Announcing: The Austrian Investor

Visit our new location at www.austrianinvestor.com
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More Wisdom from Peter Schiff

Obama Puts the Economic Cart before the Horse

By: Peter Schiff, Euro Pacific Capital, Inc.

-- Posted Friday, 27 February 2009 | Digg This Article | Source: GoldSeek.com

In his first televised speech before Congress, President Obama asserted that prosperity will return once the government restores the flow of credit in the economy. It may come as a surprise to him, but an economy cannot run on consumer loans. Furthermore, credit stopped flowing in the U.S. for a very good reason: there was no more savings left to loan. Government efforts to simply make credit available, without rebuilding productive capacity or increasing savings, are doomed to destroy what's left of our economy.

The central tenets of Obamanomics appear to be that access to credit will enable people to borrow money to buy stuff, the spending will spur production and employment, and thus the economy will grow. It's a neat and simple picture, but it has nothing whatsoever to do with how an economy works. The President does not understand that consumption is made possible by production and that credit is made possible by savings. The size and complexity of modern economies has obscured these simple concepts, but reducing the picture to a small scale can help clear away the fog.

Suppose there is a very small barter-based economy consisting of only three individuals, a butcher, a baker, and a candlestick maker. If the candlestick maker wants bread or steak, he makes candles and trades. The candlestick maker always wants food, but his demand can only be satisfied if he makes candles, without which he goes hungry. The mere fact that he desires bread and steak is meaningless.

Enter the magic wand of credit, which many now assume can take the place of production. Suppose the butcher has managed to produce an excess amount of steak and has more than he needs on a daily basis. Knowing this, the candlestick maker asks to borrow a steak from the butcher to trade to the baker for bread. For this transaction to take place the butcher must first have produced steaks which he did not consume (savings). He then loans his savings to the candlestick maker, who issues the butcher a note promising to repay his debt in candlesticks.

In this instance, it was the butcher's production of steak that enabled the candlestick maker to buy bread, which also had to be produced. The fact that the candlestick maker had access to credit did not increase demand or bolster the economy. In fact, by using credit to buy instead of candles, the economy now has fewer candles, and the butcher now has fewer steaks with which to buy bread himself. What has happened is that through savings, the butcher has loaned his purchasing power, created by his production, to the candlestick maker, who used it to buy bread.

Similarly, the candlestick maker could have offered “IOU candlesticks” directly to the baker. Again, the transaction could only be successful if the baker actually baked bread that he did not consume himself and was therefore able to loan his savings to the candlestick maker. Since he loaned his bread to the candlestick maker, he no longer has that bread himself to trade for steak.

The existence of credit in no way increases aggregate consumption within this community, it merely temporarily alters the way consumption is distributed. The only way for aggregate consumption to increase is for the production of candlesticks, steak, and bread to increase.

One way credit could be used to grow this economy would be for the candlestick maker to borrow bread and steak for sustenance while he improves the productive capacity of his candlestick-making equipment. If successful, he could repay his loans with interest out of his increased production, and all would benefit from greater productivity. In this case the under-consumption of the butcher and baker led to the accumulation of savings, which were then loaned to the candlestick maker to finance capital investments. Had the butcher and baker consumed all their production, no savings would have been accumulated, and no credit would have been available to the candlestick maker, depriving society of the increased productivity that would have followed.

On the other hand, had the candlestick maker merely borrowed bread and steak to sustain himself while taking a vacation from candlestick making, society would gain nothing, and there would be a good chance the candlestick maker would default on the loan. In this case, the extension of consumer credit squanders savings which are now no longer available to finance other capital investments.

What would happen if a natural disaster destroyed all the equipment used to make candlesticks, bread and steak? Confronted with dangerous shortages of food and lighting, Barack Obama would offer to stimulate the economy by handing out pieces of paper called money and guaranteeing loans to whomever wants to consume. What good would the money do? Would these pieces of paper or loans make goods magically appear?

The mere introduction of paper money into this economy only increases the ability of the butcher, baker, and candlestick maker to bid up prices (measured in money, not trade goods) once goods are actually produced again. The only way to restore actual prosperity is to repair the destroyed equipment and start producing again.

The sad truth is that the productive capacity of the American economy is now largely in tatters. Our industrial economy has been replaced by a reliance on health care, financial services and government spending. Introducing freer flowing credit and more printed money into such a system will do nothing except spark inflation. We need to get back to the basics of production. It won't be easy, but it will work.

President Obama would have us believe that we can all spend the day relaxing in a tub while his printing press does all the work for us. The problem comes when you get out of the tub to go to dinner and the only thing on your plate is an IOU for steak.

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 our current problems 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, 27 February 2009 | Digg This Article | Source: GoldSeek.com

- Peter Schiff C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.

FDIC Friday - 2 more banks fail

Security Savings Bank of Nevada and Heritage Community Bank of Illinois failed today and were taken over by the FDIC.

http://www.fdic.gov/bank/individual/failed/banklist.html
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Ponzi Scheme in Gold

Moral of the story: Take possession of your gold

This time, a 'golden' opportunity
Commentary: The gold world's Bernie Madoff promised 45% annual returns
By David Weidner, MarketWatch

Last update: 9:38 a.m. EST Feb. 26, 2009

NEW YORK (MarketWatch) -- Gold bugs enjoy a special place here on Wall Street.
They're our bizarre-o twins in the world of investing. When our market is up, theirs is down. We trade securities used to assign a value to companies, industries and commodities. They trade a useless piece of rock that people dig up.

We don't understand one another, so we eye each other warily. Sure, some of us may own a little gold, but we only hold it as a hedge -- or as jewelry. The gold bugs may hold some stock, but their hearts aren't in it. And they can't wear it.

Full Story...

FDIC Friday - Silver Falls Bank fails

Oregon bank is 14th failure of 2009
By MarketWatch
Last update: 9:35 p.m. EST Feb. 20, 2009

SAN FRANCISCO (MarketWatch) -- Silver Falls Bank, of Silverton, Ore., was closed Friday by state regulators and the Federal Deposit Insurance Corporation.

It was the 14th bank to fail so far this year and the 39th since the beginning of the current credit crisis.

Citizens Bank, of Corvallis, Ore. will assume all of the deposits of Silver Falls Bank, the FDIC said. Silver Falls Bank had three branches, all of which will reopen Monday as branches of Citizens Bank.

As of Feb. 9, the bank had total assets of approximately $131.4 million and total deposits of $116.3 million. Citizens Bank did not pay a premium to acquire the deposits of Silver Falls Bank, according to the FDIC.

In addition to acquiring all of the failed banks deposits, including those from brokers, Citizens Bank agreed to purchase approximately $13 million in assets comprised of cash, cash equivalents, securities, overdraft loans, and deposit secured loans. The FDIC will retain any remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $50 million.

What a tangled web they weave...

I can't blame these investors. They bought these mortgages under certain terms and now the government is changing those terms. Why would anyone want to lend if the government is going to come in and change the terms!?!? No wonder there is a credit crunch! The market must self-correct without government intervention.

True capitalism is based upon the protection of private property and private contracts. When government destroys property rights, capital flees. This is why gold is zooming - it is a vote of "no confidence" and "no trust" in government and it's worthless dollar. If you have an interest in understanding the real cause of the economic crisis I suggest listening to the Austrian Economic Theory audio courses and reading the following two books: An Introduction to Austrian Economics and Understanding the Dollar Crisis.

Mortgage investors may sue on modified loans
However, a bill under consideration on Capitol Hill might take away that right
By Ronald D. Orol, MarketWatch
Last update: 3:39 p.m. EST Feb. 20, 2009

WASHINGTON (MarketWatch) -- The White House plan announced Wednesday to help as many as 9 million homeowners avoid foreclosure was greeted with generally positive reaction by homeowners and mortgage servicers that are responsible for collecting monthly loan payments.
But many private mortgage investors, owners of trillions of dollars worth of mortgage-backed securities considered to be at the center of the financial crisis, are less impressed. Many are preparing to file lawsuits against the banks and other financial institutions that service mortgages.

Full Story...
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And the Dominoes continue to fall...

Latvia's government collapses amid economic crisis
By Polya Lesova, MarketWatch
Last update: 2:27 p.m. EST Feb. 20, 2009

NEW YORK (MarketWatch) -- Latvia's coalition government collapsed Friday, plunging the Baltic country into political turbulence at a time when its economy is mired in a severe crisis and investors are increasingly concerned about the situation in Eastern Europe.

President Valdis Zatlers said he has accepted the resignations of Prime Minister Ivars Godmanis and his administration, according to media reports.

Godmanis said his position had become untenable after his two main coalition partners failed to support him earlier Friday, the BBC reported. The capital Riga was rocked by protests over economic policy in January, and Godmanis subsequently survived a Feb. 3 parliamentary vote of confidence, according to the report.

The government collapse in Latvia comes only weeks after Iceland's government resigned over the devastating crisis that has wrecked the island nation's economy. In Ukraine, the finance minister quit last week over economic policy disagreements with the prime minister.

Full Story...

Banks kicking you while you're down

Only leave in the bank what you can afford to lose. If you decide to pull your money out of the banks you had better hurry. Fractional reserve banking simply means that they only have about $1 on reserves for every $10 on deposit. If you are not one of the first 10% to pull out your money then you will be screwed.

Here is the story on excessive bank fees.
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Awesome video of Rick Santelli telling it like it is!

Awesome, must see video of Rick Santelli telling it like it is (thanks to EPJ for bringing this to my attention):

Rick Santelli on CNBC

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A Humerous Illustration of TARP

12 slides...very funny...

TARP Slideshow

The End of Swiss Bank Secrecy

UBS to pay $780 million in tax conspiracy case
Swiss bank admits helping US clients avoid taxes; agrees to reveal identities

By Alistair Barr, MarketWatch
Last update: 6:53 p.m. EST Feb. 18, 2009

SAN FRANCISCO (MarketWatch) - UBS AG agreed to pay $780 million for helping U.S. customers avoid taxes, the Department of Justice said Wednesday.

Switzerland's largest bank also agreed to turn over the identities and accounts of some of its U.S. clients to the American government, in an unprecedented move that could shine a light into the country's secretive banking industry, the DOJ added.

Full Story...

First Iceland collapses...now Ireland?

Spreads highlight Ireland fears
By William L. Watts, MarketWatch

Last update: 12:37 p.m. EST Feb. 16, 2009

LONDON (MarketWatch) -- Fears that Ireland's banking woes will send the Emerald Isle the way of Iceland has sent the cost of insuring sovereign Irish debt against default to record levels.

Spreads on Ireland's five-year credit default swaps rose to a record 377 basis points on Friday, analysts said. That means it would cost $377,000 a year to insure a notional $10 million of debt against default. That's up from around just $24,000 a year ago.

Ireland's fiscal position has eroded sharply due to a steep economic slump. On top of that, add in the effective nationalization of the country's three largest banks and expectations for further outlays.

Iceland was left virtually bankrupt after its outsized financial sector collapsed under the weight of massive foreign-denominated debt.

Full Story...

You are being watched...

Click on the following link to view the technology that is available. Zoom in on the crowd and then go watch the movie "Enemy of the State". If you are so inclined, listen to the song that the following lyrics go to:

Electric Eye (click on this link)
(song lyrics by Judas Priest)

Up here in space
I`m looking down on you
My lasers trace
Everything you do

You think you`re private lives
Think nothing of the kind
There is no true escape
I`m watching all the time

I`m made of metal
My circuits gleam

I am perpetual
I keep the country clean
I`m elected electric spy
I`m protected electric eye

Always in focus
You can`t feel my stare
I zoom into you
You don`t know I`m there

I take a pride in probing all your secret moves
My tearless retina takes pictures that can prove

I`m made of metal
My circuits gleam
I am perpetual
I keep the country clean

Electric eye, in the sky
Feel my stare, always there
There`s nothing you can do about it
Develop and expose
I feed upon your every thought
And so my power grows

I`m made of metal
My circuits gleam
I am perpetual
I keep the country clean

Thanks to Jim Sinclair for this link.

Job Losses Pose a Threat to Stability Worldwide

February 15, 2009

Job Losses Pose a Threat to Stability Worldwide
By NELSON D. SCHWARTZ
New York Times

PARIS — From lawyers in Paris to factory workers in China and bodyguards in Colombia, the ranks of the jobless are swelling rapidly across the globe.

Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. The slowdown has already claimed 3.6 million American jobs.

High unemployment rates, especially among young workers, have led to protests in countries as varied as Latvia, Chile, Greece, Bulgaria and Iceland and contributed to strikes in Britain and France.

Last month, the government of Iceland, whose economy is expected to contract 10 percent this year, collapsed and the prime minister moved up national elections after weeks of protests by Icelanders angered by soaring unemployment and rising prices.

Just last week, the new United States director of national intelligence, Dennis C. Blair, told Congress that instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.

“Nearly everybody has been caught by surprise at the speed in which unemployment is increasing, and are groping for a response,” said Nicolas Véron, a fellow at Bruegel, a research center in Brussels that focuses on Europe’s role in the global economy.

In emerging economies like those in Eastern Europe, there are fears that growing joblessness might encourage a move away from free-market, pro-Western policies, while in developed countries unemployment could bolster efforts to protect local industries at the expense of global trade.

Indeed, some European stimulus packages, as well as one passed Friday in the United States, include protections for domestic companies, increasing the likelihood of protectionist trade battles.

Protectionist measures were an intense matter of discussion as finance ministers from the Group of 7 economies met this weekend in Rome.

While the number of jobs in the United States has been falling since the end of 2007, the pace of layoffs in Europe, Asia and the developing world has caught up only recently as companies that resisted deep cuts in the past follow the lead of their American counterparts.

The International Monetary Fund expects that by the end of the year, global economic growth will reach its lowest point since the Depression, according to Charles Collyns, deputy director of the fund’s research department. The fund said that growth had come to “a virtual halt,” with developed economies expected to shrink by 2 percent in 2009.

“This is the worst we’ve had since 1929,” said Laurent Wauquiez, France’s employment minister. “The thing that is new is that it is global, and we are always talking about that. It is in every country, and it makes the whole difference.”

In Asia, any smugness at having escaped losses on American subprime debt has been erased by growing despair over a plunge in sales among major exporters. On Thursday, Pioneer of Japan said it would abandon the flat-screen television business and cut 10,000 jobs worldwide in response to sagging demand for consumer electronics.

Millions of migrant workers in mainland China are searching for jobs but finding that factories are shutting down. Though not as large as the disturbances in Greece or the Baltics, there have been dozens of protests at individual factories in China and Indonesia where workers were laid off with little or no notice.

The breadth of the problem is also becoming apparent in Taiwan, where exports were down 42.9 percent last month, compared with a year ago, the steepest plunge in Asia.

Chang Yung-yun, a 57-year-old restaurant kitchen worker, was laid off when her employer closed in mid-November. Her son, an engineer, has been put on unpaid vacation for weeks, a tactic that has become common in Taiwan.

“The greatest fear for our people is losing jobs,” Taiwan’s president, Ma Ying-jeou, said in an interview.

Calls for protectionism have resonated among a fearful public. In Britain, refinery and power plant employees walked off the job last month to protest the use of workers from Italy and Portugal at a construction project on the coast. Some held up signs highlighting Prime Minister Gordon Brown’s earlier promise of “British jobs for British workers.”

Unemployment in Britain is expected to rise to 9.5 percent by the middle of 2010, from 6.3 percent now, according to Peter Dixon, an economist with Commerzbank in London. Germany’s jobless rate could rise to 10.5 percent from 7.8 percent, he added.

In France last week, President Nicolas Sarkozy agreed to supply low-interest loans of 3 billion euros, or $3.86 billion, each to PSA Peugeot Citroën and Renault in exchange for an agreement not to lay off French workers.

To a greater extent than in past European downturns, highly trained white-collar workers are pounding the pavement, too. Naomi Runquist-Ohayon, a trademark lawyer, has been looking for work in Paris since the beginning of the year, after losing her job in December.

“This is a new experience for me,” said Ms. Runquist-Ohayon, 39, a Swedish native who has lived in Paris and London and speaks fluent English, French, Swedish and Italian. “In London, I never had to really look. Recruiters or headhunters would call me or I would call them. It’s not so easy now.”

Half a world away in Colombia, Jaime Galeano, 40, is in a similar predicament. As a bodyguard in a country notorious for drug-related violence and kidnappings, Mr. Galeano thought his profession was immune until he lost his job last year.

“The conditions for finding a job are terrible,” he said. What is more, his age is now an impediment, with a ministry informing him that only applicants under the age of 32 would be considered for new positions.

“After turning 35, a person is worth nothing,” Mr. Galeano said.

Even India, whose startling rise to the forefront of the global economy was portrayed in the hit movie “Slumdog Millionaire,” has hit a wall. About 500,000 people lost jobs between October and December 2008, according to one recent analysis.

In New Delhi, Tarun Lamba lost the first real job he ever had about a month ago, when he was laid off as a sales manager. Mr. Lamba, 24, said he knew bad news was coming because it had been weeks since he had written a truck loan. If he has to, he said, he could join his father’s business, selling clothes. But he hopes it will not come to that.

“The cycle has to keep running,” he said. “We had a boom period one year ago, now we are in a recession, and after some time the boom will come again.”

Many newer workers, especially those in countries that moved from communism to capitalism in the 1990s, have known only boom times since then. For them, the shift is especially jarring, a main reason for the violence that exploded recently in countries like Latvia, a former Soviet republic.

“For the young generation, aged 20 to 24, this is the first time we’ve had this,” said Valdis Zatlers, Latvia’s president.

The ripples from the slowdown in Europe, North America and Asia are also being felt in Africa as migrant workers abroad lose their jobs and find themselves unable to send money home.

Since his last temporary job as a metalworker in Paris ended three months ago, Ignace Abdul has halted the monthly 200 euro payments he had been sending to his wife and three children back in Senegal. “Between 2004 and 2008, I worked nonstop,” Mr. Abdul, 30, said in an interview in a bleak Paris unemployment office. “Right now, there is nothing.”

Reporting was contributed by Keith Bradsher from Taipei, Taiwan; Heather Timmons from New Delhi; Simon Romero and Jenny Carolina González from Bogota, Colombia; and Maïa de la Baume from Paris.

FDIC Friday - 4 more banks bite the dust

FDIC shutters four banks in one day
Oregon, Nebraska, Florida, Illinois bank failures bring year's total to 13

By John Letzing, MarketWatch
Last update: 11:06 p.m. EST Feb. 13, 2009

SAN FRANCISCO (MarketWatch) -- Loup City, Neb.-based Sherman County Bank, Cape Coral, Fla.-based Riverside Bank of the Gulf Coast, Pittsfield, Ill.-based Corn Belt Bank and Trust Company, and Beaverton, Ore.-based Pinnacle Bank were closed by regulators Friday, bringing the number of U.S. bank failures for 2009 to 13 and 38 total since the start of the credit crisis, the Federal Deposit Insurance Corp. said.

Full Story...

John Williams: $100 Bills Will Become Worthless

Hyperinflation Video

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Jim Rogers: Failing banks don't need money

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Dr. Marc Faber cracks me up!

Because if I didn't laugh I would cry...




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Are you Servant or Master?

This is a great, short video where Rep. Ackerman grills the SEC regarding the Madoff scandal. The point is this: Government doesn't have a clue or the desire to fulfill their duties because there is no accountability. The system itself does not have proper accountability - they take your taxes whether they do a good job or not. There is no real agency relationship (as Lysander Spooner put it so eloquently in "No Treason VI: The Constitution of No Authority"). The system is illegitimate and flawed from its inception. You are not the master because you cannot fire your servant. It is only a matter of time before the masses simply stop paying taxes in revolt - milions already are. Then they will become the Masters again.

Ackerman and SEC Video

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