GOP presidential candidate Rep. Ron Paul will unveil his economic plan Monday afternoon, calling for a lower corporate tax rate, cutting spending by $1 trillion during his first year in office and eliminating five cabinet-level agencies, including the Education Department, according to excerpts released to Washington Wire…
But Mr. Paul does get specific when he calls for a 10% reduction in the federal work force, while pledging to limit his presidential salary to $39,336, which his campaign says is “approximately equal to the median personal income of the American worker.” The current pay rate for commander in chief is $400,000 a year.
The Paul plan would also lower the corporate tax rate to 15% from 35%, though it is silent on personal income tax rates, which Mr. Paul would like to abolish. The congressman would end taxes on personal savings and extend “all Bush tax cuts.”
He would also allow U.S. firms to repatriate capital without additional taxes. Some lawmakers have recently proposed such legislation as a way to spur job growth. Its critics argue that a tax holiday for companies with money abroad has not historically led to domestic investment.
But the plan, at its heart, is libertarian. While promising to cut $1 trillion in spending during his first year, Mr. Paul would eliminate the Departments of Education, Commerce, Energy, Interior and Housing and Urban Development. When former Massachusetts Gov. MItt Romney unveiled his economic plan last month, he said he would submit legislation to reduce nonsecurity, discretionary spending by $20 billion.
Mr. Paul would also push for the repeal of the new health-care law, last year’s Wall Street regulations law and the Sarbanes-Oxley Act, the 2002 corporate governance law passed in response to a number of corporate scandals, including Enron.
I think this is a good start to addressing the problem.
I also think this is the most serious proposal from any of the current candidates, Democrat and Republican alike.
Some may call for incremental changes. We’re past that point. We’re going to face an economic collapse. There’s no sense in strengthening federal power when this happens. And there is no point in continuing the policies that led to this problem.
Ultimately, Paul’s plan is the best out there, though it could certainly be improved upon. My proposal would be to cut all unconstitutional spending. I think that would solve a lot of problems in fell swoop.
Prevailing practitioners of economics tell us that inflation stimulates exports. They get this inverted. Otherwise, pray tell, why wouldn’t Zimbabwe be the world’s leading exporter? Inflation inflicts injury upon the manufacturing base, engendering capital outflow and the destruction of jobs.
Contrary to prevailing economic orthodoxy, inflation is not export-friendly. Inflation nurtures dependence upon cheaper foreign markets to supply us with production (i.e. begets capital outflow). Capital outflow can be reversed by compelling the Fed to tighten. If the Fed tightens, interest rates rise, prices caollapse to reflect wages, the market clears (only then does the economic recovery begin), dollars that have accumulated in foreign reserves will coming flowing back into the domestic loan market, thus lowering the natural rate of interest.
“The dollar rose against most major currencies on Thursday as a latest report showed U.S. trade deficit plunged in February,” pursuant to one news source. (1)
“The contraction in the deficit came with a big recession-driven fall in imports and an unexpected rebound in exports, the Commerce Department said overnight in the US,” pursuant to another news source. (2)
In July of 2008, the dollar went through a rally – albeit, a pseudo-rally – marked by falling nominal prices. Although falling nominal prices is not deflation (i.e. the contraction of the money supply, which would be a healthy thing), that’s the definition of deflation pursuant to prevailing orthodoxy. When the dollar rally began, the trade deficit declined, due to both falling imports and increasing exports. In other words: the fall in the trade deficit had been accompanied by a dollar rally. What prevailing economic orthodoxy teaches regarding the international cycle of trade betrays this possibility.
In November of 2007, Ben Bernanke put on an exhibition of his confusion when he said that inflation is inconsequential for everything but imports. (3) He literally said that dollar devaluation raises prices of everything not denominated in….dollars! Apparently, Bernanke has been blinded by prevailing orthodoxy, which tells us that inflation mitigates a negative balance of trade – another Keynesian apologia for inflation that needs to be buried.
On a peripheral note, Bernanke’s argument runs slightly afoul of prevailing orthodoxy. Prevailing orthodoxy tells us that inflation does raise prices for Americans, and that this magically lowers real prices for foreigners. If Bernanke can’t figure out that increasing the supply of dollars raises dollar denominated prices, then the average person is hopeless for understanding the international cycle of trade and how capital flows.
The decline in imports and rise in exports in juxtaposition with the short-lived dollar rally were not a fluke, nor is this inexplicable. The trade “deficit” is but a symptom of monetary policy. A trade “deficit” isn’t bad per se. A trade “deficit” between two countries is no worse than a trade “deficit” between two towns. The consequential part is if the trade “deficit” is due to something other than comparative advantage (e.g. inflation).
“Again, suppose, that all the money of GREAT BRITAIN were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages?” –David Hume, Essays, Moral, Political, and Literary, 1752
What mainstream economists teach runs contrary to what David Hume taught us in 1752. Prevailing economic orthodoxy inverts the international cycle of trade. We are told that inflation mitigates the trade “deficit”. By inflating the money supply, dollars will become less attractive to foreigners. Thus, runs the argument, foreigners will follow by curtailing exports to the U.S. Somehow, domestic productivity will magically be increased, stimulating exports.
The genesis of this error is begotten by the underlying macroeconomic assumptions. Rather than using microeconomic principles to understand macroeconomic phenomenon, mainstream economics fragments microeconomics and macroeconomics into separate compartments. Macroeconomics then becomes myopic, by lopping individuals out of its paradigm. Myopic macroeconomics doesn’t consider individuals; it only considers aggregates.
Translated, the macroeconomic analysis is this: the country has dollars. If the country, or nation – or whatever aggregate you wish to use – decides to print more dollars, the country, or nation, isn’t going to refuse to use its own dollars. However, the country, or nation, of, say, France, being a different country, won’t like very much the devalued American dollar.
I guess we aren’t supposed to ask why both inflation and the trade “deficit” have risen in juxtaposition with one another. Sound economics gives us that answer. If inflation did mitigate a trade “deficit”, then one is boxed into the position of currency devaluation wars. Inflation vs. counter-inflation vs. hyperinflation.
The economy is made up of individuals making choices in exchanges. When the government devalues the currency, this doesn’t only make dollars less attractive to individuals abroad, but also to individuals right here at home. This is reflected with higher prices. It isn’t about aggregates printing more money for use by aggregates.
Consequently, inflationary stimulus interferes with the price mechanism preventing prices from falling to reflect wages. The market fails to clear, thus derailing an economic recovery. With mass unemployment, the last thing that will rise will be wages. The domestic cost of production goes up. Thus, to reduce costs, capital flight takes place. Inflation actually increases the dependence upon cheaper foreign markets to supply us with production.
As David Hume saliently articulated in 1752, inflation makes not only the currency less attractive abroad, but also the higher-priced goods. It also makes the higher-priced goods less attractive right here at home. Using inflation to remedy a trade “deficit” is akin to breaking a leg to make yourself more competitive.
The short-lived dollar rally in 2008 – thanks to central bank policy – was not the consequence of the declining trade deficit; it was the cause of the declining trade deficit. Everything denominated in dollars becomes cheaper. It shouldn’t take a genius to figure out that one doesn’t become more competitive by raising prices.
If inflation actually mitigated a trade deficit, Zimbabwe would be one of the world’s leading exporters. Inflation doesn’t lower real prices for anybody. But even if inflation did mitigate a trade deficit by lowering real prices for foreigners, while making things more expensive for Americans, why would that be a good thing? Why should American economic policy be calculated to make things cheaper for foreigners and more expensive for Americans? Economic growth – which is not measured by the GDP – engenders falling prices, which is a good thing.
Pro-inflationary stimulus has served one purpose: preventing prices from falling to reflect wages. The market then fails to clear. The real issue isn’t even the direction of nominal prices, but what prices would otherwise be absent central bank manipulation. Even if prices fall in nominal terms while wages fall much faster, then we’re still suffering from the consequences of inflation. We can be suffering from lost price deflation. Falling nominal prices engenders rising real wages.
Inflationary policy by the FOMC suppresses nominal interest rates by increasing the supply of loanable funds, but without a genuine expansion of savings to fund investment. Investment can only come out of savings since producers must be able to consume in order to sustain the process of production. Deploying printing press money (i.e. unearned income) transfers money away from producers and the process of production to consumers. Inflationary stimulus disconnects consumption from production, turning Say’s Law upside down. Thus inflation not only drives capital overseas, but begets capital consumption. Inflation is injurious to the process of production.
Increasing the money supply tricks the loan market into consummating unjustifiable loans to non-credit worthy projects. That’s why malinvestment occurs and projects are halted midstream with the revelation of malinvestment. By allowing debtors to pay back creditors with devalued dollars, real interest rates are suppressed. There’s no right way for the loan market to extend credit at negative real rates, which is a negative ROR in real terms. That’s a calculus for the loan market to go bust as it did in 2008. See: http://www.federalreserve.gov/releases/h3/hist/h3hist1.htm Check out the early months of 2008. That’s not psychological and that’s not a matter of consumer confidence.
The long end of the curve is most sensitive to market forces while the short end of the curve is most sensitive to FOMC policy. If the Fed stays loose to prop up the bond market, this will undermine the very bond market the Fed is trying to prop up. Investors/lenders will account for the inflation risk by tacking an inflation agio onto the curve. Eventually, the Fed will lose control over the short end, too. Under the scenario where the Fed stays loose, there will be no floor underneath the dollar nor any roof on interest rates. If the Fed tightens, the short end will collapse instantaneously, bringing the long end down, too.
Under the scenario where the Fed props up the bond market indefinitely, both the bond market and the dollar collapse. Dollars will hit par value with the par value of bonds. The Fed will be left with $15 trillion plus – in nominal terms – worth of bonds on its balance sheet, and we will be left with both junk bonds and junk dollars. The dollar itself will go bankrupt. What’s the par value of bonds? We don’t know, because the Fed has been propping up the bond market.
Under the scenario where the Fed tightens, the bond market will collapse, but the dollar will be saved. Dollars won’t hit par value with the par value of bonds. The only way to save the dollar is at the expense of the bond market.
Until the Fed is compelled to tighten, we won’t have an economic recovery. The loan market has to set interest rates pursuant to the true supply of savings. If interest rates were to hit, say, ten percent on the two-year with a $15 trillion national debt, do the math. The longer interest rates are artificially suppressed, the higher they will have to go in order to correct the imbalances in the economy.
By tightening sooner rather than later, this will not only allow the market to discover the natural rate of interest by letting interest rates rise, this will encourage capital inflow. Capital naturally gravitates towards cheaper, higher-yielding, more efficient economies. It’s called arbitrage. The Fed is waging an eternal struggle against…arbitrage. People naturally gravitate towards where capital gravitates. We should be talking about repatriating dollars to the domestic loan market rather than repatriating immigrants to their native land.
It makes no sense to close down the borders considering the fact that welfare states engender capital outflow and the natural flow of people is to follow capital. (4) Thus it’s hard for me to not imagine that closing down the borders could be used to trap people in rather keep keep people out. Interfering with the flow of capital will necessarily lodge capital where it ought not be. Interfering with the flow of people will necessarily lodge people where they ought not be.
If a person, firm, or institution is dependent upon inflationary credit expansion – as opposed to non-inflationary – for sustenance, that person, firm, or institution is – by definition – insolvent. Somebody or some institution (e.g. the government) is spending beyond their/its means. As a nation, we have spent beyond our means. Expenditures exceed earnings and we depend on foreign markets to supply us with production.
Inflation (i.e. the creation of money ex nihilo) is no substitute for income-generating investment, which inflicts further injury upon an already precarious economy. There’s no right way to invest in the U.S. economy. It’s error to conflate trading with investing. Buying real estate is not investment. I’ll draw the distinction between trading and investing. A trader buys and sells a particular asset class based on nominal price movements. An investor buys and holds a particular asset class based on returns from the underlying asset class itself. In the case of real estate, that would be rents.
The problem isn’t a lack of regulatory oversight. One can’t regulate away past mistakes. Insolvency can’t be regulated away. The only solution is to force up interest rates, prices fall, dollars that have accumulated in foreign reserves will flow back into the domestic loan market, which will then beget a lower natural rate of interest. Any other solution will lead to the destruction of the currency, in which case everybody’s savings get wiped out. Loose monetary policy to prop up a spending orgy engenders capital outflow (i.e. begets outsourcing).
Inflation is a tax. There’s no objective difference between the government taking the money you have in your pocket and duplicating the money you have in your pocket, thus devaluing the purchasing power of what you have in your pocket. Even if prices don’t rise in nominal terms, the real issue is what prices would otherwise be absent central bank manipulation.
Furthermore, if one is going to hold the position that inflation is synonymous with economic growth, then they’re boxed into advocating skyrocketing prices in order to have a fast economic recovery. The way to have a fast economic recovery under such a scenario would be to have prices rise fast. I believe there’s a term for that. It’s called hyperinflation. Who supports hyperinflation?
The only path to an economic recovery runs through monetary tightening by the Fed. Waiting until we have an economic recovery before tightening is a calculus to destroy the currency and the economy. Absent dealing with monetary policy, no candidate can pretend to offer economic solutions. The only candidate who offers real solutions is Ron Paul.
The consequential portion of the video is around the 5:00 minute mark. Inflation is not rising prices. To say so implies that rising prices are caused by…rising prices. That contorts Irving Fisher’s own Quantity Theory of Money. Rising prices are the consequence of inflation, which is an expansion of the supply of money not redeemable in a fixed amount of specie. Prices could drop in nominal terms, yet prices could be too high in real terms. Falling nominal prices engenders rising real wages. We can still be suffering from inflation due to contortions in the price mechanism since prices remain higher than what they otherwise would be absent central bank policy.
The key to an economic recovery does not rest in Washington. The key to an economic recovery is to put Washington through a recession. Any efforts by politicians to con you into believing they’re stimulating some kind of economic progress – again, bribing you with your own money – by promoting one form of energy or another should be detected as a ruse.
Some politicians have gone “green” in the name of curtailing “dependence on fossil fuels” and “foreign oil.” It’s a sham. Why not promote a certain type of underwear in the name of curtailing dependency on a foreign brand?
The fundamental problem is that most politicians and central planners view the economy as a blob to be manipulated, rather than a complex capital structure involving individuals making choices in exchanges, a process of production, and a price mechanism.
The reason why the United States is so dependent upon foreign oil is due to policies that have already been put in place. The solution, then, is to repeal and correct these policies – not creating new legislation.
Artificially low interest rates, brought on by loose monetary policy at the FOMC, drives capital overseas (by deploying unearned income from a printing press, disconnecting consumption from production, capital is also consumed). Capital naturally gravitates to cheaper, more efficient, higher-yielding economies. Rather than generating revenue and income, the nation spends beyond its means.
If a person, firm, or nation is dependent upon inflationary credit expansion (as opposed to credit expansion from savings), then that person, firm, or nation is insolvent and inefficient. We are spending beyond our means, which – yes – engenders dependence upon cheaper markets to supply us with production.
If you want to reduce dependence upon foreign “anything,” then the Fed has to lift interest rates and Washington has to abandon the spending orgy. Dollars that have been accumulating in foreign reserves will then come flowing back into the system.
I know “clean” energy sounds so nice, so attacking it is very “environmentally-incorrect.” I will put everything I possibly can into layman’s terms. Let’s start with the following axiom: we consume energy in everything we do. If you’re that environmentally-conscious, you shouldn’t be online reading this right now because you’re using electricity which is consuming energy.
Solar energy sounds so nice. After all, it comes from the sun. But let’s not forget that there is a process of production here. Take, for example, the solarization of a house. Solar energy requires panels, charge controllers, batteries, inverters, etc. And then let’s not forget capital asset depreciation. Energy is consumed during the process of production.
If “clean” energy has a positive yield, then it will be profitable and private enterprise will pony up the capital. The government need not encourage this. If “clean” energy has a negative yield, then this means that it is unprofitable and dependent on so-called “dirty” energy for its sustenance. It would be akin to consuming 1,000 blueberries for every 500 you’re growing – nobody in their right mind would pursue that course absent government subsidies. Somewhere, you have to make up the difference.
This leads me to the following axiom: the most profitable and economically-efficient form of energy, within the construct of the unhampered market, is also the cleanest form of energy.
The best ecological hygienist is the unhampered market. Suppose a logging company owns a forest. That logging company can clear-cut the forest, say, tripling immediate income. However, this must be weighed against diminishing future income, or the capital value of the forest as a whole. Suppose, however, this is government property. This calculation no longer needs to be made, and the objective is going to be rapid extraction of resources.
No shocker, then, that government is the biggest abuser of the environment and waster of resources. Look at the atomic weapons tests done in the Nevada desert – and right on top of our own military service members.
The government does not sustain itself by satisfying consumer demands, but through compulsory taxation. Government subsidies to, and control over, industry diminishes the need to set prices pursuant to supply vs. demand. Why? Because sustenance is no longer dependent upon having to satisfy consumer demands. Sustenance is disconnected from the satisfaction of consumer demands.
It’s the price mechanism that ensures resources are allocated and managed efficiently. The price mechanism can only function within the construct of the unhampered market, allowing for producers to set prices pursuant to supply vs. demand (i.e. market-clearing prices). The scarcer the supply, the greater the demand, the higher the price. Consumption runs inversely with prices.
Government subsidies distort prices, interfering with the price mechanism, and cause prices to be set above, or below, market-clearing prices. There is a paradox in government policy in that the government encourages consumption without production (in the name of economic stimulus), tells us that we should conserve resources, while simultaneously punishing “price gouging.” Within the construct of the unhampered market, there can’t be price gouging any more than there can be wage gouging, since vendors can’t short inventories at prices beyond what consumers are both willing and able to pay.
Prices send signals to entrepreneurs, telling them where to deploy capital. Prices tell consumers what to buy and what not to buy. The price mechanism can only function within the construct of an unhampered market. There’s no need for the government to encourage or discourage the use of any kind of energy. And let’s not forget that tax credits are subsidies camouflaged as tax cuts. A tax credit merely allows a person to use a portion of income for a specific purpose (i.e. indirect subsidy). (See: http://www.businesstaxrecovery.com/articleupdates/definition-tax-credit)
I write as a native-Minnesotan. Minnesota is one of the first states that employed the use of ethanol-blend fuels. Let me say that if I see anything with ethanol in it, I avoid it like the plague. It’s “cheap” for a reason; it’s inefficient.
Only can politicians get away with turning efficient food into inefficient fuel. If politicians keep at it, we will soon be filling our automobiles up with corn and drinking motor oil. Maybe after installing those solar panels, the government can begin shooting those pollution particles (See: http://www.telegraph.co.uk/earth/environment/climatechange/5128109/Shoot-pollution-particles-into-atmosphere-to-cool-Earth-says-Obama-adviser.html) – which supposedly ”clean energy” is designed to prevent – into the atmosphere in order to block the sun and “save” us from “global warming.” Sounds like the perfect plan. It’s a plan only a politician in D.C. could dream up.
Soon, we will not only be dependent upon foreign sources of “fossil fuels,” but also so-called “clean energy.” Unless you get out and support Ron Paul for president.
I can tell you the exact date (Saturday, February 13, 2010) that I saw that TheDailyBell.com had a “guest Editorial” by Dr. Ron Paul, who I admire because he is the only Senator in Congress whose economic philosophy is the Austrian school of economics, which, in fractured German, is “ein Austrian economischer”, which I purposely use to paraphrase John Kennedy, who famously said, “Ich bin ein Berliner”, which actually translates from German as “I am a cream-filled pastry”, but everybody knew what he meant, which was that he was just another clueless American Democrat who wanted to save the whole world by taking over the whole world so that they could change the whole world, and who had the majority of American voters and Congress behind him, all of whom have heads that, for all apparent intents and purposes, are cream-filled, and that is why Kennedy said that he, too, behaved as if he had a head filled with whipped cream.
Oh, I am sure that there are those who disagree with my interpretation of what a dead president meant when he said he was a “cream-filled pastry”, and there are those who dispute my understanding of the vital role of the taco (“The prefect snack, any time!”) and the candy bar (“Perfect for times between tacos!”) in today’s modern, health-conscious world, too, so go figure. Idiots!
Regardless, the state of my mental faculties or the fact that I sound, look and act exactly like an idiot is not the point. The point is about the importance of owning gold, silver and oil when the truly idiotic Federal Reserve keeps increasing the supply of credit and money, especially as it is used mainly to buy an avalanche of new government debt (monetizing the debt! Gaaaah! We’re freaking doomed!), and how the title of his article, “More Spending is Always the Answer”, is so ludicrously ridiculous that I could not believe my eyes that Senator Ron Paul, of all the people in the world, is saying that “more spending is always the answer”, because nothing could be farther from the truth, and it is, instead, waaaAAAaaay out there past the outermost, frigid fringes of Truth, a place where we find “The promise of True Love” and “The check’s in the mail.”
It turns out that he was being sarcastic, as I should have known, and he says, “Continually increasing the debt is one of the logical outcomes of Keynesianism, since more government spending is always their answer. It is claimed that government must not stop spending when the economy is so fragile. Government must act.”
The problem is that “when times are good, government also increases in size and scope, because we can afford it, it is claimed.” Exactly!
In short, the blockheads in Congress, the Federal Reserve, the majority of the laughably-incompetent university economics professors in the country, the morons of the President’s council of economic advisors, and all Democrats, all believe that “There is never a good time to rein in government spending according to Keynesian economists and the proponents of big government.”
As a case in point, “Last week, the House approved another increase in the national debt ceiling”, he says, meaning that the idiotic American government can now legally borrow $1.9 trillion more, on top of the $12 trillion already borrowed and owed, “to stay afloat and avoid default”, although he did not mention that this monstrous new load of debt is only expected to last until just after the mid-term elections this year, at which point Congress will take us farther and farther into a deadly financial quicksand with another extension of the debt limit! Hahaha!
In this regard, Junior Mogambo Ranger (JMR) Alan L. writes, “Call one drop of water a dollar. Five drops equals one milliliter. Question: What is the volume of water of $14 trillion?”
Instantly, I am back in high school, feeling panicked and trapped because the teacher has asked me a question that not only do I NOT know the answer to, or how to figure it out, but I don’t even care, and I never WILL care about it because if I was ever actually on a train that was leaving Chicago towards Los Angeles, 2,000 miles away, going 60 miles an hour, and I knew that another train was leaving Los Angeles going to Chicago at 70 miles an hour, I wouldn’t get on the damn train! It’s that simple!
So I don’t freaking CARE how long it would be before they met and they crashed into each other with a big explosion and there are bodies everywhere and what a mess, because I won’t be there! I’ll read about it!
Apparently, JMR Alan saw the panic in my eyes, or perhaps it was the way I was reaching under my jacket preparing to shoot my way out of here if necessary, but either way, he was pretty quick coming up with the answer: “Twenty times the volume of the Great Lakes. That puts the entire area of the United States 50 meters underwater.”
Wow! I seem to remember some handsome rascal and clever bon vivant, with a twinkle in his dazzling blue eyes and a roughish grin on his boyish-yet-rugged face, say “We’re freaking doomed!” as a result of the abject stupidity of Congress and the Federal Reserve in the last 90 years or so since the Fed was created, and especially as a result of the stupidity of the last 40 years when Nixon refused to exchange dollars for gold, and doubly especially since 1997 when Alan Greenspan really started getting insane with monetary policy, and triply especially since 2008 when the unbelievably preposterous Ben Bernanke and his loathsome Federal Reserve doubled the money supply at a stroke! At A Freaking Stroke (AFS)! Doubled!
This – THIS! – is the worst thing that could happen for those of us whose fear of hyperinflation, which is guaranteed after a hyperinflation in the money supply, makes us buy gold, silver and oil with a fearful, frantic frenzy that precludes even thinking about spouses and children, except maybe about how they are a big, heavy weight around my aching neck and my only hope is to get more gold, silver and oil, which, when I do, make the whole problem worse and worse! I can’t win!
And don’t get me started on the hassles of having a few defensive fortifications in the backyard to further protect yourself against the massive social unrest that inflation causes. Neighbors are always whining about something, like maybe a couple of accidental shots, probably less than a hundred rounds all told, allegedly emanating from the Mogambo Bunker Of Trembling Terror (MBOTT), that didn’t even hit anybody, and the only real damage was Carl’s stupid barbeque grill, which was old, rusty and ugly to start with, and I didn’t think he would even mind, and there was some collateral damage to his stupid water heater, too, which was ditto on the old, rusty and ugly.
But the point is that the Federal Reserve is going to kill us with inflation in prices as a result of their relentless inflation in creation of money and credit as a result of the federal government deficit-spending so incredibly much money, and you should get some gold, silver and oil right away!
You will be glad you did, and you can fit a surprising lot of them in even the most modest-sized bunker, yet still have lots of room for supplies of ammunition, frozen pizzas and pornography. So, whee! This investing stuff is easy!
Money Supply Flood to Drown US Economy originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
Interview With Jim Willie
An interview with Jim Willie where we discuss the potential of bank failures emanating from the Middle East and rippling throughout the world being the catalyst for the next round of the credit contraction.
TRACE MAYER: Hey this is Trace Mayer and you’re listening to the 50th episode of the RunToGold.com podcast (mp3)and today I’ve got a special guest with me – Jim Willie from GoldenJackass.com. Hi Jim!
JIM WILLIE: Hi, good to be here.
ENEMIES AT THE GATE
TM: Yeah, good to have you with me. I know we communicate every now and then about lot of the very important things. And you have just posted a really important article about five minutes ago. Can you give us a brief overview about what this article is about?
JW: Sure. The article is entitled “U.S. Bank Enemies at the Gate“, I wanted to take off on that wonderful title about the Siege of Stalingrad, but you know there’s a lot of attention, Trace, that US Banks are doing this and interest rates kept low, liquidity is strong and blah, blah, blah. And what they’re missing is that foreigners have their own agenda. They have their own bank failures. They have their own failed construction projects and their own failed-nations if you will, like Spain. I think we may see a threat to the U.S. banking system come from outside. Like for instance Persian Gulf bank failures just span across the United Arab Emirates and Kuwait and Saudi Arabia and before you know it – London and New York, so maybe there is a threat outside and we have got too much attention on the inside.
TM: Yes. Because we are seeing really high inflation rates in many middle eastern countries and they are also engaging in their own type of bailouts and stimulus packages, although they might be named differently. And so you are thinking that we may see perhaps a major bank failure come out of the middle east which will affect one of our large London or New York banks?
JW: Yeah. What I am hearing that the Dubai construction projects with all the pictures of magnificent bridges and unbelievable architecture for high rise buildings may look good but are failing at an unbelievable rate – the construction boom has turned into a magnificent bust and the bailouts have come from Abu Dhabi, the financial center, is like the London of the entire Persian Gulf. So, they are bailing out these construction firms, billions are changing hands, and the currency of choice that is being loaded up on all kinds of balance sheets is Treasury Bonds. So they will start liquidating and they have already begun this and if they continue the liquidation process then we are likely to see more bank failures just from lower values.
And you know, they have to deal with their own reality. They do not have a Plunge Protection Team there, they do not have phony stress tests there, they do not have phony accounting standards board. I go into more details in the article and even more detail in my August Hat Trick Letter member’s only which is a great source of information.
There is a lot of stinking stuff coming down the pipe and if we see some bank failures string across the Persian Gulf then there is no way it does not reach London and New York because they own a lot of bank stocks for the giant U.S. Banks. Now, there is a threat that you are just not catching in the financial networks in the U.S.
FAILED REAL ESTATE
TM: Right. Interest rates regulate production over time. By keeping the interest rates artificially low, we stimulated this huge commercial real estate bubble here in the U.S., but if we think the US commercial real estate bubble is a mess then just look at what has happened in Dubai. They built all this commercial real estate and what underlying economy do they have in Dubai; sand. There is no real underlying economy there to support any of these loans on the bank’s balance sheets.
So now they have built all these giant skyscrapers that are all like white elephants of dehydrating debt in the dessert. There are these huge buildings and they are all completely empty; are they not? Of course we are going see many bank failures coming out of Dubai. Do you think that is going to start impacting the U.S. banks here because like Prince Alwaleed, a big shareholder in Citigroup, for example might want some New York banks to subsidize these failed projects with bailout fund?
JW: Well, I think that could be the sequence that happens and there are a lot of unknowns. There is one particular construction project that I think of all the time when somebody says, “Oh, the big Dubai construction boom”. Well, there is a big property with all kinds of housing and it is laid out from shaped like a big palm tree. If you are looking down from 5,000 feet it is a beautiful, beautiful thing.
What I have heard is that it is entirely empty. It has failed with no income stream. Now, I would like to just to make a quick point here and it is not like their economies are based on processing sand. They have an oil industry and a petro-chemical industry. They make refined gasoline, chemical products, have feed stock, crude oil and natural gas.
Saudi Arabia actually has the most diversified economy in the Persian Gulf. I do not think they make their own pharmaceutical aspirin pills or razor blades or soap but maybe some. But as for other Persian Gulf nation like Kuwait, U.A.E. and Bahrain, they do not have a diversified economy but they do have a petro-chemical industry and that is it. Banks and Petro-chemical.
So, beware of the threat from the back door where you have some bank failures as this is not just a liquidation of Treasury Bonds, I am talking about bank failures – large, large Persian Gulf banks that go bust and as a result there is a vast liquidation that takes place which ripples into New York and London. That is what I think could happen.
TM: Yeah, and then we see the next round of this credit contraction start because, as you know, we had the first shocks last year and we had a little bit of shaking and we saw couple of buildings go down – Lehman Brothers and AIG, but as I have written about in my book The Great Credit Contraction, which you like, is that this is just getting started. And we are seeing the collapse of a multiple centuries old monetary system. We are in for the next round and I would not be surprised if we do see the next shock-waves emanate from the Middle East.
JW: But we are getting shock-waves that happen from the inside too, Trace. Look at the FDIC today. FDIC came out and says four hundred and sixteen troubled banks, well try a thousand.
TM: Or four thousand!
JW: And their fund is dead, so they raised some fees earlier this year on member banks within the system. But they are going to have to raise it again and the bank industry has said this will reduce earnings and it is going to reduce liquidity which decreases their ability to lend. So, the FDIC itself is going to be a wet blanket on the banking industry even if they appeal to Congress for the increased funds and that is going to cause the insolvency of more banks and add pressure to the U.S. government and the Dollar. So the threat is outside the gate.
The point my article is that we have got many threats inside the economy and I agree with you completely-we are about to the second round of the monetary banking credit crisis. Perhaps September or October, probably September, but there are a lot of factors that point to the next few weeks. The FDIC announcement may be one of those factors. The summer vacation is another, they have to increase the Federal Debt limit beyond $12.1 trillion and look for Congress to come back with an attitude of responsibility when they cannot afford to stop the printing press. So, we a lot of factors coming in right now.
WHAT TO DO
TM: And so, what do people do, obviously my site RunToGold, I like the monetary metals – Gold, Silver, Platinum – what do you suggest people do, to protect themselves and to protect their capital?
JW: Well, on a smaller scale, if you only have a few thousand dollars that you want to protect, and you are not huge saver from the last twenty years from your career then I would suggest getting some gold coins or silver coins. But I would avoid the century old, you know, like the Morgan Silver Dollars. But you do not want to be buying fifty thousand dollar coins. You want bullion coins like the Silver Eagle, Kruggerand, Mable Leafs, Gold Eagles, etc. Get the standard coins because you get a lot more bullion for the price. But I do not think buying $150,000 worth of coins makes too much practical sense. You have to store them.
I believe that GoldMoney as you do, is a fine institutions, and there are others like the BullionVault, etc, but I like GoldMoney because of the way it is run and the payment features that they have.
I recommend buying gold and silver bullion bars whether 1 kilogram, 5 kilograms, 10 kilograms and etc. The real lesson that we are seeing in this credit contraction, economic failure and banks system insolvency is that because for a full generation the money has been been paper and now what survives will be not paper. It will be the metal.
TM: Yes. And in most cases, it is not even paper that is the currency supply but just little digits on a hard drive which is even less real than paper. We might even see a rush to the physical paper notes before we see a rush from the physical paper into the physical metal.
JW: The electronic money trade makes not only possible paper counterfeit but electronic counterfeit and where you can have computer programs counterfeiting your bonds, I mean imagine, this is why we have got trillion dollar frauds. One of the points I make in this article is something that Karl Deninger said that we need a new resolution trust corporation. But that is totally of the mark. We are never going to see it because because many properties are tied to different mortgage bonds and the fraud. And you cannot have an RTC if they go and buy a mortgage bond and then they have got to pay it out three times. It will not make any money and so there will not be a new RTC. You are going to have a top down solution with more and more fraud like TARP solutions, etc.
TM: Well good interview. I know that we are pretty short on time so I would like to thank you for coming on and sharing a little bit with our RunToGold.com listeners. Once again, you have been listening to Jim Willie of the GoldenJackass.com and thanks Jim.
JW: It has been my pleasure and watch this case that is likely its going to go the Supreme Court where the Federal Reserve is going to defend itself against the Freedom of Information Act. It is going to be the private Wall Street Syndicate versus the People. This will be quite interesting.
TM NOTE: Be sure to pre-order a copy of End The Fed by Ron Paul which debuts on 16 September 2009 and help Raze The Fed. With enough pre-orders it will make its appearance as #1 on Amazon and perhaps be a bestseller on the New York Times list which will cause even more pain for the Federal Reserve and Tim ‘tax cheat’ Geithner regarding House Resolution 1207. He was extremely uncomfortable in his Digg.com interview with the Wall Street Journal.
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