Gold Speculator

London's Anstee Discusses Financial Services Industry: Video

RssFeed — Fri, 10 Sep 2010 03:21:05 GMT

	London's Anstee Discusses Financial Services Industry: Video Sept. 10 (Bloomberg) -- Nick Anstee, the 682nd Lord Mayor of the City of London, talks about the financial services industry in the U.K. Anstee also discusses Europe's sovereign debt and China's economy. He speaks in Hong Kong with Bloomberg Television's Susan Li. (Source: Bloomberg)	From: Bloomberg Views: 17 0 ratings
	Time: 04:07	More in Entertainment

Ed Rogers Says He's `Very Bullish' on Japan Economy: Video

RssFeed — Fri, 10 Sep 2010 03:21:05 GMT

	Ed Rogers Says He's `Very Bullish' on Japan Economy: Video Sept. 9 (Bloomberg) -- Ed Rogers, chief executive officer at Rogers Investment Advisors K.K., a Tokyo-based fund-of-hedge-funds adviser, talks about the outlook for the Japanese economy, and investing in the nation's stocks through hedge funds. Japan's economy slowed less than initially estimated in the second quarter as companies boosted capital spending, indicating the nation's recovery was intact before a surge in the yen threatened to stunt export gains. Rogers also discusses the prospects for Japan's political landscape. He talks with Rishaad Salamat on Bloomberg Television. (Source: Bloomberg)	From: Bloomberg Views: 11 0 ratings
	Time: 04:46	More in Entertainment

A Lack of Fundamental Drive Resolves Oil to Congestion, Breaks Gold Trend

RssFeed — Fri, 10 Sep 2010 02:17:48 GMT

courtesy of DailyFX.com
September 09, 2010 04:01 PM

There were high hopes that the return of speculative liquidity this week (after the extended US holiday and the general return from summer vacation) would encourage a meaningful trend development. Yet, nothing has developed; and lethargy is setting back in.

North American Commodity Update

Commodities - Energy

Despite another Decline From Crude, the Commodity Essentially Unchanged

Crude Oil (LS Nymex) - $73.79 // -$0.51 // -0.68%

Volatility that is not accompanied by a consistent bearing is simply high-velocity chop. That is the general condition that most speculative based assets currently find themselves in. This is certainly the case with crude, which has maintained an approximate $5 range for the past four weeks. Hopes were high that this would be the week that speculators would be able to revive a trend for the market (bullish or bearish) as trading desks filled out after the extended US holiday ended and the summer doldrums came to a close. However, as is now obvious, the mere presence of more investors and traders does not guarantee a greater magnitude of price development. For oil, the boundaries of technical congestion are clear between a range high and 100-day moving average at $76 and extended series of lows down at $71. With these levels in mind, we look for the catalyst for the overdue break.

The rise and fall of risk appetite has the greatest potential over the energy market – just as surely as it can define price action for every other asset. At the same time, aimlessness in speculative interests could unduly anchor oil when other fundamental developments are taking place. This is the case presently. Risk appetite trends failed to gain traction with big global themes (like a European financial crisis, China’s overextended credit position and slowing growth for the US) finding more evidence of further speculation rather than any certainty. In the meantime, the macroeconomic developments for supply and demand remain in flux. From the docket, trade activity was in focus. An essential measure for activity levels for individual economies, this data can further be used to judge energy demands through imports and exports between suppliers and consumers of the vital resources. With this in mind, the record deficit for the UK was discouraging; but the rebalancing between the US and China helps alleviate critic trade pressure. On the other side of the coin, we would receive another update on the supply side of the market. Delayed a day due to the Labor Day holiday, the DoE’s weekly inventory figures showed a 1.85 million barrel drop in stockpiles to 359.8 million barrels. However, the data would actually come out bearish overall with net petroleum holdings hitting another record 1.15 billion barrels.

With another day of moderate volatility and an overall lack of direction, speculative interest was once again tame. Volume on the active October Nymex contract was slightly offer yesterday’s level with 337,949 in turnover. It is further interesting to note that the market is already rolling forward to the November contract despite its predecessor’s expiration still well off in the future. Elsewhere, the absence of an imminent threat has led the two-year contango (difference between the nearby and two-year deferred contract) slipped again from its recent record to $10.42; while the CBOE’s volatility index hit a new month low of 31.8 percent.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Gold Finally Marks a Move Outside of its Slow and Steady Bull Trend

Spot Gold - $1,243.65 // -$11.30 // -0.90%

Though gold essentially runs on its own fundamental tracks (the regular back and forth in more sensitive asset classes has comparatively little impact with this commodity), it is nonetheless dependent on uncertainty to fuel its consistent trend. After six weeks of a preternaturally consistent climb and coming into close proximity to a new record high, the bull run finally hit a snag. Through Thursday’s session, spot gold put in for its biggest daily decline since July 27th (the exhaustion move that preceded the upswing) and subsequently pushed through the technical floor of the steady move. It is worth mentioning that the backbone to this remarkable trend is hard to quantitatively assess; but considering this is such a steady and slow-paced move, the correction is amplified to all those that were watching.

Why did this safe haven correct when risk appetite trends were otherwise tame – specifically because they were tame. In the past month, growth and yield-sensitive markets haven’t been able to establish a clear trend to support either investment bulls or bears. This has kept these other assets stationary; but gold has maintained its bearing. Eventually, the appreciation will naturally hit its limits as the capital flow is stymied until market participants are once again encouraged to seek out a harbor for their wealth that stands outside the high correlations and fickle influence of risk appetite. With costs rising on this safe haven (the metal is just off a record high), traders are a little more deliberate in their holdings. That being said, there is still plenty of evidence of uncertainty in the market. Data from the Bank of Greece shows the nation’s banks are still borrowing near-record amounts of capital from the ECB. China moved up the release of its scheduled event risk, leading market participants to speculate an impending rate hike announcement. And, the consensus for a stalled US recovery is solidifying. Despite all this, the market still needs something tangible to react to that can be definitively interpreted as a deterioration in market and economic conditions.

Looking at the activity levels behind today’s technical correction, there is also reason to doubt that a major trend is upon us. From the activity December Comex futures contract, 111,867 turnover does not indicate an elevated level of activity that would be indicative of a reversal. The same can be said of the 13.747 shares traded on the SPDR Gold Trust fund. To further drive the point of uncertainty home, the CBOE’s Gold volatility gauge actually touched an intraday four-month low of 17.03 percent.

Spot Silver - $19.91 // $0.13 // 0.63%

Silver would put in for yet another two-year-plus high Thursday. This steady climb looks to be borrowing more from its own particular momentum rather than deferring to the fundamental developments and capital shifts in related asset classes. Indeed, gold would put in for a significant loss and equities (as a proxy for the more speculatively influenced markets) were little changed. Don’t expect this deviation to hold up for long however as turnover has not been ramped up along with underlying price action.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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Crude Oil Inventories Watch: Week Ending 09/03/2010

RssFeed — Fri, 10 Sep 2010 02:17:48 GMT

courtesy of DailyFX.com
September 09, 2010 10:51 PM

Inventories

The Department of Energy reported that in the week ending September 3rd, 2010, U.S. crude oil inventories decreased by 1.9 million barrels, gasoline inventories decreased by 0.2 million barrels, distillate inventories decreased by 0.4 million barrels, and total petroleum inventories increased by 0.2 million barrels.

Total petroleum inventories stalled at multi-decade highs in the latest week, but the surplus to the 5-year average grew substantially as stocks were nearly flat, while a significant withdrawal is typical at this time of year.. The surplus now stands at 110.252 million, or 10.7% above the 5-year average, up from 10.2% in the prior week.

Crude oil inventories decreased, but by less than is typical seasonally. The overall surplus to the 5-year average increased to 40.998 million barrels, or 12.9%, up from 11.5% a week ago.

Product inventories continued to decrease, but not fast enough. In fact, the gasoline surplus increased to 28.269, or 14.4% above the 5-year average. The distillate surplus did decrease, however, to 33.271, or 23.5% above the 5-year average.

Demand

Demand increased 0.6% week-over-week, but year-over-year growth has been slowing a bit in recent weeks. Over the last four-weeks, total petroleum demand has averaged 0.7% higher than the year ago period. Gasoline demand is up 1.1% YOY and distillate demand is up 9.4% YOY.

Imports

Crude oil imports plunged 1.9 million barrels week-over-week. Over the last four weeks, imports have averaged 9.5 million barrels per day, 0.5 million barrels per day higher than the year ago period.

Refinery Activity

Refinery utilization increased counter-seasonally to 88.2% from 87% in the prior week. Gasoline production increased almost 150K barrels per day, while distillate production held steady.

Miscellaneous

U.S. crude oil production was steady at six-year highs last week. Year-to-date oil output is up 3.8% from the year ago period.

Inventories at the NYMEX delivery point, Cushing, Oklahoma decreased 0.2 million barrels week-over-week.

BankUnited Said to Seek More Than $500 Million in IPO: Video

RssFeed — Fri, 10 Sep 2010 02:17:48 GMT

	BankUnited Said to Seek More Than $500 Million in IPO: Video Sept. 9 (Bloomberg) -- Bloomberg's Cristina Alesci talks about the outlook for an initial public offering by BankUnited, the Florida lender owned by investors including Blackstone Group LP, Carlyle Group and WL Ross & Co. BankUnited plans to raise more than $500 million when it offers shares to the public, according to people with knowledge of the matter. Bloomberg News reported in August that the Miami Lakes, Florida-based lender was planning an IPO. Alesci speaks with Jon Erlichman on Bloomberg Television's "Taking Stock." (Source: Bloomberg)	From: Bloomberg Views: 18 0 ratings
	Time: 03:33	More in Entertainment

IMF's Blanchard Discusses Global Economy, Stimulus: Video

RssFeed — Fri, 10 Sep 2010 02:17:48 GMT

	IMF's Blanchard Discusses Global Economy, Stimulus: Video Sept. 10 (Bloomberg) -- Olivier Blanchard, chief economist at the International Monetary Fund, talked about the outlook for the global economy and measures to stimulate recovery. Blanchard talked with Francine Lacqua on Bloomberg Television yesterday. (This is an excerpt of the full interview. Source: Bloomberg)	From: Bloomberg Views: 21 0 ratings
	Time: 01:48	More in Entertainment

DeLaughter Says Food Inflation to Drive Farmland Demand: Video

RssFeed — Fri, 10 Sep 2010 02:17:48 GMT

	DeLaughter Says Food Inflation to Drive Farmland Demand: Video Sept. 9 (Bloomberg) -- Dennis DeLaughter, the owner of Progressive Farm Marketing Inc., talks about demand for farmland. DeLaughter speaks with Jon Erlichman on Bloomberg Television's "Taking Stock." (Source: Bloomberg)	From: Bloomberg Views: 18 0 ratings
	Time: 03:08	More in Entertainment

Rip-Off By The Federal Reserve

Nrtadmin — Fri, 10 Sep 2010 02:00:07 GMT

The Federal Reserve uses euphemistic smoke and mirrors to obscure their operations. With full knowledge the following is not the way the Fed/government describes the system, allow me to offer a different analysis of their mathematical operation.

Congress can pay for federal expenses with funds collected from taxes, but Congress is never satisfied with this amount. The desire to buy votes/campaign contributions from special interest groups induces congress-critters to spend more, and this is identified as deficit spending. To create this make-believe money requires the assistance of the Federal Reserve.

Congress will give the Fed a security (bill, bond, or note) and the Fed will accept the document as an asset of one of the twelve FR Banks. The Fed will then establish a line of credit for the U.S. government for the same amount and list the liability as Federal Reserve Notes. Presto !! Fiat money has just been created for Congress to spend. Ref: 2009 Annual Report to Congress by the Board of Governors, page 448. http://www.federalreserve.gov/boarddocs/rptcongress/annual09/pdf/ar09.pdf The accumulated securities that are not redeemed add up to the national debt.

The fiat money is identified as a legal tender. A �legal tender� is something that is required by law to be accepted as payment for a debt---it is compelled satisfaction for, but not payment of, the debt.

If the Fed retained all of the securities (now over $13 trillion, i.e., over $40,000 for every man, woman, and child in the U.S.), the public would quickly complain that interest payments (approximately $400 billion annually) were for no benefit and the inflationary pressure would also be obvious. The Fed therefore wants to sell a major portion of the securities so it has arranged with the Treasury department to act as auctioneer for selling to the Primary Dealers. The PD submit sealed bids. Since the security has a fixed face value and interest rate, the higher the bid, the lower the interest rate for the buyer.

There is not $40,000 in circulation for every man, woman, and child. It is manifestly clear that such a value can only be visualized as an unrestricted claim on the potential earnings of the citizenry. The citizen has been reduced to an indentured servant, or slave, compelled to work for the company store and still face an increasing amount of debt. There is no possible relief. If the earnings of a citizen are subject to confiscation by taxation, the government can take the entirety and bestow what pittance Congress in their benevolence may grant.

The Primary Dealers are branches of the huge international banks/finance centers. Seven Wall Street agencies include Bank of America, Citigroup, J.P. Morgan, Morgan Stanley, Goldman, Jefferies, and Fitzgerald. Foreign agencies of Barclays, HSBC, Credit Suisse, UBS, Deutsche, BNP Paribas, RBS, Daiwa, Mizuho, Nomura, and RBC of Canada are also included. Whether these are the entities that Bloomberg is attempting to identify by FOIA as recipients of bail-out funds now in the 2^nd Circuit Court of Appeals remains to be seen.

The Fed recently obtained $700 billion bailout funds. It begged Congress for money and Congress gave them $700 billion in securities and the Fed swapped the securities to GSE/international bankers for toxic MBS�s. The Annual Report lists Assets of $776 billion securities and $908 billion Government Sponsored Enterprise Mortgage Backed securities out of $2.2 trillion total assets. Whether the bailout money was a quid pro quo to avoid lawsuits for fraud is beyond the scope of this writing. The continued mutual benefit of programs should evidence Wall Street and the Fed constitutes a Siamese twin.

The touted concept that the Treasury�s auction is used to obtain money to run the government is absurd. How could the government sell trillions of dollars of securities if the money was not already in circulation? Such a methodology cannot conceivably create fiat money in the hands of citizens to buy the securities to fund Congress.

The math is going to get more detailed. If the Fed sold all of the securities at face value, there would be no money left in circulation. The money that was created by the securities would all be taken out of circulation and returned to the vaults of the Fed. The operation is identical to the FOMC selling or buying of securities to alter the amount of money in circulation.

The value of any securities not sold by the Fed is still in circulation and becomes the Reserves for commercial banks. The Reserves (known as base money) are then multiplied via loans from commercial banks utilizing the fractional reserve practice. The Fed currently holds about $750 billion of $12.5 trillion issued securities. Ref. http://www.fms.treas.gov/bulletin/b2009_3.pdf. Chart OFS-1.

Observe that the amount of money created by the security is the amount of the principal but the amount promised to be repaid is the principal AND the interest. The interest is never created but payment is required by the agreement. It is impossible. The linear expansion of base money via fractional reserves to create commercial loans does not change this. If, hypothetically, all money in circulation was used to pay off the securities issued by Congress, all bank Reserves would be wiped out and the commercial loans would collapse---and every dollar of interest accumulated from day one would still be outstanding---but there would be no money outside of the Fed�s vaults to pay it.

The debt created by usury based sovereign debt is perpetual; it can never be paid off. The contract cannot be culminated. Any contract that cannot be culminated is an act of fraud. A contract based upon fraud is invalid from its inception. It would appear the national debt is not legally enforceable.

There are more skullduggeries involved. Let us assume a newly established sovereign nation is setting up a usury based economy with the issuance of 100 unit securities, a five year maturity, and an annual interest rate of 20 percent over a span of five years. The identifications of Congress and the Fed will be used to convey the images.

Upon the issuance of the first security, Congress has 100 units to spend. At the end of the year, Congress/Treasury has to pay 20 units to the Fed for interest. If the nation had to pay off the security at the end of the first year, the bankruptcy is obvious. There have never been 120 units created. Twenty units could be removed from society but that would leave only 80 units in circulation, cause great financial hardships, and still leave an impossible obligation to redeem a 100 unit security. The solution is to put off the interest payment until the next issue of securities for the second year. The interest is paid from the principal created by the second issue.

During the second year there are 200 units in circulation but the actual rate of interest on the second issue is not 20 percent. Since 20 units had to be paid to the security holders, congress only received 180 units to spend (100 + 80) but they are committed to pay 40 units of interest on the security at the end of the second year. The interest rate of 40 divided by 180 is 22.2 percent. Considering the second year alone, the interest is 20 divided by 80 or 25 percent.

When the security for the third year is issued, the interest of 40 units for the first two years securities will not be available for congress. Congress will receive only 60 units for public projects but will have to pay 20 units interest at the end of the year. The 240 units received by congress (100 + 80 + 60) will require 60 units of interest at the end of the third year. The cumulative interest rate (60 divided by 240) is 25 percent. The interest rate for the third year alone (20 divided by 60) is 33.3 percent.

At the start of the fourth year, the security will have to cover the interest charge for the three prior years of 60 units. Congress will receive 40 units for government spending. The 280 units received by congress (100 + 80 + 60 + 40) will demand 80 units of interest at the end of the fourth year. The cumulative interest rate (80 divided by 280) is 28.5 percent. The interest rate for the fourth year alone (20 divided by 40) is 50 percent.

The security issued for the fifth year will pay the 80-unit interest for the prior four years. Congress will have 20 units to splurge. The 300 units received by congress (100 + 80 + 60 + 40 + 20) will require 100 units of interest at the end of the fifth year. The cumulative interest rate (100 divided by 300) is 33.3 percent. The interest rate for the fifth year alone (20 units received--20 units in interest) is 100 percent.

At the beginning of the fifth year, 500 units of indebtedness have been issued on the full faith and credit of the nation for securities that must be eventually redeemed. 300 units have been available to congress for spending. 200 units have been given to the Fed as interest and another 100 units in interest will be due the security holders at the end of the fifth year.

In addition, 100 units must be found to redeem the maturing security issued the first year. This factor alone makes it obvious that more debt must be incurred to continue the scheme.

Beginning the first day into the sixth year (with no new securities being issued), after paying the 100 units of interest for the fifth year and redeeming the 100 unit security issued the first year, the 300 units that had been available to Congress (over the years) has been reduced to 100 units net gain. In the meantime, the Fed or security holders have collected 300 units in interest, gained 100 units in the redeemed security for the first year, and still have a claim on the citizenry for 400 units of outstanding securities that will accumulate an additional 200 units of interest before redemption---a grand total of 1000 units. And there was no initial investment put at risk by the Fed.

The inescapable whirlpool of usury debt can only avoid obvious default by increasing the value of future securities. Increasing the value of issued securities merely postpones the inevitable result.

A high rate of interest has been selected for the example to minimize repetitive calculations. A ten percent interest rate will consume 100 percent of the security value in ten years; a five percent interest rate will take twenty years. Lower rates of interest merely require more years to reach the same inherent bankruptcy. (Actually, bankruptcy occurs the first year, but then again, since the debt can never be paid off, the entire scheme is based upon fraud. A contract based upon fraud is void from its inception.)

An economic scheme that utilizes later investors to pay the interest due earlier investors is identified as a Ponzi scheme. This is precisely the scheme that has been presented above. The scheme will survive only as long as more principal is generated to pay the interest. This action only postpones the ultimate time of a much larger reckoning. If purchasers of the new debt cannot be found, the interest must be paid from previously generated principal and the scheme quickly collapses like any Ponzi scheme. Astute investors will demand a higher rate of interest than inflation (resulting from the creation of new principal) or they will suffer a loss of actual wealth. The increase in interest will always be greater than the increase in principal because of compounding effects; i.e., the more the principal increases, the more the interest increases.

[Current economic conditions find entities with surplus funds buying short-term securities at near zero interest rates to minimize the potential loss of value during a chaotic stock market. The drop in short-term interest rates corresponds with the movement of funds out of the equity markets. Low interest Federal Fund rate for banks was established to boost the economy as the housing bubble imploded (from easily available over-sized loans) and threatened the collapse of the banking industry (so now they are going to make the loan-trap even easier to fall into).

However, recent auctions have found Primary Dealers bidding such low prices on long term securities (which would have raised the interest rates) that the Fed ate more than 50 percent of the auction (by slipping in shill bids) to keep the interest rate artificially low. The Fed usually purchases 5 to 10 percent of an issue. The PD would have taken a haircut from anticipated inflation if they had accepted a low interest rate on long-term securities with a high bid. On the other hand, the bond market could crash if the Fed had allowed interest rates to escalate. People remember what high interest rates did in the 80�s. The Fed is trying to manipulate / control the market and the gyrations are increasingly wilder. Bill Fleckenstein in GREENSPAN�S BUBBLES writes of how the Fed suppressed interest rates to create a false prosperity that devastated the construction industry.]

A newspaper article a couple of years ago found the annual increase in interest to be 15 percent while the budget only grew 7 percent. More currently, the budget has been increasing much faster to fund/conceal the rapid growth in interest requirement. Professor Bob Blain, Southern Illinois University, Edwardsville has graphed the exponential growth in debt from 1915 to be irregular only during the 1930�s. It was that period when the Fed repeatedly made margin calls on the banks to force gold certificates and gold coins out of circulation---which repeatedly deepened the recession. This was followed by the U.S. being manipulated into WW II by Wall Street and flooding the economy with fiat Federal Reserve Notes. The future will see ever-increasing demands for debt---and interest---and war is the cause celebre. Ref. JFK, AND THE UNSPEAKABLE by James Douglas.

In 1790 during Congress� consideration of Alexander Hamilton�s proposal to pay the national debt with a usury based obligation placed upon the citizens, congressman James Jackson, after lengthy reflection on the devastation similar plans had imposed on European countries and cities, included the following observations to Congress:

�Let us take warning by the errors of Europe, and guard against the introduction of a system followed by calamities so universal�The funding of the debt will occasion enormous taxes for the payment of the interest�(such a system) must hereafter settle upon our posterity a burthen (sic) which they can neither bear nor relieve themselves from.� Ref. ANNALS OF CONGRESS, Vol. 1, 1790, pp. 1141-2.

In actual practice within the United States, a collection of taxes for part of the government spending is well known. Payment of part of the government expenses by taxation does not alter the government�s usury program; for analytical analysis, they can stand alone. The current pattern of increasingly larger deficit spending is the escalation as the climax of chaos beyond description approaches.

Footnotes:
Dr. Bob Blain, Emeritus Professor of Sociology at Southern Illinois University, Edwardsville, in a paper �Revisiting U.S. Public and Private Debt� published in 2008 observes the exponential increase in national debt from 1915 and the destruction inflicted upon historical societies by usury based monetary systems.

Benjamin Ginsberg, in FATAL EMBRACE, recently documented numerous historic occasions in which a usury debt based economic system (but not so identified) has resulted in the �financiers� facing public fury including deportation, confiscation of estates, and physical harm to the individuals involved.

Bill Fleckenstein in GREENSPAN�S BUBBLES writes of how the Fed suppressed interest rates to create a false prosperity that devastated the home construction industry.

THIS TIME IS DIFFERENT; EIGHT CENTURIES by Carmen Reinhart & Ken Rogoff reviews sovereign financing by debt.

Daily Dispatch: Spend, Then Tax

GoldSpeculator — Fri, 10 Sep 2010 01:26:03 GMT

September 09, 2010 | www.CaseyResearch.com

Spend, Then Tax

Dear Reader,

A quick follow-on to yesterday’s edition, when I mentioned in passing that certain members of the eurozone were starting to once again run into strong headwinds.
On that topic, our own Bud Conrad shot over a chart this morning showing the dangerous rise in the spread between credit default swaps for the PIIGS versus German government issues (bunds). Here’s the chart, followed by Bud’s quick comment.

The most interesting is the new European credit collapse. Credit default swaps have returned to the worst levels of the crisis for many of the PIIGS. This morning the Anglo Irish Bank is being divided up because it was about to collapse. In other words, the scenario of us ending the calm in the eye of the storm and moving to sovereign debt crisis is on track in Europe. For more on the topic, Ambrose Evans-Pritchard makes some useful observations in an article you can read here.
Bud

David again.

For those of you new to our services, the “eye of the storm” Bud refers to is the period of relative calm that the global economy has just passed through – a calm that was purchased by massive money printing and other forms of quantitative easing.

Unfortunately, none of this quantitative easing did anything to reduce the levels of bad debt that brought on the crisis in the first place. At best, it rearranged the proverbial deck chairs on the Titanic, moving large quantities of the debt from private balance sheets onto those of the public… then laying on even more.

Of course, the soaring public debt ultimately will fall on the backs of the shrinking universe of individuals who are net donors of tax revenue, versus those who are net recipients.

Spend, Then Tax

Yesterday, after a bit of early head-faking, the president of these United States made his position on the Bush tax moratorium clear – that the moratorium should come to an end, but only for individuals making over $250,000 a year. As such, they should be subject to a substantially different tax regime than their fellow Americans.

It is time, intone the president and his minions, time for the shirking rich to step up to the plate and pay their fair share to reduce the national deficit.

For the record, if you earn $250,000 a year, you are in the top 1% of income earners in the U.S. As a member of that elite group, you and your greedy friends earn a whopping 19% of all the personal income produced in this great nation… but you collectively pay 37% of the entire Federal Income Tax burden.

The top 10 percent of wage earners (loosely, you qualify if you earn more than $110,000 a year) now pay about 68% of the total.

By contrast, the bottom 50% of income earners collectively pay about 13% of the total collected.

If you take a dispassionate look at the percentages just mentioned, the notion that the nation’s top wage earners are not paying their fair share is factually incorrect.
But that is no great revelation, and anyone with a brain can spot the administration’s claims as nothing more than political pandering, with a healthy dash of class warfare stirred into the intoxicating brew the Democrats would like voters to imbibe ahead of the November elections.

I must, however, pause to pull aside the curtain to reveal the blame the government deserves in this debate.

Specifically, even though they are already footing 68% of the government’s bill, it wasn’t the top 10% of wage earners that collectively drove the deficits sky high. It was the very same politicians now accusing taxpayers of not paying enough.

The primary counterargument for not extending the Bush tax moratorium is that doing so will add another $700 billion to the deficit over the next ten years. That argument is specious, because it’s not the revenue side of the equation that’s causing the deficit problem – but the government’s insane spending. The chart here, from the Heritage Foundation, speaks a million words.

As the chart shows, while federal tax revenue has come down in the crisis – to levels last seen in 2004 – the spending has soared.

And it’s important to note that the level of revenue earned in 2004 sits in a trough between the stock market bubble that built up into 2000 and the housing bubble that peaked in 2007. Those bubbles both boosted federal tax receipts – but still were quickly overwhelmed by escalating government spending. If you were to eliminate the two bubbles, the revenues of 2004 – and today – would sync up well with the longer-term trend. More on that momentarily.

In this next chart, you can see the added detail that federal, state, and local government spending has more than doubled since 1965. Importantly, the spending is shown in inflation-adjusted dollars, which means that the increase is not just attributable to currency depreciation.

All of which is to say that for the president and others in his administration to lay the government’s problem at the doorsteps of the Americans who pay the most taxes, by a huge margin, without addressing the core issue of spending or at least having the decency to mutter a mea culpa for helping to bring us to this ruinous point, is deceitful and disingenuous.

There is a matter of principle involved here. But what is the exact principle the government is following when it treats one group of taxpayers differently from another, based on nothing more than income?

For the life of me, the only principle I can come up with is “From each according to his ability, to each according to his need.”

Oh, I can hear the anguished cries of those of you dear readers who lean to more progressive attitudes. Of course the rich should pay a higher level of income tax. Any other system would add to the burdens of those least able to afford them, all the while leaving Bill Gates to soak in every luxury his fortune allows.

I persist despite those cries, sharing my strongly held opinion that just because Bill Gates can afford to pay more without hampering his lifestyle in the slightest, doesn’t mean he should be forced to do so. Not in America, at least.

The issue that we the people should be concerned about is not whether the next entrepreneur will strike it rich and have all that the American Dream promises and more – but rather, exactly how much government can we the people afford?

Having identified the total needed to run a tight ship of state, then a flat tax can be set to pay the bill. If that flat tax causes hardship for some, then the debate should revolve around how the cost of government can be reduced even further, so that the minimal number of individuals are disadvantaged. But under no circumstance should the cost of government be allowed to exceed revenues.

By that last statement, I mean on a straight-up, transparent accounting basis. In other words, no shenanigans designed to obfuscate the fiscal situation as anything other than it is – for example, by misdirecting funds set aside for Social Security in order to pay down the deficit, a stunt that President Clinton used to great effect.

Hear! Hear! I can hear the conservatives among the audience shouting approvingly. Not so fast. When pressed for their ideas on how to reduce the deficits, Jerry Lewis (no, not that Jerry Lewis – the other one), the ranking Republican on the House Appropriations Committee, answered by calling for all non-defense discretionary spending to be frozen at 2008 levels. That, according to Con. Lewis, would save the nation $100 billion a year.

Now, glance back up at the chart above and let your finger slide across to the spending levels of 2008, versus the revenues generated in the current year. See a problem? As in that still leaves a wide gap between revenue and expenses.

And again, if you ignore the escalating ramp-up of government tax revenue in the periods leading into the stock market and housing bubbles, but rather extend the revenue gains in a more orderly upward sloping line – you discover that the current reduced levels of revenue are a lot closer to the norm.

Whether you call today’s level of revenue the new normal or just normal, adopting the Republicans’ plan to spend like it’s 2008 while taking in revenue at the current non-bubble levels still leaves the country with horrific deficits for as far into the future as the eye can see.

And this notion of leaving defense spending alone? It’s enough to make Jefferson’s bones roll over. Quoting the sound thinker…

"I am for free commerce with all nations, political connection with none, and little or no diplomatic establishment. And I am not for linking ourselves by new treaties with the quarrels of Europe, entering that field of slaughter to preserve their balance, or joining in the confederacy of Kings to war against the principles of liberty." (Letter to Elbridge Gerry, 1799)
"Peace, commerce and honest friendship with all nations – entangling alliances with none, I deem [one of] the essential principles of our government, and consequently [one of] those which ought to shape its administration." (1st Inaugural Address, 1801)

In fact Jefferson was against even having a standing army in peacetime, calling it as he saw it…

"The spirit of this country is totally adverse to a large military force" (Letter to Chandler Price, 1807)

Quoting Jefferson as such doesn’t mean that I think we as a nation should be weak to the point of being susceptible to foreign attack. But we need to get real here.

The nation has been driven into bankruptcy by our government’s prolificacy. Spending the equivalent of 5% of the nation’s GDP on the military establishment, as we now do, then saying it’s “off limits” because of some perverse social (and therefore political) meme that has it that the military is sacrosanct is ridiculous.

It’s no surprise to me that the Democrats are going to force me to reach even deeper into my family’s savings in order to allow the government to maintain its reckless spending.
Unfortunately, once again the Republicans are showing themselves to be much the same – just as they always have.

At the end of the day, the pictures painted above – of a nation that spends far more than it collects – is a picture of continuing crisis. Trying to close the gap by raising taxes, rather than getting serious about slashing the cost of government, is not only unfair, it’s simply not going to get the job done.

Reality Bites

Speaking of the nation’s national security apparatus, a recent article in England’s Guardian news service revealed just how unprepared the people in charge of protecting the president were at the time of 9/11.

Relying on comments made by Condoleezza Rice for the documentary 9/11: State of Emergency, the Guardian paints a scene that might have been straight out of Dr. Strangelove.

And I quote…

Rice revealed that the bunker beneath the White House where she was sheltering with Dick Cheney began to run out of air.
"There were so many people in the bunker that the oxygen levels started dropping and the secret service came in and said we've got to get some people out of here.
"They literally went around telling people that they weren't essential and they had to leave."
Government communication systems were failing and Bush had to resort to an unsecured line to talk to Washington. Rice said: "Despite all of the sophisticated hierarchy, sophisticated command and control equipment that we had, at that moment much of it didn't function very well and people instead did whatever they could to communicate messages. And frankly we then had to make it up.

It’s bad enough that the White House bunker was so poorly designed that it could run out of air and the entire communications system would go on the fritz, even though the White House itself hadn’t been attacked – but can you imagine the embarrassment of the poor schlub who thought he or she was in the “inner circle,” then was asked to leave the bunker, maybe to their death, because they were non-essential?
You can’t make this stuff up.

Is There Such a Thing as a Free-Market Bull?

By Vedran Vuk
Can you be a free-market supporter without being a bear? After all, government grows endlessly larger and larger. It’s hard to stay optimistic about what appears to be inevitable doom. But there are two ways of looking at the problem. Most are more familiar with the bears who watch for the next downturn and invest heavily in gold. And of course, in our opinion, this is a highly warranted perspective at the moment.

But there is a way to be a free-market bull, even in this grim environment. Instead of focusing on the growing size of government, this perspective focuses on the strength of capitalism. In many ways, capitalism has become stronger and stronger over the last century – especially on an international level. Today’s world trade is historically unmatched as new economies arise from absolute poverty. Market analysts can no longer focus on the U.S. and Europe alone but must pay close attention to Japan and the BRIC countries as well.

According to the free-market bull view, capitalism is similar to an avalanche. Once triggered in motion, little can stop the avalanche. One can throw regulations, social welfare programs, and other interventions into the avalanche’s way, but the snow will simply roll over them all. Even FDR was only able to choke off capitalism momentarily; free enterprise came roaring back after the war. His policies resulted in a Great Depression, but not a “Permanent Depression.” History sides with the bulls.

Capitalism has faced many dangers from Nixon’s abandonment of the gold, to LBJ’s Great Society, to endless spending in every administration. Through all of these events, capitalism somehow fights back, survives, and even prospers. Today’s companies and technologies are simply amazing. Our growth hardly appears stunted in the past few decades. If anything, these policies have slowed us down but haven’t stopped progress.
Does this mean the bears are wrong and bulls correct? Not at all. What really separates the two groups is timing.

The greatest free-market thinkers, such as Ludwig von Mises and Friedrich Hayek were certainly bears. Hayek wrote the Road to Serfdom during WWII because he thought that capitalism was coming to an end. In retrospect, his timing was off. Similarly, Ludwig von Mises wrote about the impossibility of socialist calculation and central planning. He never witnessed the fall of the Soviet Union in his lifetime, but ultimately he was correct. The bull and the bear believe in the same ideas. Only the free-market bull believes that the collapse will come later, while the bear believes it will come today.

Though the bull has been lucky thus far, there are plenty of cautionary tales that should warn him now. Japan’s lost decade is a glaring example. After years of regulation and intervention, something finally snapped. Almost no one saw it coming. It’s risky to be a free-market bull. Sure, the market might survive yet another recession, but it also might not. With the second longest recession continuing, even the bulls must be less confident now.

So what does the common investor take away from this? You could choose to be either a bull or bear. But there are smarter ways. In The Casey Report, we recommend holding one-third gold, one-third cash, and one-third other investments. Whether you’re a bull or a bear, the gold allocation makes sense. The bull looks at it as an insurance policy, and the bear sees a great investment. But regardless of the perspective, it’s worth owning.
The high cash allocation also works well for both. If the market really tanks for a second time, the bear will be glad to have held cash. But the bull may be even more jubilant as he readily buys companies at fire-sale prices.

The last third is the trickiest. In many ways, the bulls are right; the free market is powerful. Our economy is going to take some hits in the future, but America will nonetheless continue to produce new innovations and companies. Think about Japan’s economy again. Sure, they’ve had a lost decade, but my house is still filled with Japanese brand names. Just because the general market may collapse doesn’t mean that every company will.

Personally, I’m interested in tech companies like those featured in Casey’s Extraordinary Technology. The world may go upside down, but with the right technological idea, huge returns are still possible. Technology has the opportunity to provide surprises and breakthroughs in any sort of market. Maybe it’s not the best time to invest in a car company or a real estate investment trust. But that doesn’t mean that progress and capitalism are dead. Keep an eye out for the worst, but don’t be so bearish that good opportunities pass you by. The government is powerful, but so is the market.

That’s It for Today

As always, thanks for reading. Before signing off, a quick “told you so.” In my article on Tuesday, The Latest “Crisis,” I said the president would weigh in on the non-event of a small-town preacher putting his Bic to a Koran, and sure enough he has. Along with just about everyone else in the world.

On that story, dear reader Keith W. took exception to my comment, "If someone gets killed over this non-story, pointing the finger anywhere else but at CNN, BBC, or any of the other mass media outlets would be to point it in the wrong direction."
Keith’s objection follows…

I think the first finger of blame must be pointed at any Muslim who commits murder and the second at any Muslim who defends such murderers. The third finger can point at the media, but it's a distant third.

When you’re right, you’re right – and Keith’s right.

Even so, I’m not letting the media off the hook. They made this story, not the small-town preacher who should have been ignored. Instead, his new-found notoriety will no doubt result in his attracting a huge new following and a career as a cable television host, making him the gift that keeps on giving to members of the media in need of a headline-grabbing story on an otherwise slow day.

It’s all just so pathetic.

Until tomorrow, thanks for reading… and your many letters.

David Galland
Managing Director
Casey Research

Attached Thumbnails

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