Bob Chapman | March 25, 2009

Treasury Secretary Timothy Geithner tells us we are in a recession that will last for some time. Ben Bernanke, Federal Reserve Chairman says the economy would bottom this year. We do not think Ben is right but even if he was right he didn’t tell us how long we would bump along the bottom. If the bottom is in sight and Citigroup, GE, Hartford Insurance Lincoln Insurance, AIG, GM and Chrysler, etc. won’t need any more government funding. In fact banks are telling us they are going to make money in the first quarter. If all this is so, why is Mr. Bernanke monetizing $300 billion of Treasuries. We notice he has made no statement regarding the secret monetization that has been going on for four months. Needless to say, that is another state secret. He might also explain why there was enormous call buying in bond futures options over the three days prior to the announcement on Wednesday. Obviously there was a major leak to the anointed on Wall Street.

While Ben Bernanke buys $300 billion in Treasuries he is contemplating another $300 billion. In fact there is an excellent chance that the $300 billion, or at least a large part of it, has already been spent. Between you and we, and the fence post, Ben will need at least $5 trillion for monetization. What is being done is to cover debt and save the financial system, not to revise the economy. At the same time, as you have gotten a taste of this week, the dollar was hit very hard. Also on the agenda is hyperinflation. We predicted this in 9/04 and here it is.

These policies will continue to extend the time line for a collapse. Even Alan Greenspan says $1 trillion is not enough to remedy the financial system and economic ills. Here we are on the threshold of going Weimar, as free trade and globalization, collapses perpetual currency devaluations take place and virulent inflation stalks the world, a hyperinflation that will destroy all but the very rich, who will in the end beg for their lives.

Mr. Bernanke knows all about Weimar, Argentina and other Latin experiments that were disasters. All similar to what we see in America today. Trying to overcome deflation with inflation is like shoveling sand against the tide. More and more holders of US Treasuries and new buyers are walking away just like they are walking away from Fannie Mae and Freddie Mac bonds.

The idiot builders are at it again. Lots of condos will hit the market this year, as Fannie Mae has added new restrictions. They won’t guarantee condo buildings where less than 70% have been sold, up from 51%. They won’t back loans for sales where 15% of current delinquencies on association fees or where more than 10% of units are owned by single-entity.

Bill Gross, Chief Investment Officer at PIMCO says the Fed’s purchase of Treasuries and toxic mortgage garbage will probably exceed $6 trillion.

As we have said before the so-called solutions are being performed by the same criminals who caused all these problems in the first place. All we see is compounding problems. It is incredible that the central bank has not been held accountable. Washington’s fiscal policy and the policies of the privately owned Fed are completely out of control. The only real objective of Treasury and the Fed is to save the cabal that really controls our existence and that is Wall Street, banking and insurance.

Our money Masters tell us there is little inflation and they supply us with bogus statistics to prove it. They tell us the trillions in guaranteed government debt will not cause inflation, which currently is 9% to 10%, and is headed toward Weimar proportions. In three months it will be two years since the beginning of the collapse. They talk about a short problem when it is already long term and it could last a score of years. None of the problems we have cited in the past have been adequately dealt with. It is all patch work and Rube Goldberg solutions. There is no longer a standard. The dollar is about to collapse and a basket of fiat currencies won’t do any better. Low interest rates compound the problem. Who wants to save? Inflation is 10% and interest is 2% or 3%. The whole marketplace is distorted by zero interest rates. This is all Ponzi finance and it can come to no good end.

Manufacturing is and has been in decline for sometime now and it is going to deteriorate further. Worldwide reductions are 30% to 50%. The depth and speed of the plunge have been breathtaking and as we said on February 2, 2009, depression has begun.

In Europe, where manufacturing accounts for 20% of GDP industrial production is down 12% yoy. Brazil has fallen 15% and Taiwan 43%. In China exports have fallen and 30 million workers have been laid off. This is the biggest, fastest decline since the great depression.

From 9/16/29 until WWII, everything except gold and gold shares fell in value. At that time credit was tightened as consumer fears reduced demand for manufactured goods. As a result unemployment will continue to rise worldwide.

Exports cannot be used to escape the problems created by the Fed, Wall Street and banking. Germany is off 20% yoy, Japan 40% and in the US 23.6%. The second Great Depression is in progress. This could last ten years or longer.

Manufacturing in the US is 14% of GDP, 18% worldwide and 33% in China. Manufacturing makes up 2/3’s of exports for the US. What we are seeing is a race to the bottom. In India, handicraft exports have fallen, which accounts for 16% of GDP, some 55% yoy. Textile manufacturers have cut 500,000 jobs. More cuts are coming for future years and with them revolutions in many countries.

Which would you rather have, a 2-year Treasury bill that pays 0.87% interest in a country with 10% inflation or gold coins, bullion or shares? The answer is pretty easy – the gold related investments, which have been in a bull market since 2000. Inflation adds to gold’s allure, but we are already seeing a flight to quality, as well as uncoupling from the dollar, other currencies and world stock markets. We find it ludicrous that our government and Wall Street would have us believe that US Treasuries are as good as gold. Even Queen Hillary tells us Treasuries are a safe bet. What else would you expect from a member of the Illuminati? The result is a massive inflationary undertow building that is going to knock Americans right off their feet. The dollar is headed back down and even though now decoupled from gold, its fall will tend to have a salutary effect on gold. Having mega-inflation will give gold a big assist as well.

We predicted the recent announcement that the Fed was monetizing Treasury debt. Not only had they been buying Treasury debt for four months secretly, but as we pointed out over the years they were secretly buying Treasuries via offshore location, something over $100 billion worth in just late 2008. We can imagine what first quarter purchases looked like. Of course, you have no need to know what they are up too. It is another state secret. While this has been happening most other bonds, especially GSE, and toxic mortgage bonds find it hard to catch a bid and that is why hundreds of billions of dollars will be used by the Fed to buy them off the banks Wall Street and insurance companies, so American taxpayers can absorb their outrageous losses. In addition, we saw a vast dollar outflow and January almost $150 billion. We will soon find out if it was replicated in February. China has been bailing out of Agencies and buying short term Treasuries, which is not reassuring. Sooner or later some of those funds will find their way into gold.

It looks like the dollar has finally begun its decent versus other major currencies. This puts the US Treasury and the Federal Reserve under additional pressure. The US and world economy has been knocked for a loop and the worst is ahead of us. All the manipulation they can muster will have little affect on where economies are headed. The Fed has had to admit they have to do the unthinkable and monetize debt. Before this is over the Fed will monetize more than $5 trillion as we follow-in the footsteps of Zimbabwe, where now only gold is accepted in payment. We are entering un-chartered waters and there is a big hole in the bottom of the boat.

The first $1 trillion of Treasury purchases are underway and who knows how much has already secretly been placed in Washington and in hidden accounts in the Cayman Islands. The only weapon the Fed has left is inflation, if you can really call that a weapon. Falling asset prices have to be over come, along with a fall in consumer demand, foreclosures and rapidly rising unemployment. Those policies will expedite a flight from the US dollar and Treasuries. All buyers of dollar denominated assets know where this is headed and that is towards a depreciation of the dollar. That means losses in the dollars they hold – big losses. The question is who will break first and be a seller?

As you know misery loves company and that is why the Bank of England is headed toward zero interest rates and as well is buying British long-term bonds. Their economy is sinking faster than that of the US. M4 money and credit is up 18.8%.

Last week the Bank of Japan joined the party announcing quantum easing whatever that is. All three want zero long-term bond rates, which means very little savings will be accumulated and the economy will continue to suffer a lack of capital, that doesn’t come from a printing press. Incidentally, there are no free capital markets left, TARP is not working and the Treasury is looked at with disbelieved.

The misnomer, known as quantum easing is not working and can only be thought of in terms of desperation, because the TARP and the bailouts are not working.

The government and the Fed cannot make house and commercial real estate prices go back up to capture all that lost equity. The only way half of Americans can even make lower house payments is stop the payments, and give them the house, which we predicted five years ago would happen eventually. Even at 4%, 30-year fixed rate loans, the payments mean nothing if you have lost your job. Many people cannot even pay the interest on their debt.

The Geithner Treasury plan is a recycling of the Bush plan called trash for cash. That is the program that was just abandoned six months ago, because it didn’t work. Now we have another team of experts that are equally out of touch with things financial and economic. Obama’s judgment is few really get it and that is we have a dysfunctional financial system.

Both the Bush and Obama administrations want the easy way out and there is none.

Geithner is about to push the lie that bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. They think their true value is so high that if they were properly priced, banks and Wall Street wouldn’t be in trouble. Someone should tell these crooks that because you say it is so, doesn‘t make it so.

Subsidized purchases of bad assets with taxpayer funds to drive prices of toxic assets up stinks. Geithner’s plan will fail and Congress won’t supply any more subsidies.

In the Treasury’s new 3-part program to cleanse the US financial system of toxic assets that are clogging bank’s balance sheets won’t work.

An entity will be set up that the FDIC will use to offer low-interest rate loans to private interests for buying up bank’s soured assets, many of which are tied to mortgages that have fallen in value.

Treasury will hire outside investment managers to run public-private partnerships that could invest for potential profit for troubled mortgages, with government capital matching private capital contributions.

TALF, Team Asset-Backed Securities Loan Facility, will buy so-called legacy assets, which we assume is purchases from New York’s money center banks.

The program is a rehash of the Paulson program of six months ago that proved to be a failure. Even Paul Krugman and James Galbraith have trashed the plan.

The Plan is a sweetheart deal for toxic mortgage buyers. Government will supply 95% of the funds from the taxpayers. These buyers will be supplied non-recourse loans, loans secured only by the value of the mortgage assets being bought, worth up to 85% of the portfolio. Investors will supply as little as 20% of the money. In the final analysis government would fund 97% and private investors 3%. The program is to enrich the rich on Wall Street and allow the public to pay for it. The program is a fraud and it will end up a zombie. After this the cries will be so loud that there will be no further giveaways.

Don’t be fooled by the existing home sales numbers: 45% of the sales were foreclosures and short sales, or banks dumping properties and speculators buying. The big inventories signal much lower prices down the road from massive over supply.

GM and Chrysler that didn’t need any more money last week will need more than the $21.6 billion in aid they requested. Where is the SEC?

Mr. Bernanke says it will take a lot more taxpayer money to fix things just as political sentiment has shifted away from spending more money. The chances of the Congress approving additional money right now for TARP is about nil. Without trillions more we could end up with a 15-year depression. Whether the experts and the public know it or not the political system is in the process of being paralyzed. No more Washington bailouts; bankers and Wall Street screaming at Congress and the public screaming at Congress to stop giving money away. Our conclusion is the system will fall further into depression and inflation will rage simultaneously. The result will be higher gold and silver prices and a fall in Treasury prices and the dollar.

Keep in mind that the Fed can only monetize so much debt before we are Weimarized. They cannot continue to buy fresh Treasury debt and buy existing debt from foreigners who are offloading. The Fed will certainly be overwhelmed. Debt levels are so high and so out of whack that we are really beyond re-flating and retaining a stable currency at the same time. Dollar holders already see this and that is why the dollar has broken down from its recent highs – treasuries are next. It is now only a matter of time before real interest rates rise strangling commerce and the government. That will send banks reeling again as they have to foreclose on commercial real estate that is plunging in value. Insolvency will reign.



