International Forecaster Weekly

Deficits For The Shrinking World Economy

who are the new buyers. physical gold and silver in short supply, World economy contracting, big job losses all around, trillions in lossses, housing foreclosures surge in a weak market, how willUS treasury raise money now?

Bob Chapman | January 28, 2009

For a number of years people have wondered when sovereign nations will stop buying Agency and Treasury securities. As we have found out no one really has had that answer, nor does anyone currently have that answer.

It once was that the Japanese were big buyers. They haven’t been for a few years but they do roll their paper. The oil producers were big buyers but they certainly cannot be now with oil selling at $47.00 a barrel. China’s up to their eyeballs in US dollar denominated paper. Will they continue to be major buyers? We are skeptical. It also should be remembered that on average sovereign governments foreign exchange funds include 64.5% of those reserves in dollar denominated assets.

We do not expect funding to stop but it has to slow down, although rolling current paper will probably continue. These are assets that other nations own but really cannot spend. The money is essentially frozen. If these dollar assets were sold in any big way the dollar would collapse and so would the entire financial system.

Now that there are fewer dollars available to buy Treasuries and Agencies, how does the government fund its operations? Or we should say further massive deficit spending. It is conceivable that several nations could bolt from present secret arrangements. The stakes are higher than ever. We have an $825 billion plus stimulus package on the way. We believe the actual and psychological affect will last 3 to 9 months – probably 6 months. After that is over we return to the same underlying problems that has not been addressed.

We believe that currently secretly both the Fed and the Treasury are using debt instruments and that they are being monetized and that they will continue to do that as the market for securities wanes. This is immediately very inflationary and can only lead to default and devaluation. When this will happen we do not know - perhaps in one, two or three years. But, it is coming. The course has been set.

We also believe that most all nations will default and devalue as well, as elitists call for international financial regulations that will lead to a world currency.

We do not believe this world currency will happen. There are many people throughout the world who understand what it means and they will stop it. In the course of doing so there could well be world revolution.

Goldman Sachs tells us those losses in mortgages, loans, bonds, commercial real estate, credit cards and auto loans will be more than $2 trillion. We wonder how that will be covered? In addition, we projected a $1.3 trillion fiscal deficit for 2009. The CBO says $1.2 trillion and we’ve seen estimates up to $2 trillion. Then there are the losses in financial markets adding another $2 trillion. Little assistance can be expected from an economy that just slipped into depression.

Is it any wonder that financial stocks have been decimated recently? What has been called nationalization of banks, brokerage houses and insurance companies is really a privatization led by the privately owned Federal Reserve. Once that has been accomplished new world financial regulations will be implemented or at least that is what the elitists believe, almost all currencies will be devalued and a new one world currency will they hope become reality. What is incredible is that this master plan was ever even attempted. It shows you how arrogant these people are.

What we are waiting for is the end of inflation, which we believe is some ways away due to the massive amounts of money and credit being injected into the US and world economy. A time in the future when the risk is so great that borrowers will refuse to borrow in spite of easily available capital. We see that as being some time into the future, or one to three years from now. When that happens the quality of money deflates, as does the prices on the things that are normally purchased. That is caused by the end of rampant inflation and the further denigration of assets. The system ends debt accumulation and the use of credit. Governments then madly buy Treasuries hoping to save the collapsing economy.

This is accompanied by high interest rates as the public, governments and professionals sell bonds and shares to accumulate cash. Banks will be overwhelmed by cash demands, which under the fractional banking system that they’ll be unable to supply. Banks will run out of capital and eventually shut their doors as they did in the 1930s. This time, because those who caused this have another agenda, almost all currency will be devalued simultaneously and be replaced by a one-world currency that the world will totally reject. Polls currently show 90% of people will reject such a currency. That means gold and silver coins and barter will be used to transact business and everyday exchanges. This will also be accompanied by revolutions in many countries as a third world war wages in the Middle East. Not a pretty scenario, but an honest appraisal of what could well be on the way. There is no solution and there is no turning back. That point of no return was reached almost six years ago.

As we predicted a month ago at the long end interest rates would rise and they have risen. Using the 10-year Treasury note the yield has risen already from 2.16% to 2.65%. It is headed to 4% by yearend - maybe much sooner. That means 30-year fixed rate mortgages are headed back to 6-1/4 to 6-1/2%. Libor as well will not be able to hold today’s levels of 0.35% for the one-month and 1.12% for the 3-month. These higher rates will curtail business and personal borrowing activity further and cause further bankruptcies. This means further debt liquidation as well and a relentless increase in gold prices, as the flight to safety takes on a life of its own. As this evolves even banks will have to ration the availability of cash as government tries frantically to keep up with demand in what ultimately will be a Weimar scenario. Cash and gold and silver coins will be king. Cash will ultimately fail and barter will begin. You may not believe this can happen, but it has happened in untold previous societies. That is when the free market – better known as black market – begins. Just to give you an idea of what thin ice American and European banks are skating on, Bank of America, which is typical, holds $1.00 for every almost $40.00 in each account. This gearing is inane, but this is what fractional banking is all about. Read the “Creature from Jekyll Island” by G. Edward Griffith and you will find out exactly how it was foisted on the American public and how it’s carried out. If only $60 billion was withdrawn from Bank of America they’d be broke.

Those foreigners who support our debt habit have been slowing down their purchases of dollar denominated securities, particularly Treasury and Agency debt. The capital inflow is short $35 to $40 billion a month. That money flow is exiting the US markets. If foreigners cannot meet current account deficit demands how can the Treasury raise another $825 billion? The Treasury will hand the bonds to the Fed, which buys them by creating money out of thin air and spends into circulation a monetizing process.

We do not believe they’ll be a run on foreign money out of the US. We believe it will be a steady stream; lack of aggressive buying by G-20 members, or a slight falling off of participation. The leakage will come from second and third world countries.

As this transpires and monetization continues a pace, the US and Europe will struggle to further increase liquidity as inflation rages.

The move simultaneously by the G-20 to zero interest rates is close to being completed. After that the interest rate reductions can no longer be used. The mission then has to be accomplished by increasing money and credit and monetizing Treasury paper.

As a result of a slowing economy tax revenues are falling further plaguing governments ‘ efforts to make ends meet. Britain’s budget deficit to GDP is closing in on 10%, the US 9% and 5% in the euro zone. In deep recession already and entering depression, raising taxes is really not an option except on the wealthy. We are approaching an era of unlimited debt.

Unfortunately, even though money and credit (M-3) have expanding in major economies by 14% for over five years this is still only the beginning of money creation. Now we are seeing the public and business cutting back on debt creation. Government has taken up the slack by aggressive borrowing, which that same public and business are refusing to expand. The only answer to this foolishness is a purging of the system. That will come in time, but the longer it is delayed the worse the affect on the economy will be. Normally, these economic and financial issues would be addressed and solved, but we are dealing with something very different this time. It’s a deliberate effort to bring down the world’s economic and financial system to implement world government and a world currency. Unless you understand what these elitists are up too, you can’t understand what is really happening. This is why so many writers, economists and analysts are so often so wrong.

US debt paper is not the only debt that is being shunned. It’s happening worldwide as 20% of new offerings are under allocated. That means buyers see increased risk and they are demanding higher yields. We are already seeing this happen. It is only beginning and it will worsen. If bonds are falling, the market is falling and commodities are unattractive, where else can one go to with investable funds? To gold and silver of course, and that is in the process of happening. As proof all gold ETF’s already have close to record 1,000 tons of physical gold on deposit, or so they say they have. The physical gold and silver market for coins and bullion has been in short supply for nine months and most of that buying uncharacteristically is coming out of Europe, which hasn’t had that kind of interest for 28 years. There are some that have taken notice of the stock market’s collapse and now anticipate the breaking of a bond market bubble.

The world economy is contracting. Deflation is moving forward but for now is being offset by monetary creation and inflation. In January house prices in San Francisco fell 44% yoy and the median price of a home in southern California fell 35% yoy. Prices are off 40% to 55% dependent on the situation and we are still not near a bottom. Prices will fall another 20% to 30% from place to place. Inflation has come down but that is temporary. Wait until the results of monetization hits the markets beginning in March and April.

We ask how do you lose 2.6 million jobs in a year and that is official?

The real numbers are much higher if you eliminate the birth/death ratio, which makes the number whatever government wants them to be. The real numbers are long-term unemployment at 17.5%, U6 intermediate unemployment at 15% and short-term unemployment at over 9%. That is truth and reality.

Retail sales have fallen six months in a row and this is only the beginning. As a result personal debt is falling and savings, which were minus 0.5% six months ago, are now 2.8%. This trend will continue as will foreclosures and higher unemployment.

American Express saw profits fall 72% as more customers fell behind on loan payments for credit cards. Soured loans are about to get very ugly and are not likely to improve until 2010 if then.

Economic activity slowed dramatically in December to its weakest since May 1980, as industrial production and employment weakened again, said Chicago’s Fed. Its National Activity Index was minus 3.26 down from minus 2.78 month-on-month. The index has been negative for 17 straight months.

The 3-year US Treasury bond had a low all-time yield of 2.54% in December. Last Friday it yielded 3.31%. This is the biggest bond correction since 1982. The 10’s have moved up from 2.16% to 2.65%. This could well be a replay of the 1970s to ever-higher rates as investors demand compensation for America’s wild spending policies. The bottom line is the elitists are now faced with the worst of all possible worlds. The Treasury is going to have to offer higher rates or they won’t be able to sell their paper. We went through the markets in the 1970s and we know they were a piece of cake compared to what the next five years face.

America is loosing more than 500,000 jobs a month and its economy is contracting at an annual rate of 6%, much like in 1931 when it contracted 6.4%.

China has lost ten million jobs and Brazil lost 650,000 in December. The question is whom do you sell too? Germany’s trade has fallen 7%, Japan 12% and Korea 22% in the fourth quarter.

All our major banks and brokerage houses and some insurance companies are broke and are on Fed and government life support systems. We have not reached 1933 as yet and the Fed doesn’t have to raise interest rates because the real market is in the process of doing that. Of course, there is no gold standard to contend with. By 1934 thirty-two states had shut their banks and in Texas you could withdraw $10.00 a day. Few states could borrow on bond markets and many states had stopped paying teachers. Schools closed for months. Major George Patton charged 25,000 famished war veterans and armed farmers threatened revolution. Lawyers attempting foreclosure were being shot. America was close to revolt and revolution. At that time the Fed did little. Today it is different. That buys time but doesn’t solve the problem, which today is five times worse than in the 1930s. The Ponzi scheme is collapsing.

America’s financial losses are $3.6 trillion. The banking systems assets are $1.4 trillion, which means we have a systemic banking crisis. Banks are deficient in capital of about $1.4 trillion. That means insolvency and that is why massive funds have and will continue to flow to the financial sector. If they are not forthcoming the banking system will collapse.

The index of leading U.S. economic indicators unexpectedly increased in December as the money supply expanded, masking signs of a worsening recession.

The Conference Board’s gauge rose 0.3 percent, the first gain in six months, after a 0.4 percent drop in November, the New York-based group said today. The index points to the direction of the economy over the next three to six months.

Deteriorating labor and housing markets, the lack of credit and shrinking household wealth have battered the economy, threatening to extend what is already the longest economic slump in a quarter century. President Barack Obama is pressing for speedy passage of a stimulus plan to cut taxes, spend more on public works and save or create as many as 4 million jobs.

The Federal Reserve “has successfully prevented an implosion of the money supply. The economy is a different story,” Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, said in a note to clients. Shepherdson accurately predicted the gain in the leading indicators.

Home Depot Inc., the world’s largest home-improvement retailer, will cut 7,000 jobs, or 2 percent of its workforce, and exit its design showroom business because of a drop in consumer spending.

Closing the Expo division, with 34 retail locations, will cost about $532 million before tax, of which $390 million will be recorded in the fourth quarter, Home Depot said today in a statement. The company also plans to reduce capital spending to about $1 billion this year as it anticipates “continued weakness” in sales.

Elliott Management Corp., the $12.8 billion hedge-fund firm founded by Paul Singer 32 years ago, told clients that it bought securities from Marc Dreier, the New York lawyer jailed for alleged fraud.

Elliott lost money on promissory notes purchased in October from Dreier, who had previously done work for the company, it said in an undated quarterly letter to clients. The firm’s Elliott Associates LP fund declined 9.2 percent in the fourth quarter, its worst quarterly loss.

“There are many reasons why funds lose money, but being defrauded is among the most embarrassing and annoying,” New York-based Elliott said in the letter, a copy of which was obtained by Bloomberg News. “We continue to adapt our processes to keep several steps ahead of fraudsters, and we maintain an attitude of probing skepticism. But sometimes we get hooked, as in the Dreier case.”

General Motors Corp. said it will cut shifts at plants in Ohio and Michigan, a move that will eliminate about 2,000 jobs. GM made the disclosure in a telephone interview. GM also said it will cut output at 13 other plants in the U.S. and Canada in the second quarter.

Princeton University raised undergraduate costs 2.9 percent, setting the smallest increase in 43 years to help blunt the effect on families amid the recession.

The total for tuition, fees, and room-and-board rises to $47,020 a year, beginning with the next entering class, the New Jersey university said today in a statement.

Sales of previously owned homes in the U.S. unexpectedly rose from a record low, propelled by the biggest slump in prices since the Great Depression as foreclosures surged.

Purchases rose 6.5 percent to an annual rate of 4.74 million from 4.45 million in November that was less than previously estimated, the National Association of Realtors said today in Washington. The median price dropped 15 percent from a year ago, the biggest decline since records began in 1968 and probably the biggest in seven decades, according to the group.

“You have to put it in the context of an even steeper decline for the previous month,” said David Sloan, a senior economist at 4Cast Inc. in New York, who had the highest projection in the Bloomberg News survey. “The net trend is still negative. It does seem that some cheap prices are attracting buyers. I don’t think it’s a clear sign of a revival in the housing market. The housing market is very weak.”