The Goldwatcher

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NOTE: WHILE BAILOUT PROPOSALS were PENDING THIS POSTING WAS UPDATED CONTINUOUSLY. SCROLL DOWN FOR UPDATES.  THIS  BLOOMBERG SPECIAL REPORT  INCLUDES ARTICLES FROM MAY 2007 ON THE DEVELOPING CREDIT CRISIS

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Trust them : They are politicians, regulators and economists:

Picture courtesy Bloomberg :

Comrades Paulson,  Bernanke, Frank and other members of the new Washington Duma have revealed their masterplan to solve the global crisis of confidence. The plan follows  the enterprise of their  innovative investment bankers, asleep at the wheel regulators  and overspending public and private sectors. Perhaps the new comrades have read The Goldwatcher page 191:

 ’ the chances of a systemic solvency crisis, resembling in some ways the crisis experienced in the 1930’s can’t be ignored…..we still don’t know who the next US President will be…what mandate they will have from the electorate….but we know that in the past daunting challenges have been overcome in countries with strong economies, resolve and committed leadership…..In 2007 and 2008 seismic economic developments spurred gold price rises that were predictable, dramatic and probably sustainable. Gold bugs are now urging investors to bet the ranch on gold. On my analysis that would be foolhardy. Frank Holmes also advocates moderation in the following Chapters.’ 

The good news: 

The good news is the comrades aren’t considering the hardline approach infamously advocated  by  Treasury Secretary Mellon to  President Herbert Hoover in 1933:  ’liquidate labour, liquidate the farmers, liquidate real estate……it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted” (The Goldwatcher Page 62)

Over the last few days  the comrades got the message. The system will go bang if they try the liquidation route. The ever astute Paul Krugman concludes this morning in his NY Times column ‘The Crisis Endgame’  Mellon’s liquidation advice isn’t even being considered: ’The big buyout is coming; the only question is whether it will be done right.’

Will the buyout be done right?

1) Do the comrades have any idea what the mega bailout will cost and will they tell us?  Is saving GM also going to be financed? What about Ford?  Any other deserving causes arising from capitalist mismanagement that need to be rescued by socialist enterprise?

2) Is all short selling evil. Or is it only short selling of shares in insolvent financial services companies? Comrade Paulson’s former partners Comrades Goldman and Sachs originated and sold mortgage products of the toxic waste variety and, at the same time, made a killing betting that the value of junk mortgage products would plummet.(The Goldwatcher pages 137/8). Will that kind of shorting also be declared evil? Perish the thought.

3) Do the comrades have the financial backing of the capitalists in China for their plans? Without such backing the plan won’t fly.  (The Goldwatcher : Chapter 5 page 77 ff)

A  question for Comrade Bernanke:

Comrade Bernanke: Values have to be adjusted.  Much has to be borrowed. Too much is owing already.  You told us way back in 2002:

‘Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent,) that allows it to produce as many U.S. dollars as it wishes at essentially no cost.’

Comrade - forgive me.  I don’t understand. You are going to have to print a few trillion dollars at least to paper over the cracks in the unholy financial mess you seek to repair.  And you say dollars, like gold,  only have value to the extent they are strictly limited in supply. If that’s the case isn’t Dr Marc Faber right in his foreward to The Goldwatcher that we are  in ‘a global race to the monetary bottom (with) a very real danger that the whole world will go into hyperinflation and that paper money will be rendered worthless……the ‘Zimbabwe-ization of the world.’ (The Goldwatcher Page xiii).

The Goldwatcher is a comrade too:

An A++ for enterprise for the new initiative.  Abusive short selling should have been stopped long ago. In April last year The Goldwatcher blogged on the subject.

In 1934 President Franklin D. Roosevelt declared  there was nothing to fear but fear itself. His massive dollar devaluation that followed restored nominal solvency to the US Treasury, banking system and debtors. New Deal initiatives followed and brought the US back on the prosperity path. But it wasn’t the sort of quick fix everyone expects in the heyday of the entitlement society. Nor did everyone gain from the devaluation.  Devaluation favours the debtor. Not the creditor or saver. (The Goldwatcher Pages 65/66.)

Our comrades are wise to seek a course correction. But don’t bet the ranch on the outcome yet.  We have more to fear than fear itself.

 GOLD REMAINS ON THE AGENDA AS STATELESS MONEY THAT KEEPS IT VALUE EVEN IN THE WORST OF TIMES.

UPDATES: 

 

#4th October:  

Oct. 4 (Bloomberg) — ‘China’s central bank said it hopes to see enhanced cooperation and coordination with U.S. and among other countries to stabilize global financial markets after the U.S. Congress approved a $700 billion rescue package.

“We’re happy to see the bailout passage,” the People’s Bank of China said in a statement on its Web site today. “All countries should take the responsibility to cooperate, as we share the same interest and goal in facing this crisis.”

 

#30th September to 4th October:

In his New York Times column on 4th October  Paul Krugman writes: ‘……the plan on offer is a stinker — and inexcusably so. The financial system has been under severe stress for more than a year, and there should have been carefully thought-out contingency plans ready to roll out in case the markets melted down. Obviously, there weren’t: the Paulson plan was clearly drawn up in haste and confusion. And Treasury officials have yet to offer any clear explanation of how the plan is supposed to work, probably because they themselves have no idea what they’re doing.’  Despite this, as I said, I hope the plan passes, because otherwise we’ll probably see even worse panic in the markets. But at best, the plan will buy some time to seek a real solution to the crisis.’

Do we still have time? 

Only a few weeks chances we thought we did.  But don’t take that for granted anymore. Things are going from bad to worse.   Over $1.2 trillion has been wiped off the value of US equities since the US House rejected the Paulson plan on Monday. Over $5 trillion since the first whiff of the stench.  The Senate have now approved the plan with some modifications. It’s likely the House will follow suite.  Analysis will follow when they have decided either way.  

A vicious cycle  that could end with a global depression:  

Investors must be aware of and seek protection from risks to their financial security. Risks  include:

I: The global economy being brought to the brink of a depression potentially as damaging as the Great depression of the 1930s. This could follow the vicious cycle of de-leveraging (unwinding excess borrowings), falling asset values, insolvent banks, recession, frozen credit markets and plunging equity markets that has already started. 2:  A global crisis of confidence threatening all dollar dominated and fiat monetary arrangements. (The Goldwatcher pages 77 and 175 refer.). 

3: Money printing on a hitherto unprecedented scale eroding the value of the dollar and other currencies.

4: An implosion in the $150 trillion unregulated OTC derivatives market

Gold as insurance against the unthinkable:  Considering the extent of  current market turmoil the gold price has remained tame. One known reason  is sales by leveraged holders forced to raise cash. Other factors affecting market prices for gold are discussed in The Goldwatcher Chapter 9  The Goldwatcher’s position remains that as stateless money gold keeps its value even in the worst of times. It  must be on the agenda for investors seeking insurance against financial market risks including money printing on a grand scale and financial market disruption (The Goldwatcher :  Page 8).

 # 24th September

Martin Wolf. Financial Times Chief Economics Commentator  warns many of the financial services entities with toxic debt problems are probably bankrupt.

Martin Wolf challenges Paulson’s scheme on the grounds that it doesn’t recapitalise the financially impaired financial services entities, many of which are probably bankrupt The credit problem has its origins in excessive leveraging and delevarging. Wolf writes:
“The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007 (see charts). The balance sheets of the financial sector exploded, as did the sector’s notional profitability. But leverage, alas works both ways.

The nub of the problem is: 
‘Since US net international debt was 39 per cent of GDP at the end of 2007, virtually all of this debt is an asset of another domestic entity and would net out to zero. But when the gross debt stock is huge and economic conditions difficult, the chances that many entities are bankrupt is high. When people fear mass insolvency, lenders stop lending and the indebted stop spending.”

 

Analysis following the decision of The House on the Paulson bailout plan will include comment on implications for the gold price and derivatives markets.

# 24th September Bloomberg :  Hank Paulson’s $700 billion proposal to bail out the U.S. financial system may send the dollar to record lows by swelling the budget deficit. See 19th September comment from Jim Sinclair below.

#23rd September: Paulson, Bernanke, Cox & Lockhart address lawmakers: Bloomberg Video

# 23rd September 2008: David Walker : Peter G Peterson Foundation: David Walker sounds an alarm. in an op-ed contribution to the Financial Times. David Walker is introduced in The Goldwatcher pages 17 & 117 to 118. At the time he was US Comptroller General. This blog has several references to Walker and The Peterson Foundation.  He writes now:

 ’What do AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch have in common? Some thought that these companies were too big to fail. They were wrong: all of these companies have either filed for bankruptcy, been “bailed out” by the government, or, owing to the sub-prime crisis, have been acquired. Over the weekend, the US government went one step further, with its proposals for an estimated $700bn (€493bn, £391bn) bail-out to ease the credit crisis.’

Walker sees disturbing parallels between ‘the factors that led to the sub-prime crisis and the deteriorating financial condition and fiscal foundation of our federal government.’ Similarities that ought to ring an alarm bell for presidential candidates and Congress . The question is, will they hear it and wake up?’   In the comment Walker homes is on US unfunded entitlement debt and problems arising from Washington having charged everything to the nation’s credit card.

 # 21st September: Paul Krugman : Cash for Trash:

Paul Krugman writes ’skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.’  (The Goldwatcher pages 97 to 101) 

Making the point that in view of the excessive leverage in the system entities will still be  constrained by inadequate capital even after the bailout he urges Congress ‘to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan… in anything like its current form, we’ll all be very sorry in the not-too-distant future.’

# 24th September : Arianna Huffington makes a similar point:

‘See if this sounds familiar…..There is a gathering threat to the safety of the United States. We must take immediate action. Congress must quickly grant the President and the Secretary what they want and also give them full and unfettered authority to execute the plan.

Welcome to Economic Shock and Awe …Even the amount of taxpayer money being bandied about — $1 trillion — is similar. Think you got your money’s worth for the Iraq war? Congratulations — you’re about to buy another pricey debacle.’

#23rd September :  Harvard Professor Jeffrey Frankel joins the emerging consensus on why Paulson’s bailout package won’t work. He quotes Sebastian Mallaby on the Iraq analogy in Mallaby’s Washington post Article ‘A Bad Bank Rescue.‘ “…in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that pre-emption will avert the mass destruction of banks.”

The explicit lack of oversight or checks and balances in the Treasury proposal  worrisome – and  the nature of the bailout, how the money is to be used,  bothers him most of all. He quotes Mallaby’s key comment:

“Within hours of the Treasury announcement on Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans.”

 

#  20th September : Paul Krugman on Socialisation of US Economy : Bloomberg Interview Video Clip

# 19th September  from Jim Sinclair:

Dear Friends,
# Today’s reported potential infinite bailout of all and any portends, if adopted, the largest increase in dollars outstanding since the Jurassic Age.
It closely models actions undertaken regarding the production of currency liquidity seen in the “Weimar Republic.”
# It is reported now that more than 1000 hedge funds are on the rocks. This has the potential for a significant financial impact.
# The only way to hide the numbers from the statistics produced by the suspected actions of the Fed is to value the indebtedness purchased at 100%, claiming a wash transaction.
# The only conclusion is that when the smoke clears and the advertised actions have been adopted, nothing more dollar negative than this has ever occurred due to the potential expansion of T bills and therefore dollar supply explosion.
# Gold is the only currency with no liability attached to it which, as you have seen recently, will be selected as the currency of the people.
Respectfully yours,
Jim

Bailing out A.I.G.  - America General Insurance - Spanning the globe

 

The above Graphic on AIG’S operations published in the FT gives a picture of the insurance group’s  global footprint and wide ranging insurance and shadow banking activities. The scope for devestating repercussions  had AIG been forced into liquidation is obvious. When it looked as if A.I.G. would go into liquidation
the  risk of  global financial meltdown was too close for comfort.   We escaped that bullet. But  severe declines in world stock markets are ominous and reflect a  crisis of confidence in the US financial system.

The Lehman bankruptcy filing and AIG crises have been  extensively covered by the  media.    These links are to a few  FT comments on AIG followed by The Goldwatcher: Gillian Tett on the derivatives business that led to the AIG downfall. Martin Wolf’s analysis on What went wrong?

Is the worst over? What are the lessons for financial institutions? What are the lessons for governments?
Here is Martin Wolf’s short answer on what went wrong:  ’Minsky was right. A long period of rapid growth, low inflation, low interest rates and macroeconomic stability bred complacency and increased willingness to take risk. Stability led to instability. Innovation – securitisation, off-balance-sheet financing and the rest – has, as always, proved a big part of the story. As Minsky warned, undue faith in unregulated markets proved a snare.’ Minsky’s economic theories are introduced in The Goldwatcher pages 112 and 136/7. The ‘Shadow Banking ‘ establishment that mushroomed under the cover of financial industry self regulation is introduced in pages 136/7 and 177.

The deregulation failure:  The Levy Institute continues to host ’Minskian’ Scholars at Bard college where Minsky taught.  A September 2008 Institute publication ‘Financial Markets Meltdown. What Can We Learn from Minsky?  concludes the crisis was attributable to securitisation involving the ’originate and distribute” (mortgage securitisation) model, leverage, the demise of relationship-based banking, and a dizzying array of extremely complex instruments that—quite literally—only a handful understand.’
In the Goldwatcher blog   BAILOUT TIME HAS COME: ARE WE SEEING A RE-RUN OF THE 1930s?  the economist Paul Krugman’s New York Times column on   Bear Stearns is quoted:
     ‘Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs… The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses. A large chunk of these losses will fall on financial institutions: commercial banks, investment banks, hedge funds and so on.’
The Goldwatcher blog ends with this reference to the Great Depression:
A warning on $ devaluation from the 24th February 2008 Goldwatcher posting:   ‘The Goldwatcher alerts readers to the prospect of economic and social problems to an extent resembling those Franklin D. Roosevelt confronted in 1933 with a solution on similar lines - massive dollar devaluation. (The Goldwatcher pages 63/66)
Vicious circles and shades of the Great Depression:
There are of course major differences between now and the 1930s. The Great Depression started with a recession that slid into a depression at a time when the gold standard constrained money supply growth. Now, by contrast, we still have relatively high employment, consumer price inflation and liberal money printing.  But we also have unprecedented levels of debt leveraging small capital bases.  On the upside the leverage boosted returns on invested capital and contributed to a ‘virtuous’ circle’ of economic growth and consumer spending. Now as former US Treasury Secretary Lawrence Summers warns, we have   three vicious circles menacing financial markets. ‘A liquidity vicious cycle - in which asset prices fall, people sell and therefore prices fall more; a Keynesian vicious cycle - where people’s incomes go down, so they spend less, so other people’s income falls and they spend less; and a credit accelerator, where economic losses cause financial problems that cause more real economy problems.’Nouriel Roubini  forecasts the worst cisis since the great depression that will last for years. Other analysts argue that as large  fiscal deficits can revive weak economies central banks and policy makers will keep our economies out of recession.

The unholy financial mess causing trillions of dollars of losses We can expect  financial services regulation to be introduced without much delay. But deleveraging will continue as a recurring menace. As Bill Gross writes :  ‘.. a 10% aggregate asset price decline does more than make all 10% less wealthy. Because many of these assets are leveraged and margined, the more they decline, the more frequent and frenzied the margin calls, and if the additional cash flow is not provided, not only an asset liquidation but a debt liquidation follows. It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse.’
The question  to address is How much worse can it get.?  It’s a question we can’t answer yet.  We will know in two months time who the next US President will be and the mandate he has from the electorate.  But fifteen months after the credit crisis erupted the extent of losses banks and other financial institutions will face is still unknown.  There is every chance economic conditions will get worse before they get better. We are in uncharted waters with no signposts. Only hazard warnings. The Goldwatcher Page 119).  

Gold remains on the agenda as stateless money that keeps its value even in the worst of times

Dr. Martin Murenbeeld’s comments at the Denver Gold Forum:

The highly respected gold analyst and formidable forecaster  Martin Murenbeeld announced his 2009 forecasts at the Denver Gold Forum last week.  He raises the question ‘Has gold run into trouble?’  Following an analysis of all factors affecting gold and the dollar from all perspectives he comes up with a range of prices.  The lowest average he expects for 2009 is $686. The highest $1002.

Murenbeeld’s detailed analysis is best described as a master class in gold.   A must read.  Of course if we are at the beginning of a systemic banking failure and severe global recession, as Nouriel Roubini argues we are, events could overtake expectations. Nouriel Roubini’s latest report warns of a run on all broker dealers and the collapse of the shadow banking system.  He makes the same bleak forecast in a Bloomberg interview today. 

Within the next few days the outcome of the attempts to save Lehman Brothers from liquidation will be known   The gold price subject will be revisited when the information is known.

A year of banking crises:

 

Depositors started a run on the bank when news broke on 12th September 2007,  a year ago today,  that Northern Rock was in trouble . To avert a run on other banks and systemic failure in the financial system  the UK Treasury and the Bank of England extended a guarantee to Northern Rock depositors. But Northern Rock were already as de facto insolvent as Fannie Mae and Freddie Mac are now. By the end of February 2008 the Rock was nationalised. Last weekend Fannie and Freddie went into ‘conservatorship’ - to all practical purposes nationalised with their eventual destiny left to  the new US administration that takes office in January 2009.

The United Kingdom’s  frightful financial crisis was spelled out by Chancellor Alastair Darling in a controversial article publsihed in The Guardian last week. The worst crisis for 60 years, he predicted, is going to get even worse.  This Goldwatcher blog discusses the run on the Rock,  complicit debt (though I hadn’t invented that term yet) relating to the closed conspiratorial eye regulators kept off the Northern Rock Ponzi scheme.

The blog also discusses the perils of the multi trillion dollar unregulated credit default swaps and related problems being faced by AIG, America’s largest insurance company by assets - comments  pertinent again today.   A year ago  AIG shares peaked at $70.13. Yesterday they fell as low as $13.82 .  Essentially the AIG share  price collapse was related to inability to quantify  losses on financial detritis acquired in the happy days - compounded by an  extra $600 million loss  on its holding  in Fannie Mae and Freddie Mac now worth sweet Fannie Adams.

Technicals and Fundamentals: (# click on following charts to expand)

Yesterday  gold fell as low as $740 - a  plunge to  a  level that concerned technical analysts.   The above charts courtesy Kitco cover first the gold price  over the last 5 years,  then over 2008, then for only September 2008 . The five year chart reflects the visibly  strong pattern of a rising price supported by higher highs and higher lows. The 2008 chart reflects the breakdown in the pattern of higher highs and higher lows and reflects prices falling below 200 and 14 day moving averages.  The September 2008 chart illustrates the steep plunge over the last few days.  Technical indicators for the gold price are currently  negative. The commodities boom has reversed and the global boom has turned into a global bust.  But what about the fundamentals for gold ? 

Marc Faber’s August 20th  gloomboomdoom report  reviews contracting global liquidity, current positive indications for a stronger dollar and technical factors indicating a weaker gold price. Yet he continues to hold and acquire gold in case ‘the financial system blows up.’ His concerns about renewed dollar weakness following in future and his long held view that ‘gold will, over the next few years outperform US equities and bonds’ motivate his interest in gold. But he emphasises  that his reasons for holding gold will not apply to everyone.  Marc Faber’s carefully argued  comments can’t be summarised in a few sentences.  Subscription to his gloomdoomboom report  costs only $200 a year.

The correction in the gold, precious metals and commodities markets: 

Only one prediction is made in The Goldwatcher about the gold price. It will overshoot and undershoot. Corrections are mechanisms that bring markets back to equilibrium.  My conclusion in The Goldwatcher is that ‘without re-assurance on future policy committments (by the next US Administration) the chances of a systemic solvency crisis, resembling in some ways the crisis experienced in the 1930s, can’t be ignored.’ The prospects of such a crisis are greater now than they were when the book went to press.

The realities agenda:

Previous blogs have addressed the resignation of The Hon David Walker as  US Comptroller General and The Peter G Peterson Intitute he now heads. Walker and Peterson are committed to making absolutely sure candidates in this Presidential election will be forced  to face up to the economic realities outlioned in The Goldwatcher page 117 etc. 

There is no evidence on what Walker has achieved in advancing the aims of The Peterson Foundation as US electoral platforms  and economic realities have yet to converge.  If economic reality doesn’t bite before the election expect economic mayhem after the election. If reality bites before the election, as I still expect it will, more and more investors  within and outside the US are likely to  take on board Marc Faber’s concerns on ‘the financial system blowing up’ and recognise the value of gold as insurance against unthinkable outcomes.

Harvard’s Professor Kenneth Rogoff warns of a runaway global economy  train that ‘has all the hallmarks of a giant crisis in the making – financial, political, and economic.’  A year into the global financial crisis he finds  ’key central banks remain extraordinarily exposed to their countries ’shaky private financial sectors’ while supporting crumbling banking systems ‘on feeding tubes of taxpayer-guaranteed short-term credit’.   Central Banks, he cautions,  could find themselves in intensive care if  ‘credit losses overwhelm their balance sheets.’

Nouriel Roubini and his RGE Monitor:

Nouriel has opened the full RGE Monitor to public access making the resouce a key and essential reference point for investors. This video of an interview with Nouriel, Pimco’s Mohamed El Erian and New York Times columnist Gretchen Morgensen reveals economic realities and prospects of ‘the unthinkable’ playing out. 

 One such reality would be impairment of Central Bank balance sheets.  This video of a Bloomberg interview with James Grant mentioned in a previous Goldwatcher blog on The Global Credit Crisis covers the issues well.  To an extent the contrarian case for owning gold is supported by concerns over bail outs of damaged financial entities introducing detritis into the balance sheets of central banks. 

The contrarian case is also supported by the reflationary rescue discussed in The Goldwatcher Page 184 and the likely trillion dollar US Federal Deficit for 2009 that will follow regardless which candidate wins the election.  More on this to follow as the electoral campaigns progress.

Money Central/Ameritrade interactive:

An interactive Ameriprise presentation on Moneycentral  gives a good overview on fundemantals behind investing in gold. The interactive on the world’s largest buyers and sellers is particularly useful for a quick comprehensive picture.

The Denver Gold Forum

In the Goldwatcher (Chapter 1  Page 11) the two sides of the gold coin for investors are discussed.  One side is opaque. It relates to global macroeconomics, geopolitics etc. The other side relates to gold as a commodity and the gold mining industry. This side of the coin is, by contrast, refreshingly transparent.

 The annual Denver Gold Forum hosts a programme of presentations for institutional investors by leading gold mining and important developing mining companies.  The presentations include valuable information on mining costs,  gold price and volume prospects as well as information on other materials frequently mined with gold including copper.

This year’s  forum from September 7th to 10th has just ended. The audio record of the proceedings is accessible on the Denver Gold website. For readers interested in mining equities the information highlighted at the forum is a must. Readers interested in a better understanding of the economics and challenges of gold mining will also find the presentations useful.

Behind the F&F bailout:

 

The US Treasury bailout of the Government sponsored entities Fannie Mae & Freddie Mac, by far the biggest financial bail out in history,  followed an implicit US  guarantee for their obligations  – though it has always been explicit that the US Treasury did not guarantee the obligations. 

 

There are two headline reasons why  the US took steps to meet its implicit obligations:

First, and essentially,  because the US is the world’s biggest debtor. It owes the world money. Its creditors own both US Treasury debt obligations and F&F debt obligations.  F&F are de facto insolvent. But allowing market forces to wipe out a few trillion dollars of  their  debt would have been like heading the Titanic full steam into that iceberg. After the crash the US would have been unable to roll over or increase its borowings.

 

In a contemporary context it would be like locating  today’s tests for the Cern Particle Accelerator in the Washington offices of the Federal Reserve with links to the European Central Bank in Frankfurt, the Bank of England in London and all the world’s other financial centres  - and  making sure the tests produce a few significant and lethal big bangs.

 

In any event, without all the fancy imagery,  default by F&F on their obligations to creditors would have caused far more financial damage than the frightful events of September 11th 2001 seven years ago tomorrow. Later in this posting some detail follows on the economic and financial deterioration experienced through the years of the Bush administration.

 

A second reason for the F&F bailout was that President George Bush, his administration, the US Federal Reserve and its former and current Board Chairmen Alan Greenspan and Ben Bernanke were complicit in the build up of unsupportable debt. 

 

The Congressional Budget Office speaks out:

A report by the US Government non partisan Congressional Budget Office dated September 9th  catalogs the profligacy but doesn’t mention the worst delinquency. The administration were complicit in sponsoring  the housing bubble that triggered the demise of F&F. This crisp comment on why the US administration and the Federal Reserve were complicit is from Professor De Grauw  (The Goldwatcher page 147)  ‘One had to be blind not to see the (property) bubble  or the internet bubble………….

 

For the background to the mess we are in see The Goldwatcher:

 

Chapter 1 ‘Why Gold?’ - The Stateless Money Franchise
Chapter 5 The Dollar Standard and the Deficit Without Tears
Did gold cause the Great Depression?
Chapter 6: The Economic Consequences of 9/11 and George Bush:
         For how long will Asians go on lending for Americans to go
         On Spending?
Chapter 7: The end of Cheap Oil : ‘Chindia’ and other Tipping
Points to Instability:
         Will alternative energy come to the rescue?
Chapter 8: Globalisation and Global Economic Rebalancing
         Can the IMF avoid Global Financial Meltdown?

 

Bernanke Paulson & Co:

 

On Ben Bernanke’s doomed strategy for  ‘smart’ central bankers to cure all financial ills by pumping money into the system see page 61.

And, while Treasury Secretary Paulson’s immense skills as an investment banker were engaged to manage the F&F bailout, he spent years as the cheerleader for President Bush’s failed and  reckless economic policies and should have known better. 

 

Dismal forecasts from the CBO:

 

So, according to the non partisan Congressional Budget Office, this is  where the US economy has landed itself:

‘2008 Deficit will be near record levels ……. $407 billion, the second largest deficit ever recorded by the US…..The Bush administration has presided over the largest fiscal deterioration in American history…. It inherited a projected surplus of $650 billion for 2001. Instead we have a deficit of $407 representing a swing in the wrong direction of more than one trillion for 2008 alone’

‘…..economy continues to move in the wrong direction…..Government debt continues to climb…..

‘….today’s estimates confirm that when this administration leaves office it will have nearly doubled federal debt, representing an accumulation of debt greater than what has occurred under all the Presidents from Washington to Reagan combined. This debt is accumulating at the worst possible time, just as the baby boom generation begins to retire, and leaves a bill that our children and grandchildren will be forced to pay.’

‘Rising debt service costs are crowding out needed services…..Government has failed to meet its responsibilities……Administration fails to pay costs of its policies…..Economic forecast shows continued trouble ahead…..Thousands of jobs lost – hard work has not yielded increases in real family income…..

 

AND THIS IS ALL BEFORE THE F&F BAILOUT !

 

F&F as the tip of the iceberg - Gold as the lifejacket:

Now with the recognition that implicit debt must be honoured it will no longer be possible to keep the $50 trillion unfunded Social Insurance obligations off the US Federal balance sheet because it is classed as implicit debt (see Page 119) See also  The Peter G Peterson Foundation web site. for details of the $50 trillion involved.

 

Gold is protection against fallout from the erupting debt crisis.

.

Grim financial news : Great blogosphere news:

 Treasury Secretary Paulson has announced the de  facto  insolvency and bail out by way of nationalisation of Freddie Mac & Fannie Mae today (Sunday).  It was expected. Nouriel Roubini, who forecast it two years back,  warns of a deep global recession. Marc Faber’s September message to subscribers is titled ‘Little Good News.’

 But there is some great news for the blogosphere. The ‘Draft Sarah Palin as V.P.‘ campaign was started by a student blogger Adam Brinkley last year. His website currently has a link to an entertaining Colbert Report interview last Thursday September 5th Draft Sarah Palin for VP blog.

A September 1st Wall Street Journal Article  commented it was most surprising news on the Brinkley’s web site  promoting the governor’s chances had escaped attention. Of course, after the announcement by Senator McCain  ’…the site became a focal point for hundreds of admirers of the governor, many from Alaska. “We made sure people knew the name Sarah Palin,” says Adam Brickley, who has since graduated from the University of Colorado.

‘But Mr. Brickley adds he was so caught so off guard by her nomination that he’s still trying to figure out how to adjust the site going forward. “The one contingency we forgot to plan for was success,” says Mr. Brickley, whose site was inundated with nearly 500,000 hits when the news broke compared to normal daily volume of between 1,000 and 2,000 hits.’

Bravo Brinkley.

 

 

 

 

 All credit to McCain & Palin:

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Senator McCain amply re-assured his party last night of an inspired choice with Governor Sarah Palin as his running mate.  This Guardian Video clip gives a picture of both her awesome presentation and his triumph at the end of the evening.  To-day Margaret Carlson writes in her Bloomberg column  ‘a political star was born.’

The Democratic process works best when politicians effectively challenge their opponents.  All credit to Senator McCain, Governor Palin, the enthusiastic audience and the GOP convention organisers. Those of us outside the US will also be affected by the outcome of the November elections and welcome the prospect of  a fiercely contested election.

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To-day McCain –  then the Number Crunchers and Strategists:

           

             Following  his triumph Senator McCain will be expected to spell out policy details in his speech today. 

The next  Goldwatcher posting on this sibject will review   economic and other policy realities  after two weeks of political spectacle.  The questions the Concord Coalition,  David Walker,   The Peter G.Peterson Foundation,  other number crunchers, strategists and of course investors are likely to raise will also be highlighted.

 

           Magic, alas,  has a short sell by date. By the week end number crunchers, strategists and commentators will take centre stage.

Gold remains on the agenda as insurance against unfortunate and even unthinkable outcomes.

           

Sarah Palin as Vice President: 
Political opinions are outside the scope of The Goldwatcher book and this associated blog.  However Chapter 9 on gold price prospects discusses the importance of the forthcoming US Presidential elections and suggests on page 191:

1: ‘Without reassurance on future policy commitments the chances of a systemic solvency crisis, resembling in some ways the crisis experienced in the 1930s, can’t be ignored – and we still do not know who the next US President will be, who will be in the Administration and what mandate they will have from the electorate…

2: ‘…in the past daunting challenges have been overcome in countries with strong economies, resolve and committed leadership….Even the soaring oil price could be brought back to earth by conservation…..’

It follows that I need to comment on key issues in the Presidential campaign. A further post covering both party conventions will follow after the GOP convention closes tomorrow night.

What’s clear now is that Sarah Palin is an engaging and attractive personality successful in her career. But catapulting her to the post of Vice President takes some explaining. What’s was behind McCain’s move?

Match.com?
In a Bloomberg comment Margaret Carlson makes the match.com case. She writes:

: — It could have been a match.com ad: Presidential candidate, in need of running mate acceptable to the clan gathering over Labor Day, seeks MWF (married white female). Must like fossil fuels, guns, mooseburgers, children, sunsets; dislike polar bears, evolution and the color blue. Short courtship preferred. Must love travel, be willing to relocate almost immediately.’

Moving from cynical comment to serious analysis Carlson concludes: ‘The vice presidential choice is the only truly presidential decision a candidate makes. For someone who talks about himself as a man of honor, above politics, who believes that his No. 2 must be ready to be commander-in-chief on Day 2, this is an impetuous, superficial, reactive move designed to excite the fringe of his party and attract disenchanted women from the other…for someone 72 with four bouts of cancer, it’s a violation of his duty to do the country no harm.’

Opportunism or  brilliance?
Anyone who watched the televised Republican Convention last night and heard shell shocked delegates all ooh, ah and guffaw about McCain’s brilliant appointment of a soul mate will find it difficult to be reassured. Sheer opportunism? Yes  Sheer brilliance? No

Gold remains firmly on the agenda as insurance against unfortunate and unthinkable outcomes.