The Resourceful Bear Blog

Introduction
Today is the darkest day in American history as Congress has reached an accord with the President approving his financial bailout plan.

The Federal Reserve Rises To Become The Western World's "Bank Of Banks"
With President Bush's financial system bailout, actually a derivatives bailout, the United States Central Bank, has effectively gone to a central bank 0% interest rate, and in fact something entirely new: it immediately introduces a negative central bank interest rate until the liquidity it provides is all used up.

Yet unlike the 0.5% lending rate at the central bank of Japan, which is currently accessed by investors to go short the USD/JPY and short the EUR/JPY, as well to finance short selling of world stock market, EFA, in addition to US markets, VTI, it temporarily stabilizes, in particular it stabilizes financial institutions, which prevents their collapse and postpones default events on credit default swaps; but debases the US Dollar, and has served to start a run on US Treasuries, as is seen in the fall of TLT, as well as the rise in the rate of interest on the US Government Note, $TNX; which stimulated a rise in its 250% inverse investment, DXKSX ... $TNX and DXKSX

Definitely, as Alabama Senator Richard Shelby relates, the financial system bailout is the mother of all bailouts.

The financial system rescue is a sweeping, unprecedented, epic, landmark, watershed change; it is a sea change of economic history: it puts the nail in the coffin for capitalism and traditional investing; and is pure state corporatism, where government together with corporations, primarily bank holding companies, rule over the institution of commerce, finance trade, and investment; and it introduces the Federal Reserve with its interlocking arrangements with other central banks, as the western world banking authority, a prelude to the rise of a global banking authority, that is a global financial authority, and a Seignior who will be in charge of banking, finance, commerce, trade and investment worldwide.

Abigail Moses in September 22, 2008 Bloomberg article reports: "Collateralized debt obligations backed by mortgages will have to be unwound to qualify for the Federal Reserve-backed plan to accept troubled assets from banks, according to Royal Bank of Scotland Group Plc analysts. 'The only way that CDO investors can take advantage is to unwind the entire structure and put the underlying assets to the Fed,' ... analysts led by Gregorios Venizelos wrote ... 'The Fed plan makes liquidation potentially the best option.'"

The Federal Reserve will now replace investment banking in securitization of CDOs; it has the authority to buy "any asset, anywhere", that is debt, that troubles the stability of the world's financial system.

Pierre Paulden and Jody Shenn in September 22, 2008 Bloomberg article report: "The government is likely to buy the assets at above the prices financial firms could sell to private-sector buyers strategists Akiva Dickstein, Roger Lehman and Kamal Abdullah wrote." And those prices are market to fantasy, so the government will be paying an unbelievable price for the debt it acquires.

The Federal Reserve's authority now transcends sovereign nations and constitutions such as the United States Constitution.

There Is Definitely A Changed Financial Landscape
Doug Noland relates in Safehaven.com article Changed Financial Landscape in Safehaven.com article: "Today's finance-related economic headwinds are Cat-4 (and gaining) Hurricane Systemic Credit Seizure, compared to last year's Tropical Storm Subprime. Federal Reserve-dictated interest rates are extremely low - and the Fed and global central bankers have injected unfathomable amounts of liquidity - yet Credit Conditions have turned the tightest they've been in decades.

The Lehman bankruptcy marked a major inflection point in the confidence of contemporary "money." It was a decisive blow against trust in various money market instruments - the very foundation of our monetary system. "Money" has now tightened significantly for virtually all players that had previously enjoyed cheap short-term financings." (Financings which were used to invest long, Richard)

The Lehman bankruptcy also marked a major inflection point in confidence for the various "daisy chain" players involved in intermediating risky loans into contemporary "money." The market was convinced Lehman was "too big to fail." Its failure inflicted thousands of market participants with losses - from Primary Reserve Money Fund investors caught with short-term Lehman paper to holders of Lehman's long-term bonds. Investors all over the world were impacted.

The hedge fund community suffered mightily. The status of hundreds of billions of derivatives and counterparty obligations was suddenly up in the air or in the hands of the bankruptcy court. And, importantly, huge losses were suffered in the Credit Default Swap marketplace - the marrow of one of history's most spectacular speculative manias. (This created a Liquidity Meltdown, Richard)

Trying to add a bit of simplicity to the Complexity of a Credit Market Breakdown, I'll say the Lehman collapse marked a critical inflection point in at least five major respects: First, the Crisis of Confidence jumped the "firebreak" from risk assets to contemporary "money," shattering trust in various facets of contemporary finance that was forged over decades. Second, it required the marketplace to reexamine exposures to various direct and indirect counterparty risks, a terminal blow for derivatives markets. Third, it pushed the Credit default swap marketplace into full-fledged dislocation and instigated a long-overdue regulator onslaught. Fourth, it decisively burst the "leveraged speculating community"/hedge fund Bubble. This has ushered in another round of problematic de-leveraging and accelerated the reversal of "Ponzi Finance" dynamics. Fifth, it instilled global fear with respect to the risks of participating in the inter-bank lending market with American institutions.

Basically, the Lehman collapse marked the end of "Wall Street" risk intermediation as a significant component of system financial intermediation. Going forward, Credit growth will be chiefly generated by the banking system, supported by various forms of government backing (Fed, FDIC, Washington bailouts/recapitalizations, etc.), the government-operated GSEs, and various forms of federal government debt issuance.

Importantly, this new financial structure will ensure minimal risky lending as well as significantly reduced risk-taking. And from a global perspective, I believe newfound fears of lending to the American financial sector marks the beginning of the end of our economy's capacity for trading new financial claims for imports of energy and goods.

Over time the Changed Financial Landscape will have a profound impact on the underlying economic structure. Our economy will have no alternative than to get by on less Credit, less risk intermediation, and fewer imports.

In the near-term, the effects will be a rapid and pronounced slowdown of our economy's "output."

And while we'll only know over time, I'd bet this new financial structure will allocate much less finance to entrepreneurial activities, productive endeavors and the asset markets - while at the same time providing ample (government-directed) purchasing power to ensure stubborn consumer price inflation."

The Fact That Derivatives Are At The Heart Of The Mess Has Not Been Revealed Or Discussed
I do not hear any mention made of the fact by anyone that derivatives are at the heart of mess that confronts investors, America and the world.

Until there is an admission that the counter party risk on the credit default swap derivatives are at the basis of the issue at hand, and until the position of interest rate swap derivatives are revealed, and that the lion share of these contracts are owned by Goldman Sachs, Merrill Lynch and AIG, there will never ever be a successful resolution of the current problem; it will only fester until the whole world becomes infected again by liquidity duress.

The rescue legislation is a not a rescue; rather, it is a bailout of banks and other financial organizations, and the cost of the endeavor starts at $350 to $700 Billion and is likely over time to go up.

The Derivative Positions Of Financial Organizations Is At The Heart Of The Current Crisis
The Federal Reserve gave AIG an $85 Billion loan; the reality is that for all practical purposes AIG was nationalized by the Federal Reserve, as its disorderly failure would intensify the current financial storm and greatly complicate the government's efforts to manage it. The company is such a big player in insuring risk for institutions around the world that its failure would have shaken the global financial system to the ground.

Oil Drum reports: "In all, AIG wrote some $79 billion in insurance on CDOs backed mainly by subprime mortgages—selling insurance to financial firms like Merrill, UBS and Calyon. But AIG did much more than just issue credit default swaps on the worst of the CDOs. The total value of AIG’s credit default swap portfolio is $527 billion, according to a regulatory filing. In downgrading AIG on September 15, Standard & Poor’s said: “The primary source of the strain comes from credit default swaps covering multi-sector collateralized debt obligations, with mortgage exposure as well as insurance company holdings of residential mortgage-backed securities."

Oil Drum also relates Merrill Lynch's AIG problem: "Even after selling off some $30.6 billion in ailing CDOs to private equity firm Lone Star Funds in August at a steep discount, Merrill still has $19.9 billion in mortgage-backed CDOs in its portfolio. Merrill has marked down the value of those CDOs to $8.8 billion—a more than 50% haircut. In a recent regulatory filing, Merrill said it was adequately protected against suffering any sizeable losses on those remaining CDOs because it had purchased $6 billion worth of insurance, or credit default swaps, from “highly-rated non-monoline counterparties.’’ It’s widely believed that the bulk of that insurance was purchased from AIG, which was a prime seller of credit default swaps on CDOs up until the beginning of 2006."

A unified action by banks settled counter party exposure to Lehman Brothers credit default swaps and other derivatives; this was a large part of the cause of the Liquidity Meltdown of September 17, 2008. The September 15, 2008 Google News AFP article Lehman Bankruptcy Shakes World Financial System reports that banks world wide have provided 70 Billion to settle counterparty exposure to derivatives, most likely credit default swaps, arising from the bankruptcy of Lehman Brothers, LEH: "A consortium of 10 global commercial and investment banks announced plans to provide 70 billion dollars to help offset a credit squeeze". In a joint statement the banks relate they have 'initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.' "They also said they would work together 'to help facilitate an orderly resolution' of the derivatives exposures between Lehman Brothers and its counterparties."

President Bush's financial bailout is a derivatives bailout plain and simple.

Need For A Global Monetary Authority Was Expressed And Verbalized This Week
Shannon D. Harrington, Caroline Salas and Pierre Paulden in September 24, 2008 Bloomberg article report: "The $62 trillion market for credit- default swaps, created to protect banks from loan losses, helped fuel a near-meltdown in the financial system and now may be regulated for the first time. The derivatives precipitated plunges in the shares and debt of Wall Street firms, accelerating the collapse of Lehman Brothers Holdings Inc. and the U.S. takeover of American International Group Inc., the biggest U.S. insurer. Now, regulators want to bring oversight to a part of the credit market that may be more susceptible to manipulation than selling stocks short ... Banks 'are suffering the consequences of their own actions,' said Thomas Priore, CEO of Institutional Credit Partners ... a hedge fund with $13 billion in assets. 'They created a mechanism through default swaps to reflect a view on credit that has taken on a life of its own.' The swaps became one-way bets on the demise of financial institutions as traders hedged the risk that their partners might implode, said Gary Kelly, a strategist at broker Tradition Asiel Securities Inc."

EuroIntelligence provides the Jeffrey Garten, FT article We Need A New Global Monetary Authority, which relates that the IMF and the G7 have both proved irrelevant to the crisis, yet this crisis is truly global. The growth of global assets far outstrips the growth of global GDP, and most of the large financial companies operate worldwide. He advocates a global monetary authority, by which he does not mean a central bank, but a global capital markets regulator that would also act as a bankruptcy court.

Wikipedia Profile of Jeffrey E. Garten relates that he was Undersecretary of Commerce for International Trade under the Clinton administration and former Dean of the Yale School of Management. Before this, Garten served on the White House Council on International Economic Policy under the Nixon administration and on the policy planning staffs of Secretaries of State Henry Kissinger and Cyrus Vance of the Ford and Carter administrations. He is the author of five books and currently holds the position of Juan Trippe Professor in the Practice of International Trade, Finance, and Business at the Yale School of Management, a position without tenure.

Garten has worked on Wall Street as a managing director of Lehman Brothers and the Blackstone Group. At Lehman, he specialized in debt restructuring in Latin America. He also directed and expanded the Asian investment banking business for that firm. At Blackstone he worked in the financial advisory and mergers and acquisitions arena. From 1995 to 2005, Garten was dean of the Yale School of Management. During his tenure, the school retained its #19 rank in Businessweek's rankings.

And EuroIntelligence also provides the John Thornhill FT article Sarkozy Sets Out Bigger State Role As Current Institutions Are Ill-Equipped To Deal With Crisis which reports the speech given by Nicolas Sarkozy in Toulon, in which he said, among others, that the crisis highly deficiencies in the EU’s institutional arrangements; and said that the EU would not be in a position to deal as swiftly with the crisis as the US would. He also made the same point about the Bretton Woods institutions, (those of the neoliberal Milton Friedman), saying that we cannot manage the 21st century economy with 20th century institutions.

The World Will Become More Multipolar
Andrea Thomas in September 26, 2008 Wall Street Journal article relates: "The Wall Street financial crisis will reconfigure the world economy and the U.S. will fade as the world's dominant economic force, German Finance Minister Peer Steinbruck said in German parliament Thursday. 'The U.S. will lose its status as the superpower of the global financial system, not abruptly but it will erode,' Mr. Steinbruck said. 'The global financial system will become more multipolar.'"

Japan, China, and Russia have tremendous Forex reserves built up by trade; so definitely there is coming a multipolar world of four powers: The North comprised of Russia, the East comprised of China and Japan, the South Comprised of South America and Africa, to balance the West comprised of Europe and North America.

The GCC states and the UNASUR nations have announced common markets; each is likely to develop a common regional currency.

Patrick Markey of Reuters in September 27, 2008 article, Russia Slams Failure Of U.S. Unipolar Policies, reports from the United nations that Russian Foreign Minister Sergei Lavrov Saturday said U.S. "unipolar" policies had failed in Iraq and Afghanistan and helped provoke the recent conflict in Georgia.

Russia's invasion of Georgia last month has brought relations with the United States to their lowest point since the end of the Cold War.

In a strongly worded speech to the U.N. General Assembly, Lavrov called the U.S.-led war in Iraq a "painful blow" to global anti-terrorism efforts and questioned the NATO-led force fighting the Taliban in Afghanistan.

He described U.S. foreign policy as "unipolar" meaning that Washington regarded itself as the world's sole superpower, able to act without regard to the views of others.

"The illusion of a unipolar world confused many," Lavrov said. "In exchange for total loyalty they expected to receive a carte blanche to resolve all their problems."

Washington and European allies condemned Russia when it invaded Georgia after Tbilisi tried to re-establish control over the breakaway region of South Ossetia, which has now declared independence along with another enclave, Abkhazia.

Russia has said it responded to Georgian aggression.

A resurgent Moscow has also irked Washington by refusing to agree to increase pressure on Iran over its nuclear program and reaching out to Venezuelan President Hugo Chavez.

It has ordered an upgrade of its nuclear deterrent with a new space defense system and a fleet of submarines and sent two bomber jets to Venezuela in what analysts said was saber-rattling in Washington's backyard.

Municipalities And States That Depended Upon Financial Services Will Quickly Be Going Into The Dark Ages Both Culturally And Financially
Budget cuts in New York City and New York State will be beyond austere; the budget cuts will be unbelievable as these governments have relied upon tax revenues from many financial organization's former awesome profits; the cultural shock will be terrific and brutal.

Caroline Binham and Elisa Martinuzzi in September 25, 2008 Bloomberg article report: "London is turning against the $450 billion hedge-fund industry that helped make the city a contender for the title of world financial capital. As Lehman Brothers Holdings Inc. filed for bankruptcy and HBOS Plc was pushed into a government-brokered takeover, U.K. regulators and lawmakers found a culprit: the estimated 980 hedge funds that reside in Britain ... Harbinger Capital Partners Fund chief Philip Falcone was singled out by the Daily Mirror. The tabloid used a front-page story on Sept. 18 to brand him a 'greedy pig' for short selling, or making bets that Edinburgh-based HBOS would lose market value."

The World Is Hooked On Debt And President Bush's Derivative Bailout Plan Enslaves America And The World Unto Debt
Bei Hu in September 22, 2008 Bloomberg article reports: "Treasury Secretary Henry Paulson's $700 billion plan to buy devalued assets from financial companies is 'a joke' because it doesn't go far enough to calm markets, said Kenichi Ohmae, president of Business Breakthrough Inc. Ohmae, nicknamed 'Mr. Strategy' during his 23 years as a McKinsey & Co. partner, called for a $5 trillion 'international facility' to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said. 'This is a liquidity crisis. The liquidity has to be so big that people won't get panicky.'"

I have never been a fan of the neoliberal Milton Friedman who raised the question "free to choose"; but I am sure he would say "the current crisis and challenge is no excuse to impose state control on the markets". He might say it's laissez unfair. Wikipedia relates a quote from Capitalism And Freedom: "A governmentally established agency--The Federal Reserve System--had been assigned responsibility for monetary policy. In 1930 and 1931, it exercised this responsibility so ineptly as to convert what otherwise would have been a moderate contraction into a major catastrophe."

Elaine Meinel Supkis writing in Financial Black Holes relates that "modern capitalist banking systems create increasing DEBT and not increasing wealth!"

And, I add that the purpose of the modern day banking system is to subject Americans and the world unto debt. The bailout legislation being developed by Congress adds debt unto debt; it creates debt out of debt. Since the legislation authorize securitization of existing CDOs by the United States government, it turns the government into an investment banker!

Congressional legislation and President Bush's signature assigns this debt to American citizens, and to humanity at large: we are now slaves unto debt that was created by Wall Street under the repeal of the Glass Steagall Act.

The financial bailout is really the enactment of slavery of Americans unto government and banking lords.

Not only are Americans enslaved, but also, any nation whose bank that swaps out its debt for new US Treasuries, enslaves its people to the rule of the Federal Reserve Chairman and is indebted to the him.

I perceive at least two items in the legislation are unconstitutional.

So we have rule by men, rather than the rule of law. Perhaps one might enjoy my article America's Founding Fathers Were For Liberty, Independence And Freedom.

The bailout legislation is the capstone of self-serving, empire building and debt addicting legislation that goes back to the time when the neoliberal Milton Friedman proposed the US go off the gold standard for a floating currency exchange system. As Eddie Griffin, Member BASG, relates, the bailout puts an end to fairy tale laissez faire capitalism. It privatizes profits to an elite few and socializes risks and losses to the public at large. The legislation provides for nationalization of banking and debt.

The bailout had to be approved, as the world's financial system is on the precipice of a breakdown due to a liquidity drought, and desperately needs calming and an injection of liquidity, and the bailout enables massive stop-gap spending legislation to be sent to the President for his signature. Even many of the conservative Republicans are going to vote for the bailout.

Charles Babington of the Associated Press reports that the presidential nominees came behind the outlines of the bailout.

"This is something that all of us will swallow hard and go forward with," said Sen. John McCain, R-Ariz. "The option of doing nothing is simply not an acceptable option."

Sen. Barack Obama, D-Ill., sought credit for taxpayer safeguards added to the initial proposal from the Bush administration. "I was pushing very hard and involved in shaping those provisions," he said.

The Financial Bailout Establishes A Pyramidal Society Of Overlords And Serfs
It brings back serfdom that Joseph J. Ellis wrote about in the article American Sphinx: The Contradictions of Thomas Jefferson

And it brings back a feudal system that Jonathan Shaw writes in Harvard Magazine article Who Built the Pyramids? where he relates: Egyptian society was organized somewhat like a feudal system, in which almost everyone owed service to a lord.

The days of the Sphinx have returned. The article The Great Sphinx relates: In a depression to the south of Chephren's pyramid sits a creature with a human head and a lion's body. The name 'sphinx' which means 'strangler' was first given by the Greeks to a fabulous creature which had the head of a woman and the body of a lion and the wings of a bird. The sphinx appears to have started in Egypt in the form of a sun god. The Egyptian sphinx is usually a head of a king wearing his headdress and the body of a lion . There are, however, sphinxes with ram heads that are associated with the god Amun.

While The President's Bailout Will Temporarily Rescue Financial Organizations, The Dollar And US Treasury Bonds Will Be Destroyed
President Bush's bailout is one of financial organizations; and is an awesome example of crony capitalism, that will debase the US Dollar, $USD, and destroy the value of US Government Bonds as the interest rate on 30 year US Treasuries, $TYX, and the 10 Year US Government Note, $TNX, rise.

Matthew Benjamin in September 23, 2008, Bloomberg article report: "Treasury Secretary Henry Paulson's $700 billion proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds. The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70% of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated. 'This is sobering, absolutely sobering, even to someone who doesn't drink,' said Stan Collender, a former analyst for the House and Senate budget committees."

A run on US Government Bonds has already started, and is already seen the chart of the government bond ETF, TLT, and the zero coupon mutual bond fund BTTRX falling ... TLT and BTTRX.

Bo Nielsen and Anchalee Worrachate in September 22, 2005 Bloomberg article report: "Treasury Secretary Henry Paulson's plan to end the rout in U.S. financial markets may derail the dollar's three-month rally as investors weigh the costs of the rescue. The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond ... While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates. 'As we get to the other side of this, the dollar will get crushed,' said John Taylor, chairman of ... International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion."

Suggested Reading
Elaine Meinel Supkis September 28, 2008 article Bank Bail Bill Blesses Goddess Of Inflation provides introduction: "Everyone is now trying analyze the latest futile debt spending spree of the desperate US as we try to restore the deadly status quo that can't be saved. The nice thing about bankruptcy is, it clears impossible debts and allows a restart. But it pays to pay back everyone, somehow. There is a method of going broke but still repaying that we don't want to try because this means killing the present totally unbalanced global trade and of course, stopping the US imperial projects dead in their tracks. The world is using us and we are the fools who let this happen."

And she relates in response to the September 27, 2008, David M. Herzenhor and Carl Mulse New York Times article, Breakthrough Reached in Negotiations on Bailout: "I wish I was in on those negotiations. The GOP didn't withdraw support due to being against pouring billions into Wall Street. They were against it because the Democrats didn't want to add even more tax cuts to Paulson's Ring of Power proposal. I saw this plain as day at the hearings. All of the GOP Congressmen came into the chambers and about ten of them testified. Each one wanted capital gains tax cuts. Then all but 5 of them left the chambers when Paulson and Bernanke went it. I wrote in my notes, 'The GOP wants ONLY the tax cut, they don't care about the rest. It is a game.''

This game is clear: they want to pass off to the Democrats, the dirty job of supporting super-rich bankers or all those poor, little people will die out there in Americaland. The US public is very much against bailing out the super rich. The anger about all this will be directed towards the Democrats now even though the Democrats shot down the biggest Xmas gift ever for the rich, that 0% capital gains tax deal.

This blatant gift giving to the wealthy was totally ignored by the media. This is why I am very, very grateful so many readers gave me the money to not only go down to DC but to have a fine camera which I could use to record reality through my own lens. This is why, when we are forced to look at the world through the media filter, we get a dim picture. I saw many reporters there and they were utterly bored during the first half of the hearings because it was Congressmen arguing with each other. They just wanted an official tidbit from the Sphinx and his jinxed sidekick, Gollum.

There is no rescue plan, by the way, that will save and uphold equity values set during the previous bubble. There are ONLY two choices: the Goddess of Inflation gets to eat everything or the goddess of Depression dines. There is no third option! That is it."

Ms Supkis continues with the historical facts: "We went into a mild recession after the foolish Dot Com bubble broke. This would have cleared out a lot of junk. Instead, we decided to turn our entire economy into junk. For on the eve of the housing bubble, before Greenspan dropped interest rates to 1%, for the first time in 30 years, the government was in the green, not in the red! WOW.

This was greeted by the Supreme Court and the media as a great disaster. Mr. Tax Cutter Supreme was installed in the White House via judicial coup. He instantly began to cut taxes and the second, much more fatal bubble began to form as the Fed and the President conspired to create a gargantuan mountain of debt. I have pointed out in the past, when the interest rate is below the rate of inflation, absolutely everyone wants to get this money so everyone and everything runs in the red and goes deep into debt. This Santa Claus goodies situation is irresistible. This continues until the value of everything sopping up this free borrowing is so overvalued, no one can afford to buy them even at 0% interest.

And she provides insight into what I call Real Inflation, which is something that the Austrian Economists, that is those of the Mises persuasion continually deny: "This is all so sad. The bill passed by Congress and the GOP President is a last-ditch attempt at supporting unsupportable equity values. The hope is, this will cause raging inflation and the price/value reset that is going on will stop and we will have the power to force higher wages so both line up again. Woe to everyone, if the wage part fails! If wages don't go up, this will certainly increase the misery of the public. And since the US has killed labor unions, the chances of this working is around 0%. Wages will lag. Commodity prices will soar just like they did last year when billions were suddenly poured into the systems. And nothing will be fixed at all except we will all be in even more misery.

The proof of this is very simple: last Fall, the Congress and government began working on a bill that would 'Put money into people's pockets, fast,' in order to 'restart' the economy. It took several months to engineer this Xmas gift. I got my check the same week world energy prices hit their peak and food inflation was raging.

Afterwards, I figured out how much more I spent on food and fuel this last year compared to the year before and it came out to over $600. So my net gain was $0. This was true of all Americans. This inflationary rescue scheme merely fed inflation. Some foolish Americans spent this on goodies but this simply made their situation worse when inflation really took off after everyone got their checks in the mail".

And she references the BBC September 28, 2008 article Huge new Prime number Discovered to illustrate the underlying cause of the current world economic crisis: "This neat news story clearly shows us how magical numbers are. The goddess of Inflation is laughing. She is capable of running a paper fiat currency far beyond 13 million digits. Using the hyper-magical concept of 'zero'. Buried within this infinity of zeros added to the number one are unique numbers like the one these professors calculated via their computer banks. The goddess of Inflation has infinite computers that run all the time. She can outrun us when she wishes. Her son, Derivatives Beast sailed from $1 billion 30 years ago to a quadzillion dollars, most of it in the last four years. And it would have grown to infinity except the bankers ceased feeding this creature three weeks ago. This is the cause of the present stage of the panic, by the way. The $700 billion is NOT so we feed Main Street as the corrupt politicians are bellowing. Nor even Wall Street".

Investment Application
Austrian Economist Mike Mish Sheldon is still lost in grieving and can't provide any constructive investment suggestions; he keeps telling his readers to fax, fax, and fax Congress.

Trader Tim Knight in article Done Deal? provides this helpful graphic and relates: "The consensus seems to be that a watered-down version of the $700 billion boondoggle is being drafted and will be sent to the House for a vote on Monday. So much for the will of the public!

The big question, of course, is what will happen to the market? Will it Plunge at once? I doubt it; this is the "good news" people have been waiting for ... Enter a new bull market? pfft! ha! ... Soar, like it did September 18th and 19th, and then resume the fall, this time without the benefit of a huge new government program looming as a great new hope? This is what I'm thinking will happen. Many has tsk-tsk'd me for getting into my index puts too early. They may be right. But I've still got ample cash to increase my position at better prices, and I will view any surge as yet another shorting opportunity. There are few things one may count on in life, but on this one point I can assure you: Monday will be interesting.

I am concerned that brokerage accounts are not a safe place to hold money or investments. I know brokerage accounts are insured, but the concern comes from a massive liquidity meltdown, where if most all brokerages have a liquidity run or a liquidity drain, then the insurance would be overwhelmed.

Herb Greenburg in MarketWatch article How To Keep Your Investments Safe recommends a trust account for investments.

I recommend gold and gold alone, as an investment, and that one retain as much personal control over that as possible.

Despite the downside risk of a lower price of gold from its current $880 to $850, $820, $800, and even $775, with a falling Euro, I believe that gold relative to world stocks, GLD:EFA, and gold relative to US Stocks, GLD:VTI, will maintain value and soon rise considerably more than it has recently.

I suggest that to protect against the risk of loss of investment principal, both from market downturn and from brokerage shutdown, that one be invested in "physical gold" in four locations: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.

The financial markets have been severely stressed of late, and not even the 'mother of all bailouts' may be able to prevent a severe breakdown, with the result of economic and cultural chaos a possibility.

State corporatism will replace capitalism: here framework agreements, such as the Security and Prosperity Partnership, the SPP, replace traditional and constitutional law. Stakeholders are appoined to govern in global governance principles of civil security, and the decrees of working groups and councils such as the North American Competitiveness Council, the NACC. The stakeholders will oversee the factors of production and direct the use of natural resources for the purposes of the homeland.

Militarism and patriotism be synomous; and will be a cultural more.

Businesses will be tightly entertwined with government as we see from the Military.com and AdvertisingAge article Sears to Sell Army-Approved Clothing which announced that Soldier Chic isn't a new fashion trend, but now consumers will be able to buy officially endorsed military merchandise at their local department store.

The U.S. Army has officially licensed its First Infantry Division marks and insignias to Sears. Sears, Roebuck & Co. has signed a deal with the U.S. Army to launch the All American Army Brand's First Infantry Division clothing collection. It marks the first time the U.S. Army has officially licensed its marks and insignias; licensing fees will be used to support military programs for troops and their families.

Coming to Fashion Week

The president of Sears Apparel said the brand will be prominently featured during the retailer's Fall Forward fashion. The line will also be included in future marketing campaigns, including those slated for the holiday season. "Over the years, military-inspired clothing has played a distinct role in shaping fashion trends," Mr. Israel said. "We are now able to exclusively offer a line that is pure to the origins of that inspiration."

Military booster

The collection aims to simultaneously raise the profile of the U.S. Army and round out Sears' military program. The collection dovetails with Sears' "Heroes at Home" program, which provides home renovations to military families and has been promoted through twice-a-year marketing campaigns. Sears also has an extensive military-support program that includes community outreach and employee assistance, among other things.

Introduction
I have reproduced the report of World Socialist Website author Alan Whyte below.

Unfortunately, the New York Legislature decided this week to make most of its budget cuts on the Medicare program and less else where.

The cuts are so severe, that Medicaid is soon going to be a thing of the past in New York state -- physicians and clinics simply will not accept lower Meidicaid reimbursement; the clinics will most likely close.

My analysis is that the low income, the working class, the elderly and the disabled have just lost their health care.

And despite, the massive budget cuts, deficits loom, that are so large, government as it is currently conceived of and organized cannot function in the state of New York.

Unfortunately New York City and State, have both relied economically upon financialization and securitization provided by the investment banking and banking sectors. And now that those services are part of the bygone era of fiat wealth and investment prosperity, massive "black-hole type of deficits exist".

It's as Jesse and David Cho of the Washington Post report in article A Few Speculators Dominate the Vast Market for Oil Trading where Jesse states that: "A few large financial firms, Goldman Sachs and Vitol for example, were able to influence the rules on the exchanges to allow the manipulation of commodities prices, including oil and other energy products.

Enron was an early example of this new found power. The havoc this one company was able to inflict on the State of California is a microcosm of what is happening to the world today.

This report from The Washington Post shows what opened the door for this latest round of market manipulation. Goldman Sachs figures prominently in this story.

The Commodity Futures Modernization Act, along with the repeal of the Glass-Steagall Act, set in motion the events that are battering the financial system today in article How Phil Gramm and the Wall Street Investment Banks Helped to Destroy the US Financial System.

The worst is yet to come. The actions of the Fed and the Treasury are only serving to make the final outcome worse. We are heading inexorably towards an Abyss.

Until reforms are put back into place, and markets and governance are once again efficient and relatively free of corruption, and price discovery and asset allocation is restored to normal functioning, the economy will lurch from crisis to crisis until we are exhausted and collapse.

The best an individual can do is to try and make themselves, their wealth, their family, and their ongoing welfare as independent as possible from the US financial system."

My net analysis here is that the low income, the working class, the elderly and the disabled have just had their health care hit by a financial neutron bomb; yes the infrastructure of health care for the lower halve of society in New York state has just been destroyed by budgetary cuts.

The action of the legislature will immediately pauperized the lower halve of society; and has hastened the day of a financial system breakdown with the result that society will be pyramidal, with the elite at the top, and through stakeholders, from government and business, ruling in the global governance principles, of the Security and Prosperity Partnership of North America, that is The SPP.

I anticipated cuts in government services in my article Liquidation Thesis, where I wrote "government services and payments, service sector jobs, public and private debt of all types, and unfunded retiree benefits are going to be liquidated, that is done away with".

But I did not expect it to come this soon, and I did not expect the cuts to come out of Medicaid "right away"; I expected cuts to come out of general government services and education and transportation, which I see are taking place; but not out of Medicaid at first, like is currently happening.

New York State Legislature Passes Draconian Budget Cuts
In a special session of the New York State Legislature on August 20, lawmakers agreed with Democratic Governor David A. Paterson to make hundreds of millions of dollars in budget cuts in order to reduce the state’s budget deficit for this and future years. The cuts will immediately reduce the $122 billion budget for this fiscal year by $427 million. They are expected to cut next year’s budget by $1 billion and slash another $2.4 billion by fiscal year 2011-2012.

The legislature passed a 6 percent reduction in services, including $141 million in cuts to health care. This includes a reduction to Medicaid funding, which services the health needs of poor people, by $127 million.

The state cuts in payments to hospitals and nursing homes will be especially painful, due to the reduction in matching funds from the federal government.

There will also be a $97 million cut in aid to local governments for various health services, such as nutritional programs. The annual inflation-based increases for Medicare, the health care program for the elderly, have been capped, and this is expected to reduce spending by about $170 million every year.

There will also be a 7 percent reduction to the New York City university system, totaling $51 million, and cuts to various projects in the legislators’ districts, totaling $50 million

Immediately after the special session, the governor employed his own authority to make another round of cuts totaling $630 million. This included reducing the budget of the State University of New York system by $96 million and cutting the Dedicated Highway and Bridge Trust Fund by $41 million. He was able to do this by reducing state agency spending by 7 percent. This is in addition to his decision earlier this year to cut agency funding by 3.35 percent for a total spending reduction of $500 million, which was then followed by his decision to implement a state hiring freeze on June 30.

Social service providers have warned that these reductions will lead to a significant deterioration in vital services. “The cuts that were enacted will inflict real pain on health care providers, health care workers, and the New Yorkers they serve,” said the president of the Greater New York Hospital Association, Kenneth E. Raske.

This fiscal crunch—which is being reproduced in state after state—has been created by a growing credit crisis and recession that have dramatically reduced tax revenues. New York State’s financial condition has been thrown into particular crisis by the billions of dollars that Wall Street firms have lost, plus the layoffs of their employees. Altogether, Wall Street has accounted for about one fifth of the state’s income. The state comptroller, Thomas P. DiNapoli, has reported that tax receipts from businesses were $453 million below projections for the first quarter of the state’s fiscal year.

Before the cuts were passed, the governor’s office had projected that the budget deficit for the next fiscal year would be $6.4 billion, instead of an original estimate of $5 billion. Deficits for the next three years are now estimated to reach $26.2 billion, instead of the original estimate of $21.5 billion. Therefore, these cuts promise to be only the beginning of a series of future social service reductions aimed at offsetting the state’s ballooning deficits. Indeed, Paterson has already suggested that it might be necessary to recall the state’s lawmakers later this year to pass more budget cuts. He expressed concern that tax revenues could shrink further, due to a deepening downturn in corporate capital gains and the shrinking of the bonuses paid to Wall Street employees.

The decline of Wall Street and real estate taxes is also have an enormous impact on New York City’s budget deficit, which according to the city comptroller William C. Thompson is expected to grow from $68 million in fiscal year 2009, to more than $2 billion in 2010, and $5 billion in 2011. In March of this year, the city’s mayor, Michael Bloomberg, sent a letter to all city agencies ordering them to cut 3 percent of their budgets for this fiscal year, which began in July. This was on top of a 2.7 percent cut imposed during last fiscal year and a 4.4 percent budgetary reduction that was projected for the current year. This last cut included a special $324 million reduction to the Department of Education.

In addition, the Metropolitan Transportation Authority (MTA) is also suffering from a budget gap of nearly $900 million. This is partially a result of the falloff of monies earmarked for public transportation such as real estate taxes, due to a slowdown in that market, as well as rising costs, especially for fuel.

As a result, the authority is planning to increase fares next year, after just imposing a fare hike earlier this year. Moreover, the MTA’s budget projections are unrealistically optimistic, considering that the agency is counting on $300 million in additional support from the state and city, which given their own deficits, is nothing more than a fantasy. Indeed, at a recent meeting of the US Conference of Mayors, Bloomberg told reporters that the city is definitely not able to give the transit authority any additional money.

While the public transit system has seen a significant increase in ridership, a substantial share of it no doubt owing to commuters seeking to avoid high gas prices, the fare hikes mean one more attack on working-class living standards.

During the state’s special session, demonstrators gathered outside the Capitol building protesting cuts in health care. Protesters in wheel chairs assembled outside the governor’s office.

Various state employee union heads have also protested. Professional Staff Congress President Barbara Bowen complained that the educational cuts would “slash the only opportunity for college education for thousands of New Yorkers.” The public unions had spent millions of dollars in advertisements aimed at influencing Governor Paterson and the legislators to refrain from cutting programs involving their members.

These same unions predictably gave their support last year to the state’s Democratic Party candidates, and helped Paterson win election as lieutenant-governor, and Elliot Spitzer as governor. Paterson became the governor when Spitzer suddenly resigned in mid-March over a sex scandal, after having served only a little more than two months of his term.

In a year in which all the 212 state Senate and Assembly legislators are up for reelection this November, a number of unions had threatened to withhold their endorsements from any lawmaker who voted for budgetary reductions in education or health care. There was no indication that the threat had any impact. Both Democratic and Republican politicians voted overwhelming for the cuts. The Senate voted twice by a margin of 51-6 for the package, while the Assembly first voted 128-10 and then 131-7 to approve the draconian budget reductions.

On August 19, 2008, The New York State Fiscal Situation Was Described As Dire ... A 6.4 Billuon Dollar Deficit Is Being Estimated According To Bloomberg
Henry Goldman and Michael Quint of Bloomberg relate that "New York's Legislature will meet today at Governor David Paterson's request to consider a menu of spending cuts totaling $1 billion aimed at narrowing a $6.4 billion budget gap anticipated next fiscal year. While the Democratic-controlled Assembly favors higher income taxes for millionaires, Republicans who control the Senate say they are against any increase and oppose cutting health care, education or the workforce. Paterson has asked lawmakers to trim expenditures in the $121.3 billion budget before weighing higher taxes. 'What we're going to find out in the very near future is that we may have to do all of these things,' Paterson said ... The state's fiscal situation is 'more dire' than at any time since the Great Depression of the 1930s, he said."

On August 19, 2008, A Stand Off Exists Between Democrat And Republican California Legislators Over The State Budget
Justin Scheck of the Wall Street Journal reports that: "California's months-long budget standoff hit a low Sunday night when an emergency State Assembly meeting failed to produce a compromise between Democrats and Republicans over how to compensate for a shortfall exceeding $15 billion. At issue is the Democrats' proposal to make up for the deficit largely by increasing taxes on California's wealthiest residents -- a plan that Republicans oppose. In a vote Sunday, not a single Assembly Republican voted for the plan to raise $6.7 billion in revenue largely through income-tax increases. Republicans account for 32 of the assembly's 80 seats, but California requires that two-thirds of the legislature approve the budget. 'We're fundamentally saying 'no tax increases,' said Mike Villines, the Assembly Republican leader. If the tax standoff continues, California state workers could have their pay reduced to minimum wage, and the state could be forced to take out high-interest loans to fund ongoing operations

Related New York Woes
Patrick McGeehan of the New York Times relates: "With unemployment on the rise, New York State's jobless benefits fund is likely to run out of money again in early 2009, if not sooner, according to state officials and labor market analysts ... 'We know that the trust fund is not where we'd like it to be,' said Nancy E. Dunphy, the state Labor Department's deputy commissioner for employment security... Ms. Dunphy said the state fund, which is the source of all the standard unemployment benefits paid out to New York residents, now totals about $760 million. That is about $90 million less than at this time last year."

Keywords
newyork

Stocks rallied after the Fed announcement as hopes of further central bank interest rate cuts still remain
Briefing.com reports: "The Fed took a neutral tone in its latest directive, noting that there are both risks to inflation and growth. The Fed noted that although the economy grew in the second quarter, labor markets have "softened further" and financial markets remain under "considerable stress."

The statement was very similar to the June 25 release when the Fed also kept rates unchanged. One notable difference is in June the Fed said "upside risks to inflation and inflation expectations have increased," while the current statement says "upside risks to inflation are also of significant concern to the committee."

Dallas Fed President Fisher dissented, preferring an increase to the fed funds rate. This does not come as a surprise, as Fisher also dissented at the June 25 meeting, preferring a rise in the fed funds rate due to inflation risks.

The FOMC believes that inflation will moderate later this year and in 2009."

Economic nature cannot and will not be denied
The chart of the Russell 2000 Value shares, IWN, relative to the Russell 2000 Growth shares, IWO, daily IWN:IWO, has risen to hit June 1st to 9th resistance, and indicates that the age of financialized prosperity, and the age of liquidity coming through Federal Reserve liquidity provisions of continually lowering of interest rates and provisions of facilities of TAF, TSLF, and PDCF, has come to an end. Note how the IWN:IWO daily got oversold on July 16, as concern mounted over the GSEs Freddie Mac, FRE and Fannie MAE, FNM.

The weekly IWN:IWO weekly has been falling since the credit crisis broke out with the Citigroup CDO Bust of October 7, 2007; in the last four weeks it has rise now to hit resistance at 0.872, suggesting that the value shares, the ones most influenced by the financials, must now fall lower.

The rise of the interest rate on the 30 Year US Treasury Bond, $TYX, on March 18, 2008, and then again on July 14, 2008 in response to the TAF facilities, and the call of Bernanke for a rescue of the mortgage GSEs Freddie Mac, FRE, and Fannie Mae, FNM, indicates that a run on the US Treasury Bonds is underway.

The Liquidation Thesis is at work destroying aggregate debt, AGG, and US Treasuries, TLT; yes credit got a write down today on the very day of the Fed announcement. The Federal Reserve move to liquify and capitalize the GSEs was not well received by bond investors, they have been selling since the Ben Bernake called for a Rescue of Freddie Mac, FRE, and Fannie Mae, FNM.

The chart of the BRICS, EEB, shows that the TAF rally ended May 19, 2008, and it shows that yen carry traders sold out of some of their investment in mid-June in response to the Bank of Japan announcent that inflation is an investment risk factor.

The Microsoft MSN chart of USO, XLE, XME, OIH, GDX, and IYF relates that on July 15, 2008, immediately before options expiration, the yen carry traders sold out of oil, USO, to take profits, and to go long the financial stocks, IYF. This precipitated a disinvestment from energy production, energy service, metal manufacturing, and the HUI indexed precious metal shares. The sell off by the yen carry traders in oil effectively ended six profitable years of natural resource investing.

The Bespoke Investment Group in article Percentage of Stocks Trading Above 50-Day Moving Averages relates the limited scope of the sell off: only 3% of the energy stocks trade above their 50 day averages; the other sectors were not damaged.

And the selling of oil by the yen carry traders to take profit on oil disconnected gold stocks loose from the price of gold, as seen in the ratio of the gold stocks relative to the price of gold, GDX:GLD, terminating their long held leverage over gold. I have consistently encouraged investors to trade out of gold stocks for the real thing, both in this blog and in numerous FinancialSense.com articles.

Chart of the HUI indexed precious gold mining shares GDX shows a waterfall loss of value. There is a big difference between gold mining shares and gold; the former now resides below their May 1, 2008 value; and the latter above.

An Elliott Wave 3 Down has commenced in the EUR/JPY, FXE:FXY. This represents an unwinding of the yen carry trade. This is irreversable. The Elliott Wave 3s are the most dramatic and moving of all economic waves, they are the ones that build wealth on the way up and destroy wealth on the way down. So this action we see today in FXE:FXY is either an Elliott Wave 3 Down, or an Elliott Wave 1 Down, with an Elliott Wave 2 Up to come, and then followed later by an Elliott Wave 3 Down.

The Fed and the bankers would like to see a lower central bank interest rate. Mike Sheldon relates that PIMCO chief Bill Gross said on CNBC tht the central bank has a responsibility now to provide liquidity: "We're in an asset deflation of near-historic proportions. That calls for the use of the government's balance sheet and not for the Federal Reserve to raise interest rates," he said. "To the extent that the central banks now must prevent that deflation, interest rates don't go up, they go down." And of note Mr. Sheldon, the top leading Austrian Economist of the day adds: "With this backdrop, screams of inflation are ridiculous".

I do not think a lowering of any interest rates is going to happen, as disinvestment is coming from "the mother of all short sales", that being the EUR/JPY turning lower -- it has started an Elliott Wave 3 down: destruction of wealth is underway that will force the hand of the yen carry traders out of the bank stocks even though they were given a carrot, that is an incentive by the statement "The FOMC believes that inflation will moderate later this year and in 2009."

Furthermore, marketplace interest rates, $TYX are being called up by investors; I do not think the Fed will announce lower interest rates when market place interest rates are rising.

There comes a time when the Fed's announcements cannot rally or sustain. We have reached that point; the charts show the rally -- the GSE Rescue Rally has ended. The Fed cannot sustain the unstainable.

Interest rate differential investing is history as the commodity currencies are failed currencies; these have all collapsed.
The Australian dollar, FXA.
The Canadian dollar, FXC.
The Euro, FXE,

The Yen, FXY, is rising and will continue to rise relative to all the other currencies as investors sell currencies and stocks to repay their 0.5% interest loans. Or alternatively, its fall over time will be less than the other currencies as all fall lower in a death spiral lower together.

Mike Mish Sheldon relates that we have passed through Peak Credit and many Deflationary Hurricanes are working their way throughout society.

One deflationary hurricane manifested today with GMAC credit, falling lower; it did not participate in the "hope for Fed lowering the interest rate rally". GMAC credit weekly, GKM, shows three black crows. GMAC no longer can lend and it means GM is finished.

Yes finished despite the Tom Walsh Detroit Free Press report that The Detroit 3 Ask Up To $40 Billion In Loans: "Today's auto market is so volatile that GM, Ford and Chrysler cannot reliably predict how much help they will need from Washington to secure the big money to develop critical vehicles like GM's electric Chevrolet Volt, or retool to bring a slew of European small-car designs to the United States, as Ford is doing. But at least they have focused on access to capital as their most critical need, and communicated that to Washington. If these companies don't have access to money at reasonable interest rates, they won't survive long enough to worry whether they can meet the fuel-economy standards of 2020 or 2030".

Today's press coverage of the 'Big 3 Bailout Request' will quickly hasten the companies demise as suppliers ask for payment in advance of delivery, especially Chryslers collapse.

The economic truth is that the US automobile manufacturers are dead, dead and dead as Mike Mish Sheldon relates that the Default Risk On GM, Ford, and Chrysler Hits 95%.

Economic nature "will find a way" to call debt lower; perhaps the rating agencies will downgrade the mortgage backed securities; perhaps "the way lower" will come from the current credit gridlock intensify causing greater bankruptcy; or perhaps the way lower will come lower from intensifying foreclosures; perhaps the Elliott Wave 3 Down in EUR/JPY will force the hand of yen carry traders to sell the financial stocks; or perhaps tomorrow the stocks will simply fall lower; but definitely, economic nature "will find a way" to call debt lower and stocks will fall.

Charts of south sea bubbled ETFs and stocks
Charts show the end of the age of fiat wealth; these present as tremendous short selling opportunities:
HHK, Healthshares Cancer Weekly
XBI, Biotechnology Weekly
IHI, Medical Devices Weekly
SOHU, Sohu Inc, Chinese Internet Weekly
EDU, New Oriental, Chinese Education Weekly
LTC, LTC Properties

A number of ETFs or their stock equivalents were popped higher; like popcorn in the popper, they have popped and make for bear food; bears eat these; these are called bear food
A lot of these have debt or are debt related; the Federal Reserve Announcement Rally rallied the most financially offending ETFS and stocks.
IYF, Financial
FNM, Fannie Mae
ABK, Ambac, bond guarantor
MBI, MBIA, bond guarantor
WB, Wachovia bank, home loan lender
RF, Regions Financial, home loan lender
AIG, a leading insurance company loaded by sub prime debt.
RWR, REITS, got popped up to 200 day moving average.
KCE, Investment banking, got popped up to 50 day moving averge.
TUR, Turkey; it has manifesting a massive island reversal candlestick.
QQQQ, Nasdaq, got popped up to resistance.
XLI, Industrials, got popped to resistance.
PBS, Dynamic Meida
BJK, Gaming
XRT, Retail
PEJ, Leisure and entertainment
ROB, Global luxury
IYC, Consumer services
XLY, Consumer discretionary
KBE, Banks
KIE, Insurance
RZV, Small Cap Value
IYR, Real Estate

The Russell 2000, IWM, rose to almost 72; a level that I have covered quite a bit in my blog; this is the apex of a 'broadening top pattern' that goes back many months; and is strong resistance for the Russell 2000.

We have attained Peak Currencies and Peak Dollar
With the EUR/JPY, FXE:FXY, that is the yen carry trade having unwound we have passed through Peak Currency

World Currencies, DBV, has fallen lower.

We are now at Peak Dollar

US Dollar, $USD, closed at just under $74 which provides full retracement and strong resistance.

The economic forces that are at work now to drive the US dollar lower, will act to pull the stock market down as well.

Elaine Meinel Supkis commentary on the "true and undeniable nature of inflation"
Note the last sentence in the Briefing.com commentary above: "The FOMC believes that inflation will moderate later this year and in 2009".

It was that concept that enabled the stock market to rally today after the Fed announcement.

In timely fashion Elaine Meinel Supkis remarks in article Goddess Of Inflation Slips Out Of Sight Again, reveal the truth about inflation, which the Fed disregards and the Austrian Economists deny.

Today we look back into the not-so-murky past to see how insidious inflation can be. Today, the markets rejoice because they imagine they all can have fun and games by making funny money deals. Commodities are down! Well, this is not a new situation. It is an exact mirror of the great inflation years of 1970-1980. Also, I include the entire Federal Reserve press release about opening wider, the funny money window. This is inflationary. In the extreme. We all must understand that inflation, being a crafty goddess, looks 3 years into the future, not 3 months.

The Federal Reserve opened even wider, the temporary lending window they blasted into the side of the reserve vaults last Thanksgiving. At that time, note how they said it was all for just a few months to help everyone over a small glitch in banking systems collapsing. I laughed sardonically at that notion. The goal was, back then and today, to retrieve the lovely status quo of the Greenspan 1% lending era. Cheap loans, lots of dollars being made out of thin air, the Japanese carry trade, wild US real estate and stock markets, etc. This fabled time where the government of the US empire cut taxes, raised spending and went totally wild is now our ideal. All parties are most anxious to regain this glorious status quo. The idea that it is now history and will remain history, ie, in the past, is hard to accept. But until we finally accept reality, we will see inflation. For this is the only way of getting the machinery going again!

But inflation will kill the economy. So we try all sorts of schemes while making the funny money window wider. As usual, History tells us very clearly, inflation doesn't simply take off and that is that. She is probably the most wily of the monetary goddesses. She wears many disguises. The gnomes absolutely love her. She always makes them rapidly 'rich' and allows them to merrily bid up everything they want, carelessly and joyously. She moves silently with the old, raddled hag, Debt. Together, the lithesome, swift, smiling Inflation goddess holds grim Debt's hand and they move in tandem. Debt grows when lending is cheap. As Debt grows fatter, Inflation grows wings!

I was fresh out of Europe and very aware of the dying dollar. I was alarmed and shocked and warned everyone that the weak dollar was going to give us future problems. Every time inflation surged from 1970-1980, all sorts of schemes and plots were launched including very draconian ones like the infamous Nixon wage/price freeze, for example. Each of these schemes ultimately failed and each time, Inflation was stronger and swifter and nastier. Easy rule of thumb: the more one suppresses Inflation's speed artificially while still grinding out more 'money' the worse she is when she returns for more blood.

Squeeze US workers, run huge trade deficits and gaping, horrific government deficits funded nearly entirely by foreigners!

Why foreigners? So it would be 'off the books'! Inflation was literally exported. FOREX reserves across the planet bulged with excess US dollars. But the foreigners didn't mind, they were also the lenders who allowed this on every level. And benefitted from this new system that took the 1982 inflation and HID it from view! Now, it comes out in the open like clockwork, wave after wave. We are in the second inflationary wave since 1982. It is slipping away and people are now happy. 'It is over!' they shout on TV.

Well, it is NOT over at all! It is gathering force back underground and offshore.

Like the 4 inflation waves of the Stagflation Decade, the money destruction of bankruptcies and retractions in industry and trade cause the underlying inflation to moderate...slightly. But since the central bankers are very anxious to keep up the lending and increase debt, no sooner has this been accomplished when they boost debt and create a flood of funny money to bring prices of all ASSETS back up again. This, in turn, causes COMMODITY inflation!

(And she quotes the The Food and Agriculture Organization of the United Nations leads international efforts to defeat hunger (FAO.org) white paper 'Commodity Prices, Exchange Rates and the International Monetary System' by Dr Robert Mundell University Professor of Economics Columbia University 1999 Nobel Prize in Economic Science)

Dr Robert Mundell: I want to conclude by emphasizing that the current international monetary arrangements are far from optimal. They do not constitute a system. If the Balkanized world were suddenly transformed into a centralized empire, its first act would be to create a common currency that would be acceptable everywhere, with a great improvement in potential welfare. In the absence of a hegemonic empire, monetary efficiency depends on cooperation which in turn requires a world at peace that can be enforced. The end of the Cold War opened up a new era of globalization and the emergence of a global economy. As Paul Volcker has said, a global economy needs a global currency.

Elaine Meinel Supkis: HAHAHA. A global currency! Always, this is the most solvent empire. They determine the common trade currency. When they lose this, we get raging inflation and howling trade storms. The US is a declining empire. Its industrial base, in ruins. Its credit, in tatters. To paraphrase Monty Python's 'Meaning of Life'. The dream of a global currency is the dream of France and Germany and the euro is still amazingly strong but the political and economic power of Europe is not up to the task. This is because it is a lose, barely functional confederation. History tells us, confederations are bad at running global empires. This is why I expect China to pick up history's baton and wield it. The US cannot be the keystone currency value if we are deep, deep, deep in debt to the Chinese and Japanese empires. It is utterly impossible and we should end it swiftly while we have a chance.

Investment Application
Gold, $GOLD, closed at $886 and is still in outbreak since its May 1, 2008 price of $850 when institutional investors traded out of the financial stocks, IYF, and went long with the yen carry traders to invest in CRB commodity futures, mutual funds and ETFs. It was on that date that the world entered into Kondratieff Winter.

Despite gold's fall today, the investment demand for gold remains as seen in the following ratios:

Gold relative to stocks GLD:VTI
Gold relative to commoditioes GLD:RJI
Gold realative to oil GLD:USO
Gold relative to currencies GLD:DBV
gold relative to Treasuries, GLD:TLT

Given that we have passed through Peak Credit, and Peak Currencies; and given that we have arrived at Peak Dollar .... Gold, $GOLD, despite having fallen to $886; and having the potential to fall to $870 or $850, will arise to be the international currency Dr. Robert Mundell calls for.

Yes, the gold ETF, GLD, can easily fall to $84 or $83.

Those who have gold will be wealthy; and those who do not have gold will be pauperized.

The weekly chart of gold relative to the Yen, $GOLD:FXY, is most significant in understanding that gold goes beyond a commodity to being a currency. The currency traders used the Yen, the Euro, the Australian Dollar, and the Canadian Dollar, to take gold higher in response to the Citigroup CDO Bust of October 7, 2008. And then then in May 2008, the institutional investors traded out of the financial stocks, IYF, to invest in gold.

Now, that the currencies have died, gold is "own its own", this is especially the case given that oil, USO, is likely to fall lower.

A factor that will sustain and drive gold higher is rising market place interest rates; when ever the central are below market place interest rates, gold by nature bubbles higher.

I also favor gold because it is an "investment safe haven" in times of political and economic turmoil.

It is critical to understand that a Western World Government is a matter of historical fact and that it is the ruling political power in Euro Asia and in the North American continent.

The Western World Government was established by a framework agreement of European and US leaders on April 30, 2007 and was announced at the EU US Summit of April 30, 2007

The framework agreement was based upon success from prior meetings as documented by a number of sources such as Sumario: June 23, 2003: EU-US Summit - Washington, 25 June 2003 (Brussels) and Press Release of 6-20-2005 EU-US Summit

Given the framework agreement announced by the leaders, principles of global governance now supersede Constitutional law and national laws.

I have written a lot about multiple systemic risk potential events such as in the article Tax Exempt Mutual Fund Investors Could Suffer More Than Other Investors When The Coming Financial Breakdown Starts.

When the systemic risk event materializes, a financial emergency will turn into a greater political and economic emergency where principles of global governance security and prosperity will be enforced.

The EU US Western World Government Graduated It First Police Force Class in Garmisch Germany on July 31, 2008. The class prepared forty two military and civilian emergency management officials from 25 countries to address, prepare for and respond to catastrophic events. It took an all-hazards approach to the developing field of civil security which includes civil defense, homeland security and crisis management. For years, many nations lacked a formal framework for the concept of civil security; but now civilian military cooperation and international cooperation is the announced ethic and way of dealing with catastrophic events.

The trans-Atlantic partnership and trans-world leadership and means are now in place to deploy military peacekeeping forces anywhere in the European and North American Continent to deal with evolving political and economic emergency.

Such a deployment will certainly favor those invested in gold.

I recommend that one have a diversified wealth preservation investment strategy; it's much like having a three legged stool:
1) gold at BullionVault.com and
2) gold at GoldMoney.com and
3) ETFs and mutual funds GLD, SKF, RYWJX, and TBT, in a trust account and not a brokerage account.

The chart of SKF, in late day trading shows how it has been beaten down, presenting the opportunity for an invesment.

For the wealthy, I strongly recommend opening a Forex currency trading account and going short EUR/JPY, and short USD/JPY which closed at 108.37 is strong resistance; it particularly fits well into my investment maxim: "In a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength".

Yes, the wealthy should take note of the scientific investment research: The author in Calendar Yen Trading Patterns provides historical record that EUR/JPY and USD/JPY is frequently down in the month of August; well, we are already one week into August; the seasonal drop in both of these currency pairs, will awesomely exasperate the unwinding that is just now starting to occur in stocks and currencies. Said another way: "The mother of all Elliott Wave 3 Downs is at hand in the EUR/JPY and the USD/JPY".

The yen carry trade unwound Thursday January 24, 2008
The yen carry trade unwound as Martin Crutsinger Associated Press related the National Association of Realtor Report that sales of existing homes fell more sharply than expected in June. Sales dropped by 2.6 percent last month to a seasonally adjusted annual rate of 4.86 million units which left sales 15.5 percent below where they were a year ago. The drop in sales pushed inventories of unsold single-family homes and condominiums to 4.49 million units. That represented a 11.1 month supply at the June sales pace, the second highest level in the past 24 years.

The unwinding of the yen carry trade can be seen in the EUR/JPY, FXE:FXY, which is the barometer of the yen carry trade, falling to 1.690 yesterday.

The EUR/JPY recovered today as the euro, FXY, rose against the dollar after European Central Bank council member Klaus Liebscher said policy makers have room to raise interest rates a second time this year even as economic growth falters; this caused gold, GLD to rise to 91.47, and the EUR/JPY, FXE:FXY, the barometer of the Yen Carry Trade, to rise to 1.704; while oil, USO, fell to 100.02. Industrial metals, JJM, sank 2% to 46.74. The USD/JPY zoomed back higher to 107.28; as the yen, FXY, fell to 92.46; note: amounts and percentages are intraday and are likely to vary before closing.

Yesterday, the stock market failed at major resistance -- the bear market is fully underway again
Kevin's Market blog graphically shows that The Dow fails at major riesistance.

The investment demand for gold remains resilient despite a faltering Aussie and Loonie
The Australian Dollar, FXA, fell; it will not be achieving parity; and it is no longer a yen carry trade interest rate differentially favored investment destination as Ron Harui and Candice Zachariahs of Bloomberg report Aussie Dollar Set for Weekly Loss as Banking Losses Mount .

The chart of the Canadian Dollar, FXC, is in a bearish pattern and it fell like a rock today as Bloomberg's Jamie McGee reports that Canada's Dollar Poised for Weekly Decline on Oil, Sales Data.

The Euro, FXE, The Australian Dollar, FXA, and the Canadian Dollar, FXC, have been the gold and natural resource currencies, that have been used to take gold higher; now that risk aversion to natural resource investing is rising; and oil prices are falling, lending liquidity from the Bank of Japan at 0.5% interest did not flow into these last two currencies today; this may hurt the traditional logic for investing in gold. However an investment demand for gold remains strong as the stock markets tanks; this is seen in the ratio of gold relative to stocks, GLD:VTI, remaining firm.

We have passed through Peak Currency; all currencies are now in a death spiral lower with the US Dollar
We are seeing disinvestment from traditional long the Aussie and short the Yen based on risk aversion to debt; and we are seeing disinvestment from long the Loonie and short the Yen due to risk aversion to stagflation.

The Yen, FXY, although down today, will be rising for a period of time before it begins to fall lower as well; the source of the rise being falling stock markets globally and investors buying yen to repay their 0.5% carry trade loans.

There is a reversal now of interest rate differential currency investing. For ever and ever, investors saw natural resources stocks rising. And therefore went long the Aussie. But now as referenced above, the natural resource stocks like Kinross Gold Corporation, KGC, which suffered eleven percent loss and manifested three black crows, have sold off. This means there will be deflation, not inflation in currency pair investing.

Gold, GLD, is rising; for the common investor and all investors for that matter, gold is the now sole means of maintaining wealth; even if it, for a time falls lower now that the gold currencies are failing.

Gold is likely to jump higher from time to time, as investors leap out of stocks and into gold, in a "desperation jump" to preserve wealth.

My heart really goes out to the retired fixed income investors living off of Treasuries, TLT, zero coupon bond funds, BTTRX, and utility stocks and ETFs, such as VPU; these will see not only their capital rapidly depleted but their income as well as interest rates, such as that on the 30 year US Treasury Bond, $TYX, and inflation move higher as investors are risk averse Treasuries being contaminated by Fannie Mae And Freddie Mac Rescue liquidity and capitalization. The nationalization of the US mortgage backed securities onto the backs of the US taxpayers, has been driving $TYX higher since the Rescue was announced.

The yen carry traders are definitely in a pickle; their traditional strategies are failing.

The neoliberal Milton Friedman floating currency regime and its policies has met its Waterloo suffering defeat at the hands of gold investors as is seen in the currency harvest, DBV, falling, and gold, GLD, rising.

The world currencies have tanked and are now sinking; gold has risen supreme over stocks, bonds and all currencies.

An investment sea change has occurred: currencies are no longer floating, they are sinking.

Speculators may be borrowing from the Bank of Japan to go long gold in the futures market, or invest in gold ETFs such as GLD and IAU.

Those with access to the 0.5% Bank of Japan lending window will now be going short the markets to garner wealth; which will only increase the Deflationary Hurricanes that Mike Mish Sheldon references.

The investment demand for gold remained resilient today as disinvestment from stocks is rapidly getting underway, as can be seen in the ratio of gold relative to stocks, GLD:VTI, rising; and the ratio of gold relative to oil, GLD:USO, rising as well.

The Great Unwinding Of Investments Commences
The springs of liquidity and spigots of liquidity for stock investing have run dry and have been turned off

Jesse in report Bank Credit and Money Supply Growth shows a downturn in the "growth" of Bank Credit, MZM, M2 and M3. This documents the twin spigots used to generate fiat wealth in stocks and bonds have been turned off; these being the easy credit of the US Central Bank in TAF, TSFL and PDCF facilities, as well as the Bank of Japan, 0.5% interest loans.

The turning off of liquidity is seen in the daily chart of the barometer of the yen carry trade, that is EUR/JPY, FXE:FXY, where this metric recently turned down to 1.670, then bounced back up to an all time high in short sell covering, then fell lower to 1.690, and now is back up to 1.70, but beneath its all time high.

This turning off of liquidity is seen particularly well in the fall in margin credit and yen carry trade favored stocks, particularly the BRICS, EEB, on May 19, 2008; and then again in June, as the May 2008, Bank of Japan minutes were released indicating that inflation is an increased investment risk factor, and now today, with a significant fall lower to 44.43.

Inflation is a major factor in demand destruction at work in turning down stock such as Dow Chemical, DOW.

The ability of corporations to continually being able to wring out profits is done and over; its like a towel being wrong out; their is a maximum to what can be achieved; and that maximum has been achieved.

David Rosenberg of Merrill Lynch relates that EPS To See 35% Correction, PDF report: "The decline in domestic economic activity, steadily climbing input costs and diminished support from currency translation is likely to result in a sharp downturn in EPS, in our view. We see EPS operating earnings at 68.0 in 2008 (down 17.7% from 2007) and 63.0 in 2009 (down 7.2%). That translates into a 35% decline in EPS from the peak in 2006.

"We have been saying all along that the slowdown in the economy is not about the business sector. Balance sheets, outside the financial sector and the perennially restructuring auto sector are relatively healthy. However, the toxic combination of declining revenues and soaring costs mean that few sectors will escape this downturn with profit margins intact."

Going back to the liquidity information: the dwindling of liquidity is stock and bond deflationary: just as increasing liquidity bubbled wealth up, decreasing liquidity will ratchet wealth down.

Multiple systemic risk events are at hand: one being the credit gridlock causing a commercial lending freeze-up causing a massive increase in bankruptcies; this puts those who are long in currencies at risk.

Misery increases And Societies Become More Pyramidal
Patrick McGee of CEP news reports that unemployment came in higher that the 380K expected: U.S. Jobless Claims Soar to 406K in Week Ending July 19, 2008.

Not only are peoples are being pushed down economically, authoritarian rule is on the rise as WSWS.org author Ajay PrakashSarkozy reports that the Sarkozy government implements repressive police measures.

We have passed from one age into another -- gold is the means of preserving wealth
The age of 'investment prosperity is over' and the age of 'financial disinvestment and instability', and the age of 'state corporate rule' are rising.

One might ask, "How is state corporate rule rising"?

The leaders have announced two 'framework agreements': the Security and Prosperity Partnership of North America, the SPP, and the Declaration of EU US 2008. These give them authority to address events that threaten economic stability, and which provide for economic competitiveness. The leaders have appointed councils, working groups and stakeholders, who work in global government principles and policies of security and prosperity.

Kondratieff Winter has come to the people of the world.

My investment recommendation remains unchanged: I recommend that one dollar cost average a buy in gold within the next ten days with a diversified investment in gold at BullionVault.com, GoldMoney, and in a gold ETF, in a trust account, in Switzerland.

End of Day Charts
The US Dollar, $USD, remained unchanged; and Gold, $GOLD, rose 0.84% to close at $930.03.

Corey Rosenbloom in article Gold Takes An Unexpected Swing provides the chart of gold, $GOLD, showing its outbreak from former consolidation; with $890 forming a strong base of support.

Related Reading
My recent article Peak Dollar