Paul vs. Bernanke on Value of the Dollar

[Dig]

Oil's Recent Rise Not as Familiar as It Looks
Traders, Not Political or Supply Concerns, May Be Pushing Fuel Toward $100
http://www.washingtonpost.com/wp-dyn/content/article/2007/11/04/AR2007110401753.html?hpid=topnews
By Steven Mufson Washington Post Staff Writer Monday, November 5, 2007; Page A01

After a week of new records for crude oil prices, the question is: How high can they go? In the past 10 weeks, the price of crude oil has shot up $25 a barrel, closing at $95.93 in New York on Friday, near an all-time inflation-adjusted peak. Unlike earlier spikes in oil prices, which came on the heels of war in the Middle East, this latest ascent does not appear to be linked to any one conflict or to any physical shortage. Instead, traders who treat oil like any other commodity are widely thought to be driving prices upward, bolstered by a weak dollar and money flowing out of stock markets and other investment vehicles. So far U.S. consumers have not felt the full impact. So far U.S. consumers have not felt the full impact. Sluggish U.S. gasoline demand over the past two months has made it hard for oil giants to pass through higher costs; refinery profit margins, which hit records in the spring, have been squeezed. But if high crude oil prices persist, they will flow through to the gas pump. Yesterday, the Lundberg Survey reported that the average retail price of regular gasoline is up 16 cents in the past two weeks to $2.96 a gallon.

Many veteran oil analysts say this is a bubble. Oil is historically a cyclical business. Modestly higher production by the Organization of Petroleum Exporting Countries, a warm winter, slower U.S. economic growth and a flattening of demand in the United States could puncture these lofty prices. "It just seems that the market is spasming here," said Adam Robinson, an oil analyst at Lehman Brothers. If slowly declining petroleum inventories start to build again, he said, "the radical increase we've seen to the upside can repeat on the way down." Oppenheimer & Sons analyst Fadel Gheit says oil is $30 a barrel overpriced. But analysts also say that the past 10 weeks have demonstrated the power of traders at investment houses. Deutsche Bank oil economist Adam Sieminski, who spent six months on the bank's trading desk, said it is important not to underestimate the role of sentiment and technical factors, such as patterns of price movements and the need to hedge risks in other markets. Now, when investors hold a large number of options to buy oil at a price of $100, he says, "it's almost like magnetism. It draws prices to that level." Traders say that they are not buying and selling on whims, however. The unusually thin cushion of excess oil production around the world and the rapid growth in consumption in China and India make this rise in prices different from earlier oil price spikes, they argue. That combination, the traders add, leaves the oil markets one incident away from an even steeper increase.

"There is no current shortage, but no one deals on today's market. They make deals based on tomorrow's market. And that's what they're worried about," said Joseph Stanislaw, an oil consultant and senior adviser to the accounting firm Deloitte & Touche. The weekend declaration of a state of emergency in Pakistan, which has no direct effect on global oil supplies, won't calm nerves. "It would be silly if we waited until things were not available," said a veteran energy trader at a U.S. hedge fund, who spoke on the condition of anonymity to protect his business relationships. He said traders have become convinced that military conflict between the United States and Iran is inevitable. He added, "People react to perceptions of what will happen. That's not idle speculation." Last week, nonprofit group Securing America's Future Energy engaged in some speculation. The group invited former Cabinet members and top U.S. officials to act out how a U.S. administration might respond to an oil supply disruption. The exercise assumed that a key oil pipeline was cut by explosions in Azerbaijan, an insurgency continued in Nigeria's oil-rich Niger Delta, and cuts in oil output were made by Iran and Venezuela as a result of souring U.S. relations. In this hypothetical scenario, oil prices hit $160 a barrel. What makes the scenario more plausible than ever is that the world is consuming 85.9 million barrels of oil a day, but there are only about 2 million barrels a day of extra production capacity, almost all of it in Saudi Arabia. Much of that excess is a low-quality crude oil that can be used only in the most modernized refineries. That leaves the oil market sensitive to threats that might have been disregarded in earlier years.

"It's hard to keep in mind that things do move in cycles and that the laws of supply and demand are unlikely to have been abolished," said Daniel Yergin, chairman of Cambridge Energy Research Associates. "High prices, particularly if they become very high prices, will catalyze responses in supply and demand, and innovation," he said. Indeed, just five years after their 1981 peak, oil prices slumped, prompting then-Vice President George H.W. Bush to lament to Saudi leaders about how that was hurting the Texas economy. Eight years after Iraq's invasion of Kuwait drove prices up again, the Asian financial crisis pushed them to new lows. But many oil experts say that this cycle isn't like earlier ones. A few argue that world oil is running out. Others note that China and India's economic advances and the growth of U.S. suburbs and exurbs have built in oil demand, even at high prices. Moreover, between 2005 and 2015, China and India's populations are expected to grow by about 240 million. That could soak up new production capacity that Saudi Arabia is currently adding. In addition, countries rich in oil have not been fully exploiting their reserves. War-torn Iraq is producing almost 2 million barrels a day less than its 1970s peak. Production has declined in Venezuela because of government disputes with workers and foreign oil firms. Insurgents in Nigeria's oil-rich Niger River delta have kidnapped foreign oil workers and attacked installations, forcing companies to suspend about 700,000 barrels a day of production. In Mexico, United Arab Emirates, the Caspian Sea and elsewhere, maintenance and weather has at times curtailed production.

Supply and demand might not respond as usual. Ironically, high taxes in Europe that helped reduce consumption in past years now dilute the effect of rising crude oil prices. And high taxes in producing countries mean that oil firms don't get much more incentive to explore as prices rise. At a recent conference in Moscow, one oil executive said that, above certain thresholds, Russian taxes siphon off $19.15 of a $20 a barrel price increase. OPEC may have also miscalculated. Its most moderate members -- Saudi Arabia and Kuwait -- trimmed production a year ago to prop up then-sagging oil prices at $55 to $60 a barrel. According to the International Energy Agency, Saudi output has been running about half a million barrels a day lower than last year. Saudi Arabia may have delayed a production boost this fall out of fear -- wrong so far -- that the recent credit crisis would slow the U.S. economy. OPEC countries maintain, however, that the recent run-up in oil prices isn't their fault and point to speculators. "What more can we do?" asks Nader Sultan, an oil consultant and former president of state-owned Kuwait Petroleum Corp. "The taps are open." The power of traders and investors over the vast oil market has been growing since the early 1980s. Until then, international oil companies had long-term contracts with exporting countries that established prices and volumes. Relatively modest amounts of oil were traded daily on what was known as the spot market. But after the two 1970s oil shocks and outbreak of war between Iran and Iraq, that system broke down. An ill-disciplined OPEC stopped setting prices and struggled to stick to output quotas to manage prices. Gradually prices declined, because of more efficient use of oil in industrialized countries and extra output from non-OPEC countries and OPEC's swing producer, Saudi Arabia. In March 1983, the century-old New York Mercantile Exchange started a market for crude oil that has grown steadily. Now most major oil companies simply peg their sales and purchases of crude oil to the fluctuating prices on the exchange.

"I can't explain why the price is where it is today," Henry Hubble, Exxon Mobil vice president of investor relations, said Thurday during a press call about the company's earnings. "The market is going to dictate . . . and we're a taker of those prices." Exxon has a spacious trading floor in Fairfax, Va., where about 80 people trade crude oil and another 80 trade products. But they don't negotiate prices; instead they try to take advantage of oil quality differences, tanker locations and tiny gaps between markets to meet Exxon's refinery needs as cheaply as possible. The final prices are set relative to those on the New York Mercantile Exchange or similar markets on the day of delivery. One surprise about oil prices: So far, the economy seems to be coping. Despite an average crude oil price of $75 a barrel, the economy grew at a brisk 3.9 percent pace in the third quarter. Unemployment is low, and inflation is modest. By contrast, the oil price spikes in the 1970s fueled high inflation and weakened growth, a combination known as stagflation.

Improved automobile mileage, more efficient manufacturers and greater reliance on services have made the U.S. economy more resilient. The United States now uses half the energy it did in 1980 for every unit of economic output. Energy costs make up a smaller portion of household budgets than in 1981. In a recent paper, "Who's Afraid of a Big Bad Oil Shock?" Yale University economics professor William Nordhaus credited smarter monetary policy and better general economic conditions. Moreover, he said, in percentage terms, the oil shocks of the 1970s were much bigger than the steady price increases since 2002. But Nordhaus wrote before the latest jump in prices, and many economists are wondering how high will be high enough to hurt the broader economy. Since 2000, oil prices have quadrupled. Robert Rubin, who repeated that "markets go up, markets go down" while he was President Bill Clinton's Treasury secretary, said last week that "when oil was at $35, people said $60 oil would have tremendous effects on the economy, and at $90 we still have robust growth." But he added, "there comes some point where we will feel that vulnerability to high oil prices."

[bigron]

Gushing Oil Touches $97 a Barrel

Crude Prices Soar Past $96 a Barrel on Middle East Bombings, Government Demand Expectations

By JOHN WILEN

http://abcnews.go.com/Business/MarketTalk/story?id=3826625&page=1&Business=true


Oil futures jumped to a new record of $97 a barrel Tuesday after bombings in Afghanistan and an attack on a Yemeni oil pipeline compounded the supply concerns that have driven crude prices higher in recent weeks.

Those concerns were further fed by a government prediction on Tuesday that domestic oil inventories will fall further this year while consumption rises.

Oil was already up before news of the blasts in northern Afghanistan that killed 64 people and the attack in Yemen. Severe weather forecasts for the North Sea, expectations that domestic crude supplies fell last week and the weak dollar all contributed to the latest move upward.

While Afghanistan doesn't produce much oil, traders watch for the possibility that any escalation in the conflict there between U.S. armed forces and Islamic militants could spill over into other countries, disrupting oil supplies out of the Middle East.

John Kilduff, vice president of risk management at MF Global UK Ltd., noted that the attack in Yemen "has disrupted a pipeline that carries 155,000 barrels a day of crude."

Meanwhile, investors believe crude supplies are declining in the U.S. Analysts surveyed by Dow Jones Newswires predict, on average, that crude oil inventories fell by 1.6 million barrels last week. The Energy Department's Energy Information Administration will issue its weekly inventory report on Wednesday. Oil futures' rise above $90 a barrel has been fueled in part by two weeks of unexpected declines in inventories.

On Tuesday, the EIA predicted oil consumption will rise in the fourth quarter and next year despite higher prices, and that inventories will fall.

"Strong demand, limited surplus capacity, falling inventories and geopolitical concerns continue to weigh on the market," the EIA said in its monthly Short-Term Energy Outlook.

The weak dollar, which fell to a new low against the euro Tuesday, is also lifting oil prices. Oil futures offer a hedge against a weak dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

Light, sweet crude for December delivery rose $2.80 to $96.78 a barrel on the New York Mercantile Exchange Tuesday after earlier rising as high as $97, a new trading record.

Other energy futures also rose Tuesday. December gasoline futures jumped 6.31 cents to $2.4442 a gallon on the Nymex, while December heating oil futures added 6.71 cents to $2.611 a gallon.

Natural gas for December delivery rose 11 cents to $8.109 per 1,000 cubic feet on the Nymex.

In London, Brent crude rose $2.65 to $93.14 a barrel on the ICE Futures exchange. A number of North Sea oil platforms were being evacuated Tuesday in advance of expected severe weather.

At the pump, meanwhile, gas prices continued to rise, following oil's 39 percent price jump since August. The national average price of a gallon of gas jumped 2 cents overnight to $3.024 a gallon, according to AAA and the Oil Price Information Service.

Separately, the EIA reported that diesel fuel prices reached a national average of $3.303 a gallon, a new record.

On Wednesday, analysts also expect the EIA to report that gasoline inventories rose by 200,000 barrels during the week ended Nov. 2, while supplies of distillates, which include heating oil and diesel fuel, fell by 500,000 barrels.

The analysts expect that refinery use grew by 0.8 percentage point to 87 percent of capacity.

Oil inventories likely fell due to a suspension of output at Mexico's state oil company Petroleos Mexicanos, a major crude exporter to the United States, which temporarily shut its ports last week due to severe weather.

"The oil market is really supported by the tight inventories in the U.S. market and the general expectations for the inventory report this week are that the crude inventories will likely fall," said Victor Shum of Purvin & Gertz Inc. in Singapore.

Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on the how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.


Associated Press Writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report

[Apolitical Blues]

There may be some credence to the possibility of traders jacking up the price of a barrel of oil, however I am more inclined to believe that real reason is that the planet has reached its peak production capacity and the remaining oil is much more expensive to extract.  In a 1977 report to Congress the CIA told us the U.S. had reached its peak production capacity. 

There has been a lot of ink on the topic of peak oil and Mike Ruppert has been in the forefront of spreading this story.  Here is one of his pieces on the topic.  Sorry to say Mr. Ruppert is dealing with cancer and had to put his career on hold for the present and having to deal with the same, I'm in full support of his full recovery.

http://www.fromthewilderness.com/free/ww3/060805_380_oil.shtml

$380 Oil?
BANKS TALK OIL DEPLETION

By
Michael Kane

© Copyright 2005, From The Wilderness Publications, www.fromthewilderness.com. All Rights Reserved. May be reprinted, distributed or posted on an Internet web site for non-profit purposes only.

* Special thanks to Adam Porter for his outstanding reporting at www.oilcast.com

June 7, 2005 1800 PST (FTW): Banks across the world are now talking about oil in terms of "price spikes" and "depletion." This includes Goldman Sachs, the Bank of Montreal, and the French Investment bank Ixis-CIB.

The Goldman Sachs' report raised their price range for oil from $55 to $80 a barrel, to $55 to $105 per barrel. Goldman sees a high probability that a "super-spike" in oil prices will occur that would eventually drop back down. They took the time to address Peak Oil by stating they are not subscribers to the theory that global oil supply will hit some "magical inflection point" that would result in permanent declines.

Just days later the Bank of Montreal released a report on the largest oil field in the world, Ghawar, stating that the Saudi Arabian field is now in decline. Following this trend, the French investment bank Ixis-CIB has reported that oil prices will reach $380 by the year 2015. 1

The CIB report estimates that by 2015 the world will be facing an 8% deficit in supply verses demand. They see demand being 107.9 million barrels per day (bpd), but production only pumping 100 million bpd. As a result, adding 2.5% inflation annually from the United States, this would mean the price of oil would have to rise 6.86 times for supply to equal demand.2 Barring any miraculous supply increase, nothing short of that staggering level of price-induced "demand destruction" can bring the two numbers back together.

Ixis-CIB is a respected investment bank. According to Adam Porter, all the bank did was take the numbers that the oil industry and governments have published in terms of supply and depletion, then plugged them into a basic equation to project supply and demand 10 years from now. 3

Is $380 oil possible?

The term "demand destruction" is used repeatedly in the Goldman Sachs report; as Adam Porter points out at his web-cast www.oilcast.com (Oilcast #2), this is effectively a code phrase for massive recession. Before $380 oil could become reality, it is likely (if not inevitable) that a massive economic collapse would occur.

What's important now is not whether it is possible for oil to hit $380 per barrel in 2015, but rather the fact that banks are making such predictions at all. Six months ago such reports would have never been published by these respected investment banks. 4

Peak Oil awareness advocates have gained such a strong voice that it appears the major economic players may be ready to ride oil up for short-term profits.

Once these players decide it is time to ride up the "super-spike," they may attempt to manipulate the inevitable to occur at a time of their choosing in order to maximize their profits. If geo-political events render such manipulation impossible, it is highly likely that the super-rich have already positioned their finances for when a major catastrophe, such as the collapse of Ghawar 5, causes the markets to panic - fulfilling Goldman's prediction.

Either way, the outcome is effectively identical.

Whether they use the term "Peak Oil," avoid it all together, or choose to ridicule this geologically sound scientific principle as a "magic inflection point," it is abundantly clear that Peak Oil is now the barometer by which the pressure in the economic atmosphere will be forecast.

The "super-spike" will be just the beginning.


--------------------------------------------------------------------------------

1 "Will oil strike $380 a barrel by 2015?" by Adam Porter, Aljazeera.net, 4/21/05, http://english.aljazeera.net/NR/exeres/73CE8286-740C-482B-8150-DA57696BC02F.htm.

2 www.oilcast.com, Oilcast #6.

3 Phone interview with Adam Porter on May 8, 2005.

4 Ibid.

5 Aging oil wells often use a process called water injection in order to sustain or increase the production rate. The water pressure forces oil upward and out. This process is quite volatile and can lead to the destabilization or total collapse of an aging well, leaving the remaining oil reserves behind and effectively unrecoverable. Production at Ghawar is utilizing this technique along with horizontal drilling. Matt Simmons has warned that when used in combination these two techniques will accelerate the decline of Ghawar. If that happens, Saudi Arabian production will almost certainly have peaked. And Simmons' position is that Saudi Arabia may already have peaked.

[Dig]

There may be some credence to the possibility of traders jacking up the price of a barrel of oil, however I am more inclined to believe that real reason is that the planet has reached its peak production capacity and the remaining oil is much more expensive to extract.  In a 1977 report to Congress the CIA told us the U.S. had reached its peak production capacity. 

I like how Ruppert outed the CIA and the Bush/Clinton drug cartel.  But Greg Palast has uncovered the peak oil fraud after Mike got "cancer" (we are not sure how he got whatever he got.  And remember that the CIA uses cancer as an acceptable technique for assassinating dissidents).  Just do a search on peak oil on this forum and you will find links to hundreds of articles concerning this.  Basically the peak oil fraud has been going on for 50 years.  It has been conditioned via movies like the Mad Max Trilogy, Hackers, The Soldier, etc.  Mike saw the plan being implemented today because that is what was being leaked in 2005 to sub-elites.  Now we know that oil will rise to $200 a barrel because bilderberg wants it so.

The peak oil fraud is being used to get the neo-cons to support invading iran.  They are being told it will save the economy.  The truth is that it will expedite the bust of this failing economy.

[Mr Grinch]

Click live coverage link look on side for Bernanke feed. See how they try and dodge responsibility. Watch B52 Ben's body language and listen to his voice.... Not gonna help the markets Ill bet..

http://www.cnn.com/

Crap I missed Ron Paul debriefing B52 Ben the traitor.

[Riian]

In testimony before Congress' this morning joint economic committee, Federal Reserve Chairman Ben Bernanke says the central bank is concerned about credit crunch and rising oil prices.

In opening remarks before Bernanke's testimony, Sen. Charles Schumer (D-N.Y.), the chairman of the joint economic committee, said that he has begun to worry about the threat of a recession.

"I think we are at a moment of economic crisis stemming from four key areas: falling housing prices, lack of confidence in creditworthiness, the weak dollar and high oil prices," Schumer said. "Each of these problems alone would be enough of a threat to our economic well-being. But taken together, they are essentially the four horsemen of economic crisis."

http://money.cnn.com/2007/11/08/news/economy/bernanke/index.htm?cnn=yes

[jflack]

Here is Bernanke's full remarks and video.

http://www.cnbc.com/id/21689306

Of course he says most of the blame on the economy goes to subprime mortgages.  Not much talk about the dollar except that, "the foreign exchange value of the dollar had weakened."

[TJ]

Market didn't like what they heard...it's down over 200 points.

Several analyists on CNBC have referenced Ron Paul.  They are saying he is right.

[TJ]

Looks like Greenspan jumped ship just in time.  He probably saw the writing on the wall and didn't want to stick around to reap the heat from what he had done.

[Dig]

Ron Paul Schools Ben Bernanke Again

6 min - Nov 8, 2007
http://www.youtube.com/watch?v=yAwvlDJgJbM

Over 3,000 views in under 1 hour!

[Capt. Obvious]

Oh this was awesome!!!! Ron Paul rocks!

I would like to point out the last thing that Bernanke said, that if you hold dollars and the dollar goes down, you buyer power remains the same unless you are buying imports. Not true. Like Ron Paul said, interest rates are effected by the strength of the dollar. But also, materials used for producing goods in the US are imported too, not just the final product.

Bernanke = tool

[Dig]

I would like to point out the last thing that Bernanke said, that if you hold dollars and the dollar goes down, you buyer power remains the same unless you are buying imports.

I could not believe what I heard.  Even a high school economics course can show you this is a lie.  That statement alone should be a priority during his treason hearings.

[Biggs]

ECB head warns on exchange rate moves

By Ralph Atkins in Frankfurt and Krishna Guha in Washington

http://www.ft.com/cms/s/0/bd5c2478-8e2d-11dc-8591-0000779fd2ac.html?nclick_check=1
Published: November 8 2007 19:19 | Last updated: November 8 2007 19:19

European concerns about the impact of the falling dollar came into sharp focus on Thursday as the European Central Bank issued its strongest warning yet about “brutal” exchange rate movements.

As the dollar hit a 26-year low against sterling and neared a record low against the euro, Jean-Claude Trichet, ECB president, said recent exchange rate moves had been “undoubtedly sharp and abrupt”, adding that brutal moves were never welcome. At the same time, Ben Bernanke, chairman of the US Federal Reserve, said the falling dollar and soaring oil prices posed risks to US inflation.
Mr Trichet’s comments echoed language he used when the euro was strengthening rapidly at the end of 2004 and suggest the ECB believes exchange rates are constraining its room for manoeuvre in setting interest rates.

As expected, the ECB held rates at 4 per cent on Thursday. The Bank of England also left its benchmark rate on hold at 5.75 per cent.

The ECB almost certainly believes that more overt currency market intervention requires agreement with other central banks. But in spite of concerns that the weaker dollar will increase the risk of inflation, the Fed has shown no interest in currency intervention.

The ECB also said it would again inject €60bn ($88bn) in two separate operations to ease tensions in the three-month money market – an acknowledgment that market turmoil is not over.

Meanwhile, Mr Bernanke told the US Congress that the weak US currency and the higher price of energy would increase headline inflation in the short term and “had the potential to boost inflation in the longer run”.

[Rock]

http://www.abcnews.go.com/Politics/Vote2008/story?id=3839318&page=1

When you are Ron Paul, your public enemy No. 1 is the chairman of the Federal Reserve.

Because when you are Ron Paul, although you are technically a Republican, you are really a libertarian, and your strict adherence to the gospel of the Constitution leads you to question why the Federal Reserve -- the consortium of 12 reserve banks that acts as the U.S. central bank -- even exists.

It doesn't say anything about any central bank in the Constitution. Not only that, the primary responsibility of the Federal Reserve -- to control the money flow and availability of currency on the open market -- is something that you, Ron Paul, find incorrigible. The government, you believe, creates inflation when it prints money and moves it willy-nilly into the market to control the very inflation you think it's causing by moving that money around in the first place. Counterpoint: The gold standard was too inflexible, and the average citizen suffers when the government can't give the markets more fuel in the form of money. (And for your information, here's a Fed-produced interactive feature on the Fed.)

But you, as Ron Paul, have your druthers. You'd get right on back to the gold standard, where each dollar represents a set amount of gold. This whole artificial currency is maddening to you (and it's a lot of the reason you're running for president, although you get more press for being the only Republican candidate openly in opposition to the Iraq War). In fact, if you became president, one of the many pieces of the federal government you'd work to abolish, along with the Internal Revenue Service and the Department of Education, is the Fed.

So, when you're not out on the stump running for president but back at your day job in Washington, D.C., a job you plan to keep should you fail in your quest for the White House, it's a good thing for you, as congressman Ron Paul, to sit on the Joint Economic Committee, which from time to time hears testimony from Ben Bernanke, chairman of your hated Federal Reserve.

[Rock]

Looks like Paul is getting some publicity.........



Rock

[Dig]

Economic Terror
http://www.lewrockwell.com/orig/paul14.html
by Congressman Ron Paul, MD

Dealing with the slumping economy will prove every bit as challenging to Congress as fighting terrorism.

No one challenges the need to protect American citizens from further terrorist attacks, but there is much debate throughout the country as to how it should be done and whether personal liberty here at home must be sacrificed. Many are convinced that our efforts overseas might escalate the crisis and actually precipitate more violence. A growing number of Americans are becoming concerned that our efforts to preserve our freedoms and security will result in the unnecessary sacrifice of that which we've pledge to protect- our constitutionally protected liberty.

A similar conflict also exists once government attempts to legislate an end to a recession. In the 1970s, wage and price controls were used to suppress price inflation and to help the economy, without realizing the futility of such a policy. Not only did it not work, the economy was greatly harmed. Legislation, per se, is not necessarily harmful, but if it reflects bad policy, it is. The policy of wage and price controls makes things worse and represents a serious violation of people's rights.

Today, we hear from strong advocates of higher taxation, increased spending, higher budget deficits, tougher regulations, bailouts and all kinds of subsidies and support programs as tools to restore economic growth. The Federal Reserve recognized early on the severity of the problems and, over the past year, lowered short-term interest rates an unprecedented 11 times, dropping the Fed funds rate from 62 % to 1: %. This has not helped, and none of these other suggestions can solve the economic problems we face either. Some may temporarily help a part of the economy, but the solution to restoring growth lies not in more government but less. It is precisely too much government, and especially manipulation of credit by the Federal Reserve, that precipitated the economic downturn in the first place. Increasing that which caused the recession can't possibly, at the same time, be the solution.

The magnitude of the distortions of the 1990s brought on by artificially low interest rates orchestrated by the Fed, on top of 30 years of operating with a fiat currency worldwide, suggests that this slowdown will not abort quickly.

The Japanese economy has been in a slump for over 10 years and shows no signs of recovery. The world economies are more integrated than ever before. When they are growing, it is a benefit to all, but in a contraction, globalism based on fiat money and international government assures that most economies will be dragged down together. Evidence is abundant that most countries of the world are feeling the pressure of a weakening economy.

Many of our political and economic leaders have been preaching that more consumer spending can revitalize the economy. This admonition, of course, fails to address the reality of a record-high $7.5 trillion-and rising consumer debt. "Today, a party- tomorrow an economic hangover" has essentially been our philosophy for decades. But there's always a limit to deficit spending, whether it's private or governmental, and the short-term benefits must always be paid for in one form or another later on.

Those who felt and acted wealthy in holding the dot-com and Enron stocks were brought back to earth with a shattering correction. There's a lot more of this type of correction yet to come in the financial sector.

In recessions, to remain solvent, consumers ought to tighten their belts, pay off debt, and save. In a free market, this would lower market interest rates to once again make investments attractive. The confusing aspect of today's economy is that consumers and even businesses continue profligate borrowing, in spite of problems on the horizon. Interest rates, instead of rising, are pushed dramatically downward by the Federal Reserve, creating massive amounts of new credit.

This new credit, according to economic law, must in time push the value of the dollar down and general prices up. When this happens and the dollar is threatened on exchange markets, the cost of living is pushed sharply upward. The central bank is then forced to raise interest rates, as they did in 1979 when the rates hit 21%.

But even before any need to tighten, interest rates may rise or not fall as expected. This has just happened in 2001. Even with Fed fund rates at 40-year lows, the 10 and 30-year rates have not fallen accordingly. Many corporate-bond rates have stayed high, and credit-card rates have stayed in double digits. This happens because the market discounts for debt quality and future depreciation of the dollar.

The Fed can't control these rates, and they can't control where the new credit they create goes. This means that resorting to, or trusting in, the Fed to bail out the economy and accommodate congressional spending is foolhardy and dangerous. This policy has led to a record default for U.S. corporate bonds. Worldwide, $110 billion of bonds were defaulted on last year.

Monetary inflation is the chief cause of recessions. Therefore, we must never expect that this same policy will reverse the economic dislocations it has caused.

For over a year, the Fed has been massively inflating the money supply, and there is no evidence that it has done much good. This continuous influx of new credit instead delays the correction that must eventually come- the liquidation of bad debt, and the reduction of overcapacity. This is something Japan has not accomplished in 12 years of interest rates around 1%. The market must be left to eliminate the misdirected investments and allow the sound investments to survive.

There are other policies that will assist in a recovery that the Congress could implement. All taxes ought to be lowered, government spending should be reduced, controls on labor costs should be removed, and onerous regulations should be reduced or eliminated.

We should not expect any of this to happen unless the people and the Congress decide that free-market capitalism and sound money are preferable to a welfare state and fiat money. Whether this downturn is the one that will force that major decision upon us is not known, but eventually we will have to make it. Welfarism and our expanding growing foreign commitments, financed seductively through credit creation by the Fed, are not viable options.

Transferring wealth to achieve a modicum of economic equality and assuming the role of world policeman, while ignoring economic laws regarding money and credit, must lead to economic distortions and a lower standard of living for most citizens. In the process, dependency on the government develops and Congress attempts to solve all the problems with a much more visible hand than Adam Smith recommended. The police efforts overseas and the effort to solve the social and economic problems here at home cannot be carried out without undermining the freedoms that we all profess to care about.

Sadly lacking in the Congress is a conviction that free markets- that is truly free markets- and sound money can provide the highest standard of living for the greatest number of people. Instead, we operate with a system that compromises free markets and causes economic injury to a growing number of people, while rewarding special interests and steadily undermining the principles of liberty. Unfortunately, the policy of monetary inflation is most harmful to the poor and the middle class, especially in the early stages.

Since rejecting the current system and endorsing economic freedom diminishes the power and influence of politicians, it's difficult to get political support for such a program. The necessary changes will only come when the American people wake up to the reality and insist that the Congress pursues only those goals permitted under the Constitution.

Instead of moving in that direction of freer markets, the more problems the western countries face, the more government programs are demanded. If one looks at Europe, the United States, or even Japan as their economies weaken, government involvement in the economy increases. But in China and Russia, the horrible conditions that communism causes, ironically, made these two countries move toward freer markets when they encountered serious troubles. Even the central banks of these two countries today are accumulating gold, while western central banks are selling.

The reason for this is that the conventional wisdom of the west=s political and economic leaders is that there's a third way that is best, or an alternative to the extremes of too much freedom- laissez faire capitalism- and too little freedom- authoritarianism, socialism or communism.

But this is a myth. One can only justify intervention in the market on principle or argue against it. There's always the hope that government will be prudent and limit its intrusion in the economy with low taxes, minimal regulations, a little inflation, and only a few special interest favors. Yet the record is clear. Any sign of distress prompts government action for any and every conceivable problem. Since each action by the government not only fails in its attempt to solve the problem it addresses, it creates several new problems in addition while prompting even more government intervention.

Here in the United States we have seen the process at work for several decades with steady growth in the size and scope of the federal bureaucracy and the corresponding reduction in our personal freedoms. This principle also applies to overseas intervention. One episode of meddling in the affairs of other nations leads to several new problems requiring even more of our attention and funding.

This system leads to a huge bureaucratic government, manipulated by politicians, and generates an army of special interests that flood the system with money and demands. To achieve and maintain political power in Washington, these powerful special interests must be satisfied.

This is a well-known problem and prompts some serious-minded and well-intentioned Members to want to legislate campaign finance reforms. But the reforms proposed would actually make the whole mess worse. They would regulate access to the members of Congress, and dictate how private money is spent in campaigns. This merely curtails liberty, while ignoring the real problem- a government that ignores the Constitution naturally passes out largesse. Even under today's conditions, where money talks in Washington, if enough members would refuse either to accept or be influenced by the special interests, government favors would no longer be up for sale. Since politicians are far from perfect, the solution is having a government of limited size acting strictly within the framework of the Constitution. No matter how strictly campaign finance laws are written, they will do only harm if the rule of law is not restored and if Congress refuses to stop being manipulated by the special interests.

Most people recognize the horrible mess that Washington is and how campaign money and lobbyists influence the system. But the reforms proposed only deal with the symptoms and not the root cause. There is sharp disagreement in what to do about it, but no one denies the existence of the problem. It=s just hard for most to acknowledge that the welfare state is out of control and shouldn't be in existence anyway. Therefore, they misdirect our attention toward campaign-finance reform rather than deal with the real problem.

Very few in Washington, however, recognize the dire consequences to economic prosperity that welfarism, warfarism, and inflationism cause. Most believe that the occasional recession can be easily handled by government programs and a Federal Reserve policy designed to stimulate growth. It's happened many times already, and almost everyone believes that in a few months our economy and stock market will be roaring once again.

[Dig]

This is where I disagree.

Every recession in the last 30 years, since the dollar became a purely fiat currency, has ended after a significant correction and resumption of all the bad policies that caused the recession in the first place. Each rebound required more spending, debt and easy credit than the previous recovery did. And with each cycle, the government got bigger and more intrusive.

Bigger government with more monetary debasement and deficit spending means a steady erosion of the free market and personal freedoms. This is not tolerated, because the people enjoy or even endorse higher taxes, more regulations and fewer freedoms. It's tolerated because most people believe that their financial and economic security is the responsibility of the government. They believe they are better off with government assistance in facilitating the free market, having been taught for decades that it is necessary for government to put a human face on capitalism. Extreme capitalism, i.e. freedom, we have been told is just as dangerous as extreme socialism. As long as this belief prevails, our system will continue in its inexorable march toward fascist-type socialism.

However, support for today's policies is built on the fallacy that material wealth and general prosperity are best achieved with this third way- interventionism- while avoiding the dangers of communism and socialism. This is coupled with the firm conviction that the sacrifice of freedom will be minimal and limited and that the very rich can be adequately taxed and regulated to help the poor.

This is a fallacy because more freedom will be lost than is expected, and the productivity of the market will suffer more than anticipated. Once this realization occurs, it will suddenly be discovered that the apparent wealth of the nation is a lot less than calculated.

An economy that depends on ever-increasing rates of monetary inflation will appear much healthier and the people much richer than is the actual case. Owners of the dot-com companies or Enron stocks know what it's like to feel rich one day and very poor the next. This is not a unique experience but one that should be expected and is predictable.

Countries that inflate their currencies must adjust their values periodically with sudden devaluations, which destroy the pseudo-wealth of the middle class and poor. The wealthy, more often than not, can protect themselves from the sudden shocks to the monetary system. However, they can't protect from the insidious loss of liberty that accompanies these adjustments, and eventually everyone suffers.

Our dollar system is quite similar to the Argentine and Mexican peso systems that periodically make sudden and painful adjustments. But ours is different in one respect, because the dollar is accepted as the reserve currency of the world- the paper gold of the world financial system. This gives us license to inflate- that is, steal- for longer periods of time, and we can avoid sudden and sharp devaluations since the world's currencies are "defined" by our dollar. But this doesn't permit the ultimate devaluation that will bring a significant increase in the cost of living to all Americans, but hurt the poor and the middle class the most.

This special status of the dollar only makes the problem of the illusion of wealth much worse. Since our bubble can last longer due to our perceived military and economic strength, it appears that our wealth is much greater than it actually is. Because of our unique position as the economic powerhouse of the world, we're able to borrow more than anyone else. Foreigners loan us exorbitant sums, as our current account deficit soars out of sight. The U.S. now has a foreign debt of over $2 trillion. Perceptions and illusions and easy credit allow our consumers to spend, even in recessions, by rolling up even more debt in a time when market forces are saying that borrowing should decrease and the debt burden lessen. Our corporations follow the same pattern, keeping afloat with more borrowing.

Ideas regarding the national debt have been transformed. Presidents Jefferson and Jackson despised government debt and warned against it. Likewise, both detested central banking, which they knew inevitably, would be used to liquidate the real debt through the mischievous process of monetary debasement.

Today, few decry the debt, except for the purpose of political demagoguery when convenient. The concern about deficits expressed by liberal big spenders does not merit credibility, but even conservative spenders now are less likely to decry deficits and some actually praise them.

Just recently, the conservative Institute for Policy Innovation (IPI) announced in a national press release: "National debt can lead to a growing economy," claiming government borrowing, "produces steady long-term growth, greater security, and a higher standard of living."

This wouldn't be so bad if it came from a typically Keynesian think tank. But this is the growing conventional wisdom of many conservatives whose goal is to generate government revenues, painlessly of course, not to drastically shrink the size of government and restore personal liberty.

What they fail to recognize, once they lose interest in shrinking the size of government, is that government borrowing always takes money from productive enterprises, while placing these funds in the hands of politicians whose prime job is to serve special interests. Deficits are a political expedience that also forces the Federal Reserve to inflate the currency while reducing in real terms the debt owed by the government by depreciating the value of the currency.

Those who would belittle the critics of the deficit and national debt are merely supporting a system of big government, whether it's welfare or warfare, or both.

Debt, per se, is not the only issue. It's also because debt always encourages the growth in the size of government. Allowing it to be seductively financed through inflation or borrowing is what makes it so bad. Just because it's less painful at first and payment is delayed, we should not be tempted to endorse this process.

If liberty is our goal and minimal government a benefit to a sound economy, we must always reject debt and deficits as a legitimate tool for improving the economy and the welfare of the greatest number of people. The principle of authoritarian government is endorsed whenever deficits are legitimatised. All those who love liberty must reject the notion that deficits and debt perform a useful function.

It's possible this recession may end in a few months as the optimists predict, but if it does, our problems are only delayed. The fundamental correction will still be necessary to preserve the productivity of a market economy. If we do not change our ways, the financial bubble will just go back to inflating again. The big correction, like that which Argentina is now experiencing with rapid disappearance of paper wealth, will eventually hit our economy. The longer the delay, the bigger will be the bust and greater the threat to our freedoms and institutions.

Since we're moving toward the big correction, we're going to see a lot more wealth removed from our balance sheets and our retirement accounts. The rampant price inflation that results will erode the purchasing power of all fixed-income retirement funds like Social Security and mean a lower standard living for most people. The routine government response of increasing benefits for living expenses and medical care will never keep up with the needs or demands. Eventually we will have to give up, and a new economic system will have to be devised, as occurred in the Soviet system after 1989.

Wealth- the product of labor, investment and savings- can never be substituted by government spending or by a central bank that creates new money out of thin air. Governments can only give things they first take away from someone else. Printing money only diminishes the value of each monetary unit. Neither can create wealth; both can destroy it.

The dilemma is that early on, and sometimes for many years as we have experienced, transferring wealth and printing money seem to help more than it hurts. That's because the wealth is not real, and the trust funds, like Social Security hold no actual wealth. A pension fund with dot-com and Enron stock held no wealth either. Unfortunately, the stocks and bonds remaining are worth a lot less than most people realize.

The Social Security system depends on the value of the dollar and on future taxation. The Fed can create unlimited amounts of money that Congress needs, and Congress can raise taxes as it wants. But this policy guarantees that the dollar cannot maintain its purchasing power and that there won't be enough young people to tax in the future. Increasing benefits under these circumstances can only be done at the expense of the dollar. Catching up with the current system of money and transfer payments is equivalent to a person on a treadmill who expects to get to the next town. It tragically doesn't work.

The economic loss is bad enough, but whether it's fighting the war on terrorism, acting as the world's policeman, or solving the problems of vanishing wealth, the real insult will come from the freedoms we lose. These freedoms, vital to production and wealth formation, are necessary and represent what the American dream is all about. They are what made us the richest nation in all of history, but this we will lose if Congress is not careful with what it does in the coming months.

[Dig]

The Dangers We Face
If nothing else, the knowledge that we are now vulnerable from outside attack is shared by all Americans. The danger is clear and present and everyone wants something done about it.

There is, however, no unanimity as to the cause of the attacks, who is responsible, and what exactly has to be done. The President has been given congressional authority to use force "against those responsible for the recent attacks launched against the United States." A large majority of Americans are quite satisfied that his efforts have been carried out with due diligence.

But a growing number of Americans are becoming aware that anti-terrorist efforts, both at home and abroad, will have unintended consequences that few anticipated and that, in time, will not be beneficial to U.S. security and will undermine our liberties here at home.

Let me name a few potential dangers we face.

1. There's a danger that the definition of terrorism will become so vague and broad that almost any act internationally or domestically will qualify. If our response in Afghanistan becomes the standard for all countries in their retaliation, negotiated settlements of conflicts will become a thing of the past. Acts of terror occur on a regular basis around the world, whether involving Northern Ireland and Britain, India and Pakistan, the Palestinians and Israel, Turkey and Greece, or many other places. Traditionally, the United States has always urged restraint and negotiations. This approach may end if our response in Afghanistan sets the standard.

2. Another danger is that the administration may take it upon itself to broadly and incorrectly interpret House Joint Resolution 64- the resolution granting authority to the President to use force to retaliate against only "those responsible for the recent attacks launched against the United States." Congress did not authorize force against all terrorist attacks throughout the world if the individuals involved were not directly involved in the 9-11 attacks. It would be incorrect and dangerous to use this authority to suppress uprisings throughout the world. This authority cannot be used to initiate an all-out attack on Iraq or any other nation we might find displeasing but that did not participate in the 9-11 attacks.

3. An imprecise definition of who is or who is not a terrorist may be used to justify our massively expanding military might throughout the world. For every accused terrorist, there will be a declared "freedom fighter." To always know the difference is more than one can expect. Our record in the past 50 years for choosing the right side in the many conflicts in which we have been involved is poor, to say the least. Many times, there is no "right side," from the viewpoint of American security, and our unnecessary entanglements have turned out to be the greater threat to our security.

4. There's risk that our massive deployment of troops in the many countries of the world may contribute to a greater conflict. We are today in the middle of a dangerous situation between Pakistan and India over Kashmir, both of whom possess nuclear weapons and both of whom we generally finance. Exposing ourselves to such risk, while spending endless sums supporting both sides, makes no sense.

5. Our pervasive military presence may well encourage alliances that would have been unheard of a few years ago. Now that we've committed ourselves internationally to destroying Afghanistan and rebuilding it, with a promise that we'll be there for a long time, might encourage closer military alliances between Russia and China, and even others like Pakistan, Iran and Iraq, and even Saudi Arabia- countries all nervous about our military permanency in this region. Control of Caspian Sea oil is not a forgotten item for these countries, and it will not be gracefully conceded to U.S. oil interests. If these alliances develop, even U.S. control of Persian Gulf oil could be challenged as well.

6. Limits exist on how extensive our foreign commitments should be. We have our military limits. It's difficult to be everyplace at one time, especially if significant hostilities break out in more than one place. For instance, if we were to commit massive troops to the overthrow of Saddam Hussein, and Iran were to decide to help Iraq, and at the same time the North Koreans were to decide to make a move, our capacity to wage war in both places would be limited. Already we're short of bombs from the current Afghanistan war. We had to quit flying sorties over our own cities due to cost, while depending on NATO planes to provide us AWACs cover over U.S. territory. In addition, our financial resources are not unlimited, and any significant change in the value of the dollar, as well as our rapidly growing deficits, could play a significant role in our ability to pay our bills.

7. In the area of personal liberty, we face some real dangers. Throughout our history, starting with the Civil War, our liberties have been curtailed and the Constitution has been flaunted. Although our government continued to grow with each crisis, many of the liberties curtailed during wartime were restored. War was precise and declared, and when the war was over, there was a desire to return to normalcy. With the current war on terrorism, there is no end in sight and there is no precise enemy, and we've been forewarned that this fight will go on for a long time. This means that a return to normalcy after the sacrifices we are making with our freedoms is not likely. The implementation of a national ID card, pervasive surveillance, easy-to-get search warrants, and loss of financial and medical privacy will be permanent. If this trend continues, the Constitution will become a much weaker document.

8. A danger exists that the United States is becoming a police state. Just a few decades ago, this would have been unimaginable. As originally designed, in the American republic, police powers were the prerogative of the states and the military was not to be involved. Unfortunately today, most Americans welcome the use of military troops to police our public places, especially the airports. Even before 9-11, more than 80,000 armed federal bureaucrats patrolled the countryside, checking for violations of federal laws and regulations. That number since 9-11 has increased by nearly 50%- and it will not soon shrink. A military takeover of homeland security looks certain. Can freedom and prosperity survive if the police state continues to expand? I doubt it. It never has before in all of history, and this is a threat the Congress should not ignore.

9. There is a danger that personal privacy will be a thing of the past. Even before 9-11, there were attacks on the privacy of all Americans- for good reasons, or so it was argued. The attacks included plans for national ID cards, a national medical data bank, and "Know Your Customer" type banking regulations. The need for enforcement powers for the DEA and the IRS routinely prompted laws that violated the Fourth amendment. The current crisis has emboldened those who already were anxious to impose restrictions on the American people. With drug and tax laws, and now with anti-terrorist legislation sailing through Congress, true privacy enjoyed by a free people is fast becoming something that we will only read about in our textbooks. Reversing this trend will not be easy.

10. Flying commercial airlines will continue to be a hassle and dangerous. Even travel by other means will require close scrutiny by all levels of government in the name of providing security. Unfortunately, the restrictions and rules on travel on all American citizens will do little, if anything, to prevent another terrorist attack.

11. The economic ramifications of our war on terrorism are difficult to ascertain but could be quite significant. Although the recession was obviously not caused by the attacks, the additional money spent and the effect of all the new regulations cannot help the recovery. When one adds up the domestic costs, the military costs and the costs of new regulations, we can be certain that deficits are going to grow significantly, and the Federal Reserve will be further pressured to pursue a dangerous monetary inflation. This policy will result in higher rather than lower interest rates, a weak dollar and certainly rising prices. The danger of our economy spinning out of control should not be lightly dismissed.

12. In this crisis, as in all crises, the special interests are motivated to increase their demands. It's a convenient excuse to push for the benefits they were already looking for. Domestically, this includes everyone from the airlines to the unions, insurance companies, travel agents, state and local governments, and anyone who can justify a related need. It's difficult for the military-industrial complex to hide their glee with their new contracts for weapons and related technology. Instead of the events precipitating a patriotic fervor for liberty, we see enthusiasm for big government, more spending, more dependency, greater deficits and military confrontations that are unrelated to the problems of terrorism. We are supposed to be fighting terrorism to protect our freedoms, but if we are not careful, we will lose our freedoms and precipitate more terrorist attacks.

13. Understandably, not much empathy is being expressed for members of the Taliban that we now hold as prisoners. The antipathy is easily understood. It's not only that as a nation we should set a good example under the rules of the Geneva Convention, but if we treat the Taliban prisoners inhumanly, there is the danger it will surely be used as an excuse to treat U.S. prisoners in the same manner in the future. This certainly is true when we use torture to extract information, which is now being advised. Not only does that reflect on our own society as a free nation, but torture notoriously rarely generates reliable information. This danger should not be ignored. Besides, we have nothing to gain by mistreating prisoners who may have no knowledge of the 9-11 attacks. The idea that those captured are "terrorists" responsible for the 9-11 attacks begs the obvious question.

Optimism or Pessimism?
Many realists who see the world as it really is and who recognize the dilemma we face in the United States to preserve our freedoms in this time of crisis are despondent and pessimistic, believing little can be done to reverse the tide against liberty. Others who share the same concern are confident that efforts to preserve the true spirit of the Constitution can be successful. Maybe next month or next year or at some later date, I'm convinced that, in time, the love for liberty can be rejuvenated. Once it's recognized that government has no guarantee of future success, promoting dependency and security can quickly lose it allure.

The Roman poet, Horace, two thousand years ago spoke of adversity: "Adversity has the effect of eliciting talents which in times of prosperity would have lain dormant." Since I believe we will be a lot less prosperous in the not-too-distant future, we will have plenty of opportunity to elicit the talents of many Americans.

Leonard Read, one of the greatest champions of liberty in the 20th Century, advised optimism:

In every society there are persons who have the intelligence to figure out the requirements of liberty and the character to walk in its ways.  This is a scattered fellowship of individuals- mostly unknown to you or me- bound together by a love of ideas and a hunger to know the plain truth of things.

He was convinced that this remnant would rise to the occasion and do the necessary things to restore virtue and excellence to a people who had lost their way. Liberty would prevail.

Let us be convinced that there is not enough hate or anger to silence the cries for liberty or to extinguish the flame of justice and truth.

We must have faith that those who now are apathetic, anxious for security at all costs, forgetful of the true spirit of American liberty, and neglectful of the Constitution, will rise to the task and respond accordingly.

February 9, 2002

Dr. Ron Paul is a Republican member of Congress from Texas.

[bigron]

Card Debt a $915 Billion Disaster-in-Waiting

Tuesday, Nov. 6, 2007 3:47 p.m. EST
http://moneynews.com/money/archives/st/2007/11/6/155431.cfm?s=st

Think the estimated subprime debt load carried by the big international banks is big, at $1 trillion?
How about this: Americans now owe nearly as much – a record $915 billion – on their credit cards alone.

And defaults and delinquencies in the credit card sector are piling up – which means big banks are on the hook, again. More sand in the gears for the global economy.

Credit card companies wrote off 4.58 percent in payments between January and May, almost a third more than in the same period in 2006, according to Moody's Investors Service.


As a result, lenders such as Citigroup, Bank of America, and American Express, among others already reeling from the subprime mortgage disaster, are being further weakened.

Not to mention the staggering U.S. economy, which is so dependent on a vigorous consumer credit sector to keep it healthy. Seventy-two percent of the U.S. economy rides on consumption alone.

Third quarter numbers for banks were the worst since 2001. First Citigroup took a 57 percent hit in earnings. The decline was attributed, in large part, to consumer-credit problems. Anticipating additional defaults, they stashed away $2.24 billion in loan-loss reserves.

[Editor's Note:Cash and Banks at Risk? Protect Your Wealth Now http://moneynews.com/jump/suggestions/fir45.htm

Other major banks also took a beating and are also preparing for the expected credit card delinquencies and defaults.

American Express added 44 percent to its U.S. card division loss reserves. Bank of America, Capital One and Washington Mutual are all expecting at least another 20 percent in credit card losses over the next two to four quarters.

An increase in credit card balances and first-time cash advances were cited by Citi Chief Financial Officer Gary Crittenden as indicators of possible trouble to come. The change in loan losses was "inherent in the [Citigroup] portfolio but not yet visible in delinquencies," Crittenden told Fortune magazine.

An increase in bankruptcies is a major contributor to credit card defaults, according to Jay Eisbruck, managing director of Moody's Asset-Backed Finance Group.

Falling home prices and rising gasoline costs also add to bankruptcy woes. U.S. home prices fell 3.2 percent in the second quarter, the sharpest decline since 1987, according to Standard & Poor's.

As home prices fall, homeowners have a harder time getting cash by refinancing high-rate mortgages. The high cost of gas, often purchased with credit cards, doesn't help either.

On Monday, the national average price for a gallon of regular gasoline was $2.971, according to the U.S. Energy Department, up 10 cents from last week, and the highest since the peak summer travel period of August. A three-buck a gallon average is inevitable, say analysts.

Low- and middle-income workers who must drive to work have been hardest hit by the increases, further boosting delinquencies and defaults.

Fears are now rising that U.S. consumer credit card problems could ripple out into the global credit market, starting in Europe. Deutsche Bank, for example, is now "…in a heightened state of alert to monitor a potential domino effect," says the bank's U.S. analyst, Michael Mayo.

In the U.K., homeowners are reportedly using their credit cards for mortgage payments. Credit card interest typically runs much higher than mortgage rates, so reducing one debt by increasing another at a higher rate can be the first step on the road to default and eventual bankruptcy.

The U.K, usually 18 months ahead of the U.S. in its credit cycle, is perhaps a harbinger of things to come in the U.S. credit picture.

[bigron]

Reckoning
The Economic Consequences of Mr. Bush

http://www.vanityfair.com/politics/features/2007/12/bush200712


The next president will have to deal with yet another crippling legacy of George W. Bush: the economy.

A Nobel laureate, Joseph E. Stiglitz, sees a generation-long struggle to recoup.
by Joseph E. Stiglitz December 2007

 The American economy can take a lot of abuse, but no economy is invincible. Illustration by Edward Sorel.
When we look back someday at the catastrophe that was the Bush administration, we will think of many things: the tragedy of the Iraq war, the shame of Guantánamo and Abu Ghraib, the erosion of civil liberties. The damage done to the American economy does not make front-page headlines every day, but the repercussions will be felt beyond the lifetime of anyone reading this page.

I can hear an irritated counterthrust already. The president has not driven the United States into a recession during his almost seven years in office. Unemployment stands at a respectable 4.6 percent. Well, fine. But the other side of the ledger groans with distress: a tax code that has become hideously biased in favor of the rich; a national debt that will probably have grown 70 percent by the time this president leaves Washington; a swelling cascade of mortgage defaults; a record near-$850 billion trade deficit; oil prices that are higher than they have ever been; and a dollar so weak that for an American to buy a cup of coffee in London or Paris—or even the Yukon—becomes a venture in high finance.

And it gets worse. After almost seven years of this president, the United States is less prepared than ever to face the future. We have not been educating enough engineers and scientists, people with the skills we will need to compete with China and India. We have not been investing in the kinds of basic research that made us the technological powerhouse of the late 20th century. And although the president now understands—or so he says—that we must begin to wean ourselves from oil and coal, we have on his watch become more deeply dependent on both.

Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle “worst president” when it comes to stewardship of the American economy. Once Franklin Roosevelt assumed office and reversed Hoover’s policies, the country began to recover. The economic effects of Bush’s presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting. There is no threat of America’s being displaced from its position as the world’s richest economy. But our grandchildren will still be living with, and struggling with, the economic consequences of Mr. Bush.

Remember the Surplus?
The world was a very different place, economically speaking, when George W. Bush took office, in January 2001. During the Roaring 90s, many had believed that the Internet would transform everything. Productivity gains, which had averaged about 1.5 percent a year from the early 1970s through the early 90s, now approached 3 percent. During Bill Clinton’s second term, gains in manufacturing productivity sometimes even surpassed 6 percent. The Federal Reserve chairman, Alan Greenspan, spoke of a New Economy marked by continued productivity gains as the Internet buried the old ways of doing business. Others went so far as to predict an end to the business cycle. Greenspan worried aloud about how he’d ever be able to manage monetary policy once the nation’s debt was fully paid off.

This tremendous confidence took the Dow Jones index higher and higher. The rich did well, but so did the not-so-rich and even the downright poor. The Clinton years were not an economic Nirvana; as chairman of the president’s Council of Economic Advisers during part of this time, I’m all too aware of mistakes and lost opportunities. The global-trade agreements we pushed through were often unfair to developing countries. We should have invested more in infrastructure, tightened regulation of the securities markets, and taken additional steps to promote energy conservation. We fell short because of politics and lack of money—and also, frankly, because special interests sometimes shaped the agenda more than they should have. But these boom years were the first time since Jimmy Carter that the deficit was under control. And they were the first time since the 1970s that incomes at the bottom grew faster than those at the top—a benchmark worth celebrating.

By the time George W. Bush was sworn in, parts of this bright picture had begun to dim. The tech boom was over. The nasdaq fell 15 percent in the single month of April 2000, and no one knew for sure what effect the collapse of the Internet bubble would have on the real economy. It was a moment ripe for Keynesian economics, a time to prime the pump by spending more money on education, technology, and infrastructure—all of which America desperately needed, and still does, but which the Clinton administration had postponed in its relentless drive to eliminate the deficit. Bill Clinton had left President Bush in an ideal position to pursue such policies. Remember the presidential debates in 2000 between Al Gore and George Bush, and how the two men argued over how to spend America’s anticipated $2.2 trillion budget surplus? The country could well have afforded to ramp up domestic investment in key areas. In fact, doing so would have staved off recession in the short run while spurring growth in the long run.

But the Bush administration had its own ideas. The first major economic initiative pursued by the president was a massive tax cut for the rich, enacted in June of 2001. Those with incomes over a million got a tax cut of $18,000—more than 30 times larger than the cut received by the average American. The inequities were compounded by a second tax cut, in 2003, this one skewed even more heavily toward the rich. Together these tax cuts, when fully implemented and if made permanent, mean that in 2012 the average reduction for an American in the bottom 20 percent will be a scant $45, while those with incomes of more than $1 million will see their tax bills reduced by an average of $162,000.

The administration crows that the economy grew—by some 16 percent—during its first six years, but the growth helped mainly people who had no need of any help, and failed to help those who need plenty. A rising tide lifted all yachts. Inequality is now widening in America, and at a rate not seen in three-quarters of a century. A young male in his 30s today has an income, adjusted for inflation, that is 12 percent less than what his father was making 30 years ago. Some 5.3 million more Americans are living in poverty now than were living in poverty when Bush became president. America’s class structure may not have arrived there yet, but it’s heading in the direction of Brazil’s and Mexico’s.

The Bankruptcy Boom
In breathtaking disregard for the most basic rules of fiscal propriety, the administration continued to cut taxes even as it undertook expensive new spending programs and embarked on a financially ruinous “war of choice” in Iraq. A budget surplus of 2.4 percent of gross domestic product (G.D.P.), which greeted Bush as he took office, turned into a deficit of 3.6 percent in the space of four years. The United States had not experienced a turnaround of this magnitude since the global crisis of World War II.

Agricultural subsidies were doubled between 2002 and 2005. Tax expenditures—the vast system of subsidies and preferences hidden in the tax code—increased more than a quarter. Tax breaks for the president’s friends in the oil-and-gas industry increased by billions and billions of dollars. Yes, in the five years after 9/11, defense expenditures did increase (by some 70 percent), though much of the growth wasn’t helping to fight the War on Terror at all, but was being lost or outsourced in failed missions in Iraq. Meanwhile, other funds continued to be spent on the usual high-tech gimcrackery—weapons that don’t work, for enemies we don’t have. In a nutshell, money was being spent everyplace except where it was needed. During these past seven years the percentage of G.D.P. spent on research and development outside defense and health has fallen. Little has been done about our decaying infrastructure—be it levees in New Orleans or bridges in Minneapolis. Coping with most of the damage will fall to the next occupant of the White House.

Although it railed against entitlement programs for the needy, the administration enacted the largest increase in entitlements in four decades—the poorly designed Medicare prescription-drug benefit, intended as both an election-season bribe and a sop to the pharmaceutical industry. As internal documents later revealed, the true cost of the measure was hidden from Congress. Meanwhile, the pharmaceutical companies received special favors. To access the new benefits, elderly patients couldn’t opt to buy cheaper medications from Canada or other countries. The law also prohibited the U.S. government, the largest single buyer of prescription drugs, from negotiating with drug manufacturers to keep costs down. As a result, American consumers pay far more for medications than people elsewhere in the developed world.

You’ll still hear some—and, loudly, the president himself—argue that the administration’s tax cuts were meant to stimulate the economy, but this was never true. The bang for the buck—the amount of stimulus per dollar of deficit—was astonishingly low. Therefore, the job of economic stimulation fell to the Federal Reserve Board, which stepped on the accelerator in a historically unprecedented way, driving interest rates down to 1 percent. In real terms, taking inflation into account, interest rates actually dropped to negative 2 percent. The predictable result was a consumer spending spree. Looked at another way, Bush’s own fiscal irresponsibility fostered irresponsibility in everyone else. Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support. Credit-card debt mounted to a whopping $900 billion by the summer of 2007. “Qualified at birth” became the drunken slogan of the Bush era. American households took advantage of the low interest rates, signed up for new mortgages with “teaser” initial rates, and went to town on the proceeds.

All of this spending made the economy look better for a while; the president could (and did) boast about the economic statistics. But the consequences for many families would become apparent within a few years, when interest rates rose and mortgages proved impossible to repay. The president undoubtedly hoped the reckoning would come sometime after 2008. It arrived 18 months early. As many as 1.7 million Americans are expected to lose their homes in the months ahead. For many, this will mean the beginning of a downward spiral into poverty.

Continued part 2

[bigron]

The Economic Consequences of Mr. Bush   (part 2)

http://www.vanityfair.com/politics/features/2007/12/bush200712



Between March 2006 and March 2007 personal-bankruptcy rates soared more than 60 percent. As families went into bankruptcy, more and more of them came to understand who had won and who had lost as a result of the president’s 2005 bankruptcy bill, which made it harder for individuals to discharge their debts in a reasonable way. The lenders that had pressed for “reform” had been the clear winners, gaining added leverage and protections for themselves; people facing financial distress got the shaft.

And Then There’s Iraq
The war in Iraq (along with, to a lesser extent, the war in Afghanistan) has cost the country dearly in blood and treasure. The loss in lives can never be quantified. As for the treasure, it’s worth calling to mind that the administration, in the run-up to the invasion of Iraq, was reluctant to venture an estimate of what the war would cost (and publicly humiliated a White House aide who suggested that it might run as much as $200 billion). When pressed to give a number, the administration suggested $50 billion—what the United States is actually spending every few months. Today, government figures officially acknowledge that more than half a trillion dollars total has been spent by the U.S. “in theater.” But in fact the overall cost of the conflict could be quadruple that amount—as a study I did with Linda Bilmes of Harvard has pointed out—even as the Congressional Budget Office now concedes that total expenditures are likely to be more than double the spending on operations. The official numbers do not include, for instance, other relevant expenditures hidden in the defense budget, such as the soaring costs of recruitment, with re-enlistment bonuses of as much as $100,000. They do not include the lifetime of disability and health-care benefits that will be required by tens of thousands of wounded veterans, as many as 20 percent of whom have suffered devastating brain and spinal injuries. Astonishingly, they do not include much of the cost of the equipment that has been used in the war, and that will have to be replaced. If you also take into account the costs to the economy from higher oil prices and the knock-on effects of the war—for instance, the depressing domino effect that war-fueled uncertainty has on investment, and the difficulties U.S. firms face overseas because America is the most disliked country in the world—the total costs of the Iraq war mount, even by a conservative estimate, to at least $2 trillion. To which one needs to add these words: so far.

It is natural to wonder, What would this money have bought if we had spent it on other things? U.S. aid to all of Africa has been hovering around $5 billion a year, the equivalent of less than two weeks of direct Iraq-war expenditures. The president made a big deal out of the financial problems facing Social Security, but the system could have been repaired for a century with what we have bled into the sands of Iraq. Had even a fraction of that $2 trillion been spent on investments in education and technology, or improving our infrastructure, the country would be in a far better position economically to meet the challenges it faces in the future, including threats from abroad. For a sliver of that $2 trillion we could have provided guaranteed access to higher education for all qualified Americans.

The soaring price of oil is clearly related to the Iraq war. The issue is not whether to blame the war for this but simply how much to blame it. It seems unbelievable now to recall that Bush-administration officials before the invasion suggested not only that Iraq’s oil revenues would pay for the war in its entirety—hadn’t we actually turned a tidy profit from the 1991 Gulf War?—but also that war was the best way to ensure low oil prices. In retrospect, the only big winners from the war have been the oil companies, the defense contractors, and al-Qaeda. Before the war, the oil markets anticipated that the then price range of $20 to $25 a barrel would continue for the next three years or so. Market players expected to see more demand from China and India, sure, but they also anticipated that this greater demand would be met mostly by increased production in the Middle East. The war upset that calculation, not so much by curtailing oil production in Iraq, which it did, but rather by heightening the sense of insecurity everywhere in the region, suppressing future investment.

The continuing reliance on oil, regardless of price, points to one more administration legacy: the failure to diversify America’s energy resources. Leave aside the environmental reasons for weaning the world from hydrocarbons—the president has never convincingly embraced them, anyway. The economic and national-security arguments ought to have been powerful enough. Instead, the administration has pursued a policy of “drain America first”—that is, take as much oil out of America as possible, and as quickly as possible, with as little regard for the environment as one can get away with, leaving the country even more dependent on foreign oil in the future, and hope against hope that nuclear fusion or some other miracle will come to the rescue. So many gifts to the oil industry were included in the president’s 2003 energy bill that John McCain referred to it as the “No Lobbyist Left Behind” bill.

Contempt for the World
America’s budget and trade deficits have grown to record highs under President Bush. To be sure, deficits don’t have to be crippling in and of themselves. If a business borrows to buy a machine, it’s a good thing, not a bad thing. During the past six years, America—its government, its families, the country as a whole—has been borrowing to sustain its consumption. Meanwhile, investment in fixed assets—the plants and equipment that help increase our wealth—has been declining.

What’s the impact of all this down the road? The growth rate in America’s standard of living will almost certainly slow, and there could even be a decline. The American economy can take a lot of abuse, but no economy is invincible, and our vulnerabilities are plain for all to see. As confidence in the American economy has plummeted, so has the value of the dollar—by 40 percent against the euro since 2001.

The disarray in our economic policies at home has parallels in our economic policies abroad. President Bush blamed the Chinese for our huge trade deficit, but an increase in the value of the yuan, which he has pushed, would simply make us buy more textiles and apparel from Bangladesh and Cambodia instead of China; our deficit would remain unchanged. The president claimed to believe in free trade but instituted measures aimed at protecting the American steel industry. The United States pushed hard for a series of bilateral trade agreements and bullied smaller countries into accepting all sorts of bitter conditions, such as extending patent protection on drugs that were desperately needed to fight aids. We pressed for open markets around the world but prevented China from buying Unocal, a small American oil company, most of whose assets lie outside the United States.

Not surprisingly, protests over U.S. trade practices erupted in places such as Thailand and Morocco. But America has refused to compromise—refused, for instance, to take any decisive action to do away with our huge agricultural subsidies, which distort international markets and hurt poor farmers in developing countries. This intransigence led to the collapse of talks designed to open up international markets. As in so many other areas, President Bush worked to undermine multilateralism—the notion that countries around the world need to cooperate—and to replace it with an America-dominated system. In the end, he failed to impose American dominance—but did succeed in weakening cooperation.

The administration’s basic contempt for global institutions was underscored in 2005 when it named Paul Wolfowitz, the former deputy secretary of defense and a chief architect of the Iraq war, as president of the World Bank. Widely distrusted from the outset, and soon caught up in personal controversy, Wolfowitz became an international embarrassment and was forced to resign his position after less than two years on the job.

Globalization means that America’s economy and the rest of the world have become increasingly interwoven. Consider those bad American mortgages. As families default, the owners of the mortgages find themselves holding worthless pieces of paper. The originators of these problem mortgages had already sold them to others, who packaged them, in a non-transparent way, with other assets, and passed them on once again to unidentified others. When the problems became apparent, global financial markets faced real tremors: it was discovered that billions in bad mortgages were hidden in portfolios in Europe, China, and Australia, and even in star American investment banks such as Goldman Sachs and Bear Stearns. Indonesia and other developing countries—innocent bystanders, really—suffered as global risk premiums soared, and investors pulled money out of these emerging markets, looking for safer havens. It will take years to sort out this mess.

Meanwhile, we have become dependent on other nations for the financing of our own debt. Today, China alone holds more than $1 trillion in public and private American I.O.U.’s. Cumulative borrowing from abroad during the six years of the Bush administration amounts to some $5 trillion. Most likely these creditors will not call in their loans—if they ever did, there would be a global financial crisis. But there is something bizarre and troubling about the richest country in the world not being able to live even remotely within its means. Just as Guantánamo and Abu Ghraib have eroded America’s moral authority, so the Bush administration’s fiscal housekeeping has eroded our economic authority.

The Way Forward
Whoever moves into the White House in January 2009 will face an unenviable set of economic circumstances. Extricating the country from Iraq will be the bloodier task, but putting America’s economic house in order will be wrenching and take years.

The most immediate challenge will be simply to get the economy’s metabolism back into the normal range. That will mean moving from a savings rate of zero (or less) to a more typical savings rate of, say, 4 percent. While such an increase would be good for the long-term health of America’s economy, the short-term consequences would be painful. Money saved is money not spent. If people don’t spend money, the economic engine stalls. If households curtail their spending quickly—as they may be forced to do as a result of the meltdown in the mortgage market—this could mean a recession; if done in a more measured way, it would still mean a protracted slowdown. The problems of foreclosure and bankruptcy posed by excessive household debt are likely to get worse before they get better. And the federal government is in a bind: any quick restoration of fiscal sanity will only aggravate both problems.

And in any case there’s more to be done. What is required is in some ways simple to describe: it amounts to ceasing our current behavior and doing exactly the opposite. It means not spending money that we don’t have, increasing taxes on the rich, reducing corporate welfare, strengthening the safety net for the less well off, and making greater investment in education, technology, and infrastructure.

When it comes to taxes, we should be trying to shift the burden away from things we view as good, such as labor and savings, to things we view as bad, such as pollution. With respect to the safety net, we need to remember that the more the government does to help workers improve their skills and get affordable health care the more we free up American businesses to compete in the global economy. Finally, we’ll be a lot better off if we work with other countries to create fair and efficient global trade and financial systems. We’ll have a better chance of getting others to open up their markets if we ourselves act less hypocritically—that is, if we open our own markets to their goods and stop subsidizing American agriculture.

Some portion of the damage done by the Bush administration could be rectified quickly. A large portion will take decades to fix—and that’s assuming the political will to do so exists both in the White House and in Congress. Think of the interest we are paying, year after year, on the almost $4 trillion of increased debt burden—even at 5 percent, that’s an annual payment of $200 billion, two Iraq wars a year forever. Think of the taxes that future governments will have to levy to repay even a fraction of the debt we have accumulated. And think of the widening divide between rich and poor in America, a phenomenon that goes beyond economics and speaks to the very future of the American Dream.

In short, there’s a momentum here that will require a generation to reverse. Decades hence we should take stock, and revisit the conventional wisdom. Will Herbert Hoover still deserve his dubious mantle? I’m guessing that George W. Bush will have earned one more grim superlative.

Anya Schiffrin and Izzet Yildiz assisted with research for this article.

Joseph Stiglitz, a leading economic educator, is a professor at Columbia.

[Dig]

Oil Up, Dow Down over 225!

Dow down over 4% this week as the dollar down over 2% this week.

WELCOME TO STAGFLATION!

[Dig]

Financial Community Supports Ron Paul
http://dailypaul.com/node/6638
Posted November 9th, 2007 by manystrom
Have you noticed? Ron Paul is picking up a LOT of support within the financial community. So far, these are the names of very prominent investment advisers who have announced their support for Ron Paul: Axel Merk (Merk Hard Currency Fund), Harry Schultz (Harry Schultz Letter), Jim Rogers, (Jim Rogers.com), Richard Russell (Dow Theory Letters), and Peter Schiff (Euro Pacific Capital). Not to mention the Chicago pit traders who were cheering for Ron Paul when he went head to head with Bernanke! Also, I was down at a local silver / gold shop in Boston the other day and I handed the guy behind the counter a bill stamped with Ron Paul 2008 on it. Of course he knew about Ron Paul because of his honest money stance, and was a big supporter.

[Dig]

Ron Paul Schools Ben Bernanke Again

http://www.youtube.com/watch?v=yAwvlDJgJbM

Ron Paul on CNBC Talking Monetary Policy 11-8-07

http://www.youtube.com/watch?v=hZsZ0_OLer4

Holy crap, even the staunch Neo-Con Kudlow kisses Ron Paul's ass!

The financial gurus can now see clearly that Obi Won Paul is their only hope!

[Femacamper]

http://digg.com/2008_us_elections/FREE_BOOK_The_Case_for_Gold_by_Ron_Paul_PDF

[Femacamper]

http://digg.com/2008_us_elections/FREE_BOOK_Gold_Peace_and_Prosperity_by_Ron_Paul_PDF

[Dig]

Chicago Traders Cheer Ron Paul On As He Rips Into Bernanke

http://www.youtube.com/watch?v=z8GtXKP6bmQ

CNBC is tring to spin this but the guy on the floor is going apeshit!!!!!!!!!!!!!!

[Rock]

Ron Paul Schools Ben Bernanke Again

http://www.youtube.com/watch?v=yAwvlDJgJbM

Ron Paul on CNBC Talking Monetary Policy 11-8-07

http://www.youtube.com/watch?v=hZsZ0_OLer4

Holy crap, even the staunch Neo-Con Kudlow kisses Ron Paul's ass!

The financial gurus can now see clearly that Obi Won Paul is their only hope!

Holy Cow Dude!!!!!!!!!!!!!!!!!!



Rock

[Femacamper]

Wow...CNBC really loves Ron Paul!

I hate how they keep labelling him as a Libertarian, though.

[Dig]

Wow...CNBC really loves Ron Paul!

I hate how they keep labelling him as a Libertarian, though.

Just to be clear about the past with Kudlow....

Kudlow ignores comments about government manipulation of gold
http://forum.prisonplanet.com/index.php?topic=8556.0

One week ago, who is right and who wants to destroy America?
http://forum.prisonplanet.com/index.php?topic=1786.0

VIDEO: SLANDER ALERT AGAINST RON PAUL AS HE FIGHTS FOR FISCAL INTEGRITY!
http://forum.prisonplanet.com/index.php?topic=312.0

And this one is hard to forgive:

KUDLOW TELLS CONDI TO INVADE IRAN
http://forum.prisonplanet.com/index.php?topic=9915.msg38034#msg38034
______________________________

Also keep in mind that CNBC is 50% owned by General Electric and 50% owned by Murdoch.  They do not love Ron Paul, but the sub-elites are slowly waking up to reality and they are the ones that better wake up or they will become the cannon fodder when Hillbilly takes over.