How long will this correction in gold last? Mark Hulbert's article for the Wall Street Journal's Marketwatch suggests that we could be as close as a week away.
Hulbert's newsletter tracks the sentiment of short term traders. When short term traders are most negative on gold's prospects, that usually indicates a bottom.
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. It currently stands at just 10.9%, down from 53.8% as recently as two trading days previously.
In other words, the average short-term gold timer we track has reduced his or her recommended gold exposure by 43 percentage points in just two days' time. That's among the biggest plunges in gold sentiment I've ever seen.
If you plan to make any gold purchases in the near future, now might be the time!
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Close Call For US Banks
The major driver in the price of gold now is foreign government purchases. The following graph is courtesy of Caseyresearch.com.
As long as demand continues to outstrip suppy, prices will continue to increase. Does the above graph suggest to you that the demand for gold is declining?
As long as demand continues to outstrip suppy, prices will continue to increase. Does the above graph suggest to you that the demand for gold is declining?
The Insolvent Fed
More quotes from Jim Willie.....
The USFed is insolvent. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!
One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!
More quotes from Jim Willie.....
The USFed is insolvent. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!
One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!
Gold's Mega-Trend
Here is an excerpt from a rather long article by Jim Willie, who is one of the most respected gold advisors I know of.
"The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed.
When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner. Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon.
Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months."
Here is an excerpt from a rather long article by Jim Willie, who is one of the most respected gold advisors I know of.
"The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed.
When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner. Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon.
Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months."
Gold Backing Of The Dollar
Mike Hewitt made an interesting observation recently in his post entitled Ratio of US Gold Reserves to Various Money Supply Metrics.
It is interesting to consider that if everyone cashed in their checking accounts and went to purchase gold directly from the U.S. reserve at the current market rate, all of the gold would be gone after only 17.5% of the cash was redeemed.
If the citizens decided to also cash in their savings accounts, then that figure drops to 3.5%! In other words, the ratio of cash in circulation plus the value of all publically held checking/savings accounts to the official gold reserve is 28.5 to 1.
Though it would be unwise to simply project these ratios onto the current price of gold in order to determine what the price ought to be, they do suggest that gold is indeed undervalued.
As I write this post, gold is priced at $1,126 per ounce. Therefore, for our paper money to actually be backed by gold, as it used to be, and will also be in the future, gold would have to be valued at $32,091 per ounce.
Will gold go this high? Doubtful, but it does serve to show that gold is still tremendously undervalued.
The graphs that follow show how serious this situation really is.
Notice that the reporting of the US Gold Reserves has not changed since the early 1970s. It is speculated that the reason for this is that our gold reserves are long gone, replaced by an worthless pile of IOUs.
It is interesting to consider that if everyone cashed in their checking accounts and went to purchase gold directly from the U.S. reserve at the current market rate, all of the gold would be gone after only 17.5% of the cash was redeemed.
If the citizens decided to also cash in their savings accounts, then that figure drops to 3.5%! In other words, the ratio of cash in circulation plus the value of all publically held checking/savings accounts to the official gold reserve is 28.5 to 1.
Though it would be unwise to simply project these ratios onto the current price of gold in order to determine what the price ought to be, they do suggest that gold is indeed undervalued.
As I write this post, gold is priced at $1,126 per ounce. Therefore, for our paper money to actually be backed by gold, as it used to be, and will also be in the future, gold would have to be valued at $32,091 per ounce.
Will gold go this high? Doubtful, but it does serve to show that gold is still tremendously undervalued.
The graphs that follow show how serious this situation really is.
Notice that the reporting of the US Gold Reserves has not changed since the early 1970s. It is speculated that the reason for this is that our gold reserves are long gone, replaced by an worthless pile of IOUs. 
The above graph shows just how much money the Fed has pumped out over the last two years. Again, all backed by nothing. The rest of the world knows this and are dumping dollars and buying gold as fast as they can.
What are you waiting for?
FDIC Broke
click chart to enlargeThis chart courtesy FDIC shows the ratio between funds on hand and commitments to secure bank deposits at FDIC insured banks. Notice the rate has just gone negative. The FDIC is essentially broke!
This on top of an already broke economy, a war we can't afford and a health care bill that will cripple us.
Where will the money come from? The printing press. And everytime they cut on those presses, gold goes up.
The outlook for gold has never been brighter!
A Technical Look At Gold
Click image to enlargeFeatured is the index that measures gold against the US dollar. The green boxes surround the consolidation that took place before price broke out at the resistance line at the top of the box. The blue numbers represent the size of the advance from the break-out of one box to the top of the next box as it relates to the index at the right. You will notice that there is a dramatic progression ranging from 0.6 to 5.0.
Due to the fact that the US government has opted to go for an exponential uptrend in the federal deficits, this index is also going exponential. We can reasonably expect that the next number (currently 1.75 at the ‘?’) will be greater than 5.0; much greater!
The blue arrow inside the oval points to the observation that the two moving averages are in positive alignment with each other. This is the sign of a strong bull market.
Keep in mind that most breakouts are tested. Such a test in now underway. Use pullbacks such as the one you are seeing now, to add to your portfolio. The final top is still years into the future!
The reason we can state this with confidence is because the amount of ‘printing press money’ the Obama administration is throwing at the US economy guarantees massive price inflation and concurrent demand for gold.
Pretend you are in an auction hall. Just before the auction begins, a wealthy individual enters and begins to hand out handfuls of hundred dollar bills to the bidders. What do you think will happen to the prices realized at that auction?
Source
If you are serious about never wanting to be fooled or bamboozled by a politician again, then never look to a politician’s words, but only to his or her actions, to unearth a politician’s true character and nature. Only a fool would ever accept a politician’s words as an accurate representation of a politician’s intent.
Likewise, you would be very wise to apply the above maxim to bankers as well. Investors should look towards bankers’ actions and not their words when trying to decipher their intent. Bankers are responsible for the propaganda that gold is a barbarous relic. Bankers are responsible for the propaganda that gold is a cumbersome asset to own because it pays no interest. These are their words. Yet if you look toward their actions, Central Bankers all over the world were net buyers of gold this past year. Shouldn’t that alert you to the fact that bankers are a bunch of conniving liars in everything they tell the masses about gold?
The reason that bankers have always spread so much propaganda about gold is because gold is the kryptonite of bankers. Gold allows people to preserve their wealth against their fiat currency debasement schemes.
Even if you refuse to acknowledge the indisputable signs that the gold market is, and has been rigged for decades, you only need realize one thing – that despite the best efforts of the US Federal Reserve, the US Treasury and the Bank of England to suppress the price of gold, gold’s long term trend since 2001 when it bottomed at about $250 an ounce, has been up. And if you are astute enough to realize that the gold markets have been, and still are rigged, then observing gold’s rise from $250 an ounce eight years ago to more than $1200 an ounce just a week ago should give you the utmost confidence, that despite the best efforts of bankers to wreck gold’s price, its long-term trend will remain higher for quite some years to come.
source
Likewise, you would be very wise to apply the above maxim to bankers as well. Investors should look towards bankers’ actions and not their words when trying to decipher their intent. Bankers are responsible for the propaganda that gold is a barbarous relic. Bankers are responsible for the propaganda that gold is a cumbersome asset to own because it pays no interest. These are their words. Yet if you look toward their actions, Central Bankers all over the world were net buyers of gold this past year. Shouldn’t that alert you to the fact that bankers are a bunch of conniving liars in everything they tell the masses about gold?
The reason that bankers have always spread so much propaganda about gold is because gold is the kryptonite of bankers. Gold allows people to preserve their wealth against their fiat currency debasement schemes.
Even if you refuse to acknowledge the indisputable signs that the gold market is, and has been rigged for decades, you only need realize one thing – that despite the best efforts of the US Federal Reserve, the US Treasury and the Bank of England to suppress the price of gold, gold’s long term trend since 2001 when it bottomed at about $250 an ounce, has been up. And if you are astute enough to realize that the gold markets have been, and still are rigged, then observing gold’s rise from $250 an ounce eight years ago to more than $1200 an ounce just a week ago should give you the utmost confidence, that despite the best efforts of bankers to wreck gold’s price, its long-term trend will remain higher for quite some years to come.
source
More of America's largest companies will shrink their staffs than will hire in the next six months, according to a quarterly survey from the Business Roundtable, a group of large-company CEOs released Tuesday.
Nineteen percent of the CEOs expect to expand their work forces, while 31 percent predict a decrease in the next six months, the survey found.
That will mean fierce competition for job openings that do exist. Nearly 6.3 unemployed workers, on average, are vying for each opening, government figures released Tuesday show. When the recession began, only 1.7 jobless workers were competing for each opening.
Initial claims for jobless benefits rose by 17,000 to 474,000 in the week ended Dec. 5. The previous week's level was unrevised at 457,000.
Economists surveyed by Dow Jones Newswires expected an increase of 8,000 initial claims.
Nineteen percent of the CEOs expect to expand their work forces, while 31 percent predict a decrease in the next six months, the survey found.
That will mean fierce competition for job openings that do exist. Nearly 6.3 unemployed workers, on average, are vying for each opening, government figures released Tuesday show. When the recession began, only 1.7 jobless workers were competing for each opening.
Initial claims for jobless benefits rose by 17,000 to 474,000 in the week ended Dec. 5. The previous week's level was unrevised at 457,000.
Economists surveyed by Dow Jones Newswires expected an increase of 8,000 initial claims.
Why Stocks Are Rising
Our economic numbers are growing worse daily. On top of this we have a forthcoming Health Care Plan that will break the back of an already ailing economy. The government is printing more and more money, devaluing the dollar and American's savings along with it.
So why is the stock market going up, when it should be going down?
Printing money causes inflation. More and more dollars chasing a fixed amount of goods and services leads to higher prices. Therefore, if you go through a period of inflation, the worst thing you can own is cash because it becomes worth less. You want to own assets that will protect you against inflation. Gold is one of the simplest and smarted things you can own to protect yourself, and you can bet that those in-the-know are loading up as quickly as possible.
But at the same time, gold is an enemy to the bankster's ability to continue to print money out of thin air, and to keep this confidence game going, they need to prop up the markets to GIVE THE APPREARANCE that everything is okay, and that we are on the road to recovery.
If you can borrow money at prime less 25 or 50 basis points, or essentially for free if you are one of the big U.S. banks that received a bailout, and can put that to work in the market to buy stocks and assets forcing prices up.
This keeps the facade of prosperity alive, the printing presses running and the banksters' pockets bulging. Of course, they know that this is a bubble market built on smoke and mirrors, but you must remember.... it is YOUR money they are investing, not theirs!
How high will this market go? Who knows. But when the bubble bursts, you don't want to be anywhere close to it, and you can bet that the insiders know this and have their personal money in gold.
So why is the stock market going up, when it should be going down?
Printing money causes inflation. More and more dollars chasing a fixed amount of goods and services leads to higher prices. Therefore, if you go through a period of inflation, the worst thing you can own is cash because it becomes worth less. You want to own assets that will protect you against inflation. Gold is one of the simplest and smarted things you can own to protect yourself, and you can bet that those in-the-know are loading up as quickly as possible.
But at the same time, gold is an enemy to the bankster's ability to continue to print money out of thin air, and to keep this confidence game going, they need to prop up the markets to GIVE THE APPREARANCE that everything is okay, and that we are on the road to recovery.
If you can borrow money at prime less 25 or 50 basis points, or essentially for free if you are one of the big U.S. banks that received a bailout, and can put that to work in the market to buy stocks and assets forcing prices up.
This keeps the facade of prosperity alive, the printing presses running and the banksters' pockets bulging. Of course, they know that this is a bubble market built on smoke and mirrors, but you must remember.... it is YOUR money they are investing, not theirs!
How high will this market go? Who knows. But when the bubble bursts, you don't want to be anywhere close to it, and you can bet that the insiders know this and have their personal money in gold.
Rome and the US
I just finished reading a commentary by Doug Casey in which he parallels the similarities between the fall of the Roman Empire and the US. It is hard to deny that history repeats itself.
Rome gave the people bread and circuses once a year (government handouts), so they’d decide you weren’t such bad guys and weren’t worth rebelling against. It was a very profitable enterprise.
The problem came from the fact that as they pushed their borders out, after they looted and pillaged (cheap third world labor), they had to defend those borders (China's new economic prowess).
The Persians were a military power to contend with (Our failing military escapades). This became increasingly, impossibly costly. So the wars were what made Rome great, but were also a big part of its undoing. Both because they helped destroy the essential social fabric of Rome by wiping out its agrarian roots (our manufacturing base) and by corrupting everyone with a constant influx of cheap slave labor and free food (our dependence on cheap oil and labor) – and by actually drawing in potential invaders.
Never doubt that the invaders are here! They are called Republicans and Democrats.
Casey continues:
Lists have been compiled of at least 180 reasons why Rome fell. They range from lead in the pipes and cookware, Christianity, climate change, population decline, to barbarian invasions. And many, many others – many of them closely related, generally centering on political and military devolution. It seems to me that one of the major reasons was basic economics.
The bureaucracy became stifling, the taxes became unbearable, the money was completely debased. Diocletian put on wage and price controls – the first time recorded in the West. People became tied to their land, which became the start of feudalism. Trade came grinding to a halt.
In those days there was very little surplus; the Industrial Revolution wasn’t there to magically make food and material appear. There’s some evidence that many residents of the empire were glad to see the overthrow of a system that made production and saving impossible. The Empire in 400 AD was sociologically, politically, and militarily very different from the one of, say, Marcus Aurelius in around 180, when the decline began in earnest – even though it still had the same borders.
Rome brought some fantastic benefits to the world, and by the time things really came unglued around the year 400, the roads, cities, baths, and aqueducts were everywhere. BUT THE POLITICAL SYSTEM HAD HOLLOWED OUT THE ECONOMIC SYSTEM, and a lot of people were living in buildings they could no longer afford to maintain. Some similarities to modern times come to mind…
Rome gave the people bread and circuses once a year (government handouts), so they’d decide you weren’t such bad guys and weren’t worth rebelling against. It was a very profitable enterprise.
The problem came from the fact that as they pushed their borders out, after they looted and pillaged (cheap third world labor), they had to defend those borders (China's new economic prowess).
The Persians were a military power to contend with (Our failing military escapades). This became increasingly, impossibly costly. So the wars were what made Rome great, but were also a big part of its undoing. Both because they helped destroy the essential social fabric of Rome by wiping out its agrarian roots (our manufacturing base) and by corrupting everyone with a constant influx of cheap slave labor and free food (our dependence on cheap oil and labor) – and by actually drawing in potential invaders.
Never doubt that the invaders are here! They are called Republicans and Democrats.
Casey continues:
Lists have been compiled of at least 180 reasons why Rome fell. They range from lead in the pipes and cookware, Christianity, climate change, population decline, to barbarian invasions. And many, many others – many of them closely related, generally centering on political and military devolution. It seems to me that one of the major reasons was basic economics.
The bureaucracy became stifling, the taxes became unbearable, the money was completely debased. Diocletian put on wage and price controls – the first time recorded in the West. People became tied to their land, which became the start of feudalism. Trade came grinding to a halt.
In those days there was very little surplus; the Industrial Revolution wasn’t there to magically make food and material appear. There’s some evidence that many residents of the empire were glad to see the overthrow of a system that made production and saving impossible. The Empire in 400 AD was sociologically, politically, and militarily very different from the one of, say, Marcus Aurelius in around 180, when the decline began in earnest – even though it still had the same borders.
Rome brought some fantastic benefits to the world, and by the time things really came unglued around the year 400, the roads, cities, baths, and aqueducts were everywhere. BUT THE POLITICAL SYSTEM HAD HOLLOWED OUT THE ECONOMIC SYSTEM, and a lot of people were living in buildings they could no longer afford to maintain. Some similarities to modern times come to mind…
Wall Street Journal Takes Notice of Gold!
The Journal's recent article on gold's rise (link) is another sign that the media is starting to capitulate on its refusal to acknowledge the gold bull market. The article's subtitle was "New Factors Could Make High Prices More Sustainable Now and Limit Falls When They Come." Wow!
As previously noted in my post entitled Welcome To Stage Two Of Gold's Bull Market, we will know when gold is ready to start its next big move upwards when the media and financial markets start to hop on the gold bandwagon. Is this the beginning? Time will tell.
The Journal's recent article on gold's rise (link) is another sign that the media is starting to capitulate on its refusal to acknowledge the gold bull market. The article's subtitle was "New Factors Could Make High Prices More Sustainable Now and Limit Falls When They Come." Wow!
As previously noted in my post entitled Welcome To Stage Two Of Gold's Bull Market, we will know when gold is ready to start its next big move upwards when the media and financial markets start to hop on the gold bandwagon. Is this the beginning? Time will tell.
Healthcare
Rick Ackerman's latest commentary reminds us of the ultimate effects of the proposed health care legislation:
The financial system is no more than one default from unraveling, and it is quite possible that Dubai World will prove to be the catalyst. Less speculative is the prediction that a trillion-dollar health plan piled on top of a U.S. economy verging on depression will be fatal to any hopes of recovery.
Rick Ackerman's latest commentary reminds us of the ultimate effects of the proposed health care legislation:
The financial system is no more than one default from unraveling, and it is quite possible that Dubai World will prove to be the catalyst. Less speculative is the prediction that a trillion-dollar health plan piled on top of a U.S. economy verging on depression will be fatal to any hopes of recovery.
When The Dollar Becomes Worthless
You may have heard of the SPX, XAU, EFTs and a bunch of other derivative/paper types of investments that seems very confusing. Would like to know more about it?
Well.....you've come to the wrong place. (Again, they actually PAY me to do this!)
I don't know much about that kind of stuff, as it is mostly used by traders and speculators to make a quick buck. Since I'm not that smart, I stay away from anything with initials. (Especially the IRS.)
But, I am about to tell you all that you need to know about these things.
Investor A thinks the price of gold is going down. He writes a contract and offers to sell gold to Investor B at $900/ounce. Investor B thinks the price of gold is going up to $1000/ounce, so he buys the contract.
Now A doesn't actually have the gold he is selling, and B doesn't really want to buy the gold. They just each want to make the difference on the price movement.
This is known as a "naked" contract. (no clothes) You are selling something you don't have.(no gold)
So even though A doesn't have any gold, the contract is still enforceable by B to demand delivery of the gold. But this never happens as no one wants the hassle of exchanging physical gold.
Back to our story.
Now if gold goes up from $900 to $1000, Investor B gains $100. Why? Because he theoretically buys the gold from A at $900 and sells it at the current market price of $1000.
Investor A obviously loses $100. He now has to "theoretically" buy gold at $1000 and sell it to B at $900.
It is a paper transaction only. That is the key thing to remember, and billions of dollars of these contracs are outstanding.
So Why Do I Care?
Regarding gold, there are thousands upons thousands more of these little paper "claims" to gold out there in cyberspace than there is "physical" gold. And that is no big deal as long as no one wants to enforce their contract and take delivery of the "physical" gold.
But, what if our "paper" economic system were disrupted? What if foreigners all decided that they no longer wanted to be paid in dollars, but in gold? (This is already happening with our Asian and Arab trading partners and they have hinted that it will escalate.)
Let's face it, everyone in the world knows that the Fed is pumping dollars out as fast as they can print them, so it is only a matter of time before the music stops, everyone else takes a seat, and we are the ones who get kicked out of the game.
Overnight, the dollar could become worthless, or at least deeply devalued. Gold would skyrocket in price. And everyone who has one of these legal contracts that says they can buy gold at $900/ounce will demand their gold.
Problem is....there's not enough of it to go around........at any price, which fuels the cycle and forces gold prices higher and higher.
And if you think that can't happen here, don't forget, that is exactly what happened in pre-WWII Germany.
Europe quit taking Germany's "inflated" paper money and demanded gold in exchange for goods and services. (Germany had their own version of The Fed.) This sparked a massive decline in the value of their currency, and in the end, it took a whole wheel-barrel load of Deutchmarks to buy a loaf of bread.
Germany needed gold and/or other tangible assets, and Hitler rode in on the white horse and saved the day by stealing it from....guess who?.....the Jews.
"And now," as Paul Harvey used to say, "you know the rest of the story."
Conclusion
If you don't own physical gold, you are at risk. At HUGE risk.
I have been in the financial business since 1983 and I can tell you with certainty that this house of cards will fall sooner or later. Hopefully it will be later, but it could be tomorrow.
And when it does, your investments in tangible assets will save you.
So stay away from anything with initials, and people named Adolph.
Well.....you've come to the wrong place. (Again, they actually PAY me to do this!)
I don't know much about that kind of stuff, as it is mostly used by traders and speculators to make a quick buck. Since I'm not that smart, I stay away from anything with initials. (Especially the IRS.)
But, I am about to tell you all that you need to know about these things.
Investor A thinks the price of gold is going down. He writes a contract and offers to sell gold to Investor B at $900/ounce. Investor B thinks the price of gold is going up to $1000/ounce, so he buys the contract.
Now A doesn't actually have the gold he is selling, and B doesn't really want to buy the gold. They just each want to make the difference on the price movement.
This is known as a "naked" contract. (no clothes) You are selling something you don't have.(no gold)
So even though A doesn't have any gold, the contract is still enforceable by B to demand delivery of the gold. But this never happens as no one wants the hassle of exchanging physical gold.
Back to our story.
Now if gold goes up from $900 to $1000, Investor B gains $100. Why? Because he theoretically buys the gold from A at $900 and sells it at the current market price of $1000.
Investor A obviously loses $100. He now has to "theoretically" buy gold at $1000 and sell it to B at $900.
It is a paper transaction only. That is the key thing to remember, and billions of dollars of these contracs are outstanding.
So Why Do I Care?
Regarding gold, there are thousands upons thousands more of these little paper "claims" to gold out there in cyberspace than there is "physical" gold. And that is no big deal as long as no one wants to enforce their contract and take delivery of the "physical" gold.
But, what if our "paper" economic system were disrupted? What if foreigners all decided that they no longer wanted to be paid in dollars, but in gold? (This is already happening with our Asian and Arab trading partners and they have hinted that it will escalate.)
Let's face it, everyone in the world knows that the Fed is pumping dollars out as fast as they can print them, so it is only a matter of time before the music stops, everyone else takes a seat, and we are the ones who get kicked out of the game.
Overnight, the dollar could become worthless, or at least deeply devalued. Gold would skyrocket in price. And everyone who has one of these legal contracts that says they can buy gold at $900/ounce will demand their gold.
Problem is....there's not enough of it to go around........at any price, which fuels the cycle and forces gold prices higher and higher.
And if you think that can't happen here, don't forget, that is exactly what happened in pre-WWII Germany.
Europe quit taking Germany's "inflated" paper money and demanded gold in exchange for goods and services. (Germany had their own version of The Fed.) This sparked a massive decline in the value of their currency, and in the end, it took a whole wheel-barrel load of Deutchmarks to buy a loaf of bread.
Germany needed gold and/or other tangible assets, and Hitler rode in on the white horse and saved the day by stealing it from....guess who?.....the Jews.
"And now," as Paul Harvey used to say, "you know the rest of the story."
Conclusion
If you don't own physical gold, you are at risk. At HUGE risk.
I have been in the financial business since 1983 and I can tell you with certainty that this house of cards will fall sooner or later. Hopefully it will be later, but it could be tomorrow.
And when it does, your investments in tangible assets will save you.
So stay away from anything with initials, and people named Adolph.
Gold British Sovereign
The U.S. military packs these into paratroopers' survival kits when they do missions behind enemy lines because they are acceptable currency anywhere in the world, whereas the U.S. dollar is not.
The sovereign is about a quarter ounce of gold, small enough to use for barter.
What does the US military know that the average US citizen doesn't?
The U.S. military packs these into paratroopers' survival kits when they do missions behind enemy lines because they are acceptable currency anywhere in the world, whereas the U.S. dollar is not.The sovereign is about a quarter ounce of gold, small enough to use for barter.
What does the US military know that the average US citizen doesn't?
A Reminder: Why We Buy Gold
Gold is not an end in itself. It is only a “means” to an end.
One should own gold now as a way to:
1. Preserve their wealth as the value of paper assets fall, or default all together
2. Gain wealth in relation to the holder of paper assets
Once the paper asset bubble has burst, THEN will be the time to move out of gold and back into real estate and other wealth producing assets.
BUT RIGHT NOW, real estate and other traditional investments are in a down cycle that will continue to last for years. Although real estate is down, don’t jump in and buy just yet. Million dollar properties that are selling for half that price now, will eventually be able to be purchased for $100,000 or less. When that day arrives, dump gold, buy real estate/businesses/stocks at pennies on the dollar, and retire rich.
More millionaires were made during the Great Depression than any other time in our nation’s history. That opportunity will present itself again soon.
We buy gold now to protect our wealth from the coming storm, and once its usefullness has finished, we should sell it an move on.
One should own gold now as a way to:
1. Preserve their wealth as the value of paper assets fall, or default all together
2. Gain wealth in relation to the holder of paper assets
Once the paper asset bubble has burst, THEN will be the time to move out of gold and back into real estate and other wealth producing assets.
BUT RIGHT NOW, real estate and other traditional investments are in a down cycle that will continue to last for years. Although real estate is down, don’t jump in and buy just yet. Million dollar properties that are selling for half that price now, will eventually be able to be purchased for $100,000 or less. When that day arrives, dump gold, buy real estate/businesses/stocks at pennies on the dollar, and retire rich.
More millionaires were made during the Great Depression than any other time in our nation’s history. That opportunity will present itself again soon.
We buy gold now to protect our wealth from the coming storm, and once its usefullness has finished, we should sell it an move on.
Look After Yourself!
I like to keep my posts short, but this one is a MUST-READ in its entirety. Pay special attention to items number 4 and 5.
How the government tries to fleece you and what you can do about it
By David Galland, Managing Director, Casey Research
After a relaxing Thanksgiving break, I anticipated to return to work in a lighter frame of mind. However, the following item from FOX News crushed that hope right away:
Lawmakers Propose ‘War Surtax’ to Pay for Troop Increase in Afghanistan
Two top Democrats say they want to impose a new tax on the wealthy to finance any increase in U.S. troops for the Afghanistan war.
Rep. David Obey, D-Wis., chairman of the purse string-controlling House Appropriations Committee, is calling the idea a “war surtax.” He said that just as the federal government is expected to pay for its proposed intervention in the health care sector with new taxes, any escalated involvement in Afghanistan should come with a payment plan.
“If we have to pay for the health care bill, we should pay for the war as well … by having a war surtax,” Obey told ABC News in an interview that aired Monday. “The problem in this country with this issue is that the only people that has to sacrifice are military families and they’ve had to go to the well again and again and again and again, and everybody else is blithely unaffected by the war.”
Readers of my free missive, Casey’s Daily Dispatch, know I’m vehemently opposed to the doomed adventure in Afghanistan. On that front alone, the idea of a war tax is like a shard of glass in my eye.
But it’s even worse than that. It shows just how degraded this country has become – picking the pockets of the productive is now pretty much the only remaining source of funding the administration and its allies can imagine.
Just to be sure we keep this in perspective: At this moment, if you earn more than $250,000 a year (which isn’t what it used to be, given the steady erosion of inflation over the last 30 years), you will pay federal income taxes of about 35%, no estate taxes, and a 15% capital gains tax should the money you put at risk in the market return a profit.
As soon as next year – if the government moves up the expiration of the Bush tax cuts, as I very much expect them to – the top tax bracket will go to 39%. On top of that, the current healthcare legislation will add a 5.4% surcharge. Then, add in the Democrats’ proposed 5% war tax. So straight up we’re talking 49%.
Then there’s a near doubling of capital gains taxes, from 15% to as high as 28%. And, of course, the return of the estate tax.
But that’s just for starters, because everywhere you look states and municipalities are raising taxes and fees, and attorney generals, taking a page out of Caligula’s playbook, are casting about for their next deep-pocketed victim.
At the end of the day, the top tax rate in the U.S., starting as early as next year, will soar way over 50% of income. While further number crunching is required, it is a very safe assumption that top income earners will soon be paying over 65% of their income in taxes.
Which is to say, if you are in a top tax bracket, every penny you earn between January 1 and August 25 will go straight into the coffers of one layer of government or another.
And this while more than 40% of Americans pay no income taxes at all.
This is just another symptom of the single biggest problem now facing the U.S. (and for that matter, the world): the ballooning size and cost of government. And there are no speed bumps in sight.
Even so, endless complaining won’t really do anything other than raise the blood pressure. So, what can we actually do about it? Some ideas:
1. Buy gold. Unless and until there is an angry upwelling of popular discontent at the growing size of government – and it has to be far more substantive than just a few vocal talk radio jocks, or even 100,000 or so people peacefully gathering on the Mall in Washington DC – the government will continue to grow, or even just keep running at current levels, which means the destruction of the dollar. Many tangible assets will do well, but their intrinsic value as money means gold (and silver) will do best.
As I write, gold has again broken to a new, non-inflation-adjusted high. As with all markets, it will fall back now and again, but the trend is very much up.
2. Buy gold shares. The leverage in the high-quality gold shares can boost your returns by a factor of 2X to 10X, and more. Again, there will be setbacks, but shares in the right companies with the right projects will trend higher and higher until the Mania phase kicks in, and then things will get really interesting.
3. Be smart about taxes. Keep an eye on Pelosi’s tax trap – if you have appreciated assets that qualify for long-term capital gains, consider selling them before year-end to lock in the lower capital gains tax. Likewise, if you run a business and you can pull any income into this year, versus next, consider doing so.
4. Diversify globally. Why do it? The short version is that it’s a big world out there, and there are a lot of places that are incredibly beautiful, safe, and unbelievably inexpensive. For many non-U.S. citizens, expatriating means you’ll pay no income tax, but even if you are a U.S. citizen, there are substantial tax benefits in moving offshore. And what you can save in cheaper everyday living allows you to live like royalty, for a fraction of the cost. Which means you can save more.
Personally, I favor Argentina. Some years ago I went on a three-year quest to find paradise on earth, and Argentina was ultimately the hands-down winner.
5. Recognize the bureaucracy for what it is. These are not “public servants” but rather an entrenched interest group that is actively engaged in a systematic effort to look after itself, with no regard for the damage it’s doing to your family finances and to the country.
Now, there are two schools of thought as to how you deal with the bureaucrats. My dear friend and partner, Doug Casey, would tell you to take every opportunity to let the bureaucrats know you hold them in low esteem. For example, by asking airport security personnel how old they were before they realized they wanted to make a career out of pawing through people’s underwear.
The second approach is to accept that the bureaucrats, backed by the voting masses, hold most of the cards at this point. Poking at them with a stick risks unnecessary aggravation and worse. So, keeping a low profile and going about your business is certainly a rational choice.
Of course, there’s no better way of maintaining a low profile than moving to another country where you’ll be welcomed as a visitor and not viewed as a serf.
Is there no hope? One obvious scenario is for the Democrats to lose control of either the House or the Senate come next November’s elections, thereby returning the nation to some form of political gridlock. The best of all worlds, in my view. And the way things are heading, this is now a certainty.
But before you get overly excited about the prospects of a political solution, don’t forget the role the Republicrats have played in bringing the nation to this sorry state over the past several decades. If you’re holding out for an outbreak of capitalism or other signs of fiscal sanity once Republicans regain some modicum of political power, you are delusional. They may package their programs in different-colored paper, but when you rip away the wrappings, you’ll find the same statism and the same promises of a chicken in every pot.
Look after yourself – no one else is going to do it for you.
How the government tries to fleece you and what you can do about it
By David Galland, Managing Director, Casey Research
After a relaxing Thanksgiving break, I anticipated to return to work in a lighter frame of mind. However, the following item from FOX News crushed that hope right away:
Lawmakers Propose ‘War Surtax’ to Pay for Troop Increase in Afghanistan
Two top Democrats say they want to impose a new tax on the wealthy to finance any increase in U.S. troops for the Afghanistan war.
Rep. David Obey, D-Wis., chairman of the purse string-controlling House Appropriations Committee, is calling the idea a “war surtax.” He said that just as the federal government is expected to pay for its proposed intervention in the health care sector with new taxes, any escalated involvement in Afghanistan should come with a payment plan.
“If we have to pay for the health care bill, we should pay for the war as well … by having a war surtax,” Obey told ABC News in an interview that aired Monday. “The problem in this country with this issue is that the only people that has to sacrifice are military families and they’ve had to go to the well again and again and again and again, and everybody else is blithely unaffected by the war.”
Readers of my free missive, Casey’s Daily Dispatch, know I’m vehemently opposed to the doomed adventure in Afghanistan. On that front alone, the idea of a war tax is like a shard of glass in my eye.
But it’s even worse than that. It shows just how degraded this country has become – picking the pockets of the productive is now pretty much the only remaining source of funding the administration and its allies can imagine.
Just to be sure we keep this in perspective: At this moment, if you earn more than $250,000 a year (which isn’t what it used to be, given the steady erosion of inflation over the last 30 years), you will pay federal income taxes of about 35%, no estate taxes, and a 15% capital gains tax should the money you put at risk in the market return a profit.
As soon as next year – if the government moves up the expiration of the Bush tax cuts, as I very much expect them to – the top tax bracket will go to 39%. On top of that, the current healthcare legislation will add a 5.4% surcharge. Then, add in the Democrats’ proposed 5% war tax. So straight up we’re talking 49%.
Then there’s a near doubling of capital gains taxes, from 15% to as high as 28%. And, of course, the return of the estate tax.
But that’s just for starters, because everywhere you look states and municipalities are raising taxes and fees, and attorney generals, taking a page out of Caligula’s playbook, are casting about for their next deep-pocketed victim.
At the end of the day, the top tax rate in the U.S., starting as early as next year, will soar way over 50% of income. While further number crunching is required, it is a very safe assumption that top income earners will soon be paying over 65% of their income in taxes.
Which is to say, if you are in a top tax bracket, every penny you earn between January 1 and August 25 will go straight into the coffers of one layer of government or another.
And this while more than 40% of Americans pay no income taxes at all.
This is just another symptom of the single biggest problem now facing the U.S. (and for that matter, the world): the ballooning size and cost of government. And there are no speed bumps in sight.
Even so, endless complaining won’t really do anything other than raise the blood pressure. So, what can we actually do about it? Some ideas:
1. Buy gold. Unless and until there is an angry upwelling of popular discontent at the growing size of government – and it has to be far more substantive than just a few vocal talk radio jocks, or even 100,000 or so people peacefully gathering on the Mall in Washington DC – the government will continue to grow, or even just keep running at current levels, which means the destruction of the dollar. Many tangible assets will do well, but their intrinsic value as money means gold (and silver) will do best.
As I write, gold has again broken to a new, non-inflation-adjusted high. As with all markets, it will fall back now and again, but the trend is very much up.
2. Buy gold shares. The leverage in the high-quality gold shares can boost your returns by a factor of 2X to 10X, and more. Again, there will be setbacks, but shares in the right companies with the right projects will trend higher and higher until the Mania phase kicks in, and then things will get really interesting.
3. Be smart about taxes. Keep an eye on Pelosi’s tax trap – if you have appreciated assets that qualify for long-term capital gains, consider selling them before year-end to lock in the lower capital gains tax. Likewise, if you run a business and you can pull any income into this year, versus next, consider doing so.
4. Diversify globally. Why do it? The short version is that it’s a big world out there, and there are a lot of places that are incredibly beautiful, safe, and unbelievably inexpensive. For many non-U.S. citizens, expatriating means you’ll pay no income tax, but even if you are a U.S. citizen, there are substantial tax benefits in moving offshore. And what you can save in cheaper everyday living allows you to live like royalty, for a fraction of the cost. Which means you can save more.
Personally, I favor Argentina. Some years ago I went on a three-year quest to find paradise on earth, and Argentina was ultimately the hands-down winner.
5. Recognize the bureaucracy for what it is. These are not “public servants” but rather an entrenched interest group that is actively engaged in a systematic effort to look after itself, with no regard for the damage it’s doing to your family finances and to the country.
Now, there are two schools of thought as to how you deal with the bureaucrats. My dear friend and partner, Doug Casey, would tell you to take every opportunity to let the bureaucrats know you hold them in low esteem. For example, by asking airport security personnel how old they were before they realized they wanted to make a career out of pawing through people’s underwear.
The second approach is to accept that the bureaucrats, backed by the voting masses, hold most of the cards at this point. Poking at them with a stick risks unnecessary aggravation and worse. So, keeping a low profile and going about your business is certainly a rational choice.
Of course, there’s no better way of maintaining a low profile than moving to another country where you’ll be welcomed as a visitor and not viewed as a serf.
Is there no hope? One obvious scenario is for the Democrats to lose control of either the House or the Senate come next November’s elections, thereby returning the nation to some form of political gridlock. The best of all worlds, in my view. And the way things are heading, this is now a certainty.
But before you get overly excited about the prospects of a political solution, don’t forget the role the Republicrats have played in bringing the nation to this sorry state over the past several decades. If you’re holding out for an outbreak of capitalism or other signs of fiscal sanity once Republicans regain some modicum of political power, you are delusional. They may package their programs in different-colored paper, but when you rip away the wrappings, you’ll find the same statism and the same promises of a chicken in every pot.
Look after yourself – no one else is going to do it for you.
Commercial Real Estate Meltdown Coming
Andy Miller is one of the most knowledgeable people around when it comes to commercial real estate. Co-founder of the Miller Fishman Group of Denver, he has spent twenty years buying and developing apartment communities, shopping centers, office buildings, and warehouses throughout the country. He’s also worked extensively – especially lately – with asset managers and special servicers (those who handle commercial mortgage-backed securities, or CMBS) from insurance companies, conduits, and the biggest banks in the U.S., advising them on default scenarios, helping them develop realistic pricing structures, and making hold or sell recommendations.
"It isn’t easy. Commercial real estate sales are off a staggering 82% in 2009, compared with 2008, and last year was worse than ’07. No one is selling at depressed prices, but it hardly matters as there are no buyers, either because they’re afraid of the market or can’t meet more stringent loan requirements. Two years ago, the value of all commercial real estate in the U.S. was about $6.5 trillion. Against that was laid $3-3.5 trillion in loans. The latter figure hasn’t changed much. But the former has sunk like a bar of lead in the lake, so that now between half and two-thirds of those loans will have to be written down," Andy estimates.
“If the banks had to take that hit all at once, there wouldn’t be any banks,” he says.
Andy Miller is one of the most knowledgeable people around when it comes to commercial real estate. Co-founder of the Miller Fishman Group of Denver, he has spent twenty years buying and developing apartment communities, shopping centers, office buildings, and warehouses throughout the country. He’s also worked extensively – especially lately – with asset managers and special servicers (those who handle commercial mortgage-backed securities, or CMBS) from insurance companies, conduits, and the biggest banks in the U.S., advising them on default scenarios, helping them develop realistic pricing structures, and making hold or sell recommendations.
"It isn’t easy. Commercial real estate sales are off a staggering 82% in 2009, compared with 2008, and last year was worse than ’07. No one is selling at depressed prices, but it hardly matters as there are no buyers, either because they’re afraid of the market or can’t meet more stringent loan requirements. Two years ago, the value of all commercial real estate in the U.S. was about $6.5 trillion. Against that was laid $3-3.5 trillion in loans. The latter figure hasn’t changed much. But the former has sunk like a bar of lead in the lake, so that now between half and two-thirds of those loans will have to be written down," Andy estimates.
“If the banks had to take that hit all at once, there wouldn’t be any banks,” he says.
A Buy Signal From God
excerpted from Ed Steer's Gold and Silver Daily
Dec. 2, 2009
The big, and just about the only story in the gold world yesterday, was the news that the Darth Vader of gold companies, Barrick Gold, after 20 years of screwing its shareholders in particular... and the entire gold industry in general... has finally and at last [?] paid out the balance of its hedge book. To tell you the truth, you can never be sure if these guys are telling you the truth or not. I don't trust them as far as I can throw them. If AngloGold Ashanti does the same thing in the next little while, the world's gold hedge book will fall to only a few million ounces... which is basically nothing at all. Hedging is dead, dead, dead!!! Anyway, Barrick's stock price was up a bunch yesterday, so the market certainly liked the news. Here's the Reuters story about it headlined "Barrick closes hedge book early, stock soars"...
And now, dear reader, as I've mentioned before about Barrick and AngloGold Ashanti, the reason that they are both in such a hurry to close their hedge books is because the gold price is heading north... big time... and they already know that. JPMorgan is Barrick's bullion bank... and JPMorgan [as the biggest gold and silver short on the planet] would know well in advance that the price management scheme is about to end and would certainly want Barrick out of harm's way before it did.
excerpted from Ed Steer's Gold and Silver Daily
Dec. 2, 2009
The big, and just about the only story in the gold world yesterday, was the news that the Darth Vader of gold companies, Barrick Gold, after 20 years of screwing its shareholders in particular... and the entire gold industry in general... has finally and at last [?] paid out the balance of its hedge book. To tell you the truth, you can never be sure if these guys are telling you the truth or not. I don't trust them as far as I can throw them. If AngloGold Ashanti does the same thing in the next little while, the world's gold hedge book will fall to only a few million ounces... which is basically nothing at all. Hedging is dead, dead, dead!!! Anyway, Barrick's stock price was up a bunch yesterday, so the market certainly liked the news. Here's the Reuters story about it headlined "Barrick closes hedge book early, stock soars"...
And now, dear reader, as I've mentioned before about Barrick and AngloGold Ashanti, the reason that they are both in such a hurry to close their hedge books is because the gold price is heading north... big time... and they already know that. JPMorgan is Barrick's bullion bank... and JPMorgan [as the biggest gold and silver short on the planet] would know well in advance that the price management scheme is about to end and would certainly want Barrick out of harm's way before it did.
Revolution
This billboard is just off I-70 in Missouri.
This billboard is just off I-70 in Missouri.
I'd change it to read as follows:
1. Starve the beast, buy gold.
2. Forget about politics. Any Christian nation that elects a Muslim president is doomed!
3. Buy guns and ammo cause war IS coming.
Gold, guns, grits and God. Don't leave home without em.
Is Feb. 10 financial doomsday for thousands?
Link
A new government regulation scheduled to take effect next month has thousands of retailers, thrift stores and small businesses worried they will be forced to permanently close their doors – and destroy their merchandise.
The law is expected to have such a devastating impact that Feb. 10 is now unofficially known as "National Bankruptcy Day."
Congress passed the Consumer Product Safety Improvement Act of 2008, or HR 4040, a retroactive rule mandating that all items sold for use by children under 12 must be tested by an independent party for lead and phthalates, which are chemicals used to make plastics more pliable.
All untested items, regardless of lead content, are to be declared "banned hazardous products.'' The CPSC has already determined the law applies to every children's item on shelves, not just to items made beginning Feb. 10.
The regulations could force thousands of businesses – especially smaller ones that cannot afford the cost of lead testing – to throw away truckloads of children's clothing, books, toys, furniture and other children's items and even force them to close their doors.
Valerie Jacobsen and her husband, Paul, support their family of 13 by selling literature at Jacobsen Books in Clinton, Wis. Her family has contracts with local libraries to buy and sell overstocked books – an arrangement that draws income for both parties.
However, Jacobsen told WND that lead testing is estimated to cost $100 to $400 for each of her used children's books because she does not buy in bulk, and each batch of merchandise is required to be tested.
"There's a big difference between me and Wal-Mart or Toys 'R' Us," she said. "They'll have a batch of 50,000. Everything I have is a batch of one because I don't know its history. I'm looking at a testing cost of about $1.2 million. I would normally sell my full inventory of all children's products for probably $15,000. So, it's effectively a ban."
The Consumer Product Safety Commission states that lead testing requirements apply to children's books, cassettes and CDs, printed game boards, posters and other printed goods used for children's education. While it does claim some printing inks will be exempt, paper, cardboard, bindings, glues, laminates and other inks are still subject to regulation and require testing.
Jacobsen said that unless the new law is repealed or substantially modified, it could devastate her family business.
Jacobsen said she often shops at second-hand stores for her 11 children because she can buy quality clothing at low prices.
"Over the years I have always tried to make the most of our money, so we'll go to Goodwill," she said. "To be honest, I'd rather go to Goodwill and get a brand-name item that's hardly been worn and pay $3.99 for it than to go to Wal-Mart and pay $13.99 for something that in six weeks from now is not going to worth anything."
But now some thrift and consignment stores are in a panic over the new regulation because it extends to children's clothing, shoes and other items as well.
While some may continue to sell their children's products and disobey the law, Jacobsen told WND she's not taking any chances at her bookstore.
"Would I ever get caught? Probably not," she said. "But they are talking about $100,000 fines and jail terms of up to five years. I'm not comfortable operating with that law on the books."
Rep. Bobby Rush, D-Il., sponsored the measure along with 106 co-sponsors. In the House of Representatives, 424 members voted for the act, nine voted "present" and a single member voted against it – Rep. Ron Paul, R-Texas.
In the Senate, the totals were 89 for, eight "present" and three against – Sens. Tom Coburn, R-Okla., Jim DeMint, R-S.C., and Jon Kyl, R-Ariz.
President George Bush signed it into law on Aug. 14, 2008.
A new government regulation scheduled to take effect next month has thousands of retailers, thrift stores and small businesses worried they will be forced to permanently close their doors – and destroy their merchandise.
The law is expected to have such a devastating impact that Feb. 10 is now unofficially known as "National Bankruptcy Day."
Congress passed the Consumer Product Safety Improvement Act of 2008, or HR 4040, a retroactive rule mandating that all items sold for use by children under 12 must be tested by an independent party for lead and phthalates, which are chemicals used to make plastics more pliable.
All untested items, regardless of lead content, are to be declared "banned hazardous products.'' The CPSC has already determined the law applies to every children's item on shelves, not just to items made beginning Feb. 10.
The regulations could force thousands of businesses – especially smaller ones that cannot afford the cost of lead testing – to throw away truckloads of children's clothing, books, toys, furniture and other children's items and even force them to close their doors.
Valerie Jacobsen and her husband, Paul, support their family of 13 by selling literature at Jacobsen Books in Clinton, Wis. Her family has contracts with local libraries to buy and sell overstocked books – an arrangement that draws income for both parties.
However, Jacobsen told WND that lead testing is estimated to cost $100 to $400 for each of her used children's books because she does not buy in bulk, and each batch of merchandise is required to be tested.
"There's a big difference between me and Wal-Mart or Toys 'R' Us," she said. "They'll have a batch of 50,000. Everything I have is a batch of one because I don't know its history. I'm looking at a testing cost of about $1.2 million. I would normally sell my full inventory of all children's products for probably $15,000. So, it's effectively a ban."
The Consumer Product Safety Commission states that lead testing requirements apply to children's books, cassettes and CDs, printed game boards, posters and other printed goods used for children's education. While it does claim some printing inks will be exempt, paper, cardboard, bindings, glues, laminates and other inks are still subject to regulation and require testing.
Jacobsen said that unless the new law is repealed or substantially modified, it could devastate her family business.
Jacobsen said she often shops at second-hand stores for her 11 children because she can buy quality clothing at low prices.
"Over the years I have always tried to make the most of our money, so we'll go to Goodwill," she said. "To be honest, I'd rather go to Goodwill and get a brand-name item that's hardly been worn and pay $3.99 for it than to go to Wal-Mart and pay $13.99 for something that in six weeks from now is not going to worth anything."
But now some thrift and consignment stores are in a panic over the new regulation because it extends to children's clothing, shoes and other items as well.
While some may continue to sell their children's products and disobey the law, Jacobsen told WND she's not taking any chances at her bookstore.
"Would I ever get caught? Probably not," she said. "But they are talking about $100,000 fines and jail terms of up to five years. I'm not comfortable operating with that law on the books."
Rep. Bobby Rush, D-Il., sponsored the measure along with 106 co-sponsors. In the House of Representatives, 424 members voted for the act, nine voted "present" and a single member voted against it – Rep. Ron Paul, R-Texas.
In the Senate, the totals were 89 for, eight "present" and three against – Sens. Tom Coburn, R-Okla., Jim DeMint, R-S.C., and Jon Kyl, R-Ariz.
President George Bush signed it into law on Aug. 14, 2008.
Gold's 'Money' Value is $4,000 to $11,000: Market Strategist
Published: Thursday, 19 Nov 2009
CNBC News Associate
Federal Reserve officials on Thursday downplayed the consequences of the falling U.S. dollar, pounting to deflation as a lingering threat. The dollar has fallen 7 percent so far this year and likely has become a funding vehicle for bets on higher-yielding currencies in growing emerging markets. So how should investors guard their portfolios? Jim Rickards, senior managing director of market intelligence at Omnis, shared his insights.
“[The Fed is saying] we’re nowhere near the all-time lows, we’re back to where we were 15 to 18 months ago…So they look at that and say we’ve been there before,” Rickards told CNBC.
“My only view is that it’s a much more unstable and dangerous world: In the '80s, our creditors were Japan, Europe and the [Arab states]—and the three of them were utterly dependent on the U.S. for their national security.”
China is now the U.S.' main creditor and they don’t depend on America for national security, said Rickards. So the U.S. "doesn’t have a lever" to keep China "in line" economically or force Beijing to buy Treasury securities.
Rickards cautioned investors to stay out of the currency trade, as Fed Chairman Ben Bernanke is selling the U.S. dollar and China is selling its yuan. Instead, he advised investors to buy gold.
“Gold is not moving on a monetary vector, it’s moving on supply/demand fundamentals,” he said.
“Very few people think of gold as money. If you think of gold as money, that level is a range between $4,000 and $11,000 an ounce—that’s the price gold will have to be to support the money supply.”
“I’m a deflationary hard-dollar guy but if you’re an inflationist, if you really want to inflate the dollar, have the Fed conduct open market operations in gold and you’ll be a buyer in the gold. Gold will find its level at $4,000—and that’s a 75 percent devaluation of the dollar,” he said.
Rickards said he’s been bullish on gold for a while and said he sees gold rising to $2,000 an ounce “without breaking a sweat” in 2010. “That’s on fundamentals without treating it as money,” he added.
Published: Thursday, 19 Nov 2009
CNBC News Associate
Federal Reserve officials on Thursday downplayed the consequences of the falling U.S. dollar, pounting to deflation as a lingering threat. The dollar has fallen 7 percent so far this year and likely has become a funding vehicle for bets on higher-yielding currencies in growing emerging markets. So how should investors guard their portfolios? Jim Rickards, senior managing director of market intelligence at Omnis, shared his insights.
“[The Fed is saying] we’re nowhere near the all-time lows, we’re back to where we were 15 to 18 months ago…So they look at that and say we’ve been there before,” Rickards told CNBC.
“My only view is that it’s a much more unstable and dangerous world: In the '80s, our creditors were Japan, Europe and the [Arab states]—and the three of them were utterly dependent on the U.S. for their national security.”
China is now the U.S.' main creditor and they don’t depend on America for national security, said Rickards. So the U.S. "doesn’t have a lever" to keep China "in line" economically or force Beijing to buy Treasury securities.
Rickards cautioned investors to stay out of the currency trade, as Fed Chairman Ben Bernanke is selling the U.S. dollar and China is selling its yuan. Instead, he advised investors to buy gold.
“Gold is not moving on a monetary vector, it’s moving on supply/demand fundamentals,” he said.
“Very few people think of gold as money. If you think of gold as money, that level is a range between $4,000 and $11,000 an ounce—that’s the price gold will have to be to support the money supply.”
“I’m a deflationary hard-dollar guy but if you’re an inflationist, if you really want to inflate the dollar, have the Fed conduct open market operations in gold and you’ll be a buyer in the gold. Gold will find its level at $4,000—and that’s a 75 percent devaluation of the dollar,” he said.
Rickards said he’s been bullish on gold for a while and said he sees gold rising to $2,000 an ounce “without breaking a sweat” in 2010. “That’s on fundamentals without treating it as money,” he added.
Dow To Gold
Take a look at the chart below. In 1999 it took 45 ounces of gold to buy one share of the stock market (DJIA). Today you can buy it for 10, even in spite of the Dow's little bear market rally we are seeing right now.
As I have said over and over.... quit adding to your retirement plans that give you nothing to choose from but paper investments, and start buying gold.
CLICK CHART TO ENLARGE
As I have said over and over.... quit adding to your retirement plans that give you nothing to choose from but paper investments, and start buying gold.
CLICK CHART TO ENLARGE
Rosenberg: Gold Going To $2600 Thanks To China
It’s not just the middle-class in China that is starting to buy gold, but the central bank, which has very deep pockets, is going to do likewise. We just came across a Bloomberg News article quoting an official from the state-owned Assets Supervision and Administration Commission (Ji Xiaonan, the Chief) as saying “we recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years.” China’s reserves, after a 76% buildup since 2003, currently stand at 1,054 tons, so we are talking here about the prospect of some pretty heaving buying in coming years.
If China were to lift their gold reserves to 5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our models. If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park.
It’s not just the middle-class in China that is starting to buy gold, but the central bank, which has very deep pockets, is going to do likewise. We just came across a Bloomberg News article quoting an official from the state-owned Assets Supervision and Administration Commission (Ji Xiaonan, the Chief) as saying “we recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years.” China’s reserves, after a 76% buildup since 2003, currently stand at 1,054 tons, so we are talking here about the prospect of some pretty heaving buying in coming years.
If China were to lift their gold reserves to 5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our models. If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park.
WWJD? He'd Buy Gold
Buying Gold Creates Good
Buying gold is being obedient to the command to use "honest weights and measures", as in Leviticus 19:35, Deuteronomy 25:15, Proverbs 20:10.
Buying gold reduces monetary fraud, and fraud is bad.
Buying gold increases freedom among men, specifically by reducing the debt load of people who owe devaluing paper money, which increases humanity's overall productivity, and especially inspires and enhances freedom for yourself.
Buying gold increases wealth among savers and long term planners, which are the best and most productive class of men among humanity.
Buying gold saves lives by preventing and limiting wars which can only be funded by paper money. Nations that enslave one another with tribute are more likely to go to war for freedom. Nations that deceive one another, or take advantage of one another through paper money are more likely to go to war.
Buying gold creates harmony and peace among nations as it provides as an honest medium of exchange between nations, and nations engaged in active trade with each other generally don't war on each other.
Buying gold reduces oppressive government power, and it does so without any violence.
Buying gold preserves capital in your own hands, your own town, your own nation, so that you, and the people to whom you will give it when you spend it, will all be better off after a currency collapse.
Buying gold can prevent mass starvation that can result from a complete economic meltdown that may come. The preservation of capital can be used to purchase and preserve farms or food production facilities or distribution networks that may go out of business in an economic collapse.
A nation that uses gold as money has price stability, which allows better longer term planning for all kinds of business projects.
Buying gold allows a man to provide for his immediate and extended family, and children's children.
1 Timothy 5:8 If anyone does not provide for his relatives, and especially for his immediate family, he has denied the faith and is worse than an unbeliever.
Proverbs 13:22 If you obey God, you will have something to leave your grandchildren. If you don't obey God, those who live right will get what you leave.
Buying gold prevents others from stealing your wealth, and that is a good thing, as it rewards defenders, and thwarts (but does not harm) would-be thieves.
Buying gold can lengthen your own life, as it benefits your own personal finances which can enhance the quality of food that you can buy and eat, and it can enhance your notion of personal responsibility for your own health as well as your own finances.
Deuteronomy 25:15 If you weigh and measure things honestly, the LORD your God will let you enjoy a long life in the land he is giving you.
Buying gold inspires a person to take greater responsibility for one's own self, ranging from health to self defense.
Buying gold gives one an increase in discernment, as one realizes that most mass media is a form of propaganda and lies.
Buying gold frees one from the need to pay financial advisors for bad advice.
Buying gold reduces the inclination to gamble.
Buying gold increases a person's sense of esteem and control and safety in a world gone mad with paper money.
Buying gold as an investment helps people to understand what money is supposed to be, and why paper money is fraud.
Buying gold helps one to learn how to become an honest person.
Buying gold helps one to save money, as savings in the form of gold is not as likely to be cashed in for whimsical purchases.
Buying gold allows one to be able to be more secure with one's own finances, and thus allows one to more easily give to charities.
Buying gold is the ultimate manifestation of "delayed gratification" since gold is a pure luxury item, yet you can do nothing with it. It thus satifies none of the lusts of the flesh, but represents that you have NOT bought anything, since it is savings. Psychologists have identified that one of the most important character qualities to develop that marks the difference between success and failure in life is the ability to delay gratification. Delayed gratification requires self control. One of the fruits of the Holy Spirit is self control. Buying gold is thus the ultimate manifestation of fulfilling the desires of the Holy Spirit. No wonder God tells us directly to "buy gold refined in the fire", in Rev 3:18.
Buying gold is being obedient to the command to use "honest weights and measures", as in Leviticus 19:35, Deuteronomy 25:15, Proverbs 20:10.
Buying gold reduces monetary fraud, and fraud is bad.
Buying gold increases freedom among men, specifically by reducing the debt load of people who owe devaluing paper money, which increases humanity's overall productivity, and especially inspires and enhances freedom for yourself.
Buying gold increases wealth among savers and long term planners, which are the best and most productive class of men among humanity.
Buying gold saves lives by preventing and limiting wars which can only be funded by paper money. Nations that enslave one another with tribute are more likely to go to war for freedom. Nations that deceive one another, or take advantage of one another through paper money are more likely to go to war.
Buying gold creates harmony and peace among nations as it provides as an honest medium of exchange between nations, and nations engaged in active trade with each other generally don't war on each other.
Buying gold reduces oppressive government power, and it does so without any violence.
Buying gold preserves capital in your own hands, your own town, your own nation, so that you, and the people to whom you will give it when you spend it, will all be better off after a currency collapse.
Buying gold can prevent mass starvation that can result from a complete economic meltdown that may come. The preservation of capital can be used to purchase and preserve farms or food production facilities or distribution networks that may go out of business in an economic collapse.
A nation that uses gold as money has price stability, which allows better longer term planning for all kinds of business projects.
Buying gold allows a man to provide for his immediate and extended family, and children's children.
1 Timothy 5:8 If anyone does not provide for his relatives, and especially for his immediate family, he has denied the faith and is worse than an unbeliever.
Proverbs 13:22 If you obey God, you will have something to leave your grandchildren. If you don't obey God, those who live right will get what you leave.
Buying gold prevents others from stealing your wealth, and that is a good thing, as it rewards defenders, and thwarts (but does not harm) would-be thieves.
Buying gold can lengthen your own life, as it benefits your own personal finances which can enhance the quality of food that you can buy and eat, and it can enhance your notion of personal responsibility for your own health as well as your own finances.
Deuteronomy 25:15 If you weigh and measure things honestly, the LORD your God will let you enjoy a long life in the land he is giving you.
Buying gold inspires a person to take greater responsibility for one's own self, ranging from health to self defense.
Buying gold gives one an increase in discernment, as one realizes that most mass media is a form of propaganda and lies.
Buying gold frees one from the need to pay financial advisors for bad advice.
Buying gold reduces the inclination to gamble.
Buying gold increases a person's sense of esteem and control and safety in a world gone mad with paper money.
Buying gold as an investment helps people to understand what money is supposed to be, and why paper money is fraud.
Buying gold helps one to learn how to become an honest person.
Buying gold helps one to save money, as savings in the form of gold is not as likely to be cashed in for whimsical purchases.
Buying gold allows one to be able to be more secure with one's own finances, and thus allows one to more easily give to charities.
Buying gold is the ultimate manifestation of "delayed gratification" since gold is a pure luxury item, yet you can do nothing with it. It thus satifies none of the lusts of the flesh, but represents that you have NOT bought anything, since it is savings. Psychologists have identified that one of the most important character qualities to develop that marks the difference between success and failure in life is the ability to delay gratification. Delayed gratification requires self control. One of the fruits of the Holy Spirit is self control. Buying gold is thus the ultimate manifestation of fulfilling the desires of the Holy Spirit. No wonder God tells us directly to "buy gold refined in the fire", in Rev 3:18.
excerpt from Big Players Get Physical With Gold
Despite the trials Western economies have already experienced, worse economic times still lie ahead. The current administration appears unable to accept the pain of deleveraging and has instead set upon a course of limitless public-sector spending, financed by increased taxation, deficits, and the covert debasement of the U.S. dollar. Obama's acolytes haven't acknowledged the threat that their policies could cause the dollar to lose its privileged position as the world's reserve currency, which would devastate the relative value of the U.S. dollar and many paper investments denominated in dollars, including Treasuries. Indeed, it would likely trigger a second financial collapse, this time with accompanying hyperinflation.
To protect their wealth from inflation and financial panic, big players like hedge funds, sovereign wealth funds, and central banks are turning not just to gold, but to physical gold.
Many investors are demanding and prepared to pay for physical delivery. This indicates an intention to remain invested for a significant period of time, removing considerable selling pressure from the market. More concerning, the willingness to finance physical delivery and storage indicates a fundamental decline in the credibility of paper contracts.
Despite the trials Western economies have already experienced, worse economic times still lie ahead. The current administration appears unable to accept the pain of deleveraging and has instead set upon a course of limitless public-sector spending, financed by increased taxation, deficits, and the covert debasement of the U.S. dollar. Obama's acolytes haven't acknowledged the threat that their policies could cause the dollar to lose its privileged position as the world's reserve currency, which would devastate the relative value of the U.S. dollar and many paper investments denominated in dollars, including Treasuries. Indeed, it would likely trigger a second financial collapse, this time with accompanying hyperinflation.
To protect their wealth from inflation and financial panic, big players like hedge funds, sovereign wealth funds, and central banks are turning not just to gold, but to physical gold.
Many investors are demanding and prepared to pay for physical delivery. This indicates an intention to remain invested for a significant period of time, removing considerable selling pressure from the market. More concerning, the willingness to finance physical delivery and storage indicates a fundamental decline in the credibility of paper contracts.
Gold's Stress Test
by Rick Ackerman
Gold’s spectacular swoon on Friday provided fresh evidence that a red-hot bull market is in no imminent danger of cooling off. The initial plunge was orchestrated by bullion bankers and other promiscuous borrowers of gold when some unsettling financial news out of Dubai triggered a misbegotten panic into, of all things, dollars.
Smelling blood, gold shorts pulled their bids when it looked as though the dollar was about to soar. Alas, the buck barely got off the launching pad before gravity re-asserted itself with a vengeance. The rally was so short-lived and feeble that it will have significantly diminished the dollar’s bizarre status as a “safe haven.” That in turn will make it harder in the future for the central banks of Europe, Japan and the U.S. to kick off an inevitable dollar-support operation with some “news” annnouncement designed to promote a short squeeze.
Conversely, gold’s powerful, market-driven surge will now be even more difficult for officialdom to suppress, since Friday’s rebound was so swift and steep as to purge all doubts that bulls are overwhelmingly in charge.
Gold’s spectacular swoon on Friday provided fresh evidence that a red-hot bull market is in no imminent danger of cooling off. The initial plunge was orchestrated by bullion bankers and other promiscuous borrowers of gold when some unsettling financial news out of Dubai triggered a misbegotten panic into, of all things, dollars.
Smelling blood, gold shorts pulled their bids when it looked as though the dollar was about to soar. Alas, the buck barely got off the launching pad before gravity re-asserted itself with a vengeance. The rally was so short-lived and feeble that it will have significantly diminished the dollar’s bizarre status as a “safe haven.” That in turn will make it harder in the future for the central banks of Europe, Japan and the U.S. to kick off an inevitable dollar-support operation with some “news” annnouncement designed to promote a short squeeze.
Conversely, gold’s powerful, market-driven surge will now be even more difficult for officialdom to suppress, since Friday’s rebound was so swift and steep as to purge all doubts that bulls are overwhelmingly in charge.
A Two-Headed, One-Party Nation
If you have been reading my postings for any length of time now, you should know that I am an equal opportunity hater. Republicans and Democrats alike are the source of our problems, while they stand there pointing the finger at each other. The truth is that we live in a one-party nation. But to keep the public thinking they actually have a choice, that one-party system has two heads. One is called Republicans and the other we know as the Democrats.
Therefore it gives me great pleasure to pass on this snippet from a piece from Peter Morici of the Baltimore Sun, as he seems to be one of the few who understand this truth as well.
President George W. Bush and President Obama gave in to Wall Street and abused the TARP to bail out General Motors and Chrysler. The Federal Reserve bailed out Wall Street banks with trillions in cheap credit they used to make trades, not new loans, to earn big profits to cover losses on their failed mortgages. Main Street banks were left to fester, and now more than 120 regional banks have failed.
Small businesses lack customers and won't hire because subsidized Chinese products still stuff the shelves at Wal-Mart, and community banks lack funds to lend to worthy enterprises.
Bush and Obama..... Pete and rePete. Don't be fooled by the rhetoric. Look at what they do, not what they say, and you may find out (when you open your eyes) they each have a hand in your pockets as they lie to your face and sell us down the globalist river.
Like I said, I am an equal opportunity hater.
Therefore it gives me great pleasure to pass on this snippet from a piece from Peter Morici of the Baltimore Sun, as he seems to be one of the few who understand this truth as well.
President George W. Bush and President Obama gave in to Wall Street and abused the TARP to bail out General Motors and Chrysler. The Federal Reserve bailed out Wall Street banks with trillions in cheap credit they used to make trades, not new loans, to earn big profits to cover losses on their failed mortgages. Main Street banks were left to fester, and now more than 120 regional banks have failed.
Small businesses lack customers and won't hire because subsidized Chinese products still stuff the shelves at Wal-Mart, and community banks lack funds to lend to worthy enterprises.
Bush and Obama..... Pete and rePete. Don't be fooled by the rhetoric. Look at what they do, not what they say, and you may find out (when you open your eyes) they each have a hand in your pockets as they lie to your face and sell us down the globalist river.
Like I said, I am an equal opportunity hater.
NEW YORK, Nov 25 (Reuters) - The U.S. Mint said on Wednesday it will suspend sales of the popular American Eagle 1-ounce bullion coins as rising demand depleted its inventory.
"The United States Mint has depleted its current inventory of 2009 American Eagle 1-ounce gold bullion coins due to the continued strong demand for this product," the Mint told its authorized dealers in a memorandum on Wednesday.
Ed Steer, in his daily commentary, had this insight on the above news.
"The U.S. Mint has advised its dealer network that, until further notice, there will be no more one ounce gold eagles forthcoming. Let's see how long this delivery problem lasts. Because of Christmas, December is normally a big sales month for the Mint. They may have the sales, but they don't have the product. And, on another related note, there are some rumours out there that the South African Krugerrand is in short supply as well. Will silver eagles be next?"
"The United States Mint has depleted its current inventory of 2009 American Eagle 1-ounce gold bullion coins due to the continued strong demand for this product," the Mint told its authorized dealers in a memorandum on Wednesday.
Ed Steer, in his daily commentary, had this insight on the above news.
"The U.S. Mint has advised its dealer network that, until further notice, there will be no more one ounce gold eagles forthcoming. Let's see how long this delivery problem lasts. Because of Christmas, December is normally a big sales month for the Mint. They may have the sales, but they don't have the product. And, on another related note, there are some rumours out there that the South African Krugerrand is in short supply as well. Will silver eagles be next?"
Why Your FDIC Bank Could Fail
Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money.
If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.
The U.S. government’s Federal Deposit Insurance Corporation guarantees to refund depositors’ losses up to $100,000, which seems to make safety a moot point. Actually, this guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise.
This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs. If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is. Source
If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.
The U.S. government’s Federal Deposit Insurance Corporation guarantees to refund depositors’ losses up to $100,000, which seems to make safety a moot point. Actually, this guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise.
This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs. If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is. Source
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