In 1989, the Soviet Union watched in bewilderment as their socialist and communist impositions finally reached the point of no longer being tolerated, and one after the other, Poland, Romania, Hungary, East Germany, Bulgaria, and Czechoslovakia all broke away.

In the world’s economic climate today, rapid inflation, massive unemployment (especially among the young) is driving many countries to the same brink that the countries in the former Soviet Union experienced in 1989.  What is most disturbing for the United States is that our government’s position appears to favor the dictators and the status quo.  Our Secretary of State Hillary Clinton recently said that the Mubarak’s Egyptian government was “stable” and that it was “looking for ways to respond to the legitimate needs and interests of the Egyptian people.”  The Egyptian people interpret our actions and statements as supporting the Mubarak regime.

Llewellyn Rockwell commented in Mises.org that “When the press gets censored, opposition groups are suppressed, and corruption runs rampant.”

But, it is not only Egypt where the people are uprising.  Tibet is once again confronting China’s treatment of its citizens.  Lebanon is once again boiling over.  Other countries in Africa, the Middle East, and South America are experiencing extreme agitation from their citizens.  Even Iran, who officially says that they are supporting Egypt’s change in government, is fearful of an uprising in their own country.  Ecuador in South America is demanding change in their leadership regime. 

Kyrgyzstan is seeing protesters storming the Parliament Offices.  And, Kyrgystan is important to the United States’ battle against the Taliban in Afghanistan as we have a major military support base in that country.  But, the protesters demand change to the country’s governor and once again the United States is caught in the middle.  We are incapable of stopping the protests and the looting that is taking place now in the major cities.

First of the countries to rebel was Tunisia, then Jordan, and then all over North Africa.  Even coastal countries such as Madagascar are rioting in hopes of duplicating Egypt’s success in replacing Mubarak and throwing out their own government.  Saudi Arabia is celebrating Egypt’s success, but young Saudi’s are experiencing the same unemployment issues as the Egyptians and the king is reinforcing Saudi Arabia’s Muslimism as the first priority of all his citizens.

Egypt found the working class joining the unemployed in the demands that Mubarak step down.  Railroad workers, teachers, sanitation workers, and many other professions joined the street protests.

Again, of great concern to the United States, but receiving very little notice in the mass media is the problem in India, one of the major trading partners of America.  As Rajinder Puri reported in Boloji, the most damaging weakness of India’s political class is its lack of credibility.  Regardless of the truth, the people in India are convinced that the entire political class is corrupt.  Corruption has become so widespread and brazen that it is destroying the foundations of the Indian Republic.  We can ill afford to have another of our allies buried in a scandal while we publically support the government in power.

Armenia is another country where citizens want their President Robert Kocharian to step down.  Widespread human rights violations have been cited by Human Rights Watch as is the case in most of the countries above where the people challenge the politicians in power.  Riot police have used water cannons, stun grenades, and electric shock equipment to disperse the crowds demonstrating in the streets.

Another country, Serbia, is demonstrating against their government calling for new elections and economic reforms.  The opposition also called their government corrupt.  Again, we find the common denominators:  rising prices, high unemployment, poverty for many, and corruption of the ruling elite.

In Georgia, as reported by Jean-Christophe Peuch, demonstrators demand the resignation of their President Mikheil Saakashvili and his deputy Vano Merabishvili.

In the Sudan, the government has pre-empted demonstrations by arresting the opposition leaders.

In Albania, a political crisis escalated as demonstrators against their government protested the deeply rooted corruption.

We can no longer stand by when people of all these, and many other countries are demanding freedom, peace, and justice.  They are risking their lives and many are dying for their causes.  It serves no benefit to our government to ask for reason and negotiation.  That time has long passed.  The revolution has started in many countries.  And, the root problem may well be the economic effects of our inflationary actions, our sub-prime mortgage crisis, and the world wide economic malaise it caused.  It is time for us to take a strong leadership position again in the world economy and address the problems here at home.

Regardless of the actions of the Federal and State government to extend unemployment benefits and to appear to be sympathetic to unemployed workers, there appears to be no concern over the psyche of the workers.  One way this negatively impacts the worker is in the loss of their self-esteem.

Robert Roach, who recently lost his job as Principal of the Heartland Christian Academy in Bemidji, Minnesota, says that the lack of real attention to the issue of unemployment by government makes him – and 15 million other Americans like him – similarly unemployed, feel helpless.

His recent interview for a post as student services coordinator at a technical college found his competition to be 160 other applicants.  Even though he holds a degree in chemistry and has no debts other than his home and car, he found out very quickly that he was “over-qualified.”  He maintains that it isn’t just about the economy, it’s about self-esteem.  For those out of work, it is very easy to feel isolated and alone.

Consider the scope of the unemployment problem:

1.     We are still running over 600,000 NEW jobless claims EVERY week.

2.    The government continues to UNDER-REPORT the true problem.

3.    Those who have given up looking for work aren’t counted in any index.  At the latest count, their numbers are at 920,000 – almost a million more that should be counted on the unemployment roles.

4.    A vast majority of Americans are under-employed, having to take jobs that pay a fraction of what they formerly earned just to keep food on the table.

5.    Most of the new jobs created are in the public sector, only adding to our debt burden.

6.    The commercial banks are sitting on billions of bail out dollars rather than investing in new equipment or employees.

7.    Uncertainty about future government taxes, health care impacts and other government programs are keeping several employers on the sidelines.

8.    Major corporations are taking advantage of foreign labor costs and off-shoring many jobs formerly held by Americans.  Alan Binder, a Princeton University economist, estimates that 22% to 29% of all current United States jobs will be shipped overseas in the next two decades.

9.    Many companies are taking advantage of the vulnerable employees they have and increasing productivity by insisting on longer hours and working days by those who want to stay employed.

10.The annual summer layoffs are not here yet, and this year they will not have the governmental cover of the census to offset the loss of jobs.

11.Computers and automation are now performing many tasks formerly performed by humans and this trend will only grow over time.

12.Many workers have turned to temporary employment agencies with low pay and no benefits.  Temporary jobs represent an astonishing 80% of private job growth.

According to the Organization of Economic Cooperation and Development (OECD) the United States accounted for over half of all job losses among the 31 richest countries from 2007 to the middle of 2010.

Karl Perera, an acknowledged expert in the field of self-esteem, listed several reasons why self-esteem is so important to a person.  You can readily see how they affect the unemployed:

1.     Self-esteem can be the difference between success and failure.  This is especially important in the interviewing process.

2.    Self-esteem affects your thinking, causing your outlook to be positive or negative about all aspects of your daily life, not just your employment situation.

Your potential to achieve what you most desire (and this usually is gainful employment for the unemployed) is directly related to your self-esteem.  You must maintain positive self-esteem to overcome the attitudes of others who tell you that you cannot succeed.

Robert Reasoner, a former school administrator and the developer of a model that is used in schools throughout the United States, says that self-esteem is merely the confidence that one can meet life’s challenges and be worthy of happiness.

If this is true, how little the unemployed ask and how easy it would be for our government to provide it.

Our government is placed in a position where it must borrow 46 cents out of every dollar it spends, all the while increasing our national debt into the stratosphere.

Human Events Financial adds that this mistrust of our leaders is not just limited to the American citizens.  At the November 11^th and 12^th meetings last year of the G20, many financial leaders of other sovereign countries lobbied for an alternative World Reserve Currency to replace the dollar as the world’s reserve currency due to their concerns over the health of the United States dollar.

Historians point out that the British Sterling ruled as the world’s currency for over 200 years.  Its descent as the World Reserve Currency was the result of unsustainable national debt.  High government deficits always lead to the destruction of currency, dating back to Roman Times.  In the last 100 years, it has happened to Germany, Russia, Australia, Poland, Argentina and the Ukraine just to name a few countries that saw their currencies tumble.

Trust plays the key role in economic exchanges.  When trust disappears, market transactions break down.  Market psychologists Richard Peterson and Frank Murtha take the position that trust is the oil in the engine of Capitalism.  Without trust, the engine freezes up.

The public has repeatedly witnessed the government lying about the sub-prime banking situation, our national debt, inflation announcements and fraudulent spinning of all economic data to disguise the actual numbers.  Frederick Hayak once famously commented: “The curious task of economics is to demonstrate to men how little they really know about what he imagines they can change.”

Monty Pelerin, writing for the American Thinker, said the economic programs and policies currently in place are truly astounding.  I don’t think I have ever seen a more harmful economic environment for the county.  While some of these programs started with Bush, the Obama administration has advanced them to insane levels.

Logic, economics, common sense and history must be defied

to believe a recovery is possible in this environment.

The nation’s standard of living will be substantially lowered without prompt changes in policy.

Chris Dunn of the Huffinton Post states:  “According to the most recent data, 98% of all United States firms have less than 100 employees.  These firms are responsible for 98% of all new jobs in America and employ 50.2% of the private sector workforce.  American small businesses are responsible for over 97% of all exported goods and generate the majority of innovations that come from the United States.”

Not one dollar of the $2.3 trillion in economic stimulus funds will go to

the 27 million small businesses where most Americans work.

One hundred percent of the stimulus bill funds not destined for states will go to the top 1% of United States firms.  The firms in that top 1% have not created one new net job in America since 1977.

The American banks and the Federal government have pretended that all of the big banks are solvent.  As ABC News reported:  “The Treasury Department and the Federal Reserve lied to the American public when they said that the first nine banks to receive government bailout funds were healthy.  Most of that money will go to firms to dispose of their “toxic assets.”  Why are they toxic?  Because no one knows what they are worth, the balance sheets of the banks are not credible and therefore the entire market freezes up.  So, now the U.S. taxpayers own these “toxic assets.”

David Farr, the CEO of Emerson Electric, is typical of most large firms.  His company is large, a 41.7 billion firm, and he told Bloomberg News:  “Washington is doing everything in their manpower capability to destroy United States manufacturing, cap and trade, medical reform and labor rules.”  He says:  “I am not going to hire anybody in the United States, I’m moving.  They are doing everything possible to destroy jobs.”

Monty Pelerin concludes: “The reason Obamanomics will not and cannot work is because an economy cannot be managed from the top.  Critical incentives have been diminished or destroyed by recent economic policies.  Fear, uncertainty, threats, tax increases, penalties and violations of the rule of law are but some of the conditions anathema to entrepreneurs, small business and large business.  Businesses will not hire, invest or expand in a climate of disincentives.”

At the center of all of this is the growing distrust of government.

Until trust is restored, our economy cannot recover.  Each day brings a greater and greater concern over the confidence to move ahead with our lives. We are rudderless in a sea of uncertainty.  Trust is at an all time low judging from the approval ratings given our Congress and Administration by virtually every poll.

America deserves better.

Yeah right.

Have you seen the Health Care Bill?

2,074 pages.

Three days to read it and prepare for debate.

With her hubris buoyed by majorities in both houses of Congress and a sitting President, Nancy Pelosi, the Speaker of the House, smugly taunted the Republicans: “You’ll just have to read what’s in the bill after it passes.”

Challenge is, the public hated the bill and felt betrayed by President Obama’s broken campaign promise that there would be “no new taxes” imposed on the middle class. This was reflected by their votes changing the majority in the House of Representatives and reducing the majority of Democrats in the Senate.

The House Republicans will deliver on one of their campaign commitments next week by sending a repeal of the health care bill to the Senate, though they expect the President to veto any legislation that may make it to his desk.  In the meantime, 26 state Attorney Generals have brought actions against the bill in various courts throughout America.

It worth noting that the House Republican bill repealing the 2,074 pages of the health care bill is only 2 pages long.

A review of the actual health care bill, possible finally, now that the vote is over, reveals that President Obama’s promise of no increased taxes on the middle class is riddled with lies.  Take a look at these increases which are buried in the bill that were itemized by Ryan Ellis yesterday:

1.     There are a great number of new taxes in the bill that will impact the middle class in spite of President Obama’s promise “that families earning less than $250,000 a year won’t see their taxes go up a single dime.” Lie? Or Broken Promise?

2.    His promise that his health care bill would lower the average family’s health care premiums by $2,500 a year was contradicted by the Congressional Budget Office which said their studies showed many of those tax payers would see much higher premiums in 2016. Lie? Or Broken Promise?

3.    President Obama promised on September 10, 2009: “I will not sign a plan that adds one dime to our deficits – either now or in the future.”  When the true costs are tabulated, it shows an increase of the federal deficit of $2.5 trillion. Lie? Or Broken Promise?

4.    A little-noticed provision also indicated that the health plan will change the reimbursement structure for funding in hospitals.

5.    Even though he took Hillary Clinton to task for her plan for individual mandates during the campaign, an individual mandate excise tax appears in the final bill which imposes penalties for anyone not buying “qualifying insurance.”

6.    There is an Employer mandate tax.

7.    There is a 3.8% surtax on investment incomes for dividend, capital gains, etc.

8.    There is an excise tax on Comprehensive Health Insurance Plans.

9.    There is an increase in Medicare Payroll taxes.

10.There are surcharges on many medications that are bought over-the-counter.

11.There is a penalty for withdrawals from Health Service Plans for self-employed individuals.

12.There is a new tax for “Special Needs Kids.”

13.There is a new tax on medical devices.

14.There is an increase in the allowable deduction for medical itemized deductions from 7.5% to 10%.

15.There is a tax on indoor tanning salons and their services.

16.There is a new excise tax for charitable hospitals.

17.There is new reporting of insurance on W-2 forms for the Internal Revenue Service.

Other observers such as Conn Carroll found…

Other Broken Promises

1.     On June 15, 2009, President Obama promised the American people “No matter how we reform health care, I will keep this promise to the American people.  If you like your doctor, you will be able to keep your doctor, period.  If you like your health care plan, you’ll be able to keep your health care plan, period.  No one will take it away, no matter what.”

The Centers for Medicare and Medicaid Services confirms that the health care bill breaks this promise.

17 million Americans will be forced out of their existing health insurance.

Worse yet, they believe that continued Medicare cuts will encourage more doctors to stop seeing Medicare patients entirely and the 18 million people added to Medicaid rolls will find it impossible to find a doctor to treat them.

If you, like Paul Vici, are inspired to read the entire bill, you will find the bill almost impossible to understand.  First, on many pages you will find acronyms not identified anywhere.  Second, the pages find many references to amend other bills but no explanations are offered.  Finally, there are many relevant issues to be determined by yet-to-be appointed panels at a later date.

Their strategy appears to be one of redistributing available medical care from the aged and infirm to the disestablished and marginalized underclass – including all illegal aliens.  The bill even provides linguist services for beneficiaries who are without English language skills!

President Obama, in his attempt to justify this legislation, preys upon the credulity of the desperately poor and ill to promote a fantasy that is both financially and physically unattainable.  Congressman Joe Pitts exposes what is probably the largest lie of all:

This health care law authorizes hundreds of billions of dollars to run the new programs.

What the bill doesn’t do is provide the Department of Health and Human Services with any money to implement these programs.

That’s like founding a new company and expecting it to run without any employees or facilities.

President Obama, challenged by people such as Ryan Ellis, spoke recently about his promises during the campaign: “Take a tally.  Look at what I promised during the campaign.  There is not a single thing that I’ve said that I would do that I have not either done or tried to do.  And, if I haven’t gotten it done yet, I’m still trying to do it.”

Chuck Norris decided to take up the President and do a tally of his campaign promises.  He published his findings in his post on December 13, 2010.  He found that President Obama made more than 500 promises that had been tracked by Obamameter:

• 24 Broken Promises
• 39 Compromised Promises
• 82 Stalled Promises
• 123 Kept Promises
• 232  Not Yet Rated

Health care is obviously not the only promise Obama has broken.

The key to stagnant growth according to Bill Conerly is our slow monetary growth.  The impact of the Federal Reserve’s new policy of “quantitative easing” just continues to retard real monetary growth.

Paul Kasriel, an economist for Northern Trust, said that this has been the weakest recovery since 1933 and yet he expects GDP to grow at a rate of 3.3% and an improvement of our unemployment numbers from the current 9.8% to about 8.5 by year-end.  But, there is concern over this statistic as well because an improving job market may bring the uncounted discouraged workers who gave up looking for work in the past two years (who are not counted in the unemployment statistics) off their couches and to start looking for work again, keeping the unemployment index higher than expected.

In a CNN-Money survey of 23 economists, the average forecasts for 2011 showed:

• Unemployment to be 9% in December 2011
• Economic growth of 3.3% for the year
• Inflation at 1.8% for the year

The optimistic economists are encouraged by better than expected holiday retail sales, although the impact of those increases on consumer debt has not yet been factored in.  Ian Sheperdson of High Frequency Economics says that retail sales cannot keep rising because people are not getting pay raises and disposable incomes are at unsatisfactory levels.  And retailers cannot continue to count on sales increases if credit costs begin their long awaited rise.

Another worry that is peeking around the corner is that as the economy improves, the Fed may begin to ease up on their restraints on interest rates allowing them to rise.

The extension of the unemployment benefits is predicted to add another one-half to one percent to GDP growth but that is coming at a negative impact to the federal debt to make those payments.  This runaway printing press making more money carries with it risks that has yet to be determined.

The Federal Reserve may start the cost of credit increases, or China may start them, but in any event, credit is going to be more expensive in the future.  Whether it impacts 2011 economic health or not is yet to be seen.

In addition to interest rates having an effect on consumer activities, the worrisome competitive positioning of the dollar is another cause for concern.  At the present time, the dollar is kept competitive by the greater concerns over the euro and that the Chinese are still more interested in purchasing our debt rather than European debt.  That could change in an instant for a variety of reasons.  But a weaker dollar will force the Federal Reserve to increase interest rates to attract foreign investors and this would have a negative effect on American consumers.

State and local governments face the greatest budget challenges according to Bank of America-Merrill Lynch economist, Ethan Harris.  He says:  “the worst is yet to come.”  This is especially true where governments deal with declining real estate values which pull down property taxes.  If the state and local governments do not slash payrolls, which of course impacts unemployment, they will find nowhere to turn for financing their budget deficits.

On the bright side, American companies are producing more goods than ever with fewer people.  This has the same effect as a tax cut because it improves the profitability of the companies.  Eventually, these companies will have to hire more people and they will have the profits to fund that growth but we still need to reach an equilibrium of 5% unemployment which seems to be the optimum level to insure both inflation and deflation of wages are under control.

Warren Buffett has called the derivatives
“financial weapons of mass destruction.”

Today, the worldwide derivatives market is approximately 20 times the size of the entire global economy! Some place the risks in the quadrillion-dollar range. Unfortunately, the average citizen, much less most of our elected Congress, doesn’t even know what a derivative is!

Derivatives are so highly levered that
all the money in the world
could not cover the potential losses.

Michael Snyder has said that the hedge fund and derivatives markets are so complex and technical that even many top economists and investment banking professionals don’t fully understand them. Over $18 billion of losses were incurred by AIG on their investments in derivatives before the bailout by the American taxpayer.
Webster Tarplay said that financial derivatives have come to represent the principal business of Wall Street, London, Frankfurt and other money centers.

He further notes that a concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, instead coining phrases like “toxic assets” and the most obvious: “troubled assets,” as in the Troubled Asset Relief Program, aka TARP, the monstrous $800 billion bailout of Wall Street speculators which was enacted in October of 2008.

To illustrate the secrecy and profits that underlie the derivatives market, refer to Louise Story’s article in The New York Times where she points out that there is a meeting once a month of nine members of a select fraternity. Their goal is to protect the interests of the big banks in the vast market for derivatives, one of the most profitable—and controversial—fields in finance.

These meetings are always held in secret.

It is believed that JPMorgan Chase, Goldman Sachs and Morgan Stanley are among the guiding members. They fight to prevent other banks from entering the market, and are doing everything they can to stop any regulations which would make the prices and fees available to others. The current derivatives market is believed to generate many billions in fees each year for the major banks. The customers, or investors, for derivatives include pension funds, state governments and city governments all in an attempt to hedge their investments and to hold down borrowing costs.

The Department of Justice is investigating the whole derivatives market but most observers are of the opinion that the DOJ will do nothing to offend the big banks. They post on their web sites how important they are in the entire derivative community. For example, JPMorgan touts their awards as “Derivatives House of the Year” for 2010 and “#1 Overall Derivatives Dealer” also in 2010.

It is getting a little sticky though, as Citibank has just sued for breach of contract in a credit default swap case saying that many hedge funds are elbowing in on the derivatives market without really knowing what they are doing or the risks involved.

Leslie Rahl, founder and president of Capital Market Risk Advisors, says “Risk management is all about thinking about two or three standard deviations from the mean. No one ever expects events to fall beyond that. Once in a lifetime events that fall outside that parameter have exponential, not arithmetic, consequences. There is no doubt that the less liquid and more exotic the derivatives position, the more subjective the estimate of value is.”

On December 20, Bloomberg News reported that the Chinese are setting up a market in credit default swaps to enter the derivatives marketplace in a big way. 23 separate agreements covering a total of 1.99 billion Yuan have already been sold since they set up their credit derivatives market.

Congress, having passed the ineffectual Dodd-Frank Act has left it to the regulators to write the rules that will be in effect once they are established. The Commodity Futures Trading Commission has asked for 30 areas that require new rules as they apply to derivatives. But the big banks want their control undisturbed and are an active voice at the conference table. It is estimated that 90% of all swaps are traded through the ten largest banks generating an estimated $60 billion a year in fees.

There is no question that Wall Street will do everything in their power to protect this last opportunity to harvest extraordinary profits but we must remember that if there is an event beyond their expectations, there isn’t enough money in the world to cover the losses, especially when the risk is twenty times bigger than the entire global economy.

European Union financial leaders say they are ready to do whatever they have to do to save the euro but they are not willing to add to the already existing bailout fund. Germany has defeated every attempt to expand the rescue mechanism in place for fiscally troubled countries. Other country leaders wonder if the rescue fund would weather a collapse of Portugal and Spain, currently on the closely watched list. In the meantime, Moody’s has downgraded Hungary’s credit rating putting the Hungarians at odds with the European Union and the International Monetary Fund. Some circles report that Germany is considering abandoning the euro altogether.

Ireland is attempting to enforce a personal income tax on 2.2 million workers who historically have paid no taxes. This is causing severe political unrest in Ireland. Observers have said that the euro as a currency is a mess and will continue to be throughout 2011.

All of these financial worries come in the midst of an economic slowdown throughout Europe. Unemployment is rising, tax revenues are diminished, all of which is linked to the slowdown. Pressure to cut public spending is building as the government debt grows. Central governments in many European countries are being cut drastically.

UNITED STATES:

The financial woes of the United States are well known and the quantitative easing or bond buying program announced by Ben Bernanke to purchase up to $600 billion of bonds through next summer only makes foreign investors wary of a weaker dollar if that is accomplished.

President Barack Obama says that there is “broad agreement” on global economic policy between the G20 nations but there are other leaders that fear that the conflict between China and the United States may threaten global growth.

While Washington officials maintain that the Chinese currency is held artificially low (which allows Chinese exporters an unfair trade advantage and allows China to accumulate huge amounts of foreign reserves) China argues that it has a commitment to reform its currency values but is waiting for global economic stability before making any significant adjustments.

MIDDLE EAST:

Thomas Erdbrink reported in The Washington Post that new sanctions against Iran implemented by the United Arab Emirates have led to a sharp drop in the value of Iran’s currency, the rial. This is causing confusion in Iran’s markets and has resulted in a loss in trading value against both the dollar and the euro. The situation has become so tense that no foreign currency is being sold by currency exchanges. Even the gold merchants have closed their doors.

ASIA:

The dollar has fallen to a 15 year low against the Chinese Yuan and a record low against the Swiss franc. Officials in Asia were warning against an expected flood of foreign currencies as America moves ahead with its $600 billion asset purchase plan. Already Asian currencies are enjoying new trading positions. The Thai baht is up 11%, the Korean won is up 6% and the Philippine peso is up 8%. A major oil refiner in the Philippines just issued a bond yielding 7%, and this rate of return compared to the puny near zero rates of United States Treasuries is very attractive to foreign bond buyers.

Inflation fears abound in many countries, especially those who have a negative trade balance and are forced to import most consumer goods, food, and other staples. Experts believe that the extension of the Bush tax cuts by the Obama administration and recently approved by Congress may be positive in the short term but will do nothing to help the poor fiscal situation with budget deficits of about 10% expected in each of the next two years. Even Moody’s is warning that it may have to downgrade the United States’ AAA credit rating. This scares many of our trading partners.

Meanwhile, gold is enjoying a rapid rise in value as countries keep interest rates low in order to stimulate their economies and central banks are buying gold as a hedge against the unknown.

It is still a world-wide concern. The eight hundred pound gorilla is still the United States. In this currency scenario, the gorilla is walking a very fine tight rope and the fall could be fatal.

The International Monetary Fund states their position that the United States is as good as bankrupt. Many of the biggest players on Wall Street are behaving as though bankruptcy has already been declared.

Laurence Kotlikoff, professor of economics at Boston University, stated on August 11 that the United States is bankrupt. He said that spending less or taxing more would not bring us out of bankruptcy. Instead, what we must do is to radically simplify our tax, health care, retirement and financial systems, each of which he calls a “complete mess”.

China already has eminent domain over the United States because much of the foreign debt sold to foreigners is backed by United States’ real estate and China holds the bulk of that debt. China, in the event of a collapse of the United States, could simply demonstrate their ownership and make us a colony.
Furthermore, some observers note that China is already diversifying their reserve holdings by the use of short positions and derivatives and credit default swaps, so they may bring down the United States’ economy financially because waging a military war is very expensive and in a financial manipulation, the spoils go to those who are willing to pay the price to win that struggle.

As Thomas Heffner pointed out in his column for Economy in Crisis, China and other foreign countries now hold 44% of the United States’ debt, allowing them to have the leverage to change our policies on which war we fight, which bill we pass and what standard of living we are allowed to enjoy. Our Congress, supposedly educated individuals, seems oblivious to the avalanche that threatens to change America. They just keep exacerbating the problem by spending more and increasing our debt.

The young bankers and budding economists in China are a frustrated generation, especially as it pertains to the debt owed to China by America. So, notes Jim Landers in The Dallas News. They benefited from the sacrifices of their parents and now they want to collect their due – from the US.

The Council on Foreign Relations estimates every single American owes China $4,500. If China decides to sell its US dollar holdings, we would see a tremendous spike in our interest rates and we would be pushed back into another recession. The Keynesians in Washington respond by simply printing more money – but the young bankers in China don’t want to see their holdings further devalued by more dollars being printed. They feel they have enough dollars already. They don’t want more. Instead, they seem to be buying American hard assets rather than investing their money in Federal bonds. They are building wind energy farms in West Texas. They are making significant investments in petroleum exploration firms. They are taking a stronger position in gold.

But the educated young in China are clamoring for more investments at home. They are faced with mounting real estate costs where the average condominium in Beijing is now $172,500 against their average salaries of $21,000 a year. One of the things that irritate the younger generation in China is that purchasing bonds of the Federal government of the United States means that they only receive interest payments and they cannot call the bonds in the event of default or sell them profitably to another investor when economic news is bad.

Guan Jianzhong, Chairman of Dagong Global Credit Rating told The Financial Times: “China is the biggest creditor nation in the world and with the rise and national rejuvenation of China, we should have our say in how the credit risks of states are judged”. This is an open criticism of Moody’s and other credit rating firms in the United States who too often overstate the safety of investments and who offer better ratings than their competitors in an open market of credit rating shopping. He said that the credit rating system created the collapse in the American real estate market. So now, Dagong is beginning to publish its own credit rating ranking. Its results were dramatically different from Moody’s, Standard and Poor’s and Fitch showing China ranking higher than most other major countries. He said in his statements: The United States is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies all still give it high rankings. Is it just another manipulation to lie to American citizens and the world or is the desire to form a global government the motivation behind all these actions?

Perhaps the triggering device will be the domino effect of cities and states declaring bankruptcy forcing major changes in the United States fiscal policies. Already Illinois is paying off billions in loans that it got from schools and social service providers last year. As noted by Michael Cooper and Mary Williams Walsh in The New York Times Arizona has stopped payments for certain organ transplants. Many states are releasing prisoners early to cut expenses of housing them. Newark has laid off 13% of its police officers.

It is the long-term problems of California, Illinois, New Jersey and New York that worry economists the most. The federal stimulus money that supported many state budgets in the past year is set to run out next summer while revenues are lower than in years past due to fallen real estate values and the persistent unemployment problem.

Perhaps the relevant question ought to be: “Should I learn Mandarin or Cantonese?”

DIFFERENT VIEWS FROM DIFFERENT COUNTRIES

The classic gold standard that was uniformly in place for all the world’s economies from 1880 to 1914 is what the world needs now. Budgets of countries that adhered to the gold standard were generally in balance.  As far back as the founding fathers of the United States, the framers of the Constitution recognized gold and defined money as “coin” was historically constructed of valuable metals.

As investors around the world digest the current state of economies, they are becoming more concerned about global issues and are fleeing to gold as a safe haven for their investments.  The current debt crisis has already been dealt with in Greece. Plans are being formulated to rescue Ireland. Spain is teetering on the edge.

Free trade issues are taking a new tack in financial discussions. The two key summits, especially the one most recently in South Korea left nothing but questions on the issue.  The Federal Reserve’s latest action to issue $600 billion in new currency only stoked the inflationary fire.

The virtual rarity of the gold is what establishes its acceptance around the world.  Since the beginning of time, the total amount of gold mined is estimated to be 142,000 metric tons. 

The largest holders of gold are:

1.      The United States Treasury is estimated to have 261 million ounces on hand.  This represents 8.133 tons of gold.

2.    Indonesia has already announced it is returning to the gold standard.

3.    A little over one third of all the gold is held by investors and central banks.

4.    India holds over one third of all the gold in the Far East.

5.    China has bought more gold in the last three years than the People’s Bank holds in total.

6.    A proposal to back SDRs (Special Drawing Rights) by gold and other currency is receiving more support every month.

7.    Virtually every single central bank is accumulating gold.

8.    The BIS (Bank of International Settlements) has a large hoard of gold.

9.    Almost all of the ETFs (Electronic Traded Funds) had substantial holdings of gold.

10.  Warren Buffett is stockpiling gold.

11.  George Soros controls 16 tons of gold.

12.  Carlos Helu (the world’s richest man) is buying gold and outright purchasing working gold mines.

13.  Eike Batista (ranked number eight in the world) is buying gold.

14.  John Paulson has stated that 80% of his $12 billion are invested in gold.  

His total gold holdings are 20 tons.

15.  Since President Obama’s inauguration the stock market is up 45%, but gold is up 66% and gold mining stocks are up 108%.

16.  Many ETFs are acquiring gold without having to disclose this information publically.  A good example of this is George Soros Fund Management LLC making Soros the largest holder of gold among American citizens.  Since there is a 45-day lag in reporting for hedge funds, we won’t see the recent run-up in gold prices by these firms until early next year.

17.  China Investment Corporation is buying gold.

18.  The SPDR Gold Trust hold 1.1 metric tons.

19.  India recently bought 200 tons from the International Monetary Fund in October.

Manmohan Singh, the Prime Minister of India is pleased with the economy and growth in India, but says high unemployment in the industrial countries threatens a revival of protectionist sentiment.  He said that all of the countries must avoid competitive devaluation, deficits must be dealt with, structured reforms to increase efficiency must be implemented and finally, the exchange rate must be flexible enough to deal with the world’s financial problems.

Robert Zoellick, the President of The World Bank, writing an article for The Financial Times, said we must consider gold to instill confidence of financial markets.  Gold would provide a system of an international reference point for each country’s expectations about inflation, deflation, and future currency values.  He said that the world needs to move to a new phase like the Bretton Woods agreement that began after World War II, when almost all international economies were rebuilt under a United States dollar that was fixed to gold.

Dr. Antal Fekete noted that gold is the only ultimate extinguisher of debt.  The world’s monetary gold should be remobilized by opening the United States Mint to the free and unlimited coinage of gold.

There are two types of people who don’t want to see a return to the gold standard.

1.      Paper money racketeers who profit from fiat money.  They will do almost anything to prohibit gold from becoming a standard again.

2.    Those that say that gold standards limit and constrict economic growth.

The members in the second group are generally spokespersons for governments and the banks and individual speculators in debt instruments.  Which leaves us with the first group and these are the people who practice fractional lending and fiat money printing.

A return to the gold standard would take us out of the financial whirlpool we find drowning us and let America and the rest of the world return to solid footing.

Investors are not really interested in acquiring more United States’ securities when much better rates are available throughout the world.   The Fed’s credibility is also suffering as it appears they are losing control over their ability to attract investors and protect the United States economy from inflation. As a result of cheap money, emerging market stocks are up over 30%, but emerging market bonds are being driven to new lows.  

The net result of the new commitment to issue $600 billion in dollars created out of thin air is ineffective as the Fed appears to be the primary buyer of the government bonds.   Major credit-worthy companies such as Microsoft, Coca Cola and Wal-Mart are taking advantage of the low interest to refinance their debt depriving bond and other debt holders of income.   The price of the 30 year Treasury bonds has fallen almost 12% since Fed Chairman Ben Bernanke made his announcement of their plans.   He added more fuel to the fire when he said the government would “never” resort to monetizing their debt.  

The truth is that QE2 is just Fedspeak for creating money out of nothing.   Interest rates have to rise to begin to solve the economic problem and this cannot be accomplished when the Fed is charging zero interest to the most credit-worthy borrowers.   So, they resort to printing more money and “monetizing” the already outstanding debt.   President Obama continues to support Bernanke’s policies and nominated him for another term when he should be demanding accountability.   Bernanke’s track record since 2005 has been dismal.   He continually maintains that the United States economy is on “solid footing.”   In 2009, he promised Congress that we would not “monetize” the debt which is exactly what QE2 does.

James Bullard, the President of the Saint Louis Federal Reserve Bank said recently in a presentation to the New York Society of Security Analysts that the policies in the United States should work very hard to avoid the possibility of a Japanese-style deflation.   Japan put in place a similar program with almost zero interest rates and found that it took them over ten years to extract their economy from its effects.

The Bank of Japan now admits that the reduction in their interest rates was a failure.

The Fed is monetizing the debt and China voiced its opposition.   Over the past six months, China has reduced U.S. debt purchase of about $50 billion per month.   Although President Obama is on the offensive against the Yuan and criticizes China for keeping its currency artificially low, this is precisely the strategy announced by the FED with the tacit approval of the White House.

Bill Bonner of Agora Financial said that we are simply financing America’s trip to bankruptcy with the current policies of the Federal Reserve.   In eight months time, the Fed will own more Treasuries than China and Japan combined, making it the largest holder of government securities outside of the government itself.

Foreign observers are waiting to see what tone the newly elected Congress will take with China.   Major investors agree that if China were to stop pegging the Yuan to the dollar, the Yuan would rise dramatically in value.   China’s reserves and monetary policies are among the strongest in the world.  

This is just one of the reasons China hates QE2.   China is currently struggling to control bubbles in real estate and their own stock market.   But the over-riding concerns in China are because they are our largest creditor.   Because the dollar is a reserve currency, most of this debt is dollar-denominated.   China currently holds over 20% of our total debt and they fear greatly the continued printing of more dollars as this can only devalue the dollar and make all commodities more expensive for their citizens.   This could force them to devalue the Yuan which they would much rather do on their own terms and timetable.

China is joined in this displeasure over QE2 by Germany.   The Finance Minister Wolfgang Schauble said the Fed is “clueless” and he is absolutely disgusted by their actions.   Financial leaders in Brazil, Russia and the oil producing countries of the Middle East all are ready to oppose QE2 on every front. Brazil recently raised taxes on foreign investments. The World Bank suggested that Asian economies may need to set their own set of capital controls to prevent the asset bubbles that would result from cheap money flooding out of the United States due to QE2.

We cannot run the risk of all of the countries of the world hating QE2 and refusing to buy our debt but a change of policy from either President Obama or Federal Reserve Chairman Bernanke doesn’t seem likely at this point.   Instead, they are “doubling down” on failed policies which can only lead to the demise of the dollar.  

Can QE3 be far behind?