Monday, June 29, 2009

Tales From A Republic Gone (Once Again) Bananas

In any political crisis the first victim is truth. There are few exceptions. The case of my native country of Honduras is not one them. To briefly summarize what has happened, the President of Honduras, Mel Zelaya, was removed in a coup and forced to leave the country to Costa Rica. Subsequently, the Congress voted to officially oust Mr. Zelaya and affirmed the new presidency to Roberto Micheletti, formerly President of the Congress.

Here are the facts. First, Mel Zelaya wanted to amend the Constitution to abolish the one-term limits of Presidents. To that end, Mr. Zelaya called a referendum, which was to have taken place on Sunday (6/28). The Supreme Court had determined that such referendum was unconstitutional and therefore illegal. In Honduras the National Army hold the responsibility to distribute all ballots in elections. The head of the Army, Romeo Vasquez refused to follow orders. Consequently, Mr. Zelaya ordered the removal of Mr. Vasquez and place one of his allies in charge. As a result, the ballots were ultimately distributed.

Second, irrespective of what anyone calls it, the presidency of Mel Zelaya experienced a coup d’├ętat. This action was unconstitutional and therefore illegal. Zelaya’s opposition (in the Congress) could have begun a process of impeaching the President, but they refused to follow an orderly process. Instead, the powers-that-be resorted to illegitimate activities to depose Mr. Zelaya.

In between these facts, there are suppositions, presuppositions, surmise, guesswork, and speculation. None of which is credible at the moment. Everyone has the right to personal opinions, but they are just that, opinions. I don’t agree with Mel Zelaya. In fact, if he is reinstated as President and wins reelection, it would be disastrous for my native country. He wants to follow the footsteps of Hugo Chavez and Daniel Ortega, among other like-minded socialist proponents. Socialism causes poverty. I know this is not in vogue these days, but it is the truth. If socialism would work, the USSR would be in existence and have eminence today. This is not the case. Moreover, China’s economic growth, which has been spectacular over the last several decades, is largely the result of market reforms (i.e. abandoning socialist economic policies going back to the silly adventure call “The Great Leap Forward”) started under Deng Xiaoping in 1979.

Having said that, what is irrefutable in Honduras today is that the now-deposed President Zelaya broke the law. The administration that has replaced Mr. Zelaya equally broke the law. Both sides erred. As I just shared, I have a strong opinion against Mr. Zelaya; however, my opinion and feelings are not worth much outside the framework of constitutional law. Such framework tells me both Mr. Zelaya and current President Roberto Micheletti violated the law. Therefore their administrations, after appropriate impeachment proceeding, must be removed.

Against this backdrop, what we need to ask is the following: why did the Congress not follow constitutional process of impeaching Mr. Zelaya? My opinion is that such process would have shown how the majority of present and former politicians are thieves, liars, and usurpers of the very Constitutions they have claimed to protect. This is why I believe it never happened in the first place.

As unfortunate as the consequences are in my native country, none is unexpected for those of us who value the rule of law, liberty, and free markets—something which has never taken root not only in Honduras but in Latin America in general.

Saturday, June 27, 2009

Daredevil balancing act for the world economy

By John Authers
Published: June 27 2009 (Financial Times)

Remember the Goldilocks economy? Right up until the credit crisis, Goldilocks lent her name to a theory that the economy was "not too hot, not too cold", permitting stable growth.

Goldilocks was devoured by a large group of bears when the crisis began.

Who will give their name to the current economy? Starting in March, stocks across the world enjoyed a great rally but for more than a month now they have been moving horizontally. Almost every indicator of panic or of financial distress is now back to the levels that adhered immediately before the Lehman Brothers collapse last September took the crisis to a new and terrifying intensity.

Nobody in their right mind would claim that we are in a friendly "not too hot, not too cold" environment. So let us instead call this the Blondin economy, after Charles Blondin, the French acrobat who is most famous for his feat of walking across Niagara Falls on a tightrope.

As with Blondin, the drop is vertiginous; various different whirlpools and rocks lie beneath and yet for now the economy's move along the rope seems assured. Just as Blondin needed deliberately to make things more difficult for himself by carrying a man across on his shoulders, pushing a wheelbarrow or frying an egg in the middle of the rope, so the market is beginning to perform some stunts, raising new hazards and dealing with them.

The most frightening whirlpool is in the banking system. It almost collapsed last autumn. Although much criticised, the US administration's "stress tests" seem to have calmed nerves about this for now.

There is no way that the financial system can be allowed to stay in its current shape or under its current regulatory regime. Power is even more concentrated in a few institutions than it used to be. The flaws in regulation are now painfully obvious. Fixing these problems will be difficult and will carry risks but that problem is in the future. Blondin is still walking above it.

Deflation, or lowering prices as activity stagnates, a phenomenon that marked the Great Depression, is another big danger. The enduring problems for the financial system mean that it cannot be ruled out.

But the Blondin market is behaving as though the threat has passed, with bond markets now implying that inflation expectations are back where they were before the crisis. This week's report from the US Federal Reserve suggested that deflation was no longer a significant risk, while a new forecast from the Organisation for Economic Co-operation and Development also suggested that the risk of deflation had been averted.

As for growth, the OECD suggests that the developed world will return to very anaemic growth by the end of next year, while emerging markets, led by China, will be resurgent. Again, this is exactly what the market also implies.

Recovery in the developed world will not stop unemployment from rising even more, the forecast says, so there is a real risk that growth will not materialise at all.

Ahead lies the danger of inflation, a logical fear when government policy is designed to create it. Only weeks ago, investors sold government bonds aggressively, pushing up their yields, in a move that guards typically against inflation. Again, that fear has subsided in the past few weeks. Blondin stays upright.

If none of this sounds like the basis for optimism, that comes from evidence about company inventories. Having been cut back during the worst months of the crisis, they are now insufficient to meet demand. That implies that there could be a surge of output (good for the economy while it lasts), and that companies will have greater pricing power. That should be good for their profits, and so the "earnings season" of profit announcements for the second quarter might provide the next opportunity to blow Blondin off the rope or to speed him on his way.

In this environment, the most obvious discrepancies in valuation between asset classes have been erased. Credit was blatantly dear compared with stocks leading into the crisis two years ago, and blatantly cheap by the turn of this year; neither is true now.

While Treasury bonds were blatantly expensive at the turn of this year, when 10-year bonds only yielded 2 per cent, the yields on offer in the past few weeks, oscillating between 3.5 and 4 per cent, cannot be dismissed easily as too cheap or too expensive.

These asset classes are walking the tightrope. This is less true of the assets in which most hopes are invested, those that stand to benefit most from a "China-centric recovery". Industrial commodities and energy, and the stocks and currencies tied to them, have surged to a point where they would look very overvalued if any problems with the Chinese story came to light.

But for now, the market and the economy are walking the tightrope. They could yet continue to do so. After all, Charles Blondin lived to see his 70th birthday and died in his bed

Thursday, June 18, 2009

Paul Krugman: "We Need a Housing Bubble"

Paul Krugman, 2008 recipient of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (commonly referred to as the Nobel Prize in Economics), should be a public disgrace for not recognizing how wrong he has been. He claims that he foresaw the implosion of the housing bubble. Now I have learned that in fact he did. How? By advising Mr. Allen Greenspan, former Chairman of the FED, to inflate house prices.

On Friday, August 2, 2002, Mr. Krugman said the following:
"The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."[my emphasis]

There you have it in black and white, directly from the horse's mouth. Mr. Krugman is a genius. I tip my hat off to him. Bravo. No one in the Nobel Prize committee noticed this monumental gaffe (or perhaps bothered to check this), and yet he was still awarded the recognition. Anyone with any sense of self-respect would acknowledge their error. Being humble is not a sign of weakness but of strength. By failing to admit his error in judgement, he demonstrates the lack of the former. In the Bible, Jesus tells us that "there is nothing hidden that will not be revealed, and there is nothing secret that will not become known and come to light." I doubt Mr. Krugman believes this truth.

JP Morgan, Goldman Sachs, Morgan Stanley: Rotten Apples in Their Balance Sheets

The following represents the composition of trading assets for three major banks that were allowed to pay off their TARP assistance. Judge for yourself, but these numbers are of concern considering that the U.S. economy will continue to deteriorate. Before proceeding further, let me define two of the three major categories in determining the value of assets held in trading accounts. Subsequently I will present the amounts and ratios for JP Morgan, Goldman Sachs, and Morgan Stanley. Please note that the source of the figures is the banks' respective annual report (in the case of Goldman Sachs) or 1Q09 10-K reports (in the case of JP Morgan & Morgan Stanley).

Level 2—Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

JP Morgan (as-of 3/31/09)
Total Assets = $2.079 trillion
Total Assets carried at fair value = $833 billion
Level 3 Assets = $145 billion
Level 3 Assets/Total Assets = 7%
Level 3 Assets/ Total assets carried at fair value = 17%

Level 2 Assets vulnerable to be Level 3
Corporate debt securities = $46 billion
Leverage Loans = $13 billionConsumer + Commercial RE + ABS = $3 billion
Derivatives (minus netting & collateral) = $2.4 trillion (- $2.3 trillion) = net $2 billion

Goldman Sachs (as of 11/2008)
Total Assets = 884 billion
Total Assets carried at fair value = $595 billion
Level 3 Assets = $66 billion
Level 3 Assets/Total Assets = 7.5%
Level 3 Assets/ Total assets carried at fair value = 11%

Level 2 Assets vulnerable to be Level 3
MBS & Other ABS = $6.8 billion
Bank loans/bridge loans = 9.8 billion
Corporate debt securities = $20 billion
Equity & Convertible debentures = 15.9 billion
Derivatives (minus netting & collateral) = $256 billion (- $141 billion) = net $115 billion

Morgan Stanley (as-of 3/31/09)
Total Assets = $676 billion
Total Assets carried at fair value = $258 billion
Level 3 assets = $67.2 billion
Level 3 Assets/Total Assets = 10%
Level 3 Assets/ Total assets carried at fair value = 25%

Level 2 Assets vulnerable to be Level 3
Corporate & other debt = $51 billion
Corporate equity = $3.3 billion
Derivatives (minus netting & collateral) = $147 billion (- $97 billion) = net $50 billion

Tuesday, June 16, 2009

Investors cool on US bonds and equities

By Sarah O’Connor in Washington
Published: June 16 2009 00:52 (Financial Times)

Foreign governments and private investors dramatically reduced their purchases of US assets such as Treasuries in April, choosing instead to make riskier investments elsewhere.

Investors rushed to buy US government debt this year as the global economy teetered and they sought a safe place to park their money. That drove down Treasury yields which in turn reduced the interest rate on mortgages and helped stabilise the country’s collapsing housing market.

But as conditions have started to improve, the appetite for risk has risen, spurring governments and other investors to move their money into higher-yielding assets outside the US.

This was particularly the case for short-term securities such as Treasury bills, which mature in less than a year. Foreign holdings of Treasury bills fell $44.5bn in April according to data released on Monday by the US Treasury; they rose by almost $50bn in the previous month.

“With the global economy pulling back from the perceived precipice in early 2009, relative risk perceptions changed dramatically in favour of equities, particularly emerging market equities, and [this] report for the most part reflects these rapid changes in investor preferences,” said Brian Bethune, chief financial economist at IHS Global Insight.

Net overseas purchases of long-term US securities such as long-dated Treasuries and equities dropped from $56.4bn in March to $34.3bn in April. Of that, foreign governments reduced their purchases from a net $26.4bn in March to $16bn in April.

China, the largest holder of Treasuries, decreased its stockpile of US government bonds by more than $4bn to $763.5bn, while Japan and Russia also reduced their holdings slightly.

The move away from US Treasuries has reversed the virtuous circle that developed this year. Waning demand has forced yields higher and pushed up mortgage rates, which could snuff out the flickers of improvement in the housing market. This is in spite of the Federal Reserve’s efforts to keep rates low by buying up Treasuries.

US investors have been sending their money abroad, too. US residents bought a net $23bn in long-term foreign securities in April, up from just $1bn the previous month.

Alan Ruskin, economist at RBS Greenwich Capital, said the data helped explain why the US dollar had slid in value as the global economy’s prospects brightened. “By now, the likely stock adjustment out of Treasury bills into riskier assets is probably reasonably well advanced, but even then it is still likely to act as a significant US dollar headwind,” he said.

Friday, June 12, 2009

Banks: the new healthy

This tidbit is courtesy of the Financial Times to remind anyone who believes the banking industry is improving. Although the article doesn't tell you which bank it's referring to, it is JP Morgan.

US banks

Published: June 10 2009 14:54 Last updated: June 10 2009 18:56

As an investor, would you touch the following bank with a cattle prod?

Its total assets dwarf common equity by 25 times to one – higher than the average for US banks over the past decade. Think of this another way: just a 4 per cent hit to the balance sheet and wave goodbye to shareholders' equity. Even comparing tier one capital with risk-weighted assets reveals that its gearing is 14 times.

What about those assets then? Barely at the start of a household deleveraging process that will last for years, two-thirds of its outstanding loans are to consumers, with mortgages accounting for quarter and credit cards for 10 per cent. Yet its non-performing loan ratio of 12 per cent for mortgages in the first quarter, for example, was the highest of all the banks that are covered by Barclays Capital. That ratio increased by almost 250 basis points versus the previous quarter, and there are few signs that house prices have stopped falling yet.

Then there are its off-balance sheet investment vehicles. This bank still has a $93bn exposure – eclipsing common equity – a third of which relates to conduits that purchase securities funded by commercial paper. True, outside investors are technically first in line to take any hit. But if things get really bad, banks usually have to step up. What is more, it has so-called “level three” assets equivalent to 126 per cent of tangible common equity. These are assets which cannot be valued using observable inputs such as market prices – you just have to trust the bank's internal calculations.

Finally, like all banks, its past earnings power will be diminished due to lower economic growth and rising regulation. Unlike others, however, it is now free from the troubled asset relief programme. It is also considered by far the healthiest of the big US banks

President Obama Middle East Speech: My Critique

Although it may be difficult to believe today, there was a time where America’s perception in the Middle East was favorable. In the years before WWII, America was viewed in a positive light. It was not until overt meddling in foreign affairs, particularly in those directly impacting Muslim countries, did perception turned negative in that region of the world. This observation is merely an effect of a deeper cause, primarily the fact that America has strayed far from its original intention as framed by the Constitution. Our founding fathers left us a “Republic if we can keep it.” We have almost lost it completely. There are still some vestiges of America’s former self.

Against this background, President Obama’s oratory is misleading and in some instances outright false and revisionist. He is a lawyer by training. He knows the script rather well. In addition, he is basking in the favorable environment, given how terrible his predecessor was. Certainly starting from a low base, any improvement, while solely rhetorical, seems like a large relative improvement. But this is merely an appearance for President Obama.

Therefore, I present you a critique of President Obama’s speech to “see” through the mist. I recall a scene from a Bruce Lee movie. In it the actor recalls his master’s word while fighting: your enemy has an image, destroy that image and you will discover his true motive. Images abound in President Obama’s rhetoric. It should. This is the way crowds are controlled. If you don’t believe me, read Gustave Le Bon’s The Crowd: A Study of the Popular Mind.

I include the original speech. The bold sections represent my critique and views of either the paragraph immediately preceding it or of the speech up to that particular moment.


I am honored to be in the timeless city of Cairo, and to be hosted by two remarkable institutions. For over a thousand years, Al-Azhar has stood as a beacon of Islamic learning, and for over a century, Cairo University has been a source of Egypt's advancement. Together, you represent the harmony between tradition and progress. I am grateful for your hospitality, and the hospitality of the people of Egypt. I am also proud to carry with me the goodwill of the American people, and a greeting of peace from Muslim communities in my country: assalaamu alaykum.

We meet at a time of tension between the United States and Muslims around the world - tension rooted in historical forces that go beyond any current policy debate. The relationship between Islam and the West includes centuries of co-existence and cooperation, but also conflict and religious wars. More recently, tension has been fed by colonialism that denied rights and opportunities to many Muslims, and a Cold War in which Muslim-majority countries were too often treated as proxies without regard to their own aspirations. Moreover, the sweeping change brought by modernity and globalization led many Muslims to view the West as hostile to the traditions of Islam.

Violent extremists have exploited these tensions in a small but potent minority of Muslims. The attacks of September 11th, 2001 and the continued efforts of these extremists to engage in violence against civilians has led some in my country to view Islam as inevitably hostile not only to America and Western countries, but also to human rights. This has bred more fear and mistrust.

So long as our relationship is defined by our differences, we will empower those who sow hatred rather than peace, and who promote conflict rather than the cooperation that can help all of our people achieve justice and prosperity. This cycle of suspicion and discord must end.

President Obama recognizes that justice and prosperity rest on peaceful, voluntary exchange. This is a fundamental premise in all economic exchanges that lead to increases in wellbeing in a society and among nations. When this does not exist, then the division of labor stagnates or decreases, making everyone in society worst off.

I have come here to seek a new beginning between the United States and Muslims around the world; one based upon mutual interest and mutual respect; and one based upon the truth that America and Islam are not exclusive, and need not be in competition. Instead, they overlap, and share common principles - principles of justice and progress; tolerance and the dignity of all human beings.

I do so recognizing that change cannot happen overnight. No single speech can eradicate years of mistrust, nor can I answer in the time that I have all the complex questions that brought us to this point. But I am convinced that in order to move forward, we must say openly the things we hold in our hearts, and that too often are said only behind closed doors. There must be a sustained effort to listen to each other; to learn from each other; to respect one another; and to seek common ground. As the Holy Koran tells us, "Be conscious of God and speak always the truth." That is what I will try to do - to speak the truth as best I can, humbled by the task before us, and firm in my belief that the interests we share as human beings are far more powerful than the forces that drive us apart.

Part of this conviction is rooted in my own experience. I am a Christian, but my father came from a Kenyan family that includes generations of Muslims. As a boy, I spent several years in Indonesia and heard the call of the azaan at the break of dawn and the fall of dusk. As a young man, I worked in Chicago communities where many found dignity and peace in their Muslim faith.

As a student of history, I also know civilization's debt to Islam. It was Islam - at places like Al-Azhar University - that carried the light of learning through so many centuries, paving the way for Europe's Renaissance and Enlightenment. It was innovation in Muslim communities that developed the order of algebra; our magnetic compass and tools of navigation; our mastery of pens and printing; our understanding of how disease spreads and how it can be healed. Islamic culture has given us majestic arches and soaring spires; timeless poetry and cherished music; elegant calligraphy and places of peaceful contemplation. And throughout history, Islam has demonstrated through words and deeds the possibilities of religious tolerance and racial equality.

I know, too, that Islam has always been a part of America's story. The first nation to recognize my country was Morocco. In signing the Treaty of Tripoli in 1796, our second President John Adams wrote, "The United States has in itself no character of enmity against the laws, religion or tranquility of Muslims." And since our founding, American Muslims have enriched the United States. They have fought in our wars, served in government, stood for civil rights, started businesses, taught at our Universities, excelled in our sports arenas, won Nobel Prizes, built our tallest building, and lit the Olympic Torch. And when the first Muslim-American was recently elected to Congress, he took the oath to defend our Constitution using the same Holy Koran that one of our Founding Fathers - Thomas Jefferson - kept in his personal library.

So I have known Islam on three continents before coming to the region where it was first revealed. That experience guides my conviction that partnership between America and Islam must be based on what Islam is, not what it isn't. And I consider it part of my responsibility as President of the United States to fight against negative stereotypes of Islam wherever they appear.

This statement is flat out wrong. President Obama has the right to spouse his personal opinions, however there is nothing in the Constitution of the United States that makes a requirement “to fight against negative stereotypes of Islam wherever they appear.” The same goes for Christianity, Judaism, or any other faith. Personally, I do not condone barbaric behavior of stereotyping anyone for that matter. But President Obama is walking a tightrope here. For instance, there is no mention of how he will fight this, nor does he give any indication of it: would he invade a country to fulfill this responsibility? Would he do the same for other faiths too? Does he have domestic legal basis to do this? The answers to these questions would lead to the unequivocal conclusion that President Obama is usurping his authority.

But that same principle must apply to Muslim perceptions of America. Just as Muslims do not fit a crude stereotype, America is not the crude stereotype of a self-interested empire. The United States has been one of the greatest sources of progress that the world has ever known. We were born out of revolution against an empire. We were founded upon the ideal that all are created equal, and we have shed blood and struggled for centuries to give meaning to those words - within our borders, and around the world. We are shaped by every culture, drawn from every end of the Earth, and dedicated to a simple concept: E pluribus unum: "Out of many, one."

In this statement, President Obama implies he recognizes America is an empire, not a “crude” one but a benevolent one. He says the U.S. has fought “around the world” to spread “the ideal that all are created equal.” But President Obama does not explain what does he mean by “created equal.” Is he referring that we are all the same in an egalitarian/materialistic sense or that we are equal before the law? Does he know these are mutually exclusive objectives?

Much has been made of the fact that an African-American with the name Barack Hussein Obama could be elected President. But my personal story is not so unique. The dream of opportunity for all people has not come true for everyone in America, but its promise exists for all who come to our shores - that includes nearly seven million American Muslims in our country today who enjoy incomes and education that are higher than average.

Moreover, freedom in America is indivisible from the freedom to practice one's religion. That is why there is a mosque in every state of our union, and over 1,200 mosques within our borders. That is why the U.S. government has gone to court to protect the right of women and girls to wear the hijab, and to punish those who would deny it.

So let there be no doubt: Islam is a part of America. And I believe that America holds within her the truth that regardless of race, religion, or station in life, all of us share common aspirations - to live in peace and security; to get an education and to work with dignity; to love our families, our communities, and our God. These things we share. This is the hope of all humanity.

Of course, recognizing our common humanity is only the beginning of our task. Words alone cannot meet the needs of our people. These needs will be met only if we act boldly in the years ahead; and if we understand that the challenges we face are shared, and our failure to meet them will hurt us all.

Who is the “we” President Obama is referring to? “we” the people, implying a localized/decentralized effort, or “we” the government, implying a top-down, centralized approach? I perceive he means the latter. Furthermore, I puport he believes the myth the U.S. was founded as a democratic nation. This is wrong. The U.S. was founded as a Constitutional Republic where the rule of law would be upheld. It is of no coincidence that one of the founding fathers of this nation express democracy as “tyranny of the majority.”

For we have learned from recent experience that when a financial system weakens in one country, prosperity is hurt everywhere. When a new flu infects one human being, all are at risk. When one nation pursues a nuclear weapon, the risk of nuclear attack rises for all nations. When violent extremists operate in one stretch of mountains, people are endangered across an ocean. And when innocents in Bosnia and Darfur are slaughtered, that is a stain on our collective conscience. That is what it means to share this world in the 21st century. That is the responsibility we have to one another as human beings.

President Obama is wrong. He commits what psychologists would call the Fallacy of Composition. Cognitive fallacies, which lead to errors in human calculation, have been proven empirically. The composition fallacy presumes that what is true of the particular is true of the whole, without providing any explanation for such inference.

This is a difficult responsibility to embrace. For human history has often been a record of nations and tribes subjugating one another to serve their own interests. Yet in this new age, such attitudes are self-defeating. Given our interdependence, any world order that elevates one nation or group of people over another will inevitably fail. So whatever we think of the past, we must not be prisoners of it. Our problems must be dealt with through partnership; progress must be shared.

As a student of history, and in particular to financial history, whenever I come across anyone claiming we are witnessing a “new age,” I become concern. This term is a code word for building castles in the air without any foundation. This paragraph of President Obama’s speech is quite nebulous: when says “any world order that elevates one nation or group of people over another will inevitably fail,” does he mean imperial power? Does the same apply when one nation is economically superior to another? He claims “progress must be shared,” but he does not mention who will do this and how this will take place. Presumably he means governments will do this.

That does not mean we should ignore sources of tension. Indeed, it suggests the opposite: we must face these tensions squarely. And so in that spirit, let me speak as clearly and plainly as I can about some specific issues that I believe we must finally confront together.

The first issue that we have to confront is violent extremism in all of its forms.

In Ankara, I made clear that America is not - and never will be - at war with Islam. We will, however, relentlessly confront violent extremists who pose a grave threat to our security. Because we reject the same thing that people of all faiths reject: the killing of innocent men, women, and children. And it is my first duty as President to protect the American people.

For those “peace and love” Obama supporters, this statement alone should put the final nail to their coffin of hope. This statement is the equivalent of Bush’s “we’re fighting them over there rather than over here.” This is typical neo-con phraseology. No wonder the likes of Ken Adelman and Charles Krauthammer endorsed President Obama.

The situation in Afghanistan demonstrates America's goals, and our need to work together. Over seven years ago, the United States pursued al Qaeda and the Taliban with broad international support. We did not go by choice, we went because of necessity. I am aware that some question or justify the events of 9/11. But let us be clear: al Qaeda killed nearly 3,000 people on that day. The victims were innocent men, women and children from America and many other nations who had done nothing to harm anybody. And yet Al Qaeda chose to ruthlessly murder these people, claimed credit for the attack, and even now states their determination to kill on a massive scale. They have affiliates in many countries and are trying to expand their reach. These are not opinions to be debated; these are facts to be dealt with.

Make no mistake: we do not want to keep our troops in Afghanistan. We seek no military bases there. It is agonizing for America to lose our young men and women. It is costly and politically difficult to continue this conflict. We would gladly bring every single one of our troops home if we could be confident that there were not violent extremists in Afghanistan and Pakistan determined to kill as many Americans as they possibly can. But that is not yet the case.

President Obama never mentioned that every foreign army has left Afghanistan defeated, most recently the Soviets in the late 1980s. But in this “new age” everything is possible, like finding bridges for sale.

That's why we're partnering with a coalition of forty-six countries. And despite the costs involved, America's commitment will not weaken. Indeed, none of us should tolerate these extremists. They have killed in many countries. They have killed people of different faiths - more than any other, they have killed Muslims. Their actions are irreconcilable with the rights of human beings, the progress of nations, and with Islam. The Holy Koran teaches that whoever kills an innocent, it is as if he has killed all mankind; and whoever saves a person, it is as if he has saved all mankind. The enduring faith of over a billion people is so much bigger than the narrow hatred of a few. Islam is not part of the problem in combating violent extremism - it is an important part of promoting peace.

Again, this is neo-con phraseology, but because President Obama says it, it must be true. Do not be deceived, this is warmongering.

We also know that military power alone is not going to solve the problems in Afghanistan and Pakistan. That is why we plan to invest $1.5 billion each year over the next five years to partner with Pakistanis to build schools and hospitals, roads and businesses, and hundreds of millions to help those who have been displaced. And that is why we are providing more than $2.8 billion to help Afghans develop their economy and deliver services that people depend upon.

Let me also address the issue of Iraq. Unlike Afghanistan, Iraq was a war of choice that provoked strong differences in my country and around the world. Although I believe that the Iraqi people are ultimately better off without the tyranny of Saddam Hussein, I also believe that events in Iraq have reminded America of the need to use diplomacy and build international consensus to resolve our problems whenever possible. Indeed, we can recall the words of Thomas Jefferson, who said: "I hope that our wisdom will grow with our power, and teach us that the less we use our power the greater it will be."

Today, America has a dual responsibility: to help Iraq forge a better future - and to leave Iraq to Iraqis. I have made it clear to the Iraqi people that we pursue no bases, and no claim on their territory or resources. Iraq's sovereignty is its own. That is why I ordered the removal of our combat brigades by next August. That is why we will honor our agreement with Iraq's democratically-elected government to remove combat troops from Iraqi cities by July, and to remove all our troops from Iraq by 2012. We will help Iraq train its Security Forces and develop its economy. But we will support a secure and united Iraq as a partner, and never as a patron.

The only responsibility that America has is to pay for the war reparations and to fully withdraw all troops from Iraq. This “war of choice” was unconstitutional and therefore illegal. This is why America must bear some financial cost.

And finally, just as America can never tolerate violence by extremists, we must never alter our principles. 9/11 was an enormous trauma to our country. The fear and anger that it provoked was understandable, but in some cases, it led us to act contrary to our ideals. We are taking concrete actions to change course. I have unequivocally prohibited the use of torture by the United States, and I have ordered the prison at Guantanamo Bay closed by early next year.

So America will defend itself respectful of the sovereignty of nations and the rule of law. And we will do so in partnership with Muslim communities which are also threatened. The sooner the extremists are isolated and unwelcome in Muslim communities, the sooner we will all be safer.

The second major source of tension that we need to discuss is the situation between Israelis, Palestinians and the Arab world.

America's strong bonds with Israel are well known. This bond is unbreakable. It is based upon cultural and historical ties, and the recognition that the aspiration for a Jewish homeland is rooted in a tragic history that cannot be denied.

Around the world, the Jewish people were persecuted for centuries, and anti-Semitism in Europe culminated in an unprecedented Holocaust. Tomorrow, I will visit Buchenwald, which was part of a network of camps where Jews were enslaved, tortured, shot and gassed to death by the Third Reich. Six million Jews were killed - more than the entire Jewish population of Israel today. Denying that fact is baseless, ignorant, and hateful. Threatening Israel with destruction - or repeating vile stereotypes about Jews - is deeply wrong, and only serves to evoke in the minds of Israelis this most painful of memories while preventing the peace that the people of this region deserve.

On the other hand, it is also undeniable that the Palestinian people - Muslims and Christians - have suffered in pursuit of a homeland. For more than sixty years they have endured the pain of dislocation. Many wait in refugee camps in the West Bank, Gaza, and neighboring lands for a life of peace and security that they have never been able to lead. They endure the daily humiliations - large and small - that come with occupation. So let there be no doubt: the situation for the Palestinian people is intolerable. America will not turn our backs on the legitimate Palestinian aspiration for dignity, opportunity, and a state of their own.

For decades, there has been a stalemate: two peoples with legitimate aspirations, each with a painful history that makes compromise elusive. It is easy to point fingers - for Palestinians to point to the displacement brought by Israel's founding, and for Israelis to point to the constant hostility and attacks throughout its history from within its borders as well as beyond. But if we see this conflict only from one side or the other, then we will be blind to the truth: the only resolution is for the aspirations of both sides to be met through two states, where Israelis and Palestinians each live in peace and security.

That is in Israel's interest, Palestine's interest, America's interest, and the world's interest. That is why I intend to personally pursue this outcome with all the patience that the task requires. The obligations that the parties have agreed to under the Road Map are clear. For peace to come, it is time for them - and all of us - to live up to our responsibilities.

While President Obama’s brief exposition of the Israeli-Palestinian strife is for the most part accurate, this last statement represents a fundamental flaw. America has mettle in external affairs which are none of its business. This one is no different. “No foreign entanglements,” was a quip endorsed by one of this nation’s founding father. And it was advised with reason. More fundamentally, however, there is nothing in the constitution that requires America to “live up to our responsibilities” concerning this crisis in the land of Palestine—or any other crisis for that matter. When I say America I mean the U.S. federal government.

Palestinians must abandon violence. Resistance through violence and killing is wrong and does not succeed. For centuries, black people in America suffered the lash of the whip as slaves and the humiliation of segregation. But it was not violence that won full and equal rights. It was a peaceful and determined insistence upon the ideals at the center of America's founding. This same story can be told by people from South Africa to South Asia; from Eastern Europe to Indonesia. It's a story with a simple truth: that violence is a dead end. It is a sign of neither courage nor power to shoot rockets at sleeping children, or to blow up old women on a bus. That is not how moral authority is claimed; that is how it is surrendered.

It is often the case when a person contradicts himself/herself, one can reasonably conclude he/she is confused. This is the case in this statement. President Obama claims “Palestinians must abandon violence. Resistance through violence and killing is wrong and does not succeed.” Palestinians consider Israelis extremists. Israelis consider Palestinians extremists. Both claim the right to defense. The point is that extremists are in the eye of the beholder. Yet, a few moments ago in this speech he tells us that, “[America] will, however, relentlessly confront violent extremists who pose a grave threat to our security.” Of course, this “confrontation” can only occur within the framework of violence. So, America is doing exactly what President Obama is prohibiting the Palestinians. Make no mistake, I am not endorsing nor promoting violence, but rather pointing to the clear contradictions and lack of context in President Obama’s speech so those who read it are not deceived. In any dictionary, this is the definition of a hypocrite.

Now is the time for Palestinians to focus on what they can build. The Palestinian Authority must develop its capacity to govern, with institutions that serve the needs of its people. Hamas does have support among some Palestinians, but they also have responsibilities. To play a role in fulfilling Palestinian aspirations, and to unify the Palestinian people, Hamas must put an end to violence, recognize past agreements, and recognize Israel's right to exist.

At the same time, Israelis must acknowledge that just as Israel's right to exist cannot be denied, neither can Palestine's. The United States does not accept the legitimacy of continued Israeli settlements. This construction violates previous agreements and undermines efforts to achieve peace. It is time for these settlements to stop.

Translation: Israel must follow international law, despite the fact that America does not follow international law that curtails our interests. More hypocrisy.

Israel must also live up to its obligations to ensure that Palestinians can live, and work, and develop their society. And just as it devastates Palestinian families, the continuing humanitarian crisis in Gaza does not serve Israel's security; neither does the continuing lack of opportunity in the West Bank. Progress in the daily lives of the Palestinian people must be part of a road to peace, and Israel must take concrete steps to enable such progress.

Finally, the Arab States must recognize that the Arab Peace Initiative was an important beginning, but not the end of their responsibilities. The Arab-Israeli conflict should no longer be used to distract the people of Arab nations from other problems. Instead, it must be a cause for action to help the Palestinian people develop the institutions that will sustain their state; to recognize Israel's legitimacy; and to choose progress over a self-defeating focus on the past.

America will align our policies with those who pursue peace, and say in public what we say in private to Israelis and Palestinians and Arabs. We cannot impose peace. But privately, many Muslims recognize that Israel will not go away. Likewise, many Israelis recognize the need for a Palestinian state. It is time for us to act on what everyone knows to be true.

Too many tears have flowed. Too much blood has been shed. All of us have a responsibility to work for the day when the mothers of Israelis and Palestinians can see their children grow up without fear; when the Holy Land of three great faiths is the place of peace that God intended it to be; when Jerusalem is a secure and lasting home for Jews and Christians and Muslims, and a place for all of the children of Abraham to mingle peacefully together as in the story of Isra, when Moses, Jesus, and Mohammed (peace be upon them) joined in prayer.

The third source of tension is our shared interest in the rights and responsibilities of nations on nuclear weapons.

This issue has been a source of tension between the United States and the Islamic Republic of Iran. For many years, Iran has defined itself in part by its opposition to my country, and there is indeed a tumultuous history between us. In the middle of the Cold War, the United States played a role in the overthrow of a democratically-elected Iranian government. Since the Islamic Revolution, Iran has played a role in acts of hostage-taking and violence against U.S. troops and civilians. This history is well known. Rather than remain trapped in the past, I have made it clear to Iran's leaders and people that my country is prepared to move forward. The question, now, is not what Iran is against, but rather what future it wants to build.

It is interesting that people in general read into things which were really not said. For example, an acquaintance of mine exhorted how President Obama had apologized to Iran for American’s past interference in their domestic affairs. Yet, nothing can be further from the truth. Notice that he recognizes that “United States played a role in the overthrow of a democratically-elected Iranian government.” But President Obama never says what kind of role. Was it a minor role, a major role? Just what kind of role is referring to? Of course he never mentioned that the U.S. orchestrated the entire situation. Admission of the truth might just cause an unintended arousal in sectors of the dormant population which believes our government is always good. Our nation didn’t just “played a role” in Iran. It played the role.

It will be hard to overcome decades of mistrust, but we will proceed with courage, rectitude and resolve. There will be many issues to discuss between our two countries, and we are willing to move forward without preconditions on the basis of mutual respect. But it is clear to all concerned that when it comes to nuclear weapons, we have reached a decisive point. This is not simply about America's interests. It is about preventing a nuclear arms race in the Middle East that could lead this region and the world down a hugely dangerous path.

Whether Iran admits it, it is seeking nuclear weapons. Talks about “peaceful” construction of nuclear facilities are political claptrap. That being said, the question needs to be asked, why is Iran seeking such weapons. Irrespective of what our political leaders claim, Iran’s action is the rational expectation of our constant belligerence and taunts of invasion. Indeed, other nations will follow suit in seeking protection by building armament themselves. President Obama is correct: this will end up causing “a nuclear arms race in the Middle East.” This is the proverbial security dilemma: the more weapons countries accumulate for security reasons, the more dangerous the world becomes.

I understand those who protest that some countries have weapons that others do not. No single nation should pick and choose which nations hold nuclear weapons. That is why I strongly reaffirmed America's commitment to seek a world in which no nations hold nuclear weapons. And any nation - including Iran - should have the right to access peaceful nuclear power if it complies with its responsibilities under the nuclear Non-Proliferation Treaty. That commitment is at the core of the Treaty, and it must be kept for all who fully abide by it. And I am hopeful that all countries in the region can share in this goal.

The fourth issue that I will address is democracy.

I know there has been controversy about the promotion of democracy in recent years, and much of this controversy is connected to the war in Iraq. So let me be clear: no system of government can or should be imposed upon one nation by any other.

That does not lessen my commitment, however, to governments that reflect the will of the people. Each nation gives life to this principle in its own way, grounded in the traditions of its own people. America does not presume to know what is best for everyone, just as we would not presume to pick the outcome of a peaceful election. But I do have an unyielding belief that all people yearn for certain things: the ability to speak your mind and have a say in how you are governed; confidence in the rule of law and the equal administration of justice; government that is transparent and doesn't steal from the people; the freedom to live as you choose. Those are not just American ideas, they are human rights, and that is why we will support them everywhere.

There is no straight line to realize this promise. But this much is clear: governments that protect these rights are ultimately more stable, successful and secure. Suppressing ideas never succeeds in making them go away. America respects the right of all peaceful and law-abiding voices to be heard around the world, even if we disagree with them. And we will welcome all elected, peaceful governments - provided they govern with respect for all their people.

This last point is important because there are some who advocate for democracy only when they are out of power; once in power, they are ruthless in suppressing the rights of others. No matter where it takes hold, government of the people and by the people sets a single standard for all who hold power: you must maintain your power through consent, not coercion; you must respect the rights of minorities, and participate with a spirit of tolerance and compromise; you must place the interests of your people and the legitimate workings of the political process above your party. Without these ingredients, elections alone do not make true democracy.

President Obama is a lawyer by training. Thus, he selects words very carefully when speaking about topics of American jurisprudence. He never mentions, for example, that nowhere in the Constitution of the United States there is reference to the word “democracy.” In fact, one framer of the Constitution, James Madison, wrote in Federalist Papers No. 10 that democracies “have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths." The United States is a Republic, although only a trace of it remains. Certainly President Obama makes some magnanimous statements about American ideals, but fails to mention that in our homeland these have been usurped.

The fifth issue that we must address together is religious freedom.

Islam has a proud tradition of tolerance. We see it in the history of Andalusia and Cordoba during the Inquisition. I saw it firsthand as a child in Indonesia, where devout Christians worshiped freely in an overwhelmingly Muslim country. That is the spirit we need today. People in every country should be free to choose and live their faith based upon the persuasion of the mind, heart, and soul. This tolerance is essential for religion to thrive, but it is being challenged in many different ways.

Among some Muslims, there is a disturbing tendency to measure one's own faith by the rejection of another's. The richness of religious diversity must be upheld - whether it is for Maronites in Lebanon or the Copts in Egypt. And fault lines must be closed among Muslims as well, as the divisions between Sunni and Shia have led to tragic violence, particularly in Iraq.

Freedom of religion is central to the ability of peoples to live together. We must always examine the ways in which we protect it. For instance, in the United States, rules on charitable giving have made it harder for Muslims to fulfill their religious obligation. That is why I am committed to working with American Muslims to ensure that they can fulfill zakat.

Likewise, it is important for Western countries to avoid impeding Muslim citizens from practicing religion as they see fit - for instance, by dictating what clothes a Muslim woman should wear. We cannot disguise hostility towards any religion behind the pretence of liberalism.

Indeed, faith should bring us together. That is why we are forging service projects in America that bring together Christians, Muslims, and Jews. That is why we welcome efforts like Saudi Arabian King Abdullah's Interfaith dialogue and Turkey's leadership in the Alliance of Civilizations. Around the world, we can turn dialogue into Interfaith service, so bridges between peoples lead to action - whether it is combating malaria in Africa, or providing relief after a natural disaster.

Translation: Religion is good. Be good to one another. But since this is seemingly impossible for you and your God, government will help.

The sixth issue that I want to address is women's rights.

I know there is debate about this issue. I reject the view of some in the West that a woman who chooses to cover her hair is somehow less equal, but I do believe that a woman who is denied an education is denied equality. And it is no coincidence that countries where women are well-educated are far more likely to be prosperous.

Now let me be clear: issues of women's equality are by no means simply an issue for Islam. In Turkey, Pakistan, Bangladesh and Indonesia, we have seen Muslim-majority countries elect a woman to lead. Meanwhile, the struggle for women's equality continues in many aspects of American life, and in countries around the world.

Our daughters can contribute just as much to society as our sons, and our common prosperity will be advanced by allowing all humanity - men and women - to reach their full potential. I do not believe that women must make the same choices as men in order to be equal, and I respect those women who choose to live their lives in traditional roles. But it should be their choice. That is why the United States will partner with any Muslim-majority country to support expanded literacy for girls, and to help young women pursue employment through micro-financing that helps people live their dreams.

Finally, I want to discuss economic development and opportunity.

I know that for many, the face of globalization is contradictory. The Internet and television can bring knowledge and information, but also offensive sexuality and mindless violence. Trade can bring new wealth and opportunities, but also huge disruptions and changing communities. In all nations - including my own - this change can bring fear. Fear that because of modernity we will lose of control over our economic choices, our politics, and most importantly our identities - those things we most cherish about our communities, our families, our traditions, and our faith.

But I also know that human progress cannot be denied. There need not be contradiction between development and tradition. Countries like Japan and South Korea grew their economies while maintaining distinct cultures. The same is true for the astonishing progress within Muslim-majority countries from Kuala Lumpur to Dubai. In ancient times and in our times, Muslim communities have been at the forefront of innovation and education.

This is important because no development strategy can be based only upon what comes out of the ground, nor can it be sustained while young people are out of work. Many Gulf States have enjoyed great wealth as a consequence of oil, and some are beginning to focus it on broader development. But all of us must recognize that education and innovation will be the currency of the 21st century, and in too many Muslim communities there remains underinvestment in these areas. I am emphasizing such investments within my country. And while America in the past has focused on oil and gas in this part of the world, we now seek a broader engagement.

President Obama claims that “education” will be paramount this century, thus “emphasizing such investments within my country.” He never mentions the fact that billions upon billions of dollars of federal money has been “invested” in this area with little to show for it. It is widely known that American public schools are on average mediocre; its standards frequently behind in comparison to those in other countries. Let us not neglect a purpose of federalized education in any country: indoctrinate generations of student with what the government has blessed as legitimate.

On education, we will expand exchange programs, and increase scholarships, like the one that brought my father to America, while encouraging more Americans to study in Muslim communities. And we will match promising Muslim students with internships in America; invest in on-line learning for teachers and children around the world; and create a new online network, so a teenager in Kansas can communicate instantly with a teenager in Cairo.

On economic development, we will create a new corps of business volunteers to partner with counterparts in Muslim-majority countries. And I will host a Summit on Entrepreneurship this year to identify how we can deepen ties between business leaders, foundations and social entrepreneurs in the United States and Muslim communities around the world.

On science and technology, we will launch a new fund to support technological development in Muslim-majority countries, and to help transfer ideas to the marketplace so they can create jobs. We will open centers of scientific excellence in Africa, the Middle East and Southeast Asia, and appoint new Science Envoys to collaborate on programs that develop new sources of energy, create green jobs, digitize records, clean water, and grow new crops. And today I am announcing a new global effort with the Organization of the Islamic Conference to eradicate polio. And we will also expand partnerships with Muslim communities to promote child and maternal health.

All these things must be done in partnership. Americans are ready to join with citizens and governments; community organizations, religious leaders, and businesses in Muslim communities around the world to help our people pursue a better life.

Translation: “All these things must be done in partnership.” Therefore, we, your governments are going to take your money (in the form of raising taxes or printing it) to fund our programs. Despite no historical precedence, centralized planning works.

The issues that I have described will not be easy to address. But we have a responsibility to join together on behalf of the world we seek - a world where extremists no longer threaten our people, and American troops have come home; a world where Israelis and Palestinians are each secure in a state of their own, and nuclear energy is used for peaceful purposes; a world where governments serve their citizens, and the rights of all God's children are respected. Those are mutual interests. That is the world we seek. But we can only achieve it together.

Translation: By “we” I mean governments. We are God’s representatives on earth. We will serve you by you serving us.

I know there are many - Muslim and non-Muslim - who question whether we can forge this new beginning. Some are eager to stoke the flames of division, and to stand in the way of progress. Some suggest that it isn't worth the effort - that we are fated to disagree, and civilizations are doomed to clash. Many more are simply skeptical that real change can occur. There is so much fear, so much mistrust. But if we choose to be bound by the past, we will never move forward. And I want to particularly say this to young people of every faith, in every country - you, more than anyone, have the ability to remake this world.

Translation: Young people “you, more than anyone, have the ability to remake this world,” as long as you do what I tell you. This is pure political doublespeak. President Obama just told us a few moments ago that “you must respect the rights of minorities, and participate with a spirit of tolerance and compromise.” But this statement cannot occur in light of what he just said. Debates and disagreements will inherently “stoke the flames of division.” This is not the problem. The problem is how a society deals with it. Again, these are mutually exclusive objectives.

All of us share this world for but a brief moment in time. The question is whether we spend that time focused on what pushes us apart, or whether we commit ourselves to an effort - a sustained effort - to find common ground, to focus on the future we seek for our children, and to respect the dignity of all human beings.

It is easier to start wars than to end them. It is easier to blame others than to look inward; to see what is different about someone than to find the things we share. But we should choose the right path, not just the easy path. There is also one rule that lies at the heart of every religion - that we do unto others as we would have them do unto us. This truth transcends nations and peoples - a belief that isn't new; that isn't black or white or brown; that isn't Christian, or Muslim or Jew. It's a belief that pulsed in the cradle of civilization, and that still beats in the heart of billions. It's a faith in other people, and it's what brought me here today.

We have the power to make the world we seek, but only if we have the courage to make a new beginning, keeping in mind what has been written.

The Holy Koran tells us, "O mankind! We have created you male and a female; and we have made you into nations and tribes so that you may know one another."

The Talmud tells us: "The whole of the Torah is for the purpose of promoting peace."

The Holy Bible tells us, "Blessed are the peacemakers, for they shall be called sons of God."

The people of the world can live together in peace. We know that is God's vision. Now, that must be our work here on Earth. Thank you. And may God's peace be upon you.

Tuesday, June 9, 2009

Quarterly $1 Trillion Monetization

[Note: monetization is the process by which a country's central bank purchases the debt of its national government. Typically governments access the private market for funds. When there are insufficient private money, they (sometimes de facto but often times de jure) require central banks to close this gap. The following article, while lengthy, accurately describes the Federal Reserve System policy concerning this topic. It is certainly worth the time to read. I concur fully with its assertions.]

Quarterly $1 Trillion Monetizationby

Jim Willie, CB. Editor, Hat Trick Letter June 2, 2009

The rising long-term USTreasury Bond yield has captured attention. The breakout chart for the 10-year Treasury was pointed out here when it rose over 3.1%, hardly a high level. In the first week of May, a target of 3.5% was cited, one easily surpassed. It zoomed to 3.75%, enough to create some waves in the stock market distracted and preoccupied by nonsensical Green Shoots talk on the psychological side and by falsified bank balance sheets on the accounting side. Bigtime stress has come to the USTreasury complex, a story difficult to mask and conceal, since it is at the epicenter of the credit markets. Only on Wall Street can we hear lunacy of less bad economic statistics (framed in sophisticated second derivative arguments) amidst an absolute cavalcade of miserable news on the jobs front, home foreclosure front, and home price front. So the unemployed workers, dispossessed homeowners, and insolvent households will lead the nation on a recovery, while credit approval is much more strictly applied even to the creditworthy among us? Doubtful! Only on Wall Street can we hear of the banks undergoing a healing process when huge credit asset writedowns are replaced instead by convenient ‘Credit Value Adjustments’ as booked profits on their books.

So a stream of upcoming additional asset losses will lead an investment boom by basic accounting fraud, calling them gains with SEC blessing? Doubtful! The stock market rally is being called a ‘Sugar High’ by the venerable Wall Street Journal, very accurately. Sadly, foreigners are watching, and they are selling the USDollar down. They observe the mountain of USTreasurys hitting the market like Chain Letters bound in Treasury Auctions. They observe outright monetized purchases of the Treasury Investment Protection Securities (TIPS) designed as an inflation signal. With fading confidence, they are selling the USDollar down the river. One might realistically perceive the stock rally as based upon a flood of monetary inflation, given an assist by blatant recovery propaganda, powered further by good old fashioned accounting fraud.

Behind the bushes, a powerful billboard message can be seen by the trained eye, accompanied by loud signals audible to the trained ear. The US Federal Reserve will be forced to continue the gargantuan monetization scheme. The first round was announced in mid-March, for $300 billion in USTreasurys and $750 billion in USAgency Mortgage Bonds. Most did not give a second thought, that it was a one-time event. WRONG! The monetization news dealt a powerful blow to global confidence in the US financial system generally and the USDollar specifically. The $1 trillion monetization will be repeated, and even become a quarterly event, much like a constant sub-surface flow of water to remove a foundation built upon sand.

The trip to China by USDept Treasury Secy Geithner should be viewed as a key reassurance to these important creditors, later to be viewed as a betrayal. The Chinese audience responded with loud laughter when Geithner assured them that their $2 trillion in savings was safe and secure. This was a national humiliation event, as Geithner has been muzzled. If only the USCongress had such broad wisdom and deep courage to laugh when Goldman Sachs henchmen ‘(Made Men’) from the syndicate gave regular speeches laden with deception and rationalizations for their continued fraud. Then again, the Chinese audience is not on the receiving end of graft and bribery, nor the object of revolving doors.


The group of 20 to 22 bond dealers with contracts to sell USGovt debt securities are under siege, suffering a grand new plight. This is perhaps the best kept secret in the entire credit market right now. The USFed primary bond dealers are being squeezed. They actually have some power to respond. They are at risk, and face a possible rapid extinction. Despite the rising long-term USTBond yield, money going into USTBond purchases in general is growing like a powerful torrent. Demand for USTBonds is growing fast, very fast. Bond supply is rising faster than demand though!! The role of primary bond dealers is to hold inventory as intermediaries, a prospect that makes those dealers LOSERS right away. Auction sizes one or two years ago used to be $5 billion, $10 billion, even $15 billion on a given month. Just last week the official auction was for $110 billion, a 10-fold increase. The pushback comes from these primary bond dealers, who collectively possess the power to tell the issuer (USDept Treasury) and the agent (USFed) that buyers just do not exist in sufficient volume to absorb such huge regular supply. Fear has entered the hearts and minds of the dealers. They will soon tell their bosses at Treasury and the USFed that more monetization must come in order to lighten the supply load, or else face a renewed crisis, at least horrendous negative publicity. The credit market trucks are breaking down from the weight. The $300 billion monetization sounded like a big amount, but it is not. That amounts to two or three months in supply, if the $1800 billion in USGovt deficits is to be financed. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in failed auctions, crushing losses by the primary dealers, and their possible disappearance. Remember what happened to private equity firms stuck with their own stock and bond inventory? They went bust. That is precisely the risk to these bond dealers.


The trend is clear for those with open eyes. The official bond auctions will continue relentlessly, probably well over $100 billion per month, for perhaps twenty months at least. Worse, the USGovt federal deficits will be much bigger than estimated. Here is a sobering fact. The USGovt tax revenues are down 35% year over year. For the first time in US history, the tax collection month of April 2009 was a net negative month. Expect the USTBond supply pressures to build, not reduce. My conclusion is clear. PURE MONETIZATION WILL SOON BE A REGULAR QUARTERLY PROMISE. IF NOT, THEN A USTBOND DEFAULT THREAT LOOMS NEAR ON THE HORIZON, OR A POWERFUL SUDDEN STOCK MARKET COLLAPSE WILL ENSUE. A monetization commitment forestalls a USTBond default at a later date.

Meanwhile, the economic impact of this unremedied crisis will slowly be recognized. Watch the job losses, which continue in huge numbers. Watch the home foreclosures, which continue in accelerating numbers. Watch the national home prices, which continue in steady declines. Recall that the USEconomic recovery that began in 2001-2002 was built upon a housing bubble as a foundation. The burst of that bubble is absolutely not a completed process. The national insolvency will take its toll on USTreasurys as a certain reflection. The debt downgrade (imminent, scheduled, expected, who cares its label?) of the UKGilts two weeks ago should have awakened the world to the perception of the USGovt debt as Third World debt paper. The government finances of the United Kingdom are no better and no worse than those of the United States. The global reserve status of the USDollar and USTreasury, the greater size of the USEconomy, these only guarantee that the impact of the US fiasco have broader shock waves. The fiasco is tied to the USGovt committed debt being transformed into debt securities, the USTreasury Bonds. It is a gigantic hairball. It is like a rattle snake swallowing a goat.

The USTreasury Bond supply (skyrocketing) is growing much faster than the rising demand. The untold story is that demand is rising in stride to take the rising bond supply, FOR NOW. A rising USTBond long bond yield does not mean necessarily that money exits. Price is determined as demand meeting supply. The rising bond supply will be continuing, not just for a month or two, but for a year or two or three, maybe four. Projected USGovt federal deficits are due to occur for as far as the eye can see. Bond analysts knew that big problems would result. They have begun. Huge USGovt debt commitments ensure a skyrocket of continued USTBond supply. It is sucking in funds all over the financial markets, like a Black Hole. The stock market is at growing risk for its available funds. The primary dealers have the ability to put pressure on fund managers of a wide variety. Those managers will be urged to purchase more bonds, to alter their allocation ratios, and to respond to government pressures. Some will be lured to earn future favors. The Dow Jones Industrial stock index and the S&P500 stock index have begun to stall, after quite a run powered by short covering, relaxation of accounting rules, and widespread talk of early sightings of recovery evidence. The gargantuan outsized USTreasury Bond auctions must find funds to feed the beast, and the stock market is a nearby target. The great Black Hole of USTBond issuance and sale has the potential to draw the entire stock market into its vortex. The conclusion is simple, and the USFed must respond. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in painful stock market declines, the effects from which the public observes and understands well. Their pain usually results in hue & cry, and if not addressed, panic.


The USTreasury Bond cannot be monetized without enormous damaging fallout to the global reserve currency in the USDollar. It has begun to arrive, both to the USTreasury Bond and USDollar. For many months, my analysis has stated that even with intervention, either the USTBond falls or USDollar falls, guaranteed one, since official pressure to aid one would render harm to the other. In the last couple weeks, we have seen both fall in value, as colossal mismanagement might be the global perception that prevails, as debt quality is heavily scrutinized. The entire world is awakening to the development of a dying USDollar. Watch the euro head back to 150 with ease, then to 160 later this summer. Even the garbage British pound sterling is running, whose possible impetus is not what one might think. The commodity currencies are rising. See the Canadian Dollar, whose base creation at 77-78 cents has preceded a rise over 92 cents. See the Australian Dollar, whose base creation at 61-62 cents has preceded a rise over 81 cents. To be sure, the recovery in the crude oil price has helped power the rise, but more factors are involved. The Deflation Knuckleheads should look to the crude oil price, and the commodity currencies for guidance, even contradiction of their theories. The primary stabilizing factor against deflation is the falling USDollar, which delivers rising energy prices (now with natural gas), rising food prices, apart from domestic banking challenges on the lending side.

The USDollar has fallen in a very noticeable manner, enough to capture the attention of the world, enough to force a meeting in Beijing by USGovt finance syndicate bosses. The chart looks absolutely miserable, surely ominous, and very dangerous. The daily chart has meaning, but the weekly chart has more meaning. Three important cyclicals are shown. The relative strength is down hard, not yet at the important trigger 30 level. The stochastix is down hard, not yet near a crossover for rebound. The MACD is down hard, not yet showing signs of a level reading. Watch for a powerful upcoming negative signal, like in with the next two weeks, for a bearish crossover event. The 20-week moving average (in blue) is close to crossing below the 50-week moving average (in red). When it does cross below, expect a powerful move in the DX index to 76 then to 72, for a bottom retest. The DX dollar index has fallen below the critical 81 level, where past weekly opens and closes were registered in December. That means a retest of summer 2008 lows is guaranteed. Some speed bumps on the downhill are due in the 77-79 interval.

Finally, bear in mind the enormous fallout from USGovt and USFed actions, based in desperation. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. The effect on the USDollar will be profound, extremely deep, and potentially devastating. Confidence in the USDollar is already shaken badly by events of the last 18 months. Promised monetizations will only continue to shatter that confidence. As the USDollar plumbs the critical support lows, and pushes to lower lows later this year, the GOLD & SILVER PRICES WILL MAKE NEW HIGHS AND CAPTURE GLOBAL ATTENTION. Both gold & silver price levels are resisting even little selloffs. Be sure to avoid the Exchange Traded Funds, namely GLD for gold and SLV for silver. It is highly doubtful that they hold gold or silver bullion in claimed quantities. They are highly likely to be leasing their bullion to the cartel in order to suppress prices. See their prospectuses for names of gold cartel firms, whose names are frequently listed among the biggest owners of staggering outsized short positions on the COMEX in gold and silver futures contracts. Those are illicit Naked Shorts!


Focus has been steady on the USFed balance sheet. Not only is it huge, but it is loaded with toxic assets. They cannot easily sell off their assets in order to drain the excess liquidity from the credit markets, enough to prevent a spillover into the USEconomy. Such a big drain would permanently cripple the housing market, which would kill the banks. Doing so would cause a USTreasury bear market of monstrous proportions, which would kill the USDollar. Therefore, price inflation is coming for a simple reason that the USFed cannot drain the excess liquidity, and cannot prevent a certain eventual spillover. When price inflation arrives without welcome, or even with welcome, the impact on the gold & silver prices will be very big and very positive. The impact on USTreasurys is uncertain. Holding the line on USTreasurys will assure a powerful negative blow to the USDollar.

John Hussman makes two great points on this very important matter. He claims that price levels can remain under control only if the money velocity is held down permanently. To maintain low money velocity, the banks must keep their bank reserves over the current 95% level, something difficult to do as they gradually approve new loans. He claims that price levels can remain under control only if the value of goods & services is perceived as less than the value of USGovt liabilities packaged in debt securities. To maintain the USTreasury bubble will be difficult, especially when supply is overwhelming, especially when price inflation is seen as a growing future risk, and especially when foreigners are diversifying out of US$-based securities. Hussman makes the strong point that bank losses will continue, as new categories like commercial mortgages and formerly pristine prime mortgages add to big losses, a parallel point to mine. He concludes that the USEconomy will experience a 100% price inflation in the next decade, in order to bring back into line the debt ratio to the US Gross Domestic Product. That angle of reasoning makes perfect sense for a price inflation long range target. A double in consumer prices and the GDP price component would result in a gold price of $3000 per ounce, and a silver price of nearly $100 per ounce.


Volumes could be written about General Motors, dubbed recently Govt Motors. The illegal trampling of their bondholders is well covered. Their executives just requested $15 billion for walking around money during the bankruptcy hearing that began on Monday. Actually it is for continued operating costs. So AIG is the basket case ‘Ward of the State’ in the financial sector. So Fannie Mae is the basket case ‘Ward of the State’ in the mortgage & housing sector. Now General Motors is the basket case ‘Ward of the State’ in the industrial sector. Here is a wrinkle that few have considered. The issue arose in the 2005 near death experience suffered by GM. To confuse matters, the GM corporate bond resolution might cause a firestorm. My guess is that 5x the volume of CDSwaps are in circulation to insure against default of their outstanding corporate bonds true volume. The orderly resolution of CDSwaps might cause a powerful unwanted rally in GM bonds, even though dead. An embarrassing situation perhaps is coming. The resolution of Lehman Brothers corporate bonds was highly disruptive. GM has much greater debt volume, $172.81 billion to be exact. Since 2005, the Powerz have attempted to let GM bonds expire and roll over into more controllable securities. It could become wild.

GM is to emerge from the restructure process much smaller company, geared to selling much less profitable smaller cars. The United Auto Worker members are still attached to the USGovt umbilical line, with cost. The new & improved Govt Motors will be peddling a $40k electric hybrid called the Volt, while Toyota continues its production of the $20k electric hybrid Prius. Can anyone detect a price and experience differential in the financial transmission? Anyone who has any knowledge of competition head to head against government-run businesses should see the prospect of unexpected future losses of great magnitude at Govt Motors. Competing against high level bureaucrats who crowd executive offices is an easy prospect. Not to be dismissed, the USGovt is certain to order huge fleet purchases. By the way, evidence mounts that the main trait in common with the Chrysler dealers shut down last month were their campaign donations to the Republican National Committee by the victimized dealers. The business of politics is very consistent. Watch for a similar theme in GM dealer shutdowns. Just a footnote. The sale of the Hummer division is in the news. Each vehicle sold to the USMilitary was subsidized by a $25k payment directly to General Motors, to keep America strong.

The nation would be better served by giving every GM worker a $120k cash grant designed to assist widespread business startups, like bankruptcy counseling, import-export firms, internet software ventures, math-science tutoring, landscape services, security for abandoned empty homes, tent city planning, second sourcing for ammunition, research on the US Constitution versus fascism and communism, even lemonade stands. If 10% of new business ventures grew into viable businesses, that movement would easily eclipse the Govt Motors rebirth initiative. The costs this year and next year to General Motors will be staggering, whose estimates are way too low. The nation is obsessed with supporting failed businesses, starting with Wall Street banks, and now with industry in the heartland.

Friday, June 5, 2009

U.S. Government Debt: A Crisis in the Making

Today in the Financial Times there was a good article explaining what I believe will be the cause that will bring about the next phase of the crisis. At this point he FED will step in to buy any gov't shortfall in treasury sells. When this happens, eventually gold will rise and the stock market will fall; the true bottom will be when the Dow/gold ratio is between 1 & 2.

Here are some excerpts:

This year, according to the Organisation for Economic Co-operation and Development, projected gross issuance by OECD governments will jump to almost $12,000bn of debt, up from $9,000bn two years ago (and many times the level a decade ago.) The US alone is projected to sell almost $8,000bn, in gross terms.

Some countries, such as the UK, have a tradition of selling long-dated government debt to local pension funds, which reduces the need to roll over the existing debt stock too freque- ntly. In the UK, for example, the average maturity of government debt was 14 years at the end of 2007, or just before the crisis broke. Australia, France, Austria and Greece also have long(ish) maturities, of between seven and 10 years. But other European nations such as Hungary and Norway, have average maturities below five years. Meanwhile, the average US maturity in late 2007, was just 4.7 years and will almost certainly decline further. This year, the OECD projects that no less than 70 per cent of US issuance will be short term. That leaves the treasury market now exposed to a mild version of the same problem that plagued conduits or structured investment vehicles that relied on short-term funding in the commercial paper market: namely “rollover risk”.

U.S. government debt is a means to fund present consumption (which is anothe way to say spending). My perception is that there will be another major government bailout of the financial industry (and possibly for Main Street). Since the $700 billion TARP hasn't done the trick, they most likely will up the ante, say, an additional $1 trillion. I'm guessing about the actual figures, it could be more or could be less. We are in a bailout economy. This won't stop until the powers-that-be's checks bounce in the form of money printing to cover expenses instead of relying in traditional tax revenue. The FED will monetize the debt. Panic will set in. Investors will sell. A massive capital outflow could occur. Where will the money go? Commodities, i perceive. Thus we have a currency crisis. If this were to happen say on a monday, by the end of the week expect riots and demonstrations (a la Argentina). The Dow and gold will trade between 3K - 4K: a one-to-one ratio. When this happens, i.e. dow/gold ratio is between 1 & 2, we can surmise we've hit the proverbial bottom.

When will all this happen? I have no idea. But I do expect it will occur within the next 18-24 months. My short-term view, however, is that by Sept/Oct. we'll see another run towards Dow 6,000.

Thursday, June 4, 2009

Fascist Economy

Whenever anyone mentions fascism memories of World War II come into mind. They think Italy. They think Mussolini. They think dictator and tyrant. These thoughts point somewhere, but where exactly few people can discern. Fascism at its core is the co-dependence of government objectives with those of corporations. Like all other “isms”, with the exception of capitalism, this economic system is in search of the economic/political holy grail: the proverbial free lunch. Fascism is a top-down approach. It is “socialism with a capitalist veneer,” as Sheldon Richman explains. In a truly capitalist society, where voluntary exchange of goods, services, and ideas is respected, fascism would occur at the fringes of society. Unpopular agendas would not be rammed down by force or fear by the ruling class. In our times fascism is at the forefront of economic thinking and political landscape. Of course, it is wrapped in various veils (e.g. Keynesian economic philosophy); but the spirit is the same.

Consider last year’s bank bailout, or commonly known as TARP. At first, there was marked disagreement by the residents concerning the prudence of the plan. This apprehension was rightly placed. Fear was instilled in the people, rekindling long forgotten memories of the 1930s if this plan was not enacted. Yet despite obvious gaps the TARP plan successfully passed. Why was TARP inappropriate? Here are a couple of reasons:
1. Taking money from productive resources and transferring it to unproductive ones is wrong and immoral.
2. The stimulus plan has earmarks but politicians being experts in deception have called it by another name.
3. Politicians already have hooked the U.S. public with $9.7 trillion on bailout programs, yet still there are problems.
4. Anyone who believes deficits don’t matter is akin to someone believing in the tooth fairy. Total U.S. debt (public + private) is already close to 350% of GDP, the highest ever. Spending is not a way to prosperity, this is a Keynesian myth.
5. This is not counting unfounded liabilities (social security, medicaid, medicade) total about $45 trillion (conservative estimates).
6. Where is the stimulus money coming from? Debt. If there isn’t sufficient private demand for U.S. garbage (aka Treasurys), the Federal Reserve has hinted it will buy (by printing money out of thin air). This is ultimately price inflationary.
7. The primary beneficiaries of the stimulus plan will be those corporations connected to the politicians. This is why some CEOs crave for the plan.
8. If centralized economic planning works, the USSR would be the model to follow. I will let history speak for itself on this.

What is most nefarious aspect of fascism is that it is a road to decrease wealth creation; in other words, a path to poverty. How? Simple. The corporate aspect of fascism relies on what is call rent seeking behavior; that is, “[t]he expenditure of resources in order to bring about an uncompensated transfer of goods or services from another person or persons to one's self as the result of a “favorable” decision on some public policy.” Put another way, entities seek to increase productivity chiefly by legislation (i.e. changing laws) rather than by internal economies of scale. Companies and individuals in a fascist economy are more concern of cajoling local politicians to pass a law limiting external competition than seeking other meaningful ways to improve their product. This behavior multiplies with time. Product quality declines, ways of achieving higher productivity decreases, lobbying of government officials increases, and corruption becomes rampant.

Therefore, it is of no surprise when a Wall Street Journal article reports “how the group [made up of financial firms] spent millions of dollars lobbying members of Congress on the issue, followed by a hearing in which the lawmakers pressured the Financial Accounting Standards Board to amend the mark to market rules,” and how they are “taking steps to delay an accounting rule that would force banks and others to bring some of their off-balance-sheet vehicles back onto their books next year, which could force some to raise additional capital.”

In a truly free society none of these actions would be acceptable. But in our current world, it has become common wisdom. The ancient Biblical prophet Isaiah exclaimed accurately: “Woe unto them that call evil good, and good evil; that put darkness for light, and light for darkness.”

Monday, June 1, 2009

One kind of debt replaces another

The following is a sobering article, particularly in light of the extraordinary upswing the Dow Jones Industrial Index has experienced over the last couple of days. Bold sections represent my emphasis. There is a perception that we have turned the corner. But do not be deceived, the fundamental problems emanating from leverage have not dissipated. I wish the economy would be in fact be demonstrating the "green shoots" many pundits talk about. The reality is the opposite, however. There is no greenery to be seen. The stage is merely being set for a dramatic fall in the market later this year.


One kind of debt replaces another
By Edward Chancellor
Published: May 31 2009 16:18

As the stock market revival survives its third month, talk is turning from “green shoots” to a “sustainable recovery”. Yet this economic pick-up, like the one which followed the technology bust, has a potentially fatal weakness – it is fuelled by the rapid expansion of non- productive credit. America has not yet been cured of its addiction to debt. All that has happened is that excessive growth of household credit has been replaced by an even more extravagant expansion of government borrowing.

Leading economic indicators around the world have picked up in recent months. This is evidence of a synchronised global economic recovery, itself the product of massive co-ordinated fiscal and monetary stimulus. Furthermore, US house prices are no longer in bubble territory. The stabilisation of the housing market should stem the growth of non-performing loans in the banking system. The pronounced decline in Libor – the rate at which banks lend to each other – over recent months suggests the credit crunch may be behind us.

A recent note from Independent Strategy, a research company, questions this upbeat picture. Excess household leverage lies at the core of the credit crisis, it says, but little has been done to remove this problem. De-leveraging in Japan, which followed the banking crisis of 1997 and started from similar lofty levels of private sector debt to GDP, lasted for more than a decade. The era of Japanese debt reduction was accompanied by prolonged economic fragility. The path to rectifying US household balance sheets is likely to be long and arduous. Only a few tentative steps have been taken so far.

Incomes are being maintained by debt- financed handouts from Washington. This creates another problem. The increase in government debt is preventing a necessary rise in the US savings rate after years of profligacy. “If excess consumption lies at the core of the credit crisis,” says Independent Strategy, “the problem has been worsened by government adding leverage to help households sustain their own unsustainable debt.”

Public policy today serves to delay the day of reckoning rather than promote a return to economic equilibrium. We have been through this process before. During the technology boom of the late 1990s, US corporations were expanding net debt at an annual rate equivalent to 6 per cent of GDP.

This was a classic case of Hyman Minsky’s “Ponzi finance”. Corporate profits and asset prices became dependent on access to fresh borrowing. After the stock market turned down in spring 2000, credit dried up and the economy started to contract.

The Greenspan Fed administered the cure: interest rates were slashed and consumers were told to borrow and spend. By 2006, household credit was increasing at a rate equivalent to 9 per cent of GDP. At the time, Ben Bernanke and Timothy Geithner, then head of the New York Fed, hailed the “Great Moderation”. Yet after house prices turned down, consumers found they could no longer use their homes as ATMs. The contraction of mortgage loan growth removed a vital economic prop.

With the consumer out, it is the government’s turn to rescue the economy. Last year, net borrowing by Washington soared to 9 per cent of GDP, according to the Fed’s Flow of Funds data. This increase was equivalent to additional household borrowing at the peak of the mortgage credit bubble.

Bianco Research keeps a tally of the ever-increasing bail-out costs. These currently stand at $4,200bn (£2,600, €2,975), larger than the inflation-adjusted costs of the second world war, according to Bianco.

Another way of quantifying the bailout is provided by Grant’s Interest-Rate Observer, which adds together the fiscal and monetary response (as measured by the increase in the Fed’s balance sheet), expressed as a percentage of GDP. According to Grant’s, the current stimulus totals some 30 per cent of GDP. By contrast, the sum of all the fiscal and monetary measures during the 12 previous US economic downturns since 1929 comes to a mere 39 per cent. Over the years, the US economy has become addicted to massive credit growth in excess of incomes, argues Doug Noland in his web-based Credit Bubble Bulletin. The economy and the financial system, claims Mr Noland, start to buckle when non-financial credit increases by anything less than $2,000bn. For the moment, Washington is providing the source of this credit growth, either directly or through the giant mortgage agencies. A “government finance bubble”, in Mr Noland’s phrase, has replaced the mortgage credit bubble.

Yet the US government cannot support both the economy and the financial system indefinitely without ruining its own balance sheet. The alternative is for Washington to retrench. Only when that happens will we discover whether the current recovery is any more soundly based than the one which preceded it.