italian sovereign debt would have been 500 to 700 basis points (or more) higher than similar German government debt. In other words, if German bonds were paying investors 5%, Italian bonds would pay investors 10% or 12%. The higher cost of credit for Italy would make up for the higher risk of devaluation. Italy, quite simply, isn’t a good credit risk. It’s subprime sovereign debt.
But with the euro in place, Italy’s debts are considered almost equal to Germany’s. The market believes the euro currency union imposes better economic management on Italy and implies a German guarantee if anything goes seriously wrong. Poof... as though by magic... a poor credit (Italy) turns into a great credit — at least on paper. What happened to Italy after the introduction of the euro? Italy borrowed more and more money every year, taking advantage of the low cost and availability of credit. Asset prices in Italy soared as this debt produced an investment led boom.
What will happen next? You should already know. Sooner or later the poor quality of the credit will be exposed. Italy’s lenders will take huge loses. Asset prices in Italy will collapse. Interest rates will soar. The same will happen across the Euro zone. And the euro will be exposed for what it really is - just another paper money scheme. No different than John Law’s bank or Bear Stearns’ subprime CDOs.
Drowning in Debt
I believe the problems of Japan and the euro will hasten the demise of the U.S. dollar. Investors are beginning to look at the real credit quality of all sovereign borrowers — even the U.S. Sooner or later, they’re going ask themselves: How will America ever repay these debts? How can it even afford the interest on these obligations? And what are the ramifications for the world’s paper currency system if the U.S. defaults?
The answers, my friends, aren’t pleasant. Credit will disappear. Interest rates will skyrocket. Asset prices will collapse, while our currency plummets in exchange value — meaning the prices of hard commodities will soar. I’d expect the average American to lose 50% to 75% of his purchasing power in the first year after the devaluation of the U.S. dollar, if not more.
I know this will happen. It is not a question of if, only when.
I believe we’re approaching this end game faster than anyone realizes. For the last year, the Federal Reserve has been buying stupendous amounts of long-term credits — both mortgages and Treasury bonds. Specifically, the Fed announced it would buy $1.75 trillion (that’s not a typo) of mortgages and Treasuries between March 2009 and March 2010. This is an attempt to fool the world into believing our credit markets are safe and long-term U.S. dollar interest rates won’t suddenly rise.
Imagine what would have happened in our economy last year if the Fed hadn’t printed $1.75 trillion to throw at long-term interest rates and the federal government hadn’t run a $2 trillion budget deficit. Last year, we borrowed or printed nearly $4 trillion and injected it into the U.S. economy - that’s roughly 40% of GDP!
You will see lots of debates about what the coming currency crisis means. But if you can understand what’s happening, you will know that the value of the dollar is collapsing as the uncreditworthiness of the United States becomes evident. That means the price of hard assets — like gold — will keep rising and the value of our government’s long-term obligations will fall.
The consequences of a currency crisis are so horrible I often sit and think to myself... I must have this all wrong. Things can’t possibly be this bad. But then I look at all of the numbers again. I’ve spent my entire career following the numbers and reaching my conclusions based on the numbers alone. They’ve never led me astray. They’ve given me the confidence to reach correct conclusions literally unthinkable to other analysts. Given the hard choice between a reality that’s hard to accept and a delusion that’s impossible to trust, I’ll pick the reality. I hope you do the same.
The fact is... our country is bankrupt. It is only a matter of time before investors abandon our currency. It is only a matter of time before credit becomes vastly more expensive and our dollar is worth much, much less. While some people will benefit from this disruption, the economic chaos these changes will bring will destroy much, much more.9
Standing at the Brink of Disaster by John Pugsley
The industrialized world trembles on the precipice of a second Great Depression, while political leaders and financial authorities work feverishly to convince ignorant populations that everything is under control.
Like the frustrating arcade game Whack-A-Mole, politicians try to stop debt defaults in one sector by hammering them down with government and central bank guarantees, only to have more defaults pop up in other sectors. Now investors everywhere are beginning to awaken to the realization that government guarantees themselves are in danger of default.
In April of 2010, President Obama, referring to the vast expansion of government debt that was issued to save the nation from sub-prime-credit defaults, told us: “The tough measures that we took... have broken this slide and are helping us to climb out of this,” and the majority of economists agreed. Jeffrey Frankel of Harvard summed up the opinion of academia: “The recession is over. The last piece has fallen into place, with the BLS announcement that employment rose in March.” Alas, that was April.
In May, optimistic news disappeared from the U.S. media, while on the other side of the Atlantic, European Union (EU) finance ministers, central bankers and the International Monetary Fund (IMF), raced against time to cobble together a massive emergency package to prevent defaults of a series of EU governments.
A $1 trillion infusion of IOUs by EU members, the European Central Bank, and the IMF seemed to save the day. If a $700 billion infusion of new debt by the United States government saved the American economy from collapse in 2008, the EU politicians wagered that $1 trillion would do it for Europe.
It won’t. The contagion is spreading, and the world’s central bankers know it. Even as the EU/ IMF package was announced, Ben Bernanke reopened the Federal Reserve’s swap lines with the European Central Bank, saying it stood ready to step in when the EU plan falters.
It will. The $700-billion TARP package had to be backed up by Federal Reserve purchases of over $1.2 trillion in junk bonds. All the promises of the Euro -zone politicians and bankers will be broken. The printing presses are beginning to roll. It’s hard to call nations sovereign when they need to go begging someone else for money in the form of what will prove to ultimately be unpayable IOU’s.
The cause of every business cycle in the past two centuries has been the expansion and subsequent contraction of bank credit. Not one debt induced contraction has ever ended until the irredeemable IOUs were either purged through outright default or through price inflation.
To create a truly recession-proof world requires the opposite of an expansion of government debt. It requires the end of the archaic idea that governments should have monopoly control of the issuance of money. The significant step, and one that financial evolution must ultimately achieve, is to end all laws that control money and banking.
If the “End the Fed” movement started by Ron Paul succeeded, it would pave the way for the most important movement of all, one to end the government’s money monopoly. The true answer is to end all legal -tender laws and turn the choice of monies over to sovereign individuals, and let them decide what should be money, how much it should exchange for, and so on.10
A 2012 Secular Economic Prediction by Larry Edelson
Just a few months after the credit crunch fiasco of Sept. 2008 had mangled global markets and caused one of the greatest economic implosions of all times, powerful financiers were already working behind the scenes with a plan to devalue paper currencies, revalue gold and bring forth a new global currency (proof from a secular analyst that the “New World Order” globalists are actively planning for a single world currency). .
That’s exactly what Washington D.C. did to end the Great Depression. After all efforts failed to prop up the economy, Franklin Roosevelt declared a bank holiday for four days, closing all banks in the country – largely to stem the flow of gold. He then issued Executive Order 6102 in 1933 which allowed the Federal government to confiscate gold from the public. It effectively raised the price of gold up 69.3% and devalued the dollar. In so doing, post WWII economic problems were settled via tinkering with money values at the first Bretton Woods Conference in 1944 and then again at the Plaza Accord in 1985, when central bankers planned a coordinated dollar devaluation against the Japanese yen and German mark.
Now, currency markets are destabilizing again and will cause current values to be readjusted. And how are they readjusted? Simply by printing up more currency can one recalibrate debt-to-asset ratios by devaluing monetary units of value. If there is anyone in the world who knows how to implement a multi-currency devaluation scheme, it’s Ben Bernanke. Being a student of the Great Depression, he wrote about the event and made recommendations on how to avoid it in his book, “Essays on the Great Depression”. His latest solution for solving the currency crisis is through implementing the “Fed Express”, wherein he states, “By increasing the number of U.S. dollars in circulation, or by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”11
Deliberate official devaluation of currencies is nothing new. Ancient kings and emperors often skimped on the gold and silver content or simply made coins smaller, telling the masses they were worth the same while increasing wealth for their coffers. Nowadays, it’s much easier. Without the restraint of a gold standard or any other tangible backing, governments can simply crank up the printing presses and create more money out of thin air. And that is exactly what our country is doing. For proof, just consider the $8.5 trillion dollar “rescue plan” that was put together by the Bush and Obama team to bail out the U.S and world financial systems from 2009 thru today….
Commercial Paper Funding Facility:.......................................................... $1.8 trillion
Term Auction Facility: ................................................................................. $900 billion
Money Market Investor Funding Facility:................................................... $540 billion
Mortgage-Backed Securities Program: ...................................................... $500 billion
Term Securities Lending Facility: ............................................................... $250 billion
Term Asset-Backed Securities Loan Facility:............................................ $200 billion
Other credit extensions (AIG, for example): ............................................... $122.8 billion
GSE program: ............................................................................................... $100 billion
Primary Credit Discount: ............................................................................. $92.6 billion
ABCP Money Market Fund Liquidity Facility: ............................................$61.9 billion
Primary dealer and others: ......................................................................... $46.6 billion
Bear Stearns bailout: ...................................................................................$28.8 billion
Securities lending overnite:......................................................................... $10.3 billion
Secondary credit: ..........................................................................................$118 million
FDIC liquidity guarantees: ........................................................................... $1.4 trillion
Loan guarantee to Citigroup:....................................................................... $249.3 billion
Loan guarantee to General Electric:............................................................ $139 billion
Troubled Asset Relief Program (TARP): ......................................................$700 billion
Fannie Mae/Freddie Mac bailout: .............................................................. $200 billion
Stimulus package:........................................................................................ $168 billion
Treasury Exchange Stabilization Fund:....................................................... $50 billion
Tax breaks for banks:................................................................................... $29 billion
Federal Housing Administration (FHA):....................................................... $300 billion
Then, on April 2, 2009 the G-20 countries met in London, England. Their goal was to create a new financial order based upon new units of paper or fiat money to help wipe the world’s debt ledgers clean. There have been numerous global voices calling for such a thing. French President Sarkozy declared, “We must rethink the financial system from scratch, as at Bretton Woods”…and that it’s time to “change the rules of the game.” British Prime Minister Brown touts, “a new global financial order,” (authors note: here is secular admission of the desire to bring on a new world order, in financial terms by world leaders - globalists) describing this as a “decisive moment” for the world economy. European Central Bank council member Ewald Nowoty calls into question the “centrality of the U.S. dollar” and further states that the U.S., Europe, and Asia are developing a “tri-polar (synonymous with tri-lateral, no doubt) global currency system to replace the current dollar-centric reserve structure…”, and finally Chinese leaders have warned of the threat of a “financial tsunami” and urges action. Finally, The People’s Daily, the official newspaper of the Chinese Communist Party recently wrote, “The world urgently needs to create a diversified currency and financial system that is fair and a just financial order that is not dependent on the United States.”12
Authors comment: Remarkably, we are hearing voices from throughout the globe crying for the removal of the American dollar as the standard reserve currency of the world and the introduction of a new global currency. Even secular financial analyst Larry Edelson titled his March 2009 newsletter “Coming April 2: The Beginning of a New World Monetary System” wherein he described the basis for this call and a possible plan for it to be put in place. This is amazing, because it will be during the Tribulation that the Antichrist will establish a currency system which will require the use of a identifying system for every soul on the earth to be able to “buy or sell unless he had the mark, which is the name of the beast or the number of his name” throughout the world as given in Rev. 13:17.
Incredible and even more profound, in the July 2009 issue of Real Wealth Report, Dr. Martin Weiss of Weiss Reports interviews both Larry Edelson and Richard Mogey about their opinion on what to expect in the near future regarding global economics. Mr. Richard Mogey is the Research Director for the Foundation for the Study of Cycles – the preeminent think tank on economic cycles whose roots date back to 1931. Both he, and Larry Edelson are experts on economic cycle analysis. Let us pick up on the salient points of their interview for a most shocking prediction….
Martin Weiss: Last week, you (Mr. Mogey) explained how, back in the 1930s, Dewey (Edward Dewey was chosen by Herbert Hoover in 1931 to head up a non -profit foundation that would study the forces that drive the economy and investment markets in hopes of fending off another stock market crash that took place in 1929) made a startling discovery – that the Crash of 1929 and the Great Depression itself were actually very predictable, had economists only looked objectively at the patterns of history.
Richard Mogey: Yes! Historic cycles! Unfortunately, before the crash, they did not look at them objectively – probably for the same reasons they ignored it in this great crisis today. Even some of the smartest people in the world often believed only what they wanted to believe – that good times go on forever. But let’s fast forward to see what the stock market cycles were saying more recently about the all-time peak in the DOW of September of 2007.
Martin: Is the green line in this chart what you saw in 2007?
Richard: No. Actually, this is what we saw in 2004 and later published on Barron’s Online in Sept. 2007, just before the market peaked.
Martin: I’ve been studying the Foundation’s work side by side with other timing approaches in the marketplace today. But there’s no comparison. The deeper I probe, the more I’m amazed by the breadth and depth of what you do. Most of the other work on the market today – the formulas, the black boxes – remind me of my son’s video games when he was a teenager: A lot of bells and whistles, but not enough substance. In contrast, the work of the Foundation reminds me of Army Intelligence or the CIA in time of war. Very serious, scientific, objective, and disciplined.
Richard: One reason may be simply that we have not done a very good job of publicizing our ideas. We’re scientists and researchers; not marketers. Another reason may have something to do with our “perfect storm” forecast, and economic calamity that we believe is dead ahead. That forecast is a threat to the establishment.
And like their counterparts of the 1920’s, the powers to be don’t believe what they don’t want to believe. They believe they can alter history. They underestimate the power of these cycles. They discard our conclusions. So they discard the science and the data that support the conclusion.
Larry Edelson: Let me jump right in with the stock market. The Foundation predicted the 1982 low before the great bull market of the 1980s. It predicted the 1987 crash. It predicted the big bull market in 1995 through 2000 and called the peak of that bull market in 2000. It predicted the bull market between 2004 and 2007. As we saw, it nailed the all-time high in the DOW in Sept. of 2007. And most recently, with 10 weeks of advance warning, it called this year’s March (2009) low in the DOW, predicting a sharp intermediate rally.
Richard: Just remember we cannot be 100% correct. Sometimes our cycle forecasts call for a major turning point and we get a minor turning point. Sometimes they come earlier or later than expected. And once in a while we get a cycle reversal – the market goes in the opposite direction of what we anticipate. So there are times when the cyclical signals can get you in and out of the market at the wrong point.
Martin: Richard, regarding the Foundation’s forecast of the “perfect storm”, many investors on our blog have asked: “Is the perfect storm past or future? Isn’t it what we have already seen in recent months?” (referring to the 2008 credit crunch).
Richard: No. What you’ve seen so far in the markets is just the first squalls. And what you’re witnessing today - right now is merely the calm before the big hurricanes hit. All our research going back hundreds of years ago show that we’re seeing a pattern that is remarkably similar to that of the 1930s, and the final, all time low won’t come until late 2012. Never forget, though, between now and then, you’ll see significant – but temporary – rallies. Plus, with the “perfect storm” you will also see unprecedented opportunities in currencies, gold, silver, and other commodities, to play the surges and declines.
Martin: All driven by this millennial convergence of cycles in one time and place (authors note: what is truly amazing is that these are words from secular financial analysts, not Christian ones - even they are "sensing" the times we are living in and thereby gives significant credibility to John Paul Jackson's and Larry Randolph's prophetic words which you will be able to read in the next chapter. Moreover, the repeated occurance of the year 2012 in regard to major developments that will effect this world is all too uncanny and deserves serious consideration).
Richard: Yes, we have the 20 year economic cycle and the 60 year cycle, both crushing down on the economy, much as they did in the Great Depression. In addition to what we saw in the ‘30s, we also have a longer, 500 year geopolitical cycle – a major power shift from East to West (the China phenomena) or West to East, which is the case now. Amazingly, all three of these powerful cycles are coming together in one singular time frame.13
A Formidable Conclusion
The amazing prediction made by Richard Mogey of the Foundation for the Study of Cycles is that they see an extreme market low taking place in the economy around the latter part of 2012. Incredibly, this correlates with the same predictions being made by the 2012 prognosticators that a very serious global event or series of events will take place that will forever alter the history of the world. The independent conclusion of this research group, and their emphasis of calling this a “perfect storm” is absolutely phenomenal.
It is not by coincidence or some “pie in the sky” analysis that reveals our economy, and that of the world's, is coming to a catastrophic endpoint. This chapter and others gives substantial proof and economic underpinnings as to why this event is destined to occur. If these events transpire as many have either predicted or prophesied, we may well be able to call this the mother of all “perfect storms”. And if so, it is completely understandable and believable that with the convergence of all these catastrophic events and the chaos produced by it, there will arise a leader that the world will embrace to help usher in a “New World Order” which will be touted as the “New Age” of peace, harmony and prosperity. Sadly, it will also be the “perfect lie”, which will allow the Antichrist to rise upon the scene to further deceive, if it were possible, even the elect.
I personally believe that the stage is being set for the Antichrist to come into his position. Never before in the history of the world have so many elements of secular events and a coming geopolitical environment been put in place as predicted by biblical prophecy which would allow the establishment of a “New World Order”. Not only this, but if you add in the fulfilled prophecy regarding the nation of Israel, we are truly near the time of the Gentiles being fulfilled.
I believe that with so many “perfect” alignments coming into place, we can truly believe that the appearance of Jesus stands at an extremely high “probable” state of fufillment. If this is so, then we need to be prepared for His “probable” coming as never before and truly believe that the kingdom of God is “at hand, right at the door!”
One last comment. If Jesus does not come within the time frame the events and prophecies appear to point to, then I am convinced we will see the playing out of the above noted events. In other words, if there is any matter that we need to be absolutely prepared for (outside of being ready for Jesus), then it should be for the economic malestrom that is dead ahead. In this regard, I believe this book is a "watchman's" warning for those - whosoever will - to become forearmed and prepared for the coming economic storms ahead.