WSJ on Treasury's Very Private Asset Fund

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1. Deflation will force governments to slash expenses
   or face the collapse of power (no money, no power)

   Throughout the ages deflation prevails over inflation because markets are more powerful than governments. Governments can create spending but not confidence. They come and go but the “free markets” are always waiting to salvage what is left. The power of markets will soon prevail over the welfare state’s policy of socializing (making the taxpayers responsible for private and public with debt and financial responsibilities). This is done in order to maintain the current power structure or status quo).

   “Bail out” programs are an attempt by politicians to override market disciplines and write down debt through inflation. This leads to the disappearance of credit thus eliminates the political economy and current government administration.

   Monetization, government deficits, defaults and bankruptcies force the private sector to force governments into “involuntary bankruptcy.” This results in the take-over of the assets and functions of government.

   Since the 1930s the U.S. population has increased 92% but government employment has increased by 450%. There is great imbalance even in wage rates. Public bus drivers earn 60% more than in the private sector; postal workers get 50% more than employees at i.e. Fed Ex, UPS etc. Today government consumes 56% of all American resources, 400% more than in 1929. In the 1930s government employment was only 3% of the working population today it is nearly 40% of workers.

   The collapse of real estate values is driving property tax receipts down and creating government shortfalls. These shortfalls will be putting everything back into balance. The County Santa Clara CA income fell by 15% last year due mostly from property tax and sales tax reductions. If this loss continues at that rate for just three years it will mean the County will lose 50% of their annual income. This is a reality throughout the country. Government and the private sector will have no choice but to impose layoffs, liquidations etc. Obviously defaults, foreclosure and involuntary bankruptcy are inevitable. Defaulted bonds, mortgages and other debt will lose market value and be available for sale at a fraction of their “face value.” This fact alone is beginning to reduce lending which affects sales of those items that normally require loan for a portion of the purchase price. Soon people will be able to buy defaulted government bonds for a fraction of their value thus be prepared for the organized bond holders to seek “involuntary bankruptcy” proceedings on governments forcing the liquidation and conveyance of these assets back to the private sector.

   Governments are already finding it necessary to sell assets to cover the most pressing cost of wages, salaries, insurance, pensions etc. Credit ratings are negatively influenced by both falling income and the reduced market value of assets and collateral used to secure debt. Thus even as debt becomes more of a burden it becomes more difficult to obtain thus affecting the entire fiscal, financial and economic foundation.

   The current administration of government in the U.S. must make a choice of response to the economic crisis. If these governments press blindly ahead with inflation (repudiate debt; i.e. monetization & borrowing of money that is inherent in typical bail out programs etc.) they will be giving little thought to the destruction that will result. Inflationary depressions (financial irresponsibility and/or monetization, printing money etc.) would wipe out the financial assets (bonds, debt etc.) along with the entire economy. Monetization, bail-outs, makes work, when politicians take society’s bad debts and make them the bad debts of government and the responsibility of the taxpayer. The temptation to repudiate the debts normally results in a growing rejection of the government. In effect, the capital value of the Constitution would tumble. This would expose society to the full measure of destabilization implied by the present power equation in the world.

   How would irresponsible monetization (“bail outs etc.”)
   & destruction of creditors assets affect Americans?

   Not even the ingenuities of debt
   Could save it from its losses being met.
   -Robert Frost

   1. Social Security & Medicare Trust funds would become worthless: The largest and most important asset of the America people is their mandatory investment of their income taxes into the Social Security retirement and Medicare systems. As mandated by the U.S. Congress the taxes collected from American taxpayers for the Social Security and Medicare are used to buy in U.S. Treasury bonds. All taxpayers pay into the Social Security and Medicare as a tax. It is either deducted from their weekly, monthly or annual income or paid when filing their tax returns. Since these U.S. Treasury bonds are the primary asset held by these agencies they are the foundation on which all Americans future retirement and Medicare depend.

   Americans have come to believe and expect that their tax dollars would have been invested so as to be their when they retire or there becomes a need medical care. Treasury bonds are the underlying assets that insure these systems remain viable. These two public agencies hold over $5 trillion in treasury bonds. They are the most important asset owned by the American people for their financial security.

   A greatest percent the population that are most dependant on Social Security and Medicare make up many of the voters that voted the democrats into power. These same people therefore will be hurt most by an inflationary depression caused by (bail out programs that deal with debt and deficits by borrowing more money are doomed to failure because it leaves the American taxpayer responsible for these bad debts). Bail out programs are the monetization and printing money. This would destroy their $5 trillion trust fund and destroy the objective both Social Security & Medicare. Thus, the people hurt most by the administrations inflation program would be those that supported the Democratic party programs. When all of this becomes painfully obvious to the electorate, the parties responsible for having created this fiasco will lose their support. This gives birth to a change.

   2. Government in bankruptcy leads to a shift in power. U.S. Treasury bonds and bills are backed by the “good faith and credit” of the U.S. government. This means that if the Treasury or State and local governments were to default (be unable to sustain their current expenses) on their bond obligations, the owners of those bonds, especially foreign owners, need only put the government into “involuntary bankruptcy” and seize government assets to satisfy bond obligations.

   Throughout the centuries defaults on debt have normally resulted in a shift in power from government to the private sector. Bankruptcy results in creditors seizing assets thus the privatization of the Federal, state and local governments.

   3. Equally important are the foreigners that have been financing the U.S. government by buying Treasury bonds. They would no longer be buyers of this U.S. Treasury debt if the Treasury was “printing” dollars to buy debt. The reason for this is that bond holders, fearing inflation and printing of dollars ceasing to buy bonds do not wish to be paid back with dollars that are losing value because of rising prices (the result of the printing of dollars to buy debt). This would mean that over $400 billion dollars a year would no longer be forthcoming to finance the U.S. government.

   Also, if a political administration chooses an inflationary depression (i.e. “bail outs and monetization”) it would be a major gain and profitable for America corporations. This is because most corporations have enormous debt. Inflation would allow corporate debtors to pay off their debt with inflated dollars. This would increasing stockholder profits by allowing corporations to pay their debts and expenses with worthless dollars. Because

   The deflationary depression will decrease the value of tangible assets that are the collateral for the outstanding debt in the banking system. Although home loans, car loans etc. would also be paid off with worthless money the value of homes and real estate etc. would collapse even further than the natural deflation would be causing. Since the credit markets will cease to exist and banks and mortgage lenders will have gone bankrupt. Lenders will no longer be making loans. Without a credit market the values of homes, cars and any asset that normally requires a loan will plunge in value. With nothing having value, society disintegrates into chaos.

   Most likely governments will be slashing expenses by more than 50%

   President Obama along with state and local governments will be forced to choose slashing the major cost of running government (the welfare state). Government income will collapse by more than 50% leaving no choice but to cut costs.

   A deflationary depression would expose social conflicts papered over by welfare state spending. Since more of the government’s operating revenue in deflation would have to be devoted to servicing debt, deflations would have to be accompanied by sweeping reforms. These reforms include: reduce income redistribution, eliminate guarantees against losses and dispense with many make-work jobs. There would be a strong motive to reduce the costs of debt service by running budget surpluses, and imposing higher taxes on banks, bond holders and creditors of any kind.

   A deflationary tax on the increased purchasing power of dollars will become reality. This is explained in by the principle pointed out in this report regarding the 180° change in the effect of falling prices (including “zero bound” interest rates, see: “Calculating & setting interest rates”. On the value of the dollar (increased purchasing power due to falling prices) is a profit or gain to the creditor and holders of dollar investments. This gain must be taxed like any other gain received by virtue of living in this great country.

   As prices fall lending collapses in proportion to collateral disappearance

   When the value of collateral falls and the public’s demand to hold cash raises governments cannot stop deflation. Consumers spending amounts to more than two-thirds of the economy or GNP. In the 1930s purchase of durable goods such as furniture dropped by 50%, new and used cars fell by almost 70%, sale of consumer electronics (radios, appliances etc.) fell by over 80%. (2)

   We are already witnessing deflation and the collapse of the price of real estate, collectibles, and many other assets tumbling. This is wiping out many individuals, families and businesses. Unfortunately most financial advisors are in denial. Most people do not understand the dynamics of deflation. They are being misled by the media, politicians, financial advisors, financial institutions, bankers and educators.

   … The costs of runaway inflation (monetization) which exceed those of deflation because it destroys the credit markets and peoples “confidence.” In advanced economies, the damage done by destroying the bond market is greater than the simulative effect of eliminating all debt (i.e. monetization & printing money).

   Governments can create money but not confidence. Prosperity and wealth is the result of synergy, dynamics and confidence. When the central bank monetizes an asset by buying it (bail outs etc.) a liability is created. Only the free market can create capital by valuing assets above liabilities. Backward countries have few financial assets and capital in proportion to tangible or intellectual capital in their respective countries. Hence, even their assets are valued at low levels. An equivalent sized hotel in Zurich Switzerland is valued at a great deal more than a hotel in Zimbabwe.

   Ironically, the best place to look for a market to go straight down is in the richest countries. It is there that the bias towards optimism (creating idols) is likely to be most acute.

   Deflation is a devastating economic event. Imagine wages falling by 30% and the cost of debts and related payments increasing by an equal amount.” In light of the impending long term depression, it will not be prudent to own any asset who’s value is less than the debt. With compounded falling interest rates having any “old debt” is not being a good steward of the gift of God and carrying out his perfect will.

   Governments are ineffective in efforts to stop depression/deflation

   It is therefore critical to know what actions governments took in the last depression and prepare with for similar actions. With identical political and financial conditions existing today and identical to what we had in the 1930s we should expect our new democratic president to follow historic precedents and actions taken in the past by U.S presidents and by investors and foreign governments. In 1933 the newly elected democratic president was Franklin D. Roosevelt. Just five days after taking office he closed of all banks. This was followed by Executive orders 6102 & 6814 seized all privately held gold and silver. Failure to comply was a Federal crime with a fine and/or jail or both. In current inflation adjusted dollars the fine was $200,000 for failing to surrender gold, the jail term of 10 years would probably remain the same. Closing all banks gave government immediate control over “safe deposit boxes” where most people kept their gold assuming it to be “safe.” Bank managers were ordered to have federal a agent accompany bank customers when opening “safe deposit” boxes. When the “box was opened and gold it contained would be seized and penalties imposed.

   The severity of the 1930s government actions are a measure of what to expect from our current administration and severity of our current economic depression. A hint as to what to expect; the president of the Federal Reserve Bank of Dallas in a speech some time ago suggested that the system was “already in place” to tax “cash.” We can only assume that they know where your “cash” or investment funds are (this includes If they know where they are, you must realize they know the location of your assets and retirement funds are likely subject to seizure. Government need not explain it as a “seizure” but replacement of your assets with a government bond of equivalent value.

   It is always better to be prepared for what ever happens than
   be unprepared for what does happen

   We are emerging into a liquidity trap! The markets for currency and capital are at least 50 times greater than total world trade and as a result with deflation, governments are unable to exercise control. One of the Federal Reserve’s primary responsibilities is to support asset prices and prevent their collapse which would result in a loss of wealth that would reduce consumption and bring depression. As explained below, governments will be unable to prevent what must take place in order to normalize prices and values.

   This is an economy that dissolves and allows assets to disappear like the leaves that fall from the tree. The function of the leaf is to convert the trees energy into “tangible assets (fruit). Once the “asset/seed” has been created there is no longer a need for the leaf or bank, The bank’s purpose is to convert “economic energy” whose purpose it is to convert the trees energy (the economy) into inherent tangible or intellectual asset, as explained below (see “intellectual assets”).

   The governments and the existing government in their efforts to stimulate the economy are actually doing the exact opposite…slowing the economy by adding to the money supply nothing creative or of productive value. Instead of a lender lending money on an asset that will have increasing value which establishes a collateral value to cover the risk component of not being paid back and having a value that, in bankruptcy, can return the amount of money loaned. Thus whatever the amount of stimulus, it will naturally dissolve wealth that must and will disappear anyway by virtue of our emerging into the winter cycle. It is much like adding additional water to a draining sink; it will take all that you add but even this will go the same direction. Deflation is economic normalization. It also provides more incentive to hoard cash. This thus increases the value of said cash as prices continue to fall.

   As a result of the government “stimulus,” the marketplace becomes resistant – if not outright immune – to further infusions of credit. Be it through trillions in deficit-spending “stimulus,” or the witchcraft, quantitative easing the job of stimulating will end up being a waste of money. It is similar to gluing the falling leaves back on the tree in hopes of keeping the fruit from being harvested. “Bail outs” are extending the fall harvesting season. However, we all know that there is a set time in which the harvesting must be done and the “fruit” (equity) must be harvested. If left on the tree or vine the fruit rots and has no redemptive value.

   History tells us how much wealth will dissolve and disappear

   Between October 1929 and March of 1933 the Dow Jones lost over 80% of its value. This loss was not recovered for 23 years. The depression/deflation lasted from 1929 to 1949. The Dow Jones in 1929 was the indicator & economic barometer of what was to come. Today’s barometer is the disappearing net worth of everyone that owns or rents or occupies a home or real estate making it worse than in 1929 when few people owned stocks. Today real estate collapse affects every person in the U.S. that owns or occupies a home or other real estate thus foretells an even more devastating depression is upon us. At a minimum most owners of homes or other real estate will suffer at least an 80% collapse of its price and value. However, if you choose not to sell (liquidate) most homes will be losing 80% of their value. Allowing this to happen can hardly be considered being a “good steward” of God’s gift.

   Deflation is irreversible, like the leaves falling off of trees in fall.
   It is impossible to forestall winter, it must take place in order to have Spring©

   The major dynamic of deflation is the irreversible collapse and implosion of prices and the self dissolving wealth of both creditors and debtors. Falling prices means the dollar buys more therefore interest rates undeviatingly are bound for ZERO as prices fall and the dollar increases in value. Federal Reserve and Treasury officials prefer not to use the words depression or deflation. They often use the term “zero bound” – Here is why they use this term:

   CALCULATING & SETTING INTEREST RATES

   INFLATION (rising prices) the two components of interest rates are:

   1. RISING PRICES: dollars losing value & becoming cheaper. Creditor is paid back with dollars worth less – Apply -3% negative inflation component.

   2. RISK: that creditor may not be paid back – Apply -3% risk component.

   TOTAL: (-3%) + (-3%) = 6% INTEREST RATE

   DEFLATION (falling prices) the two components of interest rates are:

   1. FALLING PRICES: dollars in the future going up in purchasing power, a profit for
   the creditor – Apply +3% positive deflation component.

   2. RISK: that creditor may not be paid back – Apply -3% risk component.

   TOTAL: (+3%) + (-3%) = (0%) Zero Bound

   Deflation benefits creditors for they are paid back with money that buys more

   Using the illustration above we see the lender profits because of receiving payments in dollars that are buying more as prices fall which currently is not taxable.

   As in Japan interest rates have been hovering at or below zero for several years. Some lenders in Japan are paying people to borrow. Keep in mind the deflation takes into account the compound interest effect pointed out below where 7% deflation almost doubled the value of the purchasing power of money in 10 years. Again this 100% gain from falling prices is not taxable.

   As an example using Treasury bills and bonds as an investment will mean the following gain as interest rates fall: as bond interest on “new” issued Treasury bonds and bills drop from 4% to 3% (i.e. 1% ÷ 4% = 25%) The value of existing bonds earning 4% increases 25% thus the market value of a $10,000 bond increases to $12,500. Again this is because all buyers of “new” Treasury issues can earn only 3% (at 2% the value would be $15,000 and 1% $17,500). At a recent Treasury auction of “new” bonds and bills there was more demand than supply allowing the Treasury to lower interest rates. The huge demand for Treasury bonds and bills is also driven by the fact that all foreign countries that wish to have their own sovereign money accepted in commerce must have as a reserve U.S. Treasuries as security.

   The chart below is an example of the Federal Reserve bank “stimulus package” using existing government assets such as GSE or Government Supported Enterprise paper assets i.e. Fannie Mae mortgage bonds and loaning them to troubled banks etc to “prop them up.” This is not the printing of new money.
   .

   Several years ago monetary policy makers, fearing a collapse of the real estate bubble, raised rates hoping to deflate the bubble. But this is clearly not working because the Zero Bound interest rate phenomenon (see pg 10) and world markets, not the Fed, control interest rates. Not only have they failed to slow the bubble but their effort has produced an “inverted yield” curve where short term interest rates are higher than long term rates. Their purpose was to raise long term mortgage rates that now are less than when they started raising rates.

   Note: one of the Federal Reserve’s primary responsibilities is to “support asset prices and prevent their collapse and the implosion of the supply of money. All of which reduces consumption and brings depression.” They do this for example being “accommodative;” to banks by lowering discount rates (rates paid to banks when buying their loans) which influences short term interest rates. However, as is now happening and interest rates are falling to near zero Fed influence ends. Depression is similar to a sinking ship which begins with a “leak.” As bulkheads begin to burst and bilge pumps can no longer have the capacity the sinking accelerates.

   THE DEBT-DEFLATION THEORY OF THE GREAT DEPRESSIONS, By Professor Irving Fisher, October 1933: A reprint of his article in the “Econometrica” Vol. 1, No 4, October 1933 on the THE DEBT-DEFLATION THEORY OF THE GREAT DEPRESSIONS
   Page 339, Section 8 There may be equilibrium which, though stable, is so delicately poised that, after departure from it beyond certain limits, instability ensues, just as, as first a stick may bend under strain, ready all the time to bend back, until a certain point is reached, when it breaks. This simile probably applies when a debtor get “broke,” or when the breaking of many debtors constitutes a “crash,” after which there is no coming back to the original equilibrium. To take another simile, such a disaster is somewhat like the “capsizing” of a ship which, under ordinary conditions, is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but, instead, ad tendency to depart further from it.

   From: Whiskey & Gunpowder, September 13, 2007, By Dan Amoss, CFA, York, Pennsylvania, U.S.A. “One negative consequence is that financial markets are starting to shape the destiny of the real economy, not the other way around. Storied currency speculator George Soros was one of the first to speak publicly about the phenomenon of markets shaping economies. He calls it the theory of “reflexivity” and described it when testifying in front of Congress in 1994:
   “The generally accepted theory is that financial markets tend toward equilibrium and, on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly, because they do not merely discount the future; they help to shape it [emphasis added]. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal.”

   In Soros’ view, the judgments and emotions of today’s financial market participants can alter future economic fundamentals. For example, as a company’s stock grows more coveted by wild-eyed speculators, its cost of capital gets lower and lower as its stock skyrockets; the higher its stock price, the more capital a company can raise in a secondary stock offering by issuing a set amount of shares. So its ability to reinvest capital and grow — its future — is shaped by the whims of speculators.

   Housing in the Macro-economy; Dr. William Poole* former President, Federal Reserve Bank of St. Louis. When discussing the collapse of Fannie Mae (GSE , Government Supported Enterprise), the world’s largest mortgage lender and other such government entities Dr. William Poole, President of the Federal Reserve St. Louis said. “Why people can’t or won’t be more decisive & act while they can is a tragedy of the grandest order.” & “The systemic crisis will occur in a matter of days even hours” & “The Federal Government should cancel its “implied guarantee” of GSEs.”…“Capital is especially important for the GSEs because their short-term obligations are large. Fannie Mae and Freddie Mac have debt obligations due within one year or 45 percent of their debt liabilities. Any problem in the capital markets affecting these firms could become very large, very quickly. What might “very quickly” mean? Because of the scale of the short-term obligations of the GSEs, the GSEs are rolling over many billions of dollars of obligations each week. For this reason, a market crisis could become acute in a matter of days, or even hours.”

   Deflation is irreversible, like the leaves falling off of trees in fall.
   It is impossible to forestall winter, it must take place in order to have Spring©

   The major dynamic of deflation is the irreversible collapse and implosion of prices and the self dissolving wealth of both creditors and debtors. Falling prices means the dollar buys more therefore interest rates undeviatingly are bound for ZERO as prices fall and the dollar increases in value. Federal Reserve and Treasury officials prefer not to use the words depression or deflation. They often use the term “zero bound” – Here is why they use this term:

   CALCULATING & SETTING INTEREST RATES

   INFLATION (rising prices) the two components of interest rates are:

   1. RISING PRICES: dollars losing value & becoming cheaper. Creditor is paid back with dollars worth less – Apply -3% negative inflation component.

   2. RISK: that creditor may not be paid back – Apply -3% risk component.

   TOTAL: (-3%) + (-3%) = 6% INTEREST RATE

   DEFLATION (falling prices) the two components of interest rates are:

   1. FALLING PRICES: dollars in the future going up in purchasing power, a profit for
   the creditor – Apply +3% positive deflation component.

   2. RISK: that creditor may not be paid back – Apply -3% risk component.

   TOTAL: (+3%) + (-3%) = (0%) Zero Bound

   Deflation benefits creditors for they are paid back with money that buys more

   Using the illustration above we see the lender profits because of receiving payments in dollars that are buying more as prices fall which currently is not taxable.

   As in Japan interest rates have been hovering at or below zero for several years. Some lenders in Japan are paying people to borrow. Keep in mind the deflation takes into account the compound interest effect pointed out below where 7% deflation almost doubled the value of the purchasing power of money in 10 years. Again this 100% gain from falling prices is not taxable.

   As an example using Treasury bills and bonds as an investment will mean the following gain as interest rates fall: as bond interest on “new” issued Treasury bonds and bills drop from 4% to 3% (i.e. 1% ÷ 4% = 25%) The value of existing bonds earning 4% increases 25% thus the market value of a $10,000 bond increases to $12,500. Again this is because all buyers of “new” Treasury issues can earn only 3% (at 2% the value would be $15,000 and 1% $17,500). At a recent Treasury auction of “new” bonds and bills there was more demand than supply allowing the Treasury to lower interest rates. The huge demand for Treasury bonds and bills is also driven by the fact that all foreign countries that wish to have their own sovereign money accepted in commerce must have as a reserve U.S. Treasuries as security.

   The chart below is an example of the Federal Reserve bank “stimulus package” using existing government assets such as GSE or Government Supported Enterprise paper assets i.e. Fannie Mae mortgage bonds and loaning them to troubled banks etc to “prop them up.” This is not the printing of new money.
   .

   Several years ago monetary policy makers, fearing a collapse of the real estate bubble, raised rates hoping to deflate the bubble. But this is clearly not working because the Zero Bound interest rate phenomenon (see pg 10) and world markets, not the Fed, control interest rates. Not only have they failed to slow the bubble but their effort has produced an “inverted yield” curve where short term interest rates are higher than long term rates. Their purpose was to raise long term mortgage rates that now are less than when they started raising rates.

   Note: one of the Federal Reserve’s primary responsibilities is to “support asset prices and prevent their collapse and the implosion of the supply of money. All of which reduces consumption and brings depression.” They do this for example being “accommodative;” to banks by lowering discount rates (rates paid to banks when buying their loans) which influences short term interest rates. However, as is now happening and interest rates are falling to near zero Fed influence ends. Depression is similar to a sinking ship which begins with a “leak.” As bulkheads begin to burst and bilge pumps can no longer have the capacity the sinking accelerates.

   THE DEBT-DEFLATION THEORY OF THE GREAT DEPRESSIONS, By Professor Irving Fisher, October 1933: A reprint of his article in the “Econometrica” Vol. 1, No 4, October 1933 on the THE DEBT-DEFLATION THEORY OF THE GREAT DEPRESSIONS
   Page 339, Section 8 There may be equilibrium which, though stable, is so delicately poised that, after departure from it beyond certain limits, instability ensues, just as, as first a stick may bend under strain, ready all the time to bend back, until a certain point is reached, when it breaks. This simile probably applies when a debtor get “broke,” or when the breaking of many debtors constitutes a “crash,” after which there is no coming back to the original equilibrium. To take another simile, such a disaster is somewhat like the “capsizing” of a ship which, under ordinary conditions, is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but, instead, ad tendency to depart further from it.

   From: Whiskey & Gunpowder, September 13, 2007, By Dan Amoss, CFA, York, Pennsylvania, U.S.A. “One negative consequence is that financial markets are starting to shape the destiny of the real economy, not the other way around. Storied currency speculator George Soros was one of the first to speak publicly about the phenomenon of markets shaping economies. He calls it the theory of “reflexivity” and described it when testifying in front of Congress in 1994:
   “The generally accepted theory is that financial markets tend toward equilibrium and, on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly, because they do not merely discount the future; they help to shape it [emphasis added]. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal.”

   In Soros’ view, the judgments and emotions of today’s financial market participants can alter future economic fundamentals. For example, as a company’s stock grows more coveted by wild-eyed speculators, its cost of capital gets lower and lower as its stock skyrockets; the higher its stock price, the more capital a company can raise in a secondary stock offering by issuing a set amount of shares. So its ability to reinvest capital and grow — its future — is shaped by the whims of speculators.

   Housing in the Macro-economy; Dr. William Poole* former President, Federal Reserve Bank of St. Louis. When discussing the collapse of Fannie Mae (GSE , Government Supported Enterprise), the world’s largest mortgage lender and other such government entities Dr. William Poole, President of the Federal Reserve St. Louis said. “Why people can’t or won’t be more decisive & act while they can is a tragedy of the grandest order.” & “The systemic crisis will occur in a matter of days even hours” & “The Federal Government should cancel its “implied guarantee” of GSEs.”…“Capital is especially important for the GSEs because their short-term obligations are large. Fannie Mae and Freddie Mac have debt obligations due within one year or 45 percent of their debt liabilities. Any problem in the capital markets affecting these firms could become very large, very quickly. What might “very quickly” mean? Because of the scale of the short-term obligations of the GSEs, the GSEs are rolling over many billions of dollars of obligations each week. For this reason, a market crisis could become acute in a matter of days, or even hours.”

   Creditor & debtor wealth self-liquidates/disappears during deflation

   This perspective by Dr. Ludwig Von Mises is correct and hits at the heart of what to prepare for. “What wipes out wealth and profits and makes debt repayment more difficult is monetary contraction not falling prices. There is a reduction in the quantity of money or “wealth” existing in the economy. Wealth and debt, including mortgages fall in value or become worthless due to default, foreclosure, bankruptcy, wage cuts, movement of cash off-shore, government seizure, fraud and/or disappearance of money etc.” http://www.mises.org/fullstory.asp?control=1298 .

   Federal Reserve Chairman Bernanke tells us; “The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand–a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending, government tax receipts etc.–namely, recession, rising unemployment, and financial stress.”

   From CEE article: Monetary Policy, by James Tobin. “Experience, certainly in the Great Depression and also in subsequent recessions, indicates that downward adjustments of wages and prices cannot avoid damage to output and employment. Moreover, wage and price cuts may actually reduce demand from buyers delaying purchases in expectation of a further price declines.”

   Please refer to the Federal Reserve Board of Governors of the fruitless efforts of the central banks to stop Deflation in the article by the: International Finance Discussion Papers Number 729 June 2002 (62 pages). Preventing Deflation: Lessons from Japan’s Experience in the 1990s see: http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf

   August 26, 2002 Bruce Steinberg, Merrill Lynch Chief Economist, made the following
   comments about the economy: “Deflation has powerful negative economic consequences. First, it increases the real value of debt as household, corporate, government, and private debt increases. Deflation results in impairing the ability to spend or invest. Second, as prices fall and cash gains in value over time, consumers have an incentive to postpone purchases. Most important, deflation renders monetary policy potentially ineffective.” (Dollar purchasing power rises as prices fall, cash becomes scarce. In other words too much debt chasing too few dollars).

   Total home values amount to only $18 trillion or 23% of the total value of U.S. assets. With 90 million homes in the U.S. with the average home price falling by only 50% means that nearly $9 trillion of home value wealth will disappear from the economy. This is the wealth of creditors whose loans are in default and losing value and the equity of the owner that dissolves as prices fall. This is the wealth and inheritance and estate of all Americans. This wealth just dissolves itself and will not be inherited, borrowed against, spent for goods and services or anything else – it just disappears.

   The $80 trillion of values is unsustainable with a GNP of just $12 trillion. Governments will be introducing “simulative actions.” In light of the expected $10 trillion home equity loss even a trillion dollar “bail out” would only compound the problem. Governments do not have the power to forestall deflation or prevent the winter cycle that is necessary to restore prices to normal levels.

   Most foreign governments, instead of down sizing, privatization, tax cuts they normally choose Monetization (printing of money). This solution is also an unconscionable scheme of writing off or devaluating the impact of debt, promises, obligations, pensions, and entitlements, by paying them with ever depreciating money. Excessive foreign Monetization results in the rise in the relative value and purchasing power of the U.S. dollar. This is because the U.S. Treasury is restricted by foreign governments from printing “new dollars” (See: This becomes another stimulus for the boom.

   State and local governments in bankruptcy

   The computer is becoming a “medium of exchange” that is replacing money and reducing government tax revenues even further. Equally important is that the “new economy” is dethroning financial and government power centers that previously have been able to manipulate money supply and insure low interest rates. Even the Federal Reserve has admitted that they are losing the enormous income collected from settlement transactions (clearing the 70 billion checks processed by them per year).

   The crisis occurs when government is scheduled to pay off maturing debt. As interest rises, government bond sellers receive less than the face value of the bond but still must pay off the entire amount. Bond buyers disappear when bonds lose value. Finally, when governments are unable sell new bonds to pay off old ones they default. This is followed by insolvency, bankruptcy, foreclosure, liquidation and the distribution of assets by forced sale. Similarly, when a home owner defaults on his mortgage, several months later there is foreclosure and he loses his home. This massive shift in confidence will create a private sector take over of a
   major portion of bankrupt government assets and functions. It will become significant by 2010 then becoming a ground swell of creative commercial activity by 2012. Enormous profits will be realized by those who are prepared to invest in the assets of insolvent government’s world wide.

   America once again the “safe haven” for the next several years,
   but eventually will fall prey to world-wide deflation

   As it was 75 years ago, the U.S. is again perceived as a “safe haven” for both capital currency and human intellectual capital. Today is the same, all of which is helping create the dollar as the strongest currency, the largest consumer based economy, the most industrialized, the strongest military, and a leader in most areas of products, services, science & technology, computers and a largely self contained economy. However America is emerging into a deflationary depression and a total change in the realities of the economics we have known.

   America has achieved this super-power status because it is, mostly self sufficient and securely grounded on overwhelming economic and military superiority. Wealth is necessary to creating military power and military power is generally needed to attain and preserve wealth. World trade is now a matter in which the US produces dollars and the rest of the world produces things that dollars can buy. To make this even more ideal we get our dollars back when foreigners invest in America. In short we have what dollars buy then get our dollars back.

   Fortunately America’s greatest assets are the 70 million baby boomers that bring enormous maturity and a dynamic nature to all challenges. The U.S. is ahead of the rest of the world in this era because of the high expectations, creative abilities and entrepreneurial skills inherent in the baby boomers. All of this is coming together in the most dynamic technological revolution in history.

   The dynamic nature of the U.S. culture has produced 78% more high-tech patents than Europe; we spend 137% more on R&D and pay hundreds of times more than comparable foreign highly trained personnel. To the highly trained and qualified foreigners seeking to immigrate, the U.S. is often referred to as: “A paradise where innovation and hard work are rewarded;…& the U.S. has an entrepreneurial culture, people are more enterprising,…& has become a sponge that soaks up the world’s talent.” With the total stock of knowledge doubling about every ten or twelve years, it is clear that our intellectual capital is being formed far more rapidly than tangible capital. The intellectual value-added in a microchip far outweighs any cost of labor and materials.

   In this report you will be told what the future holds and how to prepare for it. To profit from deflation requires a 180 degree change in thinking. Inflation and deflation are totally different realities. We must know the difference in order to prepare for how to make the economic realities work for us.

   Intellectual Capital

   Microsoft has the largest percent of its employees being millionaires than any other equally capitalized company. These employees are worth what their brains can produce therefore intangible. Thus, productivity in high tech is higher than most other segments of the economy. Its capitalization rate (what it earns as a percent of its stock value) is much higher than most corporations. Why? Because Microsoft must keep its employees happy or they will leave and reduce the value of the company. Productivity is higher in the high tech segment because, unlike the machinist who, when he leaves work normally does not take his work home with him, whereas a high tech employee will think and even dream of solutions to the problems at work. When he wakes he may have the solution at no cost to Microsoft for the time it took to conceive. Thus it is obvious that workers who possess the intellectual capital needed for their job are paid better.

   As an example of America’s uniqueness at work changing the entire world of commerce is that governments are unable to tax intellectual capital assets, since they are intangible. For example, a brilliant programmer from India, motivated by the lucrative and creative environment the U.S provides, can be hired and produce enormous profits, yet his value when he enters the U.S. is not taxable as would be if it were an automobile etc. America is a magnet for intellectual capital.

   In almost all traditional commercial statistics there is almost no accounting for the value of information and intellectual capital assets. Nevertheless, commerce is taking place daily with the U.S. being the recipient for most the flow of intellectual capital and wealth. The value of the new “information economy” is many times greater than the value of all of the world’s commercial buildings and equipment that produce products and services. Also, since there is no accounting for the assets that represent knowledge workers that freely walk past custom officers with “nothing of value to declare.” This movement of people is mostly by being attracted to opportunity. The world’s most valuable resource is now “immaterial” and will go where it is sought after and stay where it is well regarded. America is the beneficiary of most of the free flow of these resources.

   Intellectual capital is reducing the power of
   traditional governments

   The Federal Reserve Bank of Minneapolis, Quarterly Review Fall 2000, Is the Stock Market Overvalued? “U.S. corporate equity was close to 1.8 times GNP (which is equal to the value of productive assets (which) include tangible asset and intangible assets-like patents, brand names, and firm-specific human capital. We find that the value of intangible capital is roughly 0.4 of GNP (est. $3.4 trillion) The value of high-technology companies, can only be justified by their intangible capital, particularly human capital Hall argues that “e-capital,” is human capital created by combining skilled labor and computers and is an important factor behind the recent rise in equity prices. ”

   In a knowledge-based company, a couple of computer nerds with a laptop may create as much GDP as a factory full of machinery. Microsoft has a price-to-book ratio of 11 compared with less than 3 for GM, a company more representative of the capital-intensive “old economy.
   With the total stock of knowledge doubling about every ten or twelve years, it is clear that our intellectual capital is being formed far more rapidly than tangible capital. The intellectual value-added in a microchip far outweighs any cost of labor and materials. As information products are refined, they rapidly gain capacity without increasing in size, cost of materials, or labor. (Historically) the entire “Industrial Revolution,” says Dr. Carver Mead of the California Institute of Technology, “enhanced productivity by a factor of about a hundred.” But “the microelectronic revolution has already enhanced productivity in the information-based technology by a factor of more than one million – and the end isn’t in sight yet.”

   Imagine what this truth would mean for automobile manufactures if, over the course of a few decades, without increasing the price or size of a six-passenger car, they could figure out how to make it hold 600 people, travel safely at 5,500 miles per hour, and get 2,600 miles to the gallon! That is roughly what has happened in the computer industry.

   In order to maintain the value of corporate human capital it is necessary to create a private educational system. Corporations must continually bring their human capital up to the speed in the advances in their products and the industry. To accomplish this private educational system has been developed and standardized by the private sector. These corporations issue their own “certifications” to those who attend their private educational institutions. For example, Microsoft Corporation issues a “Microsoft Certified Service Engineer” certification that is taught primarily in private technical facilities by highly paid, qualified personnel. They teach what the industry requires to be competitive. The quality of this private educational system is superior to the academic institutions grinding out “college degrees” that are taught by “tenured professors.”

   After the information revolution, what happens to money? The information revolution has changed people’s perception of wealth. We originally said that land was wealth. Then we thought it was industrial production. Now we realize its intellectual resources. The market is showing us that intellectual resources are far more important than money. This is a major change in the way the world works. Just like all the farmers who disappeared during the industrial revolution, the same thing is now happening to huge numbers of people in industry and government as we move into the information age.

   Offshore American corporate locations become magnets for foreign intellectual capital

   Many multinational corporations are moving their production facilities to third world nations where labor is cheaper and government restrictions are minimal and tax incentives are greatest.

   These same corporations maintain their research and development in the U.S. in order to benefit from the unique pool of the worlds’ highest paid technical talent network. Here they study, train and stimulate the creative synergy inherent in the network environment. Thus, technical employment opportunities in the U.S. are attracting the top talent from the all over the world. We are witnessing the flight to the U.S. of the more valuable intellectual resources; the worlds’ brightest people coming to fill these high-tech jobs. Wealth engenders wealth. At the same time the U.S. is benefiting from the flow of traditional flight capital (cash).

   But any product of the human mind can be communicated as a stream of digital bits. And it is exactly this sector of our economy—the product of our minds—that is growing the fastest. It is in the information industries, broadly defined, that the majority of the world’s new wealth is being created, the wealth upon which the value of money will someday be based. First and foremost, privacy in cyberspace will not be an abstract political right based on the vagaries of geography, government policy, or cultural norms. In the future, electronic privacy will be an absolute algorithmic certainty. The science of cryptology, long an exclusive province of government security agencies, has taken root in the private sector. Governments of the world will have to live with the fact that they will be impotent to pry into many of their citizens economic affairs. Second, cyberspace differs from our everyday world in that coercive force cannot be projected across a network. It is not possible, within the confines of the Internet itself, to compel anyone to do anything. This is a discomforting revelation to most legislators and bureaucrats, who like to pretend that their power rests on the consent of the governed rather than the barrel of a gun.

   Sophisticated networking tools guaranteeing anonymity, such as the chains of anonymous re-forwarders being set up worldwide, will make unwanted identification and location harder and harder, particularly if the number of people using these tools in the routine course of business grows. And given the globalization of commerce made possible by the Internet, allowing even solitary individuals to transact business around the world, the target of any particular act of coercion is as likely as not to be in a political jurisdiction inaccessible by the aggrieved government agency.

   What does that mean in a practical sense? It means that ordinary people will be able to create and exchange wealth outside the prying eyes and grasping hands of sovereign powers. And they will not have to retreat from society to a utopian enclave to do that, or make a full time career out of tax avoidance. In fact, most individuals won’t even have to quit their day jobs. All that will be required is a PC, some off-the-shelf software, an Internet account, and a little excess time. Imagine the consequences if a significant fraction of the world’s most productive people took a portion of their work output and used it to engage in unrestrained commerce within an economic system inherently immune from government scrutiny. The wealth produced—that is, the underlying products of their creative output upon which the value of money will be based—may never exist in the physical world. And since this wealth may not have to be exchanged with government fiat currency in order to be useful, there may be scant opportunity to seize it. This is going to be treated as a grave threat by most national governments.

   At the root of this system will be new monetary institutions that must inherently rest on the consent of the participants. Cyberspace, which promises to shield individuals from the ravages of coercive force and allow them to conduct their affairs in secure anonymity, will bring forth a burst of creative human genius not seen since the last time a new world was discovered. If Atlas Shrugged were written today, imagine how it might turn out.

   Trade deficits are in fact surplus dollars that return to the U.S. as investments by foreign entities. An important point is that trade deficits are better classified as “surplus dollars” in the hands of foreigners that have few other investment options that are as secure as US bonds, dollar debt, securities and assets etc. More objectively, foreigners investing in the US should also consider it to be their fair share of the cost (tax, tribute) paid to America for maintaining peace and free trade in the world so that all things could continue as nature would have it.

   It is better to be safe & wrong than be at risk & wrong

   From: The Great Reckoning – Davidson and Lord Rees-Mogg; “Facts become economically irrelevant if they do not fit comfortably into our existing worldview or paradigm and will generally be misinterpreted or ignored.” and Richard Bach “The worst lies are the lies we tell ourselves. We live in denial of what we do, even what we think. We do this because we’re afraid…”

   Prices have gone up for so long that most people believe they will never come down. This is best said in Barbara Tuchman’s book Practicing History she makes this point: “Men will not believe what does not fit in with their plans or suit their prearrangements.” Most of us realize that homes have become overpriced yet remain unwilling to do what should be done.

   “Take care to sell your horse before he dies.
   The art of life is passing losses on.
   Robert Frost

   Sincerely,
   Glenn Hautly

2. Everything I’ve seen is akin to putting a fox in charge of protecting a henhouse. Not only is every bailout, new and improved lending facility, accounting rule changes, etc designed to coverup all the fraud, but its taken the racketering, looting, pillaging, plundering to unprecendented levels. As Paul Ross asked in another thread – What is the money being used for?

   Go do a search on all the lending facilities that have been created over the past 18 months, bailouts in general, money given to particular wall street firms, accounting rule changes over the years, regulatory acts overturned or new acts to prevent regulation,lack of proper staffing levels at regulatory agencies and moreover how the Bush administration went after states who tried to crack down on predatory lending. Go examine what members of congress sat on which commitees and what they received in bribes, excuse me, I meant to say campaign contributions. And who knows how much more to the lies, deception and corruption I’m not even mentioning.

   Don’t you all wish that you could value your assets at whatever values you wanted to benefit yourselves.

   From the NYT – http://www.nytimes.com/2009/04/03/business/03fasb.html?_r=1&ref=patrick.net

   A once-obscure accounting rule that infuriated banks, who blamed it for worsening the financial crisis, was changed Thursday to give banks more discretion in reporting the value of mortgage securities.

   The change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them. But critics objected that the change could further damage the credibility of financial institutions by enabling them to avoid recognizing losses from bad loans they have made.

   -Gordon Brown spoke yesterday at he G20 and mentioned that they (whoever they are) were pushing towards a new world order (his words, not mine) and coordinating the efforts of banksters worldwide.

   It seems to me that there is this massive coordination to funnel all the money into a few priveledged people on the planet and to control everyone else via different ways, such as making everyone else a debt slave or that they have to rely on an all being power for food, shelter, etc. basic necessities for life.

   regards, doug

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