To a degree that few appreciate, the rapid development of the BRIC economies, especially India and China, implies a write-off of trillions in middle class wealth that prices in assumptions of economic dormancy in the rest of the world.

To download the issue go to: http://strategicinvestment.com/issues/si_june_2010_issue.pdf

To download the issue go to: http://strategicinvestment.com/issues/si_april_2010_issue.pdf

“Deficit Attention Disorder,” that is.

So does the majority of our birdbrained Congress.

They proved themselves remorselessly determined to squander another $938 billion out of an empty pocket to enact bad health care ideas from a smoker.
What are they thinking?

Obviously, they don’t read Strategic Investment.

Click here to view the issue

“For well you know that it’s a fool who plays it cool by making his world a little colder.”

– The Beatles

Click here to view the issue

When Mount Vesuvius startled rumbling in AD 79, it was time to get out of Pompeii.

Sure, there were those who said it would all blow over. As it turned out, they were wrong. The volcano erupted and buried the whole city under lava and ash.

Now a financial Vesuvius is erupting.

Lord Rees-Mogg is the former editor-in-chief of The Times newspaper and a member of the British House of Lords. His book, The Reigning Error: The Crisis of World Inflation (1974) outlined the fallacy of relying on printing press money to achieve prosperity. He accurately forecast glasnost, the 1987 crash and the fall of the Berlin Wall.

He is currently the editor of the Fleet Street Letter, the oldest newsletter in the English language.

We are in the middle of the worst financial crisis in living memory. And we face a global slump on the scale of the Great Depression.

Never before has so much wealth disappeared in such a short time U.S. wealth has shrunk for six consecutive quarters. The latest quarterly “flow of funds” data from the Fed showed the total net worth of households fell 9.0% to $51.48 trillion in the fourth quarter from $56.59 trillion in the third quarter of last year.

Since its 2007 peak, the Dow is still down 38 percent, despite the recent rally. The S&P 500 is down almost 40 percent.

The meltdown has hurt even the world’s smartest investors. Take Warren Buffet’s mighty Berkshire Hathaway. It’s down 38% percent since January.
This is a crucial moment.

Because decisions we make now will affect the rest of our lives.

The losses are staggering. But they are just the beginning.

Most of the damage is still ahead.

In just a moment, we´ll explain why…

The Government Can’t Fix This

Most people have no idea how financial crises work.

They believe the calming words of Bernanke, Geithner, and Obama. They think the whole thing will “just blow over.”

They say to themselves, “The government will save us. Everything will be fine.”

This crisis is moving fast.

Stay on top of events with critical updates from Contrarian Profits.

These will be delivered via Notes from the Investment Underground, a new daily email service that reveals how you can prevail in the coming bad years.

Simply enter your email below to get your first issue. This service is FREE to readers of this report.

But there is simply no evidence in the historical record that the financial authorities can stop a “great unwinding” like the one we are in the grip of right now.

They can hold it off for a while. They can distort it. They can make it worse. But there is no evidence that they can make it better.

Why?

Because losses are losses. Mistakes are mistakes. They don’t go away when government throws money at them.

As president of Euro Pacific Capital Peter Schiff puts it, “History clearly shows that borrowed or printed money only has the power to destroy.”

Besides, we don’t recall Ben Bernanke warning that the world faced a meltdown when he took over at the Fed in February 2006.

And wasn’t Barney Frank the chairman of the House Financial Services Committee when Wall Street was running amok and inflating the biggest asset bubble in history?

We don’t remember Congressman Frank holding hearings about the dangers it presented until after the thing blew up.

No, dear reader. Government didn’t have the answer to previous financial crises. And it doesn’t have the answers to this one either.

This is a painful truth. And it’s one that millions of Americans don’t want to face up to. But it is critical to surviving the years ahead.

Do you know someone who should read this report? Share it with them by clicking here.

Most Investors Will Be Stunned By Their Losses

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Key points summary:

* Cause of the difficulty is hubris and confidence
* In the excess of the 1920s, the consensus was that risk and pain should be socialized. People who make the mistakes should not be punished
* In 1910, the panic was extremely painful but very short because people were allowed to fail
* Misery is prolonged by government intervention
* Depression ended not by New Deal but by greatest public works project of all time… WWII.

Rick Rule is chairman of Global Resource Investments. He has dedicated his life to all aspects of the natural resource industry. His contacts and knowledge of this market are unmatched.

The shocking reality is that Americans who have prepared for the future in traditional ways could soon be completely wiped out.

In fact, we are convinced that most investors will be stunned by their losses before this financial storm passes. Others will be utterly destroyed.

But we are equally convinced that a small number of investors will not only survive but also prosper in this crisis.

The good news is you are well on your way to being one of the survivors.

You are reading this report because you are perceptive enough to sense something is terribly wrong. You have a growing sense of unease about the future. The institutions you always trusted are now giving you a queasy feeling. You know all is not well.

We congratulate you for your insight. We share your feelings.

It’s now critical you act to protect your wealth. We hope this report will help you do just that.

It has three objectives…

1. To understand how we got into this mess
2. To look at what will happen next
3. To detail ways you can protect your wealth and prosper in this period in our history.

Baby Boomers Will Suffer the Brunt of This Crash

Let us make one thing clear before we move on. This crisis will hit America’s 78 million baby boomers hardest.

We are both boomers. Most of our friends are boomers. And what strikes us most about them right now is that they are afraid.

About James Dale Davidson
Davidson is a self-made multi-millionaire, venture capitalist and best-selling author.

His books include Blood in the Streets, Financial Reckoning Day and The Sovereign Individual.

As an author and editor of private financial advisory service Strategic Investment, Davidson has made a number of bull’s-eye crisis predictions.

*He analyzed the pending fall of the Berlin Wall in February 1989, ten months before the bulldozers started their work.
*Years before the banking crisis, the S&L bankruptcies and the real estate bust became news, he told readers what to expect.
*He forecast the collapse of oil prices in 1986, the 1987 stock market plunge, the meltdown in Tokyo (the Nikkei Dow put warrants we recommended gained 324%), the rapid rout of Iraq in the 1991 Persian Gulf War and the death of the Soviet Union

He is the founder and chairman of the National Tax Payers Union, the largest and oldest grassroots taxpayer organization in US.

His forecasts and his war against taxes and deficits have earned him frequent invitations on programs such as Good Morning America, The Tonight Show and MacNeil-Lehrer.

“I don’t know what boomers are going to do,” said a friend of ours recently.

“I know I’m in good shape. I’ve saved a lot of cash. I began reading The Daily Reckoning about two years ago…and actually started following Bill’s advice. I sold almost all my stocks. I’m in cash in and gold. I don’t even have a mortgage.

“So I don’t have too much to worry about. But I’m worried anyway. I don’t know…maybe it’s just catchy. I’m cutting back as much as I can.

“For example, I was going to buy a new car. I went in the showroom and picked one out and everything. But I think I’m going to cancel the order. Well, the salesman’s not going to get his commission. And I’m going to start doing my own yard work.

“It’s silly in a way. Because I don’t have to.

“But it makes me nervous to spend the money. Which means, there’s some minimum-wage guy who’s wages are about to become even more minimal.

“And I figure that if I’m thinking that way, there must be millions of other baby boomers in worse shape than I am, and they’re probably cutting back as fast as they can.

“Businesses have got to be cutting back too. And when employers look for fat to cut, they’re bound to find the baby boomers. And then what do these people do? They don’t have savings. And they’re not likely to get another job…not in a major downturn. It could be pretty grim all around.”

Has the future ever looked so grim for the boomer generation?

Dreams of a life of ease and luxury over a long retirement have been shattered for many of us.

Congress’ top budget analyst estimates Americans have lost 30% of their retirement plans’ value.

We’re just in the eye of the hurricane.

Let’s not beat around the bush. Retirement security is one of the greatest casualties of this financial crisis. As we speak the next ‘pension crisis’ is crisis is brewing. We’re just in the eye of the hurricane. The five factors contributing to this perfect storm are as follows: mounting stock market losses, overly-optimistic plan assumptions, generous payouts, increased longevity, and a rapid spree of retirements.
That’s why we urge you to read this report carefully. You can also forward this report to anybody you know whose savings are at risk by simply clicking here.

It is critical that more damage is not done. Because unlike Wall Street execs, boomers don’t have a golden parachute to fall back on.

“It’s a culture shock,” says KPMG demographer and author Bernard Salt. “Baby boomers could well morph into the disappointed generation.

“They’ve had, with a few exceptions, 30 years of prosperity, and maybe this is their time of adversity that arrives the moment they are ready to retire.

“Working hard, paying taxes, saving money for their retirement — they get to retirement and their nest egg is cut in half.”

In fact, the situation is so bad that many boomers are now being forced to put off their plans for retirement altogether.

At least seven in ten Americans older than 45 already expect they will have to continue to work beyond 65.

“Baby boomers, particularly, are finding that they need to delay their retirement or come out of retirement to come back to work, in large part because of the decline in their assets,” says Tim Driver, director of RetirementJobs.com, which helps retirees find a job.

The Fed Actually Provoked This Crisis

One of the most important things to grasp right now is that this is no ordinary market correction.

The problem is much deeper and more complex than that…and probably not even one investor in one thousand truly understands it.

You see, what’s actually happening is the bear market that began in January 2000 is finally getting down to work.

- Kevin Phillips, author of Bad Money

Stocks have seen significant gains since their lows in March. That doesn’t mean prosperity lies ahead. What we’re experiencing is a big “sucker’s rally”— just like the one that lured in doomed investors back in 1929.From September 1929 through November 1929, the Dow plunged 47 percent from its high of 381. It then started its famous sucker’s rally of the spring of 1930, before plunging to 41 in July 1932.

Japan also had plenty of sucker’s rallies during the country’s economic slump in the 1990s.

In fact, stocks there rallied at least 30 percent higher five times after 1992. They then found new lows again…and again…and again.

Why do we believe the Dow will drop to 6,000 points again?

We don’t have any inside information, nor do we have a crystal ball. But if you study a long-term chart of the Dow, you will notice something very peculiar. It tends to go way down after it has been way up –- in 15- to 20-year waves.

The top of this wave washed over us in January 2000. Since then, the index has been higher…but not when you adjust it for inflation.

This is critical to understanding the current crisis.

It’s not an insight you’re likely to pick up on CNN. Nor is it something Barack Obama or Ben Bernanke wants to admit.

But in trying to head off a bear market back in 2001, the Federal Reserve actually provoked a housing bubble, a financial bubble a commodities bubble and a worldwide credit bubble.

As Bill wrote in his 2006 best-seller, Empire of Debt: The Rise of an Epic Financial Crisis:

What the Greenspan Fed had accomplished was to put off a natural cyclical correction and transmogrify an entire economy into a monstrous economic bubble. A bubble in stock prices may do little real economic damage. Eventually, the bubble pops and the phony money people thought they had disappears like a puff of marijuana smoke. There are winners and losers. But in the end, the economy is about where it began — unharmed and unhelped. The households are still there and still spending money as they did before. Only those who leveraged themselves too highly in the bubble years are in any trouble.

But in Greenspan’s bubble economy, something awful happened. Householders were lured to take out the equity in their homes. They believed that the bubble in real estate prices created wealth that they could spend. Many did not hesitate. Mortgage debt ballooned in the early years of the twenty-first century — from about $6 trillion in 1999 to nearly $9 trillion at the end of 2004 — increasing the average household’s debt by $30,000.

The US economy faced a major recession in 2001 and had a minor one. The newborn slump was strangled in its crib by one of the most central planners who ever lived. Alan Greenspan cut lending rates. George W. Bush boosted spending. The resultant shock of the renewed, ersatz demand not only postponed the recession, it pushed consumers, investors and businesspeople to make even more egregious errors. Investors bought stocks with low earnings yields. Consumers went further into debt. On the other side of the globe, foreign businessman worked overtime to meet the phony demand.

Wealth Without Work

It´s no secret that the engine that drives the US economy is the American shopper.

Consumer spending makes up about 70 percent of GDP.

It’s no secret, either, that spending is way down.

This October, consumer spending dropped 3.1%. It’s the first drop in spending since 1991. It’s also the sharpest drop since second-quarter 1980.

The spending slump is hitting US retailers hard. Consumer spending has fallen for the 5 out of the past 6 months in April.

We don’t need to tell you that this spells big trouble for the economy.

But what many don’t fully grasp is that consumer spending — the backbone of the boom years that lead to the recent collapse — is nothing more than an illusion.

Because instead of being based on real wage increases, as you would expect, it is based on debt — a mountain of it.

Back in 2003, Bill dealt with this another national best-seller, Financial Day of Reckoning: Surviving the Soft Depression of the 21st Century.

Throughout 2001, the Greenspan Fed did what it had to do, and the only thing it could have done: It cut rates. Month after month, sometimes 25 basis points were cut, sometimes 50 basis points …

Consumers took the bait offered to them by the Fed: lower interest rates … By mid-2001, private-sector debt equalled 280 percent of gross domestic product — the largest debt pile in economic history. Then, in the first quarter of 2002, consumers borrowed at an annual rate of $695 billion — breaking all previous records. Their incomes, on the other hand, rose at an annual rate of only $110 billion. And for the 12 months ending in April 2002, $5.9 of debt was added for every $1 of growth of GDP. By the end of 2002, private sector debt had hit 300 percent of GDP.

What was remarkable about the 2001 recession — triggered by the terrorist attacks of September 11 — was that consumers were spending with abandon.

In 2000 alone, they borrowed another $198 billion against their homes. Two years later, the total was $1.2 trillion.

In other words, the problem wasn’t that consumers lacked confidence, it was that they had too much of the stuff.

They had taken the Fed’s little “coup de whiskey.” And it went to their heads…

This Is a ‘Credit Cycle’ Bust

One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge — even to ourselves — that we’ve been so credulous.

We turn here to the words of American astronomer Carl Sagan because they so aptly describe our current economic predicament.

Americans have come to believe the particular bamboozle that we can get rich by spending…that we can get something for nothing.

As Bill put it in Financial Day of Reckoning, “Americans can no more retreat from this dream than Napoleon could have brought his troops back from Germany, Italy and Spain and renounced his empire.”

And here’s where our story gets really interesting.

- John Stuart Mill

Because what becomes clear is that this is no ordinary collapse.

Let us explain…

When left to themselves, the markets are natural phenomena. There is a wonderful simplicity about them.

Failure follows success. What goes up eventually comes down. Like a tree, they cannot continue to grow forever.

We can easily illustrate this by describing the pattern of pig farmers.

When the price of pigs rises, pig farmers naturally raise new pigs to increase production. About 18 months later, these new creatures arrive on the market. This increase in supply causes prices to fall. Farmers decide to cut back, which caused prices to rise again.

This is nothing more than the cyclical boom-and-bust cycle that defined the US economy from the end of World War II to 2001.

Then something changed radically. The Fed, under eager-to-please chairman Alan Greenspan, decided it could avoid the bust part of the cycle altogether.

The result is a different beast from your garden-variety downturn. You get a “credit cycle” bust instead.

This is exactly what we are experiencing now. And it’s more like the post-bubble depression of the 1930s than the downturn of 1973 to 1974 or 1981 to 1982…

‘Catastrophic Acceleration’ of Losses

Here’s the big worry.

The severity of this kind of bust depends on the magnitude of the bubble that preceded it. And the bubble that came before this bust was the biggest ever in history.

In fact, it wasn’t really a bubble at all. It was a “hyper-bubble.”

Now this hyper-bubble has popped, and the losses are catastrophic.

Billionaire investor George Soros recently explained just how dangerous the unwinding of these kinds of bubbles can be.

The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp.

The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage — borrowing for investment purposes.

At the peak of the boom both the value of the collateral and the degree of leverage reach a peak.

When the price trend is reversed, participants are vulnerable to margin calls and, as we’ve seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.

Of course, all this was inevitable.

Bill repeatedly warned the more than half a million subscribers of his newsletter, The Daily Reckoning.

No doubt, many got tired of hearing his warnings. But all he was doing was pointing out the obvious.

A Monster of Deleveraging

Instead of getting a typical bear market in 2001, we now face a monster of deleveraging as the biggest credit boom in history unwinds.

Deleveraging is simply the cutting back on the amount of money borrowed compared to equity.

In the case of this crisis, financial institutions sell off assets to recoup losses inflicted on their balance sheets by toxic mortgage-related securities.

These forced sales push down asset prices, hurting the balance sheets of other investors, forcing more asset sales and so on.

About Bill Bonner
Bill has written two New York Times best-selling books along with his colleague Addison Wiggin: Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Since 1999, Bill has been the editor of The Daily Reckoning, a free daily e-letter that now has more than 500,000 subscribers.

Nothing can stop this process. It’s a necessary cure for the credit bubble that Greenspan puffed up.

The problem is it is devastating the wider economy.

As The Economist magazine puts it, “What hurts finance affects the rest of the economy in spades.”

Because of leverage, a shortfall of bank capital of around $100 billion may reduce the potential supply of credit by $1 trillion.

This assumes banking system leveraging of around ten times…the geniuses running Lehman Brothers leveraged 25 times to equity.

But let’s assume that leverage of ten times to equity is about right.

So far, financial institutions have admitted to about $600 billion in credit-related losses and writedowns (net of re-capitalization via new equity issues).

This means cuts of $4 to $6 trillion to the potential supply of credit.

This, in turn, leads to higher cost and lower availability of credit to the real economy. And it forces consumers to reduce debt and consumption, most of which was based on borrowing in the first place.

This is bad enough. But it doesn’t end there…

So-called “negative feedback loops” mean the reductions in consumer spending and investment further hurt the economy. This puts further financial stress on corporations and individuals and triggers more debt defaults and more losses for the financial system. These then reduce lending capacity.

And so on…

Like a giant forest fire, the deleveraging process can’t be extinguished.

And although the government believes it can put the fire out with bonehead bailouts, at the very best all it can do is create firebreaks that limit the damage until the fire burns itself out.

Right now, the bailouts are stopping companies such AIG and Citigroup from going under. But banks are still refusing to lend to each other despite all the money the government is giving them.

The bottom line?

Click to play with Media Player

Key points summary:

* The crisis is not limited to mortgages… Financial institutions are over leveraged
* There is a wipe out of shareholder equity in financial services
* Financial service companies don’t know what their derivatives are worth
* They are keeping liquidity for themselves because they don’t know value of derivatives of others banks
* The US is the leading edge of a worldwide trend of over-leveraged financial services
* An extreme example of over-leverage is Iceland

This massive unwinding is nowhere near finished.

Remember, Wall Street has only admitted to a small fraction of its mortgage-related losses and writedowns.

And the very, very bad news is total losses are estimated to clock in at $2.5 to $3 trillion…

Home Prices Have Further to Fall

This would be bad enough. But these losses will pile up even further as home prices plunge further.

The problem, of course, is property is worth what people can pay for it. The average home has to be affordable for the average buyer. The idea that home prices could rise perpetually was pure bunkum.

For the 100 years from 1896 to 1996, home prices kept in line with GDP, inflation and income growth. It was only in the following ten years or so that they rose remarkably.

Then between 1996 to 2006, home prices rose sharply while real incomes remained stable.

It was obvious a correction was coming.

And when you saw how lenders were concocting mortgages and how people were buying much more property than they could afford, you knew that the correction would be a doozy.

How far will home prices fall?

Depending on the region, probably another 20 percent. Maybe 25 percent.

About 20 percent would put them in the range of affordability. But prices tend to overshoot on the downside, just as they do on the upside.

And if the housing sector continues on its downward spiral, it’s going to bring the value of your savings and investments down with it.

A Vicious Circle That Spells More Pain

Few people understand the US housing market better than billionaire real-estate investor Mort Zuckerman.

He is the co-founder of Boston Properties, the largest US office real-estate investment trust. He was also an associate professor at Harvard Business School for nine years.

Here’s what Zuckerman had to say about the US housing market back in March.

We are looking at the worst set of macroeconomic conditions since the Great Depression. I don’t know where the bottom is.

The most dangerous part in my judgment is what is going on in the housing world, where we’re now running foreclosures at the rate of two million a year, where nine million homes, according to the government, have either no equity in them or negative equity.

That will go up to 15 million if housing prices continue to go down this year as they’ve done last year.

Well, guess what… Prices have continued to decline. And the rate of decline is snowballing.

Year over year, foreclosures are up 18% from 2008.

And there is little indication of a turnaround in sight.

Here is a little data from RealtyTrac to drive home the point:

• May foreclosure numbers were the third highest on record
• In April, 1 in every 347 houses received a foreclosure notice
• Foreclosure filings rose 1 percent from March, 2009, and 32 percent from April, 2008
• The total number of homes lost to foreclosure will pass 1.3 million in 2009
• In California, the nation’s largest economy, 1 in 144 houses received a foreclosure notice

Falling prices are not the only thing putting pressure on homeowners. Stricter mortgage standards now make it more difficult for homeowners to sell or refinance.

Worse still, a tanking economy, massive job losses and record lows in consumer confidence are now feeding back into the housing market.

This, in turn, triggers further job losses.

Talk about a vicious circle.

Our advice?

Hope for an additional drop of only 15 percent to 20 percent. Expect a drop of 30 percent.

All this is straightforward. But it gets more complicated…

We Face a Decade-Long ‘L-Shaped’ Slump

As we’ve said already, corrections are always proportional to the booms that go before them.

Or as Bill has warned in his The Daily Reckoning e-letter, “A correction is equal and opposite to the deception that preceded it.”

Austrian economist Gotfried Haberler put it best in his 1937 book Prosperity and Depression:

The length and severity of depressions depend partly on the magnitude of the ‘real’ maladjustments, which developed during the preceding boom and partly on the aggravating monetary and credit conditions.

This is just Newton’s Third Law applied to economics.

Every action produce an equal and opposite reaction. A bubble pops and becomes an anti-bubble.

When wild spending and borrowing caused the bubble, the resulting anti-bubble will be marked by exaggerated thrift, debt cancellation and pessimism.

And herein lies the rub…

Given the crazy things leading up to the correction, you simply have to expect that this correction will be devastating.

How will it play out over the coming years? What will it look like?

A V-shaped recession is short and shallow like in 1990 to 1991. These recessions lasted about eight months. A U-shaped recession is longer and possibly deeper. A W-shaped recession is a double dip such as the one that hit in 1980 and 1981/1982).

An L-shaped recession is like the experience in Japan in the 1990s.

Nouriel Roubini, one of the few economists that saw this crisis coming, says the current crisis could trigger a Japanese-style slump.

The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity –- where excessive leveraging and bubbles were not limited to housing in the US but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies.

A housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.

At this point, the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the US and advanced economies contraction would be short and shallow -– a V-shaped six month recession -– has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the US and close to two years in most of the rest of the world.

And given the rising risk of a global systemic financial meltdown, the probability that the outcome could become a decade long L-shaped recession -– like the one experienced by Japan after the bursting of its real estate and equity bubble –- cannot be ruled out.

And as contrarian investor and colleague Mish Shedlock argues, the US experience could be even worse than Japan’s “lost decade” for the following reasons.

• US consumers are in much worse debt shape than Japan.
• There is global wage arbitrage now that did not exist to a huge degree in the mid to late 1990s. Even white-collar jobs are increasingly at risk.
• The savings rate in the US is in far more need of repair than what Japan faced. This will be a huge drag on future spending and slow any recovery attempts.
• Japan faced a huge asset bubble (valuation) problem. The US faces both a valuation problem (what debt on the books is worth) and a rampant overcapacity issue as well.
• Japan had an internet boom to help smooth things out. There is no tech revolution on the horizon that will provide a huge source of jobs.

Booms Can’t Go On Forever

Like death, no one likes economic corrections. But like death, they clear away the old mistakes and the old wood. And in doing so, they are both essential and helpful.

We are well aware that this goes against the grain. But let’s face it. You can’t win ‘em all. Losses are inevitable.

“Loss is nothing else but change, and change is Nature’s delight,” as Roman emperor Marcus Aurelius once wrote.

Booms cannot go on forever…and nor should they.

When people borrow too much money, the day eventually comes when things change and they have to pay it back.

Click to play with Media Player

Key points summary:

* Global credit markets are broken
* A world existing on credit is going to have to adjust to living within its means
* The asset class everyone is concerned about is residential mortgages. They should be concerned about commercial mortgages
* Rent payments reflected economic good years… That won’t continue
* There will be defaults on commercial mortgages
* Same with consumer debt. As income is reduced, there will be defaults
* That consumer debt has been securitized and sold to pension funds and mutual funds. This will exacerbate the current situation.
* Leveraged buyout loans will suffer… Repricing by 10-15% wipes out equity.

Or to put it another way, when the party gets too wild for too long somebody inevitably ends up in rehab.

In this period of rehab, corporations, investors and households pull themselves together. They need to get rid of houses, projects, businesses and speculations that they can’t afford.

The credit-cycle bust then enters a “balance sheet recession,” as economist Richard Koo puts it, not a standard business cycle recession.

It is a time when businesses, investors and householders realize that if they don’t cut back they could go broke.

Balance sheets must be repaired. Debts must be paid off. And expenses, so that revenues can support them.

And something needs to be left over to pay down debt and build up savings.

This is difficult, because revenues are falling too. And because one man’s expense is another man’s income.

The man who saves a dollar by not taking a cab denies a taxi driver a dollar of revenue…who then buys a dollar less of gas…or a dollar less of clothing…or a dollar less of beer.

It’s what economists call the “fallacy of composition”: the mistaken idea that what is good for one person is necessarily good for the whole lot.

Cutting back on spending is clearly good for the individual. But it does to an economy what a visit from a sniffling grandson does to a bedridden great-grandmother.

Soon, the old lady is dead.

Of course, the feds are fighting this every step of the way.

Just as the Japanese did in the 1990s…

We Are Now Japanese Too

If you think it’s bad being an American right now, spare a thought for the poor Japanese.

Stay on top of events with critical updates from Contrarian Profits.

These will be delivered via Notes from the Investment Underground, a new daily email service that reveals how you can prevail in the coming bad years.

Simply enter your email below to get your first issue. This service is FREE to readers of this report.

The Japanese investor who bought stocks in 1982 when he was 35 years old is now 61…and his stocks are not worth a cent more!

And this week he got the news that the Japanese economy is once again in recession.

During its own post-real-estate-bubble slump, Japan ran deficits of six percent of GDP

Its central bank took interest rates down to near zero and left them there for years.

Sound familiar?

Still, Japanese investors are about $15 trillion poorer than they were 18 years ago.

President Obama is about to follow the lead of Hata, Obuchi, Mori and Murayama. He is promising to throw good money after bad — taxpayers’ money, of course — to ‘fix’ the economy.

Ben Bernanke, too. He slashed rates…just as the Bank of Japan did.

He has also adopted Japanese style “quantitative easing.”

This is central bank speak for flooding the system with excess liquidity. It’s a last ditch effort to puff up credit after central banks have dropped rates to near-zero levels and are running out of options for ‘stimulating’ the economy.

But there is a crucial difference between Japan and the US: Japan had a healthier economy with a positive trade balance and huge savings.

The government could easily spend six percent of its GDP trying to replace private spending with government spending.

The Japanese saved 19 percent of GDP. So, the government could simply borrow from its own people — as the US did to finance World War II.

But America can’t finance huge deficits internally.

It doesn’t have the money…

Its people don’t save…

Any money the government gets from Americans will have to come from current private spending or from other investments.

Obviously, this is not going to do much good, since there is no net increase in spending or investing.

Nor can the US government expect to bring in unlimited financing from foreign sources. Foreigners save. But they need their money to rescue their own economies.

And not only did Japan have a cushion of cash to comfortably sit out the correction, it also had no reason to do otherwise.

With money in the bank, total economic breakdown never really threatened the Japanese. What money they owed, they owed to themselves.

The United States does not have this comfort.

Post-1929 Rescue Didn’t Work Either

Uncle Sam didn’t do much better in ‘fixing’ the Great Depression.

Why?

It’s simple, really: Presidents Hoover and Roosevelt lacked faith in the marketplace.

In this respect, they were no different to Barack Obama.

Just like their 21st century successors, Hoover and Roosevelt acted as though government management of the economy was the only solution the country’s economic problems.

But the real problem was, and still is, government intervention.

Hoover’s introduction of international trade tariffs under the Smoot-Hawley Tariff Act is an obvious example.

Rather than helping protect the wounded US economy, as Hoover had hoped, it cut American imports and exports in half and is widely recognized as a catalyst for the Great Depression.

Roosevelt’s government programs were also to blame for drawing out America’s economic woes.

That’s not to say all were a disaster. Some, like the establishing of the Securities Exchange Commission, had a stabilizing effect at the time.

But as Bloomberg columnist Amity Shlaes points out in her history of the Great Depression, The Forgotten Man, “Other institutions, such as the National Recovery Administration, did damage.”

The NRA … sought to solve the monetary challenge through price setting. NRA rules were so stringent they perversely hurt businesses. They frightened away capital, and they discouraged employers from hiring workers. Another problem was that laws like that which created the NRA — and Roosevelt signed a number of them — were so broad that no one knew how they would be interpreted. The resulting hesitation in itself arrested growth.

Sprawling government programs designed to fix the economy. Laws “so broad that nobody knew how they would be interpreted.”

Ring a bell?

As Roosevelt put it in his second inaugural address, he “sought unimagined power” to turn the economy around.

But Roosevelt wasn’t a patch on today’s Treasury Secretary…

On October 3, 2008, Public Law 110-343 bestowed upon Paulson, and now Geithner, perhaps the most incredible powers ever bestowed on one person over the economic and financial life of the nation.
The 451-page law created not only created the $700 billion Troubled Assets Relief Program, it also gave the US Treasury Secretary almost dictatorial powers.

Consider this passage from the first draft of the bill.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Or these two humdingers…

The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this act without regard to any other provision of law regarding public contracts.

Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Roosevelt may have sought “unimagined power,” but he was never brave enough to try to sign such powers into law.

You see Bernanke, Geithner and Obama really do believe the best path to calming the current crisis is to throw huge amounts of taxpayers’ money at banks, credit card companies, automakers and anyone else with a lobbyist with deep enough pockets to get his foot in the door of the Treasury Department.

But they’re all missing a fundamental point.

As Shlaes puts it:

The big question about the American depression is not whether Germany and Japan ended it. It is why the Depression lasted until the war. From 1929 to 1940, from Hoover to Roosevelt, government intervention helped to make the Depression Great.

Austrian School economist and father of modern Libertarianism Murray Rothbard reviewed the record of the post-1929 rescue team and came to the following conclusion.

The Hoover and Roosevelt administrations met the challenge of the Great Depression by acting quickly and decisively, indeed almost continuously … putting into effect the greatest program of offense and defense against depression ever attempted in America [using] every tool, every device of progressive and enlightened economics, every facet of government planning to combat the depression.

Yet the depression didn’t go away. It intensified. Real wage increases and higher government spending smothered an expected recovery in 1931.

The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy and placed where it properly belongs: at the doors of politicians, bureaucrats and the mass of ‘enlightened’ economists. And in any other depression, past of future, the story will be the same.

A Titanic Rescue

Yet on the announcement of the US government’s $700 billion bailout plan, stock markets all over the world breathed a sigh of relief…albeit brief.

This is not unusual.

As we’ve already pointed out, after the October crash in 1929, stocks rallied until April. Then they started to slide again and did not fully recover until the 1950s –- more than 20 years later.

Investors can always find reasons for optimism…when they’re in the mood. After so many years of rising prices, the momentum of a bull market keeps them hoping.

It was as though the passengers on the Titanic had seen in the distance what looked like a flotilla of rescue boats on the horizon.

Hats were tossed in the air. Life preservers were cast off. Investors cried “Hosanna!” and shouted “Yippee!” The band broke off playing Nearer Thy God to Thee and picked up a soaked version of Laissez les Bon Temps Roulez!

A couple of days later, the rescue boats drew closer…and passengers jaws dropped when they realized they were just more icebergs! Stocks sold off again.

At roughly $8 trillion, the credit crisis already clocks in as the most expensive endeavor in American history. It’s more than the country spent fighting Hitler and his allies in World War II.

And banks still aren’t lending!

Washington simply doesn’t get it.

As Rothbard puts it:

The depression is the ‘recovery’ process, and the end to the depression heralds the return to normal and to optimum efficiency.

The depression, then, far from being and evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a ‘bust.’

But after sinking the Titanic of Wall Street and the dinghies of homeowners by giving away too much easy credit, our modern-day rescuers have come to the scene with life preservers of lead: more easy credit.

The Dollar Has Become a Faith-Based Currency

This time around, the markets are not just correcting speculative excess, as they did in the panic of 1907 or in the crash of 1987.

Nor is this just a bear market like the one that followed the great bull-market peak of 1966.

That would be bad enough. The 16-year post-1966 bear market took the Dow down to a level it hadn’t seen -– in terms of price to earnings -– since the 1930s.

If that were to happen now, you could expect prices to fall for another eight years -– or until 2016. You could also expect the Dow to drop to under 5,000 points.

No. It’s not just that you have to worry about.

There’s also that little event that happened in the middle of that bear market –- on Sunday, August 15, 1971.

Do you remember? We do.

The Nixon administration had its back to the wall.

Inflation rates were growing as the government spent more and more. Soon, they were bumping over ten percent a year.

At this rate, bonds –- including US Treasury bonds -– were getting wiped out. Treasuries carried a coupon of only five or six percent.

At ten percent inflation, the owner was losing money.

As a result, investors dumped bonds, which soon earned the moniker “certificates of guaranteed confiscation.”

The lesson wasn’t lost on the foreigners.

Every time an American bought something from overseas, dollars ended up in foreign hands.

Does that sound familiar?

It should. About $2 billion a day now leaves the US.

Of course, the amount was much lower back in then. But the principle was the same.

When French president Charles de Gaulle saw what was happening, he told his ministers to get right over the Washington and redeem their dollars into gold at the rate fixed by the US Treasury: $35 an ounce.

The Nixon administration was aghast. The French were calling away US gold. And behind them was a whole line of foreigners. If this continued, Uncle Sam soon wouldn’t have any more gold.

Rather than do the honorable thing, Nixon reneged on the solemn promises of six generations. He refused to exchange gold for dollars at the promised rate.

Since 1971, it has been impossible to exchange dollars for gold at a fixed rate.

That is precisely the path that we began over four years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

- Dr G Gono, govenor of the Reserve Bank of Zimbabwe

The dollar has become a “faith based” currency instead.

It floats on sentiment, like everything else in the marketplace. It buys whatever people are willing to give you for it. Including gold.

We add an obvious footnote here. The difference between dollars and most other assets is that dollars are exceptionally cheap to produce.

In fact, the profit margin on a $100 bill may be about the highest in the world.

As Ben Bernanke puts it, the government can produce dollars at “negligible expense.”

Therein, of course, is a great temptation. If you can produce cash at no cost, why not produce more?

And this is where our story takes another twist…

Because now, just as they had the idea that inflation would always be a problem in the 1970s, investors have come to believe it is always under control in the 2000s.

People fear dandruff now more than they fear inflation.

They could to be right. But not for long…

A Mountain of Debt

There are 10^11 stars in the galaxy. That used to be a huge number. But it’s only a hundred billion. It’s less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.

- Richard Feynman

The US government has already committed more than $12.7 trillion on behalf of American taxpayers to ‘fixing’ the economy — or half the value of everything produced in the nation last year.

How much these rescues will ultimately cost is a mystery.

Where does this money come from?

Certainly not from savings as during Japan’s lost decade. The non-partisan Congressional Budget Office (CBO) recently said this years budget deficit is nearly 1.7 trillion dollars, more than 400 billion larger than forecast two months ago.

National debt just passed the $11 trillion level.

The numbers are so staggeringly high, the folks who own the national debt clock in New York had to add a digit!

US debt is now feeding on itself. It grows even when the feds keep spending flat. This happens because the interest is so great -– about $1 billion every day -– that the government now has to borrow to pay the interest.

Meanwhile, unofficial national debt -– what’s known euphemistically as the “financing gap” -– is over $50 trillion. And it’s rising very fast.

It gets worse.

Next year’s actual deficit will be closer to $2 trillion than $1 trillion.

This is the estimate put out by Morgan Stanley’s lead economist, who merely assumes that things don’t go exactly as planned.

A $2 trillion deficit equals 12 percent of GDP.

Where will the government get this money?

Not from its citizens. They’re flat broke. And not from Europe, either. Germany, Italy and France still have savings -– about ten percent of GDP -– but they need every penny to cover their own deficits.

Even the entire pile of Chinese-held dollars would finance only about half the US deficit.

What about energy exporters Russia, the Persian Gulf states and Venezuela? Forget it.

At the height of the oil bubble, net capital imports into their sovereign wealth funds were running at something like $2 billion a day. At that rate, an entire year’s worth wouldn’t cover the anticipated US deficit for four months.

Even if it were possible to borrow the kind of money the US needs to service its debt, it would raise serious problems.

It’s the same problem faced –- and ignored –- by government in 1929 and 1990. In both cases government spending rose and private spending fell.

It makes sense. There are only so many resources in an economy. Either people use them for their own ends, or the government commandeers them.

When government takes them, it is taking away from somewhere else. This happens through taxation or borrowing.

- Robert Louis Stevenson

This will come as a shock to American and British readers who are accustomed to the “win-win” ethos of the Reagan/Thatcher years.

But the pie of savings has limits. Take a slice away and you’ve got less left.

Take that slice and use it to fund more concrete, pay more educators or prop up more zombie banks, and you’ve got a “lose-lose” situation. The resources disappear, and you have nothing to show for it.

In short, people get poorer when the government tries to ‘rescue’ the economy with borrowed money.

Interest Rates Will Rise

There’s still one other problem.

Borrowing money on such a scale carries serious consequences for the debt markets.

If lenders are still willing and able to lend, of which there is no guarantee, they will want higher rates of interest.

Interest rates respond to the law of supply and demand just like everything else. Increase the demand for loans, and the price of them –- interest rates -– are bound to go up.

But higher interest rates slow down the economy. This is just the thing the government is trying to avoid.

In this sense, borrowing is not inflationary at all. It’s deflationary. It doesn’t increase the supply of money, only its cost.

But don’t worry, dear reader. The United States of America is not really going to borrow trillions more dollars to stop the correction.

It’s not going to because it doesn’t need to.

“We have a little technology called the printing press,” mused Ben Bernanke…

The Road to Disaster

Eventually, the unyielding logic of printing-press money is going to get the best of America’s financial leaders.

Just as Roosevelt did back in the 1930s, they believe they have to spend trillions of dollars to ‘save’ the economy.

But what the economy needs is new money that isn’t taken from somewhere else. It needs more spending power, not just spending power than has been shuffled around.

No government has been able to resist the appeal of printing more money –- not for more than a few decades.

Thanks to Paul Volcker, the US has done exceptionally well. The government hasn’t backed the dollar with gold since 1971…and the fiat currency still isn’t worthless.

But as this global financial crisis deepens, the ability of foreign creditors to pay for America’s nationalizing programs will be greatly reduced.

At the beginning of November, China announced an economic stimulus package of its own. The communist dictatorship that runs the place wants to spend $586 billion on various Japanese-style public works projects.

China holds roughly $1 trillion in US securities. This includes $541 billion in US Treasuries and a further $200 billion in so-called “agency securities.” These are securities issued by American GSEs such as Fannie Mae, Freddie Mac or the Federal Home Loan Banks.

If China decides to sell these securities, at a time when the US government is already expected to issue large amounts of debt to finance its own economic stimulus measures, America is going to find itself in deep, deep trouble.

Why?

Because this would further raise borrowing costs, such as mortgage rates, which are benchmarked to bond yields.

The effect could be cataclysmic. A raising of rates would trigger more mortgage defaults, more bank writedowns, more stock plunges and more unemployment.

(Do you know people who would be affected by this? Help us spread the word to other concerned investors, baby boomers and retirees. You can forward this report to anybody you know whose savings are at risk by simply clicking here.)

This is the nightmare scenario that is keeping John Whitehead awake at night.

Whitehead, now 86, is a former chairman of Goldman Sachs and deputy secretary of state under Ronald Reagan.

- Peter Schiff
President of Euro Pacific Capital

Like us, he believes the US economy faces a slump deeper than the Great Depression. He also believes that the growing deficit threatens the credit of the United States itself.

In a recent interview with Reuters, Whitehead said, “I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America.

“Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of US government bonds. Eventually US government bonds would no longer be the triple-A credit that they’ve always been.”

Make no mistake about it: The bankruptcy of the US government is well within the realm of possibility.

The US government is playing a game of Russian “debt roulette” that it can’t afford to lose.

There is already a funding crisis. And the country will have to sell a lot more bonds next year to finance the bailout packages that have already been signed off.

But there’s one more strong argument that makes us believe that, sooner or later, the feds will turn to the printing presses rather than foreign borrowers to fund its spiraling bailout costs…

This Kind of Crisis Runs Downhill

In the beginning, the financial crisis mainly hurt investors and Wall Street institutions.

But as it has spread, the meltdown in the financial sector has started to hammer the wider economy.

Now, businesses and consumers are cutting back –- and cutting back hard.

As our friend Doug Casey said recently, “This kind of crisis runs downhill. First, it was only the bankers who were panicking. Then, it was investors. Now, it’s businessmen. And soon, it will be consumers.”

(Doug knows about financial crises. In 1979, he wrote a book about them called Crisis Investing. This became the largest selling financial book in history. It was number one on the New York Times Best Seller list for a total of 12 weeks.)

As unemployment rises, it will become harder and harder for the average person to pay his bills.

And, boy, is unemployment rising.

According to David Leonhardt in The New York Times, “the share of adult men with jobs — which has been gradually falling for much of the last few decades — is now at its lowest level since the Labor Department began keeping records in 1948.”

It’s not just blue-collar workers who are being axed either. Wall Street big spenders are also getting whacked in record numbers.

Big banks have already fired about 150,000 workers. And they are reportedly planning to lay off at least an additional 15 percent.

Goldman Sachs recently showed 3,200 suits the exits, about ten percent of its workforce.

Citigroup says it will axe more than ten times that amount –- 52,000 employees –- by the end of next year.Leonhardt says this puts us on the path to the worst recession since the early 1980s.

But there’s a twist…there almost always is.

Former Oppenheimer analyst Henry Blodget says the recession in the early 1980s came after then Fed chairman Paul Volcker raised rates to nearly 20 percent.

You can reasonably expect jobless numbers to rise under these circumstances.

But the current tsunami of job losses is happening at a time when the Fed, joined by central banks around the world, is doing the exact opposite.

The Fed is so desperate to reinflate the economy, it has actually brought interest rates down to zero!

This makes the comparison with the 1980s ridiculously optimistic.

It brings us back to the vicious circle at the heart of this crisis…

Approximately 2.4 million homes will go into foreclosure this year.

Leading the forecloseure charge are the likely suspects, California, Arizona, Florida, and Nevada. Following close behind are the rust belt states, who’ve been hit especially hard as manufacturing has come to grinding halt.

The top 10 states accounted for nearly 77 percent of total properties with foreclosure filings nationwide.

Now, imagine that the unemployment rate keeps climbing, which it will. And imagine those 30 million or so unemployed people – with their mortgages, their credit cards, their home equity lines, their student loans – and ask yourself, “Which way will they vote?”

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Keypoints summary:

* The grandaddy of the problems in the US will be state and local bonds.

* Local governments enjoyed a bull market in property and retail taxes.
* Demand for services from governments goes up in recession.
* California needs $7 billion. Revenues are falling.
* We’ll see a wave of muni-bond defaults without equal since the depression.
* It’s a prefect storm, with income down and no ability to refinance.
* It’s setting up biggest bailout in history.
* But, who is going bailout the Fed?

For the man who offers to protect the dollar? Or for the man who offers ‘relief’?

How Democracy Works

George Bernard Shaw was right: “A government which robs Peter to pay Paul can always depend on the support of Paul.”

Gradually, people come to get more and more benefits. They ask for subsidies. They look for angles. They expect jobs. They want free health care and old age pensions. And gradually, the nature of democracy changes as more and more voters come to rely on the government.

In the 1980s, the Reagan administration found it could get support for tax cuts…but only by promising that it wouldn’t cut spending.

In fact, the Reagan administration argued that tax cuts would produce more money to spend! Cut the rates, argued Reaganite economist Art Laffer, and the revenue will increase. (Laffer’s theory was said to be devised on a napkin – definitely not a good measure of academic rigorousness)

Now the process of democratic corruption has gone even further…

The government is giving out more food stamps than ever before. There are more people on Social Security than ever before –- with a huge increase coming as the baby boomers retire. And more people than ever before now expect healthcare giveaways and free drugs from the government.

Finally, there are more people getting money from the federal government than there are taxpayers.

One in every six dollars of American income now comes from the government in the form of checks or vouchers. One in six.

Well…you can see where this leads.

“Democracy is a system where two wolves and one sheep vote on what to have for dinner,” said one wag. He must have been thinking of modern US government.

That’s why Republicans and Democrats in the recent election campaign both promised more spending. Deficits be damned!

Just as the logic of democracy leads inexorably towards more spending, the logic of democratic economics leads to inflation.

You see, more voters will gain from inflation than who will lose from it. Inflation will relieve the debts of the multitude of debtors. But it will destroy the savings of the creditors, too.

There are fewer creditors than debtors…and many of the biggest creditors are foreign governments, who don’t vote in US elections.

This Is Not a Crisis…It’s a Collapse

One last thing…

Try now to imagine what America will look like in the coming bad years.

Imagine houses down another 20 percent. Imagine the Dow tumbling back to the 6000 level. Imagine over one in eight workers without a job.

Imagine another eight years of falling stock prices…and two or three more years of falling housing prices…and more and more government bailouts.

This crisis is moving fast.

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Imagine consumers going on a rampage of thrift…credit cards in the trash…the nation’s malls going silent…even more bankruptcies.

Now try to imagine Barack Obama…or the hacks in Congress…or the Bernanke Fed saying “No” to the demand for more money, “No” to more bailouts, “No” to more rebates and “No” to more spending.

Imagine a Paul Volcker striding into the Fed and saying, “No more credit! We’re going to protect the dollar and the financial integrity of the United States government.”

Can you imagine it? We can’t.

We believe Bernanke will be true to his word when he said he’d “drop money from helicopters” rather than see the US in a Japan-like slump.

In fact, although there have been no helicopter sightings in the sky above Wall Street, Bernanke’s adoption of Japanese-style “quantitative easing” amounts to the same thing -– throwing unlimited amounts of money at the problem.

This is when this correction shifts from correcting not only the biggest bubble in history but also the entire post-1971 money system.

Here is what Austrian School economist Ludwig von Mises had to say about the dire situation now facing the US economy.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as a result of the voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved.

This was not merely an academic observation. Mises had been a first-hand witness to the economic and social collapse of hyperinflation in Germany and central Europe in the years after World War I.

Now, similar conditions loom in the US.

The dollar has rallied again. But it’s a fake rally.

Speaking to the Financial Times recently, famed investor Jim Rogers said the dollar rally is due to massive short covering and an unprecedented flight to cash, not because of underlying strength.

President of Euro Pacific Capital Peter Schiff agrees. Schiff has been accurately predicting this crisis since mid-2006. And we think he is right about the dollar, too.

Speaking on CNBC recently, Schiff said, “The dollar is rallying for the same reason that real estate rallied or that dot.coms rallied — it’s not because of the fundamentals.”

He also warned that the “total catastrophe” of the US currency system is fast approaching.

In fact, according to Schiff, the “credit crunch” is not the problem at all.

The problem is much, much bigger government under President Obama. It’s the trillions of dollars the US is borrowing that it can’t pay back. It’s the gaping hole in the government’s entitlement programs that will leave millions of baby boomers without a safety net. It’s that all the stimulus packages and all the bailout packages that have passed so far are making the underlying problem worse and setting us up for a much bigger disaster.

It’s not that people will go to the bank and not be able to take out money. It’s that people going to the bank will be able to take out money, but they won’t be able to buy anything with the money they take out.

You have been warned. Unlike the ill-fated residents of Pompeii, you need not wait until the eruptions overwhelm your world before you try to escape.

Now it’s the time to act.

The Known Unknowns

So far, we have attempted to address how we got into this mess and what will likely happen next as the global financial meltdown progresses.

Here we take a shot at telling you how to avoid losing what money you have (how not be a turkey) and maybe how to even make some.

Of course, the scope of this report is limited.

What we want to share with you here are some investing principles that will help you avoid being chumped by Wall Street as the global economic depression takes hold.

It may come as a surprise, but experts say that 90 percent of traders eventually lose their money.

It doesn’t surprise us much. We have been around the investment markets far too long. In fact, the number seems to us to be rather low.

Markets are unpredictable. They are infinitely complex and often chaotic systems.

What we see are several overlapping and disruptive factors, almost as if several fault lines came together at the same place in the earth. If one of them moved, it could cause some trouble, but if all of them went together, that would cause a tremendous earthquake of economic change.

- James Dale Davidson, 1992

And that’s before you take into account the recent ballooning of complex financial instruments such as credit default swaps, collateralized debt obligations and other leveraged derivative contracts.

Unfortunately, most investors refuse to accept this.

Don’t just take our word for it. According to one of the pioneers of financial derivatives Nassim Taleb, “Never before in the history of the world has there been so much complexity combined with so much incompetence and lack of understanding the problems this causes.”

We think this is probably a sound start.

The truth is we live in a world we don’t understand. But we refuse to behave accordingly. (Often there is the appearance of stability…but it should never be taken for the real thing.)

Making matters worse is that the financial world is now precariously interconnected.

Globalization means there is now the prospect of global financial collapse. Consolidation in the banking system means that all it takes is one big bank to fail for the entire banking system to be at risk.

Heck, according to mathematicians, the behavior of economic phenomena is now more complicated than the behavior of liquids or gases!

Survival Is Key

There is one very important question you need to ask yourself before we move on…

What do you really want?

You might say that you want to be rich. Who doesn’t? But we urge you first to think carefully about the best way of achieving this.

If you had money in stocks, you most likely lost some of it in the great stock-market crash of 2008. Given that world stock values have dropped by about 40 percent, you may have even lost your shirt.

By now, you’ve probably realized stocks are no “sure thing.”

Another popular way you might have being going about getting rich was by going into debt.

Debt is king right now in America. The average Joe is saddled with tons of the stuff. A rate of debt to disposable income of about 140 percent is now the national average. This has risen from 70 percent in the early 1990s to 100 percent in 2000.

But as we’ve seen over recent months, this method has its drawbacks.

Instead, we suggest another route to wealth: spend less.

This is tried-and-tested method carries very little downside…other than being deeply unpopular in a world where spending is king.

In fact, most Americans have come to believe that they need never save again.

And why wouldn’t they?

During the boom years, one of the easiest ways of feeling rich was to spend – whether it is with a credit card or a home equity loan.

And spend we did…so much so that personal bankruptcies are now skyrocketing.

Thrift may not have been very popular during the boom years when the Fed was splashing credit around like cheap bubbly at a party. But it is one of the best ways we know of avoiding the bankruptcy courts.

What can people do now to protect themselves financially?

Well, as James explained in a 1992 cover story for The Futurist magazine in which he predicted another “Great (and very violent) Depression,” you “ought to begin to behave as if a depression had already begun.”

If you reduce their expenses and save more money, you will be far ahead of the game.

We recommend you try to save 20 to 25 percent of your income.

Now, many people say that’s impossible, that it simply can’t be done. But of course it’s possible, because the US standard of consumption is now five times what it was in 1929, when the country had the highest savings rate in the world.

So there’s no reason that the United States can’t have a high savings rate again when its standard of consumption is so much higher.

Survival is key right now. Then, maybe, years from now, we can put our financial lives back together again…and get on with things.

Don’t Follow the Crowd

Follow the crowd and you’ll get slaughtered in this crisis.

If you do what everyone else does, you will get the same returns as everyone else. And giving the state of the markets, that means negative returns.

If you want to do better – that is keep your head above water and even make some gains – you’ll have to do something different.

As contrarian fund manager Rick Rule puts it, “You’re either a contrarian or a victim.”

So get some good advice.

Find an independent investment guru with a good track record and stick with him.

As Bill wrote last year in Mobs, Messiahs and Markets:

What dooms the average investor is the same mushy quality that seems to be ruining the whole country. He will wait in line – without a word of protest – while the guards frisk Girl Scouts and old ladies for dangerous weapons. He cheers on the troops as though they were a football team. And he will believe any line of guff -– no matter how fantastic — as long as everyone else falls for it. Dow at 36,000? House prices always up? Interest-only neg-am mortgage?

Investors who follow newsletter gurus have no guarantee of making money. But those who follow the crowd are practically guaranteed that they won’t!

If an investor merely recognizes the way mob sentiment works, he is way ahead of most punters.

Never Play on a Level Field

At the other extreme, investors who are unaware of the dangers of the crowd lose money because they become patsies in the public spectacle.

They read the newspapers. They watch the TV. They listen to the network pundits. As a result, they become the buyers to whom the elite sell. They become the sellers from whom the elite buy. They watch Jim Cramer and forget to smirk.

They are nothing more than mass-market speculators.

Keep these investors in your sights, the way a hunter targets a deer.

You need to know what they are doing…and do the opposite.

The real speculator therefore has an advantage. He knows his mass-market competition. And this tilts the playing field in his favor.

He knows you don’t get rich by predicting the future. The mark of a real speculator is he looks for bets that are not fair.

Buy Cheap Hard Assets and Valuable Commodities

They say a low price is a sign of inner grace. And one sector that’s cheap right now is commodities.

This is really nothing more than what Bill has been calling the Trade of the Decade: “Sell stocks. Buy gold.”

Bill has been advising readers of The Daily Reckoning to do just this for years.

The decade has some months to run yet. But from where we stand now, it’s still looking like a pretty sensible call.

We see no reason to drop this advice. As DailyWealth editor Steve Sjuggerud put it, “Buy commodities now. Sell them in 2016.”

It’s a long-term play. But we think Steve is dead right.

Commodities prices are way down now. But this is a necessary correction to recent speculative excess. It’s not the end of the bull market that started about seven years ago.

Commodities have not reached their peaks yet…not by a long shot.

Click Here to Play with Media Player

Key points summary:

* There are great opportunities in panic sold commodity equities
* We are in a secular bull in commodities
* The industry is living off of mines developed 30 years ago
* Credit crisis limits new supplies of base metals and energy
* Developing nations didn’t get entangled in financial crisis
* Poorer people spend money on things that have large inputs of natural resources
* Competition from developed nations will only increase
* Credit will be difficult to obtain for natural resource projects for the next 2 to 3 years
* Very bullish on gold in 3 to 5 years

Demand for food will keep increasing as the world population grows and urban sprawl eats up more and more farmland.

Take grains.

The average Chinese person consumes about 2,500 calories a day. Same as the Taiwanese. The difference is the average Taiwanese person eats about nine times more meat.

The Chinese, of course, are catching up. Meat consumption in China is rising at a rate of about 20 percent a year.

The outcome for grains is obvious. Demand is rising. (It takes nine units of grain to produce on unit of meat.)

Or take water.

We believe one of the most dynamic and profitable themes for the rest of this decade will be investing in water.

As commodities investor Chris Mayer puts it, “Clean drinking water is a far more precious commodity than oil.”

Although water makes up the majority of the Earth’s surface, less than three percent of it is drinkable. Pollution and disease has made much of that water undrinkable.

And unlike oil, recessions don’t make demand for drinkable water go away.

Same goes for food.

Investing in a company that supplies grains to hungry people looks like a better bet to us than investing in one that sells mortgages to people who can’t afford them.

The US economy has become far too dependent on the finance sector, on easy credit and on the real-estate market. Now the chickens are coming home to roost.

This phony formula worked for a while. But now America has caught one on the chin thanks to its over reliance on these sectors.

As a result, we believe the post-depression profits will be in exactly the opposite places – in hard assets, in food, in precocious resources. The focus will shift to things we need, rather than things we want.

Buy Gold

There has been a lot of hand wringing about gold recently.

At about $950 an ounce at the time of writing, gold is a long ways off its March 2008 peak of $1,030.80.

But the bull market in gold –- the long-term uptrend since 2001 — is intact. Gold would have to close below $650 to break it

Sure, gold and gold stocks have been hammered along with everything else in this crisis as investors and institutions seek cash.

But as we have already covered, the Fed and the Treasury are flooding the system with money as they try to resuscitate the flat-lining credit markets.

And when we say flooding, we mean flooding.

As Jim Grant of Grant’s Interest Rate Observer recently observed, the Fed took 75 years –- from 1914 to 1989 –- to get its balance sheet up to $100 billion.

From there, Alan Greenspan took only another ten years to bring it to $500 billion.

Eight years or so later, the Fed’s balance sheet hit $1 trillion. And within the space of just three weeks in late 2008, Ben Bernanke doubled that from $1 trillion to $2 trillion.

“So a second order effect which might not be subtle,” Grant suggests, “might be inflation.”

As our colleague Martin Hutchinson — an investment banker with more than 25 years’ experience on Wall Street — puts it, “Gold is not a safe haven against recession. It’s a safe haven against inflation.”

Of course, deflation –- not inflation -– is the immediate threat.

But there are no two ways about it. The Obama administration is spending like a drunken sailor right now as it tries to reinflate the economy.

And Obama is going to spend even more.

This is long-term bearish for the dollar and long-term bullish for gold.

The Coming Depression Forecast in a Nutshell

We’ve covered a lot of ground. So, let’s pause for a moment and catch our breath while reviewing the main points of this emergency report:

• The last seven years of ‘growth’ were actually a Fed-inspired hyper-bubble, not a legitimate boom. Investors’ losses have already been profound. But they will deepen.
• House prices have further to fall. This will cause more mortgage-related writedowns and losses and further tighten credit.
• We can expect the Dow to bottom somewhere around 5,000 points. This may not happen immediately. We may see a giant “sucker’s rally” first. This will be a good time to sell.
• Extreme volatility will most likely continue throughout 2009.
• If the feds manage to avoid a deflationary spiral by cranking up the printing press, inflation and a declining dollar are unavoidable.

Thank you for reading.

Good luck.

P.S. Remember, you can get critical updates to this report from Contrarian Profits by joining the Notes from the Investment Underground email list.

Surviving and prospering in the coming bad years means first appreciating what you have. Economic depression doesn’t mean that you should become depressed.

Notes from the Investment Underground is a special new daily email service that will show how to live beyond yourself, not beyond your means.

Simply enter your email address to get your first issue.

It’s free to readers of this report.

Friday, December 4, 2009

• Your December reports
• The Real America
• The Future in Demographic Pyamids

Dear Reader,

Just below you’ll find instructions on how to access you latest editions of Strategic Investment. It’s part one of at a two part series. You’ll receive the second part early next week.

To download your first issue, go to http://strategicinvestment.com/subscribers/

The password is: invest

Next week, stay tuned for more details on improvements to your subscription. You’ll also receive the December issue of Strategic Investment. As you’ll see, we take on a very big idea. The idea is also an argument about what your investment strategy should be in the coming years not only to survive, but to prosper.

The argument is that the most important financial decision you’ll ever make has nothing to do with an asset class. It is far more fundamental. The most important financial decision you’ll ever make is much simpler: where will you live?

Since its discovery, the United States has enjoyed (and mostly earned) the reputation as a place of nearly limitless economic opportunity. Demographically and geographically, the continental United States has always been blessed. This has historically translated into investment and entreprenueiral opportunties. For most US citizens, life has always gotten better, and generally speaking, wealthier.

But that is not the case anymore. And in the next two reports, you’ll see why we think it is time for you to reconsider where, geographically, your best propsects for prosperity lie. Even if it is not realistic for you to physically move (or if you have no desire to do so), you may be interested in why we believe the best investment opportunities of the coming years lie elsewhere. And keep in mind that all of our investment strategies are easy enough to execute from anywhere to you happen to be.

The Real America

Before you get to this month’s reports, take a look at the map below. It contains an interesting fact which, to our knowledge, is not widely known about America. Namely, the United States was not named, as is widely believed, for the Italian explorer Americao Vespucci.

The Waldseemüller map, Universalis Cosmographia, originally published in April 1507

Jules Marcou of the Academy of Sciences in Paris pointed out in 1875 is that “Amerigo” was not Vespucci’s name. He refers to the a map first published by Martin Walsemuller in 1507 in which America is the name given to a different coutntry entirely. We know that country today as Brazil.

Walseemuller would only have known Vespucci’s first name as “Albericus” or “Alberico.” Note that Vessucci published his 1504 pamphlet Mundus Novus under the Lartinized name, Albercius Vesputius. To get “America” out of that seemed like a stretch to Marcou. We agree.

In any event, the origins of America and what landmass it first applied to are not merely a historical curiousity. They get to a more important investment question: in which country do your best ecnomic and investment opportunities reside? That is the issue taken up in these two reports, with a great deal of focus on America and Brazil.

***The Future in Demographic Pyamids

One more brief note regarding the next new reports. In both reports, you’ll read quite a bit about the relentless logic of demography. It has a nearly irressistable effect on a country’s economic propsects, and thus, your investment possibilities.

Take a look below at the population pyramids from the U.S. Census Bureau. Briefly, a population pyramid tells you the distribution of a nation’s population based on five year increments. It’s called a pyramid because generally, stable societies have more people under the age of 50 than over the age of 50. The math of reproduction suggests if a population is not having children at the replacement rate (at least 2.1 children for every couple) it will inevitably shrink, although immigration, in some notable cases, can prevent this.

We’ve reproduced six population pyramids for you below, courtesty of the US Census Bureau. The more like a pyramid they actually look—broad at the base and pointy at the type—the younger a population a nation as.

This does not automatically suggest a growing econmy and better investments. But at least in fiscal terms, it tells you quite a bit about a nation’s ability to meete welfare state obligations on its existing tax base.

The fatter the pyramid, the more difficult it will be for the country to meet any state-made promises to ageing citizens. Have a look at the charts and reach your own conclusions. In the next two reports below, we’ll tell you ours.

]]> http://strategicinvestment.com/2009/12/14/the-real-america/feed/ 0 http://strategicinvestment.com/2009/12/02/plagu/ http://strategicinvestment.com/2009/12/02/plagu/#comments Wed, 02 Dec 2009 05:56:27 +0000 james davidson http://122.252.4.91/~strateg1/?p=1 By James Dale Davidson

You don’t have to be a conservative, a liberal or anything at all to understand America as we know it is about to get flattened. The White House says the deficit will be $1.5 trillion—in 2010 alone. All up, the national debt is now racing past an astonishing $12 trillion.

In fact, if President Obama’s own economic projections are on target, he’s going to add $10 trillion on to the federal debt in the next 10 years.

That’s more than four times the deficits of George W. Bush’s presidency… and more than all of the other presidents – combined.

Whether you agree with them or not, or who you blame for them, one thing is clear, America is facing a fiscal train wreck—andit’s heading stragiht towards you.  These are the largest deficits as a percentage of GDP since 1945, when the country was paying for World War II.

It doesn’t matter whether you talk best case (a recovery in 2010) or worst case (a Greater Depression). We’re merely talking about different shades of disaster.

When you’re dead you’re dead. There aren’t some people who are “more dead” than others.

The debt plague that’s coming will wipe out trillions more in Americans’ savings.

Millions of hard working people will see their precious last dollars wiped away as America teeters… and then loses her economic footing… a victim of the greatest accumulation of debt the world has ever seen.

This Is How America Ends

Last year alone the US government spent $433 billion of your money on interest payments to the holders of U.S. debt. The interest the government pays on its debt is the fourth largest expense in the federal budget. Only defense, social security and health spending eat through more public money.

Already, in this year’s budget, 21 cents out of every dollar of federal income taxes is needed to pay just the interest on the debt.

Very shortly, it will take all our income taxes just to pay the interest.

But long before your debt reaches “infinity” you go broke. You are unable to pay even the interest on your debt, much less the principal, and nobody will lend you money anymore. That’s what happens to people like you or me.

If you are a government, you have another choice: You print money to get out of your fix. Then inflation takes off… interest rates take off… and the dollar becomes worthless.

We’re closer than you think to these grim scenarios.

It’s too late to reverse the situation. President Obama’s spending program certainly does not do so. And the Congress—both Republicans and Democrats alike—show no sign of regaining their common sense and averting a looming disaster for America.

Unforunately, the United States government will be forced to default on such obligations as Social Security, Medicare and military pensions…  Or the government will pay for everything in full – with worthless money.

In a moment, I’ll tell you more about which one it’s going to be.

We’re simply out of time.

Short term here are some events I expect to play over the next decade.

• No matter who you are, your taxes will go up. The government will continue to raise taxes in an attempt to keep its spending programs alive. The Obama administration is already planning to raise corporate taxes, already the second highest in the world. The costs of this will be passed on to you whenever you buy something.
• The US dollar is already being undermined as the world’s reserve currency as US debt holders led by China, Russia, India and Brazil move to protect themselves against dollar depreciation. Soon the dollar will lose its reserve currency status.
• The Social Security Ponzi scheme will collapse. The government will be unable to borrow the funds it needs to replace all the money it has already spent from the Social Security trust fund.
• Interest rates in the U.S. will rise to 6% plus as the government needs to raise the rate to stimulate foreign demand.
• Excessive government borrowing will push up mortgage rates and trigger another leg down in the housing market. Huge numbers of prime borrowers have already begun to default on their mortgages, triggering what is destined to become another wave of toxic asset writedowns at banks.
• The government will default on Social Security payments and Medicare and Medicaid obligations. It will not do so in an open way. Instead, it will fail to accurately index-link Social Security benefits to the cost of living… it will ration hospital stays and doctors visits… and it will deny expensive treatments and medication to state-insured patients (beginning with the elderly)
• The US will enter a long period of economic stagnation coupled with inflation.
• In years to come, the period between 2008 and 2018 will be known as America’s “lost decade.”
• Oil prices fall to $25 a barrel before breaking through their July 11 2008 high of $147.90 a barrel.
• Unemployment rates will rise to 20%.

It’s too late to stop these events.

But it’s not too late for you to protect yourself.  It’s urgent that you take action now.

The purpose of this report is to help you decide what to do – and even help you get rich during the coming bad years.

GM’s Collapse Is a Preview
of Our Future Economy

They say history repeats itself.

This means that you can understand it well enough to profit from its predictable patters.

In other words, if you know what trends to expect you can reap huge wealth.

I’ll jump ahead here a little bit and tell you something else: The forces at work right now are the most powerful forces in over 500 years.

Terrible suffering will occur. Things most of us never imagine. But big money is going to be made at the same time.

Did ordinary Americans know they were in something called the “Great Depression” in 1930?

No.

They thought their problems would blow over. But they were wrong. US stocks didn’t reach their 1929 level for another 25 years – until 1954.

To understand where the US economy is headed, look no further than the collapse of General Motors.

“I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy,” warned legendary billionaire bond investor Bill Gross in a recent note to investors.

GM’s mistakes have been America’s mistakes… And its problems will be America’s problems.

Take the enormous unfunded health care and pension problems shared by GM and the U.S.

“Reportedly, $1,500 of every GM car sold in the dealer showrooms goes to pay for current and future health benefits of existing and retired workers,” Gross points out.

GM is liable for nearly $60 billion in health-care costs. But the total future healthcare liability for all U.S. citizens can be measured in the tens of trillions.

Just as GM’s debt problems lead to its collapse, Washington’s addiction to debt will lead to the collapse of America’s economic standing in the world.

Here’s something the Obama administration doesn’t want you to know: We cannot solve a debt crisis by issuing more debt.

It’s as simple as that.

Obama and his cronies in the Federal Reserve are on a fool’s errand. In the end, all debts – private and public – must be serviced out of earned income.

And since the country’s income is falling as its debt burden is rising, this debt must also come down.

The Bubble of All Bubbles

The US is the world’s biggest debt addict.

And government debt is now expanding faster than ever.

Most people don’t stop to think about it. But America has the biggest deficit of any serious country in the world.

The US deficit is 13% of total annual economic output. Compare that to Russia at 2.6%… Spain at 6%… France at 5%… Brazil at 1.3%… Even Argentina has a much smaller deficit than the US – at only 3.6%.

And that’s only the beginning…

Even if we ignore the relentless build-up of spending on Social Security, Medicaid and Medicare, the cost of bailing out the banks and failed industrial behemoths like GM and Chrysler will soon send the federal-debt-to-GDP ratio to well over 100%.

Then there’s Obama’s ambition to spend trillions more on health, the environment and education. Each of these programs will force the White House to borrow trillions more dollars from foreign powers such as China, Russia and Japan.

There come the “unfunded liabilities” of Social Security, Medicare and Medicaid.

It’s difficult to believe. But there is currently no funding mechanism in place for Social Security’s unfunded liabilities. They amount to $13.6 trillion – only slightly less than a year’s worth of US GDP (around $14 trillion).

This is small change compared to the gaping hole in Medicare funding.

There are three components to Medicare:

1. Medicare Part A covers hospital stays. Its unfunded component is $34.4 trillion.
2. Medicare B covers doctor visits. Its unfunded component is worth $34.0 trillion.
3. Medicare D covers the drugs benefit. Its unfunded component amounts to $17.2 trillion.

The total unfunded liability for Medicare is $85.2 trillion – just over 600% of US annual GDP. And Medicare and social security together have unfunded liabilities worth 700% of last year’s US GDP.

The Plague of the Black Debt
(Plus the Most Profitable
Investment in the U.S.)

In three years, from 1347-50, about one person out of every three in Europe died of bubonic plague.

This was the famous Black Death.

Whole villages were wiped out, left to return to the wilderness. In cities, thousands of houses were boarded up and deserted.

I call the coming disaster in America the Plague of the Black Debt.

The coming tidal wave… the ultimate collapse of this debt pile… is actually in plain view.

It’s right there in President Obama’s record debt projections… in the spiraling deficits and pork-laden federal spending programs.

Barack Obama knows… and Ben Bernanke knows… that as soon as the printing presses stop… the whole swindle will come to light.

That’s because the sucker’s rally in stocks… and the glimmer of hope it brings… is all based on the printing presses in Ben Bernanke’s basement stuffing those duffel bags with brand new, sequential dollar bills.

Investors are searching for fool’s gold: credit markets are improving due to the guarantees behind improvements in credit markets, not due to a reduction in risk… the government’s intervention is now distorting asset prices across all categories… sovereign CDS widening represents the shift of credit risk from private investors to taxpayers… the pulling of governmental guarantees would be akin to an earthquake just as the house of cards is getting higher and higher… and the political risk tornado will destroy whatever it is the earthquake leaves.

- Tyler Durden, Zero Hedge, April 3 2009

No, I don’t expect millions to die (although it’s possible if society collapses.)

What I do expect is that the world will be changed, totally and permanently. Things will never be the same again.

Let me put it simply as simply as I can. The coming debt plague will destroy America’s economic leadership.

Unless you prepare urgently now, it will leave you in indentured servitude. You will be left behind to pay the greatest accumulation of bad debt the world has ever seen.

Budget experts estimate that federal taxes would have to rise by 64% to cover the unfunded liabilities of the federal government. And that doesn’t even include your share of the cost of the ongoing multi-trillion-dollar bailouts and stimulus programs.

There’s no way to sugarcoat what’s happening.

Remember, the Congressional Budget Office’s own estimates say Obama will add almost $10 trillion to the total federal debt by 2019.

That’s about as much total debt as was outstanding at the beginning of 2007!

This will trigger the worst financial calamity in America’s history… far worse than what we’re experiencing now.

In fact, I believe it will become the greatest economic disaster in recorded history.

“We misread how bad the economy was, but we are now only about 120 days into the recovery package. The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having distributed the bulk of the money.”

Vice President Joe Biden,
July 5th 2009

Consider the following facts…

There’s roughly $11.5 in debt outstanding. Then there’s another $10.1 trillion for the on-balance sheet Obama spending. Another $99.1 trillion is coming for unfunded entitlement programs such as Social Security and Medicare.

That’s something close to $120.7 trillion by 2019.

And it’s roughly another $120,700 in debt for each of the 100 million families in America.

Now, I know this all sounds meaningless. The kinds of numbers we’re talking about are the kind of numbers that used to be used in astronomy, not economics.

But “120 trillion” has 13 zeros: 120,000,000,000,000.

To put that in perspective, in 1980 that national debt was just $930 million.  Not even $1 billion!

This will have a devastating social impact:

• I see social security benefits being cut to the bone. They’ll probably only go to the neediest.
• I see at least 21 million unemployed or in make-work public assistance jobs.
• Sick and elderly will be cared for at home. Almost nobody will be able to afford nursing home care.
• I see millions more homeowners “upside down” – with a mortgage bigger than the value of the home.
• Washington will continue subsidizing and nationalizing US industries. Government interference in commercial markets will have far-reaching repercussions that your average bureaucrat couldn’t fathom.

Now, picture yourself in a neighborhood where the houses on either side of you are empty and for sale.

Windows are broken out. Homeless and squatters break in and sleep there.

There are no police to stop them because local government is broke and the tax base has fallen sharply.

For the same reason, the streets are full of potholes and the streetlights are broken. Power outages are common. In this dark, menacing environment, crime runs wild.

Almost everyone drives a “clunker” because few people can afford a new car anymore.

Mountains of green garbage bags pile up, stinking to heaven, because it’s three weeks between trash pick-ups.

In short… The suburbs will become slums. It has already happened in communities that went broke. Just look at most of modern day Detroit.

It is going to happen in many more communities – perhaps even yours.

It doesn’t give me any pleasure to predict these things. But I want to get this information to as many people as I can… because you can prepare yourself.

You and those you love can avoid this catastrophe. And the more of us who preserve our wealth, the better it will be for our country when the time comes to rebuild.

THE PLAGUE OF THE BLACK DEBT:

How to survive America’s Next Bubble Collapse

Millions of middle-class Americans are about to suffer the biggest wealth wipe out in history as a $110.7 trillion debt avalanche buries the economy… It’s too late to reverse course… But it’s NOT too late to protect yourself and your family…

By James Dale Davidson,

You don’t have to be a conservative, a liberal or anything at all to understand America as we know it is about to get flattened. The White House says the deficit will be $1.5 trillion—in 2010 alone. All up, the national debt is now racing past an astonishing $12 trillion.

In fact, if President Obama’s own economic projections are on target, he’s going to add $10 trillion on to the federal debt in the next 10 years.

That’s more than four times the deficits of George W. Bush’s presidency… and more than all of the other presidents – combined.

Whether you agree with them or not, or who you blame for them, one thing is clear, America is facing a fiscal train wreck—andit’s heading stragiht towards you. These are the largest deficits as a percentage of GDP since 1945, when the country was paying for World War II.

It doesn’t matter whether you talk best case (a recovery in 2010) or worst case (a Greater Depression). We’re merely talking about different shades of disaster.

When you’re dead you’re dead. There aren’t some people who are “more dead” than others.

The debt plague that’s coming will wipe out trillions more in Americans’ savings.

Millions of hard working people will see their precious last dollars wiped away as America teeters… and then loses her economic footing… a victim of the greatest accumulation of debt the world has ever seen.

This Is How America Ends

Last year alone the US government spent $433 billion of your money on interest payments to the holders of U.S. debt. The interest the government pays on its debt is the fourth largest expense in the federal budget. Only defense, social security and health spending eat through more public money.

Already, in this year’s budget, 21 cents out of every dollar of federal income taxes is needed to pay just the interest on the debt.

Very shortly, it will take all our income taxes just to pay the interest.

But long before your debt reaches “infinity” you go broke. You are unable to pay even the interest on your debt, much less the principal, and nobody will lend you money anymore. That’s what happens to people like you or me.

If you are a government, you have another choice: You print money to get out of your fix. Then inflation takes off… interest rates take off… and the dollar becomes worthless.

We’re closer than you think to these grim scenarios.

It’s too late to reverse the situation. President Obama’s spending program certainly does not do so. And the Congress—both Republicans and Democrats alike—show no sign of regaining their common sense and averting a looming disaster for America.

Unforunately, the United States government will be forced to default on such obligations as Social Security, Medicare and military pensions…  Or the government will pay for everything in full – with worthless money.

In a moment, I’ll tell you more about which one it’s going to be.

We’re simply out of time.

Short term here are some events I expect to play over the next decade.

• No matter who you are, your taxes will go up. The government will continue to raise taxes in an attempt to keep its spending programs alive. The Obama administration is already planning to raise corporate taxes, already the second highest in the world. The costs of this will be passed on to you whenever you buy something.
• The US dollar is already being undermined as the world’s reserve currency as US debt holders led by China, Russia, India and Brazil move to protect themselves against dollar depreciation. Soon the dollar will lose its reserve currency status.
• The Social Security Ponzi scheme will collapse. The government will be unable to borrow the funds it needs to replace all the money it has already spent from the Social Security trust fund.
• Interest rates in the U.S. will rise to 6% plus as the government needs to raise the rate to stimulate foreign demand.
• Excessive government borrowing will push up mortgage rates and trigger another leg down in the housing market. Huge numbers of prime borrowers have already begun to default on their mortgages, triggering what is destined to become another wave of toxic asset writedowns at banks.
• The government will default on Social Security payments and Medicare and Medicaid obligations. It will not do so in an open way. Instead, it will fail to accurately index-link Social Security benefits to the cost of living… it will ration hospital stays and doctors visits… and it will deny expensive treatments and medication to state-insured patients (beginning with the elderly)
• The US will enter a long period of economic stagnation coupled with inflation.
• In years to come, the period between 2008 and 2018 will be known as America’s “lost decade.”
• Oil prices fall to $25 a barrel before breaking through their July 11 2008 high of $147.90 a barrel.
• Unemployment rates will rise to 20%.

It’s too late to stop these events.

But it’s not too late for you to protect yourself.  It’s urgent that you take action now.

The purpose of this report is to help you decide what to do – and even help you get rich during the coming bad years.

GM’s Collapse Is a Preview
of Our Future Economy

They say history repeats itself.

This means that you can understand it well enough to profit from its predictable patters.

In other words, if you know what trends to expect you can reap huge wealth.

I’ll jump ahead here a little bit and tell you something else: The forces at work right now are the most powerful forces in over 500 years.

Terrible suffering will occur. Things most of us never imagine. But big money is going to be made at the same time.

Did ordinary Americans know they were in something called the “Great Depression” in 1930?

No.

They thought their problems would blow over. But they were wrong. US stocks didn’t reach their 1929 level for another 25 years – until 1954.

To understand where the US economy is headed, look no further than the collapse of General Motors.

“I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy,” warned legendary billionaire bond investor Bill Gross in a recent note to investors.

GM’s mistakes have been America’s mistakes… And its problems will be America’s problems.

Take the enormous unfunded health care and pension problems shared by GM and the U.S.

“Reportedly, $1,500 of every GM car sold in the dealer showrooms goes to pay for current and future health benefits of existing and retired workers,” Gross points out.

GM is liable for nearly $60 billion in health-care costs. But the total future healthcare liability for all U.S. citizens can be measured in the tens of trillions.

Just as GM’s debt problems lead to its collapse, Washington’s addiction to debt will lead to the collapse of America’s economic standing in the world.

Here’s something the Obama administration doesn’t want you to know: We cannot solve a debt crisis by issuing more debt.

It’s as simple as that.

Obama and his cronies in the Federal Reserve are on a fool’s errand. In the end, all debts – private and public – must be serviced out of earned income.

And since the country’s income is falling as its debt burden is rising, this debt must also come down.

The Bubble of All Bubbles

The US is the world’s biggest debt addict.

And government debt is now expanding faster than ever.

Most people don’t stop to think about it. But America has the biggest deficit of any serious country in the world.

The US deficit is 13% of total annual economic output. Compare that to Russia at 2.6%… Spain at 6%… France at 5%… Brazil at 1.3%… Even Argentina has a much smaller deficit than the US – at only 3.6%.

And that’s only the beginning…

Even if we ignore the relentless build-up of spending on Social Security, Medicaid and Medicare, the cost of bailing out the banks and failed industrial behemoths like GM and Chrysler will soon send the federal-debt-to-GDP ratio to well over 100%.

Then there’s Obama’s ambition to spend trillions more on health, the environment and education. Each of these programs will force the White House to borrow trillions more dollars from foreign powers such as China, Russia and Japan.

There come the “unfunded liabilities” of Social Security, Medicare and Medicaid.

It’s difficult to believe. But there is currently no funding mechanism in place for Social Security’s unfunded liabilities. They amount to $13.6 trillion – only slightly less than a year’s worth of US GDP (around $14 trillion).

This is small change compared to the gaping hole in Medicare funding.

There are three components to Medicare:

1. Medicare Part A covers hospital stays. Its unfunded component is $34.4 trillion.
2. Medicare B covers doctor visits. Its unfunded component is worth $34.0 trillion.
3. Medicare D covers the drugs benefit. Its unfunded component amounts to $17.2 trillion.

The total unfunded liability for Medicare is $85.2 trillion – just over 600% of US annual GDP. And Medicare and social security together have unfunded liabilities worth 700% of last year’s US GDP.

The Plague of the Black Debt
(Plus the Most Profitable
Investment in the U.S.)

In three years, from 1347-50, about one person out of every three in Europe died of bubonic plague.

This was the famous Black Death.

Whole villages were wiped out, left to return to the wilderness. In cities, thousands of houses were boarded up and deserted.

I call the coming disaster in America the Plague of the Black Debt.

The coming tidal wave… the ultimate collapse of this debt pile… is actually in plain view.

It’s right there in President Obama’s record debt projections… in the spiraling deficits and pork-laden federal spending programs.

Barack Obama knows… and Ben Bernanke knows… that as soon as the printing presses stop… the whole swindle will come to light.

That’s because the sucker’s rally in stocks… and the glimmer of hope it brings… is all based on the printing presses in Ben Bernanke’s basement stuffing those duffel bags with brand new, sequential dollar bills.

Investors are searching for fool’s gold: credit markets are improving due to the guarantees behind improvements in credit markets, not due to a reduction in risk… the government’s intervention is now distorting asset prices across all categories… sovereign CDS widening represents the shift of credit risk from private investors to taxpayers… the pulling of governmental guarantees would be akin to an earthquake just as the house of cards is getting higher and higher… and the political risk tornado will destroy whatever it is the earthquake leaves.

- Tyler Durden, Zero Hedge, April 3 2009

No, I don’t expect millions to die (although it’s possible if society collapses.)

What I do expect is that the world will be changed, totally and permanently. Things will never be the same again.

Let me put it simply as simply as I can. The coming debt plague will destroy America’s economic leadership.

Unless you prepare urgently now, it will leave you in indentured servitude. You will be left behind to pay the greatest accumulation of bad debt the world has ever seen.

Budget experts estimate that federal taxes would have to rise by 64% to cover the unfunded liabilities of the federal government. And that doesn’t even include your share of the cost of the ongoing multi-trillion-dollar bailouts and stimulus programs.

There’s no way to sugarcoat what’s happening.

Remember, the Congressional Budget Office’s own estimates say Obama will add almost $10 trillion to the total federal debt by 2019.

That’s about as much total debt as was outstanding at the beginning of 2007!

This will trigger the worst financial calamity in America’s history… far worse than what we’re experiencing now.

In fact, I believe it will become the greatest economic disaster in recorded history.

“We misread how bad the economy was, but we are now only about 120 days into the recovery package. The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having distributed the bulk of the money.”

Vice President Joe Biden,
July 5th 2009

Consider the following facts…

There’s roughly $11.5 in debt outstanding. Then there’s another $10.1 trillion for the on-balance sheet Obama spending. Another $99.1 trillion is coming for unfunded entitlement programs such as Social Security and Medicare.

That’s something close to $120.7 trillion by 2019.

And it’s roughly another $120,700 in debt for each of the 100 million families in America.

Now, I know this all sounds meaningless. The kinds of numbers we’re talking about are the kind of numbers that used to be used in astronomy, not economics.

But “120 trillion” has 13 zeros: 120,000,000,000,000.

To put that in perspective, in 1980 that national debt was just $930 million.  Not even $1 billion!

This will have a devastating social impact:

• I see social security benefits being cut to the bone. They’ll probably only go to the neediest.
• I see at least 21 million unemployed or in make-work public assistance jobs.
• Sick and elderly will be cared for at home. Almost nobody will be able to afford nursing home care.
• I see millions more homeowners “upside down” – with a mortgage bigger than the value of the home.
• Washington will continue subsidizing and nationalizing US industries. Government interference in commercial markets will have far-reaching repercussions that your average bureaucrat couldn’t fathom.

Now, picture yourself in a neighborhood where the houses on either side of you are empty and for sale.

Windows are broken out. Homeless and squatters break in and sleep there.

There are no police to stop them because local government is broke and the tax base has fallen sharply.

For the same reason, the streets are full of potholes and the streetlights are broken. Power outages are common. In this dark, menacing environment, crime runs wild.

Almost everyone drives a “clunker” because few people can afford a new car anymore.

Mountains of green garbage bags pile up, stinking to heaven, because it’s three weeks between trash pick-ups.

In short… The suburbs will become slums. It has already happened in communities that went broke. Just look at most of modern day Detroit.

It is going to happen in many more communities – perhaps even yours.

It doesn’t give me any pleasure to predict these things. But I want to get this information to as many people as I can… because you can prepare yourself.

You and those you love can avoid this catastrophe. And the more of us who preserve our wealth, the better it will be for our country when the time comes to rebuild.

]]> http://strategicinvestment.com/2009/12/02/plagu/feed/ 3 http://strategicinvestment.com/2009/12/02/bond-traders-veto-presidents/ http://strategicinvestment.com/2009/12/02/bond-traders-veto-presidents/#comments Wed, 02 Dec 2009 05:54:59 +0000 james davidson http://strategicinvestment.com/?p=68 Bond traders aren’t elected, and they answer to nobody. But they possess knowledge about market prices around the world.

They move trillions of dollars a day. And that makes them very powerful.

When bond traders see that Obama and the Federal Reserve are really serious about bringing about inflation, they will dump hundreds of billions of dollars in US bonds.

This will deal a deathblow to the dollar. The price of US Treasuries will plummet. Who in their right mind wants to be left holding a currency that’s plunging in value?

The only way to lure lenders back will be to raise yields on US government bonds.

Rising yields means higher mortgage rates… and higher borrowing costs at the consumer level… This will lead to the complete collapse of the highly leveraged U.S. economy.

It’s a nightmare scenario for the already seriously wounded US economy. But the government will have little choice. It will have saddled itself – and you – with an unbearably high burden of debt.

So what will Obama try to do to bail himself out of this seemingly impossible situation?

The Plan to Take Half of Your Money

Obama will have to raise taxes eventually.

And with the help of a super majority in the Democratic Congress, there’s nothing to stop him!

Larry Summers and other top advisors will be there with the academic mumbo-jumbo to justify it all.

In 2009 or the year after, Obama will go on nationwide TV. He’ll look us right in the eyes. And he’ll tell us that his program to raise the tax brackets to 39.6% for people earning over $250,000 has been so successful that he’s raising the rate to 42.9% and lowering the income level to $95,000!

 But That’s Not All!

Besides raising the tax brackets, Obama will raise a host of other new taxes, great and small.

• After 2010, the death tax will be resurrected – with a chip on its shoulder. And it will hit estates that haven’t been taxed since 2001.
• Medical benefits from your employer will be taxed.
• Capital gains rates will jump to suck what little life remains from the economy.

(These are just a few of the tax hikes that have been publicly acknowledged.  You should never doubt the creative new ways the government can come up with to steal your hard earned money.)

Remember, Obama will be slashing Social Security, Medicare and every other type of government spending. The victims of these cuts are going to be in a rage. They’re going to be baying for blood.

And Obama’s going to give them somebody’s blood: yours.

Ladies and gentlemen, this is not news. We’ve already seen Clinton’s strategy was to blame the rich.

When cornered, Obama will attack with the easiest tax target – estate taxes. You can count on it. Why should anyone inherit wealth? Obama is going to ask.

Maybe the parents have earned it, but the kids didn’t. Tax it away! Fairness!

In 2010, there is no estate tax. But like Jesus calling Lazarus forth from his grave, Obama “the Chosen One,” will say “Rise up!” And in 2011 the estate tax will hit anything over a million dollars with a top rate of 55%.

A million bucks… Sounds like a lot of money, right? But it’s not. Throw together your house, your car and a small stock portfolio and you get there pretty darn quick.

Anything over that, the feds are going to be taking over half! And they are closing a noose around your ability to give gifts while you’re still alive.

If you’re worth $1.5 million – once again, something that’s quite easy when you look at all your worldly possessions – your heirs will be paying $275,000 in new taxes. Just to the feds.

Throw in probate costs, state taxes, lawyers’ fees… and easily you could see a third of your wealth vanish into thin air.

Disinherit the IRS

Is there any salvation from these outrageous new taxes?

You bet! There are specific steps you can take right now to disinherit Mr. Obama’s IRS. But if you procrastinate a few months, you could lose big.

The newspapers will tell you that there’s not much you can do to hold onto your money. They are wrong.

You can rearrange your assets to avoid the new confiscatory income and estate taxes. Using trusts and other devices over the next two years can keep your money where it belongs – with your family and loved ones.

Put simply, it’s time to bury your wealth.

This will see you through the coming bad years. It will also be the foundation of our country to rebuild after Barack Obama is gone in 2012.

It’s now clear that most assets are going to go down in value. Our whole reason for publishing Strategic Investment is to tell you what’s going up – and what to avoid!

]]> http://strategicinvestment.com/2009/12/02/bond-traders-veto-presidents/feed/ 0 http://strategicinvestment.com/2009/12/02/turning-chaos-into-cash/ http://strategicinvestment.com/2009/12/02/turning-chaos-into-cash/#comments Wed, 02 Dec 2009 05:53:50 +0000 james davidson http://strategicinvestment.com/?p=66 Lord Rees-Mogg and I called our first book Blood in the Streets. Its subtitle was “Investment Profits in a World Gone Mad.” A lot of people thought we were overdoing it just a bit.

But consider the forecasts we made that came true:

• The Crash of 1987.
• The crash in Tokyo stocks and real estate, with losses in the trillions. (Our readers tripled their money on the fall in Japanese stocks… with a low-risk investment you could buy from any U.S. broker.)
• The end of the Soviet Union and the Cold War
• The fall of the Berlin Wall and German reunification

And more recently:

• The credit crisis
• The collapse of the U.S. housing market
• The recent government bailouts and the nationalization of U.S. banks

All this is history now. And we are now faced with far more treacherous economic times than ever before.

Our objective at Strategic Investmentis to protect you from the bad news and to help you actually grow wealthy from it.

Following are three investments. They are my short list of ideal money-makers during the coming bad years. (They are yours along with many more in your monthly issue of Strategic Investment, should you decide to take me up on my no-risk introductory offer. Scroll down to the bottom of this letter and click the link to get your complimentary report right away.)

1. Low-risk and High Returns from this Giant Emerging Market Bank

Brazil’s banking system is solvent. It has no problem with non-performing subprime loans.

That is one of the reasons that I recommend Banco Itau (NYSE:ITUB), the largest bank in the southern hemisphere. ITU was also the most profitable bank in the world a few years ago.

Buying ITUB is a bet that a crisis in the US and Europe is no longer an occasion to deleverage credit in the BRIC economies.

The 80% rally of the Bovespa from the bottom in Q4 2008 suggests that the local market is convinced that Brazil is prepared to find a way forward, even if the US and other major northern hemisphere economies remain stalled out in the aftermath of the credit crisis.

Two key advantages will help Brazil on its way: its large currency reserves and that its main trading partner is now China.

ITUB has averaged a 26.8% return on equity over the past three years. And unlike the large US banks, it’s well-funded and doesn’t have a balance sheet riddled with toxic assets.

Credit card loans, for instance, only make up 8% of their loan portfolio. The bulk of their loans, 38%, has been issued to corporations expanding rapidly within Brazil.

In addition to being the largest bank in Brazil, ITU has significant presence in 11 other countries. If Brazil motors forward to become the next economic superpower, as I expect, ITUB will continue to post stellar results.

2. Your Road to a 50% Return on Investment

Another bet on future growth in Brazil is CCR Rodovias-ON NM (Bovespa: Sao Paulo: CCRO3)

CCR Rodovias is the largest operator of toll roads in Brazil. Unlike the US, Brazil has made a policy commitment to privatize the operation of its highways. This means major roadways are being auctioned on a regular basis. The return on investment has been stellar – as high 50%.

As Brazil’s largest toll road operator, CCR Rodovias, is a proxy for the growth of Brazil’s middle class. I expect the number of automobiles in Brazil to continue growing as incomes rise and the middle class becomes more vibrant.

This is already happening as witnessed by CCR’s net revenue, which increased by 15.7% in the first quarter of this year alone.

And that’s just part of the story. You see, CCR is allowed to raise its toll rates alongside inflation. This has had the effect of allowing CCR to have high profit margins. Margins before interest and taxes totaled 50.7%. That means for every $100 that comes in, $50.70 is all profit. Most companies in America would be envious.

There are still fewer than 200 passenger cars for every 1,000 people in Brazil; unlike in the US, where the car market is saturated, Brazil’s car market has a lot of “open road” in front of it.

The result is that traffic has gone up 16.3% since the fourth quarter of 2008.

Brazilians tend to prefer to live in gated communities as they reach higher levels of prosperity. This implies a surge in growth in commuter communities – and more traffic on the toll roads to fill the coffers of CCR Rodovia.

3. Make $20,000 a Year from Brazilian Bonds

One of the best plays on Brazil is to buy Brazilian government bonds, if you can afford to trade in the large denominations normally required.

I first recommended these bonds in January and we have already realized a gain of almost 29% in just five months.

You have accrued interest in Brazilian real at 12.9%. It won’t be paid until July; but your accrued interest of 53.9 real also includes a currency gain of 11.46%. This adds another $29.14 in value and brings your total gain on the Brazilian we government bonds we recommended to 28.8%. For every $1,000 you invested, you now have $1,288.67.

You can see why there has been a big appetite for Brazilian bonds lately… and why aggressive investors have been borrowing in dollars and buying Brazilian government bonds yielding 10% to 11%.

I still think these bonds are a great bargain.

In the special report Turning Chaos into Cash: Three Slam-Dunk Investments for 2009 I give the details of how to use leverage to buy these bonds and net upwards of $20,000 (maybe much more) per year.

I’ve chosen to focus on Brazil in this report because Brazil has thrived as a deleveraged economy.

Punishingly high real interest rates in the recent past have kept credit out of Brazil.

As of June 30 2002, Brazilian government loans yielded 17.7%. Business loans yielded an average of 38.28%. And the average annual yield to banks on consumer loans was 60.57%.

That’s why Brazil will continue to boom and make some investors very rich.

]]> http://strategicinvestment.com/2009/12/02/turning-chaos-into-cash/feed/ 0 http://strategicinvestment.com/2009/12/02/this-economic-collapse-happened-right-on-cue/ http://strategicinvestment.com/2009/12/02/this-economic-collapse-happened-right-on-cue/#comments Wed, 02 Dec 2009 05:35:33 +0000 james davidson http://strategicinvestment.com/?p=56 by James Dale Davidson

At Strategic Investment, our secret is the theory of “megapolitics.”

Megapolitics is a concept I developed with Lord Rees-Mogg in Blood in the Streets and The Great Reckoning: Protecting Yourself in the Coming Depression.

You don’t have to read the books to understand the main idea: The world is shaped by big, powerful forces or trends that nobody can control.

Unfortunately, the current period is fraught with grave danger. That’ s because big governments and empires are much more prone to collapse than to grow and prosper

Very few people are even aware of them, but there are historical cycles that repeat themselves over and over.

For instance, there have been nine depressions, spaced about 60 years apart, since the mid-16th century.

One explanation for this is human psychology. After a depression, the generation that suffered through it is very careful and conservative. Lenders make only totally-safe, no-risk loans. Investors will only invest in sure things.

It was 1954 before the Dow reached the level it had been in the boom of the 1920s.

Then, about 30 or 40 years after a depression, a new generation begins to take over.

Its members have little memory of the crash. They think their elders are over-cautious old fuddy-duddies who are missing profit opportunities.

And, in a way, they’re right. It’s time to get more aggressive. Think of the 1950s and 1960s.

As this new generation takes control of banks, corporations, government and other institutions, these people eventually throw caution to the wind.

By about 60 years after the last crash, there’s almost no one around who remembers what it was like. Stocks and real estate have gone up for as long as these people can remember.

The stage is set for another depression, caused by cheap money, bad loans and the foolish investments of the boom generation.

That’s where we are now. The “credit cycle” began to unwind in August 2007, with the collapse of subprime mortgage securities, but it still has a long way to go. The worst is yet to come.

The 500-Year Cycle

There is also a long 500-year cycle. No one knows precisely why this is.

What we do know is that this cycle is unusually precise.

Between 50 B.C. and 50 A.D. the Christian religion began and the Roman Republic was replaced by an empire. Around 500 A.D. the Roman Empire collapsed.

At about 1,000 A.D. the Dark Ages gave way to the Middle Ages. And around 1500 A.D. the Modern Age – our age – began.

We are now at the turning point of the 60-year and the 500-year cycles. If history is any guide, this will be a period of war, depression, dramatic changes in technology and vast social and economic upheaval.

All turns in the 60-year cycle follow a period of excessive debt. All involve a credit crisis, all lead to a collapse of property values, all ruin independent businessmen, all have serious political consequences  and all cause high unemployment and social distress.

This isn’t idle chitchat. There are opportunities to make enormous amounts of money.

For example, from those Brazilian bonds I told you about earlier we’re making an almost 70% annualized return! On bonds!

In four months one special type of gold company that I recommended has spiked up over 60%.

Yet another recommendation – a financial services play – made 38% in four days.

These are just some of the real fortune building returns racked up so far this year…

And I’m seeing many more of these high-profit anomalies on the horizon… many more than there were a few years ago…

That’s because we’re in the middle of a cyclical collapse. And that’s when asset mispricing and great opportunities abound.

Each of the great 60-year turning points creates a whole new class of millionaires and wipes out the accumulated wealth of the old class.

There’s really no escaping it. Society has to write off debts that were piled up too high when times were good.

Government can shuffle the pain around… but government cannot escape the pain.

The Market Is More Powerful
Than Any Government

The biggest mistake of our time is the belief that government can avoid the costs of bad debts and failed investments.

Just as the Russians found out that you can’t create a society in which no one can make a profit, we’re going to find out you can’t have a society in which no one takes a loss.

President Obama has set off on a policy of rescuing failed companies and big unions. It’s not going to work.

Anyone with a sense of history knows it…“old timers” who’ve seen crashes like this one before.

Take Richard Russell.

Russell is 84. He’s been writing his investment newsletter, Dow Theory Letters, for 50 years. It’s one of the most respected financial publications going. The People’s Bank of China is a subscriber. So are many Wall Street traders.

“People in this country don’t realize how bad things can be,” Russell told a close group of insiders recently.

“I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then.

“But now, you see the restaurants are still full. People are still spending money. They may be worried and they may be beginning to save, but there’s no sense of urgency.

“And there’s a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds.”

There are a lot of people with opinions on the economy and the stock market. You can hardly turn on your computer without getting dozens of them.

But there are not many opinions with the depth of experience and knowledge behind them as those of Richard Russell.

He’s been studying “the language of the markets” for more than half a century.

“The primary trend is down,” Russell told the same select group of friends and investment professionals recently.

In the end, Russell believes that no matter what Obama and Bernanke do, the primary trend will have its way. The bear market will continue until it “has fully expressed itself.”

“What would you do if you were suddenly in a position of power in the United States?” asked one of the guests at the recent gathering.

“Nothing,” replied Russell.

“I’d do nothing. I’d let it happen. I’d let the bear market do its work.”

But that’s not what President Obama – who’s just over half Russell’s age – is doing.

Obama wants the government to act. And this means tax, print, spend and legislate.

Prop up failed automakers. Stuff money into zombie banks. ‘Stimulate’ with pork-laden spending bills.

This year’s first ‘stimulus’ plan has conspicuously failed to create the millions of jobs the president promised. Reports indicate that the White House is now working on yet another stimulus’ to spend even more money out of an empty pocket.

Of course, Obama plans to print trillions of fresh new dollar bills to pay for it all.

Obama doesn’t remember the Great Depression. Richard Russell does.

The Most Important World Trend

Under the cover the economic crisis President Obama and his allies in the Federal Reserve are radically altering the U.S. economy.

We now have a projected budget deficit of 13% of GDP. That’s more than twice the size of the next largest deficit since the end of World War II.

The federal government now has massive stakes in the banking, mortgage, auto, health care and insurance industries.

Unfunded liabilities – Social Security, civil service and military pensions, the Pension Benefit, Guarantee Corporation, Medicare and Medicaid – are over the $100 trillion mark.

An entire year’s worth of US economic output stands at just under $14 trillion. Total federal tax receipts are just $2.4 trillion.

Something’s got to give. This much is obvious.

Well, behind the scenes something already is:  a 100% increase in the money available to the economy.

It’s the biggest increase in what economists call monetary base – made up of currency in circulation, bank reserves at the Fed and vault cash – in 50 years… by a factor of 10.

Think of this as a huge build up of potential cash, rather like a build-up of water behind the walls of a giant hydro dam.

Once the flood gates open, the water will gush out and drown everything in its path. Money will flood the economy and lead to higher inflation and interest rates.

It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date, what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.

So why is the Fed expanding the money supply so recklessly, if results are so disastrous?

That’s easy. The expansion of money can also result in higher stock prices, higher house prices and a weaker currency in the short term.

And these are three things Washington desperately wants right now.

Higher stock prices mean that banks and big corporations can raise money by issuing shares, rather than by relying purely on government hand outs.

Higher house prices would make it easier for families to pay the banks back for mortgages they took out on their houses.

And a weaker dollar makes the government’s debt pile cheaper to pay back.

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