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Wednesday, March 30, 2011

Bailout Inflated Big Banks While Screwing Main Street, TARP Inspector Says


On the last day of his job, the special inspector general of the Trouble Asset Relief Program (TARP) has penned his exit letter -- and, predictably, it isn't pretty. While ordinary people have been feeling the aftereffects of the bank bailout on the economy -- broadly, wider gaps in economic disparity -- Neil M. Barofsky breaks it down for us exactly what went on. Total systematic failure.

The act’s emphasis on preserving homeownership was particularly vital to passage. Congress was told that TARP would be used to purchase up to $700 billion of mortgages, and, to obtain the necessary votes, Treasury promised that it would modify those mortgages to assist struggling homeowners. Indeed, the act expressly directs the department to do just that.

But it has done little to abide by this legislative bargain. Almost immediately, as permitted by the broad language of the act, Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions, a shift that came with the express promise that it would restore lending.

As we now know, TARP's homeownership goals went down the drain as the banks padded their pockets [and continue to do so]. At this point, embattled homeowners are as likely to benefit from suing for foreclosure fraud as from government provisions. Barofsky details some of these failures, noting that 'no requirement or even incentive to increase lending to home buyers, and against our strong recommendation, not even a request that banks report how they used TARP funds.'

After gouging and obliterating Geithner for obsessively talking the talk but not walking the walk, Barofsky lands a particularly square punch -- calling out the ineptitude and total kowtowing of the government to big banks for unnamed purposes, while pointing out that the 'biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever.'

In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives.

We've all known it. But it's refreshing [if distressing] to see someone in a high level of power telling us the truth. Read the rest at the New York Times, via the Daily Beast.

By Julianne Escobedo Shepherd | Sourced from AlterNet

Posted at March 30, 2011, 7:42 am

Tuesday, March 29, 2011

Five Fun Facts About the $14 Trillion National Debt


They say China is our banker, but did you know it holds less than a tenth of our outstanding debt?

Our public debt – now at around $14 trillion dollars ($14,233,559,283,692.40 as of this writing, to be precise) – has been in the news lately, but how we accrued it, who holds it and whether it represents a problem are not well understood.

In one sense, for better or worse, our growing public debt has put trillions into the pockets of the American people. There's an economic principle known as “Wagner’s law,” which holds that as a country gets wealthier, its tax burden tends to increase. Wagner’s law makes perfect sense: in a poor country, citizens are happy to have a paved road; in a middle-income country, they expect a public school on that road; and in the wealthiest countries in the world, the public expects safe air-traffic control to guide them into an airport where they can catch a cab to a world-class public university. As the expectations of what we want government to do rise, so do the tax revenues that are necessary to pay for it all.

Wagner’s law holds true for every country in the world except the United States, where conservative economic discourse prevails. Thirty years ago the Right convinced a lot of Americans they could enjoy tax cuts without losing out on any of the services they’d come to expect. That's a big part of why our public debt jumped from $997 billion when Reagan took office to over 14 times that number today.

We could have paid for everything as we went through higher taxes but we didn't – in 2008,we ranked 26th out of the 30 countries in the Organization for Economic Cooperation and Development in terms of our total tax burden (the share of our economy we fork over to the government), coming in almost 9 percentage points below the average of the group of wealthy nations.

Here are five more fun facts about the national debt.

1. We've Always Been In Debt

Before the first session of the U.S. Congress came to a close, the public debt stood at more than $75 million, and since that time it has never been paid down. In 1835, we came close – that year, the national debt stood at just under $34,000.

The last time the public debt decreased was in the mid-1950s, so every year since we've hit a “record high” debt in dollar terms. But a better measure is how much debt we have in relation to our economic output, and that number peaked at around 120 percent of GDP during World War II.

2. The Chinese Are Not Our “Bankers”

It's become conventional wisdom that central banks in China and Japan hold a ton of U.S. debt. In The Hill this week, Tom Schatz, president of the conservative disinformation outfit known as Citizens Against Government Waste, offered some typical fearmongering, writing that the public debt will not only result in “a lower standard of living for future generations,” but that “the Chinese, who own the largest foreign share of U.S. debt, will have the American people 'working' for them.”

The reality is that, as of last year, China held 9.5 percent of our outstanding debt. The largest lender to the U.S. government is the people of the United States – we own 42.1 percent of the national debt in the form of Treasury bills held in our pension funds, 401(K)s, etc.

And 4.6 trillion – about a third – is held by the government itself. Almost 18 percent of the T-bills outstanding are sitting in the Social Security trust fund, earning interest and making the retirement program incredibly secure despite all the claims to the contrary.

3. Republicans Leave More Debt Than Dems

Between 1960 and 2010, federal spending as a share of the economy has bounced around within a fairly narrow range of between 17.7 percent (under Eisenhower) and 21.8 percent (during the first George Bush's term in office). Republicans are just as happy to spend, but they run on tax cuts, and the result is that since the middle of the last century, contrary to the “tax-and-spend” label, it's been Democrats who are far more conservative when it comes to keeping deficits under control than their Republican counterparts.

Although Congress has to share credit or blame for the budget situation at any given time, the numbers are fairly clear. As financial analyst Hale Stewart noted after George W. Bush’s first term,

Ronald Reagan started his term with total debt outstanding of 930 million and increased total debt outstanding to $2.7 trillion. This is a 13.71% compound annual increase. He never balanced a budget.

Bush I started his term with outstanding debt of $2.7 trillion and increased total debt to $4 trillion. This is a 10.32% compounded annual increase. He never balanced a budget.

Clinton started with total debt outstanding debt of $4 trillion and increased total debt outstanding to $5.6 trillion. This is a 4.2% compounded annual increase. He balanced his last three budgets.

George W. Bush started with $5.6 trillion total outstanding debt and increased total outstanding debt to $10 trillion. That works out to a 9.8 percent annual increase – just slightly more than the rate it has grown during Obama's first years.

4. You Never Paid for That Empire

It's ironic – or a testament to the influence of the conservative message machine on our discourse – that discussion of the public debt so frequently centers on “entitlements” like Social Security (which hasn't added a penny to the national debt). After all, we're still paying for Korea and Vietnam and Grenada and Panama and the first Gulf War and Somalia and the Balkans and on and on.

Estimates of just how much of our national debt payments are from past military spending vary wildly. Economist Robert Higgs calculated it like this:

I added up all past deficits (minus surpluses) since 1916 (when the debt was nearly zero), prorated according to each year's ratio of narrowly defined national security spending--military, veterans, and international affairs--to total federal spending, expressing everything in dollars of constant purchasing power. This sum is equal to 91.2 percent of the value of the national debt held by the public at the end of 2006. Therefore, I attribute that same percentage of the government's net interest outlays in that year to past debt-financed defense spending.

In 2007, when Higgs did that analysis, he came up with a figure of $206.7 billion just in interest payments on our past military adventures.

5. Public Debt Is Not Just About Borrowing

While our public debt has allowed us to violate Wagner's law, it's important to understand that we don't just sell bonds in order to borrow money. When countries with widely traded currencies like the U.S. issue bonds, they are considered the safest investments around, and are therefore issued, and purchased, regardless of the government's cash-flow needs.

NIA Responds to Harvard Economics Professor About Inflation

NIA Responds to Harvard Economics Professor About Inflation

Harvard economics professor Gregory Mankiw wrote an article that was published in the NY Times yesterday entitled, "It’s 2026, and the Debt Is Due". In this article, Mankiw gave a hypothetical Presidential address the President of the U.S. might make in the year 2026 after a failed bond auction. Mankiw's hypothetical Presidential address takes place in a scenario where in the year 2026, the U.S. Treasury "tried to auction its most recent issue of government bonds" but "almost no one was buying." According to Mankiw's hypothetical speech, during this 2026 crisis the President will admit, "The private market will lend us no more."

Unfortunately, Professor Mankiw fails to understand that the U.S. has zero chance of surviving until the year 2026. What Mankiw predicts will happen 15 years from now is already happening today right under his nose, but somehow he fails to realize it.

The public today has already stopped buying U.S. treasuries. The Pimco Total Return Fund, which was the largest private holder of U.S. government bonds, has just reduced their holdings down to zero. The private sector was buying 30% of U.S. treasuries, but today is no longer buying at all. The Federal Reserve is currently buying 70% of U.S. treasuries. If it wasn't for the Federal Reserve buying U.S. treasuries, we would already be experiencing failed bond auctions today.

According to Mankiw, the President will say in 2026, "Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly." The fact is, the last baby-boomer turned 46 years old in 2010 and 46 is the age in which the average American reaches peak consumer spending. Therefore, even though most baby-boomers might not be retired, baby-boomer spending is now in free-fall while baby-boomers are simultaneously signing up for entitlement programs at record pace. This will begin to affect our economy today, not 15 years from now.

Mankiw's hypothetical speech has the President admitting in 2026 that we "have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely" and we "have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without." The truth is, if the U.S. government cut 100% of all spending except for Social Security, Medicare, and Medicaid, we would still have a budget deficit from these entitlement programs and interest payments on our debt alone. If the U.S. wants to prevent hyperinflation and survive until 2026, we need to make major cuts to these programs today. By 2026, it will be over a decade too late and these programs will no longer exist at all.

Mankiw's hypothetical 2026 Presidential address goes on to say that "over the last several years" the U.S. has experienced a "vicious circle of rising budget deficits" and "as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous". Does Mankiw realize that the U.S. just reported a budget deficit for the month of February 2011 of $222.5 billion, more than the entire fiscal year of 2007? In our opinion, our budget deficits can't rise much more viciously than what they already are today, without the U.S. experiencing an outbreak of hyperinflation. We need to begin sharply reducing our deficits immediately or else hyperinflation this decade is inevitable.

Our real debt to GDP ratio in the U.S. today is already north of 500% when you include unfunded liabilities for entitlement programs, as well as other commitments like the backing of Fannie Mae and Freddie Mac. It will simply be impossible for this figure to rise much higher without the U.S. experiencing hyperinflation. NIA believes that unless the U.S. government completely eliminated Social Security, Medicare, and Medicaid, there is no way the U.S. government will be able to stay afloat for another 15 years with such an unprecedented level of debt.

In 2026, Mankiw believes the President will admit that, "Our efforts to control health care costs have failed." He suggests the President will proclaim that, "We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless." Does Professor Mankiw own a laptop computer, plasma TV, or mobile phone? These technologies are improving by leaps and bounds yet prices are falling. Technological advances are not driving health care costs higher! It is the government's involvement in the health care sector and their failure to allow the free market to operate that is driving health care costs through the roof.

Professor Mankiw believes the President will continue by saying, "We have to cut health insurance subsidies to middle-income families." NIA believes it is the very same subsidies Mankiw is referring to that are driving health care costs sky high. It is just like in the college education industry. If the government didn't provide subsidies for students to learn voodoo Keynesian economic theories from professors like Mankiw, college tuitions would be a lot more affordable.

To solve this supposed 2026 crisis, Mankiw believes the President will announce, "We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation." Although NIA believes employer-provided health insurance should be taxable compensation because it would end the employer based health insurance system and make health insurance cheaper for all Americans, we believe it will be impossible for the government to raise any additional revenues from tax increases. We are at a point where any additional taxes will drive economic activity overseas and result in less tax receipts. When hyperinflation soon arrives, taxes will become irrelevant. The government will fund over 99% of its spending by printing money and less than 1% from taxation.

Mankiw also believes the President in 2026 will, "increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion." Come 2026, gasoline will probably cost $20,000 per gallon, if we are lucky. An additional $2 gasoline tax will be absolutely pointless and meaningless.

Mankiw suggests that the President in 2026 will, "secure from the I.M.F. a temporary line of credit to help us through this crisis." The I.M.F. recently sold a large percentage of its gold reserves and by 2026 will likely be broke. Even if the I.M.F. was still around 15 years from now and did provide the U.S. with a line of credit that helps it survive the crisis, the largest line of credit the I.M.F. could possibly financially provide would only support a U.S. government that is less than 1/10 of its size today. Therefore, NIA believes the U.S. government should begin dramatically reducing its size immediately, before it is in need of a line of credit from the I.M.F.

It would be nice to think that the U.S. will be able to borrow and print money for another 15 years to fund endless budget deficits and that 2026 is some magical year when all of our debts will come due. The economy does not work this way and it is disgraceful that our nation's most prestigious ivy league schools are teaching such dangerous economic principles. Considering that a large percentage of our highest ranking government officials graduated from Harvard, it really explains a lot when you look at who is teaching economics at Harvard. Mankiw is the same professor who in April of 2009 called for the Federal Reserve to implement negative interest rates. Mankiw called for savers to be punished and for all Americans with $100,000 in the bank to have only $98,000 one year later.

It is the destructive Keynesian theories of economists like Mankiw that have gotten the U.S. economy into the dire situation it is in today. Mankiw and other professors like him are brainwashing American students into believing that forcing people to spend is the key to a healthy economy and the way to solve all economic problems is to create a lot of inflation. All across America, students are graduating colleges with hundreds of thousands of dollars in debt, no jobs, and no idea of how the economy actually works. They will spend the rest of their lives paying off their debts and trying to get the false economic information they were taught out of their heads. The college education system in America is the single largest fraud that exists today, and NIA is going to expose the truth about the government's conspiracy to turn American students into debt slaves in our next feature documentary, coming in April.

It is important to spread the word about NIA to as many people as possible, as quickly as possible, if you want America to survive hyperinflation. Please tell everybody you know to become members of NIA for free immediately at: http://inflation.us

The Real Story of Our Economy: Why Our Standard of Living Has Stalled Out



For more than a quarter century after WWII the fruits of America's productivity were shared with average working people, year in and year out. Not anymore.

Photo Credit: Darren Tunnicliff
Do public sector workers earn more than private sector workers? Who cares? This boneheaded question has us fighting over the crumbs. (And the answer is no -- all credible studies show that when you account for educational levels, the total compensation packages are about the same.)

The real question is: Why have most workers seen their standard of living stall over the last generation?

The answer is both obvious and appalling. More and more of our nation’s wealth is going to the few, while the many have seen their real wages actually decline. It’s a disgrace.

It wasn’t always so. For more than a quarter century after WWII the fruits of America's productivity were shared with average working people, year in and year out. But what exactly was being shared?

What’s productivity and who gets its benefits?

Productivity is a crucial economic measure of the total output of goods and services in our economy per hours worked. It’s not based on pay levels, only on hours worked in the economy as a whole. In effect, it measures how much human labor power it takes to produce everything we have. It makes a real difference to our standard of living if it takes 10,000 hours rather than 1,000 to build a house.

Output per working hour, although imprecise, is the best way we have to measure our level of technique, organization, skill, effort and intellectual firepower. Sure, this measure has significant flaws because it doesn’t really measure our health or environmental quality. But it does indeed measure the material side of our standard of living. When productivity grows, a society has the means to solve many problems and the means to enhance working and living conditions…but only if the fruits of productivity are shared somewhat fairly.

Productivity and who gets it is the story of the last two generations of the American middle class – one that saw a tremendous rise in its standard of living, and one that saw its way of life stall and even crumble.

From 1947 to 1975, our output per worker hour grew by more than 75 percent. At the very same time, the real wages of the average worker rose by nearly the same amount. The rise of productivity and the rise in real wages turned our working people into the largest, most vibrant middle class in the history of the world. This dramatic upward movement in material conditions gave America its supreme bragging rights in the Cold War. No one could deny that democratic capitalism delivered the goods to working people, not just to elites.

Until it didn’t.

Neo-liberalism and the stalling of middle-class income

This upwardly mobile economy changed during the 1970s, and it wasn’t an accident. That’s when our nation’s leaders embarked on a series of policies that were supposed to break down stagflation and rebuild our economic miracle. We now call it neo-liberalism. That’s when we decided to unleash innovation through deregulation, especially financial deregulation. That’s when we lowered taxes on the wealthy. That’s when we pushed forward globalization. That’s when we stopped raising the minimum wage. That’s when we undercut the labor movement. All this was supposed to make the economy boom and reignite the post-WWII economic miracle.

These policies, not the blind actions of markets, broke open the cookie jar of productivity. And there was plenty in there to take: Since 1975, productivity increased by nearly 180 percent – meaning that we almost tripled what we could produce per hour of labor. But unlike the post-WWII period, it wasn’t shared. Here are the brutal facts:

  • The average real wage of the non-supervisory production workers (which comprise 82.4 percent of total private non-farm employees) actually declined by 9 percent between 1975 and 2010.
  • Meanwhile the top 1 percent saw their share of national income rise from 8 percent in 1975 to 23.5 percent in 2005
  • More amazing still, the wage gap between the top 100 CEOs and the average worker jumped from $45 to $1 in 1970 to an unbelievable $1,723 to $1 in 2006
  • Today after the crash, financial incomes are so enormous that in 2010, John Paulson, the top hedge fund manager, earned $2.4 million an HOUR (not a misprint), and his tax rate is less than yours

I like Ike

These statistics turned me into an Eisenhower communist. I realized that our great, conservative general and president stood for policies that would never have let our nation’s productivity cookie jar get robbed. Under Ike, those earning $3 million or more (in today’s dollars) faced marginal tax rates of over 90 percent. (Yes, there were loopholes that bought the effective rates down to 70 percent. But, what’s the effective rate on the rich today? About 16 percent.) And Ike ended the Korean War. And he named and took on the military-industrial complex, which today would probably get you impeached.

Of course, the '50s weren’t nirvana. Segregation and sexism haunted all areas of society. (And besides, we only had three TV channels and no Facebook.) But our standard of living was rising as were our expectations. We expected society to improve and this formed the basis of the explosion in social equality that swept the country, starting with the Civil Rights movement in the South under Ike’s rule.

But after Vietnam damaged our economy and social cohesion, Democrats and Republicans alike drank the Kool Aid of neo-liberalism. A few sips and you could believe that markets would solve everything. Sip some more and you realized that you didn’t need to govern at all. You only needed to get government out of the way (while also undercutting labor laws, removing trade barriers, permitting mega-mergers, destroying Glass-Steagall, passing tighter rules on debtors, etc.). Then out you go to make some real money. It the '50s, it was fabulous to become a millionaire. By the 1980s that was chump change. Unless you’re Bernie Sanders, becoming a politician put you on the fast track to Wall Street.

It’s not just that theft of society’s productivity is unfair. It’s also incredibly dangerous. We learned both in 1929 and in 2008 that when you combine financial deregulation with too much money in the hands of the few you get a casino, a bubble, and then a crash. In the most recent crash, the super-rich had so much capital they ran out of real investments in goods and services. So Wall Street came up with new exotic bets on subprime loans to soak up the excess capital. But the fundamental cause was that the super-rich walked off with years and years of productivity gains that should have gone to working people in the form of higher wages and benefits. Show me a worker who invests in synthetic CDOs.

Watching politicians pit public and private employees against each other is the cruelest joke of this entire crash.

First of all, there would be no state and local budget gaps were it not for the fact that the Wall Street crash destroyed more than 8 million jobs in a matter of months. In any rational world, the Wall Street gamblers would be paying reparations for the damage they’ve caused, rather setting record profits based on our bailouts.

Second, the richest hedge fund honchos are the glorious beneficiaries of a tax loophole that allows them to pay a maximum federal rate of 15 percent instead of 35 percent. Closing that loophole on just the 25 richest hedge fund managers produces twice the revenue as does Obama’s wage freeze on two million federal employees.

So join me in waving Chairman Ike’s little red book. Close the hedge fund loophole and jack up the top income tax rates – way up to where they belong. Raise the minimum wage and index it permanently to inflation. Invest in infrastructure and education to put our people back to work. And stop wasting our resources on war and weapons that no one needs, or on wasteful arguments about how many teachers and cops to fire.

Ike was a staunch capitalist and usually believed in the invisible hand of the market. But he wouldn’t be letting it give us the finger.

Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It (Chelsea Green, 2009).

Monday, March 28, 2011

Keeping the State’s Money in the State

Dissident Voice: a radical newsletter in the struggle for peace and social justice

Keeping the State’s Money in the State

An Alternative Solution To The Budget Crisis

Cut spending, raise taxes, sell off public assets – these are the unsatisfactory solutions being debated across the nation; but the budget crises now being suffered by nearly all the states did not arise from too much spending or too little taxation. They arose from a credit freeze on Wall Street. In the wake of the 2009 financial market collapse, banks curtailed their lending more sharply than in any year since 1942, driving massive unemployment and causing local tax revenues to plummet.

The logical solution, then, is to restore credit to the local economy. But how? The Federal Reserve could provide the capital and liquidity necessary to create bank credit, in the same way that it provided $12.3 trillion in liquidity and short-term loans to the large money center banks. But Fed Chairman Ben Bernanke declared in January 2011 that the Fed had no intention of doing that — not because it would be too costly (the total deficit of all the states comes to less than 2% of the credit advanced for the bank bailout) but because it is not part of the Fed’s mandate. If Congress wants the Fed to advance credit to local governments, he said, it will have to change the law.

The states are on their own. Policy makers are therefore considering a variety of reforms designed to increase bank lending, particularly to small businesses, the hardest hit by tightening credit standards. One measure that is drawing increasing interest is the creation of a bank modeled on the Bank of North Dakota (BND), currently the only state-owned bank in the country. The BND has a 92-year history of safe, secure and highly profitable banking. North Dakota has the lowest unemployment rate in the country; and in 2009, when other states were floundering, it had the largest budget surplus it had ever had.

Eight states now have bills pending either to form state-owned banks or to do feasibility studies to determine their potential. This year, bills were introduced in the Oregon State legislature on January 11; in Washington State on January 13; in Massachusetts on January 20 (following a 2010 bill that lapsed); and in the Maryland legislature on February 4. They join Illinois, Virginia, Hawaii, and Louisiana, which introduced similar bills in 2010. The Center for State Innovation, based in Madison, Wisconsin, was commissioned to do detailed analyses for Washington and Oregon. Their conclusion was that state-owned banks in those states would have a substantial positive impact on employment, new lending, and state and local government revenue.

State-owned banks could be a win-win for everyone interested in a thriving local economy. Objections are usually based on misconceptions or a lack of information. Proponents stress that:

1. A state-owned bank on the BND model would not compete with community banks. Rather, it would partner with them and support them in making loans. The BND serves the role of a mini-Fed for the state. It provides correspondent banking services to virtually every financial institution in North Dakota and offers a Federal Funds program with daily volume of $330 million. It also provides check clearing, cash management services, and automated clearing house services. It leverages state funds into credit for local purposes, funds that would otherwise leave the state and be leveraged for investing abroad, drawing away jobs that could go to locals.

2. The BND not only does not compete for loans but does not compete for commercial deposits. Less than 2% of its deposits come from consumers. Municipal government deposits are also reserved for local community banks, which are able to use these funds for loans specifically because the BND provides letters of credit guaranteeing them. Virtually all of the BND’s deposits come from the state itself. All state revenues are deposited in the BND by law.

3. Although the BND is a member of the Federal Reserve system, it is insured by the state rather than by the FDIC. This does not, however, put deposits at risk. Rather, it helps avoid risk and unnecessary expense, since the BND’s chief depositor is the state, and the state has far more to deposit than $250,000, the maximum covered by FDIC insurance. FDIC insurance is not only very expensive but subjects members to FDIC regulation, making the state subservient to a semi-private national banking association. (The FDIC calls itself an independent agency of the federal government, but it receives no Congressional appropriations. Rather, it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.) North Dakota prefers to maintain its financial independence.

4. BND officials stress that the bank is run by bankers, not politicians bent on funding their favorite development projects or bestowing political favors. The bank is run very conservatively, doing only creditworthy deals and avoiding speculation in derivatives and risky subprime loans. By partnering with local banks, the BND actually shields itself from risk, since the local bank takes the initial loss if the borrower fails to pay.

5. The BND does not imperil state funds or tax money but is self-funding and self-sustaining. It manages VA, FHA and other forms of loans that are federally guaranteed and would otherwise go to large out-of-state banks. Profits on these federally-guaranteed loans are then used to build a capital surplus from which riskier loans can be made to local businesses and development projects. The BND has a return on equity of 25-26% and has contributed over $300 million to the state (its only shareholder) in the past decade — a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. Compare California’s public pension funds, which entrust their money to Wall Street and are down more than $100 billion, or close to half the funds’ holdings, following the banking debacle of 2008.

6. Partnering with the BND allows community banks to fund local projects in which Wall Street is not interested, leveraging municipal government funds that would otherwise not be available for loans. Further, infrastructure projects can be funded through the state bank at substantially less cost, since the state owns the bank and gets the interest back. Studies have shown that interest composes 30-50% of public projects.

8. The North Dakota Bankers’ Association does not oppose the BND but rather endorses it. North Dakota has the most local banks per capita and the lowest default rate of any state.

Other states could realize similar benefits, if they were to form banks on the BND model. Paying interest to coupon clippers on state and municipal bonds means sending money out of the state on a one-way trip to Wall Street. Having a state-owned bank allows the state to keep its money local, flowing into the state treasury and the local economy.

• Originally posted by Yes! Magazine.

Ellen Brown is an attorney in Los Angeles and the author of 11 books. In Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free, she shows how a private banking cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Read other articles by Ellen, or visit Ellen's website.

This article was posted on Monday, March 28th, 2011 at 8:00am and is filed under Banks/Banking.

Sunday, March 27, 2011

Libya, Japan crises will rock the economy


Libya, Japan crises could rock the economy

Prices for gasoline and fuel pumps are shown in a composite. | AP Photos

NEW YORK — The punishing allied airstrikes in Libya, coupled with the continuing nuclear crisis in Japan, threaten to push high oil prices even higher and undermine the fragile economic recovery in the United States and abroad.

If nothing else, some economists and market watchers warn, the volatility and uncertainty of both crises could cut into corporate and consumer balance sheets and shave enough off economic growth to help tip economies back toward recession.

Fears persist that Libyan leader Muammar Qadhafi could set fire to his country’s oil fields, which had been pumping about 1.6 million barrels a day before the country’s unrest turned into civil war, drawing U.S. and allied intervention.

And it’s not just Libya that’s stirring concern. Unrest has been growing in Yemen and other countries throughout the oil-producing region.

The biggest threat might be that turmoil will erupt in Saudi Arabia, a major U.S. oil supplier that pumps about 9 million barrels a day. A big drop in production there would certainly send U.S. gasoline prices, already nearing $4 a gallon in most places, skyrocketing.

“The fear factor may return with regard to Saudi Arabia,” said James Rickards, managing director of market intelligence for Omnis. “It is surrounded by Egypt (unstable), Yemen (unstable), Bahrain (unstable) and Iran (antagonistic). That story will play out over weeks and months, not necessarily days.”

Stocks were weaker Tuesday after a good day Monday. “But that’s a combination of a relief rally based on better news out of Japan and the fact that QE2 is continuing,” Rickards said, referring to the Fed Reserve’s latest program of “quantitative easing” in which it buys as much as $600 billion in Treasury bonds to help keep interest rates low and boost the economy.

It would be a mistake to use the stock market as the leading indicator for the underlying economy, given the Fed’s actions, Rickards said, adding that the movement of other market gauges was more troubling.

“The Fed will not tighten in this uncertain environment, and Wall Street loves cheap money, so stocks may continue to do well,” he said. “But if you look at oil, gold and silver, you see continued concerns about inflation and, in the case of oil, a potential drag on growth.”

The price of a barrel of oil has spiked to as much as $120 in the past month because of tensions in Egypt and now Libya.

“With reports of protests in Syria and Yemen, hostilities at the Gaza-Israel border and Saudi troops in Bahrain, the risk of political contagion remains,” Goldman Sachs analyst David Greely wrote in a recent report.

Then, there’s the pressing matter of the Japanese earthquake and tsunami and resulting nuclear crisis and massive rebuilding effort ahead.

Japan appears to be gaining some control over its ravaged Fukushima Daiichi nuclear plant, but the situation is still very fluid and significant radiation leaks remain a major concern.

Over the longer term, there’s some concern that Japan will become a significantly larger consumer of oil, given its reconstruction needs and the destruction of critical nuclear-power-generating capacity.

Indeed, Goldman Sachs wrote in its recent report that Japan may need 230,000 barrels a day of combined residual fuel oil and direct-burn crude oil to offset lost nuclear generating capacity

Additionally, significant interruptions to the global supply chain remain. Sony said Tuesday that shortages of parts and materials would cause it to close five more Japanese plants.

Already, the Japanese crisis has impacted U.S. automobile and airplane manufacturers. GM had to halt production at a plant in Louisiana, and Nokia and other mobile-phone makers are warning of supply chain disruptions.

So far, most of the disruptions have been minor and temporary. But given that Japan produces 40 percent of the world’s electronic components, analysts continue to warn of a significant longer-term impact on corporate profits.

Beyond the measurable impact of higher oil prices and disrupted supply chains, headlines about unstable situations around the globe threaten to dent consumer confidence. Sentiment had been rising on hopes for solid economic growth of as much as 4 percent in the U.S. this year, driven by companies beginning to spend their vast cash holdings.

But consumer confidence in a Reuters/University of Michigan survey fell to 68.2 earlier this month from 77.5 in February, the biggest decline since October 2008. And that was before the U.S.-led airstrikes against Qadhafi’s forces in Libya.

The economic recovery could be further endangered if consumers return to their recent pattern of debt reduction rather than consumption.

Still, many experts remain convinced that underlying growth in manufacturing, healthy corporate profits and an overall reduction in reliance on oil will help the U.S. and global economy push ahead, despite the crises in Japan and Libya or others that might emerge down the road.

These experts point to events such as JPMorgan Chase’s willingness to put forward a $20 billion loan to finance AT&T’s proposed takeover of T-Mobile and an increase in the market for risky corporate debt as signals that the recovery is real and sustainable.

“The U.S. recovery remains firmly on track,” Goldman Sachs Asset Management Chairman Jim O’Neill wrote in a recent note to investors. “Weekly [jobless] claims fell again [last week], and a clear trend for an improving job market seems under way. In addition, there was a gangbuster of a Philadelphia Fed business survey.

“The combination of a friendly Fed and an improving economy are both still present,” he added.

Back to Our Future: How the 1980s Explain the World We Live in Now



Back to Our Future: How the 1980s Explain the World We Live in Now

In his new book, David Sirota examines how '80s propaganda led us to reject the past and ultimately embrace the capitalistic future planned out for us.

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The following is an excerpt from Back to Our Future: How the 1980s Explain the World We Live in Now--Our Culture, Our Politics, Our Everything by David Sirota (Ballantine Books, 2011).

Die, Hippie, Die! Every time one of these ex-hippies comes prancing in from yesteryear, we gotta get out the love beads and pretend we care about people
. - Alex P. Keaton, 1986

For the past several days I've been noticing a steep rise in the number of hippies coming to town. . . . I know hippies. I've hated them all my life. I've kept this town free of hippies on my own since I was five and a half. But I can't contain them on my own anymore. We have to do something, fast! -Eric Cartman, 2005

In 1975, a Democratic Party emboldened by civil rights, environmental, antiwar, and post-Watergate electoral successes was on the verge of seizing the presidency and a filibuster-proof congressional majority. That year, the Rocky Horror Picture Show and One Flew Over the Cuckoo's Nest were two of the three top-grossing films -- the former a parody using the late-sixties sexual revolution to laugh at the puritanical fifties, the latter based on the novel by beat writer Ken Kesey. Meanwhile, three of the top-rated seven television shows were liberal-themed programs produced by progressive icon Norman Lear, including "All in the Family" --a show built around a hippie, Mike Stivic, poking fun at the ignorance of his traditionalist father-in-law, Archie Bunker.

A mere ten years later, Republican Ronald Reagan had just been reelected by one of the largest electoral landslides in American history, and his party had also gained control of the U.S. Senate. Two of the top three grossing films were Back to the Future, which eulogized the fifties, and Rambo: First Blood Part II, which blamed sixties antiwar activism for losing the Vietnam conflict. Most telling, "All in the Family's" formula of using sixties-motivated youth and progressivism to ridicule fifties-rooted parents and their traditionalism had been replaced atop the television charts by its antithesis: a "Family Ties" whose fifties-inspired youth ridicules his parents' sixties spirit.

The political and cultural trends these changes typified were neither coincidental nor unrelated, and their intertwined backstories explain why we're still scarred by the metamorphosis.

The late 1970s and early 1980s marked the birth of an entire industry organized around idealized nostalgia, and particularly midcentury, pre-1965 schmaltz. You likely know this industry well--it survives in everything from roadside Cracker Barrel restaurants to the Jersey shore's Old Time photo stands to Michael Chabon's novels to Band of Brothers-style miniseries glorifying the valor of World War II vets--and it first found traction in the 1980s creation of The Fifties(tm).

Turning a time period into a distinct brand seems common today, what with the all-pervasive references to generational subgroups (Gen X, Gen Y, etc.). But it was a new marketing innovation back in the 1980s. As Temple University professor Carolyn Kitch found in her 2003 study of mass-circulation magazines, generational labeling is "primarily a phenomena of the last quarter of the 20th century," and it began (as so many things have) as an early-1980s ad strategy aimed at selling products to Baby Boomers and their parents.

Like all sales pitches, fifties hawking employed subjectivity, oversimplification, and stereotypes. For eighties journalists, advertisers, screenwriters, and political operatives seeking a compelling shorthand to break through the modern media miasma, that meant making The Fifties into much more than the ten-year period between 1950 and 1959. It meant using pop culture and politics to convert the style, language, and memories of that decade into a larger reference to the entire first half of the twentieth century, all the way through the early 1960s of the New Frontier--those optimistic years "before President Kennedy was shot, before the Beatles came, when I couldn't wait to join the Peace Corps, and I thought I'd never find a guy as great as my dad," as Baby from the classic eighties film Dirty Dancing reminisced.

Why the fifties, and not the 1930s or '40s, as the face of the entire pre-sixties epoch? Because that decade was fraught with far less (obvious) baggage (say, the Depression or global war) and hence was most easily marketed in the saccharine entertainment culture of the devil-may-care 1980s.

Indeed, as the Carter presidency started to crumble in 1978 and Reagan began delivering fiery speeches in preparation for his upcoming presidential run, the crew-cut-and-greaser escapades of "Happy Days" and the poodle skirts of "Laverne & Shirley" overtook the sixties--referencing urbanity, ethnicity, and strife of Norman Lear's grittier sitcoms. In movie theaters, Animal House and Grease hit classic status almost instantly. These successes encouraged the culture industry to make the eighties the launching point for a self-sustaining genre of wildly popular back-to-the-fifties productions.

There were retrospectives such as Diner, Stand By Me, and Peggy Sue Got Married and biopics of fifties icons such as The Right Stuff, La Bamba, and Great Balls of Fire! There was Hoosiers, with its bucolic small towns, its short shorts, and its nonbreakaway rims. There were Broadway plays such as Brighton Beach Memoirs and Biloxi Blues, commemorating the honor, frugality, and innocence of the World War II years. And there was a glut of new Eisenhower biographies.

Even 1980s productions not overtly focused on decade nostalgia were decidedly recollective of fifties atmospherics.

There was Witness, which used the story of a Philadelphia cop's voyage into lily-white Amish country to juxtapose the simplicity of America's pastoral heritage against the crime-ridden anarchy of the black inner city.

There was Superman and Superman II--films that reanimated a TV hero of the actual 1950s, idealized Clark Kent's midcentury youth, and depicted his adulthood as the trials of a fedora-wearing anachronism trying to save modern Metropolis from postfifties peril. And there were the endless rip-offs-the Jets-versus-Sharks rivalry of West Side Story ripened into the socs-versus-greasers carnage of The Outsiders, while the hand-holding of Grease became the ass-grabbing of Dirty Dancing.

Through it all, pop culture was manufacturing a Total Recall of the 1950s for a 1980s audience--an artificial memory of The Fifties that even came with its own canned soundtrack.

Though we tend to think of the late 1970s and early 1980s as the glory days of punk rock and the primordial soup of what would become rap, Wurlitzer-ready rockabilly and doo-wop were the rage. This was the heyday of the Stray Cats and their standing base, the moment when Adam Ant released the jukebox jam "Goody Two Shoes," and Queen's rockabilly hit "Crazy Little Thing Called Love" hit number one on the charts. As the Hard Rock Cafe and Johnny Rockets franchises created a mini-fad of fifties-flavored restaurants, the B-52s' surf rock was catching a new wave; Meat Loaf was channeling his Elvis-impersonation act into the absurdist 1950s tribute "Paradise by the Dashboard Light"; and ZZ Top was starring in music videos featuring a muscle car that Danny Zuko might have driven at Thunder Road. Even Billy Joel, until then a folksinger, was going all in with a blatant teenybopper tribute, "Uptown Girl."

This sonic trend wasn't happening in a vacuum--it was thrumming in the shadow of the chief missionary of 1950s triumphalism, Ronald Reagan.

The Gipper's connection to The Fifties wasn't just rooted in his success as a midcentury B-movie actor nor in his American Graffiti pompadour. The Fifties had long defined his persona, career, and message. Here was "the candidate of nostalgia, a political performer whose be-bop instrument dates from an antediluvian choir," as the Washington Post wrote in 1980. Here was a man campaigning for president in the late 1970s and early 1980s calling for the country to go back in time. And not just a few years back in time--way back in time to the dreamy days before what he called the "hard years" of the late 1960s.

"Not so long ago, we emerged from a world war," Reagan said in a national address during his 1980 presidential campaign. "Turning homeward at last, we built a grand prosperity and hopes, from our own success and plenty, to help others less fortunate. Our peace was a tense and bitter one, but in those days, the center seemed to hold."

Writing to a campaign contributor, Reagan said he wanted to bring forth a "spiritual revival to feel once again as [we] felt years ago about this nation of ours." And when he won the White House, his inauguration spelled out exactly what he meant by "years ago": The lavish celebration dusted off and promoted fifties stars such as Frank Sinatra and Charlton Heston.

This wasn't a secret message or a wink-and-nod-it was the public theme of Reagan's political formula. In a Doonesbury comic about the 1980 campaign, cartoonist Gary Trudeau sketched Reagan's mind as "a storehouse of images of an idyllic America, with 5 cent Cokes, Burma Shave signs, and hard-working White People." When naming him 1980 "Man of the Year," Time said, "Intellectually, emotionally, Reagan lives in the past." The article added that the new president specifically believes "the past"-i.e. the The Fifties-"is his future." And as both the magazine and America saw it, that was the highest form of praise- just as it is today.

This all might have gone the way of New Coke if the early-1980s celebration of The Fifties(tm) was happening in isolation. But those Bob Ross paintings of happy Levittown trees and Eisenhower-era blue skies only became salient because the eighties placed them in the American imagination right next to sensationalized images of Woodstock and the Kent State massacre.

Securing that prime psychological real estate meant simultaneously doing to the sixties what was being done to the fifties--only with one twist: Instead of an exercise in idealization, The Sixties(tm) brand that came out of the 1980s was fraught with value judgments downplaying the decade's positives and emphasizing its chaos.

Through politics and mass media, a 1960s of unprecedented social and economic progress was reremembered as a time of tie-dye, not thin ties; burning cities, not men on the moon; LBJ scowls, not JFK glamor; redistributionist War on Poverty "welfare," not universalist Medicare benefits; facial-haired Beatles tripping out to "Lucy in the Sky with Diamonds," not bowl-cut Beatles chirping out "I Want to Hold Your Hand."

Some of the sixties bashing in the 1980s came from a media that earnestly sought to help Baby Boomers forgive themselves for becoming the buttoned-down adults they had once rebelled against. Some of it was the inadvertent side effect of an accelerating 24-hour news cycle that historian Daniel Marcus notes almost always coupled references to the sixties with quick "shots from Woodstock of young people cavorting in the mud, perhaps discarding various parts of their clothing or stumbling through a drug-induced haze."

And some of it was just the uncontrived laziness of screenwriters and directors.

"Getting a popular fix on the more elusive, more complicated, and far more common phenomena of the sixties is demanding because a lot of it isn't photogenic," says Columbia professor Todd Gitlin, the former leader of Students for a Democratic Society and author of The Sixties. "How easy it was to instead just make films about the wild people, because they are already an action movie, and their conception of themselves is already theatrical."

The revisionism and caricaturing revolved around three key themes, each of which denigrated the sixties as 100 percent awful.

The first was the most political of all--patriotism. Love of country, loyalty to America, national unity--these were memes that Reagan had been using to berate the sixties since his original jump from Hollywood to politics.

During his first campaign for California governor, he ran on a platform pledging to crush the "small minority of beatniks, radicals, and filthy speech advocates" at Berkeley who were protesting the Vietnam War. As president, he railed on nuclear-freeze protesters (like Steven and Elyse Keaton in that first season of "Family Ties") as traitors "who would place the United States in a position of military and moral inferiority."

The media industry of the time followed with hypermilitarist films blaming antiwar activists for America's loss in Vietnam (more on that in the chapter "Operation Red Dawn"), and magazine retrospectives basically implying that sixties social movements were anti-American. As just one example, a 1988 Newsweek article entitled "Decade Shock" cited the fact that "patriotism is back in vogue" as proof that the country had rejected the sixties--the idea being that the sixties was wholly unpatriotic.

But while flag-waving can win elections and modify the political debate, it alone could not mutate the less consciously political, more reptilian lobes of the American cortex. So the 1980s contest for historical memory was also being waged with more refined and demographically targeted methods.

For teenagers, The Fifties(tm) were used to vandalize The Sixties(tm) through a competition between the Beatnik and the Greaser for the mantle of eighties cool. As historian Daniel Marcus recounts, the former became defined as "middle-class, left-wing, intellectual and centered in New York City and San Francisco"--that is, defined as the generic picture of weak, effete, snobbish coffeehouse liberalism first linked to names such as Hart and Dukakis, and now synonymous with Kerry, Streisand, and Soros. Meanwhile, the Greaser came to be known as an urbanized cowboy--a tough guy who "liked cars and girls and rock and roll, was working class, usually non-Jewish 'white ethnic' and decidedly unintellectual."

This hero, whose spirit we still worship in the form of Joe the Plumber and "Bring it on" foreign policy, first stomped the Beatnik through the youth-oriented iconography of the 1980s-think idols such as the Fonz, Bruce Springsteen, and Patrick Swayze; movies like Staying Alive, Rocky, and The Lords of Flatbush; bands such as Bon Jovi, Guns N' Roses, and Poison; and, not to be forgotten, the chintzy clothing fad of ripped jeans and tight white T-shirts.

For adults who experienced the real fifties and sixties, the propaganda had to be a bit less overt to be convincing. So their memories were more subtly shaped with the arrival of a life-form whose mission was to absolve the hippie generation for becoming the compromised and depoliticized elders they had once railed on and protested against.

This seductive species became known as yuppies--short for young urban professionals.

The invasion of the yuppies and all of their requisite tastes, styles, and linguistic inflections officially commenced when Newsweek declared 1984 the Year of the Yuppie, following the publication of The Yuppie Handbook and the presidential campaign of Gary Hart--a New Agey candidate who looked as if he carried a dog-eared copy of the tome around in his breast pocket. A few months later, Adweek quoted executives from the major television networks saying their goal in coming years would be to "chase yuppies with a vengeance"--a prediction that came true, according to Rolling Stone's 1987 report on a series of hit shows that the magazine called Yuppievision. By 1988, a suited Michael J. Fox eating sushi was on the cover of an Esquire magazine issue devoted entirely to "Yupper Classmen." Fittingly, one of the articles noted a poll showing that 60 percent of Americans could identify the word yuppie--almost twice the number that could identify the nation's secretary of state.

While yuppie certainly evoked supermodern feelings in the 1980s, the concept was etymologically rooted in a politicized past. The word made its public debut in a 1983 newspaper column about Jerry Rubin, the leader of the Youth International Party (yippies) who had abandoned his sixties radicalism for the 1980s world of business. His life story was a textbook yuppie parable of sixties rejection: He was a member of the "vanguard of the baby-boom generation," which had "march[ed] through the '60s" but was now "advancing on the 1980s in the back seat of a limousine," as Newsweek put it.

Support AlterNet by purchasing your copy of Back to Our Future: How the 1980s Explain the World We Live in Now--Our Culture, Our Politics, Our Everything through our partner, Powell's, an independent bookstore.

David Sirota is the author of the best-selling books Hostile Takeover and The Uprising. He hosts the morning show on AM760 in Colorado and blogs at OpenLeft.com. Email him at ds@davidsirota.com or follow him on Twitter @davidsirota.

Saturday, March 26, 2011

Tsunami of Inflation to Hit U.S. with Japan Crisis

Tsunami of Inflation to Hit U.S. with Japan Crisis

Tsunami of Inflation to Hit U.S. with Japan Crisis

The earthquake, tsunami, and nuclear disaster that hit Japan this past week and the destruction that it caused is nothing compared to the tsunami of inflation that will soon hit the U.S. as a result of this crisis. A tsunami of inflation in the U.S. will mean a complete collapse of our monetary system, which could lead to millions of deaths due to a lack of food and heat. 44 million Americans are now dependent on food stamps, but when the U.S. dollar becomes worthless as a result of hyperinflation, the government will no longer have the power to support these Americans and many of them will simply starve to death.

Japan's citizens were smart enough to save up $885.9 billion in U.S. treasuries to spend in a situation like it finds itself in today. The U.S. has no such savings and is the world's largest debtor nation. Our ability to survive depends on our ability to print money that has purchasing power. The only reason the U.S. dollar still has purchasing power is the dollar's status as the world's reserve currency.

All Japan has to do is sell their U.S. treasuries and they will have the financial resources necessary to rebuild the parts of their country that were destroyed by this past week's disaster. However, U.S. Treasury Secretary Timothy Geithner said on Tuesday that he doesn't think Japan will unload their $885.9 billion in U.S. treasuries. It remains to be seen if Japan will do the right thing and sell their U.S. treasuries or if they will make the mistake of continuing to artificially prop up the U.S. economy.

The Central Bank of Japan (BOJ) in recent days has already been repeating many of the same mistakes the Federal Reserve made in the U.S. After this past week's disaster, the BOJ printed hundreds of billions of dollars worth of yen in an attempt to prop up their financial markets. Japan's central bank should be raising interest rates, which would encourage its citizens to increase their savings so that they have more resources to rebuild their country and invest into the production of clean energy. By printing trillions of yen out of thin air, the BOJ will cause prices to rise for the very building materials the Japanese need to purchase in order to rebuild.

Although the yen has been rising in recent days, it would be strengthening a lot more if it wasn't for the BOJ's actions. In fact, NIA believes that while the yen may continue to rise in the short-term, the yen is now likely to lose a substantial amount of its purchasing power over the long-term. Instead of allowing the yen to strengthen so that it is cheaper for the Japanese in import copper, iron, steel, oil, natural gas, and other commodities needed to rebuild, the BOJ's actions are actually hurting the Japanese and having the effect of propping up the U.S. economy in the short-term.

The mainstream media frequently talks about Japan's national debt and how it is 225% of their GDP. However, Japan owes most of their national debt to themselves. We have a much worse national debt crisis here in the U.S., where we owe half of our debt to foreigners. Not only that, but once you include America's unfunded liabilities for Social Security, Medicare, and Medicaid, along with its debts for Fannie Mae and Freddie Mac (which are now government backed entities), total U.S. debt obligations now exceed $76 trillion.

The Japanese economy reached peak consumer spending in 1990 and entered their "Lost Decade" of deflation with a balanced budget, high savings rate of 15%, low unemployment rate of 2%, and a net debt to GDP ratio of less than 20%. The average American peaks in spending at age 46 and the last babyboomer just turned 46 in 2010. This means the U.S. economy just passed peak consumer spending, similar to Japan in 1990. Instead of entering this decade from a position of strength, the U.S. has entered it with a real budget deficit of $4.3 trillion, a savings rate of only 4%, a real unemployment rate of 22%, and total debt obligations that are 5 times higher than GDP. We won't be so lucky to escape this decade with deflation, but will instead be faced with hyperinflation as the world loses confidence in the U.S. dollar and rushes to dump their dollar-denominated assets.

When Japan comes to their senses and realizes just how dire the fiscal situation is in the U.S., they will realize that they are much better off investing into their own economy and abandoning the U.S. economy. Just the fact that Geithner is now saying that he doesn't expect Japan to dump their U.S. treasuries, illustrates just how nervous the U.S. government is about the U.S. dollar and how devastating it would be for all Americans if the Japanese did dump their treasuries. No amount of tax increases and spending decreases will ever allow the U.S. to balance its budget. All the U.S. government can do is talk up a strong U.S. dollar, because they have absolutely no real way to keep it propped up.

All NIA members know that Geithner is perhaps the biggest liar in the U.S. government today. Geithner has long said that the U.S. will not monetize its debt, yet the Federal Reserve is now the buyer of 70% of U.S. treasuries being sold. Foreign central bank purchases of U.S. treasuries have fallen from 50% down to 30%. The days of the U.S. exporting its inflation to the rest of the world are now over.

The U.S. just reported a record budget deficit last month of $222.5 billion, a bigger deficit than the entire year of 2007. Up until today, the U.S. has been paying off its debts plus interest by selling larger amounts of U.S. treasuries to new buyers. This is effectively a ponzi scheme, although the U.S. government will never admit it. Even if Japan doesn't sell the U.S. treasuries they already own, that won't be enough for the U.S. to keep this ponzi scheme going. The U.S. needs Japan to keep buying U.S. treasuries, but not only that, they need Japan to buy larger amounts of U.S. treasuries than ever before. The odds of Japan increasing their U.S. treasury purchases during this time of crisis are close to zero, they simply don't have the financial means to do so.

If Japan doesn't step up its U.S. treasury purchases, who will pick up the slack, China? Geithner infuriated China last year by calling them currency manipulators and since then, China has been rapidly expanding the yuan's use in cross border transactions and is now setting up the yuan to be the world's next reserve currency. NIA believes China is likely to stop buying U.S. treasuries, and will instead loan money to Japan to help in their rebuilding efforts.

It is unbelievable just how many of the economists featured by the mainstream media are calling the disaster in Japan a "stimulus" for not only the Japanese economy, but also the U.S. economy. When a country is forced to rebuild an asset that it already had, it is not stimulating the economy, but is spending resources that could have went towards increasing the production of goods and services. When Japan is eventually finished rebuilding the parts of the country that were devastated this past week, the country isn't going to be better off than they were before the crisis. They will likely be even more deeply in debt, with less foreign currency reserves, and a much larger money supply. The Nikkei will likely be a lot higher than it is today due to inflation, but the yen will be worth a lot less and the Japanese will be far less wealthy as a result.

America has nothing to benefit from Japan's rebuilding efforts. Most of the commodities that Japan will import as part of their rebuilding efforts will likely come from Australia, China, and even Canada, with very little of it coming from the U.S. All of the fear and uncertainty in the world today is not going to cause another rush into the U.S. dollar like there was in 2008. When the world dumps risky assets in uncertain situations, the U.S. dollar is going to become one of the risky assets that it dumps. With all of the world's central banks now fixated on printing money in order to "solve" any short-term economic problems, gold and silver will be the new beneficiaries of all safe haven buying during times of crisis. Don't let yesterday's dip in gold and silver fool you. Precious metals were due for a dip and would have sold off no matter what. Now is the time to load up with precious metals before the Federal Reserve begins dropping hints of QE3.

12 Warning Signs of U.S. Hyperinflation

March 26, 2011

12 Warning Signs of U.S. Hyperinflation

One of the most frequently asked questions we receive at the National Inflation Association (NIA) is what warning signs will there be when hyperinflation is imminent. In our opinion, the majority of the warning signs that hyperinflation is imminent are already here today, but most Americans are failing to properly recognize them. NIA believes that there is a serious risk of hyperinflation breaking out as soon as the second half of this calendar year and that hyperinflation is almost guaranteed to occur by the end of this decade.

In our estimation, the most likely time frame for a full-fledged outbreak of hyperinflation is between the years 2013 and 2015. Americans who wait until 2013 to prepare, will most likely see the majority of their purchasing power wiped out. It is essential that all Americans begin preparing for hyperinflation immediately.

Here are NIA's top 12 warning signs that hyperinflation is about to occur:

1) The Federal Reserve is Buying 70% of U.S. Treasuries. The Federal Reserve has been buying 70% of all new U.S. treasury debt. Up until this year, the U.S. has been successful at exporting most of its inflation to the rest of the world, which is hoarding huge amounts of U.S. dollar reserves due to the U.S. dollar's status as the world's reserve currency. In recent months, foreign central bank purchases of U.S. treasuries have declined from 50% down to 30%, and Federal Reserve purchases have increased from 10% up to 70%. This means U.S. government deficit spending is now directly leading to U.S. inflation that will destroy the standard of living for all Americans.

2) The Private Sector Has Stopped Purchasing U.S. Treasuries. The U.S. private sector was previously a buyer of 30% of U.S. government bonds sold. Today, the U.S. private sector has stopped buying U.S. treasuries and is dumping government debt. The Pimco Total Return Fund was recently the single largest private sector owner of U.S. government bonds, but has just reduced its U.S. treasury holdings down to zero. Although during the financial panic of 2008, investors purchased government bonds as a safe haven, during all future panics we believe precious metals will be the new safe haven.

3) China Moving Away from U.S. Dollar as Reserve Currency. The U.S. dollar became the world's reserve currency because it was backed by gold and the U.S. had the world's largest manufacturing base. Today, the U.S. dollar is no longer backed by gold and China has the world's largest manufacturing base. There is no reason for the world to continue to transact products and commodities in U.S. dollars, when most of everything the world consumes is now produced in China. China has been taking steps to position the yuan to be the world's new reserve currency.

The People's Bank of China stated earlier this month, in a story that went largely unreported by the mainstream media, that it would respond to overseas demand for the yuan to be used as a reserve currency and allow the yuan to flow back into China more easily. China hopes to allow all exporters and importers to settle their cross border transactions in yuan by the end of 2011, as part of their plan to increase the yuan's international role. NIA believes if China really wants to become the world's next superpower and see to it that the U.S. simultaneously becomes the world's next Zimbabwe, all China needs to do is use their $1.15 trillion in U.S. dollar reserves to accumulate gold and use that gold to back the yuan.

4) Japan to Begin Dumping U.S. Treasuries. Japan is the second largest holder of U.S. treasury securities with $885.9 billion in U.S. dollar reserves. Although China has reduced their U.S. treasury holdings for three straight months, Japan has increased their U.S. treasury holdings seven months in a row. Japan is the country that has been the most consistent at buying our debt for the past year, but that is about the change. Japan is likely going to have to spend $300 billion over the next year to rebuild parts of their country that were destroyed by the recent earthquake, tsunami, and nuclear disaster, and NIA believes their U.S. dollar reserves will be the most likely source of this funding. This will come at the worst possible time for the U.S., which needs Japan to increase their purchases of U.S. treasuries in order to fund our record budget deficits.

5) The Fed Funds Rate Remains Near Zero. The Federal Reserve has held the Fed Funds Rate at 0.00-0.25% since December 16th, 2008, a period of over 27 months. This is unprecedented and NIA believes the world is now flooded with excess liquidity of U.S. dollars.

When the nuclear reactors in Japan began overheating two weeks ago after their cooling systems failed due to a lack of electricity, TEPCO was forced to open relief valves to release radioactive steam into the air in order to avoid an explosion. The U.S. stock market is currently acting as a relief valve for all of the excess liquidity of U.S. dollars. The U.S. economy for all intents and purposes should currently be in a massive and extremely steep recession, but because of the Fed's money printing, stock prices are rising because people don't know what else to do with their dollars.

NIA believes gold, and especially silver, are much better hedges against inflation than U.S. equities, which is why for the past couple of years we have been predicting large declines in both the Dow/Gold and Gold/Silver ratios. These two ratios have been in free fall exactly like NIA projected.

The Dow/Gold ratio is the single most important chart all investors need to closely follow, but way too few actually do. The Dow Jones Industrial Average (DJIA) itself is meaningless because it averages together the dollar based movements of 30 U.S. stocks. With just the DJIA, it is impossible to determine whether stocks are rising due to improving fundamentals and real growing investor demand, or if prices are rising simply because the money supply is expanding.

The Dow/Gold ratio illustrates the cyclical nature of the battle between paper assets like stocks and real hard assets like gold. The Dow/Gold ratio trends upward when an economy sees real economic growth and begins to trend downward when the growth phase ends and everybody becomes concerned about preserving wealth. With interest rates at 0%, the U.S. economy is on life support and wealth preservation is the focus of most investors. NIA believes the Dow/Gold ratio will decline to 1 before the hyperinflationary crisis is over and until the Dow/Gold ratio does decline to 1, investors should keep buying precious metals.

6) Year-Over-Year CPI Growth Has Increased 92% in Three Months. In November of 2010, the Bureau of Labor and Statistics (BLS)'s consumer price index (CPI) grew by 1.1% over November of 2009. In February of 2011, the BLS's CPI grew by 2.11% over February of 2010, above the Fed's informal inflation target of 1.5% to 2%. An increase in year-over-year CPI growth from 1.1% in November of last year to 2.11% in February of this year means that the CPI's growth rate increased by approximately 92% over a period of just three months. Imagine if the year-over-year CPI growth rate continues to increase by 92% every three months. In 9 to 12 months from now we could be looking at a price inflation rate of over 15%. Even if the BLS manages to artificially hold the CPI down around 5% or 6%, NIA believes the real rate of price inflation will still rise into the double-digits within the next year.

7) Mainstream Media Denying Fed's Target Passed. You would think that year-over-year CPI growth rising from 1.1% to 2.11% over a period of three months for an increase of 92% would generate a lot of media attention, especially considering that it has now surpassed the Fed's informal inflation target of 1.5% to 2%. Instead of acknowledging that inflation is beginning to spiral out of control and encouraging Americans to prepare for hyperinflation like NIA has been doing for years, the media decided to conveniently change the way it defines the Fed's informal target.

The media is now claiming that the Fed's informal inflation target of 1.5% to 2% is based off of year-over-year changes in the BLS's core-CPI figures. Core-CPI, as most of you already know, is a meaningless number that excludes food and energy prices. Its sole purpose is to be used to mislead the public in situations like this. We guarantee that if core-CPI had just surpassed 2% and the normal CPI was still below 2%, the media would be focusing on the normal CPI number, claiming that it remains below the Fed's target and therefore inflation is low and not a problem.

The fact of the matter is, food and energy are the two most important things Americans need to live and survive. If the BLS was going to exclude something from the CPI, you would think they would exclude goods that Americans don't consume on a daily basis. The BLS claims food and energy prices are excluded because they are most volatile. However, by excluding food and energy, core-CPI numbers are primarily driven by rents. Considering that we just came out of the largest Real Estate bubble in world history, there is a glut of homes available to rent on the market. NIA has been saying for years that being a landlord will be the worst business to be in during hyperinflation, because it will be impossible for landlords to increase rents at the same rate as overall price inflation. Food and energy prices will always increase at a much faster rate than rents.

8) Record U.S. Budget Deficit in February of $222.5 Billion. The U.S. government just reported a record budget deficit for the month of February of $222.5 billion. February's budget deficit was more than the entire fiscal year of 2007. In fact, February's deficit on an annualized basis was $2.67 trillion. NIA believes this is just a preview of future annual budget deficits, and we will see annual budget deficits surpass $2.67 trillion within the next several years.

9) High Budget Deficit as Percentage of Expenditures. The projected U.S. budget deficit for fiscal year 2011 of $1.645 trillion is 43% of total projected government expenditures in 2011 of $3.819 trillion. That is almost exactly the same level of Brazil's budget deficit as a percentage of expenditures right before they experienced hyperinflation in 1993 and it is higher than Bolivia's budget deficit as a percentage of expenditures right before they experienced hyperinflation in 1985. The only way a country can survive with such a large deficit as a percentage of expenditures and not have hyperinflation, is if foreigners are lending enough money to pay for the bulk of their deficit spending. Hyperinflation broke out in Brazil and Bolivia when foreigners stopped lending and central banks began monetizing the bulk of their deficit spending, and that is exactly what is taking place today in the U.S.

10) Obama Lies About Foreign Policy. President Obama campaigned as an anti-war President who would get our troops out of Iraq. NIA believes that many Libertarian voters actually voted for Obama in 2008 over John McCain because they felt Obama was more likely to end our wars that are adding greatly to our budget deficits and making the U.S. a lot less safe as a result. Obama may have reduced troop levels in Iraq, but he increased troops levels in Afghanistan, and is now sending troops into Libya for no reason.

The U.S. is now beginning to occupy Libya, when Libya didn't do anything to the U.S. and they are no threat to the U.S. Obama has increased our overall overseas troop levels since becoming President and the U.S. is now spending $1 trillion annually on military expenses, which includes the costs to maintain over 700 military bases in 135 countries around the world. There is no way that we can continue on with our overseas military presence without seeing hyperinflation.

11) Obama Changes Definition of Balanced Budget. In the White House's budget projections for the next 10 years, they don't project that the U.S. will ever come close to achieving a real balanced budget. In fact, after projecting declining budget deficits up until the year 2015 (NIA believes we are unlikely to see any major dip in our budget deficits due to rising interest payments on our national debt), the White House projects our budget deficits to begin increasing again up until the year 2021. Obama recently signed an executive order to create the "National Commission on Fiscal Responsibility and Reform", with a mission to "propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015". Obama is redefining a balanced budget to exclude interest payments on our national debt, because he knows interest payments are about to explode and it will be impossible to trul y balance the budget.

12) U.S. Faces Largest Ever Interest Payment Increases. With U.S. inflation beginning to spiral out of control, NIA believes it is 100% guaranteed that we will soon see a large spike in long-term bond yields. Not only that, but within the next couple of years, NIA believes the Federal Reserve will be forced to raise the Fed Funds Rate in a last-ditch effort to prevent hyperinflation. When both short and long-term interest rates start to rise, so will the interest payments on our national debt. With the public portion of our national debt now exceeding $10 trillion, we could see interest payments on our debt reach $500 billion within the next year or two, and over $1 trillion somewhere around mid-decade. When interest payments reach $1 trillion, they will likely be around 30% to 40% of government tax receipts, up from interest payments being only 9% of tax receipts today. No country has ever seen interest payments on their debt reach 40% of tax receipts without hyperinflation occurring in the years to come.

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