Ahead of the Herd Blog

by Larry W. Reaugh

The world always or ultimately operates on the fundamentals of supply and demand. To reinforce this, my understanding of the demand from the BRIC (Brazil, Russia, India and China) countries has always remained positive. These countries will continue their modernization regardless of the recession in the West.

That leaves the supply side — the question is: What has been happening to disrupt the supply of metals? Taking a cross-section and focusing on mine shutdowns and cut-backs in production, I had two huge surprises. First, I was astounded by the proliferation of new producers in the past one to three years. Second, I am shocked by the rapid response to the downturn reflected in the number of recent production shutdowns. Over the past few weeks, the number of shutdowns has accelerated considerably.

Also, major small and mid-size producers are cutting back their production in all metals. The immensity of that combined extinguished supply demonstrates that a tilt in the supply/demand equilibrium is just around the corner and a spike up in commodity prices is not far behind.

In 2003, I conducted a supply-and-demand analysis for molybdenum. As a result I moved to create a pure molybdenum company and to achieve the advantage of a head start towards production.

I have been involved in the stock market and the mining industry for the past 45 years. In that time, I have never experienced such a terrible meltdown in the markets. Even the stagflation of the 1970’s would be welcome at this point in time. The value of my mining stocks during the mid to late 70’s neither went up nor down but remained at pretty much the same prices, as compared to today where my portfolio is down by 80% to 90%. Although most markets have lost 60% to 80%, resource stocks particularly, have been hit hard. My entire working life has been in the resource sector.

The majority of the forecasters on commodities today are predicting a several-year bear market in the prices of metal commodities across the board. My fundamentalist point of view, resulting from hands on research, is the exact opposite of the popular consensus for several reasons:

1. The worldwide recession is well into its second year. I believe a financial meltdown scenario has been averted for the interim and once the new U.S. government is in place markets will establish or have already hit a bottom from which to build.

2. The U.S. and European economies are being vigorously reinflated.

3. Commodity prices have fallen too far, too fast.

4. The shutdown of several coal-fired power generating plants in China during the Olympics contributed to the metal price collapse. The shutdowns sidelined demand and led to the stockpiling of metals, for a five month period. The shutdown put China in the driver’s seat on negotiating long-term metal contracts, especially in iron and coal. As commodity demand was weakening, the final blow was the planned slow down in China, which helped accelerate the downturn, certainly a onetime event. Definitely a huge long-term benefit for China.

5. Forced liquidation of commodities by commodity traders compromised the stability of the supply/demand factor of metal commodities. London Metal Exchange (LME)-traded commodities, especially copper, will take longer to rally due to the heavy manipulation by funds, whereby much larger stockpiles existed than were apparent.

6. More producers are currently operating at or below their cash cost. Those companies with large debt are being forced to shut down their marginal operations. The reaction to this sudden market downturn by producers has been to shut down, curtail and reduce production of copper, aluminum, iron, nickel, zinc, lead, manganese, uranium, molybdenum, cobalt, tantalum, etc. Even the market for raw diamonds has shown a significant drop in price. This has been immediate and I believe it will result in a faster recovery of the prices for these commodities.

7. Literally hundreds of small to medium producers worldwide, in all categories, have been forced to shut down production of metals. Some of these producers will not re-open.

8. China will be stimulating its economy with a package amounting to $600 billion over the next three years. I believe the first beneficiary will be the steel industry, which will lead the way out of the recession in base metals. The first steel related metals to recover will be molybdenum, cobalt, manganese, tungsten, niobium and chrome.

9. Dozens of mining projects slated to begin construction have been postponed indefinitely.

10. Infrastructure replacement and expansion to be implemented in Western countries, particularly in the United States.

11. Yunnan province in China has announced a one million tonne purchase of commodities for stockpiling namely, copper, aluminum, lead, zinc and tin, a $3 billion dollar investment. The central government is also looking to stockpile all metals as a result of low prices. This would be a wise move to convert U.S. dollars into tangible assets.

I have been steadfast in my belief that all commodities are strictly governed by supply and demand with the exception of LME-traded metals, which are heavily influenced by speculators, funds and large investor trading. My theory about a bounce back in metals was reinforced when researching a large cross-section of current and near-term producers, in conjunction with a list of several operators now on care and maintenance that currently influence or could influence the supply of all categories of metal.

Due to safety regulations, China alone will be shutting down 6,000 of its 16,000 coal mines over the next two years. Forty-five out of 75 copper/ cobalt producers have shut down in the Democratic Republic of Congo. Shut downs are also widespread in Australia, South Africa, South America and India, etc.

To me, the conclusion is obvious—those companies that have recently commenced production or have advanced projects on stream to go into production are being severely punished by the market with some market caps decreasing as much as 90% to 99%. There is no avenue for them to raise money to streamline operations in order to turn the corner on new production.

At the present market stage bridge loans are a particularly difficult scenario with which to deal and any company having to repay those bridges is at severe risk of failure. It is a “damned if you do and damned if you don’t” scenario. My sympathies go out to those companies as I understand the hard work and focus required to bring on new production today. The old adage of having production to see you through the lean times has not held up this time around for a vast number of companies and appears to be a liability rather than an asset for most of them.

The entire resource sector has been ravaged with the share prices of junior explorers down 95% to 99%, intermediate producers down 60% to 90% and some majors down close to 85%, especially in the steel industry. The total resource sector has had approximately $1.5 trillion knocked off of its market cap with household names losing 85% of their market cap in the past 6 months.

In my opinion, the way all categories of mining stocks are now viewed by the investment bankers and the investment community will change radically as follows:

1. Geopolitical risk will become a major factor. A year ago it was not heavily considered in the investment strategy.

2. Bridge loans are now considered toxic by the investment community and no one is stepping up to re-finance even good projects, especially those exposed to bridge loans.

3. Bond issues and debt financing are impossible and probably should not be pursued at this time.

4. Obviously, most of the advanced-stage projects have been rendered unfeasible at current commodity prices.

5. Overwhelming reluctance to do equity financings at this point in the market.

6. Feasibility studies by new producers will have to be economical at close to current commodity prices.

7. Close attention will be focused on strip ratios, continuity of deposits, bulk testing, proven metallurgy and road access.

8. Mergers and acquisitions will only occur between strong companies. In this market weak companies will tend to bring down the strong company. The take-over candidate must be able to generate the price of the acquisition.

9. Balance sheets will be scrutinized. Companies having large debt loads will be evaluated on their ability to continue servicing that debt. Companies cannot service debt when they are losing money.

10. Companies with large commitments will face tougher evaluations.

11. Financings will get back into a selective positive mode once commodity prices move up significantly from today’s lows.

Through previous observation and current research I have identified certain trends which indicate that prices will again head north in the next 6 – 18 months and eventually break most historic highs. This commodity Bull market will break all previous cycles as the BRIC countries continue to modernize their infrastructure. The massive amount of metal supply that has been extinguished in the last 6 months will very quickly have a positive effect on metal commodity prices once again.

Some of the benefits derived from the financial meltdown are as follows:

1. Cheaper cost of production as fuel, replacement machinery, power, transportation, floatation additives and consumables go down in price.

2. Drilling and exploration infrastructure costs will go down. Drilling companies are now readily available.

3. Availability of geologists, mining engineers and engineering firms is now prolific.

4. Availability of large mining and milling equipment is readily accessible. Lead-time is dramatically reduced.

5. Availability of mining and milling personnel.

I have pretty much focused on base and minor metals in my review and it goes without saying that precious metals have a similar driving force and are experiencing closures as well. With gold being the exception, silver, platinum and palladium have a solid industrial base and will follow the direction of the base metals. Conversely, gold is the ultimate currency and will lead all metals out of this current recession. The disconnect between gold and other precious metals will become more evident going forward. My observation is that gold will play a much more important role as we become awash in all the world’s currencies and seek value that cannot be destroyed by banks or governments.

I believe the deck is stacked in favor of all commodities, surviving mining companies and explorers over the next three years. We will look back on the last two months of 2008 as the greatest buying opportunity of the century.

I am more enthused now about the prospects for our industry than I have been in the last 18 months. Caution is the direction I choose for the interim and as the market signals, I plan to become more aggressive in the future.

In conclusion, I have been investing and continue to invest at these dramatically lower prices. Due to the current market my retirement has been postponed several years and I believe the only way I will be able to recoup is to take advantage of the current low share values. This is the tax selling season, which creates further discounts from current low prices, definitely an advantage to the contrarian buyer. Look for companies that will survive the current market as these companies will be the strongest emerging from this recession. It’s a new world out there but the emerging economies need our products. Daily, more and more casualties are appearing in our industry and this will continue until well after commodity prices once again head north.

Mines cannot operate at losses so supply will diminish much faster in this cycle, once more creating runaway prices in the next leg of the commodity Bull market.

I encourage everyone to do their own due diligence as there are great opportunities in the market today with excellent projects, low-cost production and don’t forget the junior companies that are trading at less than cash value.

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Larry W. Reaugh is not an investment advisor and any reference to specific securities in this commentary referred to in the article does not constitute a recommendation thereof. For email updates from the author, contact him at lwreaugh@rdminerals.ca. The opinions expressed herein are the express personal opinions of Larry W. Reaugh. Nothing in this article should be construed as a solicitation to buy or sell any securities referred to in the list or in the article. The author bears no liability for losses and/or damages arising from the use of this article.

Johnny Silver Bear
www.silverbearcafe.com

(Editors Note: One of the perks of editing "the Bear" allows me to post my own rants. I originally published Paradise Lost in January, 2005. At the time Alan Greenspan was the FED Chairman. I have taken the artistic license to update the illustration with Ben Bernanke's likeness, although Greenspan was primarily responsible for getting us into this mess (economically). Consequently, Bernanke is in the proverbial "drivers seat" now, and I have serious doubts as to whether or not he's up to the task. The only person that I am aware of that is up to the task is Ron Paul.)

I continue to receive ever increasing numbers of email from readers who request a clarification of my views about our current economic condition, how it got this way, and what, if anything, we can do about it.

I often feel faced with a dilemma akin to telling someone it's raining, and have them not only refuse to believe me, but to also refuse to walk outside.

My views are simply an amalgamation of insights provided by the wisdom of the Constitutional pundits, economic sages, financial gurus, and free market thinkers that I have come to read every day. The Libertarian / Contrarian editorial slant I provide is as much a result of their thoughts and experiences as my own personal feelings. I depend on their insights to temper my own.

We have, in general, become oblivious to the realities of human nature and corruption. We have been placated to the point of disinterest. After all, why should we be concerned with the direction that we are being led? It seems to have worked up until now. This, I think, is the gist of the problem. It's an illusion. Smoke and mirrors. We are all being set up for a fall. The tragedy of it is that it will be our children and their children who will be hit the hardest. Whose responsibility is it to insure some kind of decent future, Alan Greenspan's? Pu-leeze!

I will remain ever vigilant in my quest to achieve some sense of clarity, and to communicate whatever clarity I can through the Silver Bear Cafe and other gracious forums that are kind enough to post my essays. Whatever clarity I have here-to-fore attained is, to say the least, disconcerting. So, in order that I may vent my concerns and spread some of my frustration around, I will attempt to dissect one major travesty.

Practically all of the problems in our country can be attributed to the continuing subjugation of the U.S. Constitution. Had the remedies for such actions, which are provided in the text of the Constitution, been applied, many of our former, (as well as current), leaders would have been prosecuted and removed from public office. One of the main reasons that the American people have allowed the wholesale dismantling of their freedoms and liberties stems from the effectiveness of the all pervasive misinformation campaign that has been waged for over 100 years. Most of us believe that we live in the land of the free. A place where every child has the opportunity to grow up and be President of the United States. This belief is, in the best-case scenario, a stretch. In the worst case, a bald faced lie. Our political leaders are increasingly sourced from a pool of self-perpetuating elitists whose main concern is to distance themselves from the masses. When Constitutional law stands in their way, they ignore it. We are not being shepherded by altruistic wise men, but, rather, herded by megalomaniacal desperadoes.

If you asked Joe Six Pack if our society continues to be based on freedom and liberty, he would probably recollect his 9th grade American History teacher and respond "Yes, of course." If you were to ask him if our society was now based on a Stalinesque model of central planning, a totalitarian system in which the Government claimed all power, and there were no freedoms that the government did not allow, he would probably say, "No way." Joe hasn't got a clue. Hey, believe me. I've been trying to get across to Mr. Six Pack for years. He has been issued blinders by the state. He hasn't got a clue.

It appears to me that the markets are rigged. All games that can be rigged will be rigged, sooner or later. The Fed, working in league with the U.S. Government, rigs the U.S. markets. But don't think for a second that the Fed has some kind of monopoly on a situation where rapacity pervades honest reason. All markets are rigged. Central bankers, the world over, are primarily involved in fleecing the people. The fact that the Fed is the most powerful of the Central Bankers, and that they are primarily responsible for perfecting the insidious contrivance called inflation, has not kept the rest of Central Bankers of the world from entering into a game of "catch up". As far as they are concerned, there is only one motive, and that motive is economic world domination. Which Central Bankers will dominate will depend on which ones end up with the most. That's just the nature of absolute corruption. That is the reason that whole world is currently strapped with a fiat system. The ability to create money, out of thin air, provides for absolute economic power. Absolute power equals absolute corruption. It's as simple as that. By rigging the markets, through various forms of intervention, the central bankers have set up a scheme whereby the wealth of the world could be siphoned off at will.

The reason that this fiat system has become so all pervasive in the world is the lure of an uncapped, unending source of credit that is availed to all governments who are willing to play the Central Banker's game.

One instance is the game that we are playing with Iraq. Why are we not buying our oil from Canada for $45 per barrel, but instead, stealing it from the Iraqis at a cost of around $1,100 a barrel? Information gained from the Energy Information Administration, (http://eia.doe.gov/) provides this data. When the number of barrels of Iraqi oil that we have imported is divided into the $300 billion we have spent on the war so far, the number comes to about $1,100 per barrel. From an accountant's standpoint, this doesn't seem like a very good deal.

According to British Petroleum's Statistical Review of World Energy 2002

Middle Eastern oil accounts for one quarter of America's imports. Iraqi crude for less than one tenth. A back of the envelope calculation reveals that Iraq quenches less than 6 percent of America's Black Gold cravings. Compared to Canada (15 percent of American oil imports), or Mexico (12 percent) - Iraq is a negligible supplier. Furthermore, the current oil production of the USA is merely 23 percent of its 1985 peak - about 2.4 million barrels per day, a 50-years nadir.

During the first eleven months of 2002, the United States imported an average of 449,000 barrels per day (bbl/d) from Iraq. In January 2003, with Venezuela in disarray, approximately 1.2 million bbl/d of Iraqi oil went to the Americas (up from 910,000 bbl/d in December 2002 and 515,000 bbl/d in November).

It would seem that $200 billion - the costs of war and post bellum reconstruction - would be better spent on America's domestic oil industry. Securing the flow of Iraqi crude is simply too insignificant to warrant such an exertion.

Admittedly, there are those that would suggest far loftier goals in Iraq than simple petroleum exploitation. Personally, I have yet to be shown.

Who's getting the $1100 per barrel? Certainly not the Iraqis. The money is going to Haliburton, Ratheon, Boeing, Northrop Grumman, and Lockheed Martin, (among many others). Where is the $1100 a barrel coming from? Why it’s coming from continuing loans to the Government by the Federal Reserve. Where does the Federal Reserve get all this money? Why, they invent it, (the term counterfeiting comes to mind.) Who's responsible for paying back the billions and billions of funny money that the Government is spending, and the interest accrued on that funny money? Good question. If your answer is "the American People", you are not entirely correct.

There are two groups in the U.S. that don't pay taxes. Those two groups consist of the very poor, and the ultra rich. As a result, the middle class has been bestowed with the sole economic responsibility of repaying the obscene abomination known as the national debt. It's not enough for the middle class to support those who are unable to work as well as those who choose not to, but to also provide the a major source of wealth that is being siphoned off by the Central Bankers and distributed to the elitists. I believe their motives have always stemmed from a desire to redistribute the wealth of the middle class to the ultra rich. This is a basic ploy right out of the collectivist's handbook. In this way they are, in the words of Omar Khayyam, attempting to "tear it down, and rebuild it in their own image." They are preparing for the intended eminent worldwide financial Armageddon.

In order to continue to supply the Government with more and more funny money, the Fed has to keep creating it. Obviously, the more they create, the more it is diluted and the less valuable it becomes. They have positioned the U.S. dollar on a huge playground slide, placed a piece of waxed paper under it, and let it go. Its accelerating decent has become big news. Even the sycophantic rah-rah rooters on CNBC are talking about it. The dollar is visiting lows not seen in almost twenty-five years.

"Bubbles" Greenspan would have us believe that this is an engineered devaluation designed to reduce our trade deficit. Hooey. The Fed has lost control of the dollar. Their mindless creation of credit has insured a mind-boggling meltdown of the entire financial system. This is not a good thing for anyone, anywhere. The dollar is the world's reserve currency. Seventy-five percent of all dollars in existence are in foreign hands. Whatever their value was when those foreigners got them, that value is evaporating right before their eyes. It's like buying ice by the pound and watching it melt away before you have time to use it. "Joe Six Pack" doesn't seem to mind. He can still buy a beer for $2.50 at the pub. Five years ago they were $1.25. By the end of next year they will be $5.00.

But it’s not just the irresponsible creation of debt that has brought us to the economic gates of hell, but also the Fed’s botched attempt to control the markets through manipulation and intervention. Their attempts to "play God", in an otherwise free market, have exacerbated, skewed, and distorted market realities to such an extent that its function has become one of dysfunction.

The turn of the century brought with it a paradigm shift in economic policy in America. With the flight of the domestic manufacturing sector, America’s balance of trade rapidly became extremely unbalanced. In an attempt to keep the economy afloat, the Fed targeted the American Consumer as a replacement for the American Producer as the chief contributor to the U.S. economy. To insure the American Consumer would be, at least temporarily, capable of such a task, "Bubbles" lowered short-term interest rates to their lowest level since 1958. This action, combined with the introduction of a plethora of reckless mortgage products, (ARMS, interest only loans, etc.), provided for an unprecedented number of new home purchases. Over thirty percent of those purchases were made by lower income individuals who had previously been unable to qualify for mortgage loans. The result was a boom in residential construction, and all related industry. The domestic housing market had effectively filled the void that resulted from the flight of the manufacturing sector and, in doing so, became a primary contributor to the American economy. That, coupled with a wave of refinancing, spurred on by the lure of cheap credit, allowed homeowners to bury themselves in debt. The application of this new found cash provided borrowers the means to buy new SUVs and invest in stocks, which effectively held up the automotive industry, as well as helping to keep the markets inflated.

Fast forward to the present. Real unemployment is running around 12%. Wages have been stagnant for the past four years. Almost everyone who wanted to refinance has already done so. Their refi money has already been spent. The automotive industry, and the housing industry are both beginning to feel the pinch. Rising energy costs, which are a result of a growing scarcity, as well as inflation, are exacerbating the situation. The DOW, which has remained basically flat over the last three years when valued in U.S. dollars, is substantially down when valued against the Euro, the Rand, the Yen and several other major currencies. The continuing devaluation of the dollar has provided the DOW with the appearance of strength, at least to the American public. More smoke and mirrors. In order to continue to lure foreign investment, the illusion that the economy is healthy and robust is of paramount importance. This presents a big problem considering our economy is in the throes of a terminal illness. The Fed is desperate to come up with a new source of support.

Enter, Social Security Reform. Now politicians are suggesting that federal withholding revenues be redirected into the stock market. Wow! What an idea. That should keep the markets inflated for a little while longer. It could certainly give the Fed a new a new source of wealth to siphon off. But wait. One of the biggest myths about Social Security is that there is any money in the Social Security trust fund. The fund has been systematically tapped and squandered by every administration since its inception. It was an unconstitutional sleight of hand to begin with. It is, and has always been a Ponzi scheme, which depends on new workers to pay the old workers. Maybe that is why the present administration is doing everything in its power to tear down the borders and accommodate as many illegal aliens as possible. Maybe that's why they're attempting to raise the age of retirement. The privatization of Social Security is simply one more scheme to siphon off the wealth of the middle class through commissions and fees, and keep the stock and bond markets inflated for a little while longer. Do you see a pattern emerging here?

What’s next? What new source of wealth will be found to target? What if there isn't another source. How about those foreigners? How can the Fed keep them buying treasury paper, which allows the Government to keep on borrowing? When approached from this perspective, we realize that keeping the bond market inflated is the primary aim of the Central Bankers, (the Fed). To what lengths will they go to keep the bond market inflated? What new legislation will they dream up for their puppet politicians to pass? If it never occurred to you that the Federal Reserve, (a private corporation), owns the U.S. Government, please read the following statement made by Fed Governor Ben Bernanke.

"By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.“

What in blazes is positive inflation? And why would anyone, representing the people, want the price of goods and services to rise? Who, but a banker could benefit from inflation? Inflation equals rising prices. Rising prices equal more loans. More loans equal more interest. The natural evolution of man would have provided for a continuing improvement in the standard of life for all persons, if it wasn't for the heinous contrivance called inflation. Technology has provided new and improved ways to produce and deliver almost everything. Without inflation almost everything would be cheaper, or at least remain the same price. Let me restate that last part. If it wasn't for the Federal Reserve, everything would become cheaper, instead of more expensive. Most people believe that inflation is a natural economic occurrence. This is simply untrue.

Constitutional mandates insist that American currency be backed by precious metals. Adhering to those mandates would insure inflation and deflation would only occur if the quantity of precious metals was significantly altered, thereby skewing the supply/demand equation. Because of the energies necessary to locate, mine, refine, smelt and coin precious metals, the value will always be relatively maintained. Because of the fact that practically no energy is necessary to produce "funny money", there is no value to begin with. Producing more of it makes it worth less than nothing, as it becomes a liability and the biggest threat in the world to liberty, freedom, peace and justice. Any devaluation of American currency is a direct result of the money that the Federal Reserve is stealing out of your pocket.

Consequently, there are other ways, besides inflation, that the Fed can cloak reality and present the appearance of a robust economy. One of these ways involves direct intervention in all three major indexes. The Fed has created a fund called the repo pool, which can exceed $30 billion. When the Federal Reserve temporarily supplies these funds to the market by buying securities from dealers with a commitment to resell, the transaction is called a repo, (repurchase agreement). The Fed uses this cash to purchase securities from primary government bond dealers. This action circumvents natural free market pressures and pumps unnatural liquidity to the banking system. Member firms, at the direction of the Fed, use this liquidity to make major purchases in the futures markets or to purchase select market weighted stocks. Through the continual manipulation of a basket of major stock issues, they can effectively hold the markets up with their "funny money". All activity of this nature is covertly inflationary, and obviously unconstitutional. Because the shareholders of the Fed, complicit banks, and dealers also profit from these deals, anti-trust statutes are broken on an hourly basis. Wall Street has devolved to nothing more than a den of thieves.

Yet another way that the Fed utilizes "smoke and mirrors" to maintain the appearance of a healthy economy, rather than allowing the specter of "black death", which hangs heavily over the real situation, to become apparent, is through the use of clandestine offshore accounts. Through these accounts, agents of the Fed buy up the treasury bonds that are not bought by hedge funds, elitist transnational corporations, or foreign central banks. During a routine sale of U.S. Treasury bonds in early September 2004, an unprecedented event took place. Foreigners, who, up to that point, had been regularly buying nearly half of all debt issued by the U.S. government, didn't buy any. This could be the Fed's biggest nightmare.

The afore mentioned usual suspects, (the hedge funds, elitist transnational corporations, or foreign central banks), could be buying US Treasury notes and bills via the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles and Panama, but I find that highly unlikely. These bankers and fund managers aren't stupid. Why buy into an asset whose value is destined to decline. Robert McTeer, head of the Dallas Federal Reserve Bank, stated in October of 2004;

"Over time there is only one direction for the dollar to go – lower.”

Our Government finances itself through the collection of taxes, (which basically go to pay the interest on the national debt), and the sale of treasury instruments, (i.e., bonds, bills, notes), which are effectively IOUs from "We the People". In its first term the Bush administration increased the Federal debt by $2.2 trillion. Congress raised the Treasury debt ceiling three times, by $450 billion in 2002, by $984 billion in 2003, and by another $800 billion on November 19, 2004, to $8 trillion 184 billion. The ready willingness, of the members of the House and Senate, to finance such deficits is a clear indication of the political and ideological makeup of most members of Congress.

More disturbing is the fact that the voting public continues to re-elect these people in the glaring face of fiscal insanity. The wars are obviously a ruse to convert the national debt into vast wealth for the elitists, (see $1,100 dollar a barrel Iraqi oil above). Please understand that there is no way that fiscal responsibility, a by-product of a gold backed currency, could ever provide for the reckless levels of debt that the American people, and their descendents, are currently being shackled to.

All the people in the world that hold Federal Reserve Notes are being fleeced. That's usually an occurrence reserved for sheep. How apropos. But, so long as crazy foreigners continue to loan us more of their "funny money" to fight these wars, the game can go on. When foreigners finally wise up to the insane nature of our economic policies and cease buying our IOUs, where will the money come from?

According to the research of Robert Chapman,

Caribbean Treasury investments soared 54% to $85.2 billion during the first ten months of 2004, seven times the 8.3% increase of all of 2003. The region is now the fourth-largest holder of US government debt, behind Japan, China and the UK. This is not coincidence. It is very significant and it has to be the Fed keeping the dollar afloat.

The previous paragraph might suggest that the Fed has stepped in and is secretly buying government debt. The reason that they are doing it secretly is because when the Fed directly buys government debt, and then uses that debt to create more money, it is immediately inflationary. No trickle down here. It is nothing less than hyperinflationary. Obviously, if the people ever began to realize that, through this action, they were getting royally screwed, they might quit electing these bozos and start to clean up the mess. Hyperinflation will make Government bonds far less attractive. Remember, the bond market is the cash cow that the central bankers depend on to continue to milk the economy. Therefore, the Fed will do everything in its power to insure that the bond market will be the last to deflate.

In order to keep the bond market inflated, the Fed will have to substantially raise rates. They will not do this, however, IMO, until the people finally wake up and start to make some noise. The sheeple are not known for public outcries, so the throes of hyperinflation will already be choking the economy long before the Fed makes any meaningful increase, (read in: double digits). The dollar is in free fall. When it breaks below the USDX .80 there is nothing in the world that can stop it, except for a massive interest rate increase. When they finally do make a meaningful rate increase, the markets will begin overtly crashing, (as I mentioned above, they have been covertly crashing for years), and the panicked investors will stampede to the bond market for security, like lemmings heading for the cliff. The bond market will find new life, and gold and silver will enter "phase three" and explode in price.

Right before the stock market melts down, the real estate bubble will go kabloowie, Fannie and Freddy will go up in a puff of smoke, and the domestic banking system will come to a screeching halt. The Fed will mindlessly continue to keep the presses running for as long as they can, (after all, that's all they know how to do). The erosion of the buying power of dollars will accelerate exponentially. From an American economic standpoint, we will have arrived at "end game".

Everyone, (except Joe), is beginning to get very nervous. Since we are absolutely dependent on the kindness of foreigners in terms of sustaining our current standard of life, their nervousness is, to say the least, very disconcerting. If they don’t continue to hold our dollars, our economy is toast. Unfortunately, people all over the world are beginning to dump their dollars, and for good reason. What would you do, given the same set of circumstances? There are reports that in some places, U.S. dollars are no longer accepted. Where will these dollars end up? Why, right here, where they started. And when they get here, and there’s a glut of them, what will happen? The good new is that there will be so many of them that they will be a lot easier to get. The bad news is that no one will want them because they won't be worth anything. Let me put a time frame on these events and attempt to put them in perspective. I believe it will become apparent to anyone paying attention within the next six months and finally come to a head within 3-5 years.

Get ready for a $10.00 cup of coffee, a $200.00 dinner, water bills that look like your electric bill, and electric bills that look like your mortgage payment. The value of coffee is not going up. The value of food is not going up. The value of water and electricity is not going up. The value of the dollar is going down. A ten-cent candy bar can still be had for a dime, providing that it's a silver dime. If you are using Federal Reserve Notes, a ten-cent candy bar now costs $1.00, and it will soon cost $2.00.

I believe that the powers that be have employed their ability to invent money by using its corrupting influence to cataclysmically screw things up. They have, with the help of their bought and paid for acompli, screwed it up so bad that it won't be easily fixed. I have always believed their plan was to casually strip up of all our liberties before they pissed us off. They have been doing a pretty good job of stripping us of or freedoms and liberties for years, and no one seems to have minded very much. After all, they successfully debased our currency and pocketed the difference, entwined us in a mire of disputes all over the globe and managed to get the whole world pissed off at us, strapped us with untenable debt that will eventually enslave our offspring, dismantled the Bill of Rights through Patriot Acts One, Two, and soon to be Three, are currently scheming to rob us of our retirement by hijacking social security, and still we re-elect them. Apparently, they haven’t pissed us off enough for anyone to do anything about it.

Given the pandemic apathy, that addles the collective mindset of our nation, there is not much hope for a political solution. By the time the sheeple wake up and attempt to politically change things, it will be far to late. We are witnessing the decent of the Phoenix, and she's going down in flames. I also believe that the Phoenix will rise from the flames and soar to new heights. Unfortunately I do not believe it will be anytime soon, and when it does, it will be under far different circumstances.

What can you do? Open your eyes. Identify, for yourself, the signs of the tyrannies of collectivism. The easiest way to identify a collectivist is to observe how he proposes to help those in need. If he advocates true charity (the giving of one’s own money) and freedom-of-choice to give or not to give, he is an individualist. If he advocates pseudo charity (the giving of other people’s money) and the use of taxation to coerce everyone to participate whether they choose to or not, he is a collectivist. The use of coercion for redistribution of wealth is the foundation of socialism, communism, Nazism, fascism, and all other variants of collectivism.

Protect yourself. Get ready now. Sell everything you don't need. Accumulate gold and silver, (most especially silver). Invest in gold and silver mining issues. The day is soon coming when the people demand that precious metals regain their place in a Constitutionally sound economic system. Prepare to defend your Constitution, yourself and those you love. Follow the course opposite to custom and you will almost always do well...

Eliminate as much debt as possible, especially “variable rate” debt, such as credit cards and lines of credit. Interest rates will be rising, so the elimination of debt offers a “real return” of escaping rising rates by creditors.

If you are depending on Social Security, stop.

It’s not what you don't know that will screw you up; it’s what you know that is wrong. The spin you hear from the mainstream media is intended to mislead you. Open your eyes and face the future. If you leave your head in the sand and ignore it, you are only leaving your butt exposed for the world to kick. This all may sound like gloom and doom, but when you get a handle on what is going to happen, you will have a future filled with opportunity. Fortune favors the Informed.

by Michael S. Rozeff

In their attempts to halt credit deflation, the government and the Fed are unleashing a torrent of corruption, inefficiency, misuse of funds, and fraud. If a bank is too big to fail and the government and/or the Fed make sure that it survives, despite the past mis-behaviors of its officers, then they invite those officers to misuse the funds that they infuse.

Any transfer of money (or funds) from stockholders and lenders to corporate officials is accompanied by methods of controlling the behavior of those officials. Transfers of money from taxpayers to governments also necessitate methods of control. Without such methods, officials, bureaucrats, and politicians have an incentive to engage in a range of behaviors that harm the interests of those who are supplying the funds. The control methods include audits, reporting requirements, boards of directors, independent committees, governance methods, arms-length dealings, ethical training, laws concerning fiduciaries, laws against fraud and malfeasance, freedom of obtaining information, and so on. All of these methods also require effective enforcement if they are to do their job.

Much of this control goes on without much publicity, until a highly-publicized breakdown occurs such as in the case of the Madoff fraud. But there cannot be well-functioning markets or well-functioning governance, corporate or non-corporate, private or public, business or non-business, without an extensive set of methods to control the behavior of agents who are entrusted with the money of principals.

Even before the recent bailouts, the federal government and the Fed were supplying enormous amounts of money to a variety of persons. It is common knowledge that their controls over the use of these funds are not anywhere near what they should be. The main reason for this is that these institutions are themselves poorly controlled by their constituencies who are forced to accommodate them. Taxpayers are forced to pay taxes, no matter how badly the funds are used. All of us are forced to accept dollars as legal tender.

The instances of government waste are well-known. The frauds committed against the Medicare program are large and numerous, but these are facilitated by the poor controls that we have over government and then its poor controls over the funds that it extracts from us. The gross over-charging by defense contractors is constantly documented. In a war like that in Iraq, the entire war with its insanely high costs is an example of non-existent control of funds by those paying the bills. The entire war is a fraud in that public officials misrepresent its costs and benefits in order to gain public approval for their misuse of the public’s money. These and more like them are examples of what happens when there are poor controls over the use of money that has been transferred from agents to principals. Bernard Madoff is now famous for having catapulted himself into the ranks of a large-scale fraud that rivals what occurs constantly between government and taxpayers and then, again, between government and its contractors.

The last year has seen government and the Fed ramp up their relatively uncontrolled dispersion of money to new heights. In an extraordinarily brief period of time and acting in great haste, we have seen a $700 billion bailout program passed by Congress along with the nationalization of such huge failures as Fannie Mae and Freddie Mac. We have seen the Fed expand its loans in all sorts of directions, including a private insurance company, foreign central banks, commercial paper, and any number of insolvent U.S. banks. We have seen the U.S. government make any number of new and expanded financial commitments and guarantees that can explode its solvency at any time and lead to very high costs to society.

Once again, the government and the Fed are committing massive frauds. They are intentionally deceiving the public about the necessity and benefits of these expenditures. A great deal of money is being transferred to persons who should be absorbing losses that they are responsible for.

At the same time, we have not seen anywhere near sufficient controls instituted over the uses of these funds. If we did have such controls, the federal government would be electing directors to bank boards across the country. The socialization of finance would come out into the open. Over time, as these funds begin to be misused by those who are receiving them, because the control mechanisms put in by the government are so weak, we can expect to see a gradual tightening of control which will bring the government control more and more into the open. We can also expect a greater politicization of the process.

If proper controls were in place, the Fed would not be releasing funds wholesale and at preferential rates to entire classes of borrowers. It would be carefully negotiating loans with controls over their use with individual borrowers. We have not seen even an accounting for the Fed’s loans. The Fed refuses to reveal information about the nature of its loans.

The government never controls the uses of its money in a way that is acceptable to taxpayers. Its controls are always weaker than even private sector controls, and private sector controls have many problems as it is. But now that the government is bailing out banks and businesses, the problems get even worse. To the extent that the government attempts to control those who receive its funds, it socializes the economy more than ever. The bigger the bailouts are, either the waste due to lack of control rises steeply, or else, if controls are put in place, the socialization of business with all its inefficiencies rises steeply. The public loses in either case.

We have always had these same issues of control of money and socialization before us. The Medicare program wastes huge amounts of money by its poor insurance structure. This represents a failure in control of how taxpayers’ funds are spent. On the other hand, to the extent that Medicare attempts to control how the funds are spent, it tells hospitals, doctors, and patients what they must do. We encounter the same dilemma as in the bailouts and the Fed loans. We are damned if they do not control, for that creates incentives for fraud, waste, misuse of money, and inefficiencies. But we are damned if they do control, for that brings even greater socialization with all of its attendant evils.

The more money that the government spends on bailouts, the more that it maintains already corrupt and inefficient institutions in place. It provides them with greater incentives to laxity, misuse of funds, and even frauds.

Public works spending will be no different. The housing and construction lobbies are powerful. They find many allies in city, education, and state lobbies. The National Association of Realtors, the National Association of Homebuilders, and the Mortgage Bankers Association are powerful. They are sometimes joined by the National Education Association that fears losses of local property tax revenues. They are joined at times by the National League of Cities, the National Conference of State Legislatures, the Council of State Governments, and the National Association of Counties. Does the unorganized public stand a chance against these organized groups?

Public works spending is public fraud. One only need note that there is just as little accountability of the funds spent as with the Fed’s loans. The politicians intend to deceive the public and misrepresent the benefits and costs of public works projects. Graft and kickbacks are present through campaign contributions and gifts. These are the kinds of factors that signal that public works spending is actually a fraud.

The politicians wave job creation numbers before the press, knowing full well that the process is a fraud. Biden is now claiming how carefully projects will be selected. This is totally unbelievable. It is rhetoric to gain support. The money will be dissipated on bike paths, costly earthquake resistant building improvements, devices to save energy that cost more than they return, increases in Medicaid, modernization of classrooms that do not improve education in the slightest, and all manner of environmental fads. Much of the public knows this, but the government uses its media platform to defuse any dissent while it extols the virtues of its actions. This deception is at the heart of the fraud.

When it comes to government and money, we are between two rocks and a hard place. The government’s uses of forced exactions (taxes) are not controlled by the principals (the taxpayers.) In the next stage, which is when government spends the money, it fails to control the uses. Waste, improvidence, and inefficiency are government hallmarks. Earmarking funds for favored interest groups is standard operating procedure, and that induces these groups to laxity, corruption, misuse of funds, and fraud. But when the government attempts to control its use of funds by controlling the behavior of its recipients, then heavy-handed and inefficient socialism and fascism rear their ugly heads.

The largest frauds in our society are the frauds of government. The largest frauds in our society are the frauds of elected leaders. They constantly betray the public trust, a term that has largely disappeared from their lips. Bailouts, Fed loans, and public works projects spread the poison more widely, inducing even more private sector laxity, inefficiency, kickbacks, payoffs, and corporate and business malfeasance. This will not diminish until those who supply the money control the uses of that money.

December 30, 2008

Michael S. Rozeff (msroz@buffalo.edu) is a retired Professor of Finance living in East Amherst, New York.

Forecast for 2009
James Howard Kunstler
http://www.kunstler.com/

There are two realities "out there" now competing for verification among those who think about national affairs and make things happen. The dominant one (let's call it the Status Quo) is that our problems of finance and economy will self-correct and allow the project of a "consumer" economy to resume in "growth" mode. This view includes the idea that technology will rescue us from our fossil fuel predicament -- through "innovation," through the discovery of new techno rescue remedy fuels, and via "drill, baby, drill" policy. This view assumes an orderly transition through the current "rough patch" into a vibrant re-energized era of "green" Happy Motoring and resumed Blue Light Special shopping.

The minority reality (let's call it The Long Emergency) says that it is necessary to make radically new arrangements for daily life and rather soon. It says that a campaign to sustain the unsustainable will amount to a tragic squandering of our dwindling resources. It says that the "consumer" era of economics is over, that suburbia will lose its value, that the automobile will be a diminishing presence in daily life, that the major systems we've come to rely on will founder, and that the transition between where we are now and where we are going is apt to be tumultuous.

My own view is obviously the one called The Long Emergency.

Since the change it proposes is so severe, it naturally generates exactly the kind of cognitive dissonance that paradoxically reinforces the Status Quo view, especially the deep wishes associated with saving all the familiar, comfortable trappings of life as we have known it. The dialectic between the two realities can't be sorted out between the stupid and the bright, or even the altruistic and the selfish. The various tech industries are full of MIT-certified, high-achiever Status Quo techno-triumphalists who are convinced that electric cars or diesel-flavored algae excreta will save suburbia, the three thousand mile Caesar salad, and the theme park vacation. The environmental movement, especially at the elite levels found in places like Aspen, is full of Harvard graduates who believe that all the drive-in espresso stations in America can be run on a combination of solar and wind power. I quarrel with these people incessantly. It seems especially tragic to me that some of the brightest people I meet are bent on mounting the tragic campaign to sustain the unsustainable in one way or another. But I have long maintained that life is essentially tragic in the sense that history won't care if we succeed or fail at carrying on the project of civilization.

While the public supposedly voted for "change" this fall, I maintain that they underestimate the changes really at hand. I voted for "change" myself in pulling the lever for Barack Obama. I regard him as a figure of intelligence and sensibility, but I'm far from convinced that he really sees the kind of change we are in for, and I fret about the measures he'll promote to rescue the Status Quo when he moves into the White House a few weeks from now.

Where We Are Now

Without reviewing all the vertiginous particulars of the year now ending, suffice it to say that the US economy fell on its ass and that the "global economy" did a face-plant as well. The American banking sector imploded spectacularly to the degree that investment banking actually went extinct -- as if a meteor landed on the corner of Madison Avenue and 51st Street. The response by our government was to shovel "loans" onto the loading dock of every organization that pretended to be something like a bank, while "bailing out" an ever-longer line of corporate claimants with a pitiable song-and-dance. The oil markets went on a roller coaster ride. The housing bubble collapse grew to avalanche velocity (taking out whole colonies of realtors, mortgage brokers, and construction contractors in its path), the commercial real estate sector developed hemorrhagic fever, retail drove off a cliff on Christmas Eve, the stock market fell in the toilet, jobs and incomes went up in a vapor, and tens of millions of ordinary citizens addicted to revolving credit found themselves in a life-and-death struggle for the means of existence. None of this is over yet.

The Year Ahead

Much of what has been lost in 2008 will not be recovered: enterprises, personal fortunes, chattels, reputations.

I expect a period of euphoria to mark the early weeks, perhaps months, of the Obama team. It will be a relief to have a president who speaks English correctly and has experienced something like real life prior to politics. Restoring credibility and legitimacy in leadership will be a big deal. If nothing else, we may recover a collective sense of consequence from a president who tells the truth, even the harsh truth. The age when it was enough to claim that "mistakes were made" might be over. A sign of this sort of change may be the commencement of prosecutions for misdeeds in banking and securities that are now destroying the entire system of deployable capital. A good place to start will be an investigation of Henry Paulson for insider trading stemming from Goldman Sachs's shorting of its own issued mortgage-backed securities when Mr. Paulson was the company's CEO. Beyond his case, there should be enough work at Attorney General Eric Holder's office to employ a line of law school graduates stretching from Brattle Street to the planet Mars. It will be salutary for the nation to see those who engineered the banking collapse come to greater grief than the mere surrender of their Gulfstream jets and Hamptons villas. By the way, being allergic to conspiracy theories, I don't believe for a minute that there is some kind of shadow elite of "Bilderburgers" standing in the background to protect these grifters -- and I also believe the reason these paranoid notions persist is because it is otherwise hard to account for the extravagant irresponsibility of the Bush circle and its servelings.

Apart from "cleaning up Dodge," so to speak, and from issues of collective character-and conscience-in-office, I worry that the avalanche of troubles already ongoing will overwhelm Mr. Obama and his people. It's also well worth worrying whether they will pursue policies similar in kind to the ones pursued by Bush, namely throwing money at everything and anything, and it sure looks like they are planning to do just that. I am especially concerned about an "infrastructure stimulus" project aimed at highway improvement at the expense of public transit. This would be the epitome of a campaign to sustain the unsustainable. We need to begin planning right away for a transition away from automobiles, not in order to be good socialists but because Happy Motoring is at the core of our unsustainability trap. The car system is going to fail in manifold ways whether we like it or not, and it will fail due to circumstances already underway. For one thing, it will cease to be democratic as the remnants of the middle class find it impossible to get car loans, or pay for fuel, or insurance, and that will set in motion a very impressive politics-of-grievance setting apart those who are still able to enjoy motoring and those who have been foreclosed from it. Contrary to what you might make of the the current situation in the oil markets, we are in for a heap of trouble with both the price and supply of petroleum (more on this below). And there is no chance in hell that any techno rescue remedy to keep all the cars running by other means will materialize.

A consensus in the blogoshpere says that the stock markets will rebound strongly during the first Obama months. This is possible just on the basis of pure "animal spirits," but the Obama Bounce will occur against a background of continued dismal business and financial news. It will appear to defy that news. By May of 2009, the stock markets will resume crashing with the ultimate destination of a Dow 4000 before the end of the year. Meanwhile, jobs will vanish by the millions and companies will go bankrupt by the thousands, especially in the so-called service sector, and in all the suppliers of such, along with the landlords in all the malls and strip malls. The desolation will mount quickly and will be obvious in the empty storefronts and trash-filled parking lagoons. In the event, two things will become increasingly clear to the nation: that the consumer economy is dead, and that there is no more available credit of the kind that Americans are in the habit of enjoying.

We'll turn around early in 2009 and discover that we are a much poorer nation than we thought because from now on credit will be extremely hard to get for anyone for anything. The businesses that survive will have to keep going on the basis of accounts receivable. This is the area where the crash of giants will be heard. I've been saying since publication of The long Emergency that comprehensive downscaling in all our activities, from farming to business to schooling to governance, will be the categorical imperative of the years ahead. Giant enterprises requiring giant loans to get from quarter to quarter will tend to not make it. Borrowing from the future will become a practical impossibility as past bad debts from previous borrowings continue to unwind, cease performing, and get written off. This argument implies that the federal government will tend to flounder just as General Motors, Citicorp, Target Stores and other gigantic enterprises will tend to flounder. It would be sad to see a President Obama so hamstrung and helpless, and it is largely why I see his role as largely symbolic -- as a reassuring presence encouraging the distressed public to bravely bear their hardships, and to be kind and helpful among their neighbors.

Households, like businesses, will have to pay as they go from earned income. The house as ATM is over. Credit cards are maxed out and credit ceilings are lowering like the ceiling in "The Pit and the Pendulum," preparing to slice-and-dice the old "normal" of family life in America. Bankruptcy will be the new Nascar. A lot of families will lose everything. They will sift and disperse into the housing owned by other family members -- parents, siblings -- and a strange new not-altogether comfortable kind of togetherness will become common. Over time, a lot of people will go looking for casual work "under-the-table"( and probably low-paying). To some degree, these workers will begin to look and act like a new servant class, and before too long they may be absorbed into the households of people who employ them. There will be plenty of room for them there.

Counties, municipalities, and states will join in the bankruptcy fiesta. It would be reasonable to expect collapsing services as a result. This would be a situation fraught with danger -- of rising crime, of public health emergencies as water systems are not kept up and sewage treatment becomes unaffordable. I don't imagine the federal government stepping into every Podunk or Metropolis from sea to shining sea and propping up these services. People will have to cope with danger and deprivation.

2009 may be the point where we begin to understand what kinds of places will be more hospitable to human society further ahead. I maintain that our giant urban metroplexes have way overshot their sustainable scale and will contract severely. With all the economic hardship, we ought to expect a lot of demographic churning, people leaving hopeless places and moving on to something more promising. I believe we will see them move to smaller towns and smaller cities. The reorganization of the rural landscape into smaller-scaled farms has not begun to occur -- though 2009 might be very hard on agribusiness, given the shortage of capital and if oil begins to march up in price by late winter. Eventually, the rural landscape will require the labor of many more people than is currently the case. Whatever else happens, 2009 will surely see a massive return to home gardening as budgets become strained to the extreme. As the New Urbanist Andres Duany said recently, "Gardening is the new Golf!"

The oil scene

Many were stunned this year to witness the parabolic rise and fall of oil prices up to nearly $150 and then back around $36 by Christmas time. Quite a ride. I said in The Long Emergency that volatility would be the hallmark of post peak oil because it was obvious that advanced economies could not absorb super high prices and would crash in response; that at some point after crashing, these economies would respond to the new lower oil price, resume their cheap oil habits, and build to another price rise. . . and crash again. . . in a declension of ever-lower industrial activity.

What I probably didn't realize at the time was how destructive this cycling between low-high-and-low oil prices would actually be in the first instance of it, and what a toll it would take right off the bat. We can see now that our first journey through the cycle took out the most fragile of the complex systems we depend on: capital finance. As a result, a huge amount of capital (say $14 trillion) has evaporated out of the system, never to be seen again (and never to be deployed for productive purposes). It will be harder for the USA to rebound from the grievous injury to this crucial part of the overall system, and Europe has foundered similarly -- though the European nations are not burdened to the same degree by the awful liabilities of suburbia.

Even if these advanced economies -- throw in Japan too -- remain moribund, the price and supply prospects for oil look ominous. My own guess is that the price of oil has overshot on the low end just as it overshot on the high end, and that, when all is said and done, we'll still see an upwardly trending price line over the long haul. The plunge, which began right after the $147 peak in July 2008, was as much the result of banks, hedge funds, and individuals dumping oil investments and positions to raise cash as it was a matter of the markets predicting a sharp fall-off in economic activity (and supposedly oil consumption). The truth is that demand destruction for oil in the USA has been surprising mild compared to the drop in price. Jim Hansen's Master Resource Report says that gasoline consumption dropped from 9.29 million barrels a day in 2007 to 8.99 million barrels a day for 2008. That's not much of a fall-off, especially compared to the price drop.

As Julian Darley of the Post Carbon Institute put it recently: "There won't be any energy bail-out." And, as many other people have noted, the recent plunge in oil prices strongly implies future supply destruction, since so many planned oil projects have been suspended or cancelled because they are economic losers at $40-a-barrel (or even $70). Even projects well underway, such as Canadian tar sand production, have been scaled back or shut down because they don't make sense at current prices. Some of these other newer projects will now never get underway -- they have missed their window of opportunity with so much capital leaving the system -- and so the hope of offsetting very-near-future depletions in old giant oil fields looks dimmer and dimmer.

Those depletions are very serious. For instance, Mexico's super-giant Cantarell oil field, the second-largest ever discovered after Saudi Arabia's Ghawar field, has shown a 30 percent depletion rate in the past year alone. (Pemex had forecast a 15 percent rate entering the year.) Cantarell provides over 60 percent of Mexico's total production, and Mexico is America's third largest source of imports -- just after Saudi Arabia (#2) and Canada (#1). Obviously, Mexico soon will lose its ability to export oil, and as that occurs, America is going to feel more than pinch -- more like a two-by-four upside the head. In short, remorseless depletion is underway and we are less likely now than even a year ago, to make up for it.

At some point, then, demand, even if slightly lower, will catch up with declining supply. My prediction for 2009 is that we will see two things occur, possibly at the same time: a resumption of rising prices, and spot shortages. I say this because the global economic fiasco is sure to produce geopolitical friction, and inasmuch as America has to import almost three-quarters of the oil we use, the prospect for trouble is great.

The tragic part of all this, of course, is that the temporary plunge in oil prices has prompted an incurious American public to assume, once again, that the global oil predicament is some kind of a fraud. Given the flood tide of fraud they have been subject to in banking and investment matters, I suppose you can't blame them from thinking that everything is some kind of a scam. Given feeble car sales this season, there are reports that an increasing percentage of those sold now are are trucks and SUVs.

Though I give Boone Pickens high marks for stepping up to the leadership plate, I'm not altogether on board with his energy proposal for swapping natural gas for gasoline in motor fuels while we swap out wind power for natural gas in electric power generation. I don't believe that the ballyhooed shale-gas-plays of the last few years will prove-out long-term, as some huckster's claim. They are expensive to drill and run, and they all tend to deplete very quickly -- around one year. I'm not convinced we have the capital or the resources even to come up with the steel necessary to drill for it. Anyway, the last thing we need is a way to prolong our car-dependency.

In the meantime, there are still those who hope (as described above) that various alt.energy systems will insure the continuation of Happy Motoring. This is an idle hope, and 2009 will be very sobering for those who imagine that hybrid cars, or electric cars, or "air" cars, or natural gas cars, or any other kind of car technology will save the day. Even if President Obama mounts an "infrastructure stimulus" program, it will not keep up with all the necessary routine road repair that our highway system requires. The extreme financial hardship faced by localities and states insures that they will have to postpone a lot of expensive highway maintenance -- even if the federal government fixes a big bunch of bridges and tunnels -- and so we face the interesting prospect that our roadway systems will enter their own deadly zone of systemic failure even before the whole car issue is settled.

I am waiting to see whether Mr. Obama will undertake a restoration of passenger railroad service. I've said enough about this in the past, but it's worth reiterating that a failure to get comprehensive passenger rail service going will be a sign of how fundamentally unserious we are as a nation.

The Specter of Inflation

This is the "other shoe" that a lot of people are waiting to drop. Right now we are caught up in a compressive debt deflation as mortgages stop "performing" and loans of all kinds are welshed on. Since money is loaned into existence, and a great many loans are not being repaid, then a lot of money is going out of existence. That's what I mean when I say that capital is leaving the system. At the same time, the Federal Reserve has made good on its promise to drop money from helicopters if necessary to prevent an implosion of the banking system (as all that older money goes out of existence), and so it's now a question as to when the amount of new money will exceed the disappeared old money. (Of course when I say money, I mean "money," because we are dealing here in a shadow realm of assumed value.) In any case, there is bound to be a lag period between the time that the Fed's money is dropped from the choppers and the time it actually filters through the banks and other recipients to the so-called "real economy" of people who buy and sell real things. The credible estimates I hear run between six and 18 months.

I'll only venture to guess that we could see the start of serious inflation sometime in 2009. To some extent, all currencies are now free-falling together, some at slightly faster rates than others, but the situation of the US dollar is so grotesquely dire, and our structural imbalances so monumental, that it is hard to imagine that our currency will not win the international race to the bottom. Gold resumed its movement upward against the dollar a week before Christmas, and that may be an early sign. The government -- and anyone badly in debt -- benefits much more from inflation than deflation, so every effort will be made to avert the latter. The trouble lies in the government's dumb incapacity to control dangerous things that it sets in motion, so that an inflationary campaign to avoid compressive deflation can so easily lead to a fiasco of super or hyper inflation -- the kind that kills governments and turns societies into murderous monsters. I'll forecast the that the US dollar is worth 40 percent of its current value by next Christmas.

Geopolitics

Well, now, who the hell knows what's in store. Aside from a few bombs here and there, and pirates skulking around the horn of Africa, the world scene was miraculously free of major incidents in 2008 -- perhaps the worst being a toss up between the September Mumbai bombings and the fiasco in Georgia, where the US prompted Georgia President Mikheil Saakashvili to send troops into the South Ossetia region and the move was answered by overwhelming force from neighboring Russia, leaving the US looking feckless and retarded for our troubles. But otherwise, there wasn't a whole lot of action out there.

Until the last few days of the year, that is. I'm sure the ever-growing cohort of American anti-semites who send me emails will be tickled when I assert that the Hamas rocket attacks against Israel of recent days guaranteed a sharp response from Israel -- and now, of course, Hamas is playing the crybaby card: "... what'd we do to deserve this...?" Well, you fucking fired a bunch rockets into Israel. Did you ever hear of cause-and-effect? This matter requires no further elucidation, except that it seems to suggest a ramping back up of hostilities. I wonder if it is the beginning of a new coordinated offensive by Islamic extremism aimed at taking advantage of the West's current economic plight (and the West's probable aversion to anything that will complicate its desired recovery). We'll know in a month or so, I think, since any coordinated campaign (if such a thing were possible) might well be aimed at confounding the new American president.

The other hot corner of the world right now is the India-Pakistan border where the 60-year-old rivalry, which has already produced three wars, looks to be gearing up for yet another round. I'm not the first one to say that Pakistan is an extremely dangerous regional player, being an economic basket case, possessing a score or so of nuclear bombs, harboring more Islamic fundamentalist maniacs than any other place in the world, and having a government held together with duct tape and twine. The caper in Mumbai last September could well have been construed as an act of war, but somehow India kept its head. Who knows where this is going. . . .

So far I have only described what is already obviously going on. Add to this the likelihood that Iran is closer to achieving membership in the atomic weapon club. They've been spinning their centrifuges all year and nobody has done anything about it. My guess is that neither the US nor Israel will attempt to take out their facilities in the year ahead. If Iran used a nuclear device against Israel, or anybody else, they would be asking to become, in turn, the world's largest ashtray. End of story. A different story, though, is how Iran might behave if and when the US Military presence in Iraq is reduced. I can imagine Iran doing anything possible surreptitiously to gain control over Iraq's southern oil regions around Basra, but even the Iraqi Shia don't like the Iranian Shia that much. Anyway, iran's economy has suffered hugely from the fall in oil prices. That nation may be in for more internal trouble than they have seen in thirty years since the Shah was tossed out by the minions of Ayatollah Khomeini.

There's been a lot of sentiment the past year that as the US and the Europe fall into economic disarray, China would emerge as the great new hegemonic superpower. While it's come a long way in a quarter-century, China's internal problems are still enormous and worsening. They're in trouble with water, food imports, mass unemployment, and energy. They have locked in some oil contracts around the world, but they are still susceptible to vagaries in the oil markets and Black Swan events. As the US consumer economy falls into a coma, and the shipping containers from China to WalMart get sparser, the Chinese government will face the wrath of millions of unemployed workers. I believe they will struggle through 2009, perhaps growing more surly as the US dollar inflates and their holdings of treasury bills begins to look more like a swindle.

Russia may be suffering economically for the moment due to the crash of oil prices, but they are energy resource-rich -- at least for the next couple of decades -- and if they don't like the current price, they can keep more of their oil in the ground until the price looks more attractive. I think Mr. Putin has the confidence of the Russian people and will survive the current malaise.

Japan remains a riddle wrapped in toasted nori. They're beggaring their own factory workers to stay solvent. Their banking sector has been zombified for a generation. They import 95 percent of the energy they use. Do they have a plan? One can imagine them sliding in resignation back to something like the sixteenth century, giving up the whole industrial circus as more trouble than it's worth, just as they once gave up on firearms.

The over-arching geopolitical theme of 2009 will be the end of robust globalism as we've known it for some time. Reduced trade, competition for energy resources, sore feelings over debts and currencies will drive the nations inward or, at least, direct their energies toward their own regions. Note to Tom Friedman: the world turned out to be round after all.

Conclusion

The big theme for 2009 economically will be contraction. The end of the cheap energy era will announce itself as the end of conventional "growth" and the shrinking back of activity, wealth, and populations. Contraction will come as a great shock to a world of conventionally programmed economists. They will toil and sweat to account for it, and they will probably be wrong. Unfortunately, this contraction will do its work in unpleasant ways, driving down standards of living, shearing away hopes and expectations for a particular life of comfort, and introducing disorder to so many of the systems we have depended on for so long. People will starve, lose their homes, lose incomes and status, and lose the security of living in peaceful societies. It will become clear that the Long Emergency is underway.

My hope for the year, at least for my own society, is that we will transition away from being a nation of complacent, distracted, over-fed clowns, to become a purposeful and responsible people willing to put their shoulders to the wheel to get some things done. My motto for the new year: "no more crybabies!"

This Slate piece tallies them up. In terms of commitments (not actual money going out the door), the government had promised, as of Nov. 25, $5.6 trillion in new handouts, er, measures to revitalize the economy. (I think it starts with the Term Auction Facility from the end of 2007.) To put it in perspective, I heard on the radio that a Bloomberg story had found that this was more than all of the United States major wars (and it included Afghanistan), even when adjusting for inflation.

Now remember back when they first bailed out Fannie and Freddie (and then especially AIG), and all of the bad things that certain economists were predicting? Do you think at that point, if we knew for sure that it would lead to an outpouring of almost $6 trillion in new commitments in just a few months, that they would have said, "Let them go bankrupt and let the chips fall where they may"?

Obama Raises Target to 3 Million New Jobs
This job creation stuff is really getting absurd. Now the President-Elect and his partner in crime are saying they will create 3 million jobs, not the 2.5 million they promised earlier, because (according to Biden) the economy is in worse shape than they originally realized.

The CNBC article doesn't say how much more it will cost to save 3 million jobs versus 2.5 million; such specificity isn't even appropriate in an announcement like this, because no one actually thinks there are serious calculations involved when politicians throw numbers around. (And wouldn't it stink if you were the 3,000,001st person to get laid off?)

But let's use the numbers that some people are throwing around for the total stimulus package. The article mentions three possible numbers: $600 billion, $700 billion, or "in the trillion-dollar range." Dividing by 3 million, the cost per job saved is:

(A) $200,000.00
(B) $233,333.33
(C) $333,333.33

I think instead of Obama's current plan, what he should do is this: Take the lowball estimate of $600 billion. Next, identify the 10 million Americans who are most in need of immediate assistance. Then, send each of them a tax-free cash payout (split up over twelve months if you doubt their discipline) of $60,000.

I'm guessing that $60 grand after-tax is a lot more than most of these people are used to making, and it's not bad to get that while you are still eligible to go get a job in the private sector. Notice that my plan is the low-ball cost estimate, and saves 4x as many unemployed people as Obama's original plan. Plus, my plan is guaranteed to actually "work," in the sense of saving families who are on the verge of foreclosure etc. (In other words there's no guarantee that Obama's job training plans etc. will get these people a job that pays them $60 grand after taxes, especially not right away.)

Obviously, my plan is stupid. It would simply ensure that the unemployment rate stays high for a year, and then we'd be back to square one. At the same time, it would take $600 billion from taxpayers and hand it out to people who aren't working. (If you want to help such people, charities and churches are happy to take your donations.) But my point is that my plan is better than Obama's, even on his own terms.

Now ask yourself: Have Obama and his team just not realized the above? Or is it just possible that they want to spend a trillion dollars to reward their own pals, just like Paulson & Co. did with their own set of cronies?

by Michael S. Rozeff

Structured finance and securitization have blown up in the Panic of 2008. Those in power have learned nothing about the current economic catastrophe. The U.S. government is still supporting Fannie Mae and Freddie Mac and still trying to resurrect a system that has collapsed before its eyes.

There is little question that governments here and abroad provided the major impetus for these financial methods that have come to grief. In his book, Securitization, Vinod Kothari writes: "In most countries, governments have tried to promote housing finance, by setting up specialized housing refinance bodies or secondary mortgage market bodies. The largest housing finance institution in the world, the Government Housing Loan Corporation of Japan, is a government-owned entity. The largest housing finance body in the U.S., Fannie Mae, is a government-sponsored entity. There are housing finance bodies of different descriptions throughout the world that are promoted, owned or supported by governments such as Hong Kong, Malaysia, India, France, South Korea and Spain." Kothari’s description can be believed, for he is not a critic of these practices. He believes that "governments owe it to their citizens to promote affordable housing."

It would be a grave error to blame the Panic of 2008 on rating agencies. But because the ratings seem to be at the center of the vortex, we need to consider them. Major players in the financial community to a great extent got caught up in a larger tide or wave that was beyond their control. They work within a system. That system, in this case, involved government and banking system support for housing finance and a government and central bank going to great lengths to prevent or mitigate recessions. But, at the same time, the financial players contributed to the tide of events. Government provided the picture frame, the support, and the materials. Following the lure of profit, the financial industry was induced to paint the government-desired portrait.

The government now has many convenient fall guys. It’s even bailing them out. The public does not see that behind the curtain, the government pulled and is still pulling the levers.

In their 1969 article "What’s in a bond rating?", Thomas Pogue and Robert Soldofsky showed that one could, on one’s own, largely replicate the bond ratings produced by bond-rating agencies. The statistics available to do the rating were available to the public. Do-it-yourself ratings were feasible.

In 1977, Mark Weinstein showed that the bond market anticipated ratings changes made by the rating agencies. If a bond was going to be downgraded, the market price had already substantially dropped by the time the ratings change was announced. Investors in the market effectively did their own rating changes. The rating agencies developed some information about securities that other investors did not have, but investors also were able to assess the risks of debt without the rating agencies.

Weinstein’s findings stand to reason. Investors assess a continual stream of information that alerts them to changes in credit-worthiness. They have a very large profit incentive to assess and continually re-assess the risk of debt instruments in case the market and the rating agencies have it wrong. Investors still have access to information and they still have a profit incentive, so that they still do their own rating changes in the market; the markets marked down many, many debt instruments in 2007, well before the rating agencies downgraded them.

In the 60s and 70s, debt instruments were simple. The rating agencies hardly ever went wrong. The rating agencies sold subscriptions, which means their ratings had some value. They did not sell ratings to the issuers of debts. But starting in the 1970s, they changed their business model. They began charging issuers for ratings. (See here.) They began working ever more closely with the issuers. The issuers structured securities so as to obtain the desired ratings. In addition, structured finance securities became the fastest-growing and most highly profitable part of the ratings business, providing half the revenues. A greater potential for conflict of interest arose. It is not hard to imagine that the technicians at the rating agencies, who have similar training to the technicians working for the investment bankers, would share the same outlooks and assumptions about risk and the evaluation of risk. It is not hard to imagine that they would develop working relationships that would paper over the very real difficulties in evaluating the loans and the options packaged up into exceedingly complex securities.

The securities being rated and issued and the ratings process became far, far more complex. (See here.) Evaluating the many loans packaged into each deal required a very high level of technical expertise and time. These securities contained embedded options whose pricing and risk were open to ambiguities and uncertainties that the mathematics glossed over. Many investors, usually institutions like pension funds and mutual funds, lacked the time and expertise. Yet they wanted to invest in the securities because they promised greater returns for the risk, or so it seemed at the time.

The demand for ratings arises in part because governments regulate the investments of banks. For example, the California code has "eligible securities" that must have an "eligible rating" by an "eligible rating service" (see p. 100 of the code). The regulators choose the major ratings firms as eligible. The demand also arises because institutions like mutual funds and pension funds are regulated fiduciaries and need some kind of legal cover for the investments they choose to make. The major rating agencies fill the bill because they are a government-approved cartel. In 1975, the SEC created a designation for credit-raters: Nationally Recognized Statistical Rating Organization (NRSRO). The SEC rule created a cartel of three firms: Standard & Poor's Credit Market Services, Moody's Investors Service, and Fitch, Inc. – these being the only firms that qualified for use by broker-dealers for satisfying another of the SEC's rules on net capital. This topic is covered here.

With more research, we may find issues and problems with the major rating agencies, that show that the cartel brought about a degree of laziness and ineptitude in assigning ratings. We may pinpoint conflicts of interest. Various court cases will shed light on the internal workings of the structured finance process. However, since the market accepted the debt ratings and can re-rate debt on its own in the market place, there are likely to be other reasons why the ratings of securitized debts proved to be wide of the mark and contributed to the Panic of 2008. Why did the market and the rating agencies both price certain credits as if they were very sound when, in a short time, they turned out to be quite unsound? Why were, what we now know to be bad debts, not foreseen? Even though government and the Fed engineered over-investment in housing and a housing price bubble, we still have to wonder why investors and the rating agencies cooperated with the bubble, participated in it, and supported it with high prices and ratings for securities that turned into junk. In some sense, their being fooled or induced into participation is what defines a bubble. I believe that rising prices and profits encourage participation. Behind those lie the government-sponsored enterprises. Fannie Mae and Freddie Mac sopped up huge amounts of securitized mortgage loans. They supported the market. That "success" encouraged securitized loans for commercial real estate, consumer loans, credit card debt, and other loans that are now also coming a cropper as the bubble pricing structure collapses across the board.

We need to think about investors and rating agencies separately. Investors buy these securities, but investors are not uniform. The bulls buy from the bears who sell. In 2007, the bears turned out to be the smart money; the bulls were the dumb money. The Wall Street Journal carried a story about a smart-money man, named William Graham, who manages a hedge fund. He bought credit insurance on a complex debt security called a CDO. When the CDO market fell, the value of his insurance rose because he could get the full insured value. The seller, who wrote that insurance, was the dumb-money man. His name was Alan McCormack. He sold the insurance on behalf of a county in Australia. The county now has to make good on the insurance it sold.

Why did Graham and McCormack take the opposite sides in this trade? We have a part of the answer. A local bank recommended the purchase to McCormack. The security promised 1.2 percent above a bank rate. It was rated AA. The companies collected within the securitized investment were thought to be sound. They were not. They included such eventual failures as Lehman Brothers, Washington Mutual, Freddie Mac, and two of Iceland’s banks. McCormack didn’t see the crash coming, the same crash that he was providing insurance against. McCormack was actually writing a naked put option, which is a risky and exotic technique. The premium he was charging was nowhere near high enough to cover the risk. Graham knew that. What he saw was that he could turn a risky CDO into a riskless CDO by buying rather cheap insurance.

Graham and McCormack were separated by a number of intermediaries who brokered. But, for all practical purposes, they traded with each other. The first thing to realize about investing is that when you are buying, someone else is selling. And that "someone else" may know more than you do.

The AA rating played a part in persuading McCormack to buy. But we can’t blame the rating agencies entirely for their over-ratings because investors like McCormack do not have to accept those ratings when they buy and sell debt securities. Unlike the old days, they cannot form their own independent assessments because they lack the information that is available to the rating agencies. They are buying a pig in a poke. They are foolishly buying without a close examination. Instead they are relying on the ratings and their bank’s recommendation with some mixture of their own greed for higher return. Those like McCormack that trusted will not be so trusting in the future. Once burnt, twice shy.

The AA rating for this security was, nonetheless, a blunder. Indeed, the rating agencies blundered big time. How did that come about? While conflicts of interest and seeking of profits may have played a part, I believe that the main reason was bad estimation of models. The rating agencies made bad judgments concerning the risks of the securities. They relied on historical data and thought that the future would be like the past. They looked at matters narrowly. They did not see that an economy-wide tower of debt would not reach to the sky. This blind spot about debt is pervasive. Today, faced with the collapse of that tower, governments and central banks worldwide are again trying to rebuild it.

The new days for debts began in the mid-80s. Many of the new debts that have fallen so much in price and caused such big losses are complex, not simple, securities. They are created from collections of loans and securities which are then divided into sub-categories called tranches. The first ones I ever heard of were around 1986 at a finance conference. They are called collateralized mortgage obligations (CMOs). At the time, they repelled me. What foolishness is this was my reaction? Who is fool enough to dabble in these non-transparent and illiquid vehicles with complicated pricing? I have my investing biases, which include high risk-aversion. I am repelled by complex investments whose pricing I cannot understand or whose underpinnings depend on imponderable variables. I am repelled by illiquid investments that cannot be easily sold. I am repelled by investments devised by mathematicians and sold by investment bankers. They probably know more than I do. I am likely to be the loser. I am repelled by hidden risks. How can I expect to get a good deal with all these reservations? Other such illiquid and doctored up investments include the limited real estate partnerships that came along some 20–30 years ago. I remember a prospectus running 150 pages of fine print. But what seems like common sense to me I have learned is not always common sense to others who are more willing to take chances.

The pricing of the CMOs had definite weak spots. Pricing them required the ability to uncover and price embedded and complicated options. Mortgage borrowers could prepay their mortgages; they had an option to prepay. No one knew exactly how to estimate prepayment. Prepayment changed the duration of the security in ways unlike the usual bond duration. These bonds tended to fall faster in bear markets than they rose in bull markets because of their "negative convexity." The various tranches differed in these qualities.

The rating agencies had to rate these complex instruments. They hired more or less the same kinds of people who created them in the first place. Everyone made more or less the same assumptions, based on past history, about prepayment risks. The rating agencies did no worse than anyone else. It seemed to be good enough. There were no immediate blowups. The years came and the years went. Confidence in these instruments grew. Besides, the government and the Fed always seemed to be there to get the economy going again when it slowed down. Recessions were mild. New Era thinking began to flourish.

Investors wanted these securities. That is the other side of this story. Wall Street manufactured and distributed these securities to institutional investors. They provided the kinds of returns and risks that these investors were looking for; they wanted a little extra bang for the buck. They wanted to look good so as to attract the money of individual investors. Clearly, the little guy has a problem in assessing the risks that are being taken by the big guys he turns his money over to.

We digress into another problem area in our financial system. The institutions who buy these securities often do not adequately check up on the risk of them. They accept the S&P ratings and go for the higher yields. Why? It’s too costly to evaluate each issue. The issues seem to work. Their investors don’t seem to care. They are in competition for funds. Furthermore, they may accept the ratings if buying in certain rating classes has been legislated to cover their rear-ends. The institutions doing the buying are often government funds and pension plans, banks, mutual funds, hedge funds, etc. They are institutions, not usually individuals. They are agents of individuals, and being such they do not exercise the care that individuals would exercise, especially when the individuals are a captive group. Individuals often do not or cannot check up on the institutions doing the investment for them. If you are a policeman who works for a town in Maine that is on the Maine retirement system, your investment choices are restricted. Restricted investments are often the case. The system of investing through these agents lacks the appropriate checks and balances of a market system. It is highly paternal. It discourages people from learning how to invest on their own. It discourages them from learning about risk. What’s more, the people doing the investment may farm it out to yet other managers so that there is even another agent layer.

The ultimate bag-holders are the working stiffs who are the contributors to these plans. They often have no choice, so that the system is not as free as it looks. These plans that use agents are brought about through tax loopholes (such as IRA plans) that don't encourage individual management of one’s investments. In many cases, the person has to leave the money with the plan managers.

The institutions are the ones who ratify the ratings of the rating agencies by buying the securities. The contributors have little or no idea what their portfolios are being stuffed with. If they knew they contained exotic securities or were loaded up with the debts of banks, would they be buying those investments on their own? I certainly would not like to turn over thousands of dollars to unknown agents following unknown strategies.

There are some fine institutional money managers who do a service. They write to me when I plump for people to learn how to manage their own investments. I expect to hear from them again. If the average person does not want to manage his own investments, he still has a nontrivial problem, which is the evaluation of the managers. End of digression.

The finance profession (the professors in conjunction with financial engineers from math and physics) extended their option-pricing models. In this was much profit. Professors crowded into Wall Street. They multiplied the number of complex securities into a veritable alphabet soup. To price the securities, they had to measure certain parameters. They had to make certain assumptions. They tended to look at past history. It is at this point that bad estimations creep in. It is at this point that the rating agencies are likely to make bad assumptions about risk. The basic error is in thinking that risk is measurable using past statistical data that is limited in scope. The weak spot in the thinking of the financial engineers and of modern finance is the presumption that they understand risk and can measure risk. There is overconfidence in this realm. Finance professionals are bewitched by numbers, complex mathematics, and elegant models. They think they can measure risk objectively. This is why they are surprised when a seemingly rare event occurs that they think shouldn’t have happened in 10 million years.

Beyond the estimation issue, there is an issue of modeling. Most models of complex securities use various stochastic processes that are complex but mathematically tractable. Yet the actual processes that generate returns are even more complex and not reducible to a process that can be modeled. I very much doubt that economists of any school, despite their pretensions, understand the factors that determine price levels of goods, but those prices are critical inputs to the returns that securities generate.

The bubble game played out quite rapidly between 2000 and 2007. Before then, the ratings on these complex instruments held up. The investment bankers went for the gold and began cooperating with the banks and mortgage brokers who originated the mortgages. They fundamentally altered the banking model. They packaged up mortgages into packages that the raters were asked to rate. The regulators encouraged this change in the nature of the banking business model. They didn't see that the banks had a weaker incentive to create strong mortgage loans (because they were selling them off) and a stronger incentive to pass on their worst mortgages to others. Greenspan publicly praised the whole process of securitization. He encouraged mortgage re-financing as well. This was a major leadership error coming from the top, and it helped propel the system into a frenzy of securitization. Greenspan thought that the risks were being managed and appraised in excellent fashion. But the model estimates were flaky and the institutions taking up these securities probably did not exercise the care and diligence they would have if they were investing their own money.

The whole story of the Panic of 2008 is complex. The basic causation traces largely to government, but it does not lie solely with regulation or inept deregulation. People in free markets make mistakes. They adopt business models that fail. Failures are an inherent part of free markets. But government attempts at protecting people from failures are worse than the failures themselves. The free market, or some semblance of it, was induced to try an experiment with securitization and it blew up. That happens. Even in entirely free markets, people will blunder and have to learn. The free market is not a panacea for human ignorance and suffering. Then again, neither is government. People learn even less quickly and remain in even greater ignorance when they turn their affairs over to government to manage. There is no more unresponsive agent than government and none that has a lower incentive to satisfy the demands of the people who turn to it and trust it to solve their problems.

The risks and drawbacks of securitization were ignored in the flush of a success that was supported by government and government-sponsored enterprises. Securitization is all but dead, but it’s on extremely expensive life support being paid for by forced exactions from taxpayers.

December 26, 2008

Michael S. Rozeff [send him
mail msroz@buffalo.edu ] is a retired Professor of Finance living in East Amherst, New York.

Peter Navarro's Blog & Weekly Newsletter

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Market Pulse

Note that this will be the last newsletter before the New Year. I do hope everybody has a great holiday -- the financial and economic turmoil notwithstanding.

As I indicated last week, cash remains king in this turbulent economy and sideways market. I do wish my loyal readers would stop challenging me on this issue after every bump up in the market. Another case in point occurred last week when the Federal Reserve slashed rates to historic lows and, at least for a day, the bulls got their sugar high. Of course, by the end of the week, the Dow had turned negative while the NASDAQ and S&P 500 indices eked out a small gain. Remember: the market stall recover until investors believe the economy will recover.

More broadly, it continues to puzzle me as to what goes on in the head of Ben Bernanke. For a Princeton professor, he seems just flat out stupid. All he has accomplished in his tenure in office has been to help wreck the financial system and almost single-handedly debase the currency.

Now here's an idea: how about if President-elect Barack Obama engineers a trade with Europe in which Bernanke is shipped off to run Europe's Central Bank and America gets the current head of the European Central bank, Jean-Claude Trichet. Maybe Obama can throw Manny Ramirez in the deal just so that the deal gets done.

Unlike Ben Bernanke, Trichet has conducted a much more careful monetary policy. Bernanke must drive Trichet nuts, however. Every time the United States lowers its interest rates, it puts more pressure on Europe to do the same. Because Trichet see the chess board better than Bernanke, he's very resistant to being dragged along by the Fed's helicopter monetary policy.

Now, one of the other things I've been saying in this column for many months now there but which is not properly being heard is that California is likely to take the United States economy down another peg because of its severe budget crisis. A number of small cities in California have already gone bankrupt. Gov. Arnold Schwarzenegger announced recently that he going to cut the pay of state employees by 10% -- a contractionary shock. And, in general, the California economic train is careening wildly and will soon be thrown off the tracks.

Now, I would like to respond to an e-mail from a reader who wondered how I would reconcile the seeming contradiction between my support for a government bailout of the auto industry and my concern that Obama's proposed fiscal stimulus will backfire. The reconciliation is easy: Obama's stimulus will be in the range of $700 billion-$1 trillion while the bailout for Detroit is a relatively small ticket item in the range of $15-$20 billion. That relatively small amount of money is well worth spending to save a significant chunk of what's left of our manufacturing base. On the other hand, the Obama stimulus is going to be very difficult to finance without causing higher interest rates or inflation above.

I received a similar e-mail from another reader who wondered how I could reconcile my support for providing homeowners with foreclosure assistance with my concern for the Obama fiscal stimulus package. Again,the reconciliation easy. The Treasury Department is already spending close to $1 trillion trying to shore up the credit markets. My beef is that this money is not being spent in the best possible way, and I believe that more of that money should find its way into the task of mortgage relief – a necessary component of stabilization. On the other hand, with the Obama fiscal stimulus, we are talking about a whole new set of expenditures, many of which will likely be made long after the recovery is in progress.

by Paul Craig Roberts

Christmas is a time of traditions. If you have found time in the rush before Christmas to decorate a tree, you are sharing in a relatively new tradition. Although the Christmas tree has ancient roots, at the beginning of the 20th century only 1 in 5 American families put up a tree. It was 1920 before the Christmas tree became the hallmark of the season. Calvin Coolidge was the first President to light a national Christmas tree on the White House lawn.

Gifts are another shared custom. This tradition comes from the wise men or three kings who brought gifts to baby Jesus. When I was a kid, gifts were more modest than they are now, but even then people were complaining about the commercialization of Christmas. We have grown accustomed to the commercialization. Christmas sales are the backbone of many businesses. Gift giving causes us to remember others and to take time from our harried lives to give them thought.

The decorations and gifts of Christmas are one of our connections to a Christian culture that has held Western civilization together for 2,000 years.

In our culture the individual counts. This permits an individual person to put his or her foot down, to take a stand on principle, to become a reformer and to take on injustice.

This empowerment of the individual is unique to Western civilization. It has made the individual a citizen equal in rights to all other citizens, protected from tyrannical government by the rule of law and free speech. These achievements are the products of centuries of struggle, but they all flow from the teaching that God so values the individual’s soul that He sent His son to die so we might live. By so elevating the individual, Christianity gave him a voice.

Formerly only those with power had a voice. But in Western civilization people with integrity have a voice. So do people with a sense of justice, of honor, of duty, of fair play. Reformers can reform, investors can invest, and entrepreneurs can create commercial enterprises, new products and new occupations.

The result was a land of opportunity. The United States attracted immigrants who shared our values and reflected them in their own lives. Our culture was absorbed by a diverse people who became one.

In recent decades we have begun losing sight of the historic achievement that empowered the individual. The religious, legal and political roots of this great achievement are no longer reverently taught in high schools, colleges and universities. The voices that reach us through the millennia and connect us to our culture are being silenced by "political correctness." Prayer has been driven from schools and Christian religious symbols from public life. Diversity is becoming the consuming value and is dismantling the culture.

There is plenty of room for cultural diversity in the world, but not within a single country. A Tower of Babel has no culture. A person cannot be a Christian one day, a pagan the next and a Muslim the day after. A hodgepodge of cultural and religious values provides no basis for law – except the raw power of the pre-Christian past.

All Americans have a huge stake in Christianity. Whether or not we are individually believers in Christ, we are beneficiaries of the moral doctrine that has curbed power and protected the weak. Power is the horse ridden by evil. In the 20th century the horse was ridden hard. One hundred million people were exterminated by National Socialists in Germany and by Soviet and Chinese communists simply because they were members of a race or class that had been demonized by intellectuals and political authority.

Power that is secularized and cut free of civilizing traditions is not limited by moral and religious scruples. V.I. Lenin made this clear when he defined the meaning of his dictatorship as "unlimited power, resting directly on force, not limited by anything."

Christianity’s emphasis on the worth of the individual makes such power as Lenin claimed unthinkable. Be we religious or be we not, our celebration of Christ’s birthday celebrates a religion that made us masters of our souls and of our political life on Earth. Such a religion as this is worth holding on to even by atheists.

December 23, 2008

Paul Craig Roberts [send him mail paulcraigroberts@yahoo.com] a former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal, has been reporting shocking cases of prosecutorial abuse for two decades. A new edition of his book, The Tyranny of Good Intentions, co-authored with Lawrence Stratton, a documented account of how Americans lost the protection of law, has just been released by Random House.

by Ron Paul

Billions of dollars were recently lost in the collapse of Bernie Madoff's self-described Ponzi scheme, in which too-good-to-be-true returns on investments were not really returns at all, but the funds of defrauded new investors. The pyramid scheme collapsed dramatically when too many clients called in their accounts, and not enough new victims could be found to support these withdrawals. Bernie Madoff was running a blatant fraud operation. Fraud is already illegal, and he will be facing criminal consequences, which is as it should be, and should act as an appropriate deterrent to potential future criminals. But it seems every time someone breaks the law, politicians and pundits decide we need more laws, even though lack of laws was not the problem.

The government itself runs a fraud much bigger than Madoff's. Our Social Security system is the very definition of a Ponzi, or pyramid scheme. If the government truly had an interest in protecting people's savings, they would allow people to opt out of Social Security altogether. We would cut wasteful spending, such as our overseas empire, to honor current obligations to seniors, and eventually phase the program out. Instead, as with Enron and Sarbanes Oxley, I expect new, unrelated legislation to be proposed that further damages freedom in the name of protecting us, amidst loud proclamations that they have made the world safe.

Merely passing a law does not fix any problems, just as throwing paper at a recession does not stop it. How can a government so complicit in mandatory public fraud effectively pre-empt private fraud? I see no reason to believe that any new law, or regulatory agency will solve anything. But I do see liberty slipping away every time Congress decides to "do something". We already have an oversight agency, the SEC, which did a poor job overseeing and preventing this, but does a great job hamstringing honest, productive businesses and driving them overseas.

Total trust in government solutions only creates moral hazard, and amplifies risky behavior. Trust in government got us here. We trusted government to eliminate risk, but it just made risk more creative and dangerous. We trusted the Federal Reserve, a supra-governmental cabal of private banks, to know better than the free market what interest rates should be, and how to stabilize the business cycle, but like a spinning top that loses its balance, it has instead spun the business cycle and the economy wildly out of control.

No governmental activity can negate market forces or nullify the cardinal rule of caveat emptor. Government can however, use our fears against us and promise unrealistic outcomes as a means to consolidate power and erode our liberties. Liberty comes with risk. This is a fact of life. But life without liberty is not much of a life at all.

The only way the American people will get through these difficult times is through our own resilience and ingenuity. At best, the government is irrelevant in finding prosperity again. At worst, government can present a massive obstacle for the economy to overcome. If we do not wise up and rein government back in to its Constitutional limitations, bloated government could be a cumbersome unnecessary weight the economy will continually have to support to stay afloat.

Dr. Ron Paul
Project Freedom
http://www.house.gov/paul/index.shtml

My relatives in New England are fighting their way out from under a giant ice storm. Here in Las Vegas it’s been snowing all week, several weeks earlier than our usual one-day-a-year photo op of snow and icicles sparkling one of our palm-bedecked golf courses before melting away by afternoon. The National Weather Service calls it “a rare snow event.”

Why? It’s getting colder. 2008 was the coolest year in a decade.

The American mainstream press seem to know “team players” don’t mention such inconvenient developments, but in the U.K., the esteemed Guardian reports “This year is set to be the coolest since 2000, according to a preliminary estimate of global average temperature that is due to be released next week by the Met Office. The global average for 2008 should come in close to 14.3C, which is 0.14C below the average temperature for 2001-07.” (http://www.guardian.co.uk/environmen...change-weather.)

How stupid does this make politicians like Barack Obama and the other suckers who have fallen for the “global warming” hoax as they race to say “Never Mind”?

Actually, they haven’t missed a beat. These guys are so “scientific” that the evidence of their own eyes and overcoats has become irrelevant. They now contend global cooling is just further proof of global warming. Honest.

So-called “climate scientists” insist “The relatively chilly temperatures compared with recent years are not evidence that global warming is slowing,” The Guardian reports.

Um … earth’s cooling doesn’t mean the earth is cooling?

“Absolutely not,” responds Dr. Peter Stott, the manager of understanding and attributing climate change at the Met Office’s Hadley Centre. “If we are going to understand climate change we need to look at long-term trends.”

You might want to pause and savor that for a moment. This is the gang who keep telling us “The Debate is over! Dissent is no longer allowed! Man-made global warming is going to ruin the Earth!”

Yet they now say global cooling “is not evidence that global warming is slowing,” and that “If we are going to understand climate change we need to look at long-term trends.”

If we are “going” to understand climate change? Like … in the future?

Sure, the mean temperature may still go up for a few more years before it plummets. So? None of the great climate cycles of the past needed us to burn coal in our power plants to make them happen, and there’s neither evidence nor any intuitive reason to believe the tiny percentage of atmospheric carbon dioxide we now generate makes any substantial difference, either.

If, a few years back, the earth was warming at a rate of one degree Fahrenheit per century, all that meant was we might be able to grow wheat 50 miles further north into Canada. It sure beats the kind of disruptions we’ll see during the next Ice Age, which is overdue.

When WILL the “Let us take over and wreck your economy so we can save you from the climate boogey-man” gang admit the earth is cooling again, and when WILL they admit, “OK, since cooling is worse than warming, and our own theory is that mankind can impact global temperature by what we burn, it’s now your duty to hold back the Big Freeze by going out there and burning all the fossil fuels you possibly can, as fast as you can”?

(Don’t even get me started on the fraud potential of “carbon trading,” a weird scam in which the buyer acquires an invisible commodity no one wants, and where both buyer and seller can benefit if they collude to overestimate the amount of carbon being “transferred.”)

Instead, on Monday, President-Elect Obama (“Delay is no longer an option; denial is no longer an acceptable response”) appointed as Secretary of Energy (a position and an office not authorized in the Constitution) Steven Chu, the confirmed global warming lunatic from the Lawrence Berkeley National Laboratory who says coal — the stuff that powered the industrial revolution, cheap coal which will last for centuries and which can be burned more cleanly now than ever before — “is my worst nightmare.”

This gang still intends to effectively ban both coal-fired and nuclear power generation. Do they believe they can meet our current demand with famously costly, unreliable, and toxic wind, solar and geothermal? (Look up the by-products of geothermal energy, some time. Then look up “battery farms.”) Of course not. The gap can only be closed by “conservation,” they’ll admit when you take a pencil and start to work the numbers.

And what does “conservation” mean, precisely?

They’d like us to think they mean just turning out the lights in our empty rooms, that kind of thing. But they don’t.

Mr. Obama has said it, straight out. He, the Chosen One, has had it Revealed to Him that we can no longer use 25 percent of the world’s energy when we have only 5 percent of the world’s population.

This is nonsense. All mankind uses less than 1 percent of the solar energy that streams past us every hour. Is it “unfair” that the Japanese eat “more than their fair per capita share” of the world’s fish? Should we have given Hitler half of our B-17s and Saddam Hussein half of our M-1 tanks “just to be fair”?

Are we now to be ruled by a depraved schoolchild obsessed with sharing the toys, granted the ability to carry forward that Ding-Dong School philosophy with powers reminiscent of the kid in the old Twilight Zone episode who could “wish people into the cornfield”?

We should be proud that we’ve learned how to capture and harness the lion’s share of the available energy in this system. It’s not like we refused to share with others “the secret of coal” or “the secret of oil,” is it? They saw how good it was; they’ve been racing to catch up to us ever since; that’s the main reason the world has escaped the life expectancies of the Stone Age.

There’s a real world out there. Purposely, artificially impoverish the nation, force us to give up our competitive economic advantages, and we’ll eventually go the way of the Carthaginians.

Does the Obama gang also intend we should share half our food — or more — with those who now eat less, an “unfairness” caused not by bad soil or bad weather but because they’re ruled by dashiki-clad kleptocrats? How will he bring that about? By knocking on our doors and telling us, “Comrade, your house and kitchen are too large! These 18 new arrivals to our country our now going to live with you and share your food!”?

They mean for us to learn to survive at 55 degrees in the winter; and to hope the tourists will still come to Vegas when our air conditioning only lowers the temperature to 87 in the summer (assuming we can afford even that.) They plan to unionize and thus close down most of our remaining factories — the Chinese will make us everything we need, you see; we’ll pay for it with the endless bales of green coupons printed by Ben Bernanke and the Elves in the Big Hollow Tree.

To see Mr. Obama admit “Under my plan, electricity costs will necessarily skyrocket” visit climatechangefraud.com.

In a Zogby exit poll, 88.4 percent of Obama voters expressed ignorance of the fact Obama said on the campaign trail that his policies would likely bankrupt the coal industry and make energy rates skyrocket. Here are the sample interviews.

Why did voters not know this? Because the mainstream press covered Wasilla, Alaska, like a glove, trying to dig up something on Sarah Palin’s overdue library books. Meantime, when it turns out Barack Obama’s Senate seat is for sale for a million bucks in Chicago, the press corps slaps their foreheads and exclaims in amazement: “More corruption in Chicago than there was in WASILLA?! Who would have thought to look THERE?! By the way, where IS Obama from, anyway?”

Steve, a veteran of both the Army and the Navy, writes in:

“Good Morning Vin,

“We here in Illinois know him for the Marxist gun grabber that he really is. What I do not understand is every time the curtain is pulled back on him in the fashion of ‘The Wizard of Oz’ it is some big surprise. We Illinoisans have been saying this about the little piece of shit Marxist for over 10 years. …

“He and his political rejects have screwed up Illinois, so now this little political whore is going to Washington and screw everybody. What you can expect in Washington is the same corrupt Chicago machine politics, right from city hall. And yes, he will ban and confiscate firearms no matter what the Constitution says.

“All the people who are buying arms and ammunition will (hopefully) not give them up just because some little ass clown in Washington does not like them, and declares them illegal. If we do not exhaust every peaceful/political means to successfully stop him, we will have two options. Resist the destruction of our Constitution, or surrender. The choice is yours.”

By Linda Monk

The Crash of 2008, which is now wiping out trillions of dollars of our people's wealth, is, like the Crash of 1929, likely to mark the end of one era and the onset of another.

The new era will see a more sober and much diminished America .

The "Omnipower" and "Indispensable Nation" we heard about in all the hubris and braggadocio following our Cold War victory is history.

Seizing on the crisis, the left says we are witnessing the failure of market economics, a failure of conservatism.

That is absolute nonsense!

What we are witnessing is the collapse of Gordon Gecko ("Greed Is Good!") capitalism. We are witnessing what happens to a prodigal nation that ignores history, and forgets and abandons the philosophy and principles that made it great.

A true conservative (Rep or Dem) cherishes prudence and believes in fiscal responsibility, balanced budgets and a self-reliant republic. He/she believes in saving for retirement and a rainy day, in deferred gratification, in not buying on credit what you cannot afford, in living within your means.

Is that really what got Wall Street and us into this mess -- that we followed too religiously the gospel of Robert Taft and Russell Kirk?

"Government must save us!" cries the left, as ever. Yet, who got us into this mess if not the government -- the Fed with its easy money, Bush with his profligate spending, and Congress and the SEC by liberating Wall Street and failing to step in and stop the drunken orgy? For years, we Americans have spent more than we earned. We save nothing. Credit card debt, consumer debt, auto debt, mortgage debt, corporate debt -- all are at record levels.
And with pensions and savings being wiped out, much of that debt will never be repaid. Our standard of living is inevitably going to fall.

Foreign countries and foreigners themselves will not forever buy our bonds or lend us more money if they rightly fear that they will be paid back, if at all, in cheaper dollars. We are going to have to learn to live again within our means.

THE PARTY'S OVER!

Up through World War II, we followed the Hamiltonian idea that America must remain economically independent of the world in order to remain politically independent. But this generation decided that was yesterday's bromide and we must march bravely forward into a Global Economy, where we all depend on one another.

American companies morphed into "Global Companies" and moved plants and factories to Mexico , Asia, China , and India , and we began buying more cheaply from abroad what we used to make at home: shoes, clothes, bikes, cars, radios, TVs, planes, computers, etc.
As the trade deficits began inexorably to rise to 6 percent of GDP, (gross domestic product), we began vast borrowing from abroad to continue buying from abroad.

At home, propelled by tax cuts, war in Iraq and an explosion in social spending, surpluses vanished and deficits reappeared and began to rise.

The dollar began to sag and sink, and gold began to soar. Yet, still, the promises of the politicians come.

Barack Obama will give us national health insurance and tax cuts for all but that 2 percent of the nation that already carries 50 percent of the federal income tax load. John McCain was going to cut taxes, expand the military, move NATO into Georgia and Ukraine, confront Russia and force Iran to stop enriching uranium or "bomb, bomb, bomb," with Joe Lieberman as wartime consigliore.

Who are we kidding?

What we are witnessing today is how empires end. The last
Superpower is unable to defend its borders, protect its currency, win its wars, or balance its budget. Medicare and Social Security are headed for the cliff with unfunded liabilities in the tens of trillions of dollars.

What we are witnessing today is nothing less than a Katrina-like failure of government, of our political class, and of democracy itself, casting a cloud over the viability and longevity of the system that has made this country the most envied in the entire world..

Notice who is managing the crisis. Not our elected leaders. Nancy Pelosi says she had nothing to do with it. Congress is paralyzed and heading home. President Bush is nowhere to be seen. Hank Paulson of Goldman Sachs and Ben Bernanke of the Fed chose to bail out Bear Sterns but let Lehman go under. They decided to nationalize Fannie and Freddie at a cost to taxpayers of hundreds of billions, putting the U. S. government behind $5 trillion in
mortgages. They decided to buy AIG with $85 billion rather than see the insurance giant sink beneath the waves.

Unelected financial elite is now entrusted with the assignment of getting us out of a disaster into which an unelected financial elite plunged the nation. We, the People, are unfortunately just spectators.

What the Greatest Generation, (the WWII generation), handed down to us -- the richest, most powerful, most self-sufficient republic in history, with the highest standard of living any nation had ever achieved -- the baby boomers, oblivious and self-indulgent to the end, have frittered it all away.

How do WE THE PEOPLE put the villains who are responsible under oath and sit them down at public hearings to determine whose necks should meet the guillotine? Hypocritically, those who had oversight
responsibility such as Senator Chris Dodd [Chairman of the Senate Banking Committee] and Barney Frank [Chairmen, House Financial Services Committee] who helped get us into this mess are on every TV channel voicing their righteous indignation and pompously sitting on their elevated platform glaring down at those they are
chastising and grilling, trying to pass the blame to others. They are disgusting.

WE THE PEOPLE should be on the elevated platform in judgment and execution of the likes of Chris Dodd, Barney Frank and the rest of the band of thieves and conspirators who are responsible for the financial collapse of the USA .

To name just a few of the culprits:

Henry Paulson Jr, Secretary of the Treasury
Alan Greenspan & Ben Bernanke -- Chairman Federal Reserve Christopher Cox, SEC Chairman.

But not to worry -- YOUR PUBLIC SERVANTS who fear being voted out of office will take their self-awarded Golden Parachute Congressional Retirement, give WE THE PEOPLE the finger one last time and head for their safe havens as the World Citizens they are.

However, before they waddle off into the sunset, they will go on record one last time denouncing corporate greed, lavish salaries, and bonuses for their key felons at Fannie May, Freddie Mac, Lehman Brothers & AIG.

Meanwhile, WE THE PEOPLE fiddle while Rome burns and are too lazy, too ignorant, and too indifferent to vote the scum out of office.

James Howard Kunstler

The peak oil story has not been nullified by the scramble to unload every asset for cash -- including whomping gobs of oil contracts -- during this desperate season of bank liquidation. The main implication of the peak oil story is that we won't be able to generate the kind of economic growth that defined our way of life for decades because the primary energy resources needed for it will be contracting.

Just as global oil production peaked, our economy evolved into a morbid hypertrophy, and the chief manifestation of it was the suburban sprawl-building fiesta that has now climaxed in the real estate bust. By the early 21st century, when so much American manufacturing had been swapped out to Asia, there was no business left except sprawl-building -- a manifold tragedy which wrecked the banks that financed it, and left the ordinary people mortgaged to it with ruinous liabilities.

That economy is now in its death throes. The "normality" it represents to so many Americans is gone and can't be brought back, no matter how wistfully we watch it recede. Even so, it was obviously not good for the country. The terrain of North America has been left scarred by unlovable objects and baleful futureless vistas that, from now on, will shed whatever pecuniary value they once had. It represents the physical counterpart to the financial mess that has been left to the young generations to clean up -- and the job will take a very long time.

We have to, so to speak, get to place mentally where we can face the kinds of change that are now necessary and unavoidable. We're not there yet. It's not clear whether the elected new national leadership knows just how severe the required changes will really be. Surely the public would be shocked to grasp what's in store. Probably the worst thing we can do now would be to mount a campaign to stay where we are, lost in raptures of happy motoring and blue-light-special shopping.

The economy we're evolving into will be un-global, necessarily local and regional, and austere. It won't support even our current population. This being the case, the political fallout is also liable to be severe. For one thing, we'll have to put aside our sentimental fantasies about immigration. This is almost impossible to imagine, since that narrative is especially potent among the Democratic Party members who are coming in to run things. A tough immigration policy is exactly the kind of difficult change we have to face. This is no longer the 19th century. The narrative has to change.

The new narrative has to be about a managed contraction -- and by "managed" I mean a way that does not produce civil violence, starvation, and public health disasters. One of the telltale signs to look for will be whether the Obama administration bandies around the word "growth." If you hear them use it, it will indicate that they don't understand the kind of change we face.

It is hugely ironic that the US automobile industry is collapsing at this very moment, and the ongoing debate about whether to "rescue" it or not is an obvious kabuki theater exercise because this industry is hopeless. It is headed into bankruptcy with one hundred percent certainty. The only thing in question is whether the news of its death will spoil the Christmas of those who draw a paycheck from it, or those whose hopes for an easy retirement are vested in it. But American political-economy being very Santa Claus oriented for recent generations, the gesture will be made. A single leaky little lifeboat will be lowered and the chiefs of the Big Three will be invited to go for a brief little row, and then they will sink, glug, glug, glug, while the rusty old Titanic of the car industry slides diagonally into the deep behind them, against a sickening greenish-orange sunset backdrop of the morbid economy.

A key concept of the economy to come is that size matters -- everything organized at the giant scale will suffer dysfunction and failure. Giant companies, giant governments, giant institutions will all get into trouble. This, unfortunately, doesn't bode so well for the Obama team and it is salient reason why they must not mount a campaign to keep things the way they are and support enterprises that have to be let go, including many of the government's own operations. The best thing Mr. Obama can do is act as a wise counselor companion-in-chief to a people who now have to leave a lot behind in order to move forward into a plausible future. He seems well-suited to this task in sensibility and intelligence. The task will surely include a degree of pretense that he is holding some familiar things together and propping up some touchstones of the comfortable life. But the truth is we are all going to the same unfamiliar new territory.

The economy we're moving into will have to be one of real work, producing real things of value, at a scale consistent with energy resource reality. I'm convinced that farming will come much closer to the center of economic life, as the death of petro-agribusiness makes food production a matter of life and death in America -- as opposed to the disaster of metabolic entertainment it is now. Reorganizing the landscape itself for this finer-scaled new type of farming is a task fraught with political peril (land ownership questions being historically one of the main reasons that societies fall into revolution). The public is completely unprepared for this kind of change. We still think that "the path to success" is based on getting a college degree certifying people for a lifetime of sitting in an office cubicle. This is so far from the approaching reality that it will be eventually viewed as a sick joke -- like those old 1912 lithographs of mega-cities with Zeppelins plying the air between Everest-size skyscrapers.

The crucial element in the transformation underway will be emotion. The American experience for a few generations has produced an adult population with very childish instincts, increasingly worse each decade. For instance, the desperate power fantasies among the younger tattooed lumpenproles -- those with next-to-zero real economic power -- suggest a certain unappetizing playing-out of resource competition when the supply of Cheez Doodles and Pepsi starts to dwindle. But even the heretofore gainfully employed middle classes are pretty lost in fantasies at least of comfort an convenience. For years now, I have wondered how their sense of grievance and resentment will be expressed when the supermarket shelves run bare and the cardboard signs get taped over the local gas pump and the cable TV gets cut off for non-payment. You wonder, to put it bluntly, how far gone we really are.

Americans make a big hubbub over the Fourth of July.

True, the victory of 1781 was an amazing triumph, and the vision of those gathered in Philadelphia five years before — that men may rightfully form or disband governments at will, for the higher purpose of protecting our God-given individual rights — is still worth celebrating.

But that confederation of free men ended after a mere dozen years, on June 21, 1788, when New Hampshire became the ninth state to ratify the new United States Constitution, making it the law of the land. At that point, the organization of free peoples created by the Declaration of Independence — the one we still celebrate each July — passed away.

Our government school teachers tell us this was necessary because the Articles of Confederation “weren’t working out.” But they are woefully light on specifics. Push them, and most will mutter uncertainly some trivia about seaboard states charging tariffs on goods transshipped to landlocked states. Point out that the first landlocked states — Vermont and Kentucky — weren’t admitted until 1791 and 1792, and they will usually fall into a puzzled, grumbling silence.

Anyway, there it is: The people fell for the siren song of “federalism,” accepting solemn promises that the powers of the new central government would be sharply limited to those expressly spelled out — funding a Navy, granting patents and copyrights, coining metal money. Not much more.

Fast forward 220 years. As a recipe for limited government, this Constitution now matches the creature it’s supposed to describe about as well as a Chihuahua’s carry-on “Pet Kennel” would fit a loping Irish wolfhound.

The prima facie proof of this failure now stares at us from every acre of the former marshland north of the Potomac, a granite necropolis and memorial park to our deceased freedoms at least a hundred times larger in manpower and frenzied ambition to control our lives than Mr. Jefferson could ever have imagined (though one suspects Mr. Hamilton would have smiled.)

In the face of this unchained monster, our thin remaining hope against outright tyranny lies in the fact that Rhode Island and North Carolina (bless them) outright refused to ratify that Constitution until a Bill of Rights was added — while Massachusetts, Maryland, South Carolina, New Hampshire, Virginia And New York all ratified only on the condition that some such set of amendments be quickly appended, as was solemnly promised.

And so, on the day we should probably celebrate as our SECOND great national holiday, on Dec. 15, 1791, Virginia became the 11th state to ratify the first 10 proposed amendments, Mr. Madison’s “Bill of Rights” — though a better name might be the “Bill of Prohibitions” on government conduct — thrown together in an attempt to placate such vociferous anti-federalists as Patrick Henry and Richard Henry Lee.

The anti-federalists warned the new government would never be hemmed in by the gossamer restrictions of a written Constitution. They were correct, of course — which is why their warnings are no longer taught in our government schools.

* An establishment of religion

To their credit, Aaron Zelman and J.E. Simkin of the little Milwaukee-based Jews for the Preservation of Firearms Ownership battled for months, back in 1999, to get city councils around the country to adopt proclamations honoring Dec. 15 as Bill of Rights Day — succeeding with a small, proud band including Randolph County, N.C.; Cobb County, Ga.; the City of Asheboro; the town of Rainier, Wash.; and spunky little Valley City, N.D.

It was also about that time that JPFO brought out the latest in their line of “Gran’pa Jack” comic books, “It’s Common Sense to Use Our Bill of Rights … Or Lose Them!” suitable to explain the Bill of Rights to any kid, aged 6 to 60 … of which more later.

But against Mr. Zelman’s admirable efforts, the question remains: Why do the folks now in charge of our national offices — including the government schools — so pass over and ignore the historic ratification of those 462 little words which have made us for two centuries the envy of men and women seeking freedom the world around — this Bill of Rights?

Because they fear folks might actually read them?

They’re in plain English, you know. It was never intended we should need an attorney to tell us what they mean — let alone that we should tolerate courts telling us they don’t mean what we can plainly read there for ourselves.

It couldn’t be because they’re afraid we’d actually go read the First Amendment, could it, which begins, “Congress shall make no law respecting an establishment of religion …”?

What does it mean for a government to “establish” a religion? Why, clearly, to establish one religion as that enforced by the government, against all others … like the Church of England.

Let us suppose, for instance, that an extremist cult were to arise, which holds it is a mortal sin to plow under any weed, or to destroy any bug or small verminous rodent which we may find on our own property, providing the priests of this extremist cult should decide (based on divine revelation) to list that weed or bug in their own scriptures as “threatened” or “endangered.”

That would be no problem, so long as the priests of this weird sect had no legal authority to do anything but preach against us from their own, private pulpits.

But let us now suppose the government were to erect a headquarters for this sect in Washington at taxpayer expense, and issue them guns and badges, empowering them to enter onto our private property, arresting and jailing us and seizing our land and homes if they should find us killing our own weeds and bugs, to which no one else can demonstrate any legal title?

That would be “an establishment of religion,” wouldn’t it, and thus banned under the First Amendment? Why, such extralegal usurpations might even tempt government agents to eventually storm, burn and massacre harmless citizens in their own churches of a Sunday afternoon, for practicing some religion not approved by Washington, mightn’t it? Thank goodness we have a First Amendment to prevent that kind of thing.

So that couldn’t be the one they don’t want us to read.

It couldn’t be because they’re afraid we’d actually go read the Second Amendment, could it? The one that says “A well regulated Militia being necessary to the security of a free State, the right of the people to keep and bear arms shall not be infringed”?

* Shall not be infringed

What’s that word “free” doing in there?

Mr. Madison knew full well that no citizen-militia was necessary to protect the security of the kingdoms of France or Russia. Mercenary, professional, standing armies did just fine to protect their borders — at the price of their own disarmed populaces being subject to tyranny under the same muskets.

Only a “free” country requires that the bulk of the potential armed forces consist of free, private citizens better armed than the men commanded by the central government, just as the unofficial “Fairfax County Militia” of Messrs. Washington and Mason had been better armed than the special militia or “National Guard” available to obey the orders of the crown’s “governor of Virginia” in 1776 … else the Revolution still fresh in Mr. Madison’s mind could never even have been launched, let alone won.

What the Second Amendment clearly means is that — as a guarantee against the threat of internal government tyranny — any law-abiding American adult not an infant or obviously insane or severely retarded has a right to own and carry with him — down to the federal courthouse, to a rally in Washington City, or onto an airplane — a belt-fed 30-caliber Browning machine gun, or a shoulder-launched heat-seeking missile. (You’re not going to argue we could stand up to the FBI, the BATF, or the 87th Airborne with a Ruger 10-22 and a few old muzzle-loaders, I hope?)

For instance, the U.S. Fifth Circuit Court of Appeals found on Oct. 16, 2001, in the case U.S. vs. Timothy Joe Emerson (docket No. 99-10331):

“We have found no historical evidence that the Second Amendment was intended to convey militia power to the states … or applies only to members of a select militia while on active duty. All of the evidence indicates that the Second Amendment, like other parts of the Bill of Rights, applies to and protects individual Americans.

“We find that the history of the Second Amendment reinforces the plain meaning of its text, namely that it protects individual Americans in their right to keep and bear arms whether or not they are a member of a select militia or performing active military service or training.

“We reject the collective rights and sophisticated collective rights models for interpreting the Second Amendment. We hold, consistent with (U.S. vs.) Miller, that it protects the right of individuals, including those not then actually a member of any militia or engaged in active military service or training, to privately possess and bear their own firearms, such as the pistol involved here. …”

“We agree with the district court that the Second Amendment protects the right of individuals to privately keep and bear their own firearms that are suitable as individual, personal weapons and are not of the general kind or type excluded by Miller, regardless of whether the particular individual is then actually a member of a militia.”

(Thus endeth our citation form the Fifth Circuit, which having gone to all the trouble of demonstrating the points at issue then promptly and predictably went astray and remanded to the lower court, ruling that taking away Dr. Emerson’s pistol under a court protective order issued during his divorce didn’t actually, you know … “infringe” his right to keep and bear arms.)

For when the Second Amendment says that right shall not be “infringed,” I would submit that means neither the weapon, nor its ammunition, nor the buying or transport of either, may be taxed, regulated, or subjected to any “permitting” process. The government can’t even require that the store clerk who sells me my machine gun “check my ID,” or write down my name.

Certainly, under a Constitution so amended, no congresswomen would ever be allowed to ban the import and private purchase of certain militarily useful firearms because their pistol grips and removable magazines makes them too useful to freedom-fighters … would they? Nor would any president be able to remain in office if he ordered surplus government M-1 Garands and Colt 1911s shredded and melted to keep them out of the hands of our own civilian militia … or banned the re-importation of American-made Garands and M-1 carbines without even submitting a bill to Congress, instead merely signing some royal decree, or so-called “executive order” … would he?

No; that’s all clear enough. So the Second Amendment can’t be the one they don’t want us to read.

* An impartial jury

Could it be they’re afraid we might read the Sixth Article of Amendment, which begins, “In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury …”

The high court, of course, now holds this doesn’t mean what it appears to mean to us non-lawyers, at all. Rather than see the courts grow too crowded, her eminence Sandra Day O’Connor now informs us no trial is required if the state agrees to jail us for fewer than 180 days … or even for fewer than 180 days on each charge.

But crowded courts are a self-correcting problem, once all defendants are guaranteed a “speedy” trial. The correct answer is to force every case to trial before a jury within one week … to ban all “plea bargains.” (Do we really believe the cops arrest all those people on the wrong charges?)

Forced to pick and choose the few cases they really have time to try, prosecutors would be forced (under the existing “speedy trial” provision) to promptly release the 95 percent of federal defendants who have committed no violent felony, but only violated some arbitrary bureaucratic edict. Aw, gee.

And by the way, what’s that word “impartial” doing in there?

The British common-law jury system with which the Founders were familiar made no provision for the judge to ask potential jurors in advance whether they favored the enforcement of the law in question … which is why the misguided government could never get any convictions in the North in the 1850s on charges of violating the hated Fugitive Slave Act, any more than a government saddled with the same jury system could convict William Penn in London, some years before, on charges of preaching a Quaker sermon.

Importantly, it is only the defendant who is guaranteed an impartial jury — we find here no guarantee that “the state shall enjoy …”

When the judge asks the jury pool whether anyone would have a problem sending someone to jail for smoking pot, or for owning an ancient collectable World War One machine gun without having previously submitted his fingerprints to the BATF, or for declining to pay a federal income tax on wages — and when that judge promptly sends home anyone who raises his or her hand — he is not empaneling an “impartial” jury; he is pre-screening a jury guaranteed to be predisposed to the government’s case. He is violating the Sixth Amendment.

The original term for a jury trial was a trial “en pays,” or “on the country.” The jury is supposed to represent a cross-section of our fellow citizens. Unless a law has broad — 92 percent, actually — public support, the chances are that a randomly-selected group of 12 citizens will include one member (8.33 percent of the panel) who finds the law a hateful abomination, and who will refuse to convict. Hung jury: Defendant walks.

That is the meaning, and the intent, of the Sixth Amendment prohibition on government taking away our life, liberty or property without “a speedy trial … by an impartial jury.”

Do you suppose that’s the one they don’t want us to read?

And what about the Tenth Amendment, which specifies, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

This means 90 percent of the laws, agencies, orders and regulators now pouring forth from Washington City like a muddy torrent from a broken dam are null and void — deformed, fatherless creatures, apt to melt away like Goblins if ever exposed to the harsh daylight of the Bill of Rights.

* ‘Which one? Point to it’

It doesn’t matter whether you like these rights and prohibitions, or think it’s a good idea to “allow” them — any more than it matters whether you think we should “allow” the sun to rise tomorrow, or the birds to fly. It doesn’t work that way.

The several sovereign states only ratified the Constitution on our behalf on condition that these protections of our unalienable rights against government “infringement” be made the highest law of the land. Without the first 10 amendments, the whole contract is null and void … without them, there IS no legitimate federal government, and their tax collectors become nothing but common thieves, subject to being shot on sight if caught outside their federal enclave on the Potomac.

Any government official who declines to protect and defend these amendments, in their clear meaning, is a traitor, in violation of the sacred oath they all take to protect and defend this Constitution. Such persons should be indicted — impeached, if they are high officials — and, only if convicted by either the Senate or an impartial citizen jury, hanged.

This includes a whole lot of Congressmen, who have voted for a massive snare of laws which “sounded like a good idea” without doing their sworn duty, which was to open said Constitution to Article I Section 8 (the Powers of Congress), scan through the 431 words found there, and then ask the sponsor, “Which one of these 18 sentences gives you the specific, delegated power to spend FEDERAL tax money to pay the medical bills of barefoot Appalachian widows? Which one? Point to it.”

All these things we can learn by merely reading our U.S. Constitution, which Barack Obama will swear on a Bible (presumably) on Jan. 20 to “reserve and protect,” whereupon — like pretty much every president since Grover Cleveland and Rutherford B. Hayes (with the possible exceptions of Hoover and Harding; see Ivan Eland’s fine new book “Recarving Rushmore”) — he will smile and proceed to ignore all those limits on central government power, probably within the first hour.

So many restrictions on government power, so concise and clearly written. How strange, that all of them would now turn out to be moot, or out-of-date, or of no practical bearing.

I believe it was columnist Joe Sobran who once said that a government under the U.S. Constitution would not be ideal — it would just be a whole lot better than the one we’ve got now.

Last time I checked, the comic book “Gran’pa Jack No. 3: ‘Common Sense’ ” was available at $4 per single copy, $20 for 25, $30 for 50, from Jews for the Preservation of Firearms Ownership, P.O. Box 270143, Hartford, WI 53027

The first Gran’pa Jack comic, “ ‘Gun Control’ Kills Kids,” was also still available. See www.jpfo.org/filegen-a-m/gpjack3.htm or telephone the JPFO at 262-673-9745 or 1-800-869-1884.

Meantime, go buy a copy of the Declaration of Independence, and the Bill of Rights, and read them to a child.

It’s our next-to-last last hope.

A version of this column was first published in 1999.

Tom Chartier
Lew Rockwell.com
Friday, Nov 28, 2008

One doesn’t need to read beyond the first sentence of a front-page article from the November 26th edition of the New York Times to see more absurdist logic rearing its ugly head.

What pray tell could be the next act in the weekly soap titled The State’s Biggest Boners? Once again, they have a grand scheme to help us. Here it is straight from the horse head’s mouth, the New York Times: “The Federal Reserve and the Treasury announced $800 billion in new lending programs on Tuesday, sending a message that they would print as much money as needed to revive the nation’s crippled banking system.”

Yee ha! Hyperinflation here we come! Little short on spending cash? Print some more! Why didn’t I think of that? Maybe I should have taken out a loan and sprung for the Uber Gut Reich Mark color printer capable of running off thousands of undetectable funny money bills in an afternoon. But then I don’t need to bother. The Federal Reserve and Treasury are going to do that for me. How kind and thoughtful.

Are these people, for lack of a better term… stupid? Never mind. The question is rhetorical.

I’m ready and willing to admit I am no economist. On the other hand, I actually paid attention in history class. I did not buy the answers to the test questions either. Let’s look back to the days of the Weimar Republic in Germany after WW I. It seems times were tough, jobs hard to find and the economy a mess. Sound familiar? So, how did they “fix” it? They printed money until they couldn’t afford more paper. And surprise, surprise… it didn’t work! Inflation ran amuck and the prices of basic necessities skyrocketed. Hence, the need for wheelbarrows to lug all their funny money to the market so they could buy a loaf of bread… if they could find one that cheap.

Friends, Americans, countrymen, here’s a real simple common sense unalterable rule of money. The more money the State prints, the less it is worth.

The actual value of your socks, cheeseburgers, ramshackle hovels and gas-guzzling Hummer H3s will remain exactly the same. However, the price tag will go shooting way up. It’s just like the dump we bought in Los Angeles for $130K and sold a few years later for $450K. It was still a dump worth $130K… if that! And soon our profits will be worth about $10K

The net result after the Feds “help you out” by printing more money is simple. You still will not be able to afford anything! In fact, since you will soon have to buy a wheelbarrow you will be worse off than if they did nothing. And that is exactly what they should do. Nothing.

How about that $800 billion? Well… if it’s printed money is it really worth $800 billion? No of course not. It’s worth no more than the paper it’s printed on, to use an ancient phrase. There’s nothing to back it up, no gold reserves, no booming industries, no nothin’. Were the plan to borrow $800 billion that would be bad enough, since borrowing more money means selling off more of America’s future to China and shackling future generations with heavy tax plans which only pay off the interest. That would be a bit like cousin Doofus and his charming wife Dodie, their maxed out credit card collection and McMansion with it’s too good to be true ARM. Oh wait… I forgot. The bank foreclosed on the McMansion.

Doofus and Dodie now live in Orange County’s Tent City in Southern California. Wait a minute… I’m wrong. One must be a resident of the city of Ontario to be homeless in Tent City. Talk about absurdist logic! I haven’t a clue where Doofus and Dodie are now.

Or maybe the plan has some sort of twisted logic behind it. Let’s see, how about we totally destroy the value of the US dollar by printing money up the wazoo. Then, we won’t have to pay off those Chinese loans! Or at least what we do pay back is a drop in the bucket. Hey that’s pure genius! What’s that? China is calling in its monstrous loans? Sure fine. A trillion US dollars can’t buy a two-door Daihatsu sedan!

So why stop at a measly $800 billion? How about $3 trillion? Isn’t that what Joseph E. Stiglitz and Linda J. Bilmes predict the war in Iraq will cost in the long run? Why stop there? Let’s run off $100 trillion, $200 trillion or $500 trillion. Since none of it’s real the sky’s the limit!

But I seriously doubt this is a wise move.

So then, how do we get out of the real crisis after the country is flooded with worthless Republic Credits? Hey I got an idea! Start a war! Kick ass! It worked for Nazi Germany… Uh well… maybe that’s a bad example. Hm… let me see if I can concoct a better one.

Hang on! We did start a war! Two of them in fact. How could I forget? I guess Iraq and Afghanistan aren’t the crowd pleasers they once were. But there’s a problem. These fun-filled military adventures have not resulted in a “booming” economy back on the ranch. Aye Carumba! Something must be awry. Where did all that money go? It certainly did not find its way back into the pockets of the people. Oh well. Easy come easy go. I guess it’s all lost in the desert, vanishing with the sands of time and disappearing into the mattresses of Halliburton, KBR, Blackwater and a collection of shyster war profiteers.

Maybe it would be better to leave well enough alone. The times will be tough for a lot of people. But the economy will iron itself out naturally someday. With the State doing something stupid to fix it, the problem will only get worse. And printing $800 billion is about as stupid as stupid can be.

Well Uncle Scam, I have a favor to ask. Please don’t try to help. Your track record has not been good.

There is a positive thread running through our energy crisis. Individual Americans keep coming up with great ideas for the development, manufacture, distribution and financing of alternative energy solutions. The following letter was sent to me by a nice lady in Minnesota that addresses the issue of financing. I’ll let you read her letter. Then, I add a few comments of my own.

The Letter………….

Dear Ron,

Thank you for replying. I didn't want to post my idea to your comments board, so I didn't tell you what it was. I appreciate your writing back to me.

My husband and I are real estate agents and developers and we also farm. We live on one of the windiest hills in the state and have often thought of getting a windmill, so last year I started doing research into wind and also solar and geothermal. I researched much of this over ten years ago when we built our house and I'm pleased to see renewable energy technology has improved a lot since I first began looking into it. We built our house facing south and we have in-floor heat on all our levels with large passive heat storage capacity in the basement so we'd be all ready to install solar and wind when it became economically advantageous. Plus, I was one of the first people in the state to install in-floor heat on second and third floors, so I got the experience of doing something no one else had tried.

There is a tremendous amount of interest in renewable energy from home owners and farmers all around me and it's extremely clear the issue holding everyone back is financing. Most of us are fine paying more for renewable energy than coal-fired electricity or natural gas, expecting we will gain in the long run, but few people have the capital it takes to install a windmill or solar panels or a geothermal system to retrofit homes, especially now that home values are stagnant and the choice of getting home-equity loans for financing is fading.

Still, Minnesota Electric companies are mandated to derive an increasing amount of their energy from renewables. I've spoken with directors of two local coops, and they don't know how they're going to do it. I asked them if there was a way they could finance small residential systems, and then get monthly payments from the homeowners as part of the monthly electric bill and they said that would work, except they have no capital to finance individual systems.

OK - so now I'm operating a few premises: (I realize I'm preaching to the choir, but please check my points.)

#1 I would think that it would be a good thing for our electric grid to have a network of small energy producers cared for by individuals with use being close to production because it would provide security in the event of a major crisis and it's also more efficient than transporting electricity over long distances.

#2 I would think that if financing would be tied to a property's electric bill and could be transferred from one homeowner to another as a "lien" on the property, there would be very little chance of non-payment regardless what the value of the property was (within reason) because if the homeowner didn't make payments on the loan, their electricity could be shut off.

#3 I would think that the consumerism of individual homeowners to find, purchase and maintain the most economical renewable energy system for their property could ensure a healthier market for renewable technologies than grants and tax credits.

#4 I would think that individual electric production could go a long way to energizing individual transportation (think all electric- or partially electric-powered cars for all of our everyday driving.)

So -- assuming it would be a good idea for electric companies to finance individual electric production -- where's the money going to come from?

Well, there are always people -- many people -- with money to invest at a decent rate in a secure investment which stays ahead of inflation. AH--- inflation -- there's another thing. Inflation is what triggered my idea when my ten-year old daughter was watching the Andrews Sisters sing "Boogie Woogie Bugle Boy" on YouTube the other day (did you know kids don't watch TV anymore - they watch the computer?) An ad came on to buy war bonds and I remembered my college economics class.

War bonds were designed to help stem inflation, fund the war, and promote patriotism, giving everyone something to do.

That's what we need to finance our shift to alternative energy -- War Bonds. That’s the point I haven't heard anyone make. Tax-free municipal bonds which are backed by the security of the electric utilities. That's what I said - backed by the electric grid - a stable network of reasonably priced, renewable energy that we need, and if we don't have it, our money's worth nothing, anyway.

Yes, I may not know what I'm talking about on several of these points. That's why I need to brainstorm with people who do. But here's the deal -- I called and talked to a staff member from my senator's office the other day and told him about this. First off, he tried to tell me all about the things on the last energy bill my senator had worked for, but the darn "other" party had vetoed, etc, etc, and how hard my senator was working, etc., etc,. and the pitfalls of partisan politics, etc., etc., and I butted in and asked, "do you know what a war bond is?" And the voice on the other end of the phone who couldn't have been more than 25 said, "uh... yeah... sort of."

"Fine, then what is it?" I asked.

"Well, I suppose it's a bond of some sort," he said.

If you don't know your history, you're doomed to repeat it. What's worse, though, is if you don't know your history, you may never remember all the good ideas.

I know you probably aren't old enough to remember war bonds, but my dad who's 91 is. He smiled when I asked him about them and told me how his mother, who never had had a bank account in her life, bought war bonds with her egg money so that her four sons would come home safely. Her egg money was the only money she ever had.

I think it's time for war bonds. Energy Independence Bonds, maybe?

Anyhow, that's my idea and I'm sticking to it. I need your help, though, to refine and shape it.

Sincerely,

Karen Willmus
Glenwood, MN

A Few Comments………..

We have to like this idea. It implies the local generation, distribution and consumption of electricity. You install and maintain a system. Your local bank handles the loan application and financing. The existing power company provides the wires, load balancing and back-up power generation.

At least - that’s the theory.

There are some hurdles to overcome:

High capital costs coupled with low efficiency mean that solar power is not an economically attractive option for a small operator. But existing research projects promise to deliver cost competitive solar power within 5 to 10 years.

In order to be cost competitive, wind power currently favors very tall towers with huge blades. We need a scaled down system designed for local operators.

If you mention hydroelectric power, people think big dams and gargantuan turbines. Yet it is physically feasible to generate electricity on a far smaller scale using water that has been diverted by modest coffer dams into a sluice or pipe that drives a water wheel or small turbine.
There are other issues. How do we link all of these systems together and maintain a stable supply of power? When will the capital cost of solar, wind, water and biomass power be cheap enough to amortize over the life of a locally owned system without government subsidy?

Eventually. These issues will be resolved. Because of higher fuel prices, the cost of generating electrical energy from fossil fuel power plants is going UP. Alternative energy will become increasingly cost competitive with existing systems – without the need for government subsidies, grants or pork. Growing interest in alternative power generation will create millions of opportunities for locally owned systems. Although most of these will be used to provide electricity for a single family, there will also be opportunities to supplement the power needs of our local neighborhood. We become a system operator.

But as Karen’s letter suggests, the biggest hurdle to overcome is financing. Solar, wind and water installations are capital intensive. Although wind, sun and hydro energy are “free”, the infrastructure needed to bring a system on-line is very expensive. That means big bucks. More money than most home owners or would-be local operators can afford. More risk than our existing banking system is willing to undertake.

So how do we set up a financing infrastructure that makes economic sense? There are several options. I favor bringing together a local operator with a local bank and the existing public utility. It has to be a cooperative effort. Our potential operator has to have some level of business sense, the smarts needed to maintain a system, and the willingness to be held accountable for its success. The bank has to be satisfied the local operator is a good business risk. The power company needs to be involved with the selection of equipment in order to make sure everything will work with the existing grid. As a business proposition, our local bank has the responsibility to be sure all the questions have been affirmatively answered, and then monitors the installation and operation of the resulting system. As a capital asset, an alternative energy system should be transferable from seller to buyer in the event the operator’s property is sold.

If we want to reduce the financing risk, then have the Federal Government provide a loan guarantee to the bank. Empower an existing agency to write loan guarantees for alternative power installations. If a loan defaults, the bank has recourse. If we need to raise a pool of additional financing for alternative energy installations, then work out a variation of Karen’s tax free Energy Independence Bonds idea. Let our local bank access this pool to fund local loans. Keep the financing costs low.

Ok. So there are a lot of questions to be answered before this proposal can be launched. But you get the idea. Keep it simple. Keep it local.

We can do this.

Ronald R. Cooke
The Cultural Economist
Author: Defensive Nation
http://tceconomist.blogspot.com/

It's an "emergency" – do as I say. Or else…
by Justin Raimondo

Did you, too, get that frisson of déjà vu when you first heard about the bank bailout and its rationale? If you don't hand over untold trillions of dollars in the next five minutes, the economy is going to explode. This was how the PATRIOT Act got rammed through Congress in record time, before anyone had a chance to even read the voluminous bill, surrendering what's left of our liberties and giving the president dictatorial powers: give us your freedom, or else the terrorists are going to blow the country up. This was also how the Bush administration and its neoconservative amen chorus whipped up war hysteria against Iraq: "We don't want the smoking gun to be a mushroom cloud." Unless we invaded Iraq immediately, we were told, Saddam would unleash his legendary "weapons of mass destruction" – yes, even against the continental United States.

The methodology at work here might be called the Dershowitz Principle, after America's most famous theoretician of torture, who maintains that what qualifies as torture is defensible in an extreme situation. That is, when life suddenly morphs into a Jack Bauer-like scenario, in which the clock is ticking and you have to torture the evil terrorist or else they'll l blow up the White House, Capitol Hill, and the corner grocery for good measure.

It seems the clock is always ticking. We live in a state of perpetual "emergency," and every day we're faced with fresh ultimatums. I've had boyfriends like that. "If you don't do such-and-such immediately, I'm going to hold my breath until I turn blue – and then you'll be sorry." The first few times I fell for it; after all, I didn't want a medical emergency on my hands. Now that I'm wiser, though not all that old yet, my response is more measured: "Blue really isn't your color, you know."

The Dershowitz Principle is that morality and truth bend under extreme conditions, like even the strongest steel – if it's hot enough. The idea, then, is to raise the temperature and create a crisis, or at least convince enough people to panic. The resulting stampede tramples liberty and the accouterments of human civilization underfoot. That's the Dershowitz Principle in action: subject people to extreme conditions – or convince them that some Armageddon-like event is about to take place – and they will do anything. Pass the PATRIOT Act. Go to war. Yes, even engage in torture [pdf]. As long as the effects of the hysteria last – and how long was it before the country began to recover from its 9/11-induced madness? – people are infinitely malleable. Or so the pattern would seem to suggest.

However, there's a catch: after a while, the pattern becomes all too obvious. If it's always an emergency, the numbing effect on the public eventually inures it to this appeal.

The passage of the PATRIOT Act and the march to war were propelled by the politics of fearmongering, with the sole argument being that if we don't do this, unimaginably horrible events will shortly follow. This view was pushed, in every possible way, by a small but well-connected and media-savvy group of intellectuals and policy wonks known as the neoconservatives. The neocons had an agenda, and a very specific goal, formulated well before 9/11: war with Iraq, to be followed by wars of "liberation" throughout the Middle East. Already ensconced in the Bush administration, they were in a perfect position to take full advantage of a fluid situation and manipulate the emotions unleashed by 9/11 to make the case for war.

That case, as we know, was a veritable anthology of fantastic fiction, a multi-threaded narrative of imaginative albeit not particularly artful lies that, in retrospect, often seem like the script of a mediocre made-for-television movie, the kind they show at the crack of dawn. This is now the generally accepted view, yet it wasn't always so.

Why, it seems like only yesterday that Antiwar.com and a few other skeptical (mostly online) voices were raised against the war hysteria, challenging the rationale for the invasion and opposing the conventional wisdom that took the government's war propaganda as fact. The hate mail we received was massive, and it continued for months: how dare we have a Web site opposing war – at a time like this! It wasn't that we were insufficiently patriotic; we were "traitors." That was the recurrent theme of these rude missives.

As time wore on, however, and the facts – or, rather, the lack of them – began to emerge, the clock-is-ticking crowd was put on the defensive. When no WMD showed up in Iraq and the hunt for them by the U.S. military was finally called off, the pundits and the public began to revise their understanding of the truth. That is, they engaged in "revisionism," which is not, contra certain televised airheads, a watering down of the truth but a clarification of what actually occurred in light of new information. The Iraq war revisionists began to discover that all the stories – the "links" to al-Qaeda, the secret Iraqi nuclear program, the plot to bomb American cities using drones laden with biological weapons – all of it was a tall tale dreamed up somewhere in the bowels of the Pentagon. The perpetrators of these lies were government officials who deliberately misled Congress and the American people, profited from the misperception, and used government resources to do it. Now totally discredited, the "experts" and "patriots" of yesteryear are today's prime candidates for an investigation by a federal prosecutor.

We've come full circle, and then some, because we supposedly have a similar "crisis" on the domestic front, an economic 9/11, in which "emergency" powers were demanded, and – in spite of initial balking on the part of some – quickly granted, without much discussion. Now we are being told – or, at least, Bloomberg News is being told – that we have no right to know how the ransom money paid to these mystery men is being dispensed, or any details beyond the unimaginable sums being bandied about. And the economy, supposedly crippled by a lack of liquidity and the complete absence of lending, is said to be still in the grip of a serious "crisis." What gives?

What gives is a replay of the prelude to war with Iraq, only this time we're talking about the road to complete government control over the economy, with the banks – the big banks – calling the tune. That old clock is ticking away, and the sound of it is getting louder with each passing day, with daily appeals from new quarters – the banks, the Big Three, every county and city in the country. To satiate these growing crowds of supplicants, a huge "stimulus" package will no doubt pass, along with an addendum of "reforms," with so many special interests feeding at the trough that a few are bound to drown in their own slop.

As the system of free enterprise, infamously called capitalism, but in reality just good old American individualism, passes from the scene, along with our constitutional liberties – felled by the previous administration – our half-forgotten childhood of adventurous intensity and love of freedom passes into history. Bypassing adulthood completely, we fall into a static senescence and fearful inflexibility. As President-elect Barack Obama ushers in a new era of all-pervasive government control over the economic life of the nation, an economic version of the PATRIOT Act, all attention is fixed on the "crisis," the rationale for this sudden radical shift.

Applying the Dershowitz Principle and bending both economic and moral sense to rationalize the world's biggest heist, both parties (including both presidential candidates) signed on to the bank bailout on the basis of "emergency" ethics: the idea that principles and good sense don't always apply, and, besides, there's no time to think, only to act.

This is precisely the method that got us into our present predicament in Iraq, and one has to wonder if the same phony "crisis" atmosphere is being generated to advance someone's agenda. The banks, according to the conventional wisdom, just aren't lending, there's a "credit crunch," and the economy will very shortly come to a grinding halt – unless we hand over our wallets and trust the government to solve the "problem." Except there isn't really all that much of a problem, according to analyst Octavio Marenzi, head of the Celent financial services consultancy,

"The credit crunch is not nearly as severe as the U.S. authorities appear to believe, and public data actually suggest world credit markets are functioning remarkably well, a report released on Thursday says. As a result, governments are pumping masses of public money into the economy across the world because of the difficulties of a few big, vocal banks and industries such as car manufacturing, which would be in difficulty anyway, according to the report published by Celent, a financial services consultancy."

"It's just stabbing in the dark with trillions of dollars," said Marenzi. Yes, well, there's someone there in the dark taking all that cash as quickly as it's being handed over, and we are forbidden to shine a light on these bag-men.

This Reuters dispatch goes on to report that Marenzi's work, which "is based on U.S. Federal Reserve data, challenges a long list of assumptions one by one, arguing that there is indeed a financial crisis but that, on aggregate, the problems of a few are by no means those of the many when it comes to obtaining credit."

If the government's own data contradicts the crisis atmosphere they're generating, then are they just making this stuff up? It's not that they're fabricating the trouble some industries and companies are in, because that's real enough. It's that they're "taking the situation of a handful of institutions and generalizing that to the market as a whole, incorrectly," says Marenzi.

The credit bubble and the real estate bubble, not to mention the auto industry's woes, have been building for quite some time. This is nothing new. Aside from that, Marenzi ticks off a number of metrics that don't jibe with the alleged credit freeze we're supposedly experiencing, such as the rate of overall bank lending in the U.S. – which is up to "its highest level ever, and has grown during the present financial crisis." Interbank lending is up 22 percent since the bottom fell out of the stock market, with lending rates at record lows. A key point made by Marenzi is that the way the crisis-mongers are gauging the level of interbank lending is incorrect, because it is "based on daily observations of eight banks, many of which were banks with particularly severe difficulties of their own."

The decline in corporate bond issuance has been compensated for by an increase in commercial lending. Consumer credit is also on the upswing, in spite of the fact that people are returning to more prudent spending habits. The crisis-mongers are pleading the case for a bailout of certain financial interests, who benefit from the bailout, and want to avoid the market correction of a massive malinvestment at all costs.

Where have we seen this kind of skewing the intelligence before? Not only that, but the economic crisis-mongers are also engaging in a favorite practice of the War Party, especially during the run-up to the invasion of Iraq: cherry-picking. Go Google that word, and type in "Office of Special Plans" or "neocons," and see what you come up with.

So the pattern repeats itself once again: government insiders manufacture then take advantage of a crisis – openly describing it as an "opportunity," as Rahm Emanuel put it – to pursue a preexisting agenda, one that will have enormous consequences down the road in terms of blowback. We'll be deep at the very bottom of a financial quagmire, wondering how we get out of it, long before folks like Marenzi are listened to. By then, of course, it will be too late.

I realize that many of my readers do not share my libertarian views on economic matters, but you don't need to be an advocate of laissez-faire [.pdf] to see the pattern of deception and the uses to which it is put. Always the goal is to extend and expand the power of government, whether it be over the economy or over some faraway province that no one has ever heard of. The Dershowitz Principle, in practice, is never applied in order to lessen the power of some individuals over others: individual freedom is the first casualty of every "emergency."

~ Justin Raimondo

Jonathan Leake, Science Editor

It has long been known that the secret of how far a golf ball flies lies in its dimples. Now scientists believe they understand the forces at work, as air flows over the ball’s surface.

Their work could be the key to a new generation of far more accurate, ultra-long-distance golf balls.

They cracked the problem by deploying the kind of extreme computing power usually reserved for predicting global weather patterns or the behaviour of sub-atomic particles. However, a set of super-computers – each one thousands of times more powerful than a standard PC – still had to run for 300 hours before they were able to see the exact flow of air around a ball, and its dimples, in flight.

The effort involved seems more than justified by the potential prize – designing low-drag balls for the world’s 60m golfers, who spend £1 billion a year on balls. Those developed using the new technology could allow club golfers – whose drives do well to reach 250yd – to match Tiger Woods’s current average of about 300yd.

Related Links
Free golf balls are par for course
“Up to now, dimple design has been more of an art than a science,” said Elias Balaras, professor of engineering at the University of Maryland, who created the equations and software to crack the problem.

Analysing the behaviour of a golf ball in flight is acknowledged as a highly complex aerodynamic problem. A ball hit by a top golfer typically reaches 160mph and spins backwards 2,000-3,000 times a minute.

This backspin generates the lift that keeps the ball in flight, and so is crucial to a long drive. Too much spin, however, produces excessive turbulence, and dimples reduce this risk.

Dimples date back to the 19th century, when players noticed older balls with rough surfaces flew better than smooth, new ones. This is because air flows more easily over a roughened surface – an effect so great that dimples can halve friction, or drag, in flight.

“For a golf ball, drag reduction means the ball flies farther,” said Clinton Smith, of Arizona State University, another member of the team, who will detail the findings at a meeting of the American Physical Society’s fluid dynamics division later today.

For years, sports goods companies have tried to analyse the airflow using simple trial and error, testing prototype after prototype. A modern ball can feature between 300 and 500 dimples in numerous different shapes and patterns.

The researchers, who had support from Sumitomo Rubber Industries, makers of Srixon golf balls, took a different approach, using equations based on measurements of balls in flight – a task impossible until now because of the computing power needed.

The super-computers used for the analysis, said Smith, produced the most detailed picture of airflow around a golf ball ever seen, showing drag and air movement across each dimple.

“The long-term goal is to optimise dimple design and realise the lowest drag possible by comparing designs,” he said.

Britain has more than 4m golfers, of whom 1.7m play at least 12 times a year. John Bushell, director of Sports Marketing Surveys, a market data consultancy for the sports industry, said: “People always seek out the latest kit, so a ball offering greater distances and accuracy could be in huge demand.”

There are pitfalls. In Britain and Europe golf is governed by the Royal and Ancient Golf Club, based at St Andrews, Fife.

The club and its American counterpart, the United States Golf Association, have issued recent rulings against new technology that alters the way the game is played.

Both have set out rules ensuring that balls have a uniform size and weight but have left companies free to change the dimples. This could change if radical new designs increase distances so much that the character of golf is threatened.

The Cultural Economist

Introduction
I feel the anguish and frustration of the thousands of men and women who are, and will be, unemployed in this recession. You did nothing wrong. You have become the unfortunate victims of arrogance, ignorance and greed. Washington. Wall Street. Corporate pomposity. Place the blame where you wish. But the proposed finance and auto industry bailouts make little sense. They will be expensive. And they will fail. American workers will suffer the consequences.

We need a plan.

The Finance Industry Boondoggle
The 700 Billion finance industry bailout is a good idea. The devil is in the details. As discussed in my essays “Who Do We Blame For America’s Financial Mess”, and “How To Save America’s Banking System” neither Congress nor the Administration have the tools to fix our sub-prime mess. This is a local problem. It has to be fixed house by house, mortgage by mortgage, community by community. No Federal bureaucracy exists to provide the depth of review and action required. But we do have Property Management companies, real estate appraisers, real estate personnel, maintenance contractors, builders, and local banks in every community. We can use this existing infrastructure to re-value, refurbish, and re-finance existing distressed real estate. Federal personnel ensure program compliance. A Federal agency “buys” toxic loans and then works with local communities to re-structure the underlying asset value. Properly managed, my proposal creates real estate value and puts thousands of Americans into affordable housing .

Make sense?

The Big Three: Money Is Not Enough
Why should the American taxpayer give money to three losers? Bankruptcy is a far better option. Why? Because it would be less expensive and far more likely to succeed. If our objective is to save jobs (a very good idea) then the result of our taxpayer “investment” should be a re-structured industry that is capable of self-sustained momentum. Let’s provide long term protection for American jobs.

Make sense?

My reasoning is based on the “cultural” part of Cultural Economics. Although numbers are important,
it is a corporation’s internal culture
that ultimately leads to its success or failure.

If we assume Pelosi, Reid and Obama are genuinely interested in doing something constructive, then they will have to pay attention to the inner workings of each company. The truth of the matter is: Spending $25 billion to save jobs is a good idea if – and only if – it actually works. Sure. The democrats believe it is politically expedient to come to the rescue with taxpayer money. But fair warning: If the $25 billion does nothing more than prolong the agony of failure, then taxpayers are going to be mad as hell. “Why,” they will ask “did you spend $25 billion of our money on a loser?”

This is a business decision. Before we pump money into the big three we should be confident our $25 billion will be worth spending. As a minimum, we should expect the big three to deliver:

1. A business plan. What do you intend to do with the money? What is your operations plan for controlling the business? What milestones have you established? Convince me you will be a viable competitor. What will you offer the consumer that differentiates your company from your competitors? What are your target markets? What is the product focus for each market segment? What is your sales strategy? Why will it be successful? What is your product development schedule? What are the risks associated with your product plan? Show me a 10 year spreadsheet of revenues versus expenses that demonstrates a high probability of financial success. Describe your assumptions. Why are they realistic? And on and on.

2. A cultural change. The biggest single barrier to a successful bail-out is not money. Or talent. It’s an insular, arrogant, imperious, and politically charged corporate culture. That’s why the big three are in Washington. Begging for taxpayer money. They do not know how to make perceptive management decisions. Attempts at creative deduction have been drowned in a cesspool of arrogant confrontation. Market planning is abysmal. Inept engineering and shoddy manufacturing are the accepted norm. Show me how corporate and labor union management will be restructured to deal with these challenges.

3. Improved labor relations. Guys. This has to be a team effort. Else it will ultimately fail. So. Are management and labor ready, willing and able to work together to ensure the success of the enterprise?

4. Reduced compensation. Labor and management will have to take a pay cut. Do not create a plan that includes management bonuses. Do show us a plan that provides substantial salary reductions across the board. If you are not willing to make a financial sacrifice, then why should we put taxpayer dollars into your venture?

It should be obvious. The big three business model is broken. If we want these companies to survive, then they need a serious management overhaul before we give them a nickel. We need to see a drastically changed product plan. Individual divisions must be focused on a specific segment of the vehicle market. And above all, change the corporate culture. Create a partnership between labor and management. Replace references to “them” with pronouns such as “we” and “us”. We don’t want to hear about “concessions”. The key word going forward must be - “cooperation”. Teamwork based on trust and mutually beneficial objectives.

Then open the checkbook.

Conclusion
In the final analysis. After all the politically expedient statements have been made. Bailouts are commercial transactions. They will not work unless they are properly managed. That process starts with a credible business plan.

Ron

Texas Straight Talk
A weekly column
by Rep. Ron Paul

Tragically, over the Thanksgiving holiday, the world was reminded how evil and cruel people can be. According to emerging accounts of the events in India, about a dozen well-armed and devastatingly well-trained terrorists laid siege on the city of Mumbai, killing almost two hundred people, and terrorizing thousands.

Regardless of the reasons, the indiscriminate shooting on masses of unarmed and defenseless people is chilling and reprehensible. How were these terrorists able to continue so long, relatively unchallenged, killing so many?

India’s gun laws are her business, of course. However, once the shock of these events and the initial reaction of fear passes, Americans should take away a valuable lesson about real homeland security and gun control from this tragedy.

Gun control advocates tell us that removing guns from society makes us safer. If that were the case why do the worst shootings happen in gun free zones, like schools? And while accidents do happen, aggressive, terroristic shootings like this are unheard of at gun and knife shows, or military bases. It bears repeating that an armed society truly is a polite society.

The fact is that firearm technology exists. It cannot be uninvented. As long as there is metalworking and welding capability, it matters not what gun laws are imposed upon law-abiding people. Those that wish to have guns, and disregard the law, will have guns. Gun control makes violence safer and more effective for the aggressive, whether the aggressor is a terrorist or a government.

History shows us that another tragedy of gun laws is genocide. Hitler, for example, knew well that in order to enact his “final solution,” disarmament was a necessary precursor. While it is not always the case that an unarmed populace WILL be killed by their government, if a government is going to kill its own people, it MUST disarm them first so they cannot fight back. Disarmament must happen at a time when overall trust in government is high, and under the guise of safety for the people, or perhaps the children. Knowing that any government, no matter how idealistically started, can become despotic, the Founding Fathers enabled the future freedom of Americans by enacting the second amendment.

In our own country, we should be ever vigilant against any attempts to disarm the people, especially in this economic downturn. I expect violent crime to rise sharply in the coming days, and as states and municipalities are even more financially strained, the police will be even less able or willing to respond to crime. In many areas, local police could become more and more absorbed with revenue generating activities, like minor traffic violations and the asset forfeiture opportunities of non-violent drug offenses. Your safety has always, ultimately been your own responsibility, but never more so than now. People have a natural right to defend themselves. Governments that take that away from their people should be highly suspect.

Antal E. Fekete
Gold Standard University Live

Here is an update on the backwardation in gold that started on December 2. It continued and worsened on December 3, 4, and 5. So far this is the most serious signal of the economic crisis: the world is rushing headlong into a Great Depression, possibly worse than that of the 1930’s. Please remember the following analogy: the serial devaluation of currencies starting with that of the British pound in 1931 meant a drastic drop in the velocity of gold circulation. This spelled a contraction in world trade that proved catastrophic to employment and economic health in general. The gold confiscation in America in 1933 only made things worse, in particular, it was the direct cause of the decline in interest rates that, in its turn, was the chief cause of the widespread destruction of capital and bankruptcies. I have discussed this correlation elsewhere.

Right now the backwardation in gold also means another drastic drop in the velocity of gold circulation, and it will also cause a tragic contraction in world trade. It will also be catastrophic to employment and economic health in general. Interest rates will continue to fall with a deleterious effect on capital. I don’t see that confiscation of gold is in the cards this time. It could not be enforced. People would not comply. Gold confiscation is a trick that can only be pulled off once. A con-game won’t work for the second time.

What I see coming is that gold will be declared ‘extralegal’ by the U.S. government to prevent gold from becoming a world currency, by withholding legal protection from contracts made in terms of gold. For example, if crude oil was bought for gold and the supertanker carrying it was hijacked, and if the U.S. Navy captured the boat from the pirates, then the U.S. government would confiscate the oil as ‘contraband’, arguing that it was paid for in gold. No court in the world would give relief to the rightful owners.

I have received several inquiries how to explain the simultaneous occurrence of gold backwardation and a further fall in the price of gold. Here is my answer. Comex is at the verge of bankruptcy, at least as far as its gold trading is concerned. The trouble is twofold.

First, Comex has a problem that the shorts are overextended opening themselves to a squeeze or, ultimately, to a corner. These are attempts on the part of gold bulls to buy up the gold certificates, instruments of delivery against gold futures contracts. These certificates give you legal title to the metal deposited in Comex-approved warehouses. Such a squeeze would cripple the operation of the exchange and make Comex lose its credibility as a viable market. When the cupboard is empty, the game is up.

Second, Comex can no longer attract sufficient quantities of gold from investors to its warehouses which, in consequence, get more and more depleted. Such a gold flow is the lifeblood not only of Comex, but of the irredeemable dollar as well. There is a world of a difference between the irredeemable dollar with the gold window of Comex open, and the irredeemable dollar with the gold window of Comex closed. The institute of the gold futures market is the prop keeping the global game of musical chairs of fiat money going. The music stops when Comex closes its gold window.

But Comex will eventually have to declare “liquidation only” policy, effectively closing its gold window. The phrase means revoking the right of holders of contracts to demand delivery on their expiring gold futures under certain circumstances. Clients have to accept settlement on their contracts in cash. This has happened in the past, e.g., in silver and palladium, although it has never happened in gold. It is not widely known that Comex would not go bankrupt de jure if it declared “liquidation only”. Small print in the contract makes allowance for this option in case of force majeure. Nevertheless, Comex would be considered bankrupt de facto in the eyes of the public if it declared “liquidation only” on its gold futures contracts. Comex is the residual source of the world’s only currency that is not the liability of some government, gold.

Moreover, by implication, it would also be the end of the irredeemable dollar as we know it. I am convinced that the managers of the irredeemable dollar are not afraid that their prodigious dollar proliferation policy endangers the value of the currency, Quantity Theory of Money notwithstanding. What they are afraid of is that the gold bulls will force Comex to close its gold window by cornering the supply of gold certificates. When that happens, it will be not only “gold is not for sale at any price” but also “oil is for sale only against payment in gold”.

We have to understand that what has kept up the paper dollar’s value through thick and thin, through war and peace, and through the burgeoning trade deficits and budget deficits since 1975, is Comex. This is the reason why the Chinese still take the irredeemable dollar in payment for real goods and services, and large quantities of food can still be purchased against payment in irredeemable dollars. But once Comex is forced to close the gold window, the dollar will lose its main prop and bearings and, with them, its purchasing power, even if miraculously the U.S. could cut its trade and budget deficit to zero.

The Quantity Theory of Money is no science. It is a model, a didactic tool. It is applicable to an imaginary linear world. This world of ours, however, is highly non-linear.

I am convinced that the clearing members of Comex are desperately trying to avoid permanent backwardation in gold. Not only is the gold futures market extremely profitable for them, but their bets have been backed by central banks gold sales and leases. All the central banks have a vested interest in maintaining the global regime of irredeemable currency. The clearing members want to have their cake and eat it: they are the consistent short sellers who keep the gold price from breaking out on the upside. But this makes gold cheap causing mass withdrawals of gold from the warehouses, gold which they want to keep in the warehouses for window-dressing purposes.

Please note that these are not naked short sales. The clearing members are convinced of gold’s upside potential, no less than you are. Their game plan is that, instead of gambling with their own gold, they want to gamble with yours and mine, and with the gold of the tech-funds. They let us buy gold futures; they let us make money occasionally. But they know that we have to take profit from time to time because we are undercapitalized. They know that we have to use stop loss orders to avoid bankruptcy. What is worse, our stop loss orders are an open book to them. We are sitting ducks which they shoot at for fun. So we have to sell.

But whether we buy or sell, we buy into strength and sell into weakness, which is exactly the wrong way to do business. The clearing members’ advantage is that they always buy into weakness and sell into strength, as they take the other side of the trade we have initiated. They don’t worry about being undercapitalized, because they can change the rules of the exchange capriciously, and they enjoy a back-wind due to central bank policy. So far they have succeeded.

But something ominous is happening. Most recently central banks have changed their policy. They have stopped selling and leasing gold. Their commitment to bail out the clearing members with gold has been changed to a commitment to bail them out with paper. This is not the same thing. Central banks have stopped feeding the market with gold sales and leases. Here is the proof.

Take Mr. Gordon Brown, the prime minister of Britain. As the Chancellor of the Exchequer he ordered the Bank of England to sell one half of the nation’s gold reserve in one fell swoop. He even overruled the Governor of the Bank who first refused. The sale took place at the average price of $250 in 2000, a major multi-year bottom. Nice shot, Mr. Brown! The Chancellor has earned the name of the bottom-picker of the century.

Now, as prime minister, he could order the Bag Lady of Threadneedle Street to sell the other half. If she did, it would be a sale fetching a price three times higher. Better still, she could buy back the gold in 30 days at a discount. (This is the meaning of backwardation in gold.)

But look who isn’t selling on these unbeatable terms? Why, Me-too Gordy isn’t, that’s who. He has learnt that a bird in hand is worth a dozen in the bush. He knows that if he falls to the temptation of ‘risk-free profits’, he may never see his gold again. It would disappear in the black hole of irredeemable currency, where the other half did. Gordy has made himself the laughing stock of the world once as the bottom-fisher of the century. He does not want to do it again. Who can blame him? If he did, he could earn a second nickname: the sweetest-singing crow of the century, and he doesn’t want that.

As you may recall, Aesop in one of his fables relates the story of the crow perched on a tree holding one big loaf of cheese in his beak. The fox beneath is hungry and salivating. He decided to get the cheese by hook or crook. He knew he could not get it by brute force, but he might get it through flattery, by massaging the bird’s vanity. The fox calls the crow his friend. He is telling his friend that of all the singing birds he loves the sweet singing of the crow best. Would his friend be kind enough to sing for him?

After a bit of coaxing the crow started crowing, but the fox did not stay to listen. He made off with the cheese as fast as his legs would take him.

Mr. Brown can print pounds galore, and even swap them for dollars. But he cannot print gold. Neither can his colleague, Helicopter Ben. That’s why he is willing to airdrop an unlimited amount of paper, but would not airdrop even one grain of gold to alleviate the economic crisis of his own making. These gentlemen still think that the present crisis is a subprime crisis and it can be tackled by flooding the system with newly created money. Scarcely do they see that, instead of being a real estate crisis, a stock market crisis, or a banking crisis, this is a gold crisis. It can only be resolved by involving gold, in particular, by remobilizing the world’s gold reserves. The most straightforward way of doing this would be to open the U.S. Mint to gold (more precisely, to the seigniorage-free and unlimited coinage of gold on private account), as Sir Isaac Newton, Master of the Royal Mint of London had done in the year 1717. Unfortunately, this option is no longer available because the trust in the irredeemable dollar has been fatally undermined by the backwardation in gold. No longer will people be coaxed out of their physical gold by the promise of risk-free profits, however large, payable in paper.

One possible explanation of the backwardation in gold is that the clearing members of Comex, who could have prevented it from happening by allowing gold to break out on the upside, have changed tactics and decided to step aside and let backwardation do the job. They hoped that it would pull in gold from the moon. The risk-free profits that backwardation promises to yield would tempt holders to swap cash gold for paper gold.

Well, so far it is not happening. Fewer than 10,000 ounces of new gold was registered at the warehouses during this episode of backwardation so far, not enough to deliver on even 100 contracts. By contrast, an extra 132 December contracts were presented for delivery by their holders.

A second possible explanation of the backwardation in gold and the decline of the gold price to $740 on Friday, December 5, is that the clearing members in desperation attempted to demoralize the bulls by their persistent selling of cash gold and December futures. Hefty margin calls went out to intimidate holders of the December contract. But the tactic seems to have backfired: while both the cash price and the December futures price fell, the futures price fell more. Backwardation was the result. The bulls refused to swap their cash gold for the December futures, in spite of further decline in the basis (making the swap more tempting still). The contest between the good guys (longs standing for delivery) and the bad guys (the clearing members) may not be resolved until December 31, the last day when the latter must deliver, or declare ‘liquidation only’. Right now it looks as if the longs are quite prepared to call the bluff. They are willing to face further decline in the gold price to force the issue. They know full well that the last thing the clearing members want is to declare force majeure, because that would kill the goose laying the golden eggs for them.

Please remember that the bad guys have another secret weapon. They can raise the margin requirement to any level higher than the value of the underlying contract. Nasty, isn’t it? The idea is to force the longs to sell their contracts and, in doing so, give up their right to take delivery. Such a measure, however, would betray the utter helplessness of the clearing members. It would be oil on the fire, triggering a world-wide rush into cash gold, ruining other paper gold markets (including ETF’s) in the process.

A third possible outcome is that all the gold demanded will be delivered in December, and the deterioration in the warehouses’ holdings will be papered over in January. No matter, the battle is already shaping up for the February confrontation when the bad guys will be in an even weaker position.

To sum up, the gold price is not the issue right now. The low gold price is a side show trying to scare the longs out of their cash gold positions. Here the iron rule of the commodity markets applies: you can squeeze the bears, but you can never squeeze the bulls. The reason is that the best you can do to shake the bulls out of their position is to tempt them with risk-free profits to give up physical gold against future gold. That is happening right now. But it appears that, for the first time, cash gold can no longer be coaxed out with paper profits. After all, gold is gold, and paper is paper.

This is why this battle is so crucial: it is the first real confrontation between physical gold and the paper dollar. Paper gold is marginalized. We know that, in the long run, the paper dollar cannot stand up to physical gold. However, as Keynes has warned us, in the long run we are all dead. This time it’s different. The long run ends on December 31, 2008.

The “last contango in Washington” refers to the end of the hegemony of the irredeemable dollar that is in no position to throw its weight around any more. The advent of backwardation means that a writing has appeared on the wall: “Mene tekel, upharsin”: the dollar has been weighed and found wanting. On the last day of this year of economic and financial surprises we shall know whether the backwardation in gold is permanent, or whether it will become permanent only after the inauguration of the new president, at the expiration of the next active gold futures contract in February.

Either way, this is a contest the bad guys cannot win. They are at the end of their rope. The low gold price means that they are left with just enough rope to hang themselves.

References

The Last Contango in Washington, June 30, 2006

Red Alert: Gold Backwardation!!! December 4, 2008

This and other articles of the author can be accessed at the website

www.professorfekete.com

Note: the author is writing a follow-up piece:

There’s No Fever Like Gold Fever

Stay tuned.

In This Christmas Season, Let Us Not Forget the Cripples

by Vin Suprynowicz
http://www.lewrockwell.com/

In this holiday season, it’s hard to be hard-hearted. So you’ll pardon me if this week I refrain from writing one of my usual missives condemning the waste, fraud, arrogance and generally thuggish behavior of our government masters, claiming they need more of your paycheck because their budgets have been “cut to the bone” when in fact they’re still bigger than last year’s.

Instead, I’d like to take this opportunity, as the Christmas carols waft from the little radio over in the corner that cartoonist Jim Day locked into the “on” position sometime before 1990, till we’ve all wondered more than once whether it would be possible to short the thing out before it finishes “My Little Tin Drum” (pa rum pum pum pum) one more time by drowning it in lukewarm Coca-Cola, to ask us all to take a moment to think about the less fortunate.

Who is it that most deserves our kindness and our charity, in this Christmas season?

The cripples, of course.

Of course, if someone in your family is temporarily out of work, you may want to step in with your checkbook and try to make their holidays a little more cheery. But the able-bodied can generally be expected to “get back on their feet” again, as it were.

Not so the lame, the halt, the blind, the spastic – your actual cripples. They have to struggle along manfully (or womanfully, as the case may be), knowing they’re not likely to wake up in any better shape tomorrow. Why? Because they’re crippled.

By now, a handful of readers are probably asking themselves, “How can this guy Suprynowicz be so insensitive? Does he live in some cave? Doesn’t he know that we refrain from using words like ‘cripples,’ these days, in order to avoid giving offense? Doesn’t he have editors who can take him aside and explain that we now prefer terms like ‘handicapped,’ ‘disabled,’ or – for those who took the Advanced Credit course in Politically Correct Euphemisms – ‘differently abled’ … words that sound nicer, while meaning the same thing as ‘crippled’?”

Ah, but do they?

At the bottom of the front page of the Dec. 2 Review-Journal appeared a story out of the Los Angeles Times, headlined “Young adults in U.S. riddled with disorders, study finds.” Surveying young Americans aged 18 to 24, some gang of shrinks from Columbia University determined that 45.8 percent of college students – and an even larger 47.7 percent of young people who are of college age but not actually attending college – suffer from serious disabilities.

Holy cow! Nearly half of our college-age young people crippled?! Was it those darned land mines? With all our other investments tanking, is it time to start investing in firms that manufacture crutches and wheelchairs?

Not necessarily. Because when the psychiatric industry tells us we’ve got millions of people “disabled” or “suffering from serious disorders” – and then takes the opportunity to “call for earlier treatment” of these young adults “to prevent lifelong dysfunction or disability” – such announcements are meant to make it SOUND like we’ve got a national emergency involving vast number of young cripples in need of tax-funded therapy, when in fact what they mean is that the kids are … ready? holding onto your chairs? … drinking and smoking and not calling girls back the next day like they promised.

“Psychiatric disorder” sounds like it means “crazy,” and it’s meant to. But even claiming 46 percent of our young people are “crazy” wouldn’t pass the laugh test, because we all know what “crazy” means, and we all know 46 percent of our young people are not running naked through the streets, hooting like apes, nor are they convinced the CIA and/or the space aliens are controlling their actions through small radio receivers implanted in their bodies.

The most common “psychiatric disorders” reported by the Columbia University survey of 5,000 young people – technically, the “National Epidemiologic Survey on Alcohol and Related Conditions” – were “alcohol abuse” (20.7 percent of college kids), “nicotine dependence” (20.7 percent of non-college kids) and other non-specified “personality disorders,” which combined strike slightly less than 20 percent of this populace.

Can you imagine? Our young adults are drinking, smoking, and occasionally acting boorish and insensitive. And here we thought al-Qaida was a threat to our way of life!

Apparently not measured in this particular survey were such other crippling – pardon me, “disabling” – ailments as Halitosis and Visible Panty Line.

It would be bad enough if this were merely a transparent scam to get the government to recognize these “psychiatric disorders” so the members of the psychiatric fraternity could tap into our insurance or tax moneys to fund the largely fruitless endeavor of “treating” them (which it is, of course), since the idea of more-or-less coercive “treatment” of someone’s voluntary choices is really appropriate only to clinics run along lines pioneered by Joseph Mengele.

But it doesn’t stop there. Once the psychiatric gang got these conditions recognized as actual “disabilities” – something they could never achieve until they convinced everyone we were being “insensitive” if we refused to substitute the highly nebulous and hard-to-define term “disabled” for words like “crippled” or “crazy,” clear and simple terms no English-speaker had had any trouble defining for five hundred years – the government actually started issuing “disability checks” to layabouts clever enough to enlist some tax-funded shrink to certify them as suffering from one of these “disabilities”!

I kid you not. Go visit your local post office on the first of the month, and check out all the able-bodied men standing in line, waiting for their government checks.

Welfare checks? No, “disability” checks!

But how can these men be “disabled” if “disabled” means the same thing as “crippled” and they’re obviously able-bodied?

You see, Bill Clinton promised to “get rid of welfare as we know it.” And he did. Mind you, pretty much the same people are still getting the handouts, funded out of your paycheck and mine. Only now it’s known as “disability.”

And no, it doesn’t mean the same thing as “crippled.”

Meantime, since we’re on the subject, letter-writers keep writing in, following the massive Nov. 4 electoral victory of Barack Obama and the collectivists, braying that “Trickle-down economics is dead! Now it’s time for trickle-up economics. Yay!”

It will be interesting to see how this works. Should you now have the misfortune to be laid off or have your work hours cut back, apparently the current recommendation is that, instead of visiting the personnel office of some outfit owned and financed with whatever minimal assets Obama’s IRS decides to allow some greedy rich guys to keep, you instead head down to the post office on the first of the month, tap some of those guys waiting in line on the shoulders, and ask if they’d be willing to get together and “trickle you up” a job.

Let me know how you do.

And Merry Christmas.

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

Turning to the mailbag, M.D. Henry E. Jones writes in, in response to my recent column on free-market medical care: “I retired in 2004 after 40 years of medical practice and I must say you mostly have it right. But we can’t advertise lower prices as the medical boards won’t allow it. Also, once a person hits 65 years of age it is illegal for a physician to negotiate with him for a lower cash price. Once a person is Medicare-eligible Medicare must be involved no matter if the patient is a billionaire!

“Then there is the basic problem of control of the number and types of physicians by the Federation of State Medical Boards using their control of medical education. So the monopoly over health care is orchestrated at every level, from the drugs allowed by the FDA to the individuals allowed to practice medicine, to the hospitals and medical schools that are granted accreditation. It’s just thoroughly rotten from top to bottom. Over 100,000 deaths are caused by the system every year, just for starters!

“You may have to hold your nose but keep on writing about it. Every article shines a little sunlight into the AMA’s rotten business of letting people die for political power and money!”

http://www.lewrockwell.com/suprynowicz/suprynowicz110.html

by Jennifer Barry, GlobalAssetStrategist.com | December 5, 2008

Back in May, I wrote about the dire state of global food supplies. At that time, grain stockpiles were at their lowest in decades, with only 50 days of supply. Food security was at risk, as demand spiked from increased human consumption and government mandates to use grain for biofuel production. At the same time, agricultural stockpiles were contracting from the mysterious disappearance of pollinating bats and bees, the conversion of prime farmland into housing developments, and hostile weather conditions in key growing areas.

Eight months later, food supplies have increased dramatically. The agricultural markets look troubled on a technical basis when priced in U.S. Dollars. Orange juice, sugar, corn, and rice are in a downtrend even after substantial price drops. The milk, soybean and wheat markets are trendless, looking for a catalyst to move one direction or the other. Buzz in the media about the possibility of a global depression has kept the commodity markets on edge.
Early predictions for the U.S. grain harvest were dire, as flooding submerged crops throughout the U.S. heartland. The condition of American fields is globally significant as the nation is the world’s largest grain exporter. However, the weather unexpectedly cooperated with farmers in the latter half of the growing season, and the U.S. produced a bumper crop of most staples.

The American corn crop had an excellent year, with the United States Department of Agriculture (USDA) expecting a 12.02 billion bushel yield - the second largest crop in history. The futures price was impacted by the reversal of fortune, correcting from a high of USD $7.99 in June to $2.93 today. The corn price was also hit by the drop in ethanol demand, as a recession in the developed world and lower crude oil prices decrease the need for biofuels. Despite lower costs, U.S. grain exports have suffered as Eurasian countries seek closer suppliers like the Ukraine or Russia.

Despite this bearish price news, corn should form a bottom in the next few months. The CBOT corn futures already expect a 45 cent jump by September 2009, and that bet is probably way too low. U.S. farmers should get a boost as livestock producers decide to feed corn instead of more expensive wheat. The artificially high U.S. dollar is dampening demand for all exports, including grains, but the greenback should soon resume its downward trend. Even with near-record yields in 2008, by August 31 of next year corn stockpiles are expected to be very tight at 1.1 billion bushels, the lowest stocks-to-use ratio in over three decades.

The U.S. soybean crop is also robust, with a prediction of a 2.9 billion bushel harvest in 2008 - a 9% increase over last year. While the increase is significant, the futures price overreacted, plunging from $16.37 per bushel in July to $7.86. Grains usually are in contango (when the future price is higher than the spot) due to the cost of storage. However the contango in soybeans is proportionally low in comparison to corn, at only a 34 cent difference between the January and September contracts.

Although the soybean market is dominated by pessimism, I see many reasons for investor confidence next year. Dry weather in Southern Brazil and Argentina has already caused a halt in soybean planting. Lower expected yields in the Southern Hemisphere coupled with continued strong demand suggests that the USDA estimate of carryover stocks is much too high at 205 million bushels. China’s recent announcement of a USD $586 billion stimulus package should support demand for all commodities, and the country is now building soybean reserves to aid its livestock producers. If Argentine farmers go on strike again over export taxes, soybean supplies could be near zero by the fall. I expect prices to increase dramatically next year.

High prices for wheat spurred planting this spring, and stockpiles in May 2009 are predicted to be almost double this spring’s 34 year lows. The European Union increased production by 26% in 2008, leaving the EU with an ample buffer for the first time in five years. Wheat prices have suffered greatly, with a crash from $13.50 in February to $4.55 this week.

Nevertheless, this increase in wheat stocks still represents a “historically low” supply equalling 22% of annual world consumption, or less than twelve weeks. In addition, wet conditions have delayed the harvest of soybeans and corn, preventing many growers from sowing winter wheat crops. While this will temporarily boost supply as grain usually needed for seed will remain in inventory, this will decrease next year’s output. Wheat crops in Argentina and Australia have suffered stress from lack of rain and will likely yield less grain.

The grains share the same problems with other agricultural products, as the scarcity of credit will likely suppress food production next year. Lack of loans to purchase equipment means that farmers must delay planting, reduce acreage or both. The usual credit sources have increased interest rates and refused to allow weaker customers to borrow at all. In addition, spiking prices for diesel, fertilizer, farm machinery, and even seed make the current market prices unprofitable for many growers.

Another factor dampening global food supply is the decline of pollinators like bees and bats. This mystery is unfortunately far from solved. Approximately 9.5% of total agricultural output is dependent on pollination in order to reproduce, contributing upwards of USD $215 billion to the global economy. Honeybees continue to suffer from Colony Collapse Disorder, where adult bees disappear without a trace. Theories on the cause range from viral and mite infections, to poor nutrition, pesticide use, or abnormally large honeycomb cells. In 2006, the U.S. had to import honeybees for the first time since 1922, and in 2007, the number of commercial bee colonies dropped another 31%.

Bats are suffering from white nose syndrome, which has killed hundreds of thousands of these mammals in the Northeast United States. Some caves have been decimated, with 97% of their bat population gone. The syndrome is associated with a fungus, but scientists don’t know if the fungus causes the fatalities directly or if it simply causes the bats to awaken from hibernation in the depths of winter and starve to death. Not only do some species of bats help farmers with pollination, they also consume insects in large quantities, and their loss can unbalance the ecosystem.

Commodities to Rebound

All this gloom and pessimism from the markets has made me even more bullish on commodities. I disagree with the analysts that have labelled the rally in commodities a bubble. I don't think we've seen a commodity bubble for over two decades. To compare increases in food prices to the speculation in the housing sector just confuses the issue, as the fundamentals are completely different.
In contrast to real estate, the supplies of foodstuffs never reached an excessive level, as stockpiles are at multi-decade lows. Very few consumers ever speculated in food, while “flipping” of real estate was common. Food-related ETFs didn’t even exist a few years ago, that’s how novel investing in food is. Although builders became very wealthy during the housing boom, farmers benefited very little until this year. Corn, wheat, soybeans and rice sell for less on the Chicago Board of Trade than they did a year ago, while costs have jumped. Now that banks are reluctant to extend credit, the capital investment in agriculture will shrink to an unsustainably low level. Those are indications of a major market bottom, not a recently popped bubble.

Unlike discretionary purchases like theater tickets or electronics, consumers need to eat so they will continue to buy food. While demand for organic produce has dropped as people attempt to cut costs, only the very poorest will eat less as a result of the economic downturn. In addition, grain futures are currently very cheap on an inflation adjusted basis. Grains are the basic building blocks of everyone’s diet, and provide most of the feed for livestock producers.

I expect grains to make a strong recovery next year as conditions are aligning for another “perfect storm” in agriculture. While 2008 has been a strong year for food production, expect limited shortages to arise in the second half of 2009. The USDA predicts that global grain stockpiles will dwindle to 67 days of supply before the Northern Hemisphere harvests next year, almost as low as stores in the spring of 2008. Any bad news in 2009 should send the markets sharply higher.

A Shrinking Pantry

Even with an ample harvest, I fear for a serious food crisis in 2009 if the credit markets are not unfrozen. The Baltic Dry Index, which measures the global cost of shipping commodities, has fallen a precipitous 94% this year to the lowest level since 1987. While some of this decline can be explained by decreased demand and larger fleet capacity, the real issue is the severe credit contraction. Many exporters can’t get the letters of credit necessary to finance their commodity cargoes. Banks are only issuing credit to their best customers, and even then, the interest rates have soared. Most importing countries are dealing with the frozen drybulk shipping markets by eating through their stockpiles, a situation which is unsustainable. Depleted stores coupled with a poor local harvest could lead to famine conditions in the most impoverished countries next year.

I want to encourage readers to again stock up on nonperishable foods. In most countries, buying extra food in May when I first recommended it would have saved on grocery bills. You don’t have to buy anything exotic, just purchase extra supplies of the foods you normally eat, especially if you can take advantage of a sale.

Even if you live in a prosperous country, the ongoing credit freeze could make your favorite items expensive or difficult to get. Most Icelanders didn’t worry about getting their basic needs met during the boom. They never expected that a crisis would make foreigners reject their currency and cut credit to importers. Reports indicate the island only has three to five weeks of food left, a scary prospect. After learning of the crisis in Iceland, I think that storing some emergency food and water is an essential investment in your health and peace of mind.

"I HAVEN'T paid an electricity bill since 1970," says Richard Perez with noticeable glee. He can afford to be smug. While most of us fretted over soaring utility bills this year, he barely noticed. Nor is he particularly concerned about forecast price hikes of 30 to 50 per cent in 2009.

Perez, a renewable-energy researcher at the University at Albany, State University of New York, lives "off-grid" - unconnected to the power grid and the water, gas and sewerage supplies that most of us rely on. He generates his own electricity, sources his own water and manages his own waste disposal - and prefers it that way. "There are times when the grid blacks out," he says. "I like the security of having my own electricity company."

Perez is not alone. Once the preserve of mavericks, hippies and survivalists, there are now approximately 200,000 off-grid households in the US, a figure that Perez says has been increasing by a third every year for the past decade. In addition, nearly 30,000 grid-connected US households supplement their supply with renewables, according to the non-profit Interstate Renewable Energy Council. In the UK there are around 40,000 off-grid homes: the number has also risen in recent years due to escalating house prices and now to more expensive home loans, both of which have driven buyers far from conventional utility networks in search of properties they can afford.

For people who live off-grid, self-sufficiency means guilt-free energy consumption and peace of mind. "It feels brilliant to use clean, free energy that's not from fossil fuels," says Suzanne Galant, a writer who lives off-grid in rural Wales. "And if something goes wrong, we can fix it ourselves." Now even urbanites are seeing the appeal of generating some if not all of their own power needs. So is energy freedom an eco pipe-dream or the ultimate good life?

Whether you live in town or the middle of nowhere, the first consideration for any wannabe off-gridder is to calculate how much energy it takes to run your home and whether it is feasible to replace this with alternative sources of power where you live.

The good news is that the energy you require is likely to be a fraction of what you presently use, says Tony Brown, head engineer at the UK's Centre for Alternative Technology near Machynlleth in Powys. The average UK household uses around 4500 kilowatt-hours (kWh) of electricity annually, plus some 18,000 kWh of gas for cooking, hot water and domestic heating. In the US the figure varies considerably from region to region. For example, households in New York City use around 4700 kWh a year, whereas those in Dallas use 16,100 kWh: there are a lot of air conditioners in Texas. In chillier regions where people use gas for heating and cooking, on the other hand, they can burn up an extra 28,000 kWh or so per household.

It would be a struggle to generate this much energy from renewables alone, so an important first step is to dramatically reduce wasted energy. This may be less fun than installing shiny new energy-generating gadgets, but it is almost as effective in cutting your reliance on fossil fuels and the grid.

The biggest energy savings will come from properly insulating your home to minimise heat loss. That done, you'll need to work out what is eating up the rest of the power you consume. The easiest way to do this is to buy an energy monitor that can provide a live display of your total energy consumption or that of individual appliances (see "What's guzzling the juice?"). This will help you focus on reducing consumption to the bare minimum, not just by switching to low-energy light bulbs and energy-efficient white goods, but also by turning unused appliances right off rather than leaving them in standby mode. With a bit of effort and investment, you should be able to get by on a few hundred kilowatt-hours of electricity a year.

Now you are ready to start replacing this with home-grown energy. Some 80 per cent of off-gridders rely on the sun to do this, with good reason: it blasts our planet with enough free energy every hour to power the world for a year and you don't need to live in the middle of nowhere to get it. The simplest way to tap into this is to use a solar collector for your domestic heating or hot water. In the summer, solar thermal devices installed on a south-facing roof or wall (north-facing in the southern hemisphere) could provide all your hot-water needs. Even in winter, solar collectors can make a worthwhile dent in heating bills, even if the water needs top-up heating from the grid or from a stove that runs on logs, wood pellets or other biomass.

The sun blasts our planet with free energy and you don't need to live in the middle of nowhere to get it
For electricity generation, photovoltaic (PV) solar panels are also a good option. They convert the sun's rays into direct-current electricity with up to 20 per cent efficiency, and most are guaranteed to retain at least 80 per cent of their original efficiency after 25 years. A 2-square-metre panel rated to give 1 kW per square metre in peak conditions could provide up to 1500 kWh per year in the UK. In more southerly and reliably sunny latitudes - somewhere like Texas, say - it would probably provide 2000 kWh per year.

With enough solar panels it is possible to cover all your electricity needs with PV, year round; the downside is that it requires a significant investment up front. Installing 8 square metres of PV panels, enough to sustain a family of four in the UK, plus storage batteries and accessories such as inverters to convert DC into alternating current, can cost tens of thousands of pounds and will take up more space than is available to most urban households. Until the cost comes down substantially, switching to a grid supplier that gets its energy from renewables may be a more realistic alternative - although it will not free you from the risk of supply interruptions.

Outside towns and cities, though, there are more options. If you have access to a nearby river or stream with a reliable flow, hydro is an excellent, cheap source of power, and flow rate is usually greater in winter when you need more power. Galant's home, a five-bedroom house in the second-wettest part of Europe, is powered by a fast-flowing mountain stream that drives a turbine, plus solar water heating and PV panels. All this reliably supplies her with around 5500 kWh per year. "If you came to my house, you wouldn't know it was off-grid," she says. "It's always lovely and warm and there's always plenty of hot water."

Anyone who has an exposed windy hillside can exploit wind power. Tony Marmont, an off-grid pioneer from Loughborough, in the English Midlands, gets 40,000 to 50,000 kWh per year from his two 25 kW turbines. People with a lot of land can benefit from a ground source heat pump, which works in the same way as a refrigerator, using electricity to transfer heat from a cool space (the ground, in this case) to a warm one (the house). A typical installation, with 500 metres of underground piping, will stabilise the temperature of a well-insulated home, keeping further heating or cooling requirements to a minimum. If, like Marmont, you have a lake to store the pipes, so much the better: it saves the trouble of digging up the lawn.

Being completely off-grid, however, does mean you need to store excess energy for when the sun doesn't shine and the wind doesn't blow. Most off-gridders use bulky, expensive lead-acid batteries for this purpose. These can store electricity only for a couple of days and their performance degrades over time, but for now they are the best available option. A few pioneers, like Marmont, use excess electricity to produce hydrogen by electrolysing water; the gas is then stored in tanks and used to power fuel cells when needed. This allows electricity generated in summer to be used in winter, but it is prohibitively expensive for most: a system like Marmont's will set you back around £1 million. What's more, the hydrogen tanks take up a lot of space.

For most of us, the energy-storage issue is a major stumbling block to going completely off-grid. And it's one reason why, for most people, it's not yet worth pulling the plug. Cost is likely to be another show-stopper - though not for those who live in really remote locations. "If you live more than a quarter of a mile from the grid, then installing your own systems works out considerably cheaper than connecting to the grid," says Otto van Geet of the US National Renewable Energy Laboratory in Golden, Colorado. Perez, for example, was told it would cost him $280,000 to be connected, which made the decision to install $25,000-worth of PV panels an easy one. Both of these barriers are coming down, albeit slowly. Engineers are working on reducing the size and cost of renewable-energy installations, while fuel-cell and battery manufacturers are trying to increase power output and storage life. The cost of generating and storing your own energy will fall as the commercial and domestic generation market grows and as new technologies emerge: thin-film PV panels, for instance, are cheaper to make than existing PV cells, which use crystalline silicon. For many, the transition is becoming easier and less costly as newly built houses are increasingly offered for sale with some of the infrastructure for renewables, such as inverters for PV panels, already installed.

In the meantime, one way to beat the problem of how to store surplus power and make good on your investment is to stay connected to the grid - or connect if you are already off-grid - and sell what you don't use to a utility company. It may not be the energy freedom you had in mind, but it does means that the grid effectively becomes your battery - there when you need more electricity, and able to take your excess power. The return you will receive for this varies widely, but Germany has already shown that such a system can work. There, homeowners selling back renewably generated power are guaranteed to get four times the market rate charged to consumers for electricity. As a result, Germany has a thriving market in domestically generated energy, with 200 times the solar electricity output of the UK. The UK is planning to bring in a similar "feed-in tariff" system in 2009, although it is not yet clear what sort of price power-generating homeowners can expect. In the US, California and New Jersey are leading the way with feed-in tariffs in the range of 8 to 31 cents per kWh, depending on the contract and the time of day when the power was generated. Most other states have a long way to go.

There is no doubt that being off-grid has its problems and it is not always the cheapest way to get your energy. Even so, pioneers like Galant, Marmont and Perez have proved that it can be done, and without giving up a 21st-century lifestyle.

"I've got five computers, two laser scanners, two fridge-freezers, a microwave, a convection oven, vacuum cleaners - you name it," says Perez. "There's an external beam antenna on the roof for the cellphone and a bidirectional satellite for internet connection. I've got 70 kWh stored in batteries that could last me five days. I have too much electricity." Too much electricity and no more bills. That's got to be worth aiming for.

UNCOMMON COMMON SENSE
For People Who Think

21st Century Gold Rush Re-Examined

Aubie Baltin CFA, CTA, CFP, PhD.

Back in late 1979, the lineups to buy Gold looked more like the lineups to buy Stanley Cup Hockey tickets at the then famous Montreal Forum. There they stood all wrapped up in their parkas, ski jackets, and bulky sweaters wearing anything from construction boots to overshoes; there was even a sprinkling of executives in their Italian leather shoes, business suits and cashmere coats, all waiting to get in on a sure thing. The analysts and economists cited a litany of reasons to explain the Gold Rush, but nobody cared. Gold prices were said to have become a barometer of political and economic fears, but in the end it was just pure GREED that drove the price until it finally peaked in January 1980 at $875 an ounce. This was yet another example of "The Obvious is Obviously Wrong." The only important factor was simply that prices were skyrocketing. Anybody who was already in was making money (of course not as much as they claimed) and everyone else was afraid of missing out on a sure thing and being left out in the cold. It was Can-Slim 20 years before IBD made it popular.

Gold was selling for $250 when 1979 began. By December, amazed at the sudden surge above $700, Gold devotees began talking $1,000 plus, some were even trying to justify $5000. The rocketing prices startled all the experts and even frightened some of those analysts who, like me, had forecast the precious metals boom early on, but none had called for anything like this. For the first seven years of this Bull Market, the newspapers and magazines had completely ignored Gold, just as they are doing today. Then suddenly in late 1979, Gold hit the front pages of all newspapers. Reports and articles on Gold and Silver began to appear everywhere and not only in the financial newspapers, but in the dailies and magazines as well. This time around, there are still NO signs of even a beginning to the newspaper articles on Gold and Silver and certainly not on the front pages. In fact it is even difficult to get quotes on most Juniors, especially those trading in Vancouver or Toronto, unless they are listed on a US exchange. But rest assured that before this Bull Market in precious metals is over, there will be similar front page stories around the world and Kramer will be yelling booya booya at every one of the Gold stocks that will permeate his program. By the way, the Fast Money boys and girl who all currently HATE Gold will love it before this Golden Bull is over.

IS THE GOLDEN BULL MARKET OVER?

If you’re worried that you missed the Bull Market and that it ended at $1,030, just ask yourself how much space is being devoted to the fact that Gold has pulled back 20% to its natural support levels, during its fairly consistent and regular weak (slow) season. Gold Mutual Funds after being the top performing funds for the last 7 years are (would you believe) have still not ever been recommended by any Mutual Fund experts or Financial Advisors. I had been expecting a $1,200 to $1,400 target to mark the end of Wave I. After 7 years of almost perfect calls, I became too overconfident and began to think I was God, but He gently (maybe not so gently) reminded me that there is only one God and it’s not me as I was brought back down to earth.

Back on earth; let me now revise my short term projections. I had thought that we were in Wave 5 of Wave (5) to complete major Wave I and my target price was $1,200 to $1,400. The recent sell-off was unexpected but upon reflection, I realized that we are still in Wave (4) which should be completed within the next 5 to 10 days then up up and away into Wave (5) whose target is still $1,225 to $1,425 to complete Wave I by the end of 2008. We will then still have up Waves III and V to look forward to and they will move a lot faster and more furious than Wave I. I will then be giving a much more detailed picture of what Wave II will look. In the mean time look to accumulate both Gold and their juniors on any further weakness over the next week or so, THE SAME ANALYSIS holds for SILVER.

DOES HISTORY REPEAT?

Today, as back then, throughout most of Gold’s Bull Market until 1979, most analysts and the media are virtually ignoring Gold. It’s only the so called Gold Bugs that continue to believe then as now in Gold. Well I’m not a Gold Bug - I’m a realist and an economist, who likes to make money and studies not only the past, but human nature as well.

The last Gold rush lasted eight years (1972 to 1980). This one started in 1999 and should last a minimum of 16 years and is therefore only half over and has another minimum 7 years left to run. BUT remember that most Commodity Bull Markets have their most explosive and dynamic run in their fifth and final Wave. I now take you back in time to the 1970’s and point out that WAVE I lasted from 1972 until 1976, four years which was also 50% of that entire Bull Market. During that time, Gold appreciated from $35 to $200, a 575% increase. If today’s Wave I ended at $1,030, then it would have increased from $250 to $1035 or 400%. However, as I now believe we are about to enter Wave (5), and should we hit my projected target range of $1,200 to $1,400, then it too will have increased 575% at $1,450. More immediately, should today’s Wave II react in the most common Elliott Wave fashion and pull back to its Wave 4 of one lesser degree, that would bring us back into the neighborhood of $800.

It’s possible, but highly improbable, given today’s financial condition of the US dollar that the market retrenches all the way back to $600 where it would then make a 50% pull-back and meet its major long term uptrend line. However that is a worst case scenario, but even then we would still be in a Bull Market. The more probable event is a 25% bull-back to the $800 area which is the apex of Wave 4 of one lesser degree. But regardless of what takes place, WE ARE ONLY HALF WAY THROUGH THIS GOLDEN BULL MARKET.

INFLATION: The bright side of the story is that Gold has to increase to $2,500 just to equal its 1980 inflation adjusted high of $875. Should Gold have the same percentage move as it had in the 1970’s, it would give us a target of over $6,250.

WARNING: A Bull Market will always do whatever it has to do to shake off the majority of investors, especially the ones that do not have a firm conviction. To make real money you must have the courage of your convictions and hang on through the most gut-wrenching consolidations, and seize these opportunities to buy low, if you want to make the BIG MONEY.

A LOOK BACK IN TIME

To give you some idea of what a real Bull Market looks and acts like, I take you back to the 1970’s:

The library that I went to had the Financial Post newspapers on microfilm all the way back to 1972, the very beginning of the last Gold and Silver Bull Market.

There were very few if any articles when Gold first moved from $35 in1972 to $200 by 1976, completing Wave I of Gold’s Bull Market. Hardly anybody noticed, certainly not the newspapers, when Gold dropped back down to $100 in late 1976, completing Wave II. It was not until Gold was exploding past $200 and well into its Wave III rally phase that a few stories on Gold and Silver began to get published and then not until late 1978 early ‘79 as Wave III was peeking at $250. Gold headlines did not hit the front page until late December 1979 and into the January 1980 TOP, helping to fuel the final Wave 5 into its eventual blow off top. We are definitely not even close to that kind of action now.

The stock tables that I found were absolutely amazing and brought back some very fond and some not so fond memories. In 1975, three years into its Bull Market, most Gold and Silver stocks were trading at under $2 and the majority were penny stocks trading under $0.25. Don’t forget that we were at or near the bottom of the worst Bear Market since 1929–1932. Even with Gold up 600% from the 1971 low of $35 to the 1975 top of $200, most Gold and Silver shares did little to make anyone, except perennial Gold and penny stock traders, wake up and take notice. I held a few seminars in an attempt to push Gold as the best way to make money during a falling market (the general markets were down 45+ % in less than 2 years), but getting an order was like pulling teeth. It was not until Gold was well into Wave III and had retraced all of its first big sell-off and got back well above $200 (the equivalent to $730 today) that I started to open some new accounts and get some decent size orders, as the Gold and Silver stocks started their historic Bull Market runs that would end at unimaginable prices.

Some examples were: Lion Mines – 1975 price $0.07 / 1980 price $380. YES, that’s right it’s not a misprint - you could have bought 10,000 shares of Lion Mines in 1975 for around $700 dollars and if you held on for the whole 5 years until January 1980, you could have netted a total profit of around $3,799,300. Not bad ay!!!!! A few others were Bankeno – 1975 price $1.25 / 1980 price $430; Steep Rock – 1975 price $0.93 / 1980 price $440; Mineral Resources – 1975 price $.60 / 1980 price $415; Azure Resources – 1975 price $0.05 / 1980 price $109. The Majors also performed superbly well, but nothing compared to the Juniors. WARNING: The Juniors, although offering great potential, also contain much greater risk as most of them ended up falling back to zero. So be careful.

No question about it, that was one of the biggest and best financial opportunities in history. I don’t know of any other time, not even the dot.com bubble (how may of us could get in on the IPO’s anyway) where in only a 3 year time span, you could have turned so little money into so much wealth. “You only need to make one good investment decision in your whole life to be super successful.”

GOOD LUCK AND GOD BLESS

LOOK TO THE FUTURE instead of being mired in the past by subscribing to “UNCOMMON COMMON SENSE.” We are now living in the kind of times in which it is imperative that you get the straight skinny on a regular bi-weekly basis. It never pays to be penny wise and dollar foolish. Subscribe now. There is an unconditional 30 day money back satisfaction guarantee. A one year subscription is only $199; two years for only $349.

Aubie Baltin CFA, CTA, CFP, PhD.

2078 Bonisle Circle

Palm Beach Gardens FL. 33418

aubiebat@yahoo.com

561-840-9767

Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information on data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as recommendation for you to buy or sell securities.

Tom Chartier
Lew Rockwell.com
Friday, Nov 28, 2008

One doesn’t need to read beyond the first sentence of a front-page article from the November 26th edition of the New York Times to see more absurdist logic rearing its ugly head.

What pray tell could be the next act in the weekly soap titled The State’s Biggest Boners? Once again, they have a grand scheme to help us. Here it is straight from the horse head’s mouth, the New York Times: “The Federal Reserve and the Treasury announced $800 billion in new lending programs on Tuesday, sending a message that they would print as much money as needed to revive the nation’s crippled banking system.”

Yee ha! Hyperinflation here we come! Little short on spending cash? Print some more! Why didn’t I think of that? Maybe I should have taken out a loan and sprung for the Uber Gut Reich Mark color printer capable of running off thousands of undetectable funny money bills in an afternoon. But then I don’t need to bother. The Federal Reserve and Treasury are going to do that for me. How kind and thoughtful.

Are these people, for lack of a better term… stupid? Never mind. The question is rhetorical.

I’m ready and willing to admit I am no economist. On the other hand, I actually paid attention in history class. I did not buy the answers to the test questions either. Let’s look back to the days of the Weimar Republic in Germany after WW I. It seems times were tough, jobs hard to find and the economy a mess. Sound familiar? So, how did they “fix” it? They printed money until they couldn’t afford more paper. And surprise, surprise… it didn’t work! Inflation ran amuck and the prices of basic necessities skyrocketed. Hence, the need for wheelbarrows to lug all their funny money to the market so they could buy a loaf of bread… if they could find one that cheap.

Friends, Americans, countrymen, here’s a real simple common sense unalterable rule of money. The more money the State prints, the less it is worth.

The actual value of your socks, cheeseburgers, ramshackle hovels and gas-guzzling Hummer H3s will remain exactly the same. However, the price tag will go shooting way up. It’s just like the dump we bought in Los Angeles for $130K and sold a few years later for $450K. It was still a dump worth $130K… if that! And soon our profits will be worth about $10K

The net result after the Feds “help you out” by printing more money is simple. You still will not be able to afford anything! In fact, since you will soon have to buy a wheelbarrow you will be worse off than if they did nothing. And that is exactly what they should do. Nothing.

How about that $800 billion? Well… if it’s printed money is it really worth $800 billion? No of course not. It’s worth no more than the paper it’s printed on, to use an ancient phrase. There’s nothing to back it up, no gold reserves, no booming industries, no nothin’. Were the plan to borrow $800 billion that would be bad enough, since borrowing more money means selling off more of America’s future to China and shackling future generations with heavy tax plans which only pay off the interest. That would be a bit like cousin Doofus and his charming wife Dodie, their maxed out credit card collection and McMansion with it’s too good to be true ARM. Oh wait… I forgot. The bank foreclosed on the McMansion.

Doofus and Dodie now live in Orange County’s Tent City in Southern California. Wait a minute… I’m wrong. One must be a resident of the city of Ontario to be homeless in Tent City. Talk about absurdist logic! I haven’t a clue where Doofus and Dodie are now.

Or maybe the plan has some sort of twisted logic behind it. Let’s see, how about we totally destroy the value of the US dollar by printing money up the wazoo. Then, we won’t have to pay off those Chinese loans! Or at least what we do pay back is a drop in the bucket. Hey that’s pure genius! What’s that? China is calling in its monstrous loans? Sure fine. A trillion US dollars can’t buy a two-door Daihatsu sedan!

So why stop at a measly $800 billion? How about $3 trillion? Isn’t that what Joseph E. Stiglitz and Linda J. Bilmes predict the war in Iraq will cost in the long run? Why stop there? Let’s run off $100 trillion, $200 trillion or $500 trillion. Since none of it’s real the sky’s the limit!

But I seriously doubt this is a wise move.

So then, how do we get out of the real crisis after the country is flooded with worthless Republic Credits? Hey I got an idea! Start a war! Kick ass! It worked for Nazi Germany… Uh well… maybe that’s a bad example. Hm… let me see if I can concoct a better one.

Hang on! We did start a war! Two of them in fact. How could I forget? I guess Iraq and Afghanistan aren’t the crowd pleasers they once were. But there’s a problem. These fun-filled military adventures have not resulted in a “booming” economy back on the ranch. Aye Carumba! Something must be awry. Where did all that money go? It certainly did not find its way back into the pockets of the people. Oh well. Easy come easy go. I guess it’s all lost in the desert, vanishing with the sands of time and disappearing into the mattresses of Halliburton, KBR, Blackwater and a collection of shyster war profiteers.

Maybe it would be better to leave well enough alone. The times will be tough for a lot of people. But the economy will iron itself out naturally someday. With the State doing something stupid to fix it, the problem will only get worse. And printing $800 billion is about as stupid as stupid can be.

Well Uncle Scam, I have a favor to ask. Please don’t try to help. Your track record has not been good.

From Metropolis magazine

James Howard Kunstler

At the moment, the ideas bundled under the rubric of “localism” are regarded as a lifestyle choice, which is to say a fashion statement of environmental concern, practiced by those with the time and means for following fashions. “Locavores” who make a point to eat locally are represented overwhelmingly by college-educated, high-income Baby Boomers who buy those $6 pint baskets of boutique blue potatoes at the farmers’ market as much to make a statement of principle (and derive moral comfort from doing so) as to eat nutritionally sound, good tasting food. Meanwhile, the rest of America keeps driving to the Shop Rite for tubes of frozen ground-round, jugs of Pepsi, and bags of Cheez Doodles made (grown?) God-knows-where. So, the stylishly fit locavores end up looking like stuck-up moralistic snobs while the majority follows the mindless corporate programming du jour like the overstuffed lumbering TV zombies they have become. By the way, locavores also overwhelmingly drive to the farmers’ market, (as I have observed in my town) and usually in motor vehicles the size of medieval war wagons.

Localism, in this sense, is very much related to the current craze for styling one’s endeavors as “green.” Tom Friedman cheerleads for “green” globalism in his New York Times column while Time Magazine runs “Greencast” programs on its website, and all kinds of specialists design green cars, green light bulbs, green toilets, green campuses, and green corporate headquarters (all the better for hawking those Cheez Doodles). Much of this activity can be described, to borrow a locution from public relations, as blowing green smoke up our own collective ass. Such, alas, is the sorry state of our culture nowadays that just pretending to mean well, for most people and institutions, is good enough.

A reality-based view of all this suggests that localism and “green” economic practices will be taken up more broadly and earnestly only when we don’t have a choice about it, and can no longer manage our bad old ways. My personal serene conviction is that we are much closer to reaching that point than most Americans realize. The romance of Climate Change currently holds the nation’s attention because it’s more like a made for Hollywood horror movie plot. Plus, there are a lot of secret side benefits. Will Connecticut become more like South Carolina? Surely some of the denizens of Fairfield County, CT, wouldn’t think that was such a bad deal. Will the grain belt move 800 miles further north into Canada? Very well, then, Canada’s our bitch, anyway. Will there be more tornadoes in Nebraska? Who cares – God made the place only so they could show movies on airplanes.

What’s roiling backstage, itching to shove climate change out of the spotlight, is Peak Oil, which is currently poorly understood at best by the public. For one thing, it’s not about running out of oil. It’s about the complex systems we depend on for everyday life in this country becoming unstable and failing as we enter the slippery slope of global oil depletion – a point which, arguably, we are already at. By complex systems I mean the way we produce our food (oil-dependent agri-business), the way we do commerce (Wal-Mart, et al), the way we do transportation (extreme car dependency), the way we do finance (Ponzi-style), and so on. The oil markets themselves are just another such complex system – and a year-over-year price hike of about 100 percent for a barrel of oil is certainly a manifestation of instability.

Price hikes are one thing. There is plenty of evidence that the American public can keep sucking up increases a while longer. What will probably bite harder is spot scarcities, when your favorite convenience store hangs a cardboard sign on the pump that says “out of gas.” This is liable to resolve out of a growing export crisis combined with a new oil nationalism – phenomena only recently acknowledged even by experts in the trade. It now appears that exports, in nations with surplus oil to sell, are going down at an even steeper rate than production declines. A country like Saudi Arabia may have produced X percent less oil in 2007 over 2006, but their exports actually declined X+5 percent. Why? They are using more of their own oil. The population is growing robustly. The Saudis are building the world’s largest aluminum smelter and many chemical factories. Russia, another big exporter, saw its car sales jump by 50 percent in 2007. Mexico is depleting so rapidly, and using so much more of its own oil, that it might be out of the export game altogether in three years. The new oil nationalism is prompting countries like Norway and Russia to husband more of their own resources as the awareness hits that they are past peak and might want to keep their own motors humming further into the future. They are also trending more toward selling oil on the basis of long-term contracts with favored customers rather than just auctioning the stuff off on the futures market.

All of this ought to be bad news for big importers like the USA – more than half of the oil we use. These days, we are not such a favored customer among other nations, in particular those of the Islamic persuasion. And when Mexico stops exporting we will lose our number two source of imports. Imagine that? Few Americans have imagined it so far, which is why we are about to be blindsided by this set of problems.

As they gain traction we’ll be forced to make very different arrangements for virtually everything that constitutes everyday life in our society. Living much more locally will increasingly be the only choice. We are utterly unprepared. We’ll have to grow food differently, at a smaller scale, closer to home, with fewer oil-and-gas-based “inputs.” It will surely require more human attention. National chain discount shopping will shut down as its economies-of-scale dissolve and formulas like the “warehouse on wheels” and just-in-time inventory lose viability. Happy motoring will fade into memory and the entire suburban equation will wilt along with it. And just about everything else you can name from centralized high schools to professional sports will be cruelly affected by problems of scale and energy.

Where architecture and urbanism are concerned, there are several major issues in my view pertaining to local outcomes. One is certainly counter-intuitive. Our big cities will contract, not grow. The fortunate ones will densify at their old centers and waterfronts, but overall the trend will be severe shrinkage, really a reversal of the 200-year-long demographic movement of people from farms and small towns to mega cities. (Places over-burdened with skyscrapers will prove to be exceptionally troubled. The skyscraper is an endangered species that will, like the Baluchitherium of yore, soon go extinct.) The overall trend will benefit the smaller cities and towns, in my opinion, but only the ones that can maintain a relationship with productive farming hinterlands and/or trade-via-water. The implications for land-use regulation are obviously huge. Rural land will no longer be valued for suburban development. Those who chose to live in rural places in the decades ahead ought to be prepared to follow rural vocations. The end of suburbia will be the end of urban lifestyles lived in rural (or ruralesque) settings.

I happen to believe that our zoning laws and land use codes are un-reformable. Instead, they will simply be ignored. We’ll return to traditional modes of inhabiting the landscape by default, as it were, because we’ll no longer have the choice of doing it 20th century style. We’ll discover the hard way that the New Urbanists won that argument. It will just not be called “New” Urbanism anymore because it will no longer stand in opposition to other practical ideologies like suburbanism or Modernism. We’ll just have plain urbanism – and design disciplines to go with it.

Architects ought to prepare for a return to traditional local materials. Modular snap-together panels and frame systems will be increasingly unavailable due to the prohibitive cost of fabrication as well as the cost of exotic metals such as Frank Gehry’s favorite, titanium. It is hard to say how severe this problem may become – a whole new industry will surely arise dedicated to the disassembly of old structures and salvaging of materials – but personally I’d say that we’re headed back to mostly masonry for the best new construction. It will necessarily be regional or local in flavor and it will require traditional tectonic methods of assembly – which necessarily implies at least a return to a kind of methodological classicism.

What remains for now is a terrible grandiose inertia among people who really ought to know better: our culture leaders. The cutting edge has become a blunt instrument unsuited to fashioning the patterns of the future. Everything we do from now on will have to be finer in scale, quality, and character. Exercises in irony will no longer be appreciated because there will no longer be a premium paid for declaring ourselves to be ridiculous. The localism of the future will not be a matter of fashion. It will be in the food we eat and the air we breathe, and we’d better start paying attention.

James Howard Kunstler
http://www.kunstler.com/

It's been linked to cot death, eczema and cancer – but now the Government wants to put it in our tap water. This mass medication can't be right, says Zac Goldsmith

'Fluoride is thought to work best by applying it directly. Drinking it to stop cavities is like eating bandages to cure a broken arm'

When is it right for a government to mass-medicate the public? It's hard to imagine a scenario. If we faced the spread of a new and lethal plague, most people would probably accept draconian intervention. But it would have to be serious.

Today, however, we're told by the Government's Alan Johnson that he intends to pursue a policy of mass medication of the British public. Not to prevent smallpox or the bubonic plague, but to tackle tooth decay. Well, tooth decay is bad news, but it's hardly the stuff of nightmares. However, fluoride, the medicine he's chosen, may well be.

We don't know if fluoride works. In the United States, where 65 per cent of people are routinely subjected to the chemical, the worst tooth decay occurs in poor neighbourhoods of the largest cities, the vast majority of which have been fluoridated for decades. When fluoridation was halted in parts of Finland, East Germany, Cuba and Canada, tooth decay actually decreased.

One of the reasons for this is that fluoride is believed to work best when applied directly, for example to the tooth. Drinking fluoride to prevent cavities is like swallowing bandages to cure a broken arm. Another reason is that a policy of mass medication through the water supply assumes that we are all the same age, size and weight, and therefore require the same dose.

What we do know is that fluoride is toxic – so toxic, in fact, that in 1984, the makers of Colgate, Procter & Gamble, reportedly admitted that a small tube of their toothpaste "theoretically at least contains enough fluoride to kill a small child".

Fluoride has been linked to cot death, eczema and Alzheimer's. It has been shown, at low doses, to cause genetic damage. And it has been linked by doctors from the National Cancer Institute and the National Health Federation to cancer.

Because fluoride causes collagen, an essential structural component in skin, muscle, ligaments and bone, to disintegrate, big question-marks are being raised over its possible contribution to arthritis, a problem that has increased by 63 per cent since 1997, and which now affects 70 million Americans.

Other reports are appearing that link the accumulation of fluoride in bones to an increase in hip fractures among the elderly. The Journal of the American Medical Association reported recently that "with increasing dose of fluoride in the drinking water, the hip fracture ratio increases," a view echoed by The Lancet, The Annals of Epidemiology and other science journals.

Further studies have linked fluoride use to hyperthyroidism (underactive thyroid glands), one of the most widespread medical problems in the US, affecting more than 20 million people and leading to fatigue, weight gain, depression and heart disease. That's scarcely surprising, given that fluoride used to be prescribed by European doctors to depress thyroid activity.

Alan Johnson's principal concern is for the poorest in society. But studies as far back as the Fifties, by the American Dental Association and the Canadian National Research Council, have shown that people with poor diets are more susceptible to the health risks of long-term ingestion of fluoride.

What is extraordinary is that fluoride was ever considered for mass medication. It has always been contentious. Indeed, the first ever lawsuits against the US 's atomic bomb programme, the Manhattan Project, concerned fluoride, not radiation. What's more, the first health tests for fluoride were designed to establish how much industry could afford to release into the environment without damaging human health.

In the summer of 1943, a group of New Jersey farmers reported that something was "burning up" their peach trees, maiming their horses and cattle and killing their chickens. The source of these ills was a nearby DuPont corporation factory that was producing millions of pounds of fluoride for use in the Manhattan Project. Immediately after the war, the farmers filed suit against DuPont. At the time, the Manhattan Project's chief of fluoride toxicology studies, Professor Harold C Hodge, asked his superiors if there "would be any use in making attempts to counteract the local fear of fluoride through lectures on fluoride toxicology and perhaps the usefulness of fluoride in tooth health?"

The most widely cited study into the benefits of water fluoridation was conducted in New Zealand between 1954 and 1970, and it is used by fluoridation advocates to this day. But the study failed to meet the most basic criteria for scientific objectivity, not least because the decline in tooth decay that the community in question experienced was also seen in other non-fluoridated communities in the region. The then Mayor of Auckland, Sir Dove-Myer Robinson, described the so-called Hastings Experiment as a "swindle".

At best, the jury is out. Perhaps there are reams of recent studies that lay these fears to rest. If so, Johnson needs to share them with us. Mass medication is a big deal, and there should be proper debate before it is applied. Is fluoride safe? Does it even work? More importantly, is it right for a government to impose a controversial medicine on the entire population to deal with a non-life-threatening complaint?

From immune boosters to detoxing, which herbal infusion is right for you?

By Anastasia Stephens

This week a leading study from Queensland University, in Brisbane, Australia, revealed that drinking three cups of green tea a day for eight weeks may lower blood pressure and shrink fat cells, confirming the long-held belief of herbalists in the therapeutic effects of a warm brew.

Indeed, there are hundreds of different concoctions on the market, which claim to help treat everything from stress to digestive problems. But which one is right for you?

ANASTASIA STEPHENS investigates.

A leaf out of nature's book: Herbal teas have been found to aid emotional and physical health

SLIMMING: Green tea Researcher Dr Lindsay Brown, a pharmacologist at Queensland University, studied the effect of green tea, blended with grape seed, spearmint and olive leaf, on a group of rats.

They were fed a fat and sugar-laden diet, causing the fat around their stomachs to double in eight weeks, and their blood pressure to soar.

When the tea was added to their junk food diet, their weight and blood pressure returned to normal in the same amount of time.

'This tea could be an effective way of confronting obesity,' says Dr Brown. 'We think it works by stopping fat cells releasing inflammatory chemicals that attract more fat.'

TRY: As this mix isn't widely available in teabags, buy the teas separately and mix them. At www.theleafshop.co.uk you can order green tea, spearmint and olive leaf from £2.30 per 50g.

CALMING: Chamomile Apigenin - a chemical constituent of chamomile - binds to pain receptors in nerve cells to produce a sedative and calming effect.

Research published in the Journal of Clinical Pharmacology found that the tea induced a deep sleep in 80 per cent of heart surgery patients, despite the fact that they were suffering from anxiety and pain.

'Some molecules in chamomile have sedative effects and the plant has been used to calm anxiety for centuries,' says Dee Atkinson, medical herbalist and founder of Napiers, a UK-wide herbal dispensary. 'It's a mild sedative for people with anxiety, nervousness and mild insomnia.'

TRY: Pukka Relax (£2.15, www.pukkaherbs.com) containing chamomile and fennel.

DIGESTIVE: Cardamom Often found in mixed spice teas alongside cloves, cinnamon and fennel - these spices have a long history of use as digestive aids. Their oils have been shown in studies to have an analgesic (pain-relieving) effect, and relax the gut lining while boosting the secretion of digestive enzymes.

'Volatile oils in many spices calm the digestive tract and boost secretion of digestive enzymes,' explains Dee.

TRY: Before your meal, drink a blend of spices such as Yogi Tea's Stomach Ease (£1.89, www.yogamatters.com) containing cardamom, fennel, coriander and cinnamon, or Spice Delight by Hambledon Teas (£1.89, www.hambledenherbs.com).

IMMUNITY: Echinacea Research published in The Lancet this year found that echinacea can cut the risk of contracting a cold by more than half.

Researchers at the University of Connecticut also found it could shorten the length of a cold by an average of 1.4 days. Another study at the University of British Columbia, Canada, confirmed that the herb killed the microbes that cause colds and flu.

'In lab studies we've found that echinacea extract has potent virus-killing activity against the flu and also kills bacteria linked to cold symptoms,' says Professor Jim Hudson at the University of British Columbia, Canada.

TRY: While higher doses of echinacea, taken in tablet or tincture form, are needed to prevent and treat infections, drunk regularly as tea it will have a mild immune-boosting effect.

Try Dr Stuart's Echinacea Plus (£1.65, www.drstuarts.com) or Organic Echinacea Aid by Traditional Medicinals (£2.99, www.traditionalmedicinals.com).

DETOX: Dandelion Drink dandelion tea for a double detox. The leaf acts as a powerful diuretic, helping the body clear toxins through the kidneys.

The root stimulates the liver to clear toxins by releasing bile into the digestive tract.

'Bitter molecules in dandelion root helps detoxification by stimulating the release of bile into the gut,' says Dee Atkinson. 'You can use it alone or combine it with other herbs that also clean the liver and kidneys for a detox.'

TRY: Go to a herbal dispensary such as Neal's Yard for a mix of leaves and root to infuse as a tea. Alternatively, try a tea such as Floradix Dandelion Leaves Herb Tea (£1.55, www.goodnessdirect.co.uk), or Pukka Tea's Cleanse, a blend of detoxifying herbs that includes dandelion (£2.15).

WOMEN: Angelica Used widely in Chinese Traditional Medicine for women's health, angelica is said to regulate the monthly cycle.

'This herb is known to help with symptoms of hormonal imbalance such as cramps and menstrual irregularity,' says Dee. A trial at Lanzhou Medical College in China found that ligustilide, one of the active molecules in angelica, improved regularity by more than 80 per cent.

TRY: Containing angelica, and a blend of other herbs, Women's Balance by Yogi Teas (£1.82), can have a mild effect. An infusion of pure angelica from a herbal shop such as Neal's Yard (www.nealsyardremedies.com) will have a stronger effect.

Getting the best from your brew

• The quality of herbs you find in pre-prepared teabags varies hugely - some cheaper, seemingly natural teas contain flavour enhancers, while the 'active' ingredients needed to have a health effect would be low and barely noticeable.

• That's why it's important to choose a good-quality brand - and preferably one containing organic ingredients.

• 'A pre-made teabag is convenient,' says Dee Atkinson. 'But it won't generally be as effective or powerful as your own infusion made from fresh herbs or those from a good supplier.'

• Outlets such as Neal's Yard Remedies (www.nealsyard remedies.com) or Napiers (www.napiers.net) sell good quality neat herbs such as chamomile or valerian. Using these when making an infusion, you can make a stronger tea.

• Heap two to three generous spoonfuls of a herb such as chamomile flowers into a cafetiere and cover with 150ml of hot water, leaving it to sit for at least three minutes.

• 'If you can, make peppermint tea from fresh peppermint leaves, or a spice tea from freshly ground spices,' says Dee. 'When using a root such as ginger, remember, you'll need to chop and bruise it, then boil for four to five minutes for the ingredients to be released.'

• 'If a herb has a noticeable aroma, cover your infusion with a saucer while it sits,' she says. 'That will prevent volatile oils - which tend to have a calming effect on the digestive and nervous system - from evaporating.'