International Forecaster Weekly

A Lever To Keep The Economy Afloat

A lever to keep the economy afloat... record debt levels - 82 trillion, record rate of debt growth as well... Rumsfeld running operations off the books... Davos... Colombia and Venezuela... statistics to reflect upon... and more...

Bob Chapman | January 30, 2005

We find that Federal Reserve monetary policy works by inciting changes in financial asset prices. Speculative trading is at the heart of their system and its liquidity, and balance and stability are maintained only as long as the Fed keeps leveraging. That is via the stock market and real estate. Those wealth factors keep America happy. Any sane person knows that your house cannot be an ATM machine forever. You cannot forget that leverage works both ways. Once leverage comes to an end, we have deflation. It should not and never has been heretofore the place of the government or the private Federal Reserve to accommodate massive debt. This is risk the average household does not understand and should not undertake. This is not creating financial and economic stability. In fact, it is just the opposite. The leveraging of today’s US housing market is going to be one of the colossal financial blunders of all time. The system has to be purged and that very serious structural adjustment is the only thing that can return our financial system back to stability. You cannot keep a system afloat by enticing foreign investors solely to keep their currencies from appreciating against our dollar. Who knows when the foreigners will cease accommodating our debt. This is being played out by the value of the dollar. It sinks as debt rises and accommodation wanes.

This is all gambling plain and simple. The financial affairs of our government and households are not supposed to function that way. Markets are going to fall and destabilization is on its way. Excesses are about to be accounted for. The stampede begins slowly with a little distress, which gives into fear and dissatisfaction. Bonds, stocks and real estate begin to fall in value and commodities; gold and silver, become the only safe haven in the storm. If nothing else, they will win by default. The world is about to rediscover that the only real money is gold.

From 2000 to mid-2004, credit grew $2.4 trillion a year. That is three times as fast as ten years earlier. It is like being on an accelerator that picks up speed every minute. Eventually it is going so fast you cannot get off. Something snaps and the escalator crashes and disintegrates. Credit expansion has to inherently go forward at a faster rate because if it does not it spirals into recession and depression.

As the world’s reserve currency when the dollar falls all other nations are injured in varying degrees. About 70% of foreign central banks’ reserves are in dollars. Thus, if over a five-year period the dollar falls 65%, the value of the reserves of foreign central banks fall commensurately. That also applies to global businesses, which hold large amounts of dollars. It means as well that when America enters recession so will everyone else. The increase in interest rates we envision this year to protect the dollar value and a reduction in credit expansion will begin a long delayed recession. That will bring about a major contraction in world trade and the world will share our misfortune. We will see currency blocking and controls and finally a breakdown in free trade and globalization. That would leave barter as the system for trading goods.

This is part of the reason we are now at war and foreign occupation. We predicted five years ago that war would create a cover for economic failure. The product of this adventuristic solution is more staggering debt, which compounds the financial problems. These wars will come to an end once the dollar index breaks 80, because that $2.4 billion in foreign inflow will cease. Our elitist leadership is simply going for broke, because there is no other way out. That is why we have the Patriot Act because they will need it to control Americans.

When you pencil in all the debt commitments, you will find the US is on the hook for $82 trillion. That is over 800% of GDP. There is absolutely no question of the eventuality of bankruptcy. Our President told us Afghanistan and Iraq would cost us $50 billion and we are already at $162 billion. That number would double if we began to extricate ourselves tomorrow. Many nations want us out of these Middle East wars. If they were serious about that, all they would have to do is stop our $2.4 billion a day in funding. We have been led into a quagmire by George and the neocons. They do not have the finances and manpower to continue the war. They have lost control of Iraq to the insurgents. There are few additional troops to be sent and a draft would take six months lead-time to send additional trained forces. If the US-UK withdraws, it will be a strategic debacle not only on the field in Iraq but also back home in America. Eighty-five percent of Americans do not have a clue as to the terrible position our country has been put into. When they discover the blunders, the political reaction will be explosive. Then wait until they discover the country is financially out of control.

Finally, George W. Bush has lost his credibility with a large sector of the Republican Party. As we said, we believe the Social Security partial privatization and other changes are dead on arrival. The immigration issue will suffer the same fate eventually. A good portion of both parties do not want to be associated with Bush in any way due to the disaster that Iraq has become. Besides, these elected representatives are already getting ready for the next election and they do not want to be tied to a lame duck. In addition, backing Bush is very dangerous to the Republicans because the lunatic may attack Syria, Iran, or both. An attack on Iran could easily bring a world nuclear war. Another possibility is that the elitist will need a scapegoat as negative world opinion builds and it may be that his own handlers may have him assassinated. The next four months will tell the tale as to where Mr. Bush, the Republicans and America are headed. We can assure you that the Republicans are well aware Mr. Bush’s approval rating of 48 is 10% to 20% below that of every previous setting President at this stage of his second term and 56% of respondents do not believe the Iraq war is worth fighting. They are also aware the dollar index is about to test 80 something, which it has not done since 1972, just before the Bretton Woods Agreement collapsed. This is when we lifted gold backing for the dollar and started to dump our debt and inflation on the rest of the world.

We remember when Cabot Corporation came public. We think it was in 1968 when we read who was involved it was like who’s who from the Council on Foreign Relations, one of Mr. Bush’s latest choices as Secretary of Energy was Sam Bodman who was a mover and shaker at Cabot, which is one of the worst corporate polluters in the nation. In just one year, Cabot released 54,000 tons of toxic emissions from their refineries and was the fourth largest source of toxic emissions in Texas. What else would you expect from these arrogant crooks?

George and the neocons have consolidated control over the military and intelligence communities, covert operations and purged and politicized the CIA. This concentration of intelligence and military power is reminiscent of the mid-1930s in Germany. This control will not only be used against Iran, Syria and other countries, but also against the American people as the CIA is downgraded, the ongoing phony war against terrorism will be expanded. The neocon goal of the establishment of democracy will move forward in the Middle East. As our President tells us, “the survival of liberty in our land increasingly depends on the success of liberty in other lands and the best hope for peace in our world is the expansion of freedom in all the world.” This is Orwellian-speak, for we have other lands to conquer and the key to that strategy is Iran and N. Korea. This is being done not by Americans, but by elitists who control our country. This is a war against terrorism, and Iraq is just one campaign, one stepping-stone in the implementation of their new world order.

Defense Secretary Rumsfeld is running operations off the books free from legal restrictions on other agencies. The Pentagon does not feel obligated to report any of this to Congress. We are talking about what is now called black reconnaissance. As the US prepares for an Iranian invasion, the EU countries have prevented Iran from developing a nuclear weapon, in exchange for economic and trade benefits. The Europeans have tried to get George and the neocons to join in on negotiations, but they have refused to do so. Our government is being run by executive order and there is no control over the President, Rumsfeld or the Pentagon. If we allow this to continue, we will end up in nuclear war.

The FBI has new software for spying and is increasingly asking Internet servers to conduct wiretaps on targeted Americans on the government’s behalf, reimbursing companies for their costs.

The police are now attaching GPS devices to track the movements of suspects, without having to put a physical tail on them. Suspects include anyone who disagrees with the government. Those considered unpatriotic.

A Los Angeles Times poll has found that the percentage of Americans who believe the situation in Iraq was “worth going to war over” has sunk to a new low of 39%. It was 44% in October. Fifty-two percent said the administration should wait to see what the new Iraqi government wanted before pulling troops out of Iraq and 37% said we should begin drawing down some of our troop strength. Forty-seven percent believe we should pull our troops out within a year, while 49% say they could support a longer deployment. Thirty-seven percent said troops should remain as long as it takes to secure and stabilize the country. Support for this war is now lower than support for the Vietnam War was at the TET offensive. Only 4% said they would favor increasing American forces after the Iraqi election. Only 29% believed the US was winning against the insurgents. Regarding the 1/30/05 election: 31% thought elections would have a positive effect; 34% saw no significant effect; and 27% thought the election would lead to more violence. Forty-five percent believed the war had destabilized the Middle East and 24% thought it stabilized the region. Sixty-five percent believed the war had harmed the US image around the world. Only 10% said it helped. The Pentagon has created a new espionage arm and is reinterpreting US law to give Defense Secretary Donald Rumsfeld broad authority over clandestine operations abroad. It is called the Strategic Support Branch and deploys small teams of case officers, linguists, interrogators and technical specialists, alongside newly empowered special operation forces. What is very disturbing is that this new unit has been operating in secret for two years in Iraq, Afghanistan and other places the department refuses to name. They have been interrogating prisons and scouting targets and recruiting foreign spies; work previously done by the purged and emasculated CIA. The agents include many “notorious figures,” whose links to the US government would be embarrassing if disclosed, in other words famous and common criminals. They have agents conducting surreptitious missions, in friendly and unfriendly states, where conventional war is a distant or unlikely prospect. This is all done in the name of combating terrorism.

The funds for the unit came out of a secret black ops fund much the same way the CIA has operated for many years. There was no congressional authority or appropriation. Command is at the Tampa-based US Special Operations Command, or SOCOM, and its clandestine component, the Joint Special Operations Command. They have authority to pay foreign agents as well. Involved is Delta Force and an Air Force human intelligence unit and Navy Seal Team Six. The primary mission is better intelligence about the enemy and to penetrate and destroy organizations such as al Qaida. They also want to set up a Pentagon-controlled espionage school, duplicating the CIA’s Field Tradecraft Course at Camp Perry, VA. The overall concept is to go anywhere and do anything with little or no accountability.

This is augmented by small groups of super-secret commandos, with state of the art weaponry, who are serving in action to protect the President, which previously has never been made public. They operate under a secret counter-terrorism program code-named “Power Geyser.” The precise number of these Special Operations forces in Washington, this past inaugural, is secret but our guess most were from Delta Force. The Northern Command has refused to comment on the operations. The above information in detail can be gotten from a new book, “Code Names: Deciphering US Military Plans, Programs and Operation in the 9/11 World” (Steerforth Press.) The book was written by William M. Arken, a former intelligence analyst for the US Army.

There is no question that foreign central banks are moving out of the dollar and into euros and other currencies. This is bad news for the financing of the current account deficit. The foreign platform under the dollar is being slowly removed.

Police can use drug-sniffing dogs to check vehicles stopped for traffic offenses, even without reason to suspect the presence of illegal narcotics, the US Supreme Court ruled.

The UN has urged all major industrial countries, especially Japan and the nations of Europe, to help the US reduce its deficits by spurring their own economies to grow faster. In other words, inflate. The IMF and other financial institutions say the US cannot continue to carry its huge debts. The US deficit is a global problem. The US has pushed their own and world growth by consuming far more goods than it exports. The UN is more concerned about nations other than the US, because they are holding 70% of their reserves in US dollars and face another 35% loss. The US has amassed a debt without precedent, some 5.4% of GDP. In Europe, only England has a current-account deficit.

Bushites believe that they can create paper money that is both stable and expandable. That is about as stupid as trying to force Democracy on Iraq, a country that has never experienced such madness.

It is nice to know that China has lost faith in the dollar and the stability of the US currency. They said their first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies. The issue for China is not whether to devalue the yuan, but to limit it from the US dollar. China is under no pressure to revalue its currency. China says people are beginning to understand the US dollar will not stop devaluating.

US consumers have become particularly self-indulgent and they are the weakest link in the US economy that could leave the rails at any moment. Any slowing of American consumerism will have a devastating effect on the entire world economy. The end of American hyper-consumerism is an accident waiting to happen. As soon as interest rates rise the funding of the massive spending spree through borrowing against the inflated value of homes will end. This is the insanity that is the US economy. Thirty-one percent of Americans are ashamed that Mr. Bush is their president.

The WSJ describes the pittance set aside for veterans’ benefits as “Congresses’ generosity”, even as the Republican-controlled Congress and Bush Pentagon get set to slash billions more from the Veterans Administration programs. David Chu of the Pentagon, in a mockery of the contribution of veterans, defended a new round of cuts by ironically describing funding for programs like veterans’ education and job training, health care, pensions, VA housing and the like, as hurtful to national security. Bush really wants to kill Tricare and cut VA spending $15 billion over the next ten years. This year he wants to cut health care $900 million and the Veteran’s housing program $50 million. Just to show you how evil this neocon cabal is, when Rep. Chris Smith pushed too aggressively for the vets’ fellow Republicans, stripped him of his chairmanship of the Veterans Affair’s Committee. This doesn’t sound like compassionate conservatism to us. George Bush has already spent $280 billion on his war and he wants to take part of the cost out of the hides of the veterans.

The elitist World Economic Forum kicked off five days in Davos as PM Tony Blair focused his keynote speech on the need to master climate change, the theme this year of the G8 group of industrialized nations. This, like the Bilderberger conference, is where the elitists trash out your future whether you like it or not. There will be 2,200 participants from 96 countries. Protecting this ungodly rabble are 5,000 federal troops, a squadron of F-18 fighters and 50 helicopters.

The Mortgage Bankers Association Index of mortgage application activity decreased 3.6% to 658.1 for the week ended January 21, 2005. It was up 16.2% last week. They said the 30-year fixed mortgage rates averaged 5.58%, down six basis points on the week. Their purchase index, a gauge of loan requests for home purchases, fell 2% to 439.0. The previous week it rose 14%. Sales of existing homes fell 3.3% in December. Refi apps fell 5.7% versus plus 19.1%. Refis made up 46.5% of all mortgage applications, down from 48.9%. Apps for ARMS fell to 31.7% from 32.8%.

A federal judge has ruled that Arizona lawmakers are shortchanging 200,000 students who are illegal aliens to learn English, and ordered the legislature to fix the problem by the end of 2005. That means, the state will have to spend $400 million a year to service felons. The state already spends an additional $354 per child or $800 million a year on English leaner education programs. Now they have to spend $1,200 more. The move by our federal government could bankrupt the state and will certainly force tax increases on voters. This is a tiny example of the high cost of illegal aliens in our country.

A recent report from the CBO, Congressional Budget Office, says they do not expect long-term interest rates to rise. If that is so, we will not see many foreigners buying our 10-year Treasury notes. That also means government will have to fund most of its debt in short-term paper. Carrying costs will rise, and the lack of long-dated paper will signal a deterioration of credit quality. On top of this, all statistics are bogusly reported, thus, who can expect foreigners to buy any of our debt. The CBO is totally out of touch with reality and like so much of what goes on in Washington, they are losing their credibility. It is impossible for interest rates on 10-year Treasuries not to go up.

In order to protect the opium crop, and just as we predicted, our government will not use spray planes to kill opium crops in Afghanistan, which produces more than 70% of the world’s opium. If they had killed the crop, they wouldn’t be able to fund their black operations.

The US for many years has been active in Colombia in assisting the government against FARC, the narco-terrorist group. As there was in Vietnam, there are military advisers in country-accompanied by US Special Forces and Colombian military. Considering the actions of the US, in both Colombia and Venezuela recently, and the oil war now in progress, we believe the bush administration wants to do the same thing in Venezuela as they have in Iraq and they are using Colombia as a springboard. In fact, it’s surprising that they did not pursue Venezuela first. The oil is a short distance away, they already had a force nearby, and logistically it is a much easier target than Iraq. Be as it may, it is a safe bet Venezuela is next. That is why Petrosur or PetroAmerica is being used as an energy alliance and that is why the South American community of Nations was created in December. The first victim of these moves was FTAA. That is why the Granda affair was created. PlanColombia and the domination of the region by the US has begun. Our government was not able to overthrow the Chavez government so the next move will be to bring about warfare. Venezuela had best expedite their defense because their timeframe for outside interference is the next two years. The Bush neocons cannot unseat the Chavez government legally, so before the next election, two years hence, they have to move to invade the country under the guise of rooting out this government, which they will accuse of helping the narco-terrorists. The elitists want to steal Venezuela’s oil now that they do not control it anymore. Yes, we will hear administration officials saying Venezuela is undemocratic. The next we will hear is that Venezuela is aiding the narco-terrorists. It is the view of the elitists that once Venezuela is subdued, the remainder of South America will fall into their hands like ripe fruit. There are currently more than 400 US advisers permanently in Colombia and most of them are mercenaries. Colombian police are being militarized and $1.3 billion in the latest military equipment is being moved into Colombia. We see a Colombian army of 200,000 and when you add in support, it’s 320,000 people. The US is creating a base for war. This is war on the people of South America and, particularly Venezuela. Once the South American countries are defeated, the US will have a permanent residence on the continent. Stopping drugs will be the cover for the operation, whose real intent is to control the entire region. All of this would not have been necessary had the Venezuelan elitist been able to maintain power, but they became so corrupt that the citizens removed them from power.

It is easy for the elitists to manipulate Colombia. It is a country with 20% unemployment, and 40% of those who work have to depend on the underground economy. All the money in the country is in the hands of elitists or drug producers and the national economy is run by the IMF. The people have an uncaring elitist government and the alternative is just as bad. Behind the scenes all America wants in the name of free trade, globalization and transnational corporatist control is the further subjugation of the people.

At Davos, Switzerland, at the World Economic Forum the talk was to be about global warning. It was about the heat in the kitchen. US government debt is increasing, not decreasing. There is a total lack of savings with no change in site. The dollar is in a precarious position. The G-7 policy makers want Europe to boost productively; loosen government regulations; revive consumer and business demand; open markets to free trade and the US raise its savings rate to pay for its deficits. Only in your dreams gentlemen. We are headed in the opposite direction and nothing will stop the stampede. Of course, US interest rates have to rise - not 1%, but 3% to 4%. Otherwise, nothing will change in regards to dollar weakness. The price, of course, is a falling stock, bond, real estate and economy. Our government and our citizens are leveraged to the eyeballs and they will suffer financially as well as the US economy. The whole world is losing faith in the dollar. The Fed had best move quickly or we will have to impose foreign dollar holding currency controls.

Seymour Hersh, Pulitzer Prize winning reporter, sees George Bush’s endeavors messianic. George feels victorious in what he is doing, and he is committed and believes he is doing the right thing. He is going to continue to do what he is doing in Iraq and expand it if he can. Hersh thinks that the number of body bags that come back will make no difference to him because he sees it as a price he has to pay to put America where he thinks it should be. He has purged the intelligence section of the CIA and neutralized the agency. We are now going to replace Saddam Hussein, with a Saddam-lite, by the name of Allawi, who was a member of Mukabarat, Saddam’s secret police. Hersh says it is Bush’s intentions to bomb Iraq into the Stone Age irrespective of the loss of life. We are all going to have to pay for the Bush’s neocons and elitists - pay for what they have done. We are going to see our dollar and economy crushed. We will no longer have the world’s reserve currency; we cannot be trusted to have it anymore. Oil will begin trading in euros. What the Bushes and the elitists have done to us is horrible and the damage will go on for years to come.

There is now no question that central banks have begun to dump the dollar. The world has finally visited reality and finally views the debt-ridden fiscal policies of George Bush as disastrous. The administration and the Fed can no longer rely on foreign central bank support. The pressure for the dollar index to fall below 80 has begun and it is only a matter of time before it happens. The measured pace of lowering the dollar will get out of control once interest rates rise over 2%, not because the rates are putting pressure on the dollar, they are not, it is because the higher rates will rip the US economy apart. That is why it is so important that you are out of US stocks, bonds and real estate and that your are in gold and silver coins and shares and bonds denominated in euros, Swiss francs and in German bunds.


For the first six months of 2004 violent crime fell 2% in the US compared to the same period in 2003. Property crimes fell 1.9%, murder 5.7%, robbery 5% and aggravated assault 0.9%, and rape was up 1.4%. Venture Capital spending increased 11% in 2004. Tommy Hilfiger will cut 200 jobs and cease production of men’s jeans.

Copper Mountain Networks, a maker of DSL networking gear, will lay off most of its staff of 111 employees. Over the past two weeks, gasoline prices rose for the first time in nearly three months, up $.05 a gallon to $1.8463. Prices are still lower by $.19 then they were on 10/22/04. To save money Jet Blue and Northwest are sending planes to El Salvador. America West uses Singapore and Hong Kong for servicing. How does this make you feel? Are you getting it yet? GE saved $336 million outsourcing to India. They also gained $157 million on new tax legislation from buddy George Bush. GE’s financial subsidiaries contribute 50% of earnings and these profits are taxed at only 3%. You are taxed at over ten times that rate but then again you are not the largest elitist company in America. GE’s industrial business fell to 16.7%.

The NYSE is considering opening the exchange one to two hours earlier each day. Sales of existing homes fell 3.3% in December. The Conference Board’s Index of consumer confidence increased to 103.4 from a revised 102.7 in December. Sixty-five experts projected 101. The gauge of optimism, the present situation index rose to 110.9 from 105.7 in December. The confidence index of consumer expectations for the next six months fell to 98.4 from 100.7. Those who saw jobs as hard to get decreased to 24.7%, and those who saw jobs as plentiful rose to 20.7% in January, from 19.4% in December. Consumer spending, which accounts for about 70% of the economy, probably rose 4.1% during the fourth quarter of 2004, after growing 5.1% in the third quarter.

The airline industry’s pretax loss for 2005 is expected to be more than triple previous estimates, due to rising fuel prices. Celestia will cut 5,500 jobs. The help wanted index was 38 versus 36 in November. December durable goods orders rose 0.6% after a 1.8% rise in November.

California housing permits rose nearly 8% last year to surpass 200,000 for the first time in 15 years, yet that growth rate is expected to stall this year. The big spot for building was the Inland Empire in the San Bernardino area due to the cheap price of land. Starts in Ventura and Orange Countries for single-family units declined 24% and 23% respectively. Chapman University, anticipates a 13% drop in permits in the Inland Empire this year. P&G is buying Gillette for $57 billion and will fire 6,000 workers or 4% of its workforce of 140,000. First time claims for unemployment benefits rebounded after a sharp decline in the previous week. They were up 7,000 to 325,000. Those receiving state jobless benefits rose sharply to 142,000, the largest increase since July 17, 2005. The 4-week moving average of claims rose 15,250 to 2.76 million. The insured employment rate was 2.2%, up from 2.1%.