ECON Why The Mania Phase In Gold May Be Upon Us

For at least a decade now, I've been telling TB2K members that most of the money in the world today- including most US dollars- exists only in digital form. Very little of it is paper- less than 5%, if the figures are to be believed. It's been that way for a long time- go read http://query.nytimes.com/gst/fullpage.html?res=9F06E6DF1439F935A25755C0A960958260 if you don't believe me (and please note the publication date...).

Despite the tremendous amounts of "money" that exist in the modern world- we have to use quadrillions to measure it now, because mere trillions are not enough- little of it exists other than as ledger entries in bits and bytes- just like this post. How much is a quadrillion? A thousand trillions. How much is a trillion? A thousand billions. And so on. In other words, LOTS of zeros.

All of a sudden, a LOT of that digital money is going POOF, for various reasons. That's making a lot of people nervous, believe it or not. As people get nervous about their money, they start looking for safe places to put it.

Gold is the ultimate safe place for money. It has been for all of human history. In fact, gold has been the ultimate in money for all of human history. And it still is, because there is not much of it, and it takes a lot of labor to wrest it from the earth. The quantity of gold cannot be increased at some government's or bank's whim. The quantity of digits can. Digits are in endless supply, gold is finite. People are beginning to catch on to that fact.

A lot more digits are going to go POOF before the real panic into gold (and silver) really begins. Is there anything that can prevent this panic? Of course there is. All it will take is for governments to change their spendthrift ways and stop living beyond their means. Are you really willing to bet that will happen?

I'm not...

dd
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http://www.safehaven.com/article-10777.htm
July 18, 2008

Why the Mania Phase in Gold May Be Upon Us
by Jeff Clark

That's right: the long-awaited Mania stage in gold may be nigh. How can I make such a claim? After all, some have been screaming "It's here! It's here!" for months or even years. So I propose that instead of simply declaring that Mania time is near, I lay out the facts and see if you come to the same conclusion.

First, let's agree on the personality of a Mania. A Mania begins with a fleeing or panic from customary investments toward what seems to be the asset of the day; it ends in an astounding run-up in price. For gold, while the over-exuberant profit seeking is yet to come, the stage is now being set for the Mania's beginning: investors are fleeing real estate, bonds and, increasingly, blue chip stocks because their prospects are so bleak. Even TIPS (Treasury Inflation-Protected Securities), according to Morgan Stanley, are failing to keep up with inflation because the official CPI to which they're tied understates inflation by underweighting, for example, the past year's 40% increase in gasoline and 130% increase in corn. The very investment designed to protect from inflation is falling short, since its gauge is more cheerful than accurate.

So, what will fleeing investors flee to? A hint is found in the never-say-die price of oil. You may not be buying oil at these levels, but somebody is, the underlying message being that even though some commodities appear expensive, they represent something more tangible than paper money and more profitable than conventional equities.

Although I believe this is evidence of what's to come for gold, it's not my reason for declaring the Mania close at hand.

To get to my answer, consider what occurs in the economic and monetary landscape just before a gold Mania...

Inflation is drowning your life - everything at the store costs staggeringly more than last year, and gasoline prices force changes in your driving habits. The government tries to bring inflation under control, but instead the currency of your nation takes a scary nosedive. Investors abruptly push up interest rates. The stock market is in a downward spiral, dropping literally every day. Foreign investors are dumping your country, and loans all around you are defaulting. Unemployment is rising. Your household wealth is plummeting (with damage from both the real estate and the stock markets), and there's no end in sight to inflation.

Would you concur this is the kind of environment that leads directly to a rush into precious metals?

I've got news for you... it's already happening. The country of Vietnam is experiencing every one of those maladies... inflation is an incredible 27%, interest rates are over 8% (they rose 100 basis points in one swoop), the stock market was down every day in May, and unemployment has more than doubled (from 2% in '07 to 5.1% in '08).

And here's the interesting part: how did the Vietnamese public react to all this? Did they dollar-cost average down on equities? How about real estate; that's always a long-term winner, right? What about bonds? Maybe inflation-protected securities? Or did they just sit on cash? How about none of the above. The economic and monetary problems in their country have sent the Vietnamese fleeing to gold. And not gold stocks; gold bullion. Furthermore, they're hoarding (and hiding) it from their government.

Hard figures on the size of the local gold trade aren't available, but current estimates are that the public owns 16 million ounces, including 1.3 million ounces imported in the first quarter of 2008. Of this, only about 10% has been deposited into banks (which actually pay 2.5% interest on gold). The remaining 90% presumably is under mattresses (or hanging around the owner's neck).

And the trend to gold is spilling into other financial areas. After a long period of quoting land prices in Vietnamese dong, landlords are now setting prices in gold in order to avoid the dong's devaluation. Nguyen Trung Vu, general director of the Ky Moi Real Estate Co, said that while it is complicated to quote prices and make transactions in gold, "I think that making transactions with payment in gold will become a trend."

My question to you is, what happens when Americans flee their currency, as the Vietnamese have? What happens when inflation isn't just an annoyance but becomes lifestyle-altering, as in Vietnam? What happens when the stock market continues to plunge and all traditional investments are losing investments, as in Vietnam? What happens when the dollar loses so much value that the average citizen scrambles for a safe harbor for their money?

Well, the stage is set. Account statements for the first half of the year are in the mail, and they aren't pretty. What alternatives are left? To where will American investors send their dollars?

When it dawns on the general public that, as in Vietnam, no conventional asset is safe - let alone profitable - gold will take off. Our flight to quality is just around the corner because it's already happening an airplane ride away.

There is other hot-off-the-press evidence that the golden pot is starting to boil...

It is possible the central banks of Russia and Argentina are buying gold. There is also unconfirmed talk that the central bank of China and other sovereign wealth funds may be buyers. Since these countries have trillions more cash than Western central banks have gold, it is easy to envision a scenario where central banks as a whole become net buyers, even if some countries continue selling.

Over 50 countries are now experiencing double-digit price rises. Ukraine is now at 29%, and in the Gulf states inflation is out of control. Russia is at 15%, and India is close behind at 11%. China is on the cusp, at 7%. Interest rates are still below inflation rates in much of the emerging world.

The supply/demand picture for gold is getting tighter every month... Older mines are playing out, rising costs threaten the marginal operations, and large new deposits are simply not being discovered. Yet demand in all categories is up - industrial, jewelry and investment. And the potential for investment dollars to flee to gold is tremendous; consider that the sum total of the world's paper financial assets (including equities, bonds and bank deposits) equals US$74.5 trillion. Yet the value of all physical gold held by private investors and central banks is just US$1.1 trillion. A mere 5% of that going into gold would be $3.725 trillion. What do you suppose that would do to the gold price?

The Gold Mania is nigh. In fact, our research shows this is the last summer you will be able to buy gold for 3 figures. Do you have enough? Perhaps the most transparent way to find the answer is to ask: will you feel like you bought enough gold when it's selling for $2,000 an ounce?

Zimbabwe has minted a new 100 Billion Zimbabwe dollar note, it is equal to one US dollar. It is expected to be released to foreign currency exchangers on Monday 7/21/08.

Unfortunately 100 Billion Zimbabwe dollars, will not buy a loaf of bread in Zimbabwe.

dd, I have been paying attention for years, and am grateful for your posts and advice.

And I so agree that gold mania is nigh but these days I'm forced to stick with silver, which I believe may turn out to be an even better safehouse.

I know in my heart of hearts that I should kill my substantial retirement fund at work and transfer it into PMs... If anyone has done this could you please relate your experience? I'd hate to retire only to find out that they don't have anything for me, and that is pretty much how I see things going. I'm about ten years from retiring and pretty apprehensive about my financial security in old age.

PassGo,

Look into http://www.goldstartrust.com/ , which acquired American Church Trust Company in 2007. These folks have a longstanding reputation in establishing PM-backed IRAs.

dd

http://www.safehaven.com/article-10776.htm

July 18, 2008

Panic on Wall Street Is Building- Gold and Silver's Role
by David Morgan

Before getting into this missive, I would like to state that other silver commentators make a very strong case for silver being a metal that does well in good, prosperous times. I absolutely agree. If the world at large were gaining in real wealth and the economy were humming along, we all might be purchasing flat screen TV's and using even more silver than we do today. Bottom line, silver does not need bad times to do well.

However, I am experienced enough to know two people can look at exactly the same thing and see it differently. This is what makes the world go round -- an exchange of ideas. In fact, I am on record as stating there is nothing more important in a true free market than the free exchange of ideas.

My worldview is that silver plays a role in the best of times and in the worst of times. Right now there is a huge shift of wealth; wealth is being created in the East and wealth is being diminished in the West. It is and has been my very studied opinion that wealth cannot be printed, and therefore the role of gold and silver at this point in time comes mainly as a means to protect or build wealth.

Fannie Mae (FNM) and Freddie Mac (FNM) were on the verge of collapse, only to be saved by the full faith and credit of the United States. But in reality the Fed did not save them, YOU did. If you are a U.S. citizen, the bailout has your name on it and you don't even know it, do you?

When a financial institution, bank, broker, hedge fund (Long Term Capital Management) gets bailed out, it is the taxpayer that ultimately pays for it. The Fed "loans" money to the failing institution and rewards mismanagement, but the loan is paid for by collecting taxes from you! How often has your friendly banker asked you to bail out others that have made poor business decisions? The answer is, plenty of times, but those who read the mainstream press never get a clue that the full faith and credit of the United States means simply, the ability of the federal government to tax its citizens. It is just that simple!

The U.S. government is coming to the rescue (through you), but is this "too little, too late"? All of this fear is also being fanned, thanks to statements by Federal Reserve Chairman Bernanke, who told Congress the U.S. economy is faced with "numerous difficulties," such as strains in financial markets, a shaky job market, and ongoing weakness in the housing market. These difficulties are persisting, despite the Fed's massive interest rate cuts and expanded lending efforts over the past year. Will the Federal Reserve and Treasury be able to save the country from suffering a massive financial collapse?

It depends. It depends upon what you consider a financial collapse, and I tend to look at it from a very realistic point of view. On a case-by-case basis. If you had your entire retirement account with Enron, then you have had a financial collapse. If you are an autoworker for General Motors, then you may be feeling a bit unsure of your future.

The only real way to gain an idea of whether this latest move by the Treasury and the Federal Reserve is going to help is by objectively asking yourself what currency has survived the test of time. The answer is NONE; no piece of (government backed) paper has ever stood the test of time.

However, fear not, because two commodities have stood the test of time and they are gold and silver. These metals have a 5,000-year track record of preserving wealth and at certain times enhancing wealth. You see both of these monetary metals stand outside the entire financial system and yet are money in and of themselves. They are immune to bank or brokerage failure, poor management, or even government intervention. That is the beauty of owning an asset outside the financial system: you have the peace of mind that some of your savings is safe no matter what happens.

Do Even Greater Troubles Lie Ahead?

Thomas Jefferson offered these words at the founding of our country, "Banking establishments are more dangerous than standing armies." The next few months may prove to be very difficult if the financial crisis spreads throughout the world.

The big "IF" is, if perhaps the worst is behind us, the system will continue and the past errors made by leading financial institutions will be resolved. Certainly, if you are objective, this is a "possibility" but in my view a very remote one. The problem is that if things deteriorate slowly, more people will not wake up in time to really take action.

Which action? The act of buying a metal that reflects the light of truth in good times and bad -- SILVER.

For what it's worth, Freddie Mac's stock symbol is "FRE." David Morgan repeated Fannie Mae's stock symbol for both Fannie Mae and Freddie Mac.

Pass Go, Everyone I know has been transfering their retirements out of the standard venue and changing over to safer things like PM's. Although none of them are changing all of it over. They are all keeping some in stocks and bonds too.

My personal belief is to do a little bit of everything...be diversified... so in case this fails, you have that as a back up. Again this is my personal plan... not financial advice.

I agree that eventually silver will be a real value..but have the other stuff just in case it doesn't.
------------------------------------------------------------------------
Doazdoats, I have come to appreciate your written words. You're always spot on!

MM

Thanks for the lead, dd.

I feel like I would be stupid to trust a retirement fund with my future these days.

Main prolem with them is I don't have the PM.

I've been reading several gold market sites since way back in the late 90's. I cannot remember which ones, or who the authors were back then, maybe some of those guys are still writing present day articles, but what I'm going to reference is some past things I remember. By the way, I have a fairly good reference memory, but it is sometimes like paper 'fiat' money.

When Russia collapsed back in the 90's there were many news (tv) references about how their paper 'fiat' money was devalued AND that a new paper 'fiat' money rose as a replacement. The citizens were literally cheated out of their life savings overnight. That paper 'fiat' money is still what is circulated today.

Those Russian citizens who had been saving/storing/collecting gold and silver became overnight millionaires and are the same individuals who prosper today in the Russian businesses, in fact, they are the ONLY businesses that turn money over, the balance are still using barter.

The Russian government from the collapse forward have done a tremendous amount of gold purchases to fill their 'fed' reserve. It is believed they hold a tremendous amount of gold reserve now, and what was interesting was back then is that the Russians made statements about building this reserve because that is how a nation holds a world view financially, but they also mentioned that gold/silver would be the only money standard in the not too distant future as 'fiat' systems were going to collapse world-wide. I think their world-wide statements then were brushed off because nothing happened way back then to the fiat systems.

Recently someone on some site noted that the Russians had also invested/bought a considerable amount of silver and that they were predominately investing in silver at this time, this was in the past couple years, maybe even 3-4 years ago, but no one really paid attention to this stuff because of the gulf wars. Russia's recent heading toward a stealthier silver reserve is both about it's use in the monetary system but more about it's need in meeting furture manufacturing demands.

When Argentina's fiat system collapsed, it's gov started working on building a gold and silver reserve, kept their fiat around for the citizens, and of course there citizens also resorted to bartering, not much different a process than Russia's but their citizens were much more modern so the pains of the collapse were more difficult because the people were not as independent in their living standards like the Russian citizens.

I have not been searching for articles regarding what Argentina actually did, or has done to date, I figured they were following Russia's model to whatever extent possible to regaing a world financial position with regard to gold/silver in their treasury.

Then there is the question about what happened to the phenominal amount of gold (maybe silver as well) that was hauled out of Iraq?? I recall reading that Sadam's stash seemed to have gone missing?? I wonder where it is today?? I figure that the US has it, melting it as we speak into bars, etc that tie it to the US treasury somehow, and that all the speculation of the US gold/silver reserve being gone and nothing in the coffers to back the fiat money will suddenly be reversed?? The US will suddenly be a nation of wealth in the world standings much to whomevers suprise.

While the mania phase in gold may be upon us, currently it is only the pawn brokers who are gleaning or cleaning up the gold from those who are having troubles making ends meet. The percentages of gold movement on the markets seems to be a few percent higher that it's normal past, but not enough trading to signify some kind of a gold rush, especially in the bird-in-hand variety. I DO expect all that to change soon, and that change will be another big dot to take notice of - big time notice of a big time dot.

NP

on edit:

By the way, while I did some investing in gold, I mainly focused on silver because I felt it's value would gain MORE due to it's need in manufacturing. I also invested in what's called dirty silver, older coins at 90% (approx) because it probably would be more the 'cash on the street' that people would be able to identify with more easily.

As far as the 'electronic funds', what you might have in your savings accounts will seem to go poof, but your debt will be records that got well maintained. I would make sure I have some paper form of proof regarding my accounts at minimum. If I were to think at maximum - my accounts would find a way to be closed and my safe deposit would be maintained by me in my own safe deposit box.

NP

No mania yet

My friends in the business say there is just a smattering of new business when gold gets in the news, like when it hit 1000. No big deal.

The author is early. We should all be early, too. HOpe you have some in your portfolio, however meagre. The one thing you don't want to be is buying your gold when there's a mania on.

Yea, almost ready; there is no mania until there is more inflation. People will need PM's when their wallets can't handle the pressure of inflation anymore.
That's when they'll see the light, and not before.
That deosn't mean that the the major players aren't getting positioned now. They are. The price of gold has moved up in the face of sagging crude oil prices in the last week. Normally they move up/down together-crude oil is a predicter of future inflation-

It appears that gold and oil are decoupling(again), yet I believe that this is the setup for another surge in PM prices.
-Or I'm competely wrong-
But I'm right more than I'm wrong.

Great Northwet said:

It appears that gold and oil are decoupling(again), yet I believe that this is the setup for another surge in PM prices.

Click to expand...

Great point and, if this continues, you've gotta think the end of our financial system is near.

Today's ounce of gold is the exact same ounce of gold from 5000 years ago or 5000 years hence.

Anyone wanna take bets that today's US Dollar will be the same even 5 years from now???


The difference is astoundingly clear - no govt. is (currently) able to print an ounce of gold and likely never will.
Printing presses make great magazines, newspapers and books - but can only make seriously lousy fiat currency.

http://seekingalpha.com/article/85669-historic-financial-collapse-underway

Historic Financial Collapse Underway?
by: Porter Stansberry
posted on: July 20, 2008

I tend to be in hotel rooms when bubbles burst.

On January 6, 2000, I was on the 30th-something floor of the Marriott hotel across the street from the convention center in San Francisco. I was jet lagged and up working even though it was still dark outside, around 5:30 a.m. local time. Just then, Lucent Technologies announced earnings before the market opened. After beating expectations for 15 quarters in a row, Lucent missed its earnings forecast by 18¢. Much worse, it reported a $1 billion drop in revenue. You can't miss on revenues by $1 billion unless something is horribly wrong.

And something was horribly wrong. It wasn't clear until months later, but that was the morning the bull market in tech, telecom, and the Internet died. I vividly remember that morning. Believe it or not, I didn't have to look up the date or the details on the earnings miss. That morning is seared on my brain. It was the end.

I don't believe it was a coincidence I was in San Francisco that day. We financial scribblers follow the market. We cover what's hot. I visited tech capitals San Francisco, Boston, or Seattle nearly every month during the big bubble of 1998-2001. It was an incredible, exciting time. I'm glad I got to see it up close and personal.

This month, I got the same feeling I did back on January 6, 2000. It's over. And I was watching it all collapse, at the epicenter.

Recently, I was at the Four Seasons Hotel, looking down over the Las Vegas strip. Fannie Mae (FNM) and Freddie Mac (FRE) have finally cracked. While the stocks haven't gone to zero yet, it's clear the market woke up to the obvious fact equity holders of these companies are holding worthless pieces of paper. From my hotel room, I could see many of the reasons why...

Las Vegas may end up being the single-largest source of mortgage defaults. Upscale home prices here have fallen nearly 40%. The $2 billion Cosmopolitan hotel development is in default. The $6 billion Las Vegas Plaza is being delayed. Even Donald Trump has put his second tower on hold. It's a bloody mess.

Meanwhile, City Center, a $9.2 billion condominium/hotel development on the strip, is still going up.

Pre-construction sales began in February of last year – just before the financial markets shut out condo developers completely. I can see six huge cranes and the enormous steel infrastructure, half wrapped in glass. I cannot embellish on how big City Center is.

Each of its six main buildings seems bigger than any existing building in Las Vegas. This is the largest privately financed development in the history of the United States. It sits in the middle of a desert, in a city whose economy is dominated by gambling. Those two facts alone would give most reasonable investors pause.

The entire complex is five-star. One-bedroom condos here sold for $700,000. And the complex includes literally thousands of them. What will they be worth in foreclosure? I'd bet less than $200,000. And who will absorb those losses? I can't help but think in another two years we will look at those buildings and wonder, "What were they thinking?"

On a smaller scale, the same problems and the same questions are being asked of real estate buyers all over the United States. And the answers are not pleasant. By a huge margin, the largest owners of residential mortgages in the world are Fannie Mae and Freddie Mac.

Whether we like to admit it or not, the entire market for housing in the United States has been corrupted by government involvement. By subsidizing the availability of credit and by granting huge tax incentives to home speculators, the government helped finance the biggest bubble of all – the biggest bubble in history. It won't be unwound without serious disruptions to our economy and, unfortunately, a tremendous amount of pain.

I was listening carefully this week to the congressional testimony of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. Both insisted Fannie and Freddie have enough capital to continue their operations. Paulson sounded just like a Latin American finance minister on the eve of devaluation.

Incredibly, they both insisted all that was needed was more regulation! I felt like I was watching a kind of financial Nuremberg trial, where the main perpetrators of the crime were utterly oblivious to the evil they'd created. I was aghast.

Consider: Only 20 years ago, the U.S.'s total outstanding mortgage debt made up roughly 30% of our GDP. Homeowners held large stakes in their houses – close to 70% of the equity on average. Today, mortgage debt equals nearly 80% of GDP. The average homeowner owns less than half the equity in his home. This seismic change in the nature of home ownership and debt financing occurred nearly overnight – in less than one generation.

Fannie Mae and Freddie Mac made it all possible. Released from capital-ratio requirements and backed with a line of credit at the Treasury, they were able to buy a nearly unlimited amount of mortgages. Today, Freddie or Fannie finance more than 80% of all new mortgages in the United States. Over the last several decades, their presence in the market greatly lowered interest rates, created an endless supply of credit, and pushed housing prices higher. Meanwhile, the cost of the government guarantee, which lay behind Fannie and Freddie's power, was invisible.

Now what?

The size of the bailout of Fannie Mae and Freddie Mac could easily surpass $1 trillion. But Congress has no understanding, at all, of what's about to happen.

In 2003, chairman of the Senate Banking Committee Chris Dodd refinanced his home mortgages with Countrywide Financial (CFC), receiving a below-market interest rate that allegedly saved him $75,000 a year. He never disclosed the benefit to the Senate and claimed he was in Countrywide's VIP program because he was "a good customer of Countrywide's" – which is as bald-faced a lie as has ever been told in Washington, D.C.

In any case, the bill Dodd is getting through Congress (which was written by Bank of America (BAC), by the way) will create a new tax on Freddie and Fannie – 4.2 basis points on all mortgages they buy. That would generate about $600 million annually.

And, the money won't go into the general fund. Most of the money (65%) will go directly to the secretary of Housing and Urban Development, who will pass out the loot in the form of block grants to states. The Treasury secretary will get the rest of the money. He's allowed to give it to any nonprofit entity he chooses. And that means, whoever wins the presidency will get another $600 million (or more) each year to kick back to political backers. All for "affordable" housing, of course...

If Congress had any idea how serious the problems with Freddie and Fannie were going to become, they wouldn't mess around with a new tax or allowing a rival to Fannie and Freddie (Bank of America) to draft the bailout. Clearly, Congress has no idea how much trouble Fannie and Freddie face. Here's my estimate:

Freddie and Fannie own or guarantee $5 trillion (yes, trillion) in U.S. residential mortgages. I'm convinced mortgage losses after recoveries will exceed 10% of the total outstanding and could exceed 20%. Thus, over the next 12 to 24 months, Fannie and Freddie will likely face losses of between $500 billion and $1 trillion. That's a huge amount of money, even for Congress.

There's simply no doubt Fannie Mae's and Freddie Mac's shareholders will be wiped out. Last month, I wrote the market value of the mortgages on their balance sheets has fallen by at least 5%, wiping out all of their equity. And when you factor in the off-balance-sheet guarantees these firms have sold, it was impossible to imagine they remained economically viable...

I'm embarrassed to admit my estimate of Fannie and Freddie's viability was hugely optimistic. Both firms seem unlikely to last through the end of July. Readers who followed my advice in June are up over 70% on their short positions in Fannie and Freddie.

I'm certain the government will do whatever it takes to ensure Fannie and Freddie continue to operate – but that doesn't mean bailing out the shareholders. All the government will do is guarantee Fannie and Freddie's debts. That means a huge amount of taxpayer money is about to go into troubled mortgages. A huge amount of money the government doesn't have and won't be able to increase taxes enough to afford. And that means inflation is going to get a lot worse. The government is going to pay for guns, butter, and housing. Look out.

The value of the dollar is going to go down, and the price of everything else is going to go up. I think this sets the stage for a true inflationary crisis – as the economy can't adjust to soaring commodity prices. I also find it hard to believe our foreign creditors will continue to hold U.S. Treasury bonds if the U.S. Treasury takes on all of the mortgage losses of Fannie Mae and Freddie Mac. I think they'll dump our bonds and that will literally be the end. No more world reserve currency. No more pegs to the dollar around the world. We'll be on our way to banana republic status, in terms of credit quality.

What's the best way to protect yourself and to make money on this looming crisis?

You must buy gold and silver as a hedge against a further collapse in the value of the U.S. dollar.

Most people don't spend any amount of time thinking about the value of the dollar. It has never occurred to nine out of 10 Americans that the last 35 years mark the first time in recorded history that every major financial power in the world operated with fiat (paper) money in the absence of a World War. No monetary backstop exists anywhere – no limit in any country to the amount of paper the government can create on a whim. Meanwhile, the track record of every experiment with fiat money is 100% perfect: In every case, the currency regime was eventually destroyed by an inflationary crisis.

I believe we have begun the monetary crisis that will end the dollar standard that has governed world trade since World War II.

I can promise you, the same way I promised readers that GM (GM), Freddie Mac, and Fannie Mae were "zeros" – the U.S. dollar's strength will continue to fade.

Slowly, bit by bit, Americans will realize this. Our foreign creditors will realize it, too. The result will be a flight from the U.S. dollar into other assets – at any price. Please set up your affairs now, so you can profit from the coming panic, not be a victim of it.

Writing the most recent issue of my investment advisory – my third strong endorsement of precious metals in as many years – I can't help but feel like Chicken Little. Are things really this bad? Well, let me ask you which do you think is more likely?

Scenario one: The U.S. government recognizes its severe financial mismanagement. It allows Fannie and Freddie to collapse completely and does not assume their liabilities. Mortgage investors take huge losses. Mortgage rates soar to more than 10%. Housing prices fall 75% – which makes housing affordable for millions of Americans previously priced out of the market.

In the meantime, the government cuts spending by 30% and reduces taxes radically to encourage economic growth (which, ironically, increases tax receipts, leading to a balanced budget). It restructures Social Security, moving the age of retirement to 75. And most importantly, the government gets out of health care completely, renouncing all of its Medicare obligations. Hospitals and doctors immediately drop their fees to meet the affordability requirements of a free market.

Scenario two: The U.S. government refuses to take responsibility for causing a bubble in mortgage finance. Rather than allow the bubble to deflate quickly, it bails out Fannie and Freddie. Mortgage losses build for five years, reaching more than $1 trillion. Housing prices stabilize in good neighborhoods, but risk-averse lending practices result in widespread vacancy across broad swaths of America.

Refusing to substantially raise taxes, annual deficits surpass $1 trillion in 2010. Total government debt begins to spiral out of control as our interest costs mount. Our foreign creditors lose confidence in the dollar and begin dumping it on the world market. Inflation surpasses 20% annually and prices for energy soar. Oil reaches $250 per barrel. The president alleges an international conspiracy to destroy America and threatens to attack China if it continues to sell the dollar. Price controls are instituted.

No paper currency regime has ever lasted. No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP). A default is not likely – it is inevitable.

The answer seems obvious and urgent. Make sure you own a substantial amount of gold and silver. I prefer to own plain bullion. Buy gold and silver bullion and bury it somewhere safe. The gold won't rust. Silver is more difficult to manage, but the best way to own it is to take physical possession.

That's what I strongly recommend you do. Right now. Seriously. I wouldn't be surprised to see prices of these metals soar if Fannie and Freddie are taken over by the Feds, which is what I expect will happen.

Is there a chance I'm wrong about all of this? Is there a chance the death of Fannie and Freddie will mark the end of the crisis? That financial stocks will rise from here and gold and silver will fall?

Yes, absolutely. At some point all of the bad news will be in the market, and prices will turn before the fundamentals improve. So, yes, I might be Chicken Little. I might be dead wrong. But I don't think we are anywhere near the end of the real estate bubble collapse, and I know we haven't even begun to deal with the fiscal imbalances of our profligate politicians.

One more thing... I wish I were wrong about all of this. But I don't believe the debts of our government and many of our neighbors will ever be repaid. As a nation, we've essentially bankrupted ourselves over the last 20 years. And the consequences of those actions will be felt by several generations of Americans, at least.

I worry about the middle class, people who generally lack the financial knowledge and resources to protect their savings. They will probably believe the lies they're told by the mainstream press about "greedy" speculators and evil oil companies. They will almost surely support the policies and the politicians who are actually responsible for their increasing poverty.

I also worry about people who are retired and depending on the government to support them. They will surely see their standard of living decline substantially.

And finally, I worry most of all about my infant son. Will he grow up in a vastly different kind of America than I did? He could. And that makes me saddest of all.

I read somewhere this morning that George Soros has studied the recent history of the ratio of gold to oil. This ratio is usually around 10-1, so with gold at $960 and oil at $130 he has now gone long on gold and short on oil on the premise that either gold will rise to $1300 or oil will drop to $96 to restore the 10-1 ratio.

You must buy gold and silver as a hedge against a further collapse in the value of the U.S. dollar.

Yep.

Bottom line.

Great post, dd.

Double_A - And there it goes out the gate! The new Zimbabwean $100 BILLION currency note, that is. I actually bought a complete collection of Zimbabwean hyperinflation currency notes (from Zim$0.01 to Zim$500 million), so eventually I'll need to add this one to the pile as well. In 1993 Yugoslavia issued a 500 billion dinars currency note which, as far as I know, still holds the world record for the largest number of zeroes ever printed on a single piece of currency. Maybe Zimbabwe will finally break that record (assuming they print all the zeroes and don't just print "billion" out) -- when you consider that in 2006 Zimbabwe lopped three zeroes off their currency, the new Zim$100 billion note might be considered as actually Zim$100 TRILLION.


Zimbabwe introduces $100 billion banknotes

CNN.com
July 19, 2008


HARARE, Zimbabwe (CNN) -- Zimbabwe's troubled central bank introduced $100 billion banknotes Saturday in a desperate bid to ease the recurrent cash shortages plaguing the inflation-ravaged economy.

The bills officially come into circulation Monday, although they were on the foreign currency dealers market Saturday.

As high as they are, though, the bills still aren't enough to buy a loaf of bread. They can buy only four oranges.

The new note is equal to just one U.S. dollar.

Once-prosperous Zimbabwe has seen an unprecedented economic meltdown since it gained independence in 1980, with the official inflation rate now at 2.2 million percent.

Gideon Gono, governor of the Reserve Bank of Zimbabwe, said the new notes are for "the convenience of the banking public and corporate sector" in light of price hikes.

"The RBZ has noted with concern the unjustifiable and incessant general increases in prices of goods and services. It is therefore appealing to the business community to follow ethical business practices as well as take an interest in the plight of the general public," Gono said in a statement dated

Zimbabwe started issuing large bank notes in December, starting with denominations of $250,000.

In January, the government issued bills in denominations of $1 million, $5 million, and $10 million -- and in May, it issued bills from $25 million and $50 million up to $25 billion and $50 billion.

The new bills are actually bearer checks and have an expiration date of December 31. Zimbabwe has not had formal currency since the introduction of bearer checks as a temporary measure in 2003.

"The RBZ is fighting a losing battle," economist John Robertson said in Harare. "As long as the inflation remains high, cash shortages will persist. There is need to address the inflation by increasing production so that too goods do not [cost] a lot of money."


http://edition.cnn.com/2008/WORLD/africa/07/19/zimbabwe.banknotes/index.html

Despite the comments below, gold is not really an investment, at least not for ordinary people. Instead, it is simply monetary insurance. It helps you preserve your purchasing power, not make money in the genuine sense of the word. Don't be confused...

dd
=====

http://www.independent.co.uk/news/uk/this-britain/the-rush-for-gold-sales-of-bars-double-872392.html

The rush for Gold: Sales of bars double
Investors opt for bullion rather than shares or property.
By Rachel Shields
Sunday, 20 July 2008

Britons who still have any wealth to invest are turning their backs on the property portfolios, stocks and shares, and sports cars that have long constituted conventional investments, and pumping their savings into old-fashioned gold bullion and coins.

Leading gold bullion suppliers BullionVault, ATS Bullion and Baird & Co have all revealed record levels of investment in gold bars, and the World Gold Council (WGC) has reported a big increase in the number of gold coins being bought.

Last year saw an 81 per cent increase in UK investment in gold coins, taking the amount bought to 4.5 tons. Traditionally, in Indian and Asian markets, gold jewellery and coins have often been traded, while in France and Italy the trade in ingots – small pieces of gold – has previously been much stronger than in the UK.

But this is changing. "We have seen a rising level of interest in gold as an investment in the UK," said Matthew Graydon of the WGC. "Retail investors have realised that gold offers an effective hedge against currency movements, is an effective inflation hedge, and is a proven safe haven in times of financial turbulence."

New figures from BullionVault reveal the amount of gold bars purchased through them has doubled in the past year to 7.5 tons, more than half of which is owned by British clients. ATS Bullion claims its turnover has doubled in the past year, while Baird & Co reports customers queueing around the block to buy its gold.
With minimum outlays of around £1,000 at most bullion companies, tangible investments are looking increasingly attractive for middle-income savers. It seems that factors which once deterred people from investing in gold – such as bullion not paying interest – are no longer putting savers off.

"I put a significant percentage of my investments in gold bullion about two years ago," said David Walker, an account manager for a media company.
"Some people thought it was an odd thing to invest in, but there is a great sense of actually owning something... If you put your money in pension funds, it could lose money, if you give it to a fund manager, they might lose it, but having it in gold makes you sleep a lot better at night."

Buying shares in gold-mining companies is also on the rise, with firms such as BlackRock Gold and General Investment Managent reporting an increase in clients keen to invest in gold funds.

That's right: the long-awaited Mania stage in gold may be nigh.

Click to expand...

Unless you're speculating in gold, why would you want the price of gold to skyrocket, especially considering the probable implications of that increase?

Rucus,

No one with a lick of sense WANTS gold to skyrocket in price. Fact is, it's more as if we're AFRAID that it will skyrocket, due to the other circumstances that prevail right now and will apparently continue to worsen through the forseeable future.

The question to ask instead is more like, "Why would anyone want to hold on to dollars while their value visibly evaporates?" If you own a fire extinguisher, is it because you WANT a fire to break out? Same thing...

Gold (and silver) in today's economy is not a speculation. It is a refuge.

dd

Agreed. Some say inflation/hyperinflation, others say deflation/depression. Some say hyperinflationary depression, others say hyperstagflation. A lot of baskets to put a few meager eggs in, but what other choice is there?

Dozdoats said:

http://seekingalpha.com/article/85669-historic-financial-collapse-underway

Scenario one: The U.S. government recognizes its severe financial mismanagement. It allows Fannie and Freddie to collapse completely and does not assume their liabilities. Mortgage investors take huge losses. Mortgage rates soar to more than 10%. Housing prices fall 75% – which makes housing affordable for millions of Americans previously priced out of the market.

In the meantime, the government cuts spending by 30% and reduces taxes radically to encourage economic growth (which, ironically, increases tax receipts, leading to a balanced budget). It restructures Social Security, moving the age of retirement to 75. And most importantly, the government gets out of health care completely, renouncing all of its Medicare obligations. Hospitals and doctors immediately drop their fees to meet the affordability requirements of a free market.

Click to expand...

I want gold to rise so we can eventually get to scenario one. We are in a viscous circle that is not going to be corrected by Washington politicians. It will take a calmity to get the slate clean.

Rucus Sunday said:

Agreed. Some say inflation/hyperinflation, others say deflation/depression. Some say hyperinflationary depression, others say hyperstagflation. A lot of baskets to put a few meager eggs in, but what other choice is there?

Click to expand...

"Hyperstagflation" -Now that is something I've never heard before.
Imagine soaring prices in consumer staples combined simultaneously with increasing unemployment and wealth destruction on a national scale.
-Mad Maxian-

Great Northwet said:

"Hyperstagflation" -Now that is something I've never heard before.
Imagine soaring prices in consumer staples combined simultaneously with increasing unemployment and wealth destruction on a national scale.
-Mad Maxian-

Click to expand...

That is exactly what I fear the most. Food, energy, health care, etc. go through the roof while your pension, stocks, 401k, savings and housing value are all destroyed. Yeah.....that has the makings of good doomer novel......

Spark Farkle said:

I read somewhere this morning that George Soros has studied the recent history of the ratio of gold to oil. This ratio is usually around 10-1, so with gold at $960 and oil at $130 he has now gone long on gold and short on oil on the premise that either gold will rise to $1300 or oil will drop to $96 to restore the 10-1 ratio.

Click to expand...

Hey Spark; thank you for that. I did some searching on the topic, and sure enough the ratio historically is around 10/1. BTW, in my searching I see that Soros is now long on gold. -IMHO if a trader goes long on anything, that's one hell of an indicator.

Caveats are everything. I always include the phrase "as long as we're not in a hyperinflation at the time" when talking about spiking silver and gold prices. The economy didn't collapse in the mid-1980s when silver and gold had their record runs, so I don't think it's necessarily a given that spiking precious metals MUST be accompanied by a collapsing economy.

Hyperstagflation. Scary thought.

First time I ever heard the term was from Bob Chapman:

http://www.theinternationalforecast...aster_Weekly/The_Formula_For_Hyperstagflation

The Formula For Hyperstagflation

Posted: June 14 2008

Inflation predicted over the next year, expect rate hikes over the next 12 - 18 months, failures pile up, failed measures to save the economy to have a cumulative effect, orgy of Wall Street fraud causes credit crunch, a worldwide disaster in the making, commodities rigging has a golden lining

The acceleration of inflation is baked into the economic cake for, at minimum, the next 12 to 18 months worldwide. Fed jawboning won't change that. Phony PPT dollar rallies won't change that. Fed rate hikes won't change that. The reduction of money and credit won't change that. Falling oil prices won't change that. Lies about economic statistics, and especially about inflation data, won't change that. So, why can't the rate of inflation be changed for the next 12 to 18 months, you might ask? The reason is because inflation is not determined by smoke and mirrors, or by gimmicks and false data. It is determined by the rate at which the total supply of money and credit is being expanded or contracted (what economists call M3), which is measured by determining how much money and credit is being fed into, or subtracted from, each nation's financial system by its central bank over the course of a given month, as compared with the amount determined for the previous month. That figure is then annualized. Basically, the annualized rate of M3 that is determined for any nation becomes that nation's rate of inflation (expansion) or deflation (contraction), with a delay that usually runs about 6 to 18 months.

Contrary to what the fane-stream media, pusillanimous pundits and Wall Street shills might tell you, inflation is caused by too much money and credit chasing after too few goods, and today's oil and food crisis is now providing everyone with a textbook example of how profligate expansion of money and credit can ruin an economy in a frighteningly short period of time. The baked-in inflation rate for the US will run from its current 12.625% to as high as 18% over the next 12 to 18 months, even if the Fed totally cuts off all money and credit tomorrow and then throws rate hikes in for good measure! Our current actual (as opposed to official) rate of inflation of 12.625% is running at a lag of about one year from the time M3 had reached the 12.625% level, and that is why we see 12 to 18 more months of 12.625% to 18% inflation. We have extended our projection out to 18 months because we do not see M3 going below 12% any time soon.

If the Fed and the traitors in the White House and Congress want to see stagflation gone wild, just go ahead and let the Fed raise rates and/or contract the supply of money and credit. The baked-in inflation will then continue even as the economy goes into a thermonuclear meltdown! The Dow will lose 500 to 1000 points on each .25% rate hike as de-leveraging accelerates, margins are tightened and liquidity is drained from the system. Bond markets will be destroyed as principal plummets. The situation is now so bad that even a substantially weaker yen cannot bring enough carry trade liquidity into the system to hold up the general stock markets. It now takes 3.5 more yen to buy a dollar or a euro than it did with the Dow was just over 13,000, yet the Dow is now at just over 12,300. Part of the current stock market weakness is due to the lack of support from the PPT, which is trying to minimize the liquidity and profits available to large specs that could be used to rally metals. Hence, the need for protective derivatives.

Further, any dollar strength achieved by any such Fed rate hikes will have little impact on gold and silver because the resulting destruction of the economy will send everyone to gold and silver as the safe-haven of choice. Treasuries and money markets will still be yielding negative rates of return while the banks are getting hammered by the next round of the ongoing real estate debacle. As attention moves from the hundreds of billions of toxic waste held by banks in off-balance sheet SIV's to the hundreds of billions in toxic waste held by banks in off-balance sheet VIE's (Variable Interest Entities), any dollar-denominated treasuries and money markets aren't going to cut it any more as the real estate market drops into an even deeper, darker pit, sending the various real estate derivatives, and bank balance sheets, further down into the depths of the abyss. You will then watch precious metals go up with the dollar instead of running contrary to one another, and food and energy commodities might keep going up as stocks, bonds and other paper assets continue to be shunned by traders despite the stronger dollar. Throw in bank failures, heavy toxic waste write-downs, earnings disappointments, a consumer spending crisis, a credit default swap crisis, a new false-flag attack and/or a new theatre of conflict, and only precious metals will be going up with oil as the dollar gets taken out by the ensuing recession.

Rate hikes, coupled with weaker real estate values, and thus huge declines in both bond principal value and bond collateral value, could set off a bear market in bonds that could take the whole system down even more quickly than the credit-crunch and subprime debacles combined.

Note that when the Fed was on its rate hike campaign that terminated at 5.25%, inflation continued to grow because M3 was wildly expanded during the entire rate hike campaign. That is what separates the current inflationary debacle from all other periods of inflation. During all other periods of high inflation, the cure for an overheated economy was applied by either an increase in interest rates or by a contraction in M3, or by both. The current inflationary cycle is the first period of high inflation where interest rate hikes were totally offset, and overwhelmed by, the expansion of money and credit which totally negated any slowing of the economy that might have been achieved by the rate hikes. The Fed, Wall Street and our bought-off and compromised government officials conspired to keep up the speculation that was used to power the ongoing derivatives fraud by pumping out prodigious amounts of money and credit while lying to us about inflation, which was skyrocketing as a result. That is the precise reason why the Fed's rate hikes failed to cool the economy and to slow inflation. Instead, the derivatives fraud led to the credit-crunch, which then cooled our economy. Then, in order to attempt to save our economy, rates had to be cut back by the Fed while money and credit were expanded even further, the perfect formula for hyperinflation which you are now witnessing as we write this issue of the IF. In addition, the economy was not saved, and now inflation is getting worse as the direct outcome of the failed measures to save our economy, thus causing further and additional damage to our economy as food and energy costs skyrocket and US consumers are tapped out. That, in turn, is the perfect formula for hyperstagflation.

Note that our economy was destroyed already before the credit-crunch by free trade, globalization, off-shoring, outsourcing and both legal and illegal immigration, and now we have rampant inflation to boot. Precious metals and their related shares, professionally managed Forex accounts and Swiss franc-denominated government bonds are your only options at this point to avoid being beggared and impoverished by the Illuminati.

As mentioned above, an orgy of Wall Street fraud has brought us an economy-killing credit-crunch. That credit-crunch has forced the Fed to initiate a maniacal expansion of money and credit to keep Illuminist insider financial institutions from imploding. Much of the money and credit from that maniacal expansion is not being re-loaned because all confidence in the system has been lost due to rampant, rampaging fraud, much of which was committed by Illuminist insiders against other Illuminist insiders, proving once again that there is no honor among thieves. So where is this huge portion of all that money and credit going if it is not being re-loaned? A very large portion is being used to make substantial, speculative profits from a whole bevy of commodities, especially from crude oil and agricultural products, by virtue of a loophole provided by the depraved group of village idiots who run our country (Congress), a loophole that allows big banks to operate in the commodities markets without position limits, allowing them to run amok in those markets with privileges that are not extended to other, non-elitist players. Our government regulators always provide us with such a level playing field, don't they? What an absolute disgrace.

Inflation is destroying the world economy as central banks around the globe pump out money and credit until it inundates everything, and the leading creator of inflation and destroyer of the world economy is the Federal Reserve, a private banking concern, a majority of which is owned by two shareholders, namely, JP Morgan Chase and Citigroup, the main fraudsters of Wall Street. Wherever you see financial chicanery, these two malfeasants are usually somewhere in the mix. Ask Enron and Bear Stearns shareholders. And now the Fed's machinations, in cahoots with elitist banks around the world, have caused a worldwide stock market crash and have sent the world financial system into an inflationary quagmire, perhaps to pave the way for world government. You have already seen us drop from a high last year of about 14,200 on the Dow to today's roughly 12,300, a 13%+ loss. That would have been triple or quadruple were it not for the PPT. Then there is China, whose stock market has shed 50% from its peak, India, whose markets have shed 27% from their peak, Japan, whose stock markets have been in a state of implosion for two decades and Brazil, which is about to watch its currency implode for the second time in a decade. China uses 5 times more oil per unit of GDP produced than does the US. What do you think oil prices are doing to them? So much for free trade and globalism, and so much for the hypothesis that emerging markets can carry the world financial markets while the US and other western economies in Canada and Europe go under. What you have is a worldwide disaster in the making, with food shortages, starvation, social upheaval and revolution on their way. The would-be lords of the universe have really done it this time. We expect that very few of them will survive when people find out what they have done.

Robert the Bruce stopped the British Black Nobility from imposing their draconian feudal system on Scotland in 1314 at the Battle of Bannockburn. Our Founding Fathers fought and won two wars against the perfidious British Black Nobility to keep them from imposing their mercantilism and European-style, debt-based, private fractional reserve banking system on America with victories in the Revolutionary War and the War of 1812. Now we can add Ireland, whose citizens have stopped the European Union and its free trade, globalist agenda, both supported by the British Black Nobility and the other Black Nobility of Europe, dead in their tracks with a vote against the Lisbon Treaty, which was the EU's attempt to short circuit the common folk of Europe to establish their regional dictatorship and regional currency in preparation for a diabolical one-world government and one-world currency. Let's hope that the citizens of the US do the same with the clandestine North American Union and the Amero. This adds to the EU's woes as a one-interest-rate-fits-all policy continues to alienate the weaker EU members from the EU's economic powerhouse, Germany, the vast majority of whose citizens want their old Deutsche Marks back. While that group of weaker members may include Ireland, and while Ireland has shown considerable weakness from an economic point of view lately, that weakness does not appear to extend to their political wisdom. Let's hear it for the Irish! ERIN GO BRAGH!!!

Retail sales rose 1.0% for the month of May. Big whoop! That figure is not adjusted for the actual rate of inflation, which also just happens to be approximately 1.0% per month here in the US. That means retail sales were actually flat, with all growth attributed to price increases and not a smidgeon to an increase in the amount of goods which consumers purchased. Thus, our 160 billion-stimulus package netted a big fat goose egg. Perfect.

It is clear that oil and food are being driven up while gold and silver are being suppressed, so that when it comes time for the next precious metals rally, everything else will be hit and the dollar will be talked up. Apparently the cartel has not yet figured out that all the money from the sell-off of oil and other commodities will have to find a home somewhere, and precious metals are a very likely resting place. No one believes anything emanating from Bernanke, the Fed or our Treasury anymore. They have been dead wrong about every prediction they have made, and have lied pathologically. We will likely see rate cuts before we ever see rate hikes. The next debacle is on its way, and as soon as Ben the Bear Killer gets wind of it, he'll drop rates faster than JP Morgan Chase took over Bear Stearns with a big, juicy taxpayer gift courtesy of the Fed. Meanwhile, we must endure the poppycock drivel that the Fed and our Treasury support a strong dollar, with M3 still over 16% and ongoing, unbridled speculation by banks in the commodities markets with easy cash and credit from the Fed, received in exchange for toxic waste collateral. Again, perfect.

Not only does the nominal price of gold and silver tell you how desperate we are financially, but the degree of manipulation should also be considered. If gold and silver are used as hedges, especially gold, then why do they go down when everything else is going up? Oil was only at 112 when gold was over 1000. Now we have 870 gold with oil at 135 and many food commodities doubling, tripling and quadrupling. Does that make any sense to anyone? If it does, then they are either a cartel insider, or they are just plain dumb. Three cheers for ETF's and mint certificates, backed by the gold and silver of the proletariat which is now being used by the elitists to suppress precious metals by selling and leasing the very gold and silver which the duped proletariat think they own, while resource shares are ignored or naked-shorted. This transpires as bullion banks are paid to take out short-term silver leases and as specs continue to gamble in rigged casinos owned by the elitists while refusing to purchase and take possession of their gold and silver for cash. Welcome to corporatist, fascist America, where the sheople continue to confirm P. T. Barnum's famous quote. Detach yourself from the Matrix, or get reamed.

If you think employment is bad now, wait until thousands of municipalities go bankrupt. They are the only ones making any significant contributions of good-paying jobs at this point. Their tax receipts are dropping into the tank as their bond insurers go belly up, as their ratings drop off a cliff, as their lending rates double, triple or more, and as the auction rate municipal bond market goes the way of the dodo bird, while the 330 billion owned by auction rate municipal bondholders goes up in flames since there exists no market where they can be sold, and bank's do not intend to revive the old one. The state and local governments are about to join consumers in the big "Sorry-We're-All-Tapped-Out" final binge party as they make appointments to have consultations with their bankruptcy attorneys. This transpires as they are forced to take over houses that have been abandoned by people who should never have owned them in the first place and as they make accommodations for the tent cities that are growing in size and number by the hour. Wonder what corporate earnings will look like when the municipal tits are shut off?

Previously our Defense Department gave a $35 billion air fleet tanker contract to EADS, which manufactures the Airbus, rather than to Boeing - a contract that should have never been written in the first place. The US doesn’t need the tankers. In that process 44,000 well paying US jobs were lost to Europeans. As it turns out the bid-awarding process was corrupt. The EADS fleet will cost American taxpayers dearly and the model is less safe than the Boeing model. Boeing could have saved taxpayers $90 billion. The EADS contract will cost us $40 billion. The aircraft is less capable. EADS is using illegal subsidies. EADS won exemptions from key national security laws. The Boeing model produces 25% less carbon dioxide, reducing greenhouse gases and offers a 24% fuel savings – a cost borne by taxpayers. Even as the contract for $40 billion is being handed over, the federal government is aggressively pursuing legal action against EADS at the WTO for getting grants and loans at unfairly favorable rates.

The key Senator John McCain (R-AZ) played a crucial role in blocking the deal to build air tankers from going to Boeing. The position fattens his campaign coffers.

The question is who arranged the payoffs and who received them?

I kind of like David Galland's "stag-flagration" as a descriptive term. I think of it as a conflagration of a milling monetary herd that can't decide which way to stampede and so just burns to the ground in place.

"So, we are calibrating our investments toward a serious economic slowdown, but with high inflation. Some people would call that Stagflation. But given the severity of both sides of that formula, the situation may be better described in terms of Scorched Earth. Or, because people seem to find concepts ending in "flation" handy, Stag-flagration." (David Galland, "Scorched Earth Economy," SafeHaven.com, July 03, 2008)