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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PRICE VOLATILITY & MORE SPENDING

July 24, 2008 by david.pennington.

by Michael Pennington 

Precious Metals Price VolatilityWe have often discussed how volatile the price of gold and silver is in the market place. This is due to the gold cartel working feverishly at times to lower or cap the prices. This is done in an effort to disguise from the American people what is actually occurring to their financial futures. You cannot allow these downward moves to affect your rationale for purchasing metals in the first place. Have the courage of your convictions and know that the fundamentals haven’t changed. As long as the fundamentals are the same, over time we know that the dollar will continue it’s decline and gold and silver will therefore continue their rise. No jawboning or market intervention will change these facts over the long term. Use these dips to buy more of your position. Remember Gold and Silver are a currency, a hard asset. U.S. dollars, stocks and bonds are paper, backed by a corrupt system manipulating markets to mask their misdeeds and benefit their friends.  Expect this volatility as normal and use it to your advantage. Do not sweat the day-to-day changes. Gold is headed for $1,100 and Silver is going to $22 before year end.Inflation is Attacking Your Portfolio
The dollar has been slowly collapsing over the past five years, losing one-half of its purchasing power compared to the euro. Crude oil has gone up by a factor of five, while gold has tripled. The demand for the dollar is declining. Hardly a day goes by without some central bank or major institution announcing that they have diversified out of the dollar into other currencies.SPEND, SPEND, SPEND IS GOOD, GOOD FOR GOLD AND SILVEROne can hardly keep up with all the new spending bills coming out of the federal and state governments these days. The Fannie and Freddie bailouts, according to Treasury Secretary Paulson, could end up costing the taxpayers in excess of $1 trillion dollars. This year alone it could increase our budget deficit by $800 billion. The FED has also predicted 150 US Banks will be declared insolvent this year. Not to worry, everyone is protected by the FDIC, correct? The problem is that the FDIC only has $1.5 billion in total assets, which is truly a drop in the bucket. One large financial like a Wachovia or Washington Mutual would exceed their total assets by tenfold. Obviously, not everyone will be protected. A good rule is that, if you see smoke in the hole, there’s a fire someplace nearby. Don’t find yourself at the end of a line somewhere because you trusted your bank.Congress is also considering a second “stimulus” check for all Americans. This is nothing more than dropping money out of helicopters as Fed Chairman, Ben Bernanke, promised he would do if necessary. The estimated cost is $500 billion.Congress has already passed a homeowner foreclosure bailout law. This new law will produce government spending of $200 billion dollars to help out homeowners who bought houses they couldn’t afford from mortgage companies at interest rates they couldn’t afford. Once again, if you were a responsible person who purchased a home you could afford with a fixed mortgage you stand to pay in higher taxes for the others who will be bailed out.We even have in the state of Washington now a bill pending that will provide those in need with “gas stamps”.  Similar to food stamps this program will issue $500 per year in stamps redeemable for gas.I could go on but the list seems almost limitless. Suffice it to say, the big spend socialists are burying this country in a sea of debt. For what purpose? The answer to this question seems very obvious. 

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FANNIE MAE BAILOUT AND NAKED SHORT SELLING

July 21, 2008 by david.pennington.

by Michael Pennington 

THE FANNIE MAE & FREDDIE MAC BAILOUT

The Congressional hearing with Bernanke and Paulson last week was nothing short of ridiculous. The one thing it tells me is how desperate the financial elites are in covering up there mess. I’ll put the terms of this bailout in simplest terms I can. THERE ARE NO TERMS. These two private corporations now have the ability to write UNLIMITED checks for UNLIMITED amounts as long as they want to and whenever they want to. If they lose $2 billion in July, fine they write a check for it…if they want to provide their CEO with a $15 million bonus, fine they write a check for it. The only fight in Congress was that the Republicans wanted to put a MAXIMUM amount on this “Overdraft Loan”, while the Democrats wanted to provide an UNLIMITED loan ability. The Democratic controlled Congress won.  Just think if General Motors was given the ability to write unlimited checks for unlimited amounts without repercussions. Yet, Congress and the FED felt comfortable that they did not have to buyout the shareholders and call it what it really is and that is nationalization of the mortgage business.

THE NAKED SHORT SALE FIASCO

It is very interesting that part of the “Rescue Plan” announced was when SEC Commissioner announced a  “tough” regulation that would outlaw the naked short selling of Fannie, Freddie and other financials??? Excuse me but there already exists a law called, Regulation SHO,  banning naked short selling. It requires the delivery of shorted sales within a 12 day time period. The problem is that this regulation was never enforced. It was never enforced because the Wall Street guru’s and primary dealers were making so much money ripping off retail investors, the SEC just looked the other way. The Commissioner is now telling their buddies that they can’t continue to allow them to do this with these two securities. Of course, implied is that the SEC will continue to look the other way, especially if they are selling naked shorts in the gold and silver stocks.

“Naked short selling” is basically fraud. It destroys the value of the true existing shares, and possibly the company itself.  In a true short sale, the short seller is required to own shares in the company being shorted. Not so with a naked short sale. Someone creates NEW SHARES out of thin air in their name and then sells them for delivery to a BUYER. The BUYER pays for the shares, but never gets anything;  instead the broker registers a debt in the name of the original seller. This can happen over and over again so that there really is an UNLIMITED SUPPLY of stock that can be sold into the market.

It’s unbelievable to me that the regulators can crack down on naked shorts in the financials and not protect the rest of the market. If it’s a problem for some of the stocks, then I believe it’s a problem for all of the stocks. Personally, I have written the SEC before complaining about naked short interference in stocks I own, but they simply preferred to ignore that it even happened. They would refer to Regulation SHO as a deterrent from this happening. What a joke.

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MORE FED BAILOUTS MEAN HIGHER PRICES FOR GOLD & SILVER

July 14, 2008 by david.pennington.

By Michael M. Pennington 

For several weeks now I have been warning customers that Gold and Silver were about to go back up and exceed previous highs. We are beginning to see the moves predicted at this time. The trend of course is being driven by a weak dollar, the same driver of higher oil prices. It’s inevitable that the dollar will continue to collapse. Higher deficits, additional government bailouts, a deluge of dollars worldwide and rapidly increasing inflation are just some of the reasons why. Gold and Silver is your only protection in this environment.

It now appears certain the FED must bailout Fannie Mae and Freddie Mac. They worked hard all weekend coercing many banks to buy their short term notes on Monday morning. Where they might fall short, the FED has promised to make the difference. This is certainly a case of these companies just too big to fail.I predicted this a year ago. It was not just the mortgage crisis responsible for their insolvency, but both companies were targets of Wall Street crooks. Billions of dollars were siphoned off by rich elitists causing  US taxpayers once again to be the bagholders. As I’ve said often, many more financials/banks are also insolvent. This weekend we witnessed the takeover of IndyMac Bank, the second largest in the history of the United States. Experts predict at least 150 more banks this year could go bankrupt. The sad fact is that this is just the beginning and not the bottom as some others want you to believe. The truth is being hidden from the US public so as not to create panic as our once proud financial system is on the brink of collapse. Those who have planned all this profited from what is happening beyond our imagination.

The last straw could very well be Iran. If the US or Israel drop any bombs on Iran, global financial stability of any measure will end. The likelihood of such an event occurring appears more likely each day, probably now being carried out by Israel. OPEC’s chief has said such an event could cause oil to double within a few days. Needless to say the stock markets will plunge around the world. Once again, physical gold and silver is your only protection. As we saw earlier this year, the shortage in physical supply will reappear and if you wait too long there might not be any precious metals left to buy..

Ask yourself, what is the downside to taking a conservative approach by acquiring gold and silver right now? Both have increased every year for the last 6 years. The truth is there is no downside. On the other hand, failure to protect your assets could cause the loss of every investment dollar. Remember the rule, if it burns (such as anything made out of paper) sell it and stay away from it. Stocks, bonds, future contracts are all about to be hurt badly. I am already protected. I am writing this to help others save their assets. DO NOT PROCRASTINATE ANY LONGER!

If you don’t believe me, examine the charts that follow. They tell the whole story. Matters are only going to get worse before they get better…

 

CHART #1 shows the annual rate of return for Gold since 2001. Compare this to your other investments returns. The bull market in gold has another 12-18 years to run its course. In addition, the silver chart is just as impressive.

 

Dec 2001	$276.50
Dec 2002	$348.10	Up 25.90%
Dec 2003	$415.70	Up 19.42%
Dec 2004	$437.50	Up 5.24%
Dec 2005	$517.10	Up 18.19%
Dec 2006	$638.00	Up 23.38%
Dec.2007	$838.00	Up 31.2%
June 30, 2008	$961.00	Up 14.7%

 

 

 

 

 

These last two charts clearly illustrate the seasonality of Silver. Always, in late July and early August we see large sums move into the Silver and Gold markets. This year should be even more than normal. This means we are in for an increase in the price of these precious metals very soon. In fact, the move up has already started. I urge you to take action, as matters in the financial community are only going to get worse.

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NOW IS THE TIME TO GO ALL IN

July 3, 2008 by david.pennington.

by Michael Pennington 

The US economy is near collapse. In spite of the FED lowering interest rates for more than a year, the economy is on the edge of a historic collapse – not just a recession. The US banks are nearly all insolvent right now. They are only existing based on bail-out type loans and capital infusion by the FED, who can print as much money as they want.  It will take many years and considerable legislation to change the current predicament. There is no quick fix. The retail market is falling apart at the seams. Today, Starbucks announced the closure of over 600 stores. Retail customers are saving what they can just to put gas in their family cars. The outlook is bleak. The housing sector continues to decline and while many attempt to predict the bottom, we are not close yet. Prices on homes will likely decline another 15% this year and next. The automobile and airline industries are falling apart. The losses at GM, Ford and the major airlines continue to set records with every quarterly report. Stocks will continue to fall as the FED cannot raise rates without pushing the economy over the cliff, and it cannot lower rates anymore as inflation is already burning out of control like our forest fires. Any move in interest rates right now will hurt stocks and that is why the Dow continues to fall, and that is also why the FED is sitting on its hands. How about bonds? If the FED raises rates, like everyone is expecting them to soon, bonds will eventually fall harder and faster than stocks.

Gold and Silver is the only safe place to be invested for the near future.  Regardless of what the FED does, Gold and Silver will go up and go up fast. I believe we will see $1,175 in gold and $25 in silver before the end of this year. The correction we have been experiencing since gold dropped over $125 is over. I have said all along that even in a bull market we will some major reversals, but that does not mean the bull is over. It is just an opportunity to accumulate more metal at lower prices.

For hundreds of years, citizens have bought metals to fight inflation. Our inflation is picking up huge momentum and can only be reversed with tough economic policy that the US is unwilling to consider at the present time. Their only defense now is to jawbone their denial that inflation exists. The Middle Class of the US is in the bullseye of the political elite. Purchasing Power is eroding faster than the government’s revenue. Taxes are going through the roof and that will not change. Every large corporation in the US has either announced large price increases or will soon. The pressure on these businesses to increase prices is intense as their costs are escalating rapidly.

The US dollar keeps dropping against other currencies. While this might help our exports in the short run, it debilitates US customers in the long run. All products imported from overseas will cost more, as will overseas travel. There will be widespread decline in respect for the dollar. Just as a penny is walked over today, soon it will be $1, because like the penny it won’t be able to buy anything.

RECOMMENDATION

I suggest immediate accumulation of gold and silver in everyone’s portfolio based on the following:

30% Gold Bullion, Eagles, mapleleafs or krugerrands; 30% Silver Bullion, Eagles or mapleleafs; one bag of silver $1,000 face amount coins; 20% in a well-diversified Precious Metals Mutual Fund; 10% in high quality numismatic gold and silver coins, and the remainder in an insured money market account.

I would avoid especially all stocks, mutual funds not already mentioned; bonds, ETF’s and storing metals overseas. This is the time you want to diversify your assets out of dollar denominated investments and transfer them into hard assets, like silver and gold.

If any of you think it might be too late to begin re-location of your assets, I can assure it is not. The dollar news will get worse and the gold/silver moves will be extraordinary. DO NOT DELAY further however. If you do, you are needlessly putting in jepordy your hard earned assets.

 

 

 

 

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