Ruble Drops to Pre-1998 Crisis Low on 6th Devaluation This Year

Ruble Drops to Pre-1998 Crisis Low on 6th Devaluation This Year

By Emma O’Brien

Jan. 19 (Bloomberg) -- The ruble fell below the weakest level seen in the 1998 Russian crisis after the central bank devalued for the sixth time in seven days to protect reserves.

The currency slid to as little as 33.0455 per dollar today, the lowest since early 1998, before the government defaulted on $40 billion of debt. The ruble has lost 7.3 percent since official trading resumed this year, extending the decline to 29 percent since August.

Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to avoid “sharp” currency swings, after the 71 percent decline against the dollar in 1998 caused investors to flee and savers to pull bank deposits. Investors have withdrawn $245 billion from Russia since August as a 69 percent drop in oil, Russia’s war with Georgia and the disruption to gas exports exacerbated the effect of the global financial crisis, according to BNP Paribas SA data.

“Fear of another devaluation means nobody wants to buy rubles right now,” said Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S, which rates itself among the five biggest traders of ruble in the world through Finnish subsidiary Sampo Bank Plc. “The ruble has begun to look more and more overvalued because of the fall in the oil price.”

Russia’s reserves, the world’s third-largest, have dropped by $171.6 billion to $426.5 billion since August, as policy makers sold currency.

The ruble weakened 1.4 percent to 37.8179 against the basket by 1:29 p.m. in Moscow, extending this year’s drop to 6.8 percent.

Lowered Forecast

Danske lowered its forecast for the ruble today, seeing a further 15 percent depreciation versus the basket to 44.45 in three months, down from a prediction of 38.6 in December.

The quickened pace of devaluations is encouraging investors to place so-called short positions on the ruble-basket rate, Rasmussen said. A short is a wager a security is going to decline.

Non-deliverable forwards predict an 11 percent decline in the ruble to 36.93 per dollar in the next three months. NDFs fix a currency at a particular level at a future date and are used by companies to protect against foreign-exchange fluctuations.

Bank Rossii, which manages the currency against a basket of about 55 percent dollars and the rest euros, widened its target range today, a bank official said. The currency has fallen 29 percent versus the basket since Aug. 1.

The ruble fell to 43.8880 per euro, the lowest since the common currency’s introduction in 1999, and is down 6.1 percent this year.

Crude Prices

Urals crude, Russia’s main export blend, has declined 69 percent to $44.43 a barrel from a record in July, below the $70 a barrel needed to balance the budget this year.

Russia’s MosPrime rate, the average interest rate banks charge to lend money to each other, rose to a two-month high of 12.5 percent today, according to the central bank.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

Last Updated: January 19, 2009 05:39 EST

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Zimbabwe to launch Z100 trillion dollar note

Zimbabwe to launch Z100 trillion dollar note

Nelson Banya
Reuters North American News Service

Jan 16, 2009 13:51 EST

HARARE, Jan 16 (Reuters) - Zimbabwe's central bank will issue a 100 trillion Zimbabwe dollar banknote, worth about $33 on the black market, to try to ease desperate cash shortages, state-run media said on Friday.

Prices are doubling every day and food and fuel are in short supply. A cholera epidemic has killed more than 2,000 people and a deadlock between President Robert Mugabe and the opposition over power sharing has dampened hopes of ending the crisis.

Hyper-inflation has forced the central bank to keep issuing new banknotes which quickly become almost worthless. There is an official exchange rate, but most Zimbabweans resort to the informal market for currency transactions.

As well as the Z$100 trillion dollar note, the Reserve Bank of Zimbabwe plans to launch Z$10 trillion, Z$20 trillion and Z$50 trillion notes, the Herald newspaper reported.

"... the Reserve Bank of Zimbabwe has introduced a new family of banknotes which will gradually come into circulation, starting with the Z$10 trillion," the Herald said, citing a central bank statement.

Previous banknote issues have done little to ease the plight of Zimbabweans who often line up for hours outside banks to withdraw barely enough to buy a loaf of bread.

Critics blame the economic meltdown on government mismanagement, including the seizure and redistribution of thousands of white-owned farms. The once-thriving farm sector has fallen into ruin.

Mugabe, 84, in power since independence from Britain in 1980, says Western sanctions are the main cause of the economic crisis and worsening humanitarian situation.

A worsening cholera epidemic has piled pressure on politicians to bury their differences and try to ease the suffering of millions. The disease has killed 2,225 people out of 42,675 cases, U.N. figures show.

Political analysts say the establishment of a unity government between Mugabe's ZANU-PF party and the opposition Movement for Democratic Change (MDC) is the best hope of reversing the economic slide and the humanitarian crisis.

But power-sharing talks are deadlocked over the control of key ministries. Tsvangirai accuses Mugabe of trying to assign the MDC a junior role and has demanded the release of detained opposition members and activists.

Detainees include rights campaigner Jestina Mukoko, accused with others of plotting to topple Mugabe. A court gave her permission on Friday to ask the Constitutional Court to release her.

In neighbouring South Africa, European and South African ministers called on the Zimbabwean parties to implement their agreement.

"Ministers expressed grave concern at the ongoing violence and abductions and recognised that a political solution to Zimbabwe's problems is critical to bringing an end to this cycle," they said in a statement.

The presidents of South Africa and Mozambique meet Zimbabwean political parties on Monday in a new push to break the impasse.

Source: Reuters North American News Service

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How to “Inflation Proof” your earnings

How to “Inflation Proof” your earnings

[The following has not been verified with a tax professional and is offered for informational purposes only. Use this information at your own risk and seek competent, professional advice for your own personal situation.]

With the prospect of high inflation on the horizon it is now more important than ever to protect your assets and your earnings.

Here is a unique way that you can do this:

Simply ask your employer to pay you in One Dollar Silver American Eagles or Fifty Dollar Gold American Eagles instead of paper dollars. These coins are legal tender and are fully acceptable in commerce.

Example: Let's say you currently earn $2,000 per month from your job. The current price of a One Dollar Silver American Eagle is approximately $16 (as of 12/27/08). Divide $16 into $2,000 and you get 125 X One Dollar Silver Eagles. This is what you would ask your employer to pay you: $125 per month in the form of One Dollar Silver Eagles!

Now here is where it gets interesting...Your monthly earnings are now only $125! Suggest to your employer that your new withholdings be based upon $125 instead of the $2,000! Could it be that you can now claim only $125 per month in income and get a reduction in your income tax liability?

If you cash in these Silver Eagles for paper dollars then you could have a capital gain and be subject to additional tax. But what if you offered to pay your expenses with One Dollar Silver Eagles instead of paper dollars? When buying a $16 (paper dollar) item why not offer a One Dollar Silver Eagle instead? If they accept it, ask them to give you a receipt for “One Dollar”.

How can you make it easy for your employer to pay you this way? They certainly do not want to run around scouring coin shops to buy Silver Eagles and then try to deal with the transport, storage and security before they pay you. There is a better way. Each pay period simply have your employer order from an online coin dealer and have the coins drop-shipped to your doorstep. No hassles.

For your employer, might it be presumed that they bought the assets (silver dollars) for $16 each and then traded them to you for $1 resulting in a $15 loss on their books?

Now what if you own your own business? The same concept can apply and it is probably easier. Price your products and services in One Dollar Silver Eagles and have your customers pay you via the drop-ship method as well. Also, why not go ahead and pay your employees the same way? They may work a little harder and stick around a little longer knowing that you are looking out for their best interests!

Of course this is all easier said than done but I hope I have given you ideas on how you can protect the purchasing power of your earnings.

If all else fails, take your regular pay and buy silver and gold. When you see the price of these metals rising start asking for pay raises (if employed) or raise your prices (if you own your own business).

To your success!
The Bullion Insider

Watch that printing press

Mr. Kellner contemplates where the next bubble will form. In other words, where will all this money flow to? We believe a large portion of it will flow to gold & silver.

Watch that printing press

Commentary: Money supply will soar once banks loosen purse strings

By Irwin Kellner, MarketWatch
Last update: 12:01 a.m. EST Dec. 23, 2008

PORT WASHINGTON, N.Y. (MarketWatch) -- As 2008 draws to a close, one of our chief concerns is deflation. A year from now, the nation's No. 1 problem might well be inflation.
Last week's statement by the Federal Reserve indicated that, when it comes to interest-rate cuts, the central bank has gone about as far as it can go.

The Fed acknowledged that the actual federal funds rate was well below its target because it has injected massive amounts of liquidity into the economy. So it made this rate its new target, and said that it would concentrate instead on pumping gobs of money into the system.

Not that the central bank has been exactly resting on its oars.

On the contrary, according to the Federal Reserve Bank of St. Louis, the monetary base (the raw material for the money supply) has risen at a seasonally adjusted annual rate of 86% over the past year. Bad enough, but over the past three months this has skyrocketed to an annual rate of almost 1,000%!

Adjusted reserves have ballooned from $100 billion to $700 billion since mid-September, while the Fed's balance sheet has more than doubled over this period of time, from about $900 billion to a thumping $2.2 trillion.

These funds are beginning to show up in the Fed's two measures of the money supply. M2 has risen 8% over the past year, while MZM, the St. Louis Fed's measure of liquid money, is up more than 10% during the same period.

This is with the banks still reluctant to lend. Once they loosen their purse strings, the money supply will soar.

When this happens, don't be surprised if the Fed stops reporting these numbers. This is what it did several years ago, when it stopped reporting M3, which apparently was rising too fast for the Fed's comfort.

While virtually no one is raising prices in today's depressed economy, all this liquidity will soon become an accident looking for a place to happen.

While virtually no one is raising prices in today's depressed economy, all this liquidity will soon become an accident looking for a place to happen. The trick then, for the Fed, is to drain this excess liquidity before it turns into inflation.

This is easier said than done, because the Fed will have to begin weaning us off easy money long before the recession ends. By the way, this could happen sooner than you think.

Besides easy money, the sharp plunge in oil prices since midyear has put billions of (after-tax) dollars back into the pockets of consumers, business and governments -- by some estimates as much as $250 billion.

Add to this the $150 billion in tax rebates that Washington mailed out over the summer, and this economy already has received stimulus equal to almost 3% of GDP. When the new administration takes over in January, you may expect additional fiscal stimulus of as much as 5% of GDP.

Such a push could easily jump-start the economy -- right into another round of inflation.

For its part, the Fed may find it difficult to reverse course. This is because in the process of blowing up its balance sheet, the central bank has bought lots of instruments for which there are few ready buyers.

Thus we are likely to witness the formation of a new bubble, possibly as soon as a year from now. The question is where.

It will be a while before shell-shocked retailers and others try to raise prices. Oil is unlikely to go up either, in view of the imbalance between supply and demand. The same goes for housing. The jobless rate is likely to be too high to tempt labor to go for big pay increases (at least in most sectors).

But workers might have some leverage when it comes to rebuilding the country's infrastructure -- one of the president-elect's top priorities. In addition, prices of such commodities as steel, cement and construction equipment could also soar as tons of money land in this sector literally overnight. End of Story

Irwin Kellner is chief economist for MarketWatch, and is Distinguished Scholar of Economics at Dowling College in Oakdale, N.Y.

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The Fed Makes Money

The Fed Makes Money

By Nicholas von Hoffman
The Nation

December 22, 2008

"Quantitative easing," don't you love it? It's the latest business-economics euphemism designed to mislead. I do not know who they think they're fooling: it's like doctors calling excruciating pain "discomfort."

Quantitative easing is the government's way of saying it is printing money. The Federal Reserve Board is printing the money, incalculably large amounts of it, to drive interest rates down to the zero range and ramp up business activity.

The New York Times summed up what that crew of economists, professors and Wall Street operators in Washington are undertaking: "the Fed bluntly announced that it would print as much money as necessary to revive the frozen credit markets and fight what is shaping up as the nation's worst economic downturn since World War II.

"In effect, the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself. 'The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,' it said. Those tools include buying 'large quantities' of mortgage-related bonds, longer-term Treasury bonds, corporate debt

The money for buying these billions or trillions of loans, mortgages, bonds and every other sort of debt does not come out of your pocket now, although it may come out of your hide later on. These are not tax dollars; they are not borrowed dollars; they are not dollars generated by anyone's earnings. They represent no ratio to anything of value. You cannot even say that they have been created out of whole cloth, which would mean that they derive from some kind of antecedent of value. These are dollars plucked from nowhere.

The rationale for the alchemic generation of money out of the thinnest of air is that the economy is starving for greenbacks but is like a sick person who cannot take nourishment by mouth. It must be injected à la an intravenous line into a body with a collapsed circulatory system. What we do not know is if this procedure is akin to pumping blood into a corpse or if the patient will sit up and start feeling better.

Either way, the United States of America's currency is being depreciated. This will not be the first time and, if history is any guide, do not expect miracles. It was tried in the early 1930s in hopes that it would ignite an inflationary surge in prices and, by making American goods selling for depreciated dollars cheaper, our exports would perk up. Neither happened.

But other things did. Other trading nations depreciated their money so that their export goods would be cheaper and, as did the United States, raised tariff barriers to keep other nation's exports out. You cannot find a better example of a zero-sum game.

It looks like we are seeing at least a partial repeat of seventy-five years ago. Washington, instead of raising tariffs on imports, is taking to subsidizing at least one major American industry threatened by foreign competition, the automobile industry. They are doing the same in Russia, where the natives in Vladivostok were so upset at the prospect of prohibitive tariff increases on imported foreign cars that they rioted. Japan and China, for much the same reasons as here, are dropping their interest rates.

As of now the EU is less enamored with lowering interest rates. Apparently somebody on the continent has figured out that individuals and businesses without jobs or customers are not going to borrow money at any interest rate, regardless of how low it might be.

Even before the Fed announced it was going in for quantitative easing, the value of the dollar plunged. People, businesses and nations buy US government bonds because they believe such bonds keep their money safe and earn a modest amount of interest. If American money is no longer going to be safe because it is being devalued and US bonds are going to be paying close to zero interest, foreigners will stop buying them. Since we have been living off borrowed money to pay for our gasoline, our cars and our clothes, quantitative easing, instead of getting business going again, may be the shovel we do not need to dig ourselves into a deeper hole.

If the dollar is debased past a certain point, foreign investors will panic, sell their dollar-denominated bonds at any price they can get, bolt for the doors and leave us with a godawful depression and an inflation such as you won't believe until you go to the supermarket and pay $100 for a quart of milk. Something of this sort happened in Argentina a few years ago, literally pauperizing that nation's middle class.

Cheapening the dollar runs risks and poses serious problems in every direction. The dollar as the international reserve currency, the money that is accepted everywhere as the preferred means of payment, is the foundation of American power and influence around the world. We will be presenting ourselves with a major national security problem if we continue to undermine our own currency.

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Will printing money help the economy?

Of course, we side with Brian Doherty...

Will printing money help the economy?
What's the wisdom behind the Fed's recent actions? Doug Henwood and Brian Doherty debate.

December 17, 2008 - LATimes.com

Today's question: Critics say that the Federal Reserve -- which will buy up to $800-billion worth of troubled mortgage and consumer-credit assets -- is effectively printing money to fix the economy. What's the wisdom behind the Fed's actions? Doug Henwood and Brian Doherty debate the consequences of federal monetary policy.

It's better to inflate than deflate.

Point: Doug Henwood

It's not just critics who say the Fed is printing money to fix the economy. That's what it's doing, and I don't see what's wrong with it.

Back in 2002, Federal Reserve Chairman Ben S. Bernanke gave a speech reflecting on what a central bank might do if faced with the threat of deflation -- an extended period of falling prices. Falling prices might sound nice, but over the last century, they've generally accompanied severe economic crises, like Japan in the 1990s or, worse, the U.S in the 1930s. A deflation turning into a depression is a central banker's worst nightmare. And we're at risk for one of those today.

In that speech, Bernanke -- who made his academic reputation by studying the role of bank failures and other financial troubles in propagating the Depression -- said that everything should be done to prevent a deflation from taking hold, and if one took hold, everything should be done to reverse it. Speaking six years ago, Bernanke laid out the framework for what the Fed is doing today -- deep cuts in interest rates, unorthodox purchases of securities (not the short-term U.S. Treasury paper the Fed usually trades in but long-term bonds, mortgage bonds and even private securities) and financing a big fiscal stimulus by printing money. "If we do fall into deflation ... we can take comfort that the logic of the printing press ... must assert itself, and sufficient injections of money will ultimately always reverse a deflation," he said.

For further perspective on current events, we can turn to a classic 1933 paper on debt deflations by economist Irving Fisher. His model boils down to this: Some shock hits the economy, resulting in an increase in pessimism and asset sales. Asset sales drive down prices, leading to more pessimism and distress selling. That results in a shrinkage in the money supply and a decline in velocity (the speed at which money turns over, a function of how quickly people spend). Prices for goods and services fall, hitting profits and raising the real value of debts. Businesses go bust. Managers of surviving firms cut production and employment.

This deepens pessimism, leading those with cash to hoard it. Repeat in a vicious cycle. The point of Bernanke's printing press is to arrest and reverse this process.

Fisher, writing when the New Deal was only months old, noted that FDR's early policies of imposing a bank holiday (after 10,000 had failed) and going off the gold standard quickly reversed the deflation and marked the beginning of an economic recovery. After contracting by 27% between 1929 and 1933, the economy grew 43% from 1933 to 1937.

Sure, printing money sounds awful, but not as bad as watching the unemployment rate hit 25%, as it did in 1933.

Libertarians consider this an interference with the self-adjusting beauties of the free market. Some even argue that the New Deal made the Depression worse, by not allowing the system's excesses to be purged, through some economic equivalent of a high colonic. Bernanke doesn't agree, and I'm glad for that.

Doug Henwood edits the Left Business Observer and does a weekly radio show on WBAI-FM in New York and KPFA-FM in Berkeley.

Runaway inflation would cause far more misery than a bit of deflation.

Counterpoint: Brian Doherty

Deflations can be grim, and inflations can be grim. As a way to help ameliorate -- though not eliminate -- these often damaging fluctuations in currency value, I'm going to speak up for a line of thought I've long been sympathetic to: the hard money school of economics (the Austrian variety is my favorite) which posits that the best way to "manage" the money supply is to remove from political authorities the ability to make more of it willy-nilly.

The most dire eventuality of government's ability to inflate its way out of perceived problems (as I fear Bernanke is gearing up to do today) dwarfs even the difficulties in America in the 1930s or 1990s Japan (more on that in a minute). See the hyperinflations of Germany in the 1920s, Hungary in the 1940s and, more recently, Zimbabwe.

Given Bernanke's firmly stated beliefs, and the fear of the early '30s deflation you mention, we have far more reason to fear inflation out of control than rampant deflation. Inflation out of control means, among other evils, the wiping out of most savings and most Americans seeing their real resources gradually shrink even with apparent monetary gain.

Deflation, especially of the mild variety we might be seeing right now, need not lead to the looping downward spiral of Fisher's model. In the last half of the 19th century, for example, America saw overall price deflation combined with overall healthy economic growth (with some ups and downs along the way). See this data sheet from the St. Louis Federal Reserve Bank on how deflationary episodes can correspond with economic growth and health.

Even if Fed money supply looseness doesn't lead to a repeat of a 1923 Germany horror show, I think we have recent evidence indicating that a Bernanke inflation solution might not save us. Although Doug has elsewhere argued that the problem was Japanese authorities not acting quickly enough, I think the experience of Japan in the 1990s -- where at least 10 attempts at massive fiscal stimulus, lowering interest rates to rock bottom and raising the money supply all failed to propel the nation from recessionary doldrums -- should at least make us wonder if Bernanke's policy is worth the risk.

Yes, deflationary hangover adjustments from years of cheap credit and money growth can be painful, which is why free-market, hard-money types advocate eschewing willy-nilly credit and money growth in the first place. One big worry arising from Bernanke's current intentions is that if we seem hellbent on increasing the quantity of these mysterious paper things to get out of today's mess, those things are going to be worth less -- far less -- even if that inflationary action solves an apparent short-term problem.

And that could hasten the day when the people who lend the U.S. money in the hopes of getting back something that's worth close to what they lent us will stop. Which, as gold goes up and the dollar down, leads us to tomorrow's topic, roughly: How much government debt is too much?

Brian Doherty is a senior editor at Reason magazine and author of "Radicals for Capitalism" and "Gun Control on Trial."

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The Four Stages of Inflation

To understand "The Four Stages of Inflation" read pages 68 through 74 from this online book by Murray Rothbard entitled "The Mystery of Banking":

http://mises.org/Books/mysteryofbanking.pdf



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Real Rates and Gold

Here is an excellent analysis that shows the bullish situation developing for gold...

Real Rates and Gold
by Adam Hamilton

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Australia hands people cash to splurge for Christmas

Of course this is highly inflationary and is bound to drive up prices eventually. Also, who's going to pay for this? The same people receiving the currency of course! Through higher taxes and/or inflation (the running of the monetary printing press). The citizens still get the short end of the stick because the politicians will take their cut before redistributing these collected taxes or freshly printed currency.

Australia hands people cash to splurge for Christmas
By James Grubel

CANBERRA, Dec 8 (Reuters) - The Australian government delivered more than A$8 billion ($5.2 billion) in cash payments to families and pensioners from Monday to stop the economy from sliding into recession and urged people to spend the money ahead of Christmas.

The cash is part of a A$10.4 billion economic stimulus package announced on Oct. 14 and aimed at boosting consumer confidence and retail sales as Australia fights off slowing growth and rising unemployment due to the global downturn.

But rather than pay off debt, the government wants people to spend the money in the run up to Christmas, saying the spending will help protect jobs and save the economy from further slowing.

"I've urged pensioners and families to spend this money responsibly, to use this money to make ends meet, to help out their kids and help out their grandkids," Prime Minister Kevin Rudd said on Monday.

"If the government doesn't empower consumers at a time like this, in the midst of global financial crisis, then in fact we will have even greater challenges ahead."

The payments come after official data showed Australia's economic growth slowed to 0.1 percent in the September quarter, its slowest pace in 8 years, and with unemployment set to rise due to the fallout from global slowdown.

The cash payments worth A$8.7 billion, or about 0.9 percent of gross domestic product, give 2 million families A$1,000 for each child, and give four million pensioners more than A$1,000 each. The money will be paid directly into bank accounts over two weeks.

PRE-CHRISTMAS BOOST

Treasurer Wayne Swan said the payments would boost gross domestic product by between 0.5 and 1 percent, and create up to 75,000 jobs.

"This package is a substantial boost to our economy," Swan said, adding the government would keep all options open if further action was needed in 2009 to keep the economy growing.
"We will assess that as we go through the early part of next year."

The government said it expects to make A$4 billion in payments by Thursday, and business hopes the money will revive sagging retail sales and give retailers a pre-Christmas boost.
"If people are saving for a rainy day, I can tell them it is pouring outside," Australian Retailers Association executive director Richard Evans told Australian radio.

Economists said the package would be a welcome boost to the economy, on top of interest rate cuts from the Reserve Bank amounting to 3 percentage points since September, and would help keep the economy growing.

Westpac's director of economics and research Bill Evans said he expected consumers would spend about A$3.5 billion of the stimulus payments, and save the remainder.

"That would be enough to keep GDP growth in positive territory over the three quarters to June 2009, although growth would be painfully weak and certainly not sufficient to stop the unemployment rate rising towards 6 percent through 2009," he said.

TD Securities senior strategist Joshua Williamson said the spending package would not be enough to lock in long-term growth.

"As the package is a temporary measure, any growth on the consumption side of the national accounts in the December quarter from the package will unwind just as quickly in the first quarter of 2009." ($1=A$1.54) (Editing by James Thornhill & Jan Dahinten)

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Peter Schiff: Low Rates, Big Problems

Another ingredient for hyperinflation:

Low Rates, Big Problems

By: Peter Schiff, Euro Pacific Capital, Inc.

-- Posted Friday, 5 December 2008 | Source: GoldSeek.com

Government and mainstream economists have erroneously concluded that the key to reversing the financial free fall can be found in stopping the plunge in home prices. (I would offer the corollary that the key to reducing injuries in auto accidents is to suspend the laws of inertia). But to accomplish the improbable task of re-inflating the housing bubble, the government appears ready to announce a coordinated plan to push down mortgage rates to just 4.5%. Of course, this is precisely the wrong solution to the housing crisis, but when it comes to bad ideas our government has been remarkably consistent.

The plan would require the newly created Federal agencies of Fannie Mae and Freddie Mac to lower rates to 4.5%, and then require the Fed to directly buy the loans after they were made. The idea is that by lowering mortgage rates, current homeowners will be able to afford to make their payments, and new buyers will be more likely to qualify for larger loans, provided of course they do not have to come up with a burdensome down payment. If 4.5% is not enough to convince reluctant borrowers then look for the mandated rate to drop further. Perhaps there may come a time where the interest flows to the borrower instead of the lender. Anything to get Americans borrowing again.

But artificially suppressing mortgage rates will encourage risk taking and debt assumption at a time when consumers and lenders should be acting prudently. By setting rates below market levels, and buying mortgages that no private funder would want to touch, the government is creating a mortgage entitlement. Given the size of the home mortgage market, the program could eventually become one of the largest entitlement program on the federal books.

The most obvious problem is that the Government has no money. All it has is a printing press. So the more money it provides for cheap mortgages, the higher the inflation tax will be for all Americans. Higher inflation will cause the difference between where rates should be and where the government sets them to grow wider, and the entitlement to become more costly to provide.

Assuming $5 billion in mortgages are refinanced at 4.5% in an environment where the unsubsidized rate would have been 10%. The annual cost to the government in such a scenario would be $275 billion. But the subsidy will have to be provided in perpetuity, as the minute it is removed, mortgage rates would surge and housing prices would plummet. Of course, the mere existence of the subsidy will continue to create demand for mortgage credit, which the government will be forced to provide by printing even more money. This would set into place a self perpetuating spiral of rising inflation and mortgage demand, with practically 100% of mortgage money being provided by the government. Ultimately the whole scheme would collapse, as run-away inflation would completely destroy what would be left of our shattered economy.

Some argue that since the government can now borrow for 30 years at 3%, issuing mortgages at 4.5% is a winning trade. There are three problems with this analysis. First, just because money is cheap does not mean we should borrow it-you think we would have at least learned that by now! Second, this analysis does not factor in default related losses. Finally, there is no way the government would be able to borrow that much money at the long end of the rate curve without driving interest rates much higher. The only reason long-term rates are so low now is that the government is concentrating its borrowing on the short end of the curve. So to pull of the trade, the government will have to finance it with treasury bills. If we turn the government into a massively leveraged hedge fund that cycles a multi-trillion dollar carry trade of short-term debt used to finance long term mortgages, then I think we already know how that movie ends.

In the final analysis the market must be allowed to function. If real estate prices are too high they must be allowed to fall, regardless of the consequences. Lower prices are the market's solution to housing affordability. Government attempts to artificially prop up prices will have much more dire economic consequences then letting them fall. Until we figure this out, there will be no escape from the economic death spiral the government is setting in motion.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read my just released book "The Little Book of Bull Moves in Bear Markets." Click here to order your copy now.

For a look back at how I predicted the current crisis, read my 2007 bestseller "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.

More importantly, don't wait for reality to set in. Protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com. Download my free Special Report, "The Powerful Case for Investing in Foreign Securities" at www.researchreportone.com. Subscribe to my free, on-line investment newsletter, "The Global Investor" at http://www.europac.net/newsletter/newsletter.asp.

-- Posted Friday, 5 December 2008 | Digg This Article | Source: GoldSeek.com

- Peter Schiff C.E.O. and Chief Global Strategist


Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06840
800-727-7922
www.europac.net
schiff@europac.net


Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.

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How to pay off your debts for pennies on the dollar

With the potential of coming inflation/hyperinflation in the next 6 months to 24 months here is one strategy to pay off debts on the cheap:

Convert all interest rates on your debts to "fixed" interest rates. Pay the minimums on these debts and pay the maximum on those debts that are "adjustable". Take the rest of your money and buy as much gold and silver as possible. If/when inflation/hyperinflation kicks in you can pay back these debts for pennies on the dollar by selling some of your precious metals. Consider the fact that the dollar can lose most of its value in a currency collapse.

Look at Zimbabwe for a glimpse at the potential future of the dollar:

Zimbabwe Crisis (source)

If you think that the current economic crisis is something that has never happened in history before, you may be wrong! After the collapse of the agriculture sector in Zimbabwe in 2000, the inflation in that country skyrocketed to 231 million percent a year! Just think about it - 231 000 000%! Unemployment went up to 80% and a third of country’s population left it.

Let`s now have a look at the photos that you may not be able to see anywhere else in the world.

Here is a boy getting change in 200 000 dollar notes!

One 200 000 dollar note equals less than $0.10 cents.

December 22nd, a new note of 500 000 dollars introduced to the market!

Next - 750 000 dollars.

January - new note of 10 million dollars.

This US $10 dollar note is 10 times worth more than the 10 million dollars Zimbabwe note.

A case worth 65 billion Zimbabwe dollars which equals to $2000 US dollars.

This guy is going to a supermarket. The exchange rate is 25 million Zimbabwe dollars for 1 US dollar.

This mountain of cash is worth $100.

50 Million note is then introduced!

Next is 250 million dollars note!

Sorry, how much is this t-shirt?

- It`s cheap, only about 3 billion dollars!

May - a note of 500 million dollars is introduced!

June - note worth 25 and 50 billion are printed.

And finally - 100 billion dollars note!

What can you buy for it? Well, these 3 eggs for example.

Thats how people went to restaurants!

And the bills:

In August, the government devalued Zimbabwe dollar by removing 10 zeros from notes.

However, inflation kept going up and in September for this amount of cash you could only buy 4 tomatoes.

And for this - some bread.

And then it started again: 20 000 dollars note in September.

50 000 a couple of weeks ago!

They`ve got a pretty good chance of hitting billion dollar notes again by the end of this year!

Layaway making a comeback

Consumers who are tapped out are now resorting to layaway. The author of this article suggests saving in an interest-bearing account and then paying cash for the item which, under normal circumstances, is a good idea. I offer an another viewpoint: Savings accounts are paying virtually no interest. With inflation or hyperinflation lurking around the corner - layaway may make sense since you can lock-in today's price and potentially pay the item off later with cheaper dollars. If you are going to save - do it in gold and silver and you have a better chance of preserving your purchasing power.

Main Street Credit Crisis: Bringing Back Layaway for Purchases. The Anti-Saving Crusade Continues

Solutions

Peter Schiff is right on target but government will do the opposite. Therefore, you must buy gold & silver:



View Part II here
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"Inflation Holocaust"

Watch the interview with famed investor Jim Rogers as he describes the coming "inflation holocaust":

http://www.cnbc.com/id/27097823

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FDIC Insurance: The Big Lie

The new bailout package has lifted the FDIC insurance amount from $100,000 per account to $250,000 per account. Do not be misled by this Confidence Game.

Let's look at the facts:

The FDIC, according the its 2007 annual report, has $53 billion dollars.
The Indy Mac Bank Failure is expected to soak up from $4 billion to $8 billion.
That leaves any where from $45 billion to $49 billion dollars to guarantee over 4 Trillion dollars worth of deposits.

Banks only keep about $1 on hand to cover every $10 worth of deposits. The rest of the money has been loaned out. This means that if more than 10 percent of the depositors attempt to withdraw their funds at any one time the banks would have to shut down because the funds would not be there. How do you like those odds of getting your money out? It's like playing a game of musical chairs with one chair and nine other people. Everything is fine while the music is playing but what happens when the music stops?

Here is what would likely happen if more than 10% of the depositors attempt to withdraw their cash at the same time:

First, the government would declare a "bank holiday" and close down the banks for a period of days. When they reopen they would likely limit the amount of money that you can pull out each week. A few short years ago this happened in Argentina where depositors could only withdraw $200 per week.

Next, they would pump liquidity into the markets (in other words they would print massive amounts of money) sparking accelerated inflation. This would cause people to dump their dollars and trade them for basic goods and gold in order to protect their purchasing power.

This rapid increase in the money supply becomes self-feeding as people dump more and more dollars for items that act as a "store of value" causing supply shortages. Prices of food and other necessities would rise rapidly. Precious Metals will also rise rapidly.

Don't wait for these things to happen before acting. Pull out the money you want to protect, build up your food storage, and buy as much gold, silver, and platinum that you can.

Sincerely,
The Bullion Insider
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Stunning Recap of the Dollar Death Spiral

A picture paints a thousand words...

National Debt Clock

For an excellent overview in words read the following article:
US Dollar Doomed as Credit Crisis Tuning into a Currency Crisis

Title Wave of Inflation coming?

Our good friend Robert Wenzel has pointed out the possibility of massive inflation in our future on his blog. Read the short commentary here:

The Federal Reserve Is About To Engage In The Greatest Money Supply Inflation In Its History

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