Carts and Horses

Peter Schiff

In a CNBC debate last week, former Labor Secretary Robert Reich presented a set of contradictory beliefs that unfortunately reflect the conventional wisdom of modern economists. In a discussion with Wall Street Journal columnist Stephen Moore, Reich correctly and comprehensively listed the reasons why American consumers could spend so lavishly before the crash of 2008 and why they can no longer keep up the pace. But instead of making the logical conclusion that former levels of spending were unsustainable and that spending should now reflect current conditions, he advocated that government take on additional debt so that tapped out consumers can spend like they used to.

To achieve this, Reich called for lowering taxes on working Americans and raising taxes on the rich. He argued that middle-income Americans are more likely to spend additional dollars while the rich are more likely to save and invest. As a "demand-side" economist, Reich made clear that spending is superior to savings and investing as a catalyst for growth.

To put it simply: Reich believes that the cart pushes the horse. In his worldview, businesses produce goods and services simply because consumers spend. Therefore, anything that increases spending fuels growth. Unfortunately, he fails to see what should be strikingly obvious: capital formation must precede production, which then allows for consumption.

In a complex society like ours, those relationships are hard to see. However, if we break it down to a simpler level, it becomes more obvious (as I try to accomplish in my new book: How an Economy Grows and Why it Crashes). For example, let's take a look at a simple barter-based economy consisting of only three people: a butcher, a baker, and a candlestick maker.

If the candlestick maker wants cake, he can't simply demand that the baker hand it over. The cake needs to be produced, and the baker has to expend labor and material to produce it. Unless the candlestick maker offers the baker something of value in exchange, the cakes won't get baked. The ability of the candlestick maker to demand cake from the baker is a function of his ability to supply candles to trade. Without production, consumption can't occur.

What if the candlestick maker gets sick and produces no candles? As the baker would be unwilling to give his cakes away, he would likely stop baking cakes for the candlestick maker. Economic activity would naturally contract until the candlestick maker recovers.

But according to Reich, if the candlestick maker doesn't have anything to trade, the government should step in and give him candles. But where will the government get them? It could take them from the candlestick maker; but if he is not making candles, how will he pay the tax? Even if there were a few candles left to tax, any that the government took would simply transfer demand from the candlestick maker to the government. No new demand is created.

Alternatively, if the butcher is still healthy, the government could tax him, and give his steaks to the candlestick maker to buy cakes. However, this doesn't create new demand either. It simply transfers demand from the butcher to the candlestick maker.

Some may feel that a barter-based metaphor doesn't hold water because the ability to expand the money supply and create credit gives an economy far more flexibility. This is a deceptive argument. Although money is more efficient than barter, it doesn't change the dynamic between production and consumption.

But Reich suggests that printed money can stimulate demand just as effectively as real candlesticks. But what good will the paper offer the baker if there are no candlesticks to buy? All the baker can do is bid up the prices of those goods, like steaks, that continue to be produced. Similarly, if the government simply prints money and gives it to people to spend, no new production occurs. Prices merely rise to reflect the increase in the supply of money relative to the supply of consumer goods.

In a more complex economy, the relationship between production (supply) and spending (demand) still holds. Every consumer either lives off his own productivity or the productivity of someone else. When individuals work, the wages earned result from the productivity of labor. The ability to consume is directly related to the production of goods or services that result from one's efforts. However, if people waste their labor in unproductive jobs, little real demand is created.

In the Soviet Union, everyone had a job, yet workers had to stand in line for hours for basic necessities. Although everyone worked (for the government), production was too low. This lack of production meant wages delivered relativity little in the way of purchasing power.

Since production cannot be created by government stimulus, neither can demand. To the extent that there are savings, demand can be brought forward by stimulus - but only at the cost of future demand, plus interest. If stimulus could produce demand, then no nation would be poor. Taken to its logical end, Reich's argument suggests that African poverty would be wiped out if African governments simply printed money more freely. In reality, Africans are not poor because they lack currency to spend; they are poor because their corrupt and inept governments inhibit production by soliciting bribes, denying property rights, abrogating contracts, preventing the accumulation of capital, and nationalizing profits.

Reich is correct about one thing: Americans are indeed broke. But rather than encouraging the country to spend itself deeper into debt, he should call for greater savings so that we have the means to invest in new businesses and new industries. That is the true road back to solvency, but it will only work if we have less government spending, fewer regulations, lower taxes (particularly on those with the highest propensity to save and invest), and higher interest rates.

Unfortunately, Reich and his allies are calling the shots in Washington. The country cannot recover until the only thing politicians stimulate is demand for new economic leadership.

For in-depth analysis of this and other investment topics, subscribe to The Global Investor, Peter Schiff's free newsletter. Click here for more information.

Click here to download Peter's latest Special Report: My Five Favorite Gold & Silver Mining Stocks.

Peter Schiff C.E.O. and Chief Global Strategist Euro Pacific Capital, Inc.

Peter  Schiff

Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nations leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.

Copyright © 2005-2010 Euro Pacific Capital, Inc.

www.europac.net

The Gulf Crisis is Not Over

Anne McClintock

Slow Violence and the BP Coverups

Three vanishing acts are being played out in the Gulf: the disappearing of the oil from the ocean surface by Corexit, the disappearing of the story by the media blockade, and the disappearing from view of the shadowy private contractors who are making a mint helping BP and the Coast Guard keep a cover on the clean-up. This triple vanishing trick, collectively choreographed by BP and sundry federal agencies, culminated on August 4th in a report released by NOAA that claimed 75% of the oil spill had been captured, burned, evaporated or broken down. The White House hailed the report as something to celebrate. Energy advisor Carol Browne announced: "the vast majority of the oil is gone."

A clamor of outrage immediately rose from the Gulf, as residents refused to dance the crisis-is-over, happy-feet dance. Hundreds of locals furiously insisted that they were still seeing masses of oil on ocean, beaches and marshes, and dead fish, dolphins, sharks, birds and other marine life washing ashore. Then on August 18th scientists from the Universities of Georgia and South Florida produced an open challenge to the White House report, asserting that 70% to 79% of the oil in the Gulf still remained in the water. Charles Hopkinson, a professor of marine science at the University of Georgia declared: "The idea that 75% of the oil is gone and of no concern to the environment is just absolutely incorrect."

Spike Lee, filming in the Gulf, scoffed at what he called the BP/White House "abracabra kawabanga" trick and called on journalists to stay with the story. A few weeks earlier, the triple vanishing act had come together personally for me in a story that Steve, a private contractor, told in the shadows of a southern Louisiana bar. I call the contractor Steve, though that is not his real name. I cannot tell you his real name because he has assured me that he will kill me if I do. I had been in the Gulf for three days with Karin Hayes, a film-maker, documenting the oil-spill when Steve approached us in the bar, urgently wanting to tell us something.

"It’s as if a nuclear apocalypse has gone off in the Gulf," he said. "The media is not telling the truth. No one is telling the truth. Let me tell you something. Yesterday on the beach where we work, my crew cleaned up seven hundred bags of oil. Today we went back and the beach was completely covered in oil, as if we had never been there. Today we carried away another seven hundred and fifty bags. Every day we clean up, then the tide brings it in again. The oil is everywhere, deep under the sand. Today I wanted to measure the oil, so I stuck my shovel into the sand and the oil was down there eight inches deep."

Steve leaned in close, "Do you want to know how long my contract is to work down here?" he asked. "Three years." His jaw muscles tightened as if he wanted to suck his words back into his mouth, but could not. "They are telling everyone it is not so bad, but clean-up will take many years. I am going to be here a long time." Steve wiped a hand heavily over his eyes as if they were burning. "Let me tell you something. Today we saw three sharks washed up dead on the beach. The insides of their noses were black with oil. The membranes of their mouths were black with oil. Their eyes were black with oil."

Steve is a war veteran who has seen a great deal of horror, but he seems to find this memory inordinately upsetting. "I am telling you this for the sake of our grandchildren," he said. "We have an apocalypse going on and no one is paying enough attention."

The CTEH Cover Up

A few days later, Steve and I were talking in the chemical-laced dusk of a car park. The Louisiana night was a strange brew of oily vapors and ginger blossom. Steve was slumped against his car, exhausted by his fifteen-hour day. The red tip of his cigarette burned on-off in the dark like a warning signal. As we talked, the nightly, muffled thrup-thrup of distant helicopters began. A number of people had told me about these strange, night flights, as helicopters and planes headed out on mysterious missions. I asked Steve where they were going.

"They are looking for oil," he said. "The helicopters go out first at dusk. When they spot oil, they radio the gps locations back to the Coast Guard. Then between one and three in the morning, the planes go out and spray the oil with dispersants."

"Why do they go out at night?" I ask. "They are hiding the oil with dispersants, Steve said. "They don’t want people to know how much oil there is out there. And they don’t want people to know how much dispersants they are spraying. It’s one of the big secrets down here."

As it happens, Steve knows a good deal about dispersants. Before coming to work on the oil spill, he worked as a contractor for Halliburton; he now works in the Gulf for a company dealing with environmental toxicity and health hazards. It took a couple of hours talking and half a bottle of Southern Comfort before Steve revealed the name of his company. "I work for CTEH," he said. Then he dragged his hand hard over his eyes. "I can’t believe I just told you that," he said, but it was clear he wanted to.

Founded in 1997 in Arkansas, CTEH (Center for Toxicology and Environmental Health) specializes in toxicology and risk assessment. According to its website, CTEH "specializes in the specific expertise of toxicology, risk assessment, industrial hygiene, occupational health, and response to emergencies or other events involving release or threat of release of chemicals." As it happens, CTEH is the company down in the Gulf that is quietly monitoring the levels of chemical toxicity of the oil-spill and its possible impact on the health of offshore workers involved in the clean-up.

CTEH is part of the Joint Unified Command based in Houma, Louisiana, where BP shares its office with the Coast Guard. The CTEH website is frank: CTEH is "proud" of its role in the Unified Command response. The website is less frank, however, about one stunningly important omission. CTEH is being paid by BP.

CTEH, in other word, is monitoring the possible toxic effects on workers of the chemicals BP has unleashed, and it is doing this at BP’s expense. In short, CTEH is being paid by BP to check up on BP. This is a conflict of interest so flagrant it is like a murder suspect hiring the forensic experts who will examine the murder scene.

CTEH has, to boot, an impressively consistent record of unsavory conflict of interest cases, where they have ruled favorably every time on behalf of their corporate clients. CTEH was hired by a coal company after it unleashed a massive coal-ash spill in the Tennessee Valley. CTEH declared everything hunky-dory. CTEH was hired by a paper mill sued by an employee for asbestos exposure. CTEH blamed the employee’s health problems on his lifestyle. Murphy Oil Refinery hired CTEH after spilling one million gallons into a community in St Bernard’s parish, LA. CTEH found nothing there for anyone to worry about.

Now, down in the Gulf, BP is paying CTEH to monitor the toxic levels of the air and water. As Nicholas Cheremisinoff, a former Exxon chemical engineer and expert on pollution prevention says, this means there is "a huge incentive for them to under-report."

This also means that if anyone sues BP for health problems caused by toxic exposure to oil or chemicals, CTEH will be the expert witness called in on BP’s behalf. Indeed, two Gulf Coast residents, Glynis Wright and Janille Turner, are now filing a class action suit against BP in Alabama, for alleged health problems caused by clean-up chemicals, claiming that Corexit is four times more toxic than the crude oil. Cheremisinoff has said he is "100 per cent certain" CTEH will be called in as expert witness for BP.

Not surprisingly, down in the Gulf CTEH is flying very low under the radar. According to a report filed by the Louisian Bucket Brigade, at a community meeting in New Orleans, CTEH was present, but without any insignia or identifying credentials, repeatedly reassuring residents that the area was safe and that heat was the main hazard facing workers. When the LBB reporter asked the EPA rep why they were working for CTEH, the rep responded: "CTEH?...don’t know them." When the reporter pulled out a copy of the CTEH website, the EPA rep backtracked: "Oh, yeah, we look at their data." Asked if that didn’t amount to a conflict of interest, the rep admitted, "Yeah, that is a danger." Shortly afterwards, he backtracked again: "No, we don’t really do anything with them. Who are they again?"

This crazy, conflict-of-interest carousel--where BP pays CTEH, and the EPA relies on CTEH data to monitor BP--is so flagrant that Rep. Lois Capps (D-CA) has formally requested that President Obama relieve BP of responsibility for protecting the health of workers and local residents.

CTEH and the EPA underplay the hazards, but down in the Gulf people are getting sick. Some men working on the oil spill have become ill and some hospitalized, though we don’t know the full extent because sick workers are contracted by BP not to talk to the media. BP could well stand, not for Beyond Petroleum, but for Beyond Principle. In a particularly nefarious act of cost-cutting and labor control, BP has hired prison inmates to do the clean-up, refusing to let them wear respirators, as this makes it visible that conditions are hazardous. Nor can they carry cell-phones lest they document the damage. Forced labor: slavery déjà vu. And there’s an extra perk for BP. Private companies like BP who use people on work-release get tax rebates of $2,400 for every worker they employ.

I heard many stories of people getting sick. I talked to the wife of a Vietnamese fisherman: "My husband has had chest problems ever since he went to work for BP," she told me. "A lot of people are getting sick. And when the south wind blows, my asthma gets bad," she said. In an internet café, I overheard a young man talking loudly into his cell about a blistering rash on his chest. "The doctor thinks it’s over-exposure to the chemicals," he said.

The Corexit Cover-up

You have to hand it to them: BP’s image makers do a heck of a job looking on the bright side of life. Consider the multi-million dollar ads they regularly place in the New York Times (any one of which would go a long way towards putting an out-of-work fisherman on his feet). Not a drop of oil to be seen from sea to shining sea. Even the skimmers seem to be skimming up stardust. The beach are pristine. Not a dollop of oil to be seen. As Marci, a private contractor with an energy company, sardonically said to me one evening: "Clean. Clean as a baby’s butt clean. You know why? Dispersants." Marci asked me: "Why do you think the oil stopped fifteen miles from the Florida coast? All along the Gulf, there is a fifteen-mile wide line where the oil stopped. How did it stop at that magical line?" She told me the same story others had told: "At night they go out with planes and spray it with dispersants. So the beaches look clean. But the oil is still there. Wait until the fall," she said, "Wait until the weather cools, and the Mississippi drops. Then the oil will rise to the surface. Then the oil will come back."

Marci was bristling with suppressed anger. ""You have to understand the tides," she said. "Why do you think the oil is inside the booms, not outside them? It’s because of the dispersants. The dispersants sink the oil under the water. It looks like the oil is gone. But then the tides go in, taking the oil with them, and the oil goes in under the booms. Then the water cools, the oil rises, the tide goes out, and the oil is caught on the inside of the boom. Close to the marshes, close to the birds." Travelling round Barataria Bay by boat and air, I have seen this for myself and have photos to show for it: islands surrounded by boom, with the oil trapped on the inside.

From the beginning, the use of dispersants has been clouded with controversy and cover-ups. The cutely named Corexit is made by the American company Nalco, and is famously banned in the UK and Europe on the grounds of its lethal toxicity. In April, shortly after the Deep Horizon blowout, Lisa Jackson of the EPA ruled that Corexit should only be used in "extremely rare" cases. Down in Louisiana, for decades there’s been a tightly-knit culture of mutual cronyism where local politicians and oilmen have their hands deep in each others pockets. On August 1st, the US House of Representatives Committee confirmed that for over three months, in violation of EPA’s official guidelines, the US Coast Guard had fast-tracked 74 permits giving BP the green light to "carpet-bomb" the Gulf. All told, at least 2 million gallons have been dumped into the Gulf, sprayed over the seas, islands and marshes.

The main ingredient in Corexit is 2-Butoxyethenol, which is toxic to blood, kidneys, liver and the central nervous system, also causing cancer, birth defects. Corexit is mutagenic for bacteria, huge amounts of which live in the Gulf of Mexico. Corexit ruptures red blood cells and accumulates as it moves up the food chain. The EPA, reluctant at first to release data, eventually conceded that Corexit is lethal for 50% of any group of test animals that comes in contact with it. Even the Department of Transportation classifies Corexit as Class 6.1: Poisonous Material" for transportation purposes.

The risks of Corexit to humans, the fragile marsh ecosystems and marine life are potentially staggering. Riki Ott, a marine toxicologist and tireless community activist, has testified meeting people all over the Gulf who are showing symptoms: "headaches, dizziness, sorethroats, burning eyes, rashes and blisters that go so deep, they are leaving scars."

Dispersants have never been used in such quantities before, or at such depths in the ocean, or on open marshland. Dispersants are so dangerous because they accumulate up the food chain. Fiddler crabs absorb the toxins in their muscles and are then eaten by birds. Coyotes and feral pigs eat the bird corpses. Pelicans absorb the toxins from fish and even lightly oiled pelicans ingest the oil through their constant preening. Larger marine life like tuna, dolphins and whales carry the greatest lethal loads. Stories have been told by fishermen finding vast, floating graveyards of birds, dolphins and whale corpses near the Macondo well site, which, they say, are secretly disposed of at night.

Oil on the surface is easier to see, easier to retrieve, easier to burn. One study shows that oil mixed with Corexit is 11 times as lethal as the oil alone.

So why use such lethal toxins in the first place?

Dispersants are called dispersants because that’s what they do. They disperse the oil; they don’t destroy it. Dispersants sink the oil below the surface, make it harder to see, and therefore harder to sue BP for liability. On August 20th scientists produced new evidence of vast undersea plumes of oil drifting for miles. This week, another team of scientists in the journal Science confirmed the discovery of a massive 22 mile subsea oil plume the size of Manhattan and, most dismayingly, very little evidence that the oil was being broken down by microbes.

Chris Pinetich, a marine biologist and campaigner with the Sea Turtle Restoration Project, confirmed what Steve and others had told me: that Coast Guard planes were flying out at night spraying Corexit on the water and land. "People need to realize that their water, their air, the sand they are walking on, they things they are touching when they wake in the morning are coated with this stuff," he said. "We are producing an experiment in the Gulf the likes of which no one has ever seen. Top scientists admit that. We are all part of the experiment."

Death by dispersants is slow and invisible. Death by dispersants wreaks its havoc over generations. Dispersants are what Rob Nixon has called "slow violence." We often think of violence as immediate and spectacular, bounded by space and time. Nixon recalls us to violence of a different kind: the "attritional devastation" that takes place gradually over time and space. Slow violence may be less visible, less media-sensational but enacts a toll no less lethal and lasting for being slow and out of sight.

Corexit is a form of slow violence: a conjurer’s trick, an alchemy of deceit, a sorcerer’s bargain with life and death.

And down in Barataria Bay, people cough the BP cough. Workers have rashes and burning eyes. Their ears get infected; their hands get blisters. When the southwind blows, lungs tighten and close. Some fishermen vomit, some struggle to breathe. Some get dizzy, some get diarhorrea. Some have ashthma, some fast-beating hearts. Their chests burn fire; their throats are sore. And their children cough the BP cough.

Slow Violence in the Gulf

Dispersants are not the only form of slow violence wreaked on the Gulf. The Deepwater Horizon blowout was by any standard spectacular violence: a volcanic crimson and grey apocalypse, an ocean in flames, a doomed, industrial colossus slowly pitching and sinking, taking with it nine men dead. But everyone I spoke to in the Gulf, echoed the same refrain: the Deepwater blowout was only the most recent, fast-forward, telegenic calamity on top of the permanent slow-motion catastrophe in the Gulf.

The slow violence of the oil spill comes on top of decades of slo-mo slaughter of the Gulf’s marshes and ocean waters by three forces: industrial dumping, chemical contamination and agricultural run-off; the forced engineering of the marshes by dredging and levees; and the tearing up of the vulnerable marshes by storms and hurricanes.

On July 18th, Karin and I flew in a Coast Guard plane to the Mocondo site. Two days before, BP partially capped the well. But flying over the five great passes where the Mississippi empties into the sea, I could still see great streaks of rust-red oil along the islands, and long white ribbons of dispersants in the foam-line of the currents. I already knew that beneath the Mocondo "ground zero" site lay a vast zone that had been dead for years, dead long before the Deepwater explosion: the Gulf "dead zone," a stretch of water utterly inhospitable to life as vast as Lake Ontario.

The Gulf is one of the richest and most diverse eco-systems in the hemisphere, our largest wetlands and 40% of our fishing grounds. But since the 1950s, decades of greed and deregulation have turned the Gulf into the United States’ largest industrial wasteland. The Gulf is an immense, watery mausoleum to the hedonistic high-times of the military-industrial petro-era. If a gigantic hand emptied the Gulf like a basin of water, we would see a drowned version of industrial New Jersey: seeping oil-rigs, dumped military ordinance, unexploded bombs, thousands of miles of pipelines, a giant watery wrecking-yard, cluttered with the debris of a century of industrial waste. Miles from anywhere, the spires of an oil rig rise from the marshes, like a church to a demonic god.

Ninety per cent of all drilling for oil and gas in the United States takes place in the Gulf. This statistic hit home for me only when I opened a Hook ‘n Line fishing map. On the map, the Gulf’s waters are marked with thousands of small, red blocks so thickly clustered the map looks like a map with the measles, a map of malady. Each red square marks one of the 4,000 platforms littering the Gulf, many of them abandoned and many leaking.

The Gulf also bears the brunt of agricultural pollution from the heartland: runoff and waste from Midwest cornfields, sewage plants, golf courses, factories, nitrogen from fertilizer drain down the Mississippi into the Gulf every year. And through these damaged and vanishing marshes, massive watery superhighways have been cut, canals and passageways for the barges and huge ships on their way to the Gulf. Every straight line in the marshes is man made and a road to destruction. Every straight line has been forcibly dredged for flood control and shipping, the river and marshes forcibly reengineered by levees and canals to stop flooding, thereby fatally closing off the silt and fresh water that the marshes needs to sustain themselves, and rendering them vulnerable to the yearly slow violence of the hurricanes.

For many people I spoke to, the violence of Katrina was as great as the violence of the oil spill. Southern Louisiana is a half-drowned, shape-shifting, upside-down world, where boats float out of the treetops, and houses tilt out of the water. Everywhere we went, people still lived among the debris of Katrina. Boats flung by Katrina left to rot on the grassy verge of roads, half-wrecked houses, trees stripped bare and leaning arthritic against the evening sky.

Every day, Karin and I would drive past the huge coal and oil refineries, the Port Sulphur toxic dump, rotting boats, sunken cars, abandoned roads lined with methane barrels. Down near Venice, we found a toxic lake so rank with chemicals we can barely breathe. Not for nothing is the Deep Delta where we travelled every day, called "cancer alley," with highest rates of cancer in the US.

One evening, Karin and I pulled into an unprepossessing marina near a town called Empire, driving carefully past the sleeping BP security guard. A few oyster-boats were festooned with yellow boom, but the rest of the marina wore a forlorn and dilapidated air. From every boat, the useless fishing nets hung like shrouds, dark relics of better times. One man moved slowly about his small houseboat. We got talking and Lloyd Boudreau invited me into his houseboat and unrolled a huge photo of the disaster Katrina had wrought: the picture of his life turned upside down by Katrina. Stubbing fingers blackened by a life on the oil rigs, he pointed to his houseboat, upturned like a toy. Katrina is the ghost he lives with, as if he has no room in his heart to begin to think about the oil spill.

Battered by the accumulated slow violence of decades of corporate greed and mismanagement, dredging, levees, and hurricanes, the Louisiana delta is vanishing before our eyes, slipping into the sea at the rate of one football field every half hour. Since the 1930s, land the size of Delaware has vanished under water.

From Blowout to Blowback

Then BP partially capped the well and the media began to cap the story. NOAA issued its report on August 5th with some implausibly neat arithmetic, declaring 75% of the oil gone. I speak to Steve on the phone. "All the media has left," he says. "But the oil hasn’t."

Then blowback starts. Saying 75% of the oil is "gone" sounds cheering (less cheering, of course, if one remembers that 25% of the Deepwater spill is still four times as much as the total Exxon Valdez spill), but down in the Gulf, no one is buying even the 75%-gone story.

"The oil has not gone," Tony, an out-of-work shrimp fisherman told me, "It’s just below the surface." "They’re just covering their butts," says woman at a gas-station. "They want everyone to think it’s over," Charlotte Randolph, Lafourche Parish president said of the NOAA report: "This week in Lafourche parish we had hundreds of barrels a day washing in.

I call PH Hahn, Director of Coast Zone Management in Plaquemines Parish. "I know there is plenty of oil out there," Hahn insisted. "They say they have captured 75%, but they don’t even know how much there was to begin with. Figures lie, and liars figure," he says.

"From the very beginning," PJ told me, "the Coast Guard went to bed with BP. There was no oversight. They tried to cover for themselves. Now they’re trying to declare a quick ending. If they can get the President to convince everyone that it is over, then that reduces BP’s liability. There are two things working right now: there’s an election coming up and we have a President dying in the polls. They want to tell everyone it’s all ok. Now," PJ says, "the media has left. They want to kill the story."

"Last weekend, he continued, "we got stuck on a sandbar. When we gunned the engines, there was nothing but oil behind the boat. Then we dove with the Cousteau group again and there was plenty of oil on the bottom of the ground. The sand just covers it up. On Sunday night, we stopped at a barrier island, and as we were walking back to the boat, black oil spurted out of the hermit-crab holes. We pushed a stick down into the ground, and when we pulled the stick out, the oil began bubbling up. Fresh oil, not weathered oil. Wait till the shrimp boats start going out again. When those trawlers hit bottom, that’s when we will see a lot of things."

A New Orleans radio poll showed 80% of respondents did not believe the NOAA report. Others offered similar testimony. Steve told me he saw a huge slick about five miles long and one mile wide on his way to work. Bob Marshall, writing for the New Orleans Times-Picayune reported seeing a great deal of oil at South Pass. Fishermen reported oil both inside Barataria Bay and out near the great Mississippi Passes and barrier islands. Riki Ott, flew out over Barataria Bay and afterwards wrote: "Bay Jimmy on the northeast side of Barataria Bay was full of oil. So was Bay Baptiste, Lake Grande Ecaille, and Billet Bay....We followed thick streamers of black oil and ribbons of rainbow sheen....The ocean’s smooth surface glinted like molten lead in the late afternoon sun. Oil. As far as we could see: oil."

On my last evening down in the delta, fishing guide Dave Iverson took me by boat through Barataria Bay to the pelican rookeries at Queen Bess and Cat Islands near Grand Isle. As we passed through the he hauntingly lovely, lacey-green filigree marshland, flocks of snowy egrets and ibis lifted gracefully into the air ahead of us, an explosion of white confetti, an exuberant celebration of life. But returning through the marshes in the twilight through the oil-damaged parts, I saw miles of tangled boom filthy with oil, and inside the boom the black marshes, blackened as if a fire from hell had roared through. And everywhere a great stillness. Not a bird to be seen. I thought of John Keats’s great line: "The sedge is wither'd from the lake and no birds sing." I thought of Rachel Carson’s book Silent Spring that launched the modern environmental movement. Will this silence do the same?

On what abacus can we count the slowly dying, the invisibly hurt, the already poisoned but not yet dead? In this, our summer of magical counting. All summer we’ve been counting: numbers of gallons spilled, numbers of toxins released, numbers of birds dying, numbers of fishermen out of work. We are like children counting on our fingers in the dark, trying to ward off the shapeless face of something dreadful has been unleashed and cannot fully understand.

And down in Barataria Bay, the crabs climb out of the burning water and hold their claws to the sky. The creels stand empty; the boats lie still. Nets hang like shrouds. And children cough the BP cough.

Anne McClintock is the Simone de Beauvoir Professor of English and Women's and Gender Studies at UW-Madison. She is the author of Imperial Leather: Race, Gender and Sexuality in the Colonial Contest, which was republished online by the ACLS E-Humanities Book Project. McClintock has written short biographies of Olive Schreiner and Simone de Beauvoir and a monograph on madness, sexuality and colonialism called Double Crossings. She has co-edited Dangerous Liaisons with Ella Shohat and Aamir Mufti. She can be reached at: amcclintock@wisc.edu

counterpunch.org

Rethinking Gold: What if It Isn't a Commodity After All?

Jeff D. Opdyke

This won't sit well with some people: Gold isn't a commodity. There. I've said it.

But before you fire off an angry response, hear me out. The facts might change your view of gold's role in a portfolio.

For a long time, we've all heard that gold is a commodity - no different, really, from silver or wheat or pork bellies. Its price ebbs and flows (supposedly) with inflation, which historically drives commodity prices.

Odd, then, that gold's elevated price hasn't fallen in response to tepid U.S. inflation numbers. The Consumer Price Index as of July pegged inflation at just 1.2% for the previous 12 months, not counting seasonal adjustments. Nor has gold reacted to what Mohamed El-Erian, Pimco's chief executive, recently called "the road to deflation" on which he sees the U.S. traveling.

Data show that gold closely mirrors the movement of the U.S. dollar.

The conventional wisdom holds that neither of those scenarios - low inflation or deflation - should be good for gold. And yet it refuses to abandon record highs in the $1,200-an-ounce range. Something seems amiss.

I recently asked research firm Ibbotson Associates to run a correlation study to determine how closely inflation and gold-price movements track each other. You would expect gold, as a purported commodity, and inflation to move in tandem.

The data, going back to 1978 and capturing an inflationary spike, shows a correlation of, at most, 0.08.

That is low. Really low. Perfect correlation is 1; at minus-1, two assets move in perfect opposition. Near 0 implies gold and inflation barely acknowledge one another, and moves in unison are largely happenstance.

So if inflation doesn't push and pull at gold prices, what might it be? If you believe correlation studies, the answer is the U.S. dollar.

Going back to 1973 - a period that defines the modern, non-gold-backed dollar - the greenback's movements closely track gold's direction. The correlation between month-end gold prices and the Major Currencies Dollar Index, as reported by the Federal Reserve, is minus-0.45.

That clearly is a stronger correlation than you find with inflation. But let's take this a bit further. Let's shorten the time frame to the period from gold's 1980 peak to today.

The result: Over the past 30 years, the correlation between the dollar and gold is minus-0.65 - a high negative correlation. It means the dollar and gold are effectively on opposite ends of a seesaw. When the dollar is in favor, gold retreats. When it is under pressure, gold prices swell.

Look at the nearby chart. It is like a photo of a mountain scene reflected in a tranquil lake. The rises and falls and horizontal meanderings of gold are nearly the negative of the dollar's.

The implication is that gold isn't a commodity - at least not one that hews to the definition of something that people and industry consume.

Instead, "gold is a currency" whose daily price is a gauge of the market's concern about the "potential diminishment" of the purchasing power of the dollar and other paper currencies, says Paul Brodsky, a principal at New York's QB Asset Management.

If he is correct, it is the potential longer-term weakening of the dollar that is the real issue for the gold market, not inflation or deflation.

Some will note rightly that gold's record spike came amid the last great inflation surge. Those folks might be misreading the tea leaves.

Gold's four-year rally beginning in summer 1976 happened amid a four-year dollar decline. When the dollar bucked up at the end of 1980, gold prices retreated. Inflation was more of a sideshow than a driving force.

The question, with gold hanging around the $1,200 level, isn't "Is gold in a bubble?" as so many are asking. It's "What next for the dollar?"

Since its separation from gold, the dollar has been in a long downtrend, punctuated by periodic strength. The Fed's Major Currencies Dollar Index is down 27% since 1973, and down 45% since the dollar's peak in early 1985.

For investors convinced U.S. lawmakers and central bankers will successfully manage the budgetary woes and the massive unfunded liabilities of Social Security and Medicare, then gold is overvalued in the long term. Righting America's national balance sheet would explicitly raise the dollar's value as investors with money abroad move assets into a more-sound American economy. The selling of euro, yen and pounds would push the dollar higher - and gold lower.

If, however, you worry the U.S. balance sheet is irreparably damaged, then gold currently reflects the likelihood that a weak-dollar trend still has years to run as the U.S. struggles with its financial mess. Investors - and consumers - looking to preserve their purchasing power will gravitate toward gold, since its quantity isn't easily manipulated.

Invest in gold, then, according your beliefs about the future of the greenback. Just don't invest based on the idea that gold is a proxy for inflation. You are likely to be played for a fool.

Write to Jeff D. Opdyke at jeff.opdyke@wsj.com

online.wsj.com

Bancor: The Name Of The Global Currency That A Shocking IMF Report Is Proposing

The Economic Collapse

Sometimes there are things that are so shocking that you just do not want to report them unless they can be completely and totally documented. Over the past few years, there have been many rumors about a coming global currency, but at times it has been difficult to pin down evidence that plans for such a currency are actually in the works. Not anymore. A paper entitled "Reserve Accumulation and International Monetary Stability" by the Strategy, Policy and Review Department of the IMF recommends that the world adopt a global currency called the "Bancor" and that a global central bank be established to administer that currency. The report is dated April 13, 2010 and a full copy can be read here. Unfortunately this is not hype and it is not a rumor. This is a very serious proposal in an official document from one of the mega-powerful institutions that is actually running the world economy. Anyone who follows the IMF knows that what the IMF wants, the IMF usually gets. So could a global currency known as the "Bancor" be on the horizon? That is now a legitimate question.

So where in the world did the name "Bancor" come from? Well, it turns out that "Bancor" is the name of a hypothetical world currency unit once suggested by John Maynard Keynes. Keynes was a world famous British economist who headed the World Banking Commission that created the IMF during the Breton Woods negotiations.

The Wikipedia entry for "Bancor" puts it this way....

The bancor was a World Currency Unit of clearing that was proposed by John Maynard Keynes, as leader of the British delegation and chairman of the World Bank commission, in the negotiations that established the Bretton Woods system, but has not been implemented.

The IMF report referenced above proposed naming the coming world currency unit the "Bancor" in honor of Keynes.

So what about Special Drawing Rights (SDRs)? Over the past couple of years, SDRs have been touted as the coming global currency. Well, the report does envision making SDRs "the principal reserve asset" as we move towards a global currency unit....

"As a complement to a multi-polar system, or even—more ambitiously—its logical end point, a greater role could be considered for the SDR."

However, the report also acknowledges that SDRs do have some serious limitations. Since the value of SDRs are closely tied to national currencies, anything affecting those currencies will affect SDRs as well.

Right now, SDRs are made up of a basket of currencies. The following is a breakdown of the components of an SDR....

*U.S. Dollar (44 percent)

*Euro (34 percent)*Yen (11 percent)

*Pound (11 percent)

The IMF report recognizes that moving to SDRs is only a partial move away from the U.S. dollar as the world reserve currency and urges the adoption of a currency unit that would be truly international. The truth is that SDRs are clumsy and cumbersome. For now, SDRs must still be reconverted back into a national currency before they can be used, and that really limits their usefulness according to the report....

"A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR’s value remains heavily linked to the conditions and performance of the major component countries."

So what is the answer?

Well, the IMF report believes that the adoption of a true global currency administered by a global central bank is the answer.

The authors of the report believe that it would be ideal if the "Bancor" would immediately be used as currency by many nations throughout the world, but they also acknowledge that a more "realistic" approach would be for the "Bancor" to circulate alongside national currencies at first....

"One option is for bancor to be adopted by fiat as a common currency (like the euro was), an approach that would result immediately in widespread use and eliminate exchange rate volatility among adopters (comparable, for instance, to Cooper 1984, 2006 and the Economist, 1988). A somewhat less ambitious (and more realistic) option would be for bancor to circulate alongside national currencies, though it would need to be adopted by fiat by at least some (not necessarily systemic) countries in order for an exchange market to develop."

So who would print and administer the "Bancor"?

Well, a global central bank of course. It would be something like the Federal Reserve, only completely outside the control of any particular national government....

"A global currency, bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing."

In fact, at one point the IMF report specifically compares the proposed global central bank to the Federal Reserve....

"The global central bank could serve as a lender of last resort, providing needed systemic liquidity in the event of adverse shocks and more automatically than at present. Such liquidity was provided in the most recent crisis mainly by the U.S. Federal Reserve, which however may not always provide such liquidity."

So is that what we really need?

A world currency administered by an international central bank modeled after the Federal Reserve?

Not at all.

As I have written about previously, the Federal Reserve has devalued the U.S. dollar by over 95 percent since it was created and the U.S. government has accumulated the largest debt in the history of the world under this system.

So now we want to impose such a system on the entire globe?

The truth is that a global currency (whether it be called the "Bancor" or given a different name entirely) would be a major blow to national sovereignty and would represent a major move towards global government.

Considering how disastrous the Federal Reserve system and other central banking systems around the world have been, why would anyone suggest that we go to a global central banking system modeled after the Federal Reserve?

Let us hope that the "Bancor" never sees the light of day.

However, the truth is that there are some very powerful interests that are absolutely determined to create a global currency and a global central bank for the global economy that we now live in.

It would be a major mistake to think that it can't happen.

theeconomiccollapseblog.com

Under Siege in America

Jonathan Emord

As an attorney who represents businesses and interacts frequently with entrepreneurs, I hear repeatedly concerns that investigators for various federal and state agencies have become emboldened and are endeavoring to put them out of business. This widely expressed sentiment is not paranoia. It is a justified fear, and it is giving rise to a bunker mentality highly destructive to free enterprise. Many executives are holding onto their cash, hunkering down, and avoiding making moves to expand their businesses, hire more employees, or undertake new ventures because they greatly fear an unpredictable regulatory future—one where relationships with lenders and insurers are changing fundamentally and will keep changing in unforeseeable ways for years to come.

The greatest uncertainty they fear is the unleashed regulator, unleashed by the Obama Administration with instructions to seek and destroy. They believe the new army of regulators coming out of the Obama Administration regard industry as exploitative and evil. They are undoubtedly correct, at least to the extent that career civil servants who have harbored hatred for those they regulate but have been stopped from taking adverse action by political appointees of a conservative bend now have no such barriers in their way.

When law and law enforcement become unpredictable, entrepreneurs look for places to hide. Because they most often have assets not easily removed from a country, they usually try to stay off the radar screen, avoiding any move that will heighten their visibility by regulators. This is a characteristic of many third world countries, where regimes are unstable, where police can become armed bands of thugs, and where judicial decisions and local elections can be bought.

In the United States, we have enjoyed a very long period of stable governance. Transitions of power from one party to another have occurred without violent revolution. Police, while on occasion corrupt, are by and large law abiding. The military remains under civilian control. We, of course, had the great benefit of George Washington, who established limits to power through his words and deeds as President and Commander in Chief.

The rule of law, once held sacrosanct here, is now violated with impunity by federal regulatory agencies whose leaders think their missions more important than any laws that forbid their actions. They reinterpret their authority, acting directly against statutory and constitutional limits on their power quite frequently. They conduct under cover surveillance operations against citizens of this country, falsely representing their identities in an effort to induce violations of agency rules as a bases for prosecuting the offenders. Civil and criminal penalties can attend these violations, and many of the rules in question are either so obscure or counterintuitive as to seem incredible to those who violate them.

Rangers in the West whose cattle have traversed rights of way over federal lands for in excess of a century, have suddenly come to realize that they are being held guilty for the first time of trespass on those federal lands and ordered to pay huge fines. A trespass is deemed to occur every time a calf, a cow, or a bull takes a step onto federal property off of the right of way. Not good about following street signs, cattle on the move rarely stay in their lanes. BLM and Park Service agents perch with binoculars from high points and aircraft, photographing every trespass, monitoring the brands on the cattle, and then circling back to impose fines on unsuspecting ranchers.

Folks who own cherry orchards come to find out from professors at the university that certain kinds of tart cherries contain high levels of antioxidants and other biochemicals that are effective in reducing the symptoms of arthritis. They give that information, including the studies, to customers who buy cherry juice. Agents of the Food and Drug Administration visit them unannounced, inspect their farms, demand their literature, and inform them that they must stop telling people of the effects of cherries and cherry juice on arthritis or their cherries will be deemed unapproved new drugs. The farmers can then be charged with selling unapproved drugs, sentenced to jail terms, and lose their farms.

Dairy farmers who harvest fresh milk from healthy cows and share it with neighbors or make it available to health food stores come to realize that several federal and state agencies, doing the bidding for large milk processors, will prosecute them because their milk is not pasteurized, without regard to the fact that the milk is healthy and contaminant free. Parents who home school their children and elect not to obtain vaccinations for them, choosing to avoid any risk of injury from vaccines while simultaneously not exposing their children to public school environments, are surprised to learn that state health authorities insist that they vaccinate their children against their will, despite the fact that they pose no material risk of disease transmission to the general population.

Parents of a child dying of cancer are informed by attending oncologists that they can do nothing to save the child. The parents take their child to a clinic that offers an experimental drug for the cancer in question. The child takes the drug, begins to experience a reduction in tumors throughout his body. The parents are then informed that the FDA has determined that the child is ineligible to receive the experimental drug and must return to the failed regimen previously rejected by the parents and their attending oncologists.

A single mother who lives in the city and has two school age children decides after a second break-in to her home that she must arm herself. Delighted that she has maimed an intruder and stopped the break-ins, her delight turns to a feeling of helplessness when police arrest her and charge her with use of excessive force. She discovers that her successful use of her weapon to defend her home and children has resulted in a criminal prosecution for excessive force and a civil prosecution by the one she maimed for negligence, both entertained by the courts rather than dismissed. She ends up incurring huge legal bills, continues to suffer break-ins, and is sentenced to community service that forces her to leave her school age children alone at home for several hours each day.

A border patrol agent in pursuit of illegals who have crossed the border without authorization discharges his weapon and kills one in the course of that alien resisting arrest. The agent is prosecuted, convicted, fired, and given a life sentence.

These are all true examples of a bloated, all-consuming regulatory state that replaces a system of ordered justice with one of bureaucratic efficiency and that replaces respect for the rights of man and the rule of law with expansion of agency control over every aspect of enterprise.

Economic and civil liberties cannot prosper, let alone survive, in an environment of unstable law and law enforcement. Unless we reestablish constitutional government in the United States, replete with governors accountable to the people and possessed of limited powers and meaningful protection for economic and civil liberties, we are not that far from witnessing our nation devolve into the anarchic decay, rife corruption, and official lawlessness that is so common in third world countries.

Jonathan W. Emord is an attorney who practices constitutional and administrative law before the federal courts and agencies. Congressman Ron Paul calls Jonathan “a hero of the health freedom revolution” and says “all freedom-loving Americans are in [his] debt . . . for his courtroom [victories] on behalf of health freedom.” He has defeated the FDA in federal court a remarkable seven times, six on First Amendment grounds, and is the author of Amazon bestsellers The Rise of Tyranny, and Global Censorship of Health Information. For more info visit Emord.com.

www.emord.com

How Hyperinflation Will Happen

Guest Post:

Tyler Durden's picture




Submitted by Gonzalo Lira
How Hyperinflation Will Happen
Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.
To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate demand levels by way of fiscal “stimulus” spending—the classic Keynesian move, the same old prescription since donkey’s ears.

But the stimulus, apart from being slow and inefficient, has simply not been enough to offset the fall in consumer spending.

For its part, the Federal Reserve has been busy propping up all assets—including Treasuries—by way of “quantitative easing”.

The Fed is terrified of the U.S. economy falling into a deflationary death-spiral: Lack of liquidity, leading to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy grinding down to a halt. So the Fed has bought up assets of all kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent this deflationary deep-freeze—and will continue to do so. After all, when your only tool is a hammer, every problem looks like a nail.

But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.

This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—

—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

So this is how hyperinflation will happen:

One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.

This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.

It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.

The Fed’s buying of Treasuries will occur in such a way that it will encourage asset managers to dump even more Treasuries into the Fed’s waiting arms. This dumping of Treasuries won’t be out of fear, at least not initially. Most likely, in the first 15 minutes or so of this event, the sell-off in Treasuries will be orderly, and carried out with the idea (at the time) of picking up those selfsame Treasuries a bit cheaper down the line.

However, the Fed will interpret this sell-off as a run on Treasuries. The Fed is already attuned to the bond markets’ fear that there’s a “Treasury bubble”. So the Fed will open its liquidity windows, and buy up every Treasury in sight, precisely so as to maintain “asset price stability” and “calm the markets”.

The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.

But they don’t have to do what the Fed tells them, much less what the Treasury tells them. Since they weren’t really nationalized, they’re not under anyone’s thumb. They can do as they please—and they have boatloads of Treasuries on their balance sheets.

So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.

Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They’re not stupid: Everyone is aware of the idea of a “Treasury bubble” making the rounds. A lot of people—myself included—think that the Fed, the Treasury and the American Zombies are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.

Whether it’s true or not is actually beside the point—there is the widespread perception that that is what’s going on. In a panic, widespread perception is your trading strategy.

So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, “Time to get out of Dodge—now.”

Note how it will not be China or Japan who all of a sudden decide to get out of Treasuries—those two countries will actually be left holding the bag. Rather, it will be American and (depending on the time of day when the event happens) European asset managers who get out of Treasuries first. It will be a flash panic—much like the flash-crash of last May. The events I describe above will happen in a very short span of time—less than an hour, probably. But unlike the event in May, there will be no rebound.

Notice, too, that Treasuries will maintain their yields in the face of this sell-off, at least initially. Why? Because the Fed, so determined to maintain “price stability”, will at first prevent yields from widening—which is precisely why so many will decide to sell into the panic: The Bernanke Backstop won’t soothe the markets—rather, it will make it too tempting not to sell.

The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?

Commodities.

By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon. But it will not be because ordinary citizens have lost faith in the dollar (that will happen in the days and weeks ahead)—it will happen because once Treasuries are not the sure store of value, where are all those money managers supposed to stick all these dollars? In a big old vault? Under the mattress? In euros?

Commodities: At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008.

It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities. By the end of the day of this panic, commodities will have risen between 50% and 100%. By week’s end, we’re talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot up the most—to $100 an ounce within the week.)

Of course, once commodities start to balloon, that’s when ordinary citizens will get their first taste of hyperinflation. They’ll see it at the gas pumps.

If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week—perfectly possible, in the midst of a panic—the gallon of gasoline will go to, what: $10? $15? $20?

So what happens then? People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon.

If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.

When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.

So immediately after the Treasury markets tank, equities will fall catastrophically, probably within the next few days following the Treasury panic. This collapse in equity prices will bring an equivalent burst in commodity prices—the second leg up, if you will.

This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.

This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset prices don’t skyrocket—they collapse, both nominally and in relation to consumable commodities. A $300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.

Right now, I’m guessing that sensible people who’ve read this far are dismissing me as being full of shit—or at least victim of my own imagination. These sensible people, if they deign to engage in the scenario I’ve outlined above, will argue that the government—be it the Fed or the Treasury or a combination thereof—will find a way to stem the panic in Treasuries (if there ever is one), and put a stop to hyperinflation (if such a foolish and outlandish notion ever came to pass in America).

Uh-huh: So the Government will save us, is that it? Okay, so then my question is, How?

Let’s take the Fed: How could they stop a run on Treasuries? Answer: They can’t. See, the Fed has already been shoring up Treasuries—that was their strategy in 2008—’09: Buy up toxic assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what’s the Fed supposed to do? Bernanke long ago ran out of ammo: He’s just waving an empty gun around. If there’s a run on Treasuries, and he starts buying them to prop them up, it’ll only give incentive to other Treasury holders to get out now while the getting’s still good. If everyone decides to get out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They’re at the mercy of events—in fact, they have been for quite a while already. They just haven’t realized it.

Well if the Fed can’t stop this, how about the Federal government—surely they can stop this, right?

In a word, no. They certainly lack the means to prevent a run on Treasuries. And as to hyperinflation, what exactly would the Federal government do to stop it? Implement price controls? That will only give rise to a rampant black market. Put soldiers out on the street? America is too big. Squirt out more “stimulus”? Sure, pump even more currency into a rapidly hyperinflating everyday economy—right . . .

(BTW, I actually think that this last option is something the Federal government might be foolish enough to try. Some moron like Palin or Biden might well advocate this idea of helter-skelter money-printing so as to “help all hard-working Americans”. And if they carried it out, this would bring us American-made images of people using bundles of dollars to feed their chimneys. I actually don’t think that politicians are so stupid as to actually start printing money to “fight rising prices”—but hey, when it comes to stupidity, you never know how far they can go.)

In fact, the only way the Federal government might be able to ameliorate the situation is if it decided to seize control of major supermarkets and gas stations, and hand out cupon cards of some sort, for basic staples—in other words, food rationing. This might prevent riots and protect the poor, the infirm and the old—it certainly won’t change the underlying problem, which will be hyperinflation.

“This is all bloody ridiculous,” I can practically hear the hyperinflation skeptics fume. “We’re just going through what the Japanese experienced: Just like the U.S., they went into massive government stimulus—hell, they invented quantitative easing—and look what’s happened to them: Stagnation, yes—hyperinflation, no.”

That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.

That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011.

The question for us now—ad portas to this hyperinflationary event—is, what to do?

Neanderthal survivalists spend all their time thinking about post-Apocalypse America. The real trick, however, is to prepare for after the end of the Apocalypse.

The first thing to realize, of course, is that hyperinflation might well happen—but it will end. It won’t be a never-ending situation—America won’t end up like in some post-Apocalyptic, Mad Max: Beyond Thuderdome industrial wasteland/playground. Admittedly, that would be cool, but it’s not gonna happen—that’s just survivalist daydreams.

Instead, after a spell of hyperinflation, America will end up pretty much like it is today—only with a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean out all the bad debts in the economy, the crap that the Fed and the Federal government refused to clean out when they had the chance in 2007–’09. It would break down and reset asset prices to more realistic levels—no more $12 million one-bedroom co-ops on the UES. And all in all, a hyperinflationist catastrophe might in the long run be better for the health of the U.S. economy and the morale of the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won’t be surprising. But I digress.

Like Rothschild said, “Buy when there’s blood on the streets.” The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

I have no idea what will happen after we reach the point where $100 is no longer enough to buy a cup of coffee—but I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal. I have no idea the shape of that new normal. I wouldn’t be surprised if that new normal has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls—I’d say it’s likely, but for now that’s not relevant.

What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next.

I think we’re going to have hyperinflation. I hope I have managed to explain why.
4.435295