Bob Chapman | February 5, 2011

The Euro zone participants who have financial problems, Greece, Ireland, Portugal, Belgium, Spain and Italy are expected to deflate via austerity and at the same time be more competitive. This is supposed to be accomplished quickly so that overhanging debt can be extinguished. This, of course, is an impossible task. You have the IMF demanding austerity and EU members demanding growth.

The problems of the southern European states are similar to those of the states and municipalities in the US. The product of years of living beyond their means, and being accommodated by banks who knew they should have never been making the loans they were making. These entities cannot print money to solve their problems and they cannot grow fast enough to service current levels of debt, never mind service additional debt necessary to spark growth. They cannot manipulate their money supplies, because they have no control over them. They have no control over interest rates as well. They either find a way to pay the debt or they default. The only other alternative is to find someone to lend to them. That usually takes place at higher interest rates, due to the risk to the lender. These conditions are truly a quandary.

Each nation and state had its own set of problems. The most obvious was and is living beyond their means. Some had uncompetitive economies and some had one interest rate fits all, a condition that tricks unsuspecting countries into borrowing more than they can afford. Some had real estate and stock market bubbles; some had slow growth in part caused by lack of increasing productivity. Some had anemic savings or an economy dependent on loans from bankers who used a fractional banking system that they in error over-expanded. That is the way it was and still is.

We ask ourselves how did so many nations do the same stupid things and why would bankers use disastrous levels of leverage and lending? We certainly cannot totally ascribe it to greed or stupidity. Bankers are not stupid people. The policies followed by these nations were promulgated by the Federal Reserve and the City of London to bring about a crisis that would lead to world government. This is what this whole orchestration is all about.

As the Treasury’s debt figure wanders above $14 trillion, the question arises again will the US dollar remain the world’s reserve currency? The Fed says they’ll spend $900 billion by April or is it June? On the other hand a little bird told us they have already spent $1.7 trillion in their quest to fund the Treasury and Agencies.

The municipal market, as we predicted three years ago, is getting killed. Yields are up by .30% in January after having seen yields fall 1.50% since last October. The bond program Build America bonds is now over and that will keep municipalities from selling more bonds. The yields will be substantially higher, so you will see very few issues hit the market.

In California, Governor Moonbeam Jerry Brown, wants to raise taxes like Illinois has, but those terrible Republicans are blocking him from doing so because any tax increases must be approved by the taxpayers. As you are aware Fed Chairman Bernanke has ruled out bailouts for state or local entities. In addition, elitist Newt Gingrich is pushing for legislation to allow states to go bankrupt. That means all or part of pensions and benefits will be wiped out. If such a bill looked like it was being passed, munis and state bonds would again collapse for fear of default or partial default.

In Europe the Chinese have made it clear that they are buying euro debt bonds. As a result yields have fallen and the euro has rallied from $1.30 to $1.38 in a short period of time. The big question is how much are they prepared to buy and will their purchases make a major difference in the sovereign obligations of the problem countries? As we reflect we can now understand why Chancellor Merkle was so vehement when she announced that Germany would defend the euro. She had to have known that the Asian cavalry was on the way.

The Federal Reserve became law in 1913 and has since that time managed to assist the dollar in losing 95% of its value via its profligate issuance of money and credit. The express purpose of the Fed’s creation was to end panics, depression, recession and business cycles. It has failed to accomplish any of those things and as a result the purchasing power of the US dollar has been destroyed.

This experience has been a far cry from stability. We wonder what the House and Senate were thinking about when they passed such legislation in as much as the Constitution says that only gold and silver can be used as legal tender for payment. That is why the dollar had gold backing until August 15, 1971. The departure was caused by growing US debt and the ability of foreign nation dollar holders to redeem their dollars gained in trade for gold. Thus, you can see the Federal Reserve note is a fiat currency, one having no value or backing other than the good word of a bevy of American and foreign bankers.

There has never been any doubt in our minds that the Fed is unconstitutional. Over the past 50 to 100 years there has been little protest regarding its unconstitutionality until the last several years. Polls now show 70% of Americans want it done away with. The natural question is why did it take so long for people to understand that a group of bankers had been issued a license to steal. The answer has to be a lack of education. It has been a long hard struggle to make people understand how the fruits of their labors were being stolen by a band of common criminals. The people still collectively do not understand that these bankers own them and their country. They accomplish this by buying 95% of our legislators via campaign contributions, lobbying and by other illicit means. They also control the corporations that provide jobs in manufacturing and services. As they set out to control financial America so many years ago they also set out to control the educational process. That is one of the reasons nothing is discussed as to the true mission of the Fed. That is to totally control America society.

The Fed in control of the monetary system has been instrumental in the accumulation of debt by the US government. It does that by buying Treasury and Agency securities. The cash deficit should be in excess of $2 trillion in fiscal 2011 ending on September 30th. One of the things that most investors do not realize is that government does not use GAAP, which US corporations use. Companies have to report cash losses and non-cash losses from the increase in liabilities on there balance sheet. That means the unfunded liabilities such as Social Security and Medicare, etc. would take the liabilities up to $105 trillion.

Unfortunately, Fed funds rates are approximately zero. In 2003 they were 1% for the same reason, which is to pump up the economy. If you couple zero rates and major creation of money and credit you have a toxic mess. That is reflected in the dotcom and real estate booms and bubbles. As a result the net worth of Americans fell 9% during that period. As we wrote previously the rally and problems in the economy and the bear market rally we are deeply involved in will eventually collapse. Just be patient. Yes, that is correct, we never escaped the underlying recession. That means it takes two salaries to replicate purchasing power people had in 1971. This fact is deliberately hidden by government by it producing bogus statistics for CPI, COLA, PPI and employment. We will spare you the details, but bogus covers it all. The government says CPI inflation is 1-1/2%, we say it’s 6-3/4%. They say U6 is 16-7/8%, we say it is 22-1/4%. We are losing about 7% a year. That is why buyers of 10-year T-notes at 3.5% is such a guaranteed loser. The bottom line is the powers believe government should be purging the system, but they won’t do that. They want the game and profits to last as long as possible so they can loot the maximum from the American people. The US doesn’t have the choices they had in 1982, as the world’s largest creditor. Today it is the largest debtor and debt is 89% of GDP. Increasing interest rates won’t help unless you are thinking in terms of 25% to 30% and looking at a real purge. That is what the system has to have, but those in power are unwilling to do that. As a result we could have years of depression.

In 1968 and again in 1980 inflation climbed and so did gold and silver and the shares. This time you will need much higher rates to stop inflation. In addition if we go to QE3 and another $2.5 trillion in spending we could have hyperinflation. It also won’t be long before 25% of tax revenues will be devoted to paying interest on debt. Interest rates are headed higher, so those numbers could change considerably over the next few years. The 10-year US T-note has moved from 2.20% to 3.64%. It is a fact that interest rates are rising in spite of massive buying of long dated paper by the Fed. Rates will move slowly higher to offset the damage caused by artificially low rates used by the Fed to keep the economy from collapsing along with the unbridled issuance of money and credit from out of thin air. Estimates are for 10% rates in 2 to 3 years. We see 10% in 2 to 3 years dependent on how much liquidity is dumped into the system. The unpleasantness has only begun.