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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Financial System Designed Almost Exclusively to Benefit the Rich

Stock-Markets / Financial Markets 2009 Nov 14, 2009 - 01:45 PM GMT

By: Bob_Chapman

Stock-Markets

Best Financial Markets Analysis ArticleThe American journey that began on 8/15/71 is going to end over the next several years. The problems that have manifested themselves over the past few years signal the final stages of a destructive process that has stifled production and innovation and encouraged fraud in Wall Street and banking. The injection of money and credit into the financial system via the Fed and the Treasury has almost exclusively benefited the wealthy financial sector and has spread only crumbs to American citizens.


The residential housing sector is dying, as now is the bubble in commercial real estate. It is now only a matter of time that the stock markets new bubble is broken. Insolvency in insurance, banking and on wall Street has been temporarily papered over. These are the culprits who created our problems along with their mentor the Federal Reserve. These are the same people who created fraudulent CDOs and MBSs, which caused the credit collapse. For that they have been rewarded.

Free trade, globalization, offshoring and outsourcing have ripped the heart out of our industrial base and now are shredding our service sector unabated. At the rate of our present decline we will be a second tier nation in five years. The loss of 8 million jobs over the last nine years is staggering. What has been done to our economy is criminal. Every month we hear of revelations of insider trading scams, Ponzi schemes, front running by 16 major market makers led by Goldman Sachs, naked shorting by major brokerage firms and market manipulation by the Treasury and the Fed and nothing is done to stop it. Billions of dollars are being stolen daily from American investors.

It is now quite obvious that the Elites have decreed that the dollar is to be abandoned as the world reserve currency and it is to be replaced by either a new international trading unit or a one-world currency. The US banking system and the dollar are being taken down slowly so that the public won’t catch on to what is being done to them. Again, we return to 8/15/71. That is when the dollar demise began and the end of the American empire began. We have been delivered into the tentacles of corporatist fascism. Big business, Wall Street, banking and insurance are being merged with government. Both entities are controlled by the same personages. The charade of solvency continues until the designated moment when the elites have decided to pull the plug. The demise of the US is just another episode in the long history of this cabal that has brought us misery for more than 1,000 years, not to mention the continuous wars to cull world population and the greater concentration of wealth and power over the centuries. After the purge the new currency will have gold backing and the process will begin again anew. That is why gold and perhaps silver will be the only refuge from the changes in fiat currencies worldwide. The changes we are witnessing are going to be permanent-short of changes via revolution, which now is the only avenue left open to citizens of our country and many others. The time we see being borrowed is an artifice to fit a well laid out timetable. Remember your only salvation is gold and silver related assets. They are the only way to preserve your assets.

The second stimulus package has been a failure. The third package, as we predicted last January, will go to debate early next year. Our guess is a congressional package of $400 to $800 billion and a bank lending increase of some 14%. That is the amount they cut lending over the past year. More money will be thrown at the system. It won’t work, and in 2010, we should see official inflation back at 5% and unofficial inflation at more than 14%. The housing credit will be extended, as will unemployment benefits and seniors will get another $250 check. Yes, we will also get another clunker Car program. This should send the economy sideways into mid-2011 or perhaps to 2012. Unemployment will reach a real U6 figure of 23% by the end of the year. Give or take two points unemployment should stay at this level for about two years. In 2011 inflation will pass 30%. We will have a better figure later. In other words, a delaying action, but no real recovery. Thousands of financial institutions will fail and that will lead to consolidation and nationalization. The minute stimulus increases in money and credit, monetization and low to zero interest rates end deflationary depression will begin having graduated from hyperinflation. There will be neither reform nor any real recovery, because the elitists are again destroying the system to obtain even greater power over the inhabitants of the world. We are on a difficult journey and you had best prepare yourself for it. This time there is no turning back.

In a victory for President Barack Obama, the Democratic-controlled House narrowly passed landmark health care legislation Saturday night to expand coverage to tens of millions who lack it and place tough new restrictions on the insurance industry. Republican opposition was nearly unanimous.

The 220-215 vote cleared the way for the Senate to begin debate on the issue that has come to overshadow all others in Congress.

Joseph Contorinis, a former money manager for the Jefferies Paragon Fund, was indicted by a federal grand jury on fraud charges in what prosecutors said was a $7.2 million insider-trading ring.

The indictment by the Manhattan grand jury follows Contorinis’s February arrest. Another person charged with him, Nicos Stephanou, who was an associate director of mergers and acquisitions at UBS AG’s London office, pleaded guilty in May to seven felony counts that he passed information about bids for Albertson’s Inc., the Boise, Idaho-based grocery store chain. Stephanou’s friend, George Paparrizos, also pleaded guilty.

“Stephanou had access to and learned material information about merger and acquisition transactions,” the indictment says. “Stephanou provided Contorinis, and others known and unknown, with UBS insider information” from 2004 to 2006.

U.S. consumer credit fell in September for an eighth straight month, the longest series of declines on record, as thousands of Americans lost their jobs and banks tightened access to loans.

Borrowing fell more than economists predicted, declining by $14.8 billion, or 7.2 percent at an annual rate, to $2.46 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $9.86 billion in August, less than previously estimated. The consecutive declines were the most since records began in 1943.

There are two ways to look at the stimulus package after almost a year of operation. The first is what might unemployment have been without the package and what has it accomplished in increasing employment. There is no question we have seen massive fiscal and monetary stimulus not seen since the 1930s. As we pointed out six years ago the depth of structural impairment was very deep and it would take years to work out of the damage done to American infrastructure by the policies of the Federal Reserve and the debt created by the past three administrations, both on and off balance sheet.

New unemployment figures were just released and they show that U3 has risen from 9.8% to 10.25, but more importantly if you use U6 unemployment is 17.5%. This U6 includes: U1 those unemployed 15 weeks or longer; U2 those who completed temporary jobs; U3 total unemployed as a percentage of the civilian workforce; U4 discouraged workers as a percent of the labor force: U5 discouraged workers and U6 total unemployed. Embedded in U6 is the birth/death ratio and if you extract that and use the compilation criteria of 1980, officially U6 is 17.5%, but using the original formula real unemployment is 22.2%. These statistics point out how serious the situation is in view of the fact we are told unemployment was 25% during the Great Depression. They also point out the dismal results that have been obtained by the stimulus package, which is about 70% spent. All government and Wall Street have done is deceive the public and business by using U3, which is not at all representative of what is really going on.

All our problems credit-wise stem from 1989-1992 when we had a great opportunity to have a recession and purge the system. That didn’t happen even though 30-year T-bond rates rose to 8-3/16%. The Fed continued to heap abuse on the system for years to come to advance the greedy wealth accumulating goals of the elitists behind government.

This perpetuation of a broken system and a fiat monetary unit was accomplished by continual reflating. This time it was mortgage finance, both residential and commercial, securitizations of collateralized debt obligations, fraudulent bond ratings and spectacular leverage by banks, hedge funds, Wall Street, insurance companies, pension plans, and fiduciaries of all stripes. The banks are still hung out at 40 times deposits and they haven’t brought a large portion of their non-performing assets onto their balance sheets.

The Fed’s answer, similar to the 1930s, was to slash interest rates to zero, which again has promoted speculative leveraging and a dollar carry-trade.

As we wrote in 1971, the departure of the dollar from the gold standard on 8/15/71 was the beginning of the decent of imperial America, but, of course, few were listening. Now 38 years later the end is in sight. The collapse of the dollar and the financial and economic system, due to the interconnectivity every nation in the world will be affected in varying degrees. Some nations will suffer greatly, especially the US, UK and Japan. As a result there has been in process a flight into real assets such as gold and silver and commodities.

The falling dollar will require that Americans produce more, reduce credit and cut their standard of living. That means consumption as a percentage of GDP will fall from 72% to the long-term mean of 64.5%, which we predicted six years ago. The Fed has not as yet decided when to raise interest rates. We believe they have no intention of lowering rates for at least a year and perhaps they’ll keep them at zero for a long time. That plan could be interrupted by official dollar devaluation and debt default in conjunction with other nations. That is in spite of unemployment that could be 35% two years from now. The elitists believe reflationary dynamics worldwide will provide the momentum to pull the US and the world out of depression. We have news for them; it is not going to work. This so-called new paradigm will only create more bubbles, which will soon appear in China, Brazil, Asia and India. China has spent $1.8 trillion and already has bubbles in their stock and property markets.

2010 will be a difficult year for the US. Toward the end of the year real inflation should be over 14% and 10-year should be ½% to 1% higher at 4% to 4-1/2%. As a result the dollar should be selling at 60 on the USDX and gold should be $2,500 to $3,000 and silver over $50. The second stimulus plan will have carried the economy for the year, but only just that. The problem cannot be solved by throwing money at it.

The administration in its quest to find solutions for a slow economy and ever-rising unemployment, the Cash for Clunkers, became a reality. It cleaned out a burdensome inventory and kept the assembly lines humming. That short productivity increase was almost 10%, which is ridiculous, but it also deprived dealers of future sales. We see this as a zero sum game where very little was accomplished. Now, as we predicted in January, the beltway is rife with talk of another stimulus package. These are not solutions; they are stopgap measures dreamed up by desperate people.

Washington and Wall Street now tell us there is recovery, but we fail to see it. Zero interest rates worldwide are close to that level and only two countries have revised rates; Australia and Norway, and they, due to their economies being resource based. This doesn’t show strength; it reflects weakness. Zero interest rates and monetization, along with money and credit creation, continue unabated. It has become so obvious that gold hits new highs daily in spite of government manipulation. All the talk of an exit strategy is just that – talk. There cannot be such a strategy. If rates are raised and money and credit and monetization curtailed the entire system will collapse and deflation will assume command. As each passes the elitists try to use new strategies to extricate themselves from the problems that they deliberately created. As a result the dollar cannot establish any upside momentum and decends to new lows weakly. At each Treasury auction the Fed has to supply funds to foreign governments to make it appear foreigners are buyers when in fact in fact in good part it is monetization.

Banks continue to fail at a record pace and the FDIC is out of money. Some 120 banks have failed this year. Congress presently is in no condition to lend against the FDIC’s $500 billion line of credit, especially with debt limits being approached. As a result of these policies we are in an interlude as inflation wells up in the bowels of the economy. In 2010 it will erupt in all its fury and those not invested in gold and silver assets stand to lose much of their purchasing power.


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