it is true?? is this the end of the usa dollar????? and huge rise in gold??

[michael]

 

 

By Patrick A. Heller, Market Update

September 09, 2008

 

 

 

On Sept. 7, U.S. Treasury Secretary Henry Paulson announced plans for the federal government to seize control of troubled mortgage lenders/buyers Fannie Mae and Freddie Mac.

 

The two companies will be placed in conservatorship under management of the Federal Housing Finance Agency. As part of the agreement, the federal government will receive some $1 billion of senior preferred stock in each company plus warrants for a right to a 79.9 percent stake in each company. In return, the federal government has agreed to provide as much equity capital as needed to cover all future losses from mortgage defaults.

 

The two companies together hold over $5 trillion in residential real estate mortgages, roughly half of the entire U.S. market. In the 12 months ended June 30, 2008, the two companies had reported a combined $14 billion in losses.

 

Fannie Mae and Freddie Mac have almost $200 billion in short-term debt that was maturing in the next four weeks. The prospects of rolling over this debt were so poor that government officials feared an imminent failure of the real estate mortgage market. By taking over the two companies, the federal government is able to prevent the immediate collapse of this market.

 

Government officials are promulgating the BIG LIE in trying to understate how much this takeover will cost the federal government (i.e., taxpayers). Almost every news report I have heard or read cites the Congressional Budget Office cost estimate of only $25 billion.

 

Conservatively, that is a TRILLION DOLLAR LIE!

 

As of June 30, 2008, according to the most recent survey from the Mortgage Bankers Association, 9.2% of all one-to-four family home mortgages were at least one month overdue or already in foreclosure. This is the highest delinquency rate in the 39-year history of this survey.

 

Even the highest quality debt can only be dumped right now for, at most, 80 percent of face value. This assumes that there is no major disgorging of mortgages from Fannie Mae, Freddie Mac, or anyone else. Any program of massive sales of mortgages would almost certainly increase the discount from face value of all debt.

 

With Fannie Mae and Freddie Mac holding $5 trillion in mortgages, and under orders to sharply trim their portfolios - each company is to have a maximum of $850 billion by the end of 2009, then keep whittling down until they only hold $250 billion in mortgage - the U.S. government has, in effect, just absorbed $1 trillion in immediate losses.

 

The federal government already has more than $9 trillion in acknowledged debt plus is on the hook for around $70 trillion in unfunded future liabilities (such as Social Security and Medicare). So where is the federal government going to come up with an extra trillion dollars (and possibly more) to bail out Fannie Mae and Freddie Mac?

 

Governments can only obtain resources from the private sector. It can confiscate it through higher taxes, borrow it by issuing more debt, or steal it through inflation by increasing the money supply. To cover the costs of the takeover, the federal government is going to have to take at least one of these steps.

 

Raising taxes will hurt the economy even further, so I don't expect the costs to be covered by that route. The U.S. government has ramped up its borrowing so much that it can only try to float more debt by raising the interest rate paid on all future debt. That leaves inflating the money supply as the politically easy means of financing the seizure of Fannie Mae and Freddie Mac.

 

Unfortunately for the federal government, an inflationary rise in the money supply will hurt the value of the U.S. dollar. The largest holders of U.S. government debt are foreign governments and central banks. So far, they have largely held together in not dumping large quantities of U.S. government debt.

 

I think it is inevitable that the takeover of Fannie Mae and Freddie Mac will be the final crack in the dam that causes one or more of the major holders of U.S. government debt to bail out. I expect a flood of foreign-held U.S. dollars and dollar-denominated debt to flow back to the U.S. This will accelerate the decline of the U.S. dollar, relative to other currencies and also in absolute terms. In order to persuade anyone to take U.S. debt, interest rates will have to soar and greater collateral will have to be pledged.

 

In my judgment, now that the U.S. government has taken control of these Fannie Mae and Freddie Mac, we are locked into the end of the U.S. dollar as we know it.

 

Even though the eventual result of this takeover is easy to comprehend, almost nobody seems to grasp the implications of what has happened. This is exactly what U.S. government officials want. That the takeover was going to happen someday was pretty much a foregone conclusion for at least the last month. However, the general public was mostly ignoring the situation, assuming that if there was a problem, the government would, of course, take care of it.

 

To lull the general public into thinking that this weekend's takeover was the right step to take and that it will somehow avert a crisis, the U.S. government has pulled out all the stops early this week. Even though the U.S. government is now more broke than it was last week, the markets have been manipulated so that the relative value of the U.S. dollar has increased, the U.S. stock markets have rallied, interest rates have been held in check, and gold and silver - alternative currencies to which holders of U.S. dollars might switch - have seen their prices fall to their lowest levels of 2008.

 

This market manipulation by the U.S. government and its trading partners may only last a few days or it may last a few months. It will end someday, perhaps very soon. Once the tide turns, I expect we will then see the largest ever percentage rise in the prices of gold and silver.

 

I also predict that at least one nation will come out with a gold-backed currency. If that happens, the U.S. dollar will be on the way out. Enjoy acquiring precious metals at today's bargain prices.

[michael]

is it truuuuuuuuuuuuuuuuuuuuuuuuuuuue??

 

IS IT TRUE??????

[physics-fan3.14]

Taking the $70 trillion figure at face value, then another trillion on top of that is trivial. The $70 trillion figure is using future debts, which is always risky and up for interpretation, but I don't think that it will get that bad: the system will have to collapse before then.

 

The people have generally become complacent: the government knows all and will take care of all. There is nothing to worry about, because if I or anyone or even the country gets into trouble, the government will fix it.

 

Didn't you hear that we were going to start using Euro's next year? The dollar has been replaced.

 

 

[EZ_E]

There is zero doubt that eventually, one day, our economy will collapse.

 

It is not a matter of if but when.

 

Neither a household nor a business could operate like the US Government and expect to remain solvent for long.

[just-john]

every great economy in history has collapsed our government has done a good job preparing us for it .Look at the news from the Olympics with the metal count our news said we lead everyone in the number of medals won .What would George Patton say about that

if you saw the move you know.The good news is 20 million illegals have found jobs here

the bad news it doesn't show on the employment numbers.The good news is they are paying into somebody's social security bad news when you get it you better like the taste of dog food because thats all you can afford.

 

"China has been the world’s largest economy for 18 of the past 20 centuries

http://en.wikipedia.org/wiki/Economic_history_of_China

[EZ_E]

 

"China has been the world’s largest economy for 18 of the past 20 centuries

http://en.wikipedia.org/wiki/Economic_history_of_China

 

Cool read, John! Of course I have a special interest in it since my wife is Chinese and I'm learning Mandarin now. (thumbs u

[James_OldeTowne]

I think that without a doubt, the key to personal financial safety is to minimize debt. Get your credit cards, car(s) and student loan(s) paid for as quickly as you can (in that order), then get your mortgage debt down. I anticipate staying poor for years to come, but at least I've managed to limit my debts somewhat. A cheap home is the key !

[EZ_E]

I think that without a doubt, the key to personal financial safety is to minimize debt. Get your credit cards, car(s) and student loan(s) paid for as quickly as you can (in that order), then get your mortgage debt down. I anticipate staying poor for years to come, but at least I've managed to limit my debts somewhat. A cheap home is the key !

 

That is exactly right!

[physics-fan3.14]

and student loan(s) paid for as quickly as you can

 

Now why would I want to do that when the nice people offered me a 20 year term? Seriously, though, I strongly agree. I never put more on my credit card than I can pay off that month. While I haven't gotten around to the house buying part yet, my philosophy will be to buy a fixer-upper and save lots of money (years of working construction with my dad has got to be good for something, right?).

 

Any individual, family, company, or country that continues to borrow more than they make will go bankrupt, there's just no way around it. As you can see, currently the interest on the debt only accounts for 9% of the budget. This number is not shrinking - the US is doing one of those sorts of repayment plans that are getting homeowners into so much trouble these days and only making small payments on the interest. Where will this lead?

 

[DC Dawg]

There is zero doubt that eventually, one day, our economy will collapse.

 

It is not a matter of if but when.

What makes you think it hasn't and that everything else is just a mirage.

 

Neither a household nor a business could operate like the US Government and expect to remain solvent for long.

Except that unlike a household or business, the US government has the ability to create money. One quick call to Ben Bernanke, Ed Moy, and Larry Felix, the government can create it and force the regional Feds to buy it. Another call to Henry Paulson and the Office of Currency Control can dump more debt bonds in China.

There you have it... instant money!

 

Scott

[EZ_E]

I reckon that you're right, Scott, concerning the when. The dollar has lost 40% of its value in the past 6 years. That's pretty damn drastic! I certainly haven't seen a corresponding increase in my salary.

 

 

Actually, when I wrote the second line I thought to myself that it would be nice to print more money when in need. :þ

[Oldtrader3]

When all of the Economic 8 Powers and China are partners in our Debt, Bonds, Derivatives and Freddie/Fannie mortgage obligations, we can not fail. The rest of the world can not afford our failure any more than we can. We have allowed ourselves to be weakened through greed and poor monetary decisions. We have to fix what is broken!

 

The Fed has no choice but to make good on our promises to guarantee this debt. If we don't, our system and our currency becomes nearly worthless and we all are in the soup. Sloganeering, pointing fingers and wistful thinking are not appropriate responses to the present problem. We all need to prepare for a belt tightening and delivering on our financial promises to the world or we will have a financial contraction that would make 1929 seem like a tea party.

 

It is time for the hand wringing to be replaced by a concerted effort to make our economy stronger and work through this adversity. This means that we are are the Government and have to work to make the Government successful through the financial challenges ahead. This is a world Central Bank problem where all of us need to cooperate and work to get out of this financial morass that we are in. Creativity and hard work are the answer, not wringing hands and saying I told you so. This is not a Political Party problem, it is a nonpartisan, world economic problem that requires strength, cooperation and creative problem solving to work through this monetary crisis. National debt and money supply expansion are symptoms of a bigger credibility problem. Confidence in our financial system and in our currency are what is needed by all financial institutions who are involved.

 

Alluding to the timely collapse of our system is not appropriate right now. Creative financial solutions and hard work to fix our banking system and restoring our credit system worth are what is needed at this point in history.

 

Entitlements are not and should not be the problem. Earmark spending, defense spending and waste are the real issues. Fix those and the rest will fall in line.

[just-john]

they still don't get it. I'll borrow all the money and give you 5% but you money plus the 5%

won't buy 1/2 of what it does today when they are paid back.Thats why were capitalists and their not

[jackson64]

great post OldTrader....what is often overlooked is the inter-connectedness of the World Economy..

 

of course foreign countries will continue to prop up the American economy--we fill a vital niche as the World's Consumers..

 

who will buy the $20 boom boxes and cheap products from Malaysia, China, Singapore, Indonesia, Guatamala, Mexico etc. etc.. if our economy dies..?

 

rising economies like China are dependant on our consumerism to provide jobs to millions of their underclass...thus saving their government from extensive social programs..

 

not to mention French wines, Italian suits and shoes, german autos, japanese gadgets/electronics...you get the picture...it is also in their own interest to buy American debt as opposed to the costs/issues that these countries would face if they lost the lions share of their market for goods and millions became unemployed

[World Colonial]

The answer to the original question now is "no". I have to go to work now but the idea that entitlements are not a huge problem is preposterous. This along with world policing is why spending and the national debt have soared. I would slash military spending, eliminate most Federal entitlement programs completely and phase out all the others. Then I would lower Federal taxes and let the states pick up the responsibility. But most people would be opposed to that because then there would limits to government spending because they cannot print money, and this is exactly why that should happen.

[Oldtrader3]

World Colonial,

You need to remember that a large percentage of the funds which are labeled Entitlements are Social Security and Medicare funding. Medicare and Social Security are largely paid for by collection of separate payroll tax revenues that are earmarked solely for that purpose. Plus, Medicare is also funded by premiums which are paid by every person receiving Social Security benefits. My wife and I pay nearly $200./month in Medicare Insurance premiums out of our Social Security Income.

 

The largest issue with the Social Security entitlement is the misappropriation of all surplus payroll taxes since 1964. Social Security surplus revenues have been diverted into "Earmark" programs and/or spending for various Wars. Much of this Social Security surplus has also been diverted into spending which is outside of the annual Federal Budget. These separate payroll taxes were never legally intended to be diverted out of the Social Security entitlement fund. However, because of this spurious diversion of surplus funds, Social Security is underfunded and will run out of funding apparently, in 2040 or thereabouts.

 

When younger people rail about the cost of entitlements, I wonder if they truly understand the mechanics of how the specific entitlements for Social Security and Medicare have been unlawfully diverted away from their intended purpose by our elected politicians. To me this diversion of payroll taxes away from their intended entitlement fund is the real issue, not the payment of entitlements themselves.

[jtryka]

The government will never be disciplined fiscally as long as they have the power to create "money" from thin air. If they actually had to go out and physically borrow what they wanted to spend (i.e. the war bond drives of WWII) rather than sending a memo to Hank and Ben to create it, we would have a whole different situation.

[World Colonial]

I am familiar with all that you state but let me clarify my prior post.

 

Technically, Social Security and Medicare are not entitlements. Though for Social Security, the disability and survivors benefits practically are.

 

I agree that diverting payroll taxes into the general fund is a fraud. And so is the farce of the so-called "trust fund" and the notion that their is a "surplus". This surplus is not economic, but an accounting book keeping entry because Social Security is not a distinct entity from the rest of the federal government no matter what anyone says. (We even found that out with FNM and FRE last weekend and they were supposedly private entities.) So it does not matter whether the balance in this "trust fund" is infinite or zero. Eventually when Social Security experiences a cash flow deficit, it will have to sell the "trust fund" securities. But from a practical standpoint to pay benefits, it will not matter whether the funds come from the "trust fund" or from the general revenue fund. So in actuality, it will run out of funds whenever benefit payments exceed payroll taxes, and not when this mythical "trust fund" is exhausted. This means that Social Security is in even worse shape than you think it is.

 

But there really aren't many other options for this current surplus without letting the participant's directly control their "contributions" and that is not going to happen. As it it is managed now, investing in the private markets would be even worse in my opinion because I would not want the government controlling any more of the private economy than they do now.

 

The problems I have with Social Security and Medicare are as follows, which is why I want to phase it out:

 

The system is compulsory.

 

Benefits received are not directly proportional to the "contributions" made. It is a quasi-welfare program for low income earners.

 

Participants have absolutely no private property rights in the system. If I died today, my beneficiaries would (I believe) either get zero or a whopping $255.

 

But my reply to your post was based more upon my understanding that if only the government were more "efficient" , that the social programs we have now would be sustainable. I do not believe that but even if I did, I would still want them abolished and sent back to the states.

 

By my definition, most federal government spending is unconstitutional and money thrown down endless ratholes. Most people do not agree with that because they are supporters of the democratic welfare state, which is the system we have.

[just-john]

golds down dollar 's up world didn't end ====don't worry be happy

[Conder101]

So in actuality, it will run out of funds whenever benefit payments exceed payroll taxes, and not when this mythical "trust fund" is exhausted. This means that Social Security is in even worse shape than you think it is.

Agreed, and for SS that's in about 4 to 6 years. Then the government will have to increase borrowing to start paying off the IOUs in the so called Trust fund.

 

Rant follows feel free to ignore.

 

Medicare is going to have it's own problems and so will the people depending on them. Medicare is once again discussing making significant cuts in disbursements to doctors and hospitals and are adding more and more treatment and procedures to their list of things they will not reimburse the doctors for. (And under Medicares' rules the docor is not allowed to bill the patient for those procedures that Medicare disallows. The doctor or hospital has to eat the bill.) A lot of doctors and hospitals are starting to seriously consider no longer accepting medicare patients.

 

Medicare is also become penny-wise and pound foolish on trying to keep the costs down. Everyone know that it is much cheaper to catch and treat diseases especially cancer, early rather than wait until it is fully developed. But they now no longer pay for early screening tests, but they won't pay for treatment unless the tests show the diseases presence.

 

Colon cancer is a good example. Almost 100% curable if caught early. It used to be a colonoscopy was done in the doctors office and cost $400 and Medicare paid for it. Then Medicare decided it was a surgical procedure and so had to be done in the hospital, cost $2,200. Then they decided that since it was a screening procedure, they wouldn't pay for it. Now when the patient comes into the hospital (sometimes in the doctors office takes care of this) they have to be told that "because it is a test, Medicare won't pay for it. Do you still want to do the test?" and asked to sign an ABN (Advanced Benificiary Notice) I've had a lot of shocked patients tell me "But I've never had to pay for it before!" The reason? We, the hospital, aren't allowed to bill them for it. So the hospital, or a combination of the doctor and the hospital, wind up writing off the bill. (and the cost gets passed on to everyone else, especially those with private insurance. Thank you Medicare. They save money on the test, the doctors are more reluctant to order tests because the money comes out of their and the hospitals pockets, and the patient often doesn't get tested as often and is more likely to develop cancer that has to be aggressively treated, and then Medicare loses money by having to spent a LOT more money on the later term aggressive treatment than they saved on the tests. And people die who could have been cured with early or more frequent testing.

[World Colonial]

I do not know the specifics of Medicare operations and will defer to you. But from an economic standpoint, the soaring medical costs the US has experieced since its creation (along with Medicaid) in the 1960's are entirely predictable as they always are for any area of the economy that is as grossly distorted by the government as this one is. The same thing has happened with the two other largest areas in which the government has involved itself in, housing and "education".

 

The reason for these soaring costs is because whenever demand is not directly based upon the end user's ability to pay, providers will always raise their prices as much as they possibly can and the artifically induced demand will create a strain on the economic resources available to provide these services. Or in the case of housing, it created a credit and debt bubble which sent market prices to Bizarro world levels in many places or made them less affordable than they should have been in all or almost every other.