THINGS THAT MAKE YOU GOHmmm…A walk around the fringes of finance

18 May 2011 1

“As a very important source of strength and security, cherish public credit. One method of preserving it is, to use it as sparingly as possible; avoiding occa-sions of expense by cultivating peace, but remem-bering also that timely disbursements to prepare for danger frequently prevent much greater disburse-ments to repel it; avoiding likewise the accumula-tion of debt, not only by shunning occasions of ex-pense, but by vigorous exertions in time of peace to discharge the debts, which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden, which we ourselves ought to bear.”– GEORGE WASHINGTON

“ The consequences arising from the continual accumulation of public debts in other countries ought to admonish us to be careful to prevent their growth in our own.”– John Adams, First address to Congress, Nov 23, 1797

“Louie Louie, oh noMe gotta goAye-yi-yi-yi, I saidLouie Louie, oh babyMe gotta go”

– Louie Louie, The Kingsmen

2.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 2

In February 1964, The Beatles were on top of the Billboard charts for the first time with ‘I Want To Hold Your Hand’ and their arrival at JFK on the 7th for their now-legendary appearance on the Ed Sullivan Show two days saw the beginning of ‘Beatlemania’ as the Fab Four took the world by storm and changed popular music forever.

Sixteen months on from the Cuban Missile Crisis, Cuban/US tensions were still high as Cuba cut off water supplies to the US base at Guantanamo Bay in reprisal for the US seizure of 4 fishing boats off the coast of Florida while on the other side of the world the Republic of China (Taiwan) severed dip-lomatic relations with France over their recognition of the People’s Republic of China.

Jimmy Hoffa was on trial for jury tampering, Greeks and Turks were fighting in Cyprus and the Italian government sought US help to stop the Leaning Tower of Pisa from failing over.

Meanwhile, Robert Kennedy, the US Attorney General had problems of his own.

Kennedy had received a letter from an outraged mother dated January 30, 1964 demanding he inves-tigate an issue of the utmost national importance. The letter began with a bang:

Dear Mr. Kennedy:

Who do you turn to when your teenage daughter buys and brings home pornographic or obscene materials being sold along with objects di-rected and aimed at the ‘teen age market in every city, Village and Record shop in this Nation?

What on earth could be provoking such outrage? What could be tearing at the moral fabric of America?:

My daughter brought home a record of ‘LOUIE LOUIE’ and I, after reading that the record had been banned from being played on the air because it was obscene, proceeded to try to decipher the jumble of words.

The lyrics are so filthy that I cannot enclose them in this let-ter

Yes. It was The Kingsmen’s version of the Richard Berry hit ‘Louie Louie’ - that widely acknowledged piece of depraved filth.

The outraged mother was under no illusion about how serious this was and the course of action Ken-nedy needed to take:

I would like to see these people, The “artists”, the Record company and the promoters prosecuted to the full extent of the law.

We all know there is obscene materials available for those who seek it, but when they start sneaking in this material in the guise of the latest ‘teen age rock & roll hit record these morons have gone too far.

In finishing her plea, the author made a statement and begged a question for good measure:

This land of ours is headed for an extreme state of moral degradation what with this record, the biggest hit movies and the sex and violence exploited on T.V.

How can we stamp out this menace? ? ? ?

CLICK TO SEE LETTER

3.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 3

Sadly, the identity of the moral crusader has been concealed for all eternity, but the remarkable na-ture of this story doesn’t end with her hopelessness for the future of America.

Amazingly enough, J. Edgar Hoover’s FBI proceeded to open an investigation into the case of the Louie Louie lyrics.

According to those vile ‘teen agers’, if the record were played at 33rpm instead of 45rpm, the deprav-ity revealed itself. Now, armed with that knowledge, and ignoring the time taken to procure a copy of the record, one would imagine that the investigation would take approximately 3:30 as a single listen to the 2:41 record at the slower speed would answer any lingering doubts.

But no.

The FBI spent over TWO YEARS trying to decipher the lyrics - even interviewing one of the Kingsmen who, understandably denied there were any obscenities hidden within the words of what was a simple song based on a Jamaican sea shanty. Eventually, once they decided once and for all that they couldn’t actually decipher the words and they’d spent countless taxpayer dollars on establishing that fact beyond a reason-able doubt, the following letter was sent to Hoover personally:

...The Department advised that they were unable to interpret any of the wording in the record and, therefore, could not make a decision concerning the matter...

Also, for the information of the New York Office, the FBI Labora-tory advised that because the lyrics of the recording, “Louie Louie” could not be definitely determined in the Laboratory examination, it was not possible to determine whether this recording is obscene.

And so the case was closed and taxpayer dollars could be directed to fighting the REAL battles of the day; could Mr. Ed really talk? Was Paul McCartney actually dead?.....

The point here is two-fold.

Firstly, the idea of taxpayer money being spent frivolously is hardly a new one. If anybody thinks that cutting the US expenditure below the debt ceiling is a tough thing to do, just take a look at the ear-marks on the average Bill that passes the house. For example, remember the October 2008 stimulus package? Well, amongst the earmarks included in the small print of the ‘bill that saved the world’ were $2 million for children’s wooden arrow makers, $1.9 million for the Charles B. Rangel Center for Public Service (er.....), $192 million for the US Territories’ rum industries, $460, 752 for the chief ingredient in beer - hops and $188,000 for the University of Maine Lobster Institute.

Remember the Omnibus Bill in December of 2010, the blocking of which led to the rise of the Tea Party? Well the earmarks in that one totalled $8,313,820,025..... yes, you read that number right, over $8 BILLION.

So on Monday, when the US finally breached the Statutory Debt Limit and Timothy Geithner wrote to Congress to explain how he’d managed to keep the country solvent for the next couple of months by declaring a ‘debt issuance suspension period’ for the Civil Service Retirement and Disability Fund, permitting Treasury to redeem a portion of existing Treasury securities held by that fund as invest-

CLICK TO SEE LETTER

4.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 4

ments and suspend issuance of new Treasury securities to that fund as investments, it should hardly have been a surprise to anybody that the US was only able to stay afloat through robbing the A.A.R.P. to pay the D.E.B.T.

Now, we all KNOW the debt ceiling will be lifted - none of us thinks for a second that the elected rep-resentatives of the United States of America will say ‘enough is enough’ and cut the spending spigots off - in fact, two of the central protagonists in the story managed to talk tough and yet demonstrate the emptiness in their words at the same time already this week (and it’s only Wednesday).

First up, the President, Barack Obama, speaking on CBS’ Face The Nation on Sunday night:

“...[if investors] around the world thought the full faith and credit of the U.S. was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system...We could have a worse recession than we’ve already had.”

“Our obligation is to raise the debt ceiling... But to raise the debt ceiling without dealing with the underlying problem is totally irresponsible.”

So there, in the bold sentence above is the truth about how Obama views raising the debt ceiling - it’s an obligation to do it.

So what about the counter from across the aisle where the guardians of fiscal propriety reside? Re-publican House Speaker John Boehner had this to say on the matter:

“At some point it’s clear to me that we have to increase the debt ceiling,”

Before adding:

“And as we do, we’re going to do it in a way that addresses America’s long-term fiscal challenges.”

So..... the President says it’s an obligation and the opposition leader says it’s something they ‘have’ to do.

Any questions?

Boehner’s throwaway line about ‘addressing America’s long-term fiscal challenges’ as well as Obama’s commitment to:

“...make sure no single group -- not seniors, not poor folks, not any single group -- is carrying the whole burden[.] Let’s make sure the burden is shared,”

are soothing words indeed, but the problem lies largely in the fact that the three most powerful men in America currently (The Donald notwithstanding) have not spent a day in the private sector in their working lives. Obama? Career public servant. Bernanke? Career academic turned public servant. Geithner? Career public servant.

None of these men appear to understand what a ‘budget’ actually is, because they have never re-ally had to balance one in a business sense. To them, a budget is an amount of money they are given to spend - and spend it they will. Anybody running a business that does NOT have an infinite line of credit that can be arbitrarily raised once it has been maxed out understands that you just can’t put off the hard decisions forever. Sooner or later those decisions get taken out of your hands by your creditors. But to the political class, the business of buying votes and/or following a course of action they are absolutely certain will solve everything are far less abstract concepts than making a bunch of numbers add up.

5.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 5

Take a good look at the chart above. See if you can find the last time the national debt was lowered. If you look closely enough you’ll just about see a small decline during the early days of JFK’s administration but otherwise it’s up, up and away (coincidentally enough, the pace acceler-ates noticeably in the years following Nixon’s decision to close the gold window, but we’re not going THERE today) for the beautiful ballooning debt of the United States. The only good thing that can be said is that it’s a bipartisan effort.

Which brings us on to our second point, namely, the fact that it doesn’t REALLY matter if you’re a Democrat or a Republican - hell it doesn’t even matter of you’re a European or an American - if you are a POLITICIAN, you will follow a very obvious course until forced to do otherwise and, in doing so, you will say pretty much anything that people want to hear (luckily, you have a complicit public who just want to be told everything will be OK).

Just recently we have seen plenty of evidence of the power of words from politicians around the world and we have discussed many examples of them in these pages. Yesterday, right on cue, the fol-lowing headlines hit the tape (thanks Alan):

*DJ Geithner: Budget Woes Threaten Economy, National Security

*GEITHNER WARNS AGAINST `MAGICAL THINKING’ ON ECONOMY

*GEITHNER: SOLVING DEBT PROBLEM NOT AS HARD AS GREAT DEPRESSION

*GEITHNER SAYS HE’S ‘OPTIMISTIC’ ABOUT THE COUNTRY

*GEITHNER SAYS ADDRESSING THE DEBT IS `THE PRESIDENT’S CAUSE’

So, let’s go through the politician’s checklist:

Mention National Security

Mention solving the problem

Mention that it will be OK

Mention that you’re focused on the issue at hand

CLICK TO ENLARGE SOURCE: GETMONEY

XXXX

6.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 6

Here are a few soundbites from the past couple of days as the debt ceiling was breached (again):

Geithner said U.S. “fiscal problems are so pressing that they threaten to undermine the founda-tions of our future economic strength” and the country’s ability “to protect our national security interests.”

In response to a question, Geithner said the U.S. benefits from global confidence in the dollar, especially during times of financial and economic stress when investors turn to the currency as a safe haven.

“That is an important thing we want to preserve and protect about the United States,”

and the piece de resistance:

“the debt limit must be increased. It is simply not an option for Congress to evade the basic respon-sibility to protect America’s creditworthiness.”

Now, can somebody PLEASE explain to me how taking on MORE debt makes America MORE credit-worthy? Seriously.

Weighing in on Europe’s ongoing debt crisis, Geithner was asked whether the region could handle the situation it found itself in. “Yes.”, he said, “They just have to do it”.

They just have to do it. Doesn’t matter if the numbers don’t add up. Makes no difference if the coun-tries making up the Eurozone are, in many cases, insolvent - they just have to do it.

Simple.

Across the aisle, our friend John Boehner struck a defiant tone:

House Speaker John Boehner said on Sunday that President Obama is “really not serious” about tackling America’s deficit problem.

In an interview broadcast on CBS’ “Face the Nation” Sunday, Boehner accused the president of fail-ing to take “real action” on the deficit, saying it is time to “just deal with” the nation’s economic problems...

“He’s talking about [the deficit],” Boehner told Harry Smith. “But I’m not seeing real action here. And I just think this is the moment. We all know what the problems are. So, why don’t we just deal with them? No more kicking the can down the road.”

“Now is the time to deal with the fiscal problems we have in an adult-like manner,” he added...

“Listen, I understand what the president was saying about jeopardizing the full faith in credit of the United States,” Boehner said. “I’m ready to cut a deal today.

“We don’t have to wait until the 11th hour,” he continued. “But I am not gonna walk away from this moment. We have a window of opportunity to act. Because if we don’t act, the markets are gonna act for us. Our creditors are gonna act for us.”

Well them’s fightin’ words indeed so we’ll have to wait and see whether the Republicans stand firm and make the tough decision to shut down the government knowing that it’s the responsible thing to do.

But before you listen TOO carefully to the words of the politicians, let’s check in with InTrade to see what the odds are that the deficit limit will be raised, shall we? Let’s find out where people are putting their MONEY - which, while not as cheap as words, is getting cheaper every day:

7.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 7

So that’s a 95% chance of a sparkly new $15.1 trillion limit by September 30th and an 85% chance of a similar raise by August 31.

Any questions?

Right then. Let’s recap, shall we?

We have a family that has maxed out its credit card. We have the parents of that family telling the kids that they can’t go on like this while simultaneously promising them a foreign holiday, a new car, a couple of jetskis and front row seats at a Justin Bieber con-cert and we have 300,000,000 kids who pretty much all agree that the treats need to stop, but will stamp their feet and scream if they actually DO.

Can you imagine how big a bummer it’s going to be when the credit card company decides enough is enough and cancels the card?

After something of a rant, it’s time to get down to the important stuff for today and that begins with a look at the tectonic plates on which the most recent earthquake victims sit and the question of who’s next. From there we spend a bit of time in Europe as the politicians there take a leaf out of their Transatlantic cousins’ playbook and stall for time, Gordon Brown warns of impending hardship and we ponder whether Italy might just surprise us all.

Gideon Gono is back and has a crazy idea that Might. Just. Work, Robert Reich introduces us to a new martial art - Budget Jujitsu (though why he didn’t call it Budgitsu is beyond me - so much cleaner), Matt Taibbi shows us some damning evidence and we read the third part of the Good, the Bad & The Ugly which focuses on the Federal Reserve.

Meredith Whitney is back and she’s up to her old tricks, the Chinese get a taste of what a failed bond auction looks like, we try to ascertain whether Greece is the next Lehman Brothers and Peter Grandich gives us his views on the silver market manipulation debate.

We have charts of the history of the world’s reserve currencies, US housing demographics, the vari-ous scenarios facing Greece and a recap from Jesse of gold, silver and the dollar as well as interviews with Hugo Salinas Price and Russell Napier and a fascinating look at how the process of ‘fracking’ is carried out.

They just can’t budge it.

8.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 8

Contents 18 May 2011

Is San Francisco Next?

Euro Crisis Worsens As EU Leaders Play For Time

World On Course For Next Crisis, Warns Gordon Brown

Italy Next To Seek EU Bailout

Reserve Bank Of Zimbabwe Urges Gold-Backed Zim Dollar

The Good, The Bad And The Ugly - Part Three

The Battle Is Squared, And Why We Need Budget Jujitsu

Testimony, Goldman-Style; A Tour Through The Levin Report

China Treasury Bonds Undersubscribed On Tight Liquidity After Latest RRR Hike

Meredith Whitney: The Hidden State Financial Crisis

Could Greece Be The Next Lehman Brothers? Yes – And Potentially Even Worse

Peter Grandich On Manipulation

Charts That Make You Go Hmmm.....

Words That Make You Go Hmmm.....

And Finally.....

9.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 9

Jian Lin Was 14 years old in 1973, when the Chinese government under Mao Zedong recruited him for a student science team called “the earthquake watchers.” After a series of earth-quakes that had killed thousands in northern China, the country’s seismologists thought that if they augmented their own research by having observers keep an eye out for anomalies like snakes bolting early from their winter dens and erratic well-water levels, they might be able to do what no scientific body had managed before: issue an earthquake warning that would save thousands of lives.

In the winter of 1974, the earthquake watchers were picking up some suspicious signals near the city of Haicheng. Panicked chickens were squalling and trying to escape their pens; water levels were fall-ing in wells. Seismologists had also begun noticing a telltale pattern of small quakes. “They were like popcorn kernels,” Lin tells me, “popping up all over the general area.” Then, suddenly, the popping stopped, just as it had before a catastrophic earthquake in 1966 that killed more than 8,000. “Like ‘the calm before the storm,’” Lin says. “We have that exact same phrase in Chinese.” On the morning of February 4, 1975, the seismology bureau issued a warning: Haicheng should expect a big earthquake, and people should move outdoors.

At 7:36 p.m., a magnitude 7.0 quake struck. The city was nearly leveled, but only about 2,000 people were killed. Without the warning, easily 150,000 would have died. “And so you finally had an earthquake forecast that did indeed save lives,” Lin recalls. “People were excited. Or, you could say, uplifted. Uplifted is a great word for it.” But uplift turned to heartbreak the very next year, when a 7.5 quake shattered the city of Tangshan without so much as a magnitude 4 to introduce it. When the quake hit the city of 1.6 million at 3:42 a.m., it killed nearly 250,000 people, most of whom were asleep. “If there was any moment in my life when I

was scared of earthquakes, that was it,” Lin says. “You think, what if it happened to you? And it could. I decided that if I could do anything—anything to save lives lost to earthquakes, it would be worth the effort.”

Lin is now a senior scientist of geophysics at Woods Hole Oceanographic Institution, in Massachusetts, where he spends his time studying not the scurrying of small animals and fluctuating electrical cur-rent between trees (another fabled warning sign), but seismometer readings, GPS coordinates, and global earthquake-notification reports. He and his longtime collaborator, Ross Stein of the U.S. Geo-logical Survey, are champions of a theory that could enable scientists to forecast earthquakes with more precision and speed.

Some established geophysicists insist that all earthquakes are random, yet everyone agrees that af-tershocks are not. Instead, they follow certain empirical laws. Stein, Lin, and their collaborators hy-pothesized that many earthquakes classified as main shocks are actually aftershocks, and they went looking for the forces that cause faults to fail.

O O O THE ATLANTIC / LINK

The formal act was quickly settled, but German Finance Minister had no time to cel-ebrate. The members of the budget committee in the German parliament, the Bundestag, had hardly given their blessing to billions in new aid for ailing Portugal last Wednesday before parliamentarians were drilling the finance minister with questions about the next troublespot -- Greece.

The lawmakers wanted to know more about the secret meeting held the previous Friday, which had been reported by SPIEGEL ONLINE and which top European politicians were still denying as their lim-ousines were pulling up to the Château de Senningen in Luxembourg. Was it true that Greece needs

...When the quake hit the city of 1.6 million at 3:42 a.m., it killed nearly 250,000 people, most of whom were asleep

10.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 10

billions more in financial assistance?

More importantly, the parliamentarians wanted Schäuble to elaborate on reports that Greece is in-solvent and that the government in Athens has already considered withdrawing from the monetary union.

In his lengthy response to their questions, the minister denied the reports, explained the turf battles during the negotiations in Brussels and asked the parliamentarians to remain patient until an interna-tional panel of experts had thoroughly assessed the situation in the country. “For now, we’re going to wait until the results of the report are out in July. Then we’ll see what happens next.”

As they play down the issue, try to appease critics and play for time, Germany’s finance minister and his European counterparts are determined to keep on denying reality in the struggle to rescue the common currency.

More than a year ago, they created a €110 billion ($157 billion) bailout fund for Greece. Since then, however, the likelihood of a gov-ernment bankruptcy has only increased. The country’s mountain of debts is growing, the economy is at risk of collapsing and the prom-ised austerity programs are not progressing as planned.

As a result, economists and financial experts have long agreed that forgiving a large share of Greece’s debts will be unavoidable. Euro-pean leaders, however, seem to be resorting to denial and faith healing instead.

“A restructuring of Greek debts is absolutely out of the question,” says French Finance Minister Chris-tine Lagarde, while Schäuble notes: “A debt restructuring is not under consideration and is completely speculative.”

Instead, the European Commission intends to fight the crisis with new debts, even though govern-ment officials in European capitals are still denying this, as usual. There is talk of a €60-billion loan package, additional austerity programs and even tougher austerity.

If the medicine isn’t working, increase the dose. That, at least, is the treatment plan being pursued by the saviors of the euro in Brussels. A new austerity and loan program would not only increase Greece’s debt and curb the economy even further. It would also stigmatize Greece as Europe’s stepchild for decades to come, dependent on the goodwill of the lender nations, governed by the inspectors of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), a prospect London’s Financial Times describes as a “political nightmare.”

O O O DER SPIEGEL / LINK

The global economy is heading towards another meltdown despite the lessons of the last financial crisis, Gordon Brown has warned.

The former prime minister said that unless leaders take more action, the recent credit crunch could prove just the “trailer” to a string of crises.

SOURCE: DER SPIEGELCLICK TO ENLARGE

11.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 11

“In 2008, when we were hours away from ATMs running out of money, small businesses being unable to pay their staffs, and schools and hospitals closing down through lack of cash flow, it felt as if the crisis of the century was upon us,” he wrote in US magazine Newsweek.

“But if the world continues on its current path, the historians of the future will say that the great financial collapse of three years ago was simply the trailer for a succession of avoidable crises that eroded popular consent for globalisation itself.

“Those who believe that the world has learned from the mistakes that led to the crash are mistaken.”

Mr Brown said the “resolve” to act seen immediately after the crisis has been replaced by indeci-sion and vested interest. He urged politicians at the next G20 summit, which takes place in Cannes in November, to take control of a globalised financial system which is still “perilously” unregulated.Mr Brown’s comments come amid repeated warnings by European policy-makers that the debt crisis surrounding the eurozone’s weaker nations could have a worse systemic effect on global markets than the collapse of the investment bank Lehman Brothers in 2008, which precipitated the last crisis.

O O O UK DAILY TELEGRAPH / LINK

Italy is next in line to seek a bailout from the European Union and the International Mon-etary Fund as a ‘slow-motion banking crisis’ unfolds in the country, Felix Zulauf, President of Zulauf Asset Management said.

“Everyone is focused on Spain. I think the next country to go is Italy,” Zulauf told delegates at a confer-ence in Edinburgh.

“What I notice is a tremendous deposit outflow. It’s a slow-motion banking crisis, and the banking system has been the big buyer of government bonds in Italy,” Zulauf said.

“They (the banks) have been buying between 60 and 90 percent of the bonds is-sued in recent years. And the way the balance sheet is developing in the Italian

banking system, they won’t be able to do that, and I wonder who will buy those bonds,” he added.

This would in turn then create upward pressure on Italian bond yields and could send Italy into a new recession, according to Zulauf.

Another recession in Europe as a whole is also a very likely prospect, Zulauf said.

“The EU is trying to dictate a very severe austerity program…and that will lead to a lengthy recession, I would call it a depression, and we will see later this year that Italy, Spain and virtually all the periph-eral countries will be in negative growth again,” he said.

“I think there is a 90 percent likelihood of another recession in Europe (beginning) later this year,” Zulauf said.

O O O CNBC / LINK

The central bank says the country must consider adopting a gold-backed Zimba-bwean dollar warning that the US greenback’s days as the world’s reserve currency are numbered.

Government ditched the Zimbabwe dollar in 2009 after it had been rendered worthless by record in-flation levels and adopted multiple foreign currencies with the US dollar, the South African Rand and

... “Everyone is focused on Spain. I think the next country to go is Italy,”

CLICK TO ENLARGE

12.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 12

the Botswana being the most widely used.

Finance minister Tendai Biti says the country needs at least six months import cover and a sustain-able track-record of economic growth, inflation stability and above 60 percent capacity utilisation in industry before the Zim dollar can be brought back into circulation.

However central bank chief, Dr Gideon Gono said the country should consider adopting a gold-backed currency.

“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.

“We need to re-think our gold-mining strategy, our gold-liberalisation and marketing strategies as a country. The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way.”

Gono said the inflationary effects of United States’ deficit financing of its budget was likely to impact other countries to leading to a resistance of the green back as a base currency.

“The events of the 2008 Global Financial Crisis demand a new approach to self reliance and a stable mineral-backed currency and to me, Gold has proven over the years that it is a stable and most de-sired precious metal,” Gono said.

“Zimbabwe is sitting on trillions worth of gold-reserves and it is time we start thinking outside the box, for our survival and prosperity.”

O O O NEW ZIMBABWE / LINK

The results speak for themselves. The Federal Reserve has been in existence for nine-ty eight years and over that time the U.S. Dollar has lost 95.6% of its purchasing power. In other terms, the bankers who have controlled our currency since 1913 have generated 2,172% of inflation in just under a century. In the prior one hundred years, when the country was growing by leaps and bounds, there was virtually no inflation. I’m not sure the average person fully understands this concept. To put it in layman’s terms, something that cost $4.40 in 1913 will cost you $100 today. A pair of boys’ school shoes cost 98 cents in 1913. You could purchase three loaves of bread for 10 cents. You could pur-chase six rolls of toilet paper for 26 cents. The truly frightening impact on the American middle class has happened since Richard Nixon closed the gold window in 1971 and allowed the Federal Reserve to print money unfettered by consequences and slimy politicians to make irresponsible unfulfilled promises as bribes for votes. This [table] should worry even the most ignorant of the masses.

Items 1971 2010/11 % Increase

Average Cost of new house

$28,000 $273,000 975%

Median HH Income $10,300 $47,000 456%

Average Monthly Rent $150 $750 500%

Cost of a gallon of Gas $0.40 $3.80 950%

Average New Car Price $3,430 $29,200 851%

United States postage Stamp

$0.08 $0.44 550%

Movie Ticket $1.50 $7.89 526%

13.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 13

Even with the proliferation of two worker households since 1971, household income has not come close to keeping up with the costs of daily living. The average American’s standard of living has de-clined dramatically over the last forty years and they don’t even know it. Americans have become the slaves of bankers and pay the cost of their own slavery through inflation and debt. It is not a coincidence that consumer debt, which was virtually non-existent prior to the 1960s, began to take off in the 1970s and went nearly parabolic from the early 1990s until the 2008 financial collapse. As the Federal Reserve and political class created inflation, which reduced your standard of living, the bankers who own the Federal Reserve and control the politicians used their slick marketing machine to convince you that acquiring goods using vast quantities of debt was just as good as buying things with cash you saved.

Who benefits from inflation and the issuance of trillions in debt to average Americans? Based upon the decades of gargantuan Wall Street profits, mammoth bonuses paid to bank executives, and fact that Washington politicians absconded with trillions from American taxpayers to save their Wall Street masters, it appears that bankers and politicians are the beneficiaries. A gutted, indebted, jobless, de-moralized middle class were the recipients of the downside of inflation and debt. Without a Central Bank issuing a fiat currency, with no constraints, none of this could have happened.

O O O BURNING PLATFORM / LINK

Technically, the federal government has now reached the limit of its capacity to borrow money.

Raising the debt ceiling used to be a technical adjustment, made almost automatically. Now it’s a political football.

Democrats should never have agreed to linking it to an agreement on the long-term budget deficit.

But now that the debt ceiling is in play, there’s no end to what the radical right will demand. John Boehner is already using the classic “they’re making me” move, seemingly helpless in the face of Tea Party storm troopers who refuse to raise the ceiling unless they get their way. Their way is reactionary and regressive – eviscerating Medicare, cutting Medicaid and programs for the poor, slashing educa-tion and infrastructure, and using most of the savings to reduce taxes on the rich.

If the only issue were cutting the federal deficit by four or five tril-lion dollars over the next ten years, the President and Democrats wouldn’t have to cave in to this extortion. That goal can be achieved by doing exactly the opposite of what radical Republicans are de-manding. We can reduce the long-term budget deficit, keep every-thing Americans truly depend on, and also increase spending on education and infrastructure — by cutting unnecessary military ex-penditures, ending corporate welfare, and raising taxes on the rich.

I commend to you the “People’s Budget,” a detailed plan for doing exactly this – while reducing the long-term budget deficit more than either the Republican’s or the President’s plan does. When I read through the People’s Budget my first thought was how modest and reasonable it is. It was produced by the House Progressive Caucus but could easily have been generated by Washington centrists – forty years ago.

But of course the coming battle isn’t really over whether to cut the long-term deficit by trillions of dollars. It’s over whether to shrink the government we depend on and to use the savings to give cor-

... If the only issue were cutting the federal deficit by four or five trillion dollars over the next ten years, the President and Democrats wouldn’t have to cave in to this extortion

14.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 14

porations and the super-rich even more tax benefits they don’t need or deserve.

The main reason the “center” has moved so far to the right – and continues to move rightward – is radical conservatives have repeatedly grabbed the agenda and threatened havoc if they don’t get their way. They’re doing it again.

Will the President and congressional Democrats cave in to their extortion? When even Nancy Pelosi says “everything is on the table” you’ve got to worry.

We can fortify the President and congressional Democrats and prevent them from moving further right by doing exactly what the Tea Partiers are doing — but in reverse.

Call it budget Jujitsu.O O O ROBERT REICH / LINK

There is one small section of the People vs. Goldman Sachs article that I wanted to elabo-rate upon online, as it simply is too hard to convey the full humor/balls of the situation without put-ting all the documents in their entirety on display.

Exhibit #1 is a presentation made in October of 2007 by Josh Birnbaum, one of the head traders on Goldman’s Structured Products Group. Even completely divorced of any relation to Goldman’s future legal difficulties, this is a very amusing docu-ment; what Birnbaum is essentially doing in this presentation is telling his bosses that the people in his division should get paid way more for all the

great work they did shorting the housing market in 2007. The early pages all document the great suc-cesses of the division that year, showing that Goldman made more money on residential mortgages than anyone else [left]:

Birnbaum wanted his SPG divi-sion to get paid more for this great performance. As the Levin report describes it, this was a “proposal that SPG traders be compensated in a manner similar to hedge fund managers.”

In that regard, Birnbaum sets up his campaign for increased compensation by way of a sort of “re-sponses to questions” mode, wherein he first lays out the potential objections to giving the SPG unit a massive raise [right], then proceeds to rhetorically demolish each of those objections one-by-one.

O O O MATT TAIBBI / LINK

SOURCE: ROLLING STONE

SOURCE: ROLLING STONE

15.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 15

Chinese treasury bonds were once again under-subscribed on tight market liquidity after the People’s Bank of China, the central bank, raised banks’ reserve requirement ratios (RRR) for the fifth time this year on May 12, the Southern Metropolis Daily reported on Monday.

The central bank scheduled the auction of RMB 20 billion worth of one-year treasury bonds and RMB 10 billion in six-month bonds on the country’s interbank bond market for May 13. But banks, faced with tight liquidity, only purchased RMB 11.71 billion worth of one-year bonds and RMB 9.63 billion worth of six-month bonds, the report said.

The reference yield of one-year treasury bonds was raised to 3.0246% from the previous issuance, while the bond yield of 182-day discounted treasury bonds was 2.91%, the paper said.

Tighter liquidity was behind the under-subscription, as the central bank resumed selling three-year notes on May 12 after a hiatus of more than five months, a bank analyst who was not named was cited as saying.

The central bank also raised banks’ RRRs by 0.5 percentage points on the same day, effective May 18, the fifth consecutive month its has raised RRRs this year.

Analysts had reckoned the restart of three-year bill issuance had satisfied banks’ needs to reinvest in the product as the bills were the major kind of bills to mature in May, the paper said.

Besides, the central bank had been net injecting funds in the past three weeks after it squeezed the volume of the one-year bills to RMB 30 billion in the recent issuance on May 10, and the restart of the issuance of three-year bills was seen as the central bank’s attempt to strengthen its open market operations.

The market generally believed that the influence of the central bank’s open market operations had weakened recently and the diversification in tools used would help drain liquidity.

The restart of three-year bills was considered an appropriate tool in the central bank’s measures to drain liquidity, and the central bank would be more prudent in using RRRs after the resumption of three-year notes as the RRRs had already reached a record level before its fifth hike this month.

After the most recent RRR hike, China’s biggest banks will be required to put aside 21% of their depos-its in reserve, based on earlier announcements made by the central bank.

Compounded by the effect of the three-year bills, the consecutive increases in RRRs have brought “real and heavy pressure” on small and medium-sized lenders, the paper said.

“We thought the central bank might want to rely more on open market operations and there would be less chance of an additional hike in RRRs this month after the restart of three-year bills… but the recent RRR hike really surprised the market and completely reversed investors’ earlier optimistic ex-pectations,” an unnamed bank trader was quoted as saying.

O O O BUSINESS CHINA / LINK

Next month will be pivotal for most states, as it marks the fiscal year end and is when balanced budgets are due. The states have racked up over $1.8 trillion in taxpayer-supported obliga-tions in large part by underfunding their pension and other post-employment benefits. Yet over the past three years, there still has been a cumulative excess of $400 billion in state budget shortfalls. States have already been forced to raise taxes and cut programs to bridge those gaps.

... the recent RRR hike really surprised the market and completely reversed investors’ earlier optimistic expecta-tions,

16.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 16

Next month will also mark the end of the American Recovery and Reinvestment Act’s $480 billion in federal stimulus, which has subsidized states through the economic downturn. States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.

The condition of state finances threatens the economic recovery. States employ over 19 million Amer-icans, or 15% of the U.S. work force, and state spending accounts for 12% of U.S. gross domestic prod-uct. The process of reining in state finances will be painful for us all.

The rapid deterioration of state finances must be addressed imme-diately. Some dismiss these concerns, because they believe states will be able to grow their way out of these challenges. The reality is that while state revenues have improved, they have done so in part from tax hikes. However, state tax revenues still remain at roughly 2006 levels.

Expenses are near the highest they have ever been due to built-in annual cost escalators that have no correlation to revenue growth (or decline, as has been the case recently). Even as states have made deep cuts in some social programs, their fixed expenses of debt service and the actuarially recommended minimum pension and other retirement payments have skyrocketed. While over the past 10 years state and local government spending has grown by 65%, tax receipts have grown only by 32%.

Off balance sheet debt is the legal obligation of the state to its current and past employees in the form of pension and other retirement benefits. Today, off balance sheet debt totals over $1.3 trillion, as measured by current accounting standards, and it accounts for almost 75% of taxpayer-supported state debt obligations. Only recently have states been under pressure to disclose more information about these liabilities, because it is clear that their debt burdens are grossly understated.

O O O MEREDITH WHITNEY / LINK

It was less than three years ago that the failure of Lehman Brothers sent tremors through the global financial system, threatening the existence of every major bank and triggering the most severe economic crisis since the Great Depression. As Europe’s policy elite met for fresh crisis talks today, the dark fear that haunted everyone around the table was this: if the bankruptcy of a middling-sized Wall Street investment bank with no retail customers could have such dire consequences, what would hap-pen if the Greeks decide they have had enough and renege on their debts?

Could Greece, in other words, be the new Lehmans? Given the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt, there is only one answer. Greece could certainly be the next Lehmans. The likelihood that a Greek default would pose a threat to the future of the eurozone as well as to the health of the world economy means it has the potential to be worse than Lehmans. Much worse.

Given that gloomy prognosis, the European Union and the currently rudderless International Mon-etary Fund know something has to be done but are not quite sure what.

To be fair, it’s a tough one. A single currency that involved a hard core of European countries that were broadly similar in terms of economic development and industrial structure might just have worked. Bolting together a group of 17 disparate economies with different levels of productivity growth, differ-ent languages and different business cultures was an accident waiting to happen, and so it has proved.

The weaker countries, on the fringes of the single currency area, have not been able to cope with the

... Today, off balance sheet debt totals over $1.3 trillion, as measured by current accounting standards, and it accounts for almost 75% of taxpayer-supported state debt obligations

17.THINGS THAT MAKE YOU GO Hmmm...

18 May 2011 17

disciplines involved in giving up control of their interest rates and their currencies, with the problem going much wider than the three countries – Greece, Ireland and Portugal – that have sought bailouts. Spain’s housing boom and bust was the result of the pan-European interest rate being too low; Italy’s increasing lack of competitiveness stems from a lack of exchange-rate flexibility.

It was also clear from the outset that the structure of monetary union would result in struggling coun-tries being subjected to deflationary policies. Since the eurozone is not a sovereign state there is no formal mechanism for transferring resources from rich parts of the monetary union to the poor parts. Nor, given language barriers and bureaucratic impediments, is it easy for someone made unemployed in Athens to get a job in Amsterdam. Instead those countries seeking to match Germany’s hyper-com-petitive economy have to cut costs, through stringent curbs on wage increases and fiscal austerity.

This was the plan A that was wheeled out for Greece last spring, when it became the first eurozone country to run into trouble, and it has been repeated for Ireland and Portugal. Plan A involved pro-viding Athens with a bridging loan so that it could continue to meet its debt obligations, while at the same time insisting on draconian steps to cut Greece’s budget deficit. Pain plus procrastination: the traditional recourse for policymakers who lack imagination, as Europe’s have done throughout the sovereign debt crisis. Clearly, plan A has not worked, as anyone who has piled up too much debt on their credit card could have predicted.

O O O UK GUARDIAN / LINK

Q: I have read a long and closely reasoned essay by Avery Goodman on Seeking Alpha, describing what he believes to be massive manipulation of the silver market. He goes into great detail about JP Morgan and the like. How much credence do you give this hypothesis?

A: I don’t think it’s a coincidence that when you look at when silver really started to rise sharply and get into a parabolic stage was on the heels of the testimony that came before the US commodity commission last year by a trader who actually stepped up and made claims and supported claims of manipulation. I don’t think that was coin-cidence. I do think that we are playing on perhaps the most un-level playing field the investment world has ever seen. The small investors and small-time players like myself are at a distinct disadvantage. I know that’s the case because hindsight has shown that the great financial crisis that we endured a few years ago came on the heels of some of the biggest players selling investments on one end and absolutely shorting those same investments on the other end for themselves. None of them have even gone to jail. They have nuclear weapons, and we have pea shooters. Any accusation or claim that silver went up and or down because of not just day-to-day fundamentals but because of people’s abilities to manipulate is, I think, genuine.

O O O PETER GRANDICH / LINK

18.CHARTS THAT MAKE YOU GO Hmmm...

18 May 2011 18

The metals seem almost locked at the hip with equities at this point in the credit crisis. Its an idle liquidity thing, driven by negative real interest rates on savings and sovereign debt. The real economy offers few produc-tive outlets and the recovery cannnot obtain traction because the government has not corrected the abuses and distortions that created the problem in the first place.

As one might expect, la Douleur appears to be struggling to break out higher, and avoid falling over a rising wedge. It can go either way. Lower seems a bit more likely, but in the world of fiat, these things are relative.

Foreign governments, of at least the non-client state kind, appear to be continuing to eschew Treasur-ies.

Let’s see, the Fed buys Yen, and the BOJ buys Treasuries. You put your right hand in, you put your right hand out, you put your right hand in, and you shake it all about...

O O O JESSE / LINK

CLICK TO ENLARGE ALL CHARTS ALL CHARTS SOURCE: JESSE

19.CHARTS THAT MAKE YOU GO Hmmm...

18 May 2011 19

From Ralf Preusser and Sphia Salim at Bank of America Merrill Lynch. Unsurpris-ingly, perhaps, the analysts reckon the ‘muddling through’ options are most likely:

O O O FT / LINK

20.CHARTS THAT MAKE YOU GO Hmmm...

18 May 2011 20

This is the second map that I created with my urban geographer brother Matthew Mulb-randon on the Housing Price Index (HPI). A description of these maps as well as the first set can be found on Design & Geography. This new set is inflation adjusted and covers the entire span of the Federal Housing data set 1991-2010.

O O O VISUALIZING ECONOMICS / LINK

CLICK TO ENLARGE

CLICK TO ENLARGE

SOURCE: VISUALIZING ECONOMICS

SOURCE: ENGCOMS (VIA ZEROHEDGE)

21.

18 May 2011 21

WORDS THAT MAKE YOU GO Hmmm...

Thanks to Osage Exploration we can get a better understanding of the complexities of ‘Fracking’.

Click on the image (left) to find out how the pro-cess works.

Russell Napier of CLSA thinks the S&P goes to 400.

He was right about the recent rally off the lows.

That is all.

Mexican billionaire Hugo Salinas Price explains why this year will be a BIG one for precious metals in Mexico. He discusses the questions raised by the recent startling purchase of gold by the Central Bank and why he feels silver will be monetized this year in Mexico.

CLICK TO WATCH

CLICK TO WATCH

SUBSCRIBE UNSUBSCRIBE COMMENTS

and finally…

18 May 2011 22

Hmmm…

© THINGS THAT MAKE YOU GO HMMM..... 2011