Monday, March 09, 2009

My friends,

Bill Buckler says that we have far, FAR more to go to reach bottom. And he doesn't even know the half of it!

My friends, I was watching this particular crash from about 9 years ago. At the time, nobody wanted to listen. Not media, not friends, not family, not clients... nobody except about 3 people from a thousand. By my personal experience, 95% did not care to see evidence of total collapse even if it was reduced to one simple graph with historic benchmark reference. "Total Debt to Total GDP". That was the chart that I showed to everyone I knew. 5% cared enough to respond and most of them forgot about it within 2-days.

My friends, I am not a genius. I am not a prophet. I am not anything special. So why is it that a simpleton like me can bring up a totally accurate forecast that 99.9% of the people ignore? I saw this coming and it is not near bottom. I am telling you now as a friend, this is just the beginning.

There is a lesson here. I don't know what the lesson is for certain but it doesn't seem to show us as particularly wise human beings if we can't predict debt-crash amidst unprecedented debt loads globally. Come on... this is kindergarden stuff. Please be aware. We had all these lessons in 1929 and now we are witnessing an exacerbation of the very same lessons at multiples beyond what they were at that time! Total debt to total gdp... simple graph. predictable results. Right here -->>

It is easy to get discouraged in our age if you see some part of truth unfolding very clearly and you try to explain to people how they can benefit from your deductions wildly and save themselves great pain.

Some consolation -

I know of a few people out there that did get into silver at 4+ dollars. That feels good, knowing that silver will bounce above 50 easily in the coming years! I know also that some people are buying arable land, getting back to their families, preparing for deficit and I am glad about these efforts that I am privileged to know about.

Hey, my friend, did you see this VIDEO? Please watch it. It is the best of its kind among hundreds of others. Very clear explanation of a complex problem related to our economic crash.

Enjoy the Privateer. Comments welcome.

I will have a family newspaper out soon if all goes according to plan. We have solutions and soul-utions for people... and so we wish to make them available.

Cheers, Tate


The economically imploding world is entering into the land of the surreal.
Central banks worldwide have reached (or are nearing) zero target rates of official interest. There is next to no room left to manoeuvre to try to reignite any new credit expansion. The alternative now sought by governments of all descriptions is to replace the borrowing the public is not doing with their own. Budget deficits are exploding all over the world.

A Mindless Spectre Is Stalking The World:

It is a spectre launched by Lord Keynes in 1936 when he warned that if the public lowered their consumption and increased their saving, there would be "insufficient demand". According to Keynes, such a serious situation had to be promptly addressed by deficit spending and lower interest rates to increase demand through credit expansion. What he never understood was the role of savings as the real economic means with which to increase the capital tools of production and therefore, later consumption.

In all his writings, Keynes stated that savings could be replaced by credit expansion and government budget deficits as the means with which to keep demand up, factories humming and consumption at a height that ensured "full employment". What Keynes never understood is the fact that any given structure of capital tools and infrastructure has a requirement for an ongoing stream of savings simply to maintain it. Such a structure requires an even greater stream of savings to improve and/or to expand it.

Today, with lowering interest rates no longer an option, governments are making a desperate play for the second Keynesian alternative - deficit spending. But deficit spending only consumes the capital!

Global Advance Warning - Another Downturn Straight Ahead:

Stock markets act to discount future economic conditions into present-day prices. Stock markets around the world are now flashing red. The MSCI World Index had three consecutive weeks of decline to the end of February. As of the end of February, the benchmark had fallen 22 percent since the year began. In 2008, the index fell 43 percent! The global deflationary effects of these huge falls are enormous and are spilling into the world's real economies with startling speed. Corporations everywhere are cutting their dividends, wanting to hold on to the cash themselves. As a consequence, insurance companies, pension plans etc. can now look forward to a cut in their incomes from dividends. When the ownership of capital - which is what owning shares means - no longer pays a useful dividend, then the capital is worthless.

If the ownership of monetary savings no longer pays a useful rate of interest, then the money is worthless.

The World's Factories Are Falling Silent:

Former US Fed Chairman Paul Volcker has called attention to the unprecedented slowdown in the world's factories. He stated that the present slowdown in world factory production was happening faster than in 1930! The Privateer has called attention to this situation over several past issues. Factory output is collapsing at the fastest pace ever. Here is the global roundup. The annualised figures for February are as follows: Taiwan - 43 percent, Ukraine - 34 percent, Japan - 30 percent, Singapore - 29 percent, Hungary - 23 percent, Sweden - 20 percent, Korea - 19 percent, Turkey - 18 percent, Russia - 16 percent, Spain - 15 percent, Poland - 15 percent, Brazil - 15 percent, Italy - 14 percent, China - 12 percent, Germany - 12 percent, France - 11 percent, US - 10 percent and Britain - 9 percent. This is a catastrophe.

When "Just In Time" Runs Out Of Time:

Prior to the Japanese inventing "just in time" manufacturing in the mid-1950s, most factories held much larger in-house inventories of the necessary components for what they made. These inventories made it possible for factories to keep working in the event of a temporary disruption in their supplies. This is not so today, for the good economic reason that holding large inventories costs money. In today's world, most factories only hold an inventory of between three to five days of production - or even less.

This leads directly to the danger that the massive global slowdown in manufacturing will have the effect of ripping the links in the global production chain apart. A shutdown in one place can disable many other factories all around the world. If the main producer of one simple item common to many production processes suddenly closes its doors, the remaining producers do not have the capacity to fill the output gap. Real physical factory shutdowns follow as a matter of course in many other places until the item can be produced elsewhere. This is a real physical situation - and an unavoidable one.

Commercial Finance Too Has Gone "Just In Time":
Again back in the mid 1950s, most businesses held sufficient money in liquid or near cash form to meet all their expected payments for between forty to one hundred days into the future. That gave them an immense inherent financial resilience if some of their customers were late in making payments. Today, the "just in time" theory has taken over here too. Most businesses only hold in house what amounts to "cash in the till". Most borrow VERY short term, weekly or even daily. Most modern businesses are reliant on payment from customers to make their loan payments, even their short- term loan payments.

This is why the global credit crunch is so dangerous for business. It has progressed from a credit slowdown - to a credit contraction - to a global credit money deflation. This process has hit business HARD. Around the world today, there are numberless businesses which can no longer gain access to previously easily available "just in time" financing. Holding little if any cash with which to meet normal payments, most of these businesses have a forward time horizon of a week. Deprive them of short-term commercial credit and they have no other choice than to close their doors when all those who have supplied them with goods cannot wait any longer for payment. This has broken the "supply chain" just as the inventory situation has, but this time for financial reasons. Today, both of these two economic events are hitting home over the world. One affects physically real goods. The other event is financial but just as real in economic terms. Combined, these two features explain the crash in global output.

Before June This Year - There Will Be REAL Scarcity:

You can't get any if there ain't none! The global factory slowdown already reported here will have real and physical consequences - soon. There will suddenly be gaps on the shelves of stores which were normally filled with retail goods of certain kinds. When the store manager is asked why this has happened, he will likely answer that the supplier suddenly went out of business. Don't be surprised if that store has closed its doors when you come by the next time. The great deflation is hitting the ground.

The US Budget - Deficits With A Vengeance:

The proposed Obama federal budget is so extreme in its financial structure as to defy description. The Privateer is used to that, though. Revenues for 2009 are projected at $US 2.19 TRILLION, down 13 percent from a year ago due to the recession. With the bank bailouts and the $US 787 Billion economic recovery program, 2009 expenditures are estimated at $US 3.94 TRILLION - up 33 percent over 2008.
Note that the Bush bailouts contribute to the huge $US 3.94 TRILLION spending estimate.

US Budget Deficits As Far As The Eye Can See:

Revenues $US 2.19 TRILLION - expenditures $US 3.94 TRILLION. That leaves a gap or budget deficit of $US 1.75 TRILLION! And THAT leaves a US federal budget in which 44 percent of its expenditures must be borrowed. That is a 32 percent expenditure increase over the 2008 level, one of the biggest year to year increases in the past 50 years! It represents 27.7 percent of GDP, a serious hike from the 21 percent level reached in 2008. Borrowings are projected to be 79.9 percent higher than federal revenues, a situation well known to banana republics. Any fiscal sanity has gone completely out of the window.

Obama's First Budget:

The 2010 proposal that President Obama has sent to Congress is for a $US 3.55 TRILLION budget for the fiscal year which begins October 1 this year. The projected deficit for this 2010 budget is $US 1.17 TRILLION! With the current fiscal year now half over, the US is planning to borrow and spend $US 3.52 TRILLION over the next year and a half! President Obama's first full year budget also seeks standby authority for $US 750 Billion for bailing out US financial firms while planning for a health care system overhaul and almost $US 1 TRILLION in higher taxes from 2.6 million of the richest Americans.

It is worthwhile to understand here who are deemed to be the "rich" inside the United States. In Obama's case, it is any single person earning $US 200,000 in a year and any family earning $US 250,000!

In The Background - The Spectre Of SAVINGS:

The American public has turned its back on more debt. The personal savings rate has risen to 5 percent, the highest since March 1995. At an annual rate, US personal savings rose to a record $US 545.5 Billion. A year ago, the US personal savings rate was 0.1 percent. This is a massive turn by the American public.

US consumer spending dropped at a 4.3 percent annual rate last quarter, the most since 1980, after falling at a 3.8 percent pace over the previous three months. That marks the first time that consumer purchases have dropped by more than 3 percent in consecutive quarters since record keeping began in 1947. US GDP shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department reported. These are the reasons why the Obama Administration has increased its expenditures from 21 percent of GDP to 27.7 percent. If the American public refuses to borrow more (even at today's interest rates) to reignite a US credit expansion, then Obama will certainly try to do it for them, even if he has to borrow the US Treasury past the edge of oblivion. In the process of borrowing and spending these immense sums of money, Obama will increase over- consumption in the US economy. That will become obvious in time. But the worst economic mistake he is making is to increase taxes right in the middle of a deepening US recession while at the same time borrowing in order to increase consumption of the real economic goods which the US economy needs to rebuild itself.

The fiction that increased expenditures leading to increased consumption will make new factories and plants spring out of the ground as if by magic is fatally wrong. What must increase is SAVINGS, which leave unconsumed goods out in the economy. These are the economic means necessary to build factories and tools on factory floors. While Americans try to save, Obama cancels it with taxes and consumption.
Who Really Believes This?:

The US government has, on behalf of American taxpayers, pledged more than $US 11.6 TRILLION over the past 19 months to bail out banks and stimulate economic growth according to data compiled by Bloomberg. The blindingly obvious question is: Where is the money going to come from? The clue is in the fact that all this is being done by the government on behalf of the American taxpayer. That being so, the American taxpayer will have to pay for it all. The only problem is that nobody has asked a taxpayer.

Specific Signs Of Deflation:

Citigroup, which had a market value of $US 277 Billion at the end of 2006, has tumbled 97 percent since then, leaving it valued at $US 8.34 Billion. That is $US 269 Billion in purchasing power which has gone up in smoke and which all those still holding Citigroup shares will no longer be able to exercise.

General Motors Corp posted a loss of nearly $US 30.9 Billion for 2008. Ford lost $US 14.6 Billion and Chrysler lost $US 8 Billion. The US banks lost $US 26.2 Billion in the last three months of 2008. AIG, American International Group Inc, posted a record $US 61.7 Billion quarterly loss on March 2 and got a new government bailout of $US 30 Billion. For all of 2008, AIG lost $US 99.29 Billion. AIG shares have been as low as 42 cents! The shares have lost 99 percent of their value over the past year.

Fannie Mae asked the US Treasury for $US 15.2 Billion in capital and raised the possibility of requesting more aid after a sixth consecutive quarterly loss drove its net worth below zero! Below zero - it is broke! Fannie and Freddie's combined books of business during December stood at $US 5.319 TRILLION.

Don't Bank On It:

Two hundred and fifty-two US commercial banks and savings institutions with total assets of $US 159 Billion were termed problem banks at the end of last year by the Federal Deposit Insurance Corp. The FDIC insurance fund has fallen to $US 19 Billion from $US 52 Billion at the end of 2007. It too is broke.

US Capital Investment Collapses:

US business purchases of new equipment have plunged at a 29 percent pace, the most since 1958! This shows that the US stock of capital is not being renewed. This is de-industrialisation at an enormous rate.

Don't Make Them - We Don't Buy Them:

Orders for US durable goods fell for a record sixth consecutive month in January, signalling that companies are cutting back on spending as customers retrench. The 5.2 percent drop was more than twice the projected amount and followed a 4.6 percent decrease in the prior month, the Commerce Department said in Washington. Total US durable goods orders have plunged at an annual rate of 43 per cent over the last three months! Production of consumer durable goods including vehicles, furniture and electronics fell 10.5 percent in January, the biggest monthly drop since November 1959! The Privateer could go on and on. All this data is a look inside the US economy and what it shows is that there is a savage contraction in real, physical output taking place. When durable goods orders crash by 43 percent in three months and actual real production by 10.5 percent in a single month (December), one is looking at an economy which has been driven off a cliff and is now in free fall.
In the face of this, no amount of media skills and or skills in reading a teleprompter will suffice. Expanding the size and spending of government is the very last thing needed economically. What IS needed is a US marketplace free of regulatory interference where clearing prices which move goods can be found. What is also needed is an enormous and drastic sequence of cuts in federal, state and local government expenditures with mass layoffs if required - so that costs can be lowered for producers.

The Approaching GLOBAL Crescendo:

All over the world, governments worldwide have their backs to the wall. Their economic legitimacy is being tested before the eyes of their citizens and they have to be seen to be doing - "something". The problem is that they have done "something" for decades, they have been politically intervening in their own economies. That is the process which has placed their economies in their current predicament.

WHO Decides?:

Now, in a fast climbing crescendo, governments across the world are engaged in multi-pronged attempts to "fix" all the accumulated problems in their economies in an orgy of further interventions. This attempt is certain to fail, leaving the world to face a fundamental choice. Either governments decide what is to be produced and in what quantity and quality or that decision is made by private people in the civil economy simply by choosing what to buy and what not to buy. If the second choice is made, it will be the buyers in the private civil economy who decide what shall be produced and in what quantity and quality. Businesses which meet the requirements of these private buyers, or come close, will be rewarded by climbing sales and higher earnings. This will enable them to expand. Those which do not meet the buyers' requirements will have falling sales and then losses.

The private individual in his or her capacity as a producer will, under the division of labour in the free market, be able to see clearly where the best jobs are. These will be the businesses where wages and salaries are climbing and also have the best working conditions. It is the price mechanism which puts this information in full public view. And, living in freedom, people are free to change their jobs at will.
This economic combination, and no other, accounted for the vitality of the free market economies and the road they travelled towards ever higher living standards.

Then - governments intervened.

When Governments Decide - Anti-Market Economies Are The Result:

If governments decide (directly or through rules and regulations) what shall be produced and in what quantity and quality, the nations so governed will end up with a welfare state. Inexorably, that will be followed by socialism, where all the productive tools have become public property solely owned by the government. At the end of that road is communism, where all human beings become public property, the slaves of government. The parallel track, to the same end destination, is the one in which government leaves the facade of a free market in place and in full public view. Meanwhile, by means of massive bureaucracies and a tidal wave of regulations, taxes, fiat money and credit money, subsidies, bailouts etc., the government decides what shall be produced and in what quantity and quality. This economic system was named "Corporatism". Its matching political system is called "Fascism". Both of these systems were once perfectly well understood. That is not the case today.
Mussolini, who instituted "Corporatism" in Italy, was quite clear. In a 1923 pamphlet titled "The Doctrine of Fascism" he wrote, "If classical liberalism spells individualism, Fascism spells government. Fascism should more appropriately be called Corporatism because it is a merger of State and corporate power." Mussolini's politics were also clear: "All for the state, nothing outside the state, nothing against the state." This is Totalitarianism, the goal being to make the individual subject to government.

Today, it is not the free market which has failed, but Interventionism. There has not been a genuinely free market in any western economy for generations. It is only the areas where a partial market was allowed to function for a period of time which have been responsible for the economic progress which has been made since the end of WWII. But today, even a partial market freedom is close to extinction.

Recognising a free market is easy. THERE IS NO INCOME TAX. Gold (and/or Silver) coin circulates as money. Private property and contracts are sacrosanct, as is the total separation of state and economics.

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Monitoring Crashes / Finding Soul-utions