http://aznow.biz/finance/current-economic-crisis#comment-1802

My Response:

I’m sorry, but your argument is not factually accurate nor does it hold water.

The U.S. owe over $4.6 Trillion to foreign countries. While a much larger portion of their debt is internal in the form of unfunded liabilities, so what? That’s actually even worse. Foreign creditors are the least of their worries. Do you honestly think any President would put Chinese creditors ahead of U.S. Citizens? No! So the fact that they are indebted to themselves means major cuts across the board. They continue to inflate away their debts by printing money which erodes the standard of living for all Americans. And who can bail out the U.S.? No one! They’re not Greece with the IMF in wait to issue a Eurobond and buy them more time. When they reach the breaking point, it’s game over! Lights out.

The U.S. have certainly enjoyed their status as the world reserve currency. But recently, foreign investors have significantly cut U.S. debt holdings. China and Russia lead the pack in this regard. Sure, many of the world’s largest investors still flock to the U.S. dollar as a “safe haven” in times of crisis, but for how much longer? Confidence can erode quickly. If that happens and there’s fewer buyers of Treasuries, rates will have to re-adjust upwards. The only thing keeping the U.S. economy on life support right now is artificially low interest rates. Even a rise of 2 percent would wipe out many Americans and businesses at this delicate juncture.

U.S. Congress haven’t been able to come up with any substantial budget cuts. Government continues to grow at an alarming rate. Their debt super committee ended in deadlock. If they continue spending and raising their debt ceiling, they will eventually completely collapse. They’re already spending twice what they collect in revenues each year and the gap keeps on growing.

The U.S. gold reserves have never been independently audited and no one knows for sure just how much physical gold they still actually hold. Even so, their debts are so great that even the stated value of all of their gold reserves doesn’t come anywhere close to paying it all off.

The U.S. federal government is considered the biggest landlord in the world owning or controlling billions of dollars of commercial land and properties which they’ll have to sell off to foreign countries when they really start to get desperate. This still won’t come anywhere close to significantly paying down their debts though.

The U.S. used to lead in innovation and freedom for business. Now they lead in bureaucratic red tape and crony capitalism. Bail outs for “too big” to fail institutions at the expense of the middle class. Privatized profits with socialized losses for big finance. The EPA are out of control, as are all of the state and federal laws and taxes squeezing small business and innovation at every level. Case in Point, how long does it take to get a potentially life saving drug approved through the FDA these days?

The U.S. might have been charitable, but donating borrowed money is unsustainable.
Obama just put the final nail in the coffin on the Keystone Pipeline, killing the project entirely. Canada is now partnering with China to build another pipeline to ship oil to them. This will hurt Americans dearly as they fall even more at the mercy of the middle east nations for their oil dependence while China enjoys cheaper oil.

When an unemployed individual could get a zero down mortgage for over $500,000 on an already highly speculative property, alarm bells should have been ringing.  Such a person is unlikely to even be able to service the minimum monthly payments on their own, much less repay the mortgage.

Lenders being aware of this, often approved 125% cash back mortgages(based on optimistic estimates of the homes future value).  This way the borrower could use the extra funds to service the minimum mortgage payments for a couple of years and then either “flip” the home for a profit, or just walk away in some cases without recourse.  The banks bet on property values rising indefinitely and saw little risk involved in the transactions.

Of course we know how the story ends, but at the time it appeared everyone was a winner and U.S. GDP numbers reflected this.  For instance:

• The person selling the home pockets a hefty profit
• The realtor and mortgage brokers involved make a fat commission
• Wall street underwriters buy the mortgage along with hundreds of thousands of others like it, then repackage them into tradable asset backed securities
•  The ratings agencies make their cut by stamping these securities with a AAA rating
• Wall street brokers make fat commissions selling the repackaged debt to the market
• Banks purchase these AAA securities and receive fat dividends each quarter from holding these “risk free” assets
• The home buyer gets to live in their dream home with a hefty bank account balance from the “cash back” they received
• Retailers see their sales grow as this “new” money seeps from buyers bank accounts and floods into their cash registers
• Retail jobs are created as stores hire additional staff to keep up with consumer demand
• Developers rake in windfall profits and can’t build malls and retail outlets fast enough to keep up with demand
• Stock markets soar as homeowners “invest” their new wealth seeking greater returns

Of course this is an over simplified example, but it illustrates the typical cycle we saw during the real estate boom.  This cycle continued for several years as borrowers and lenders took on ever increasing amounts of debt, all the while reporting significant increases in their wealth(on paper anyway).  But it only tells half of the story.  A silent partner working behind the scenes made all of this possible.

The Silent Partner

The Federal Reserve was created in 1913 with the enactment of the Federal Reserve Act, largely in response to address a series of financial panics.  It’s evolved into its present day role which is to conduct the nation’s monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions.*Courtesy of Wikipedia

Perhaps the least understood role of central bankers is their indirect influence on the free market economy and its economic cycles.  Based on theories developed in the early 1900‘s by John Maynard Keynes, modern day Keynesians believe that the free market can’t function efficiently on its own.

They prescribe regular doses of government intervention, administered by a small panel of “experts” looking down from an ivory tower.  With methods about as reliable as consulting tea leaves, they decide when an economy is expanding too rapidly or contracting too severely and adjust monetary policy accordingly.

Keynes was a free thinking and somewhat eccentric intellectual, with overall rather fragmented logic.  He became famous for his fresh ideas on the stale subject of economics.  Armed with an above average intellect, he often publicly humiliated those who dared challenge his ideas.  He was a force to be reckoned with, garnering the respect of the most powerful influencers of his time.  He soon became an authority on economic policy.

Arguably one of the most influential economists of our time, he pioneered the field of macroeconomics.  But while many of his ideas appeared brilliant in theory, they often proved to be quite flawed in practice.  Keynes regularly contradicted himself throughout his career, even publicly refuting his own theories at times.

Despite the flaws in his theories, many of Keynes ideas are still practiced in modern economic policy.  The idea of a panacea for all financial woes continues to prove irresistible to policy makers and politicians.

The Federal Reserve and government policies created a moral hazard in an otherwise efficient free market economy.  By lowering and holding interest rates too far and for too long, they fueled speculation in leveraged investments.  In addition, policy supporting home ownership distorted an otherwise reliable risk/reward system of checks and balances in the financial sector.  We are living through the consequences of this self imposed economic crisis.  Some say we’ve averted a depression, but I fear we’ve simply postponed it.

What we do know is that people are frustrated and fed up with a system that seemingly ignores them.  Many feel they can’t get ahead and are barely getting by.  They see the lifestyle that their parents had and they want that for themselves.

Education is prohibitively expensive and jobs are scarce. Well paying jobs seem even harder to come by.  Meanwhile, government is cutting funding to programs that benefit the middle class, while giving the rich tax breaks.

Executives of major corporations earning gargantuan compensation packages, while their companies lose money and cut jobs are adding fuel to the fire.  The gap between the rich and the poor continues to grow and the middle class are quickly becoming the new working poor.

Back in 2008, America was tired of the status quo.  Many of the frustrations that the OWS movement are expressing today were felt by those who voted for Barrack Obama back then.  The tears shed from the massive crowds that gathered in Washington for his inauguration were indicative of the sentiment that day.  People felt they’d finally been heard and that their country would be back in their control.

So far, the OWS protests are basically gatherings where people share their frustrations. It’s kind of an open mic format, where everyone is allowed their moment on the soap box.  Although not exclusively, much of the group is comprised of the twenty something Gen-Y demographic.  Well versed in using social media, they’ve leveraged technology to spread their message and rapidly expand their support base.  People hear what they’re doing and can relate to their frustrations.  They feel something must be done, but they don’t know exactly what.

It’s easy to criticize those who have and sympathize with those who have not.  The story of Robin Hood resonates with people because it embodies the basic principles of socialism.  Tax a poor man and it’s unfair.  Steal from a rich man and it’s justice.  Many from the OWS movement feel that the rich have more than enough wealth and should be willing to share some of it with other 99 percent.

America was once the greatest nation on earth. They fought for independence from a tyrannical government in England and won.  They didn’t win independence because of their superior military might(England was far more powerful militarily), but rather because they had a clearly defined reason “why” they were fighting. To England, America was just another colony. To Americans, they were fighting for their right to life, liberty and the pursuit of happiness.  They had far more to gain and also far more to lose than did England and thus won the battle.

America’s founding fathers believed in a small government and a powerful people. The constitution was written to ensure that their country never became like England and that their republic would always remain independent and for the people.  It was really quite a simple plan, but it required the grit and full faith of its citizens to succeed.

Flash forward to today and America has a massive government.  In fact, many of the highest paying jobs in the country are government jobs.  They’re less of a republic and much closer to a kleptocracy as it currently stands.  The England that America fought for independence from, was a mere pimple compared to the cancerous growth of government that’s presently spreading throughout every facet of the nation.  Government is creating layer upon layer of bureaucracy, while at the same time stripping civil liberties and freedoms away from citizens and making it more difficult for small businesses to thrive.

America has racked up Trillions in debt and continues adding to it every day.  Worse still, much of their debt is owed to communist China.  It’s estimated that by 2015, the interest payments alone paid to China will entirely fund their communist People’s Liberation Army.  America is indirectly supporting the very communism it once fought!

But it’s not just America. Canada, Switzerland, the U.K. and many other G-8 nations have become increasingly government heavy and violated citizens rights. Politicians around the globe continually promise entitlements to angry and demanding citizens without even the most rudimentary plans of how they’re going to fund them.

Citizens continually demand more from their government and they’re relinquishing their civil liberties and basic freedoms in order to get it.  This dangerous trend has made it far easier for kleptocratic leaders to emerge.  Promise the world, take away the power of the voters and profit by serving the wealthy elite.

The OWS movement are correct in that they recognize something is wrong with the current state of affairs. They’re just misguided and perhaps, somewhat unaware of the true source of their frustrations.

Blaming Wall Street and corporate greed as the source of society’s problems is the lazy approach.  It’s like blaming drug dealers and prostitutes for practicing their trade.  Sure, we feel it’s morally wrong and damaging to society at some level.  It’s easy to vilify them and sweep them under the rug.  Yet they wouldn’t exist if there wasn’t demand for their products or services from the general population in the first place.  Is the problem the dealer or the junkie?  We need to detox as a society from dependence on government entitlements and rely on ourselves and each other.

While many unscrupulous corporations and individuals have reaped windfalls at the expense of others, there are also many positives to free market capitalism.  Companies like Amazon, Apple and Google may never have materialized without the help of Wall Street investors. Average citizens wouldn’t be able to participate in the wealth generated by these corporations without modern capital marketplaces such as the NYSE and NASDAQ.

Sure, greed got out of control on Wall Street and we’re living through the fallout from that.  But main street can’t claim innocence either.  Most of those sub prime mortgages were taken on by ordinary citizens who saw dollar signs and got greedy themselves.  Is it Wall Street’s fault that people didn’t do their homework by doing their own research instead of relying on others to do it for them?  No one forced those people into taking on too much debt. In fact, the process was started by the government, not Wall Street.

When the Federal Reserve decided to keep interest rates at record lows for an extended period, banks and ordinary investors began to see opportunities in real estate.  In addition, the government decided to guarantee mortgages of otherwise unqualified individuals, so that they too could participate in home ownership.  These manipulations into the free market economy created risk imbalances and resulted in the subsequent housing bubble and bust.

If the free market were truly in control and interest rates were actually set by the lending institutions based on the full consequences of the risk falling onto their own shoulders (as it used to be throughout most of modern history), this boom and bust would never have occurred.  Bankers would have been forced to be selective to whom they lent money to, to avoid losing money themselves.  If the government offers to take on all of the risk of default of a loan, the bank has nothing to lose and everything to gain.

Obviously things spiraled out of control even further where financial institutions were trading derivatives based on derivatives using complex quantitative mathematics that seemingly proved the risks were minimal. And in theory, they were. Unfortunately, as diversified as their portfolios appeared by spreading risk miles wide and an inch deep, they overlooked the fact that they were all heavily invested in one primary sector; US real estate. So when the market imploded, everyone sank with it.  Trillions of dollars evaporated overnight and lending ground to a halt.

So here we are in 2011. Unemployment remains stubbornly high, wages are stagnant at best, home prices remain depressed while health care and education costs continue to rise.  Meanwhile, the rich are seemingly profiting while everyone else continues to suffer.  OWS are rightly frustrated, yet they need to focus that frustration toward the right people and causes.  Guess what?  It’s not Wall Street.

It’s congress stupid!  They need fight for a change in government.  They can’t continue to expect entitlements.  Instead, they should leave charity to their fellow citizens to look after and get the government out of their lives.

I close with my dream of a truly great economy.  I dream of less, not more regulation, a simplified tax code, of not having to pay personal income taxes or social security, of protecting the purchasing value of my money by going back onto a gold standard.  I dream of a ban on corporate lobbyists and an even playing field for everyone to have a chance to be heard.  I dream of getting the government out of health care and education, of an end to all illegal and undeclared wars, bringing the troops home.  Finally, I dream of a society that makes starting a small business as easy as it was for a kid to start a lemonade stand back in the day.  Presently, the government machine has become so out of control that they’re even regulating those!

And please, if you ever hear the following words, run: “I’m from the government and I’m here to help you.”

Then they came for the trade unionists,
and I didn’t speak out because I wasn’t a trade unionist.

Then they came for the Jews,
and I didn’t speak out because I wasn’t a Jew.

Then they came for me
and there was no one left to speak out for me.

Think before you join the #OccupyWallStreet or any other “Occupy” movement. 

It’s interesting to listen to “experts” from both the inflation and deflation camps explain what we need to do in order to fix the global economy.  Of particular interest (for entertainment value alone) is Nobel prize winning neo-Keynesian Paul Krugman.  He contributes regularly to his blog on the NY Times and doesn’t hold back when sharing his delusions views.

Of course he’s firmly in the deflation camp and believes that the US is stuck in a classic liquidity trap and that the recovery hasn’t gained traction because Bernanke and the Fed haven’t acted aggressively enough.  He states that if he were in charge, he’d have thrown far more stimulus at the system.  In fact, on one of his posts he goes on to say that the best thing that could happen to the economy would be to start a fictitious war against imaginary aliens.  ”Super” Krugman claims he’d  save the economy by creating American jobs building weapons and defences in preparation for a war that would of course never happen.  This “stimulus” would give the economy the much needed traction it needs and the private sector would step in as the program wound down.  He must love the positive effect hurricanes and earthquakes have on the economy!  Think of all of the construction jobs the clean up and re-building creates.

The logic is tragically flawed.  It’s typical Keynesian dogma that believes in creating productivity out of thin air.  The reality is, you just can’t.  Sure, you create jobs and in turn the dollars earned in those new jobs work their way into the local economy.  But in order to “create” jobs, the resources must first be taken away from somewhere else.  Winston Churchill summed this up rather nicely.

We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.

We must always remember that whatever the government gives, it must first take away.  If they are “creating” jobs, the money to pay those wages must come from somewhere.  It has a neutral effect at best.  In the US, it’s worse because the money is borrowed and accumulates interest.

The markets lately sure seem to reflect deflation though don’t they?  In the US, lending remains stagnant, housing prices continue to fall, the markets are falling, gold and silver have fallen significantly and interest rates are reman at all time lows.  People and corporations are hoarding cash and sitting on the side lines so the economy remains stalled.  Seems like the the deflationists are winning right?  Where’s all of the massive inflation and soaring interest rates that some predicted?

The answer lies in the solutions laid forth thus far.  Take housing for example.  The astronomical rise in home prices was instigated by the federal reserve lowering interest rates and holding them at record lows for far too long.  As people realized they could borrow money cheaply, many used the leverage offered to them to speculate in real estate.  As this “new” money entered the system, it created inflation in the housing sector.  In order to work off the effects of this bubble, the free market needs adjust prices back to affordable levels for regular Americans.  The government has repeatedly tried unsuccessfully to revive this bubble to spur economic growth.  Homebuyer tax credits and record low interest rates aren’t enough to encourage Americans to buy.  They’ve been burned too badly, plus many don’t have the credit worthiness to allow them to borrow or refinance.

Gold has risen significantly over the last year.  In fact, it has risen every year over the last decade.  But to say it has risen is actually misguided.  In reality, gold IS money.  Its value remains constant.  No government can set its price.  All they can do is manipulate their fiat currency.  So if it used to cost $400 US dollars to buy an ounce of gold and it now takes $1,600, the dollar has in fact lost $1,200 in purchasing power.  Sure, other prices haven’t risen that much in the local economy, yet.  That’s because prices and wages tend to be sticky and take a while to adjust to the true effects of inflation.  But once inflation really takes off, prices will rise significantly.

The official reported inflation numbers are very misleading.  For starters, they exclude food and energy.  They also use formulas based on hedonic regression to offset the true rise in the price of goods.  For example, they would state that if a business has a recent computer that’s 5 times more powerful than one bought 3 years ago, then those using that computer are by proxy, 5 times more productive.  Ridiculous I know, but it’s what they do.  For a more accurate measure of inflation statistics, Shadow Stats offer figures based on non manipulated numbers.

So is the theory of a liquidity trap really something we need to worry about?  After all, deflation seems to be a major worry as people won’t spend money if they think they can get the same goods and services for less at a later date, right?  Reality tells us a resounding NO!  Do people hold off on buying the latest TV, iPhone, or computer because they know it’ll cost way less for the same item later?  Do people put off filling their tank with gas or eating if they suspect prices will drop in the future?  You know the answer.  And what’s wrong with people saving money anyway?  After all, we don’t have a demand problem at all.  The market always has enough demand for viable resources and services.  I’m sure demand fell for horses and carriages when Henry Ford invented the Model T.  But that’s what progress does.  Society moves on.  If they implemented modern economic policy back in Ford’s day, they might have bailed out the horse breeders to “stimulate” growth in that sector.

Reality is much simpler than fiction.  It’s also true that common sense isn’t so common.  We all seem to suffer from a major case of analysis paralysis.  What we should do is shrink the size of government and get them out of the economy.  We need real progress and real job creation, not life support for obsolete professions.  We need infrastructure, modern transportation methods and cleaner energy.  But not if we have to foot our grand children with the bill.  I’m sure I’d be much more efficient if I had a private jet instead of a car to get around.  But you know what?  I can’t afford a jet, so I make do with what I have.  Citizens, governments and businesses around the world need to learn this lesson.  It’s not those with the most resources that win.  It’s those who are most resourceful and resilient that thrive.

Finally, I’d like to end by to putting a final nail in the coffin on the tired theory of deflation.   Falling prices are not the real threat at all.  Governments all use fiat currency nowadays and have access to a printing press.  They can print as much money as they like.  They can create as much inflation as they would like.  In fact, all central banks CAN do effectively is create inflation.  So no threat of deflation could ever not be countered by the far more powerful inflation creating tools they already hold.

I anticipate the G20 nations to continue to stimulate and prop up defunct industries and countries.  But in the end, the free market is far more powerful and will ultimately rule.  Simply buying time and in turn, making the problems worse by nationalizing debts is far from a solution.  The bubble we’re experiencing right now is the government.  It too will pop and it’ll be ugly.  Socialism is already dead.  It has never and will never work over the long run.  The world is learning this right now. You can’t spend more than you take in long term .  It just doesn’t work.  The sooner we embrace this, the sooner the real economy can recover.  God speed!

Article By Charles Payne, CEO & Principal Analyst

These days there seems to be a new shocking poll out every day, but there was news this morning from Gallup that speaks volumes about why the economy isn’t moving. When asked the best long-term investments the reply was overwhelmingly…gold! This is incredibly interesting stuff, but says Americans have lost faith in this country and in the powers that have the ability to keep it great. Interestingly, Ben Bernanke took a poke at Washington today, but it’s the fact the Fed and the Administration are so fixated on short-term bounces in the economy that the longer term potential is dimming. Rising debts and a weaker dollar are the one-two punch that ultimately hurts bonds, savings, and eventually stocks. People seem to understand this more than the experts. There is an element of our future wrapped around an inner belief things are going to get better. It’s a self-fulfilling destiny that makes success possible in part because we know it’s going to happen. These days there are too many unknowns to be confident, and what we do know doesn’t suggest greatness. We know the government has grown in size and intrusiveness. We know this Administration wants to greet hard-earned success with harsh rhetoric and higher taxes. We know this Administration is trying to create a medical system that will dilute care and send costs soaring. We do know the Fed has no qualms printing money and probably will continue to do so. Things have changed dramatically in the past ten years. There was a time when Americans invested in war bonds. There was a time you knew owning a piece of land in this country was the bedrock of future wealth. From what I understand, this is the first time Gallup has included gold as an option in this survey. There is no doubt years ago it would have had a negligible impact as witnessed in the organization’s 2003 survey on the best long-term investments.

I hear from people who already own gold wondering if they should sell.  Many people think it’s too late to buy or worry that there’s too much downside risk at this point. Aren’t we close to the top now?  I say we’re not even close.

Sure, we’ve had a decade long bull market in gold and on the surface it appears to be a bubble ready to pop.  Yet bull market bubbles typically end at the height of extreme speculation, characterized by three to five days of a decline in price with higher volume than the preceding session, occurring within a relatively short period of time.  This is followed by a mass entrance by retail investors, who as always are late to the party and soon get wiped out. Think dot com mania.  So far, we have seen neither of these events.

While gold is trading significantly over its 150-day moving average, the fundamentals contributing to gold’s rise remain unchanged. With the latest speech from Bernanke today, I have even more confidence that it will continue to rise.

But it’s not just my opinion.  South Korea’s central bank recently purchased gold for the first time since the Asian financial crisis in 1997.  The gold portion of South Korea’s official foreign reserves surged to $1.32 billion at the end of July, up from just $80 million at the end of June.

I expect prices to continue to climb so long as central bankers around the world are underinvested gold and are still looking to increase their holdings:

• Mexico recently upped  its gold reserves by almost 100 tons, up from just 6 tons holdings prior!
• Russia purchased 26 tons during the second quarter, taking its total gold holdings to around 837 tons, equivalent to almost 8% of the country’s reserve assets.
• Thailand’s gold reserves rose by 15.5% in the two months and rose to about 4.07 million ounces in June, from about 3.523 million ounces in May.

So if central banks around the world are topping up their gold reserves and have quadrupled their total purchases from the market in the last quarter alone, should we feel safe holding gold as well?

Central banks were net sellers of gold for nearly two decades up until 2009 when the became net buyers of gold.

Venezuelan President Hugo Chavez said that he plans to nationalize the gold sector, including extraction and processing and use the production to boost the country’s international reserves:

“I have here the laws allowing the state to exploit gold and all related activities. That is to say, we’re going to nationalize the gold and we’re going to convert it, among other things, into international reserves because gold continues to increase in value” – Hugo Chavez

He’s also ordered the repatriation of 90 percent of Venezuela’s gold reserves held abroad, returning the country’s gold reserves back to Caracas:

“We’ve managed to increase the international reserves. We have close to 12 or 13 billion of dollars in gold reserves. We can’t allow it to continue to be taken away” – Hugo Chavez

With the current policies of central banks around the world, the fundamentals for gold price appreciation (which is really fiat currency depreciation) remain sound.  Unless we see some major shifts in global economic policies, we’re still far away from a ceiling in the price of gold.

Apple has had its ups and downs over the years, but really thrived under Jobs leadership and vision.  I doubt they’ll have the same “magical” effect on audiences without Jobs taking the podium though.  An army with the best soldiers in the world is only as effective as the leadership of their general after all.  While Tim Cook is a great operations guy from what I’ve read, I doubt he has the vision and sales ability of Jobs.

Steve Jobs is the Henry Ford of my generation.  A bold visionary with an astounding ability to both captivate and motivate people.  It will likely be another generation or longer before we see someone else come along with the stature and creative genius he possesses.