THE TIMEBOM_ KEEPS TICKING

October 6, 2008 by david.pennington.

by Michael M. Pennington 

This month we have over $54 Billion in credit derivatives that must be settled by the Treasury Department. The first of these are the Fannie Mae and Freddie Mac derivatives which come due on Tuesday. Later in the week, it’s Lehman Brothers. No one knows yet how this will work, but one thing is clear this might be the last straw, so be prepared for the worst – this week. Many insurance companies and banks hold this worthless paper so it is possible there are more casualties that could be announced later this week. We are in full crisis mode.

In total, there is more than $600 trillion in notional derivatives to be resolved. Clearly, the bankers and greedy Wall Street CEO’s and hedge fund managers  have gone beyond the scope of fiat currencies. The worthless dollar will soon be bust. These derivatives are risky bets based on the prices of real estate and commodities. Since both asset classes have been falling dramatically and the OTC paper is leveraged 100 to 1, when oil falls $1 per barrel the corresponding derivative loss is $100.Simply put, no entity could even begin to absorb losses of $100-$200 Trillion.

We are now at the terminal stage of the crisis. The contagion has spread through the global financial system. Our hotshot derivative salesmen, making millions in the process, sold this worthless paper to banks around the world. In turn, these financial institutions have hidden their derivative exposure off the balance sheets. Its no wonder almost no one understands derivatives. It’s been their dirty little secret for years. And now it is a crisis effecting us all.  It has gone from a crisis of liquidity to a crisis of solvency and now to a crisis of confidence. Regardless of what our politicians might think – you can’t legislate confidence. Everyone wants their money out because they no longer trust the banks.

HOW TO SOLVE THE BANKS PROBLEMS

Here’s a novel idea for all the money hungry bankers. Go back to accumulating checking and savings accounts from average hard working people. Fire all the traders and accountants who have been busy buying and selling risky derivatives – didn’t Enron teach these people

LET’S RENAME “PONZI SCHEME” TO “PAULSON SCHEME”

People need to wake up and understand that this is not a political party problem. THERE AREN’T TWO PARTIES IN THE US. The Republicans and Democrats in Washington are married to each other and exist for the benefit of the other. They are controlled by others outside of Washington D.C. Therefore, it’s impossible to throw the bums out because there’s only more bums to take their place. The only true factions in this nation right now are those who believe in the Constitution and democracy and those who don’t. Unfortunately, the secular socialists have the upper hand right now. We as citizens have to find a way to reverse this and restore America and its founding fathers ideals. Clinton, Bush, Gore, Cheney, Paulson, Frank, Bernanke and Greenspan and others should all be arrested and held for high crimes against the American people.

ANOTHER FOX – ANOTHER HENHOUSE

A Goldman Sachs Group alumnus in charge of the nation’s economic rescue? How unusual. Except, of course, it isn’t. Hank Paulson is promoting Neel Kashkari, the Treasury’s assistant secretary for international affairs, to be the point man overseeing the $700 billion financial bailout as the interim head of Paulson’s Office of Financial StabilityPaulson’s inner circle already includes former Goldmanites Dan Jester, a financial institutions banker, and retired banker Steve Shafran, who focused on corporate restructuring at Goldman. It also included Robert Steel, who has since left Treasury to become CEO of Wachovia. Kashkari’s appointment is another example of how deep those Goldman Sachs ties go. In fact, Paulson himself was recruited by a former Goldman Sachs banker: former White House Chief of Staff Josh Bolten. Bolten. Let’s see if I understand this. Secretary Paulsen is responsible for the $700 billion bailout fund and he appointed the guy immediately underneath him to make sure the Treasury Secretary is completely ethical. Huh???  

 

 

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Bailout ALERT

October 4, 2008 by david.pennington.

by Michael M. Pennington

I realize many of you may disagree with me on this but I am pleased that the Bailout Law was defeated in its present form. At least for awhile longer our nation voted against a massive socialistic power grab. This entire crisis was planned by the government. If you remember Chairman Greenspan actually encouraged new home buyers and refinancers to use ARM’s and he likewise went on record saying that these derivative swaps were a good thing that they helped balance the economy. Even Warren Buffett answered him by calling these securities a “ticking time bomb“. The SEC Chairman Cox passed several rule changes that accelerated the demise including doing away with the uptick rule on short sales. Again the Government passed laws pushing people who couldn’t afford homes into mortgages that they couldn’t pay. Then they forced banks to buy this bad paper or face PC racist repercussions. But the bailout law included just about everything - foreign banks, money
market funds, FDIC, Wall Street etc. etc. FED money  has lost its value and we will see a continued movement toward gold ownership because gold is the only honest currency. This morning the FED added $2 TRILLION in liquidity to the economy and so did several other central banks. The FED also said it would add several more TRILLIONS if need be. Those in the know also said the $700 BILLION bailout was just an initial amount and that $700 BILLION was renewable and could end up in the TRILLIONS. The friends of those controlling this country are all well taken care. Goldman Sachs was going to lose $20 BILLION due to the collapse of AIG. After the government bailout, they lost zero. The taxpayer picked up the tab of $85 BILLION to make sure Goldman had no losses. Even if this Bailout Law had passed, the crash was only going to be delayed. There are over $415 TRILLION in notional derivative paper in the market that is worthless. This problem hasn’t even been
addressed yet. The question might be do we experience a harsh downturn and turn over TRILLIONS of dollars to the Secretary, or do we experience a harsh downturn without giving the “BOYZ” TRILLIONS of our dollars.
GOLD - Instead of soaring  up $100, as it should have, you can bet the government is doing everything they can to keep a lid on gold and silver. How much longer they can do this is anybody’s guess. It should be noted that the Euro collapse today which normally would drive gold lower.It looks like gold is beginning to trade as the ultimate currency - one with no agendas and no obligations. Physical demand is soaring now so it seems like gold and silver will eventually have to go up substantially. It is disturbing to me personally when commentators asked for the market to go down more so the regulators will realize they made a mistake and pass the law.So while the government is intervening in what used to be free markets you can bet they will keep the pressure on stocks and bonds. It’s how they get their way. What is pathetic is that the same politicians who passed all these lousy laws are the very ones now clamoring for the government to fix what they
helped create in the first place. Regarding gold stocks, remember what I said about paper burning. The price of Gold is up 6% while the gold stock index is down over 5%. When you buy gold and silver, buy the physical! For weeks now I have been warning about SELLING ALL STOCKS. I really hope everyone took precautions in this regard.There will be a time to get back in, but now is definitely NOT the time. Things will change rapidly with each day. Let us all hope that God blesses us with peace and serneity during these troubled times. MIKE

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PAULSON AND THE WEIMAR REPUBLIC

September 29, 2008 by david.pennington.

by Michael M. Pennington 

The Federal Reserve was created in the US in 1913 in secret meetings and since that time they have slowly turned the United States into the greatest debtor nation the world has ever seen. History is littered with the graveyards of fiat currencies, i.e. money backed only by the worthless promises of someone else willingness to assume their debt. Every dollar ever created has a corresponding liability. The only exception is gold. It is the only asset that has no liability. The government’s answer to all economic problems, is to inflate, inflate, inflate until the problem goes away, or is replaced with a bigger one. I have had several people ask me about my references to the Weimar Republic of Germany following WWI. It is a classic example of hyperinflation and the terrible consequences it has on the effected society. The chart below gives you an illustration of what it was like during these times in Germany and what could be ahead for all of us.

July 1914            4.2 marks to the dollar
January 1919      8.9
July 1919            14.0
January 1920      64.8
July 1920             39.5
January 1921       64.9
July 1921              76.7
January 1922       1,919.8
July 1922              493.2
January 1923        17,972
July 1923               353,412
August 1923          4,620,455
September 1923    98,860,000
October 1923         25,260,208,000
November 1923     4,200,000,000,000 (yes, trillion. )

[Source: Gordon Craig, “Germany 1866-1945″]

By late 1923, the German government required 1,783 printing presses, running around the clock, to print money. Germans wheeled shopping carts filled with literally trillions of marks to pay for a single loaf of bread. Employees asked to be paid their wages each morning so that they could shop at noon before merchants could post higher prices.In 1919 they were tipping the bellboys with a gold piece and in 1923 the same gold piece would have bought the hotel.Today in the US we see Crude oil is $132. Corn is $6.The cost of everything is rising. Inflation is worsening, and it’s not hard to understand why. M3, the total quantity of dollars, is now growing by 17% per annum. Weimar inflation has arrived in America.The Federal Reserve is following the footsteps of the central bank in Weimar Germany. It is the same path taken by many central banks that have issued countless fiat currencies based on nothing but government promises. It is the path to the fiat currency graveyard, and the once almighty US dollar – which long ago used to be “as good as gold”, just like the Reichsmark once held that same exalted title – is knocking at the graveyard’s gate.

For those who scoff at the notion that this type of hyperinflation occurred many years ago and couldn’t happen today, you only have to look at what is happening right now in Zimbabwe. Weary Zimbabweans each day face a new wave of price increases that many basic goods and services out of their reach. A loaf of bread now costs what 12 new cars did a decade ago. Monthly inflation recently rose to 1,063,572 % according to a Reuters report. Economic analysts say unless the rate of inflation is slowed annual inflation will likely reach 5,000,000% by October.

Throughout history, it’s been proven that the basic laws of economics can be violated by governments for a short time, but in the long run, intervention and manipulation does not work in a free society.more stories like this According to FED records, they have loaned banks $188,000,000,000.00 per day over the past 3 weeks. This is nothing compared to the $1,000,000,000,000.00 that Paulson is now asking for. But there are many other “checks” being written as the printing presses work overtime, including:

* Treasury buying mortgage-related assets: $700,000,000,000.00*

Potential supplementary stimulus package favored by Democrats: $100,000,000,000.00*

 Insuring money market funds: $72,500,000,000.00*

Treasury fortifying the Fed’s balance sheet: $100,000,000,000.00*

Expansion of temporary swap lines with central banks: $180,000,000,000.00.*

 Loan to AIG: $85,000,000,000.00*

Fed purchase of agency discount notes and ABCP: amount not specified.*

Fed loans through the Primary Dealer Credit Facility: $20,000,000,000.00 through Sept. 17.*

Fed’s discount window: $33,000,000,000.00 balance.*

Treasury purchase of GSE MBS this month: $10,000,000,000.00*

Potential cost of Fannie/Freddie bailout: $500,000,000,000.00.*

Treasury Secretary Paulson’s Bailout Plan  700,000,000,000.00

Financing the current account deficit: priceless.

Investment implications: Sell the U.S. dollar.

“The fiscal cost to the US is likely to be enormous. Speculation will intensify on a possible US government paper downgrade. US policy-making and credibility have been put into question. The safety of US assets has been put into question. We remain concerned with the repercussions that this crisis will have on the financial flows into the United States against the context of a still large current account deficit

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THOUGHTS ON THE NEW RTC RESCUE PLAN

September 22, 2008 by david.pennington.

by Michael M. Pennington 

If you want warm and cozy thoughts on how the government saved Americans from a Great Depression, all you need to do is to listen to the media. But if you want a “what-really-happened” report from a goldbug’s perspective, then read on. The old Resolution Trust Corp that was created in 1990 to deal with the Savings & Loan crisis was resurrected once again. Originally, it cost every taxpayer about $4,000. Today’s new RTC will require $1,000,000,000,000 or more and was approved by a handful of politicians with little planning, no debate and no real understanding of the consequences. In all my years of experience, no one makes really good decisions when under short term duress. How soon we forget. The S&L crisis was followed by politicians calling for more regulation and oversight so such corruption will never happen again. Bad lending practices, cooked books etc. have happened all over again in less than twenty years now with the banking crisis. As the new RTC is established, all the “bad paper” in commercial banks, investment banks, insurance companies, mutual funds, money market funds and S&L companies once again will be transferred into the new “Trust”. Under the old RTC, there actually existed assets, which were the mortgages on the properties assumed. Today, the new RTC will own zero. The paper being assumed is worth zero. This is why the financial institutions were going under. Therefore, the real truth here is that the taxpayer is “gifting” all of this bad paper and they are gifting it to the very criminals responsible for the problem in the first place. Another way of saying this is that the American taxpayer was not asked, but was assigned by the government, the task of bailing out private corporations who were going bankrupt due to gross mismanagement and internal criminal activity. Since most of those responsible are friends of Greenspan, Paulson and many others, they were in fact “pardoned” for their criminal activity. We will hear in the days ahead about all the steps taken to assure this happens never again, but as long as the criminals are rewarded with abundant riches and then pardoned for their crimes, I suggest they will do it all over again. Why not?

CONSEQUENCES OF THE NEW RESCUE PLAN AND ITS AFFECT ON GOLD AND SILVER

While most people were celebrating the huge rally in stocks, mostly unnoticed was the significant increase in commodity prices.  Normally, when the stock market moves up, commodity prices move down, especially energy and gold/silver prices. Not today. Today’s reported potential infinite bailout of all and any financial losses is the largest increase in dollars outstanding since Noah’s Ark.It closely models actions undertaken during the production of currency liquidity as seen in the “Weimar Republic.”   More than $150 Billion was flooded into the system this past week by the FED to increase liquidity. Then $85 Billion went for the Lehman bailout and another $100 Billion is set aside for the AGI bailout. The new RTC Rescue will create at least $1 Trillion dollars and we’re nowhere near the end in sight yet. Can anyone spell  I N F L A T I O N. 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 in the US due to the potential expansion of T bills and therefore dollar supply explosion.  Silver and Gold are the only protection. After today, I see Gold increasing to over $2,000 oz and Silver increasing to over $100 per oz.2. Everyone on Wall Street admits to the government intervention in the stock market this week. This raises the question of how anyone can trust in the future the prices quoted on what used to be a free market.3. It was reported that home prices in the future will remain over market-clearing levels which will closely assimilate government price controls. This eventually will discourage new home buyers as price appreciation in the future will be hard to come by.4. For sure the Options and Futures exchanges will be dysfunctional for some time. Short sellers are required to balance positions.5. Knowing that any future bailout will wipeout common shareholders, the overall value of the stock will be lower to account for this additional risk.WASHINGTON MUTUALIn spite of everything, Washington Mutual has not been able to find a buyer. At least maybe now, customers will stop withdrawing their funds. Their black hole may be the deepest one out there yet. Perhaps they will end up putting the company for sale on Ebay!It will take awhile to digest the unbelievable occurrences of this week. Seven days ago, venerable US companies like Lehman Bros and Merrill Lynch were proud self-standing firms, AIG, who was the largest insurer in the USA, was not a ward of the state, and Money Market Funds were still trusted. One month ago, Freddie Mac and Fannie Mae were in operation and owned by most mutual funds and banks. Six months ago, Bear Stearns was still independent. That was then, Now is Now. It takes awhile to recognize that your country has been conquered. It’s a new world we are living in and every American needs to admit that our new bosses are not the same as our old bosses. 

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EMERGENCY ALERT - MONDAY UPDATE

September 16, 2008 by david.pennington.

by Michael M. Pennington 

THE STOCK MARKET

In the last 24 hours, the financial markets have witnessed epic events , none of which are good for the average citizen. The Dow was down about 500 points today and it’s very likely that more severe declines will be forthcoming this week. Mutual Funds have declined significantly as most stock funds carried AIG, Merrill, Lehman or all three in their portfolios. We could see a day or two of higher stocks if the FED reduces interest rates, but any rally will be met with fierce selling.  I advised all of my family members to sell shares early today. The downside risk here is considerable. Later, after Bernanke and the FED drop money from helicopters the US will enter a period of hyperinflation. At that time you shift back into stocks. In the meantime, capital preservation is all important. Already tonight, the Japanese market is at the lows for the year. There is much more bloodletting left.

GOLD & SILVER STOCKS

It defies logic that Gold was up $23 today and Silver was up $.32, and yet the HUI Gold/Silver Index fell by 5%. Some might say they were caught in the overall downdraft, but I say that these stocks are still being shorted massively by naked short sellers. Why? For the same reason the COMEX spot price has been hammered the past three weeks. The Government does not want all these dollars being liquidated to be attracted to the Precious Metals sector. This is one of the reasons why I buy physical metal instead of the shares. The shares are even more easily manipulated down through naked short selling. Anything made of paper and that can burn I recommend staying away from. If the regulators don’t ban naked short selling, technically the markets could fall to zero. There is a law now banning this trading, but the regulators look the other way because they and their friends  are making too much money because of it.

TEN BANKS CREATE A $70 BILLION POOL TO HELP TROUBLED INSTITUTIONS.

This announcement was intentioned to help quiet the market fears, as ten banks contributed $10 billion each to a pooled fund to help those institutions in trouble. What isn’t said is that this clever device is a fractional reserve pool allowing each of the ten banks to use 33.33% of the total, or $23.3 billion as a capital infusion on their own balance sheets. Thus they have “magically” created  $163 billion of “good” capital for their joint balance sheets. This is very bad however for the dollar, for investor confidence and for the integrity of the banks’ balance sheets and capital reserve.

PAULSON’S NEWS CONFERENCE

I got sick to my stomach today listening to this crap. The very people responsible for all of this happening are the very ones who created the environment that allowed it to happen. Yesterday it was Greenspan, today Paulson. Events such as we have witnessed of late just don’t happen overnight. I have been writing for months and even years that these days will arrive. Those behind the curtains who created this mess knew full well what the eventual outcome would be, Poole, Summers, Lindsey, Levitz, Rubin, Corzine, Kissinger, Brezhinski etc. They have had many months to put their plans into action and how it would be handled when the crisis comes public. You can also bet that these guys have positioned themselves to take full advantage of the current situation which is destroying many investor lives. They herd a willing media out in front of the cameras to assure the worried public that all is well. Not one CEO complicit in this scam has been investigated less much prosecuted. The fired CEO of Fannie Mae left his job with a $159,000 guaranteed monthly payment for life. You can bet that all of those who made huge sums shorting the gold stocks during this downdraft are re-positioning themselves right now to make huge sums when they allow the stocks to rise. What a deal, they go play the derivative game with their customer’s money. I get tired hearing them say they’re just playing the hand they were dealt. This is how all government crooks operate. Pass a law, ignore for a few years and then claim that their hands are tied by it after the crooks who passed it are collecting massive pensions on some beach. I can just imagine in the year 2014 where someone asks a  The Director of Homeland Security, “Why are you shooting all those people? The answer is “Well our options are restricted by the Patriot Act passed way back in 2003.”

WHAT THE FALL OF AIG WOULD MEANWade C. Smith
> 3329 S. Hwy 89
> Perry, Utah 84302

Mr. Greenberg was another of the corporate crooks who ruined a great company. He turned them from an insurance company into the largest global derivates player.  On Friday, they said they needed $10 billion in capital to stay solvent. The FED refused to help them thus far. Now they say they need

$75,000,000,000. The truth is they probably need more than that. No one has come forward to “merge” or “buyout” AIG. So late today, The New York Governor stated the State of New York will provide state taxpayer funds to help over the short term. There’s another loss for the citizens of New York. The problem here is that AIG’s derivatives will bring down the large commercial real estate division, and as result this could create a domino effect in the commercial real estate market that has been unscathed thus far.

Be prepared for more bad news in the financial sector. Like a cancer, these defaults will spreads. There are still trillions of dollars in derivatives that need defaulting. Two weeks ago the government warned about the critical nature of 179 banks. Today, they indicated as many as 1,000 could adversely be affected.

 

 

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Thoughts for the Week

August 25, 2008 by david.pennington.

by Michael Pennington 

FREDDIE, FANNIE and THE FEDIt seems to me that the FED is way too close to the financial markets, Wall Street and the elits in charge of them. They are too quick to jump in and respond to their pleadings for help using taxpayer funds that our politicians offer on a platter. The thing that bothers me the most is that the people being “saved” are the very ones who got rich off the backs of the public and their employees. Is there any question why all this greed and corruption continues? Those responsible for it are the very ones being rewarded for their corruption. Our markets will never be cleaned up until this changes. 

THE  SILVER and GOLD PRICE  MANIPULATION EXPOSEDMost of us are well aware now of the price suppression scheme orchestrated by the U.S. Central Bank. Well-known silver analyst Ted Butler deserves much of the credit for exposing the many illegal practices used to implement this fraud. In commentary published today, Butler examines data from the U.S. Commodity Futures Trading Commission and reports:“As of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. “Between July 14 and August 15, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38 percent. “For gold, three U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and three U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an 11-fold increase and coinciding with a gold price decline of more than $150 per ounce. “As was the case with silver, this is the largest short position ever by U.S. banks in the data listed on the CFTC’s [Internet] site. This was put on as one massive position just before the market collapsed in price.”Yet, the regulators turn their heads and ignore the most blatant evidence that the FED is orchestrating through their brokers such as Goldman Sachs, the late Bear Stearns and now their commercial banks who carry out their bidding to paper sell silver and gold into the market to drop the price. In spite of these derivatives being extremely risky and in spite of the fact many of these financial institutions are already insolvent, they know they will be bailed out by the FED regardless of the huge losses possible. How much more corrupt can things get? 

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THIS WEEK IN THE PRECIOUS METALS MARKET

August 19, 2008 by david.pennington.

by Michael Pennington 

Buying on the Come

Several issues I would like to address this week. The first is that I have heard of many investors buying from sources who do not have the product in inventory, but are promising delivery at some future date. I hope to convince you all that this is not in your best interest. I know of horror stories where the purchaser has waited 4-6 months and are not able to obtain a refund without paying a significant termination fee. When you buy “on the promise of future delivery” you are actually selling the metal short. The large dealers end up hedging to protect their price by selling a future’s contract short to protect his sales price  in the event of a price decline. This position actually drives the price of the metal lower in the short term. And if you have to wait 30-60-90 days for silver from any seller, it means they are selling what they do not have, and hope to get it from someone else that does not have it today either!  That means they are short, (they owe you silver) that they do not have!And if there is a “regular” 60 day delay, where they have you pay for it all up front, instead of a tiny 5% deposit down payment, then they are “floating” on your money, like you gave them an operating loan! The honest dealers will only sell you what they already own. DO NOT FALL INTO THIS TRAP!

The Market Shortage

While today’s metal shortage is real, it should not last long. Markets tend to be corrective and this manipulation lower will also correct soon. The market is very tight for physical metal. Johnson Mathey is the largest producer of 100 oz silver bars and they reported today they are 300,000 ozs behind filling orders.As for Silver Eagles, one authorized distributor has speculated that Mint may not produce any more 2008-dated coins and will commence production of 2009-dated Silver Eagles.  If so, no new Silver Eagles will be available for delivery until January 2009.
Still, another distributor is confident the Mint will produce more 2008-dated Silver Eagles in the next few weeks.How is this manipulation/intervention going to end? Since prices between the physical and paper metals have disconnected indicates to me they are failing as we speak. The only way this will end is in default. We are seeing that happen now as deliveries of physical are being delayed. There is so much more paper metal than physical metal it will have to drive prices of physical higher. The laws of supply and demand can only be broken for a short time.  The reality is that silver is scarce.  Buy it if you can find it!
 
HOW LONG WILL THE DOLLAR RISE?

The media is now busy promoting the idea that the dollar will continue to rise against other world currencies. This is normal propaganda but before we just accept this at face value, we need to question how the following facts will affect this claim:1.    The U.S. deficit continues to grow at epidemic proportions;2.    The FED has now implied they will bailout European banks as well as their own; the ECB is not permitted by law to bailout any of their own financials, so to avoid possible collapse, the FED has stated they will help their foreign counterparts;3.   If Washington really intended to stabilize the Dollar or, more ambitiously, to push it up against the other currencies, there would only be a couple of ways to accomplish this: raising significantly the Fed’s interest rates, and lowering drastically the pace of money printing. But if the government decided to implement this type of policy, the US economy would stop dead a few weeks. We would see the real estate market fall to zero by lack of affordable credit as a result of soaring interests on Adjustable Rate Mortgage loans, consumption would become negative (i.e. shrinks back each month), corporate failures would multiply exponentially, Wall Street would collapse under the burden of innumerable debts.4.   Household debt is now 131% of disposable income, compared with 93% at the top the dotcom bubble, 79% in the property boom of the late-1980s, and 62% at the end of the 1970s.Such a series of events, sure to happen if Washington implements a voluntary policy of dollar-rescue, is probably unacceptable to the US authorities. Therefore, apart from talking – and further self-discrediting – they cannot do anything. The method used in the past decades is no longer available: no one will accept to buy large amounts of Dollars in order to rescue the US currency if some voluntary policy as described is not implemented by Washington. As they will not do it, the rest of the world will draw its own conclusions and continue to diversify out of the U.S. Dollar. 

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NO MORE SILVER EAGLES - AGAIN

August 14, 2008 by david.pennington.

NO MORE SILVER EAGLES – AGAINby Michael Pennington 

An obvious question is where have all the silver eagles gone? As of today, none of the large suppliers of bullion dealers, or the dealers themselves have anymore silver eagle boxes. I have said it before on this forum and others that the day is coming soon when it will be impossible to buy silver at any price. Once again, we have witnessed blatant manipulation on the part of the FED and their elitist owners in the past several weeks driving the price of both gold and silver to dangerous low levels. They do this simply by selling the metals short in the “paper market” intensely enough to convince speculators that they should sell their long positions and the route is on. The reasons, as always, are to convince people that their dollar is solid and that there is no inflation eating away at the middle class assets. This is motivated so they can continue their devastating policy of creating more dollars in attempt to keep their credit rich, fiat system from collapsing. It will inevitably, but in the meantime they have to keep the sham alive. Just this week, the FED announced they have loaned troubles banks another $25,000,000,000. They have already “loaned” Freddie Mac and Sallie May $50,000,000,000 and yet unbelievably they allow these GSE’s to still pay their shareholders a DIVIDEND that comes from the money borrowed from the American taxpayer.I mentioned the danger of lower prices. Everyone is aware of the huge short position in silver. It is the largest short position in any commodity in our country’s history. It is more than one year’s full production. The regulatory officials turn their heads and allow this illegal activity to continue. This past week Silver dipped below its cost of production. Two of the nation’s largest silver miners just reported losses for the second quarter. If they are losing money when silver was at $17.50 per ounce, what do think will happen at $14.50 per ounce? When the mines stop producing, silver is still needed for many manufactured goods and processes. Prices will escalate rapidly and then the millions of ounces short will be squeezed, probably into default.Remember, these markets exist on fear and greed. When prices are falling, fear takes over and visa versa. But you need to have the courage of your convictions. DO NOT BELIEVE WHAT YOU HEAR IN THE MAINTREAM MEDIA. Believe what you see with your eyes. Know the fundamentals and stick with them. Manipulation has always been a short term strategy. The markets eventually react as they should. The dollar my friends is toast. Everybody else in the world knows it and most of the world’s largest nations are doing whatever they can to diversify out of dollars. The Euro was muscled off the near $1.60 level by more than $10 billion in currency market intervention, along with Trichet’s verbal intervention stating that the economic environment might take precedent over inflation. Today as he reverses himself by making inflation the primary concern, more intervention is taking place to make the Euro look weak in the face of a statement that should have had the opposite impact.When evaluating your investments look at the return/risk over a given period. Any clear minded individual aware of the facts will conclude that gold and silver, but especially silver, are among the best investments today at these prices.

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THE STOCK MARKET, STORAGE, ETF’S & WORLD RISKS

July 29, 2008 by david.pennington.

by Michael Pennington

WHERE  WILL THE STOCK MARKET  BE IN 2012?Attempting to answer this question in the short term is a slippery slope. What makes this even more hazardous than normal is the widespread doom and gloom surrounding Wall Street. There is the housing crisis, the credit crisis, the banking crisis etc, etc. I never thought in my lifetime I would see Ford stock selling at $4 per share or General Motors selling for $10. The old “rules of investing”, like Buy and Hold, don’t seem to be working anymore. Anyone who bought General Motors in 1952 and held until today lost money, excluding dividends.Today’s financial crisis has no practical solution. There are only acts of desperation in reaction to each crisis further corrupting an already weak dollar. Just this week the IMF said there is no end in sight to the U.S. housing market and that losses on bad mortgages could exceed $1 trillion dollars. The only tool the FED possesses now is to inflate and that is what they are doing. The FED is in no position to fight inflation by raising interest rates. Higher rates would simply bury the economy, so we will have to live with global hyperinflation. This week, several major corporations, like Sara Lee, Colgate, US Steel and Hasbro just to name a few, have announced their intentions to raise prices. This is the first of many, many more to come. It is likely at some point in the future we will see the highest interest rates in the history of the U.S. We are already hearing references to the Weimar Republic following WW I.In 2009 the new President will be under tremendous pressure to appoint a new FED Chairman, who would be Volker-like in aggressively fighting inflation. This means higher FED Funds rates in the 12% range. Then we will witness the worst recession the U.S. has seen and it will last until 2012 when economic recovery appears and interest rates are eased. The biggest loser during this downturn will be stocks. In my opinion it looks very possible that the Dow could reach its 1996 lows of 4,000. By 2012 then stocks will be the place to be as stocks bottom and hard commodities top. In the meantime, preservation of capital is the most important goal. I continue to recommend moving funds out of stocks and bonds into hard assets, notably gold and silver.THE STORAGE PROBLEM SOLVEDStorage is always a consideration in contemplating the purchase of precious metals. By far, the most preferable means is to take personal possession. You can then either store them with a separate, private security company near where you live (if available) or store them on your personal premises. If have money to buy them, then you have the money to provide a secure sight somewhere on your personal property. Build a hidden room, complete with a fireproof safe, and don’t tell anyone but a close family member where the safe with “valuables” is located.  A house burglar is normally a cheap crook looking for a quick, easy “hit”. As a result, you are always close to your metals and can easily access them in case of need.ELECTRONIC TRADED FUNDSHopefully, I have harped on this enough during the past year. Regardless of whether it might be SLV or GLD I highly recommend you sell these funds and buy physical metal instead. If you haven’t read any of my articles on this, I encourage you to do so. Look in the archives under “SLEEPING WITH THE ENEMY”. The trustees for these funds are selling the metals short into the market and potentially creating a situation where your portion of the metal owned is not really there for you. Please do your homework. If you need additional information on this, let me know, and I will send you plenty.GEOPOLITICAL RISKS ARE ENORMOUS AND MOUNTINGAs if the global financial risks aren’t great enough, the world’s geopolitical risks are deteriorating. We all know about the problems in Iraq and Iran, but the problems in Afghanistan is re-emerging and what’s worse is what’s happening now in Pakistan. It appears our presence in the ME will take many years to police the situation. The smallest blowup could easily escalate into a full scale war among the various factions. The price of oil and other commodities needed around the globe could double in a week. The chances of such an event occurring with a New President is higher as these people will want to test a new Administration. 

 

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US HISTORY - FIAT MONEY ALWAYS FAILS DUE TO CORRUPTION

July 27, 2008 by david.pennington.

NOTE TO MY READERS:  This is an important article published by the Mises Institute exploring the former US Central Bank which closed its doors in 1841. Professor Gouge concludes that it’s the system that is flawed. He states, “ Give the management of it to the wisest and best men in the country and it will still produce evil. As a fractional reserve profit-making institution its natural and inevitable tendency is to inflate.

The Fed’s Predecessors in American History

Daily Article by H.A. Scott Trask | Posted on 12/17/2003

Before there was the Federal Reserve there was the second Bank of the

United States (1817–1836). Since the late nineteenth century, historians and economists have lauded this institution for its salutary control over the currency, its regulation of the state banks, its prudent stewardship of the government’s funds, and its example of a fruitful private/public partnership in the field of central banking.Writing in 1957, Bray Hammond, in his now standard Banks and Politics in America: from the Revolution to the Civil War, described the second Bank as a noble predecessor for the Federal Reserve. Contemporary hard-money critics saw the bank in a different light. Their critique reveals an institution that was as inflationary as the state banks, frequently abused its power, did not prevent the destructive business cycle, and inhibited the emergence of a system of noninflationary private banking. It was an institution that behaved much as the Federal Reserve System does today.

The first Bank of the

United States was chartered in 1791. The Federalists argued that a national bank was necessary to bolster the credit and assist the fiscal operations of the federal government. Three fourths of its capital was composed of government bonds. The paper-money banking system was still in its infancy then, and so little was said of the need to regulate the currency. In 1811, the Jeffersonian Republicans, now in the majority, did not renew the charter. A tie vote in the Senate was broken by the vice-president, the heroic George Clinton of New York. Clinton was a former anti-Federalist and a hard-money man. America’s first experiment with a nascent central bank was over. However, the

Madison administration would soon be proposing a second more powerful one.The Background to the Chartering of the Second Bank

Congress declared war on

Great Britain in June of 1812 ostensibly to vindicate “free trade and sailor’s rights” but actually to seize Canada. The

Madison administration decided to finance the war by borrowing paper money from the banks and individuals and printing interest-bearing treasury notes. Such financiering spurred an enormous inflation of money and credit, drove specie from the country, and helped create a classic Austrian-style boom. Not so in

New England whose people opposed the war, refused to lend money (or state militia) to the federal government, and maintained a vigorous trade with the enemy (they traded overland with the British in

Canada and offshore since the English navy exempted them from their American blockade).If people in the other states wished to buy British goods, and they did, they had to go through New England. As a result, her banks and merchants amassed specie, while the banks west of the

Hudson tottered on the brink of insolvency; her currency was convertible (”hard”) while the currency of the southern and middle states was composed of depreciating bank paper. It was only a matter of time before these banks would have to suspend specie payments, and when the British invaded the

Chesapeake in August, 1814, they did so. With the only check on inflation removed, the banks expanded their issues, and writers began praising the flexibility, expansibility, and wealth-creating power of an irredeemable paper currency. The popular saying was that paper money was “as good as gold,” nay even better, because cheaper.While this era was for debtors “a golden age,” the federal government found itself in acute financial embarrassment. The revenue was being collected in depreciated bank paper or treasury notes, and bonds could only be sold by offering enormous premiums. In addition, the merchants were complaining of the enormous “inequalities in the exchanges,” meaning that they had to deal with differing exchange rates between every city and state in the Union. For instance,

New Orleans bank notes were not current in

New York City, nor were the notes of the “country” banks of

Pennsylvania current in Philadelphia. This complicated the business of domestic commerce. The

Madison administration proposed a second national bank to remedy these difficulties. Spokesmen named two essential objects. A national bank would boost the credit of the government, and it would provide a “uniform national currency.”  Of course, uniformity could have been realized by returning to the silver standard and bona fide specie payments, and reducing the currency, but there were few who mentioned this option.Although the end of the war in January 1815 curbed the agitation for a new national bank, the

Madison administration soon resumed its lobbying in Congress. They repeated their earlier arguments that without a national bank the government would have great difficulty raising money during a war or national emergency and that only the government could provide a sound national “circulating medium.”  They added two new arguments. A government bank could pressure the state banks to resume specie payments and curtail their excessive note issues. In the same year, the administration emitted $20 million in treasury notes and encouraged the state banks to use them as reserves upon which to pile additional bank credits and notes!Hard-money men gagged, and then pounced with savage fury on the proposal. Congressman Ward of

Massachusetts pointed out the obvious. If the government wished to compel the banks to resume paying hard money, all it had to do was to refuse to accept the notes of nonspecie paying banks for the payment of import duties, the purchase of public lands, and the buying of government bonds. John Randolph of

Virginia warned prophetically that instead of remedying the evils complained of, the new bank would only aggravate them. Perhaps the most memorable objection came from Senator William Wells, a hard-money Federalist from

Delaware: 

“This bill came out of the hands of the administration ostensibly for the purpose of curtailing the over issue of Bank paper: and yet it came prepared to inflict on us the same evil, being itself nothing more than a simple paper making machine; and constituting, in this respect, a scheme of policy about as wise, in point of precaution, as the contrivance of one of Rabelais’ heroes, who hid himself in the water for fear of the rain. The disease, it is said, is the Banking fever of the States; and this is to be cured by giving them the Banking fever of the

United States.” 

Despite these trenchant objections by hard-money Federalists and Old Republicans, the charter for the second Bank of the United States (B.U.S.) was passed by both houses of Congress and signed into law by President Madison in April 1816. The bank was capitalized at $35 million, to be composed of $7 million in specie and $28 million in government bonds. (Clearly an unstated but powerful impetus behind the bank was to deliver a financial windfall for politically connected bond holders and to raise their price in the market.) 

However, when the bank opened in early 1817, its actual paid in capital included only $2 million in specie and $21 million in bonds. Stockholders had paid the rest in stock notes (i.e. promissory notes secured by their stock), which was already the customary way of forming bank capital. The bank was authorized to found branch offices throughout the union and by the end of the year there were 19 of them.

“More Bank Paper of the Same Sort:” The Record of the Second Bank

As if to confirm the fears of its opponents, the federal bank entered into a collusive agreement with the private banks of the Atlantic cities. The latter would agree to resume paying specie on February 20, 1817, on the dual condition that the branch banks would not require of them the payment of balances in hard money and would issue currency and make discounts to compensate for the modest curtailments being made by the city banks. Both groups seemed to think that a nominal resumption coupled with the partial substitution of national bank notes for state ones would restore public confidence in the currency and cure the evil of depreciation. In the words of Condy Raguet, then a hard-money

Pennsylvania state senator, “the directors of the new bank fancied that if they could only persuade the city banks to call that a sound currency which was in reality an unsound one, the evil of depreciation would be cured.”  In other words, they thought the state of the currency was all about psychology, not economic law.The directors adopted an even worse policy toward the southern and western banks. They encouraged them to inflate. The branches paid out their own notes and drafts when discounting, but they accepted local bank notes as payment. Merchants used federal branch notes and drafts, which were current everywhere, to purchase eastern manufactures while state notes supplied the local currency. The consequence was that huge balances against the state banks accumulated in the branch offices of the federal bank.

However, rather than return the redundant notes for payment, the branches retained them as a fund upon which they drew interest. The federal bank did nothing to compel the state banks to reduce their issues or credits or pressure them to resume actual specie payments. Many observers noted that the resumption of February 1817 was only nominal; as proof, they pointed out that most state bank paper continued to circulate below par. Even worse, the B.U.S. added to the already excessive quantity of money its own emissions. One critic estimated that in its first year of operation, the federal bank made $43 million in discounts on a specie base of only $2 million.

Condy Raguet brilliantly summarized the policy of the federal bank during its first year and a half of operation (1817–18). Almost at once, “they began to add to the mass [of paper money and credits] already redundant, by emissions of their own notes; and in the course of few months added to the mass of bank loans an amount greatly beyond the reductions which had been made. By this means the currency, although nominally convertible, was depreciated below its former low state, and was thrown back, instead of being advanced on the road of restoration.”  Instead of helping to reduce the excessive indebtedness, the bank worsened it. “This unwise procedure of replunging the people into the debts from which they had been partially extricated, and of involving others who had hitherto escaped, was continued for a time; but the dreadful day of retribution at length arrived.” 

Being one of the only true specie paying banks in the country, and finding its reserves all but depleted by mid-1818, the directors realized that they had to curtail lending and contract their notes to avoid suspending payment and thus losing their federal charter. Consequently, they called in loans and required balances due them by the state banks be paid in hard money or national bank notes. This curtailment policy precipitated the panic of 1818/19. In the words of William M. Gouge, a hard-money editor and political economist from

Philadelphia, “The Bank was saved, but the people were ruined.”The 1820s: A Period of Sound Money under Federal Bank Regulation?  Not.

Historians cite the relatively low-inflation decade of the 1820s as an example of the successful maturing of the regulatory policies of the federal bank. They say the state banks were restrained from inflating to excess by the regular requirement that they pay their balances to the federal branch offices in hard money. Contemporary critics had a different view. They saw an institution whose objective was controlled inflation (i.e. a steady and consistent, but not unduly excessive, inflation of money and credit) and whose policy was to protect the state banks rather than restrain them.

The most comprehensive and detailed critique of the B.U.S. during this decade was found in William M. Gouge’s enormously influential Short History of Paper Money and Banking in the United States (1833). Gouge began by pointing out that bank inflation during the decade was significant enough to produce a regularly recurring cycle of feverish business expansions followed by painful business depressions. The years 1821, 1824, 1827, and 1830/31 were boom times. The years 1822, 1825, 1828, and 1832 were times of contraction and crisis. He argued that given the nature of fractional-reserve banking, these cycles were inevitable regardless of the existence of preventive legislation or the regulatory powers of a national bank. “The evils produced by the system of paper money and moneyed corporations are of such a nature that they cannot be remedied by acts of legislation. When they come they must be endured. If we will have the system, we must bear its consequences.”  Likewise, periodic suspensions of specie payments were “necessary incidents” of a mixed currency system of paper and precious metal.

Gouge demonstrated how the federal bank continued to act with indulgence toward the state banks, refraining from pressing them for the settlement of bank balances. By this liberality, the banks of North Carolina, South Carolina, and Georgia continued to evade paying specie throughout the decade, as did many other banks in other parts of the country.

After 1822, the B.U.S. resumed the practice of lending its own notes or credits while accepting payment in state bank paper. The federal bank thus increased its own circulation while it brought the state banks under its power. In the two years previous to the panic of 1825, the B.U.S. increased its circulating notes by 105 percent while the state banks did so by only 57 percent. Again, during 1830–1831, it increased its circulation by 64 percent while the banks of

New York increased their notes by only 29 percent and those of

Pennsylvania by 21 percent. Thus, during both these periods, the very bank invested with the duty of regulating and restraining the other banks was inflating at twice their rate.What’s more, the enlarged issues of the federal bank were providing the state banks with a new form of paper reserves upon which they could discount and increase their circulation. Just as the “country” banks regarded the notes of the eastern mercantile banks as equivalent to specie, so did the state banks regard the notes and drafts of the Bank of the United States. Not only could they exchange them for specie at the branch offices, they could use them to pay balances (when demanded) owed the federal bank. Thus, in the words of Gouge, “Each extension of the business of the United States’ Bank in exchanges, increased its circulation of branch drafts, and each increase of branch drafts, after the new mode of operation was fairly established, enabled the State Banks to increase their issues, by providing them with means to meet such demands against them as might be made by the United States Bank.”  In other words, the more the federal bank inflated, the more safely could the state banks do also.

Another method by which the B.U.S. sought to protect the general system of bank inflation was by buying and selling domestic and foreign bills of exchange. Condy Raguet took aim at the exchange dealings of the federal bank in an essay in his brilliant journal The Free Trade Advocate and Journal of Political Economy. He began by arguing that a free and unfettered exchange market was “the best regulator of [national] currencies” and the tendency of metallic money to flow abroad during periods of inflation was the only effective check upon excessive bank issues. As a result, anything that disturbed the “natural” or “market rate” of exchange was pernicious.

In the previous issue, he had printed an anonymous essay by a distinguished gentleman who claimed to have intimate knowledge of the regulatory policies of the federal bank. (He revealed later that the author was none other than the president of the B.U.S., Nicholas Biddle). The author admitted that when the price of foreign bills was rising on the market, the bank would sell some of the bills it had previously purchased in order “to keep the exchange market easy and to prevent the excessive price of bills.” 

Yet, as Raguet pointed out, it was precisely the rising price of foreign bills (indicating that the demand for imports was outpacing the supply of exchangeable goods) that rendered the shipment of specie the most profitable remittance to

Europe and caused the importing merchant to withdraw specie from the banks. Thus, the federal bank was acting to depress the only sure mechanism (the exportation of specie) for stopping an inflation-induced business expansion and reducing the excessive issues of paper and extensions of credit. Biddle had also boasted that his bank had acted to protect the nation’s specie stock by withholding, or threatening to withhold, discounts and accommodations from merchants who were known to be shipping specie.”We cannot therefore but conclude,” wrote Raguet, “that the dealing in bills of exchange by the bank, upon the principles professed, removes the great check upon over-trading and over-issues of paper, created by the free competition of the exchange market.”  Raguet’s brilliant analysis proved that the exchange and discounting operations of the federal bank were designed not to restrain the state banks from issuing to excess but to protect them while inflating by inhibiting the exportation of specie.

An incident during 1825, cited by Gouge, revealed how Nicholas Biddle strove to prevent suspensions of specie payments by the banks. Hint: it was not by pressuring them to maintain high reserves or avoid making risky loans. In the summer of that year, after two years of inflation, the banks were on the verge of suspending payments and the country was experiencing a financial crisis. To avert the impending catastrophe, Biddle rushed to

New York City to dissuade “a gentleman” from making a large demand on the

Philadelphia banks for specie in order to establish a bank in New Orleans. Banking reserves were so low they could not withstand the demand. Biddle persuaded him to accept federal drafts on

New Orleans in lieu of specie. He thus saved the state banks, as well as his own federal bank, from catastrophe.Political Machinations of the Federal Bank

In July 1832, when President Andrew Jackson vetoed the bill to extend the charter for the Bank of the United States another 20 years, Biddle sought to contract the economy to deny him reelection in the fall. When that failed and

Jackson was reelected, Biddle continued to constrict credit for another two years in order to destroy Jackson’s popularity and coerce a re-charter.President Jackson had removed the government’s deposits from the federal bank in 1833, and its federal charter expired in 1836. However, the bank obtained a state charter from

Pennsylvania, and it remained an immensely powerful financial institution. Moreover, the president tried to make his bank so indispensable and popular that it would be re-chartered by a future Whig Congress. If deflation had failed as a political weapon, he would try inflation. During the enormous inflation of 1835–36, Biddle’s bank led the charge, and when the inevitable reaction commenced in the spring of 1837, Biddle tried to reflate the economy by speculating in cotton and borrowing heavily in Europe. When the banks of New York called a banking convention in the fall of 1837 to set an early date for the resumption of specie payments, Biddle refused to attend, and he exerted all the influence of his bank to delay resumption as long as possible. Attempts to obtain a new charter failed, but Biddle’s inflationary policies soon wrecked his bank and it closed its doors for good in 1841.Conclusion

Could the Bank have performed its regulatory role faithfully under a different president, who was a monetary conservative instead of an inflationist?  Gouge denied it. “The fault is in the system,” he wrote. “Give the management of it to the wisest and best men in the country, and still it will produce evil.”  As a fractional-reserve profit-making institution, its natural and inevitable tendency was to inflate. As a quasi-government bank, its natural tendency was to preserve for the government the option of borrowing paper money to finance their wars. All governments would rather borrow than tax. Samuel Tilden, a hard-money federal senator from

New York, put it well: “How could a large bank, constituted on essentially the same principles, be expected to regulate beneficially the lesser banks?  Has enlarged power been found to be less liable to abuse than limited power?  Has concentrated power been found less liable to abuse than distributed power?”  Let the record of the Federal Reserve since 1914 bear witness.—-

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