The Collapse of America’s Service Economy
Friday, April 18, 2008
Recent high profile bankruptcies of mainstay American retailers, such as The Sharper Image and Linens ‘n Things, as well as the proposed mergers between Blockbuster/Circuit City and Delta/Northwest,

4/18/2008
Authorities Lose Patience with Collapsing Dollar
- UK Telegraph 4/18/2008
Fed Hawks Lacker, Fisher Warn on Inflation
- Reuters 4/18/2008
Fed's Kohn Says Banks' Caution an Economic Threat
- San Diego Union-Tribune 4/18/2008
High Probability of U.S. Recession
- Toronto Globe and Mail 4/18/2008
Latest Economic Tea Leaves Point to Recession
- New York Times

Bank of England Swaps 100 Billion Pounds Worth of Bonds to Revive Bank Lending: Action mimics a similar swap of $200 billion of securities by the U.S. Federal Reserve last month

Bears Baffled by Oil Highs: Yet some analysts continue to warn that oil prices are teetering close to a steep fall -- at least back near $80 a barrel

CREDIT BUBBLE BULLETIN
Crisis intermission -
now for stage two
Recent action by several central banks has reduced the immediate risk of a precipitous US economic downturn. Yet with the rules of US finance radically altered last month, putting in jeopardy huge hedging positions, the backdrop is set for stage two of the crisis.
Doug Noland reviews the previous week's events each Monday.

Just staying alive
The slight coverage of recent US government market interventions seems to ignore the implications, concluding that the markets will chug along indefinitely. That is reminiscent of the attitude of people living immediately under a dam who profess unconcern at the risk it might burst - it is the only way they can preserve their sanity. - Doug Wakefield

Inflation of the third kind
As if it wasn't bad enough that food prices are soaring along with numerous other commodities, thanks to the profligate behavior of central banks and their minions, we now hear that Russian oil production has peaked. That's right - we are looking at diminishing supply and rising demand. And that means one thing - yet more inflation.

Bank of America Net Falls 77% to $1.21 Billion on Writedowns for Bad Debt Bank of America Corp., the second- largest U.S. bank, said profit dropped for a third straight quarter as the company set aside $6.01 billion for bad loans.

National City to Receive $7 Billion Infusion, Slash Dividend; Shares Fall National City Corp., Ohio's biggest bank and subprime lender, plans to raise $7 billion from a group led by Corsair Capital LLC to bolster its balance sheet and will cut the dividend after posting a first-quarter loss.

Stocks Drop on Earnings Concern; Bank of America, Caterpillar Shares Slide U.S. stocks fell for the first time in five days on lower-than-estimated earnings at Bank of America Corp., National City Corp.'s plan to sell shares at a discount and concern slower demand will hurt profits at Caterpillar Inc.

Carlyle, Deutsche Bank Plan $500 Million CLO for High-Yield Bonds, Loans Carlyle Group, the world's second largest private-equity firm, is raising a $500 million collateralized loan obligation to buy high-risk, high-yield debt being sold by banks at discounted prices, according to people with knowledge of the plan.

Dollar Decline Decelerates With G-7 Blessing as Weakening Shows No Endgame Traders betting on intervention by the Group of Seven nations to stem the dollar's 7.7 percent decline against the euro this year may be disappointed.

Mattel Posts Loss on China Costs; Hasbro Net Unexpectedly Climbs on Dolls Mattel Inc., the world's largest toymaker, posted its first quarterly loss in almost three years on higher manufacturing costs in China while Hasbro Inc.'s profit unexpectedly rose on sales of Transformers action figures.

BofA hit by writedowns and credit costs
First-quarter earnings at Bank of America dropped nearly 80% to $1.2bn as the largest US bank by market value was slammed by writedowns and rising credit costs writeDate( 1208779215000, 'Grey', '13:00', 9999999999999); - 13:00

• BofA to sell part of China bank stake
• Lex: Chinese bank holdings

• BofA deal could boost BNP Paribas US presence
• BofA may scrap prime brokerage unit sale

BoE unveils £50bn debt market plan
Plan carries steep fee structure writeDate( 1208779535000, 'Grey', '13:05', 9999999999999); - 13:05

• Video: Peter Thal Larsen on the Bank's move

BofA plunge sets tone on Wall Street
Pharma in focus as Eli Lilly misses estimates writeDate( 1208782886000, 'Grey', '14:01', 9999999999999); - 14:01

• FTSE steady after move to ease lending squeeze

Funds to invest $7bn in National City bank
New stage of US bank recapitalisation writeDate( 1208786147000, 'Grey', '14:55', 9999999999999); - 14:55

• BofA to sell part of China bank stake

UBS details subprime losses
Three parts of the bank amassed large positions writeDate( 1208782610000, 'Grey', '13:56', 9999999999999); - 13:56

• In depth: UBS

Panic Time at the Federal Reserve - Steve Hanke, Forbes

We're at Plan B of Credit Crisis - Anatole Kaletsky, Times of London

Worst Credit Crisis Since the '30s? - Herb Greenberg, MarketWatch

• No End to Dollar's Decline
• Oil Hits $117/barrell

Florida luxury home market shows signs of wear


Teens turn to thrift as jobs vanish and prices rise


World 'could see 70s-style slump'

LAKSHMAN ACHUTHAN AND ANIRVAN BANERJI
Choosing Recession Forbes — There is a raging debate about how the economy got into recession, and who is to blame. Many have concluded that the housing and credit bubbles guaranteed recession. But an essential point is being overlooked — that this recession was actually avoidable as recently as several weeks ago. How could that be?

Banks, Credit and the Need for More Stimulus - Editorial, NY Times

Greenspan: How It Went Wrong, How to Fix It - Steve Forbes, Forbes

Parsing Henry Paulson - James Surowiecki, New Yorker

Sound Money & Free Markets Will Spur Recovery - John Chap
man, RCM
Next Week May Be the Last Fed Cut - Gerard Baker, Times of London

A Stronger Dollar Requires Tighter Money - Brian Wesbury, FT Advisors

Bear market leaves
short options
The air of gloom that has overhung the world's stock markets this year shows little sign of disappearing, leaving many investors in index mutual funds desperate for a turn in their fortunes. Yet exchange-traded vehicles tied to Asian and Western businesses and currencies offer an alternative route to profits even while the bears rule the market. - Julian Delasantellis

Glitter among
the debt depths
The credit crisis consuming the brightest and best of our financial brains has drawn comparisons with the Great Depression. Far-fetched? Not if you look at US debt figures, already way past levels seen seven decades ago. And large chunks of new debt created courtesy of the Federal Reserve this year will start coming due in about three months from now. That means fun for some of us.

CREDIT BUBBLE BULLETIN
Crisis intermission -
now for stage two
Recent action by several central banks has reduced the immediate risk of a precipitous US economic downturn. Yet with the rules of US finance radically altered last month, putting in jeopardy huge hedging positions, the backdrop is set for stage two of the crisis. (Apr 21, '08)
Doug Noland reviews the previous week's events each Monday.

Bank of America to alter loan practices
Shanghai down over 50% from peak
Many problems with mortgage bailouts

Memo to Bernanke
Enough With the Rate Cuts, Already!

The sudden surge in stocks is not a sign that things are back to normal; far from it. If anything, things are worse than ever. Credit remains unusually tight despite Bernanke's cuts to the Fed Funds rate or the creation of various "auction facilities" that remove mortgage-backed securities (MBS) from banks balance sheets. Businesses and consumers are still having a hard time getting funding, which means that the velocity of money in the financial system is decelerating rapidly and this increases the likelihood of a system-wide freeze-up. Libor is just the flashing red light.

A rise in Libor adds billions in additional interest payments for homeowners, businesses and other borrowers. According to the Wall Street Journal:

"Libor is one of the world's most important financial indicators. It serves as a benchmark for $900 billion in subprime mortgage loans that adjust -- typically every six months -- according to its movements. Companies globally have nearly $9 trillion in debt with interest payments pegged to Libor, according to data provider Dealogic."

Commercial real estate deals are mostly pegged to Libor as are adjustable rate mortgages (ARMs). In fact, most of the mortgages that were written up during the boom-years were tied to Libor. That's why Peter Fitzgerald, chief financial officer at Radco Cos., said, "If Libor were at 4 per cent instead of under 3 per cent , there would be a disaster that would take years to unwind." (WSJ)

A rising Libor puts the Fed and the Bank of England in a tough spot. They're trying to keep rates artificially low so the banks can increase their lending and recoup their losses, but the market is not cooperating. The market is driving Libor upward, which means the Fed is losing control. The real cost of money is going up.

The Bank of England was forced to intervene on Monday. Mervyn King, the UK's central bank governor, launched a "Special Liquidity Scheme" to "improve the liquidity of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks." The plan will provide $100 billion for "illiquid assets of sufficiently high quality" (Mortgage-backed securities) to "unfreeze" bank lending. The plan is similar to the Fed's auction facilities which have provided over $200 billion in exchange for dodgy MBS, collateralized debt obligations (CDOs) and commercial paper (ABCP) According to Bloomberg:

"The Central Bank's move allows financial institutions to add government bonds to their inventory of liquid assets and make it easier for them to raise cash and lend, especially to consumers seeking home loans. In return the government will hold the riskier mortgage-backed securities." The Bank of England said the swaps would be for a period of one year and could be renewed for up to three years, although the banks would be on the hook for losses on their loans. It's a sweet deal for the investment banks and a total loser for the British taxpayer who could get stuck with hundreds of billions of worthless MBS.

The $100 billion liquidity-injection is the biggest bailout in the Bank's history, and it was granted without public input or Parliamentary authorization, just like the Bear Sterns transaction. The bankers call the shots while the public picks up the tab. The Bank's action puts to rest the idea that "the worst is behind us". It isn't; in fact, recent estimates suggest that the losses to the banking system could exceed $1 trillion. There's still a lot of carnage ahead.

The $100 billion will help to stabilize the money markets and put the banks on sounder footing, but it does nothing to help the housing market. The British real estate market is on life support because most of the mortgage financing was coming from investors who bought MBS. Mortgage securities are currently down 92 percent from the same period last year, which leaves potential buyers without a funding source. The BOE is considering creating a British-style Fannie Mae to kick-start the stalled housing industry by providing government-backed loans. The private sector will not be a big player in the housing market for the foreseeable future.

The same is true in the US. If the Fed can't bring Libor down with interest rate cuts, then it will have to develop a back-up plan. The next step would be "quantitative easing"; a monetary policy that was implemented by the Bank of Japan in 2001 "to revive that country's economy that was stagnant for a decade. Quantitative easing entails flooding the banking system with excess reserves, resulting in pushing the benchmark overnight bank lending to zero." (Reuters) There are indications that Bernanke is already preparing for this radical option, but there's little chance that it will succeed. Whether the banks are able to lend or not is irrelevant. Public attitudes towards indebtedness have changed dramatically in the past few months. Overextended consumers are looking for ways to pay off their debts. This will make it more difficult for Bernanke to reflate the equity bubble through credit expansion. When people are frightened or pessimistic about the future, they naturally curtail their spending. A recent poll conducted by the Washington Post/ABC illustrates how the public's attitude towards the economy has darkened in a matter of months. According to the survey:

"Nine out of ten Americans now give the economy a negative rating, with a majority saying it is in 'poor' shape, the most to say so in more than 15 years. And the sense that things are bad has spread swiftly. The percentage who hold a negative view of the economy is up 33 points over the last year, and the percentage who rate the economy 'poor' has increased 13 points in the last two months. That is the quickest 60-day decline since the Post and ABC started asking the question in 1985" (Washington Post)

The average American is showing a better grasp of the deteriorating economic conditions than the stock market. Housing sales continue to tumble, manufacturing is off, unemployment is steadily increasing, retail sales are flat, and inflation is soaring. Consumers are feeling the pinch of rising food and energy costs, loss of home equity and a general downturn in the credit markets. Money is tight and jobs are scarce.

ARE YOU BETTER OFF THAN YOU WERE 8 YEARS AGO?

When George W. Bush took office in 2000, oil was $28 per barrel, the euro was $.87 on the dollar, gold was $274 per ounce. Today, oil is a record $114 per barrel, the euro is nudging $1.60 on the dollar, gold is $945 per ounce. The country is presently engaged in a $2 trillion war in Iraq with no end in sight. The federal government has expanded over 30 per cent under Bush. Wages for working people have stagnated, unemployment has risen, 47 million Americans are without health care, and the economy is slipping into recession.

Now the banks are buried beneath a mountain of bad investments and foreclosures are at record highs. In California 65,000 homes are now in some stage of foreclosure while the total number of homes sold in February—new and used---was a mere 20,513.

The knock-on effects of the housing bust are just now rippling through the broader economy. Consumer spending is sluggish, growth is weak, and the stock market is more volatile than anytime since the 1930s. The Fed has usurped congressional powers to deal with insolvency problems at the banks. Public money is now being provided for the purchase of dubious assets held by unregulated investment banks owned by private speculators. The Fed is simply making up the rules as it goes along. Bernanke's actions have not yet been challenged by any congressman or senator.

The Fed's monetary policies have triggered a run-up in commodities prices which is driving up the cost of everything from corn to copper. Food riots have broken out in capitals around the world and leaders are worried about growing political instability. The media is blaming drought, high energy prices, and biofuels for the sudden rise in prices, but these are only secondary factors. Currency devaluation has played a bigger role than shortages or blight. The world is awash in dollars which are steadily losing value. Pension funds and foreign central banks are diverting dollars into commodities rather than keeping them in corporate bonds or the sagging stock market. Here's an excerpt from the Wall Street Journal that sums it up:

"Inflation is rising throughout the world due to dollar weakness, and the prices of such commodities as oil and corn have soared. ..As former Fed Chairman Paul Volcker noted last week, we are already in a "dollar crisis". Even the IMF---typically the temple of devaluationists—is alarmed by the dollar's fall. Dollar weakness has already contributed to soaring commodity prices that have walloped US consumers just when their spending is most needed to offset the housing slump. ...The commodity boom is result in large part of the Fed's weak dollar policy, and it may have tipped the US into recession that could have been avoided." (Wall Street Journal)

Foreign banks and investors currently hold $6 trillion in dollar-based assets and currency. When the dollar falls; speculation will increase and prices will rise. Currently, the US is exporting its inflation and fueling political unrest in the process. If Bernanke continues to slash interest rates, the problems will only get worse. The Fed could raise rates by 50 basis points tomorrow and the commodities bubble would explode overnight, but that doesn't look likely.

The idea that soaring commodity prices are the result of speculation is controversial. The economist Paul Krugman does not think that "low interest rates and irrational exuberance" are responsible for the high prices. Rather, he thinks they are the result of "rapidly growing demand and constrained supply". This is certainly possible. Perhaps, there is no bubble at all.


Currency Intervention to Save the Dollar


The G-7 finance ministers met in Washington last week and announced their "resolve" to minimize the volatility in the currency markets. Many people took this to mean that foreign central banks would take a more active role in shoring up the dollar. So far, there's been no indication of support. The dollar has stayed within the $1.58-1.59 per euro range for more than a week. Help could be on the way but, then, maybe not. The only one who can really save the dollar now, is Bernanke. All he needs to do is indicate that the rate cuts are over and the bleeding will stop. Bernanke has already cut the Fed Funds rate from 5.25 per cent to 2.25 per cent since September. (way below the 4.1 per cent rate of inflation) It's clear that he sees a deflationary tidal wave about to hit sometime in the next few quarters. Why else would he slash rates so aggressively.

Last week, former Fed chairman Paul Volcker took the unusual step of publicly chastising Bernanke in a speech he gave to the Economic Club of New York. Volcker's comments indicate the level of frustration with the Fed's dollar-savaging rate cuts which have caused problems around the world. Volcker said "The recession is not the Fed's problem. It's the government's. The Fed's job is to defend the currency and fight inflation—exactly the opposite of what this Fed is doing." The former Fed chief thinks Bernanke should raise rates now, because if he doesn't, he'll have to raise them even more later, "with even more awful consequences."

Martin Feldstein, chairman of the Council of Economic Advisers under Ronald Reagan, joined Volcker in blasting the Fed and calling for an end to the rate cuts. In a Wall Street Journal editorial on April 15 Feldstein said:

"It's time for the Federal Reserve to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage....Lower interest rates could raise the already high prices of energy and food, which are already triggering riots in developing countries. In order to offset the inflationary impact of higher imported commodity prices, central banks in those countries may raise interest rates. Such contractionary policies would reduce real incomes and exacerbate political instability....lowering interest rates stimulates economic activity to a point at which labor and product markets cause wages and prices to rise. That is unlikely to happen in the U.S. in the coming year. The general weakness of the economy will keep most wages and prices from rising more rapidly.....But high unemployment and low capacity utilization would not prevent lower interest rates from driving up commodity prices.

"Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates."

Additional cuts will probably have negligible effect on housing and consumer spending, but they could be a savage blow to the dollar. It's not worth it. Lower rates will be devastating for people living in poorer countries. In the US, middle class families spend only 15 percent of net earnings on food. In poorer countries people spend upwards of 75 percent of their income just trying to feed themselves. That's why riots are breaking out everywhere; the Fed's monetary policy is a catalyst for political instability.

Besides, lower interest rates don't necessarily increase demand or make credit more easily available. The only way to spark demand is to make sure that wages keep pace with production so that workers can buy the things they produce. That's the only way to create a prosperous economy, too; build a strong and well-paid work-force.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com

Party Like It’s 1932: The Obama Option
by Norman Solomon / April 22nd, 2008

Seventy-six years ago, to many ears on the left, Franklin D. Roosevelt sounded way too much like a centrist. True, he was eloquent, and he’d generated enthusiasm in a Democratic base eager to evict Republicans from the White House. But his campaign was moderate — with policy proposals that didn’t indicate he would try to take the country in bold new directions if he won the presidency.

Yet FDR’s triumph in 1932 opened the door for progressives. After several years of hitting the Hoover administration’s immovable walls, the organizing capacities of labor and other downtrodden constituencies could have major impacts on …

(Full article …)

Ambac hit by $3bn subprime charges
Shares plunge 21% on Q1 loss of $1.7bn writeDate( 1208954013000, 'Grey', '13:33', 9999999999999); - 13:33

• Ambac keeps Moody’s and S&P top grade

UPS downbeat on outlook for US economy
Cuts earnings forecast for full year writeDate( 1208956745000, 'Grey', '14:19', 9999999999999); - 14:19

• UPS posts profit warning as growth fades

Ambac distress set to hit US financial stocks
Boeing and Yahoo help offset mood on Wall St writeDate( 1208955491000, 'Grey', '13:58', 9999999999999); - 13:58

• Banks fall heavily in London

US regulator fears wave of bank failures
Collapses could rise above historical norms writeDate( 1208904765000, 'Grey', '23:52', 9999999999999); - 23:52

• Concerns spread beyond mortgages

Commercial aircraft side lifts Boeing
First-quarter net income ahead 37% writeDate( 1208956213000, 'Grey', '14:10', 9999999999999); - 14:10

• European View: Boeing’s problems do Airbus a favour

Delta, Northwest hit by soaring fuel costs
Losses at airlines after goodwill writedowns writeDate( 1208957896000, 'Grey', '14:38', 9999999999999); - 14:38

• John Gapper: The airlines merger that will not fly

Dollar Trades Near Record Low Versus Euro on Wider Yield Spread

Until now, I have given equal credence to two possible scenarios:

1. We could have several years of inflation as we do now, and the powers-that-be would have a sudden rush of brains to the head, like Paul Volcker and Ronald Reagan did in 1980, and stop the “printing press,” ending inflation and the gold and silver bull market, for at least a few years; or
2. It is too late to stop it. The political forces and the Unfunded Liabilities would prevent the powers-that-be from ending the money-printing process, and in fact, would grossly accelerate it. This would result in a hyper inflation (400 percent inflation or more), and the eventual total destruction of the dollar. Suddenly America would find its money totally useless. Store shelves would be empty, gas would go through the stratosphere, and Americans would suffer through the greatest threat since the Great Depression of the ’30s.

So what caused me to settle on number two?

I received John Williams' recent newsletter “Shadow Government Statistics,” www.shadowstats.com in which he describes his case for a hyper-inflationary depression. It was most persuasive. It certainly persuaded me, and is consistent with what I’ve said for years.

I spent the '70s fending off the media label of "Prophet of Doom," arguing that I expected much less than doom. It turned out to be so.

With my new book in circulation, I’ll face the same accusations, and this time they are right. The financial world we know and love is facing genuine doom. You could lose the value of all your assets in the stock market. You could find yourself unable to buy essential commodities, when you want them, and gold and silver will be valued, not in the tens or hundreds of dollars per ounce, but in the thousands!

John Williams’ Shadow Government Statistics newsletter is most unusual. John is a consulting economist with all of the academic credentials. Most of his clients are bank officers and high-ranking corporate officers. He has rearranged the government data according to historical analysis.

For example, the government says inflation is under four percent by the simple expedient of eliminating energy and food from their calculations. John says inflation is over 11 percent, including energy and food.

His academic credentials are way ahead of mine, but at least I know enough to understand his work. It’s my job to try to reduce such things to terms my subscribers can grasp.

Here are some brief paragraphs from this 25-page report.

“With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets.”

" …a law professor at Harvard and The University of California, Berkeley, who experienced the Weimar Republic hyperinflation, said, 'It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money."'

“…the still-unfolding banking solvency crisis has confirmed the Fed’s and the U.S. government’s willingness to spend whatever money they have to create in order to keep the financial system from imploding.”

" The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century."

“The historical culprit generally has been the use of fiat currencies - currencies with no asset backing such as gold - and the resulting massive printing of currency that the issuing authority needed to support its system, when it did not have the ability, otherwise, to raise enough money forits perceived needs, through taxes or other means.”

“The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off.”

“Hyperinflation: Extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless. A fairly crude definition of hyperinflation is a circumstance, where, due to extremely rapid price increases, the largest pre-hyperinflation bank note ($100) becomes worth more as functional toilet paper than as currency.”

"The current economic contraction is about halfway towards being classified as a 'depression.'"

"Official CPI could be running in double-digits by year-end 2008."

“The U.S. economy has been in a recession since late-2006, entering the second down-leg of a multiple-dip economic contraction, where the first down-leg was the recession of 2001 that really began back in late-1999. Annual CPI inflation currently is running around 11.6%, again, facing further upside pressures.”

“The evolving depression quickly will move to great-depression status, when the hyperinflation hits. It will be extremely disruptive to the conduct of normal commerce.”

“Ongoing M3 currently shows a record annual growth rate of 17.3%.”

"In the near future, dollar selling should build towards an extreme, with heavy foreign investment in the dollar fleeing the U.S. currency for safety elsewhere. With the domestic financial markets and U.S. Treasuries so heavily dependent on foreign capital for liquidity, the Federal Reserve - now touted as the formal financial market stabilizer - will be forced increasingly to monetize federal debt. That process will build over time, given the federal government’s effective bankruptcy."

“Again, the current circumstance will evolve into a hyperinflationary depression, then a great depression. Although such is not likely much before 2010, or after 2018, the financial end game for the current markets will tend to come sooner rather than later and will break with surprising speed when it hits.”

“2008 will favor an incumbent party loss, i.e. a victory for the Democrats.”

“What promises hyperinflation this time is the lack of monetary discipline formerly imposed on the system by the gold standard, and a Fed dedicated to preventing a collapse in the money supply and the implosion of the still, extremely over-leveraged domestic financial system.”

“The limits to the unlimited abuse of the debt standard are particularly evident in the GAAP-based financial statements of the U.S. government, which show the actual federal deficit at $4.0-plus trillion for 2007 alone, with total federal obligations standing at $62.6 trillion. With no ability to honor these obligations, the government effectively is bankrupt.”

"Although the U.S, government faces ultimate insolvency, it has the same way out taken by most countries faced with bankruptcy. It can print whatever money it needs to create, in order to meet its obligations. The effect of such action is a runaway inflation - a hyperinflation - with a resulting, full debasement of the U.S. dollar, the world’s reserve currency.”

“Oil prices are near historic highs, the dollar is near historic lows, and money growth is at an all-time high. The near-term outlook for all three is for new record levels and for extremely strong upside pressure on U.S. inflation. … gold prices should continue setting new historic highs.”

“The difference is in accounting … for unfunded Social Security and Medicare liabilities.”

“Put into perspective, if the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis. In like manner, given current revenues, if it stopped spending every penny (including defense and homeland security) other than Social Security and Medicare obligations, the government still would show an annual deficit.”

“U.S. federal obligations are so huge versus the national GDP that the country’s finances look more like those of a banana republic than the world’s premiere financial power and home to the world’s primary reserve currency, the U.S. dollar.”

“The effect of this structural change has been that most consumers have been unable to sustain adequate income growth beyond the rate of inflation, unable to maintain their standard of living. The only way personal consumption can grow in such a circumstance is for the consumer to take on new debt or liquidate savings. Both those factors are short-lived and have reached untenable extremes.”

“From the Fed’s standpoint, it can neither stimulate the economy nor contain inflation. Lowering rates has done little to stimulate the structurally-impaired economy, and raising rates may become necessary in defense of the dollar.”

“By the time hyperinflation kicks in, the economy already should be in depression, and the hyperinflation quickly should pull the economy into a great depression. Uncontained inflation is likely to bring normal commercial activity to a halt.”


“In the United States, the printing presses have not been revved up heavily yet, but the commitments are in place, as seen in the annual GAAP-based deficit running on average more than $4.0 trillion per year. That amount is far beyond the ability of the government to tax or the political willingness of the government to cut entitlement spending. While the inevitable inflationary collapse, based solely on these funding needs, could be pushed well into the next decade, actions already taken likely have set the stage for a much earlier crisis.”

“It is this environment that leaves the U.S. dollar open to potentially such a rapid and massive decline, and dumping of U.S. Treasuries, that the Federal Reserve would be forced to monetize significant sums of Treasury debt, triggering the early phases of a monetary inflation. In this environment annual multi-trillion-dollar deficits rapidly would feed into a vicious, self-feeding cycle of currency debasement and hyperinflation.”

“Given the extremely rapid debasement of the larger denomination notes, with limited physical cash in the system, existing currency would disappear quickly as a hyperinflation broke. From a practical standpoint, however, currency would disappear, at least for a period of time in the early period of a hyperinflation.”

“Barter System. With standard currency and electronic payment systems non-functional, commerce quickly would devolve into black markets for goods and services and a barter system.”

“Gold and silver both are likely to retain real value and would be exchangeable for goods and services. Silver would help provide smaller change for less costly transactions.”

“In such a circumstance, gold and silver would be primary hedging tools that would retain real value and also be portable in the event of possible civil turmoil. Also, at some point, the failure of the world’s primary reserve currency will lead to the structuring of a new global currency system. I would not be surprised to find gold as part of the new system, in an effort to sell the system to the public.”

“I still look for U.S. stocks to take an ultimate 90% hit, peak-to-trough, net of inflation, during this period.”

Ruff Times subscribers who accept John’s scenario have no downside! At the worst, if Scenario number one occurs, they will make tons of money in gold and silver, then we will eventually put out a sell order and the world will return to relatively normal. If I and John Williams are right, it will literally save your current lifestyle, and perhaps even your lives.

By Howard Ruff
The Ruff Times


Howard J. Ruff, the legendary author and financial advisor, has re-edited and will re-issue his 1978 mega best seller, How to Prosper During the Coming Bad Years, still the biggest-selling financial book in history, with 2.6 million copies in print. He is founder and editor of The Ruff Times Financial Newsletter. This article appeared in the March 7, 2008 issue of The Ruff Times. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio.

(You can learn about it here). The Ruff Times has served more than 600,000 subscribers – more than any financial-advisory newsletter in the world. His new book is now in book stores or at www.rufftimes.com.

Housing slump may exceed Depression
Lenders Swamped by Delinquent Mortgages
We're losing everything
Bondholders Lucky to Get 10 Cents in Looming Defaults
Bank of America to alter loan practices
Shanghai down over 50% from peak
Many problems with mortgage bailouts

The great silence
of a Gilded Age
We live in a Gilded Age, in which bankers and fund managers pocket billions of dollars, echoing a similar period of growing wealth in the 19th century. Yet few protest at income inequalities not seen in the US since before the Great Depression. That may change, and the great silence of the second Gilded Age may give way to the great noise of the first. - Steve Fraser

China tax cut reverses shares plunge
The Chinese government has scored at least a temporary success with its latest move to halt the plunge in the country's stock market, among the world's worst performers this year. Shares jumped almost 10% after an overnight cut in stamp duty, raised 11 months earlier, helped return confidence to investors.

Chinese shares rocket (AFP)

Engine and wagon
The growth of multinational US corporations, to the point where revenues of the top 10 match almost 15% of the country's gross domestic product, has coincided with an increased separation of their interests from those of the US. As the world heads for a period of painful change, a better understanding of what drives that change is essential. - Max Fraad Wolff

The Democrats'
free-trade divide
Executives within the US corporate elite, deterred by the George W Bush administration's international recklessness, will find many Democrats eager to return to Bill Clinton's pro-corporate vision for the global economy. But the broken promises of "free trade" pacts mean the majority of Americans have reason to cry foul at such deals and to demand a truly democratic economic agenda. - Mark Engler

Magical money from thin air
Don't be fooled by the slowdown of the magic money printing machine smothering the US in increasingly useless dollars. The Federal Reserve goons have been busy elsewhere, including flogging off a third of the Treasury bonds it had accumulated over nine decades. We are doomed.

THE BEAR'S LAIR
The rising protectionist tide
The rising rice price confirms that the world has moved decisively towards protectionism. Globalization in its extreme form has failed, yet revival of the Doha round of trade talks and the end to the pernicious growth of bilateral trade deals could help the rich West ensure maximum protection of its living standards at the minimum possible global economic cost. - Martin Hutchinson (Apr 22, '08)

SPENGLER
Rice, death and the dollar
For developing countries whose currencies track the US dollar and whose purchasing power declines along with the American unit, catastrophe looms. So China, for example, is exchanging its depreciating reserves of the greenback for things of value, notably rice, with frightening consequences for dependent countries and deadly consequences for American foreign policy. (Apr 21, '08)

Memo to Bernanke: Enough With The Rate Cuts, Already!
by Mike Whitney / April 24th, 2008

Last week’s stock market blowout added more than 4 per cent to the Dow Jones Industrials, but it had no affect on Libor rates. Libor rose steadily from Tuesday through Friday signaling more troubles in the banking system. Libor, which means London Interbank-Offered Rate, is the rate that banks charge each other for loans. It has a dramatic effect on nearly every area of investment. When the rate soars, as it did last week, it means that the banks are either too weak financially to lend to each other or too worried about the ability of the other bank …

(Full article …)

The Precious Metals Market is Manipulated: Gold, GATA and the Turn to Higher Ground- by Catherine Austin Fitts - 2008-04-22

• The Economy
  • Greenspan: How It Went Wrong
  • Parsing Henry Paulson
  • Free Markets Will Spur Recovery
  • A Final Fed Rate Cut?
  • Analysis of McCain's Econ Plan
  • Depth of the Downturn

http://www.chuckcoppes.com/latest/petrodol...ism_report.html

Petrodollar Warfare & Collapse of U.S. Dollar Imperialism Special Report

Microsoft Shares Fall After Windows Sales Decline Casts Doubt on PC Demand Microsoft Corp., whose Windows software dominates the personal-computer market, dropped as much as 5.7 percent in late trading after sales slumped, casting doubt on whether PC demand can hold up in a slowing economy.

Ambac's Callen Says AAA Credit Rating `Solid' Without Selling New Shares Ambac Financial Group Inc. Chief Executive Officer Michael Callen says analysts who expect the bond insurer to shore up its finances by selling stock are wrong.

U.S. Consumer Sentiment Probably Fell to 26-Year Low on Job Losses, Fuel Confidence among U.S. consumers probably fell this month to its lowest level in a quarter century as gasoline prices rose to a record and unemployment climbed, economists said before a report today.

Ford's Profit Shows Mulally May Do for Automaker What He Did for Boeing Ford Motor Co. Chief Executive Officer Alan Mulally may be pulling a repeat: Turning around the No. 2 U.S. automaker in the same way that he helped revive Boeing Co., the world's second-largest aircraft maker.

Carlyle Group May Buy $525 Million Stake in NYC Tower, People Familiar Say Carlyle Group, the world's second- largest private-equity firm, is poised to buy the retail portion of 666 Fifth Ave. in New York for $525 million in a transaction that would help owner Jared Kushner repay debt, according to people familiar with the matter.

Bailout suspicions
April 25, 2008
There is some Interesting circumstantial evidence circulating on the web suggesting the Bear Stearns liquidation and takeover was actually to disguise the federal bailout of JP Morgan. More

MARKET RAP
The calm before the storm?
China's reduction of a stock transaction tax energized a local market that was edging closer to a decline as precipitous as the 50% slide seen over the past six months. Survival of the optimism in Shanghai and elsewhere in Asia may depend on the US Federal Reserve's thoughts, to be aired next week.
R M Cutler runs his eye over the ups and downs in the week's markets

http://www.atimes.com/atimes/Global_Economy/JD26Dj04.html

Oil prices to double by 2012: Canadian study
Apr 24 03:05 PM US/Eastern


U.S.: biodiesel usage to increse to 1 billion gallons per year by 2012.

The price of oil is likely to hit 150 dollars (Canadian, US) a barrel by 2010 and soar to 225 dollars a barrel by 2012 as supply becomes increasingly tight, a Canadian bank said Thursday.

The CIBC report says the International Energy Agency's current oil production estimates overstate supply by about nine percent, since it wrongly counts natural gas liquids -- which are not viable for transportation fuel -- in its numbers.

Analyst Jeff Rubin in his report noted accelerating depletion rates in many of the world's largest and most mature oil fields. He estimates oil production will hardly grow at all, with average daily production between now and 2012 rising by barely a million barrels per day.

"Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," said Rubin.

"Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years, almost doubling from current levels."

The CIBC report also notes that while production increases are at a virtual standstill, global demand continues to grow.


http://www.breitbart.com/article.php?id=08...;show_article=1

Many States Appear To Be In A Recession



The finances of many states have deteriorated so badly that they appear to be in a recession, regardless of whether that's true for the nation as a whole, a survey of all 50 state fiscal directors concludes.

The situation looks even worse for the fiscal year that begins July 1 in most states.

"Whether or not the national economy is in recession _ a subject of ongoing debate _ is almost beside the point for some states," said the report to be released Friday by the National Conference of State Legislatures.

The weakening economy is hitting tax revenue in a number of ways: People's discretionary income is being gobbled up by higher food and fuel costs, while the tanking housing market means people are spending less on furniture and appliances associated with buying a house.

The situation is grim in Delaware, with a $69 million gap this year, and bleak in California, with a projected $16 billion budget shortfall over the next two years, the report said. Florida does not expect a rapid turnaround in revenue because of the prolonged real estate slump there.

By mid-April, 16 states and Puerto Rico were reporting shortfalls in their current budgets as the revenue those budgets were built on _ typically, taxes _ fell short of estimates. That's double the number of states reporting a deficit six months ago.

The NCSL said the news is even worse for the upcoming fiscal year, with 23 states and Puerto Rico already reporting budget shortfalls totaling $26 billion. More than two-thirds of states said they are concerned about next year's budgets.

The results are consistent with a drumbeat of bad economic news for states that several budget groups have produced in the past few months.

Last week, the Washington-based Center on Budget and Policy Priorities said 27 states are reporting projected budget shortfalls next year totaling at least $39 billion.

President Bush said Tuesday that the economy was not in a recession but a period of slower growth. However, some economists have pointed to the string of declines in manufacturing orders to argue that the economy has fallen into a recession.

Bolstering their position, the Commerce Department reported Thursday that sales of new homes plunged in March to the lowest level in 16 1/2 years. The government also reported that orders to factories for big-ticket goods fell for a third straight month in March, the longest string of declines since the 2001 recession.

Some states "have declined so much that they appear to be in a recession," the NCSL report said.

It also noted the silver lining for states where the economy is based on energy, such as North Dakota and Wyoming. Alaska is making so much money from oil that it announced an estimated surplus next year of $8 billion, almost twice the state's annual budget.

In North Dakota, revenue is above legislative predictions by 13 percent, and in Louisiana, the oil and gas sector is robust.

"For energy-producing states, the fiscal situation is strong and the outlook is good," the report said.

Among other findings:

_More than half the 16 states reporting deficits this year have cut spending, including $1 billion by Florida lawmakers last year and across-the-board cuts in Nevada. At least eight states are debating raising taxes or fees, including a proposed $1-per-pack cigarette tax increase in Massachusetts to raise $175 million.

_Twelve states, including Georgia, Idaho and Illinois, reported that personal income tax collections were failing to meet estimates, and in eight of these, collections were even below a reduced forecast.

_Many states, including Alabama, Arizona, Massachusetts, Minnesota, Nevada and Wisconsin, plan to tap their rainy day funds, which contain money set aside for fiscal emergencies. Nevada may use its entire rainy day balance.

http://www.huffingtonpost.com/2008/04/25/m...n_98555.html___

On the Net:

NCSL: http://www.ncsl.org

Stocks in U.S. Drop as Consumer Confidence Declines; Microsoft Shares Fall U.S. stocks fell for the first time in three days after consumer confidence dropped to a 26-year low, Microsoft Corp. reported slumping sales and oil climbed more than $3 a barrel.

Consumer Sentiment in U.S. Falls More Than Forecast to Lowest in 26 Years U.S. consumer confidence fell more than forecast in April to its lowest level in 26 years, a sign record gasoline prices and rising unemployment will prompt Americans to curb spending.

Homeowners Convert to Costlier Fixed-Rate Mortgages Amid ARM-Twisted Fears Mortgage refinancing in the U.S. is increasing as record numbers of homeowners dump their adjustable-rate mortgages for the security of a fixed loan.

Microsoft Shares Fall After Windows Sales Decline Casts Doubt on PC Demand Microsoft Corp., whose Windows software dominates the personal-computer market, fell as much as 6.4 percent in Nasdaq trading after sales slumped, casting doubt on whether PC demand can hold up in a slowing economy.

U.S. States `Deteriorating' as Economy's Slump Curbs Taxes, Lawmakers Say U.S. states expect to have at least $26 billion less than they need to pay their bills during the next budget year as a slumping economy erodes tax receipts, according to a national survey.

Euro dives as wheels fly off eurozone economy


Pain of Foreclosures Spreads to the Affluent


Unpaid utility bills soar as economy sags


Trust in Central Banks Passes Point of No Return


Credit vehicle defaults continue to climb


City of London hit with 'Code Red' by Moody's


FHLB Chicago to stop mortgage-buying program

The Pentagon Strangles Our Economy: Why the U.S. Has Gone Broke

By Chalmers Johnson, Le Monde diplomatique

60 years of enormous military spending is taking a dramatic toll on the rest of the economy.

Peter Bernstein Doesn't Like What He Sees - E.S. Browning, WSJ

Don't Trust This Market Rally - Jim Jubak, MSNMoney

Papering Over the Problem
By Wilson Burman
We’re all paying for the Bear Stearns bailout.

Wall Street, Run Amok
Payrolls Probably Shrank, Growth Slowed: U.S. Economy Preview 26-Apr-2008
U.S. Economy: Sentiment Weakens More Than Anticipated 26-Apr-2008
The trillion-dollar mortgage time bomb

CREDIT BUBBLE BULLETIN
The meaning of stage II
The return of confidence and greed to the financial markets is persuading even seasoned strategists that the worst of the financial crisis is behind us. Yet distortions in the US and global economies remain and will continue as authorities risk global financial and economic catastrophe to sustain the unsustainable. The countdown to stage II of the crisis has started.
Doug Noland reviews the previous week's events each Monday.

THE MOGAMBO GURU
Big, bad, and the bill is rising
The idea that the US is suffering from some sort of credit crunch is now so familiar that it is almost banal. But banal it is not. The reduction in short-term commercial loans outstanding indicates that nothing less has happened than a rupture in the system. And the bill for fixing this is going to be big. Very, very big.