BRUSSELS — The European Parliament on Thursday broadly rejected an agreement with the United States on sharing information about bank transfers that was aimed at tracking people suspected of being terrorists…..The United States could still rely on an agreement on mutual legal assistance to seek the data. But that could make the process of gathering the information more cumbersome.

Read the full article here.

Historically, every financial and economic crisis has been used to further centralize power and concentrate wealth. This one is no different, and in fact the moves being promoted by the Obama administration and the central banks of the Western powers will take the whole world to the pinnacle of financial despotism — unless enough people wake up and claim their own “money power.”

In recent months, the Fed has expanded its “assets” from about $800 billion to more than $2,000 billion. Those so-called assets are securities it bought from financial institutions and loans made to central banks in other countries. But the Fed refuses to name the specific recipients of those funds, while admitting that by doing so they are manipulating the value of the US dollar on foreign exchange markets. (Congressman Alan Grayson Grills Fed Vice Chair Donald Kohn.)

Where does the Fed get the money to buy those “assets” or to make those loans? Quite simply, it creates the money. Unlike you or me or any other economic entity, the Fed has the power to create Federal Reserve dollars by effectively writing a check against no funds. This is the function known as “Open Market Operations.”

What is the economy experiencing now, and what is in prospect for the future? Despite unprecedented inflation of the money supply, we are now (mid-July, 2009) in a period of depression. How can we have simultaneous inflation of the currency and still have economic depression?

It is a matter of where the money is going. While the public sector (federal government) is being lavishly funded to maintain a global empire, and the banks are being bailed out to try to keep a dysfunctional and destructive financial system from collapsing, the private productive sector is being starved for credit. As a result, businesses are bankrupting, people are losing their jobs and their incomes, and lower levels of government are being squeezed because their tax revenues are shrinking.

There is also the matter of the real estate bubble that was created by the financial institutions as they loaded up the private sector with a debt burden that was way beyond its ability to bear. Now that burden is being shifted to the public sector as the government assumes those “toxic” loans. Unfortunately, it is not the poor suckers who were lured into the debt trap that are being relieved, but the predatory lenders who laid the traps. So mortgages are being foreclosed at an unprecedented scale, people are losing their equity as housing values plunge, and more Americans are being made homeless.

These are the factors that have so far kept the effects of monetary inflation from becoming extreme. Ultimately, however, such abusive issuance of political money shows up as rising prices.

When will the price effects of hyper-inflation begin to kick in? How will the government respond to it? What will be the social and political fallout? What can ordinary people do to protect themselves from monetary and legislative abuses? These are the questions that beg for answers.

Already there are rumblings and signs that the U.S. dollar is about to lose its status as the global reserve currency. When that happens, imports of energy and other necessities will become more expensive. The U.S.’s massive trade deficits will not be sustained into the future. China, the OPEC countries, and others that have been buying massive amounts of U.S. government bonds with their dollar earnings, are indicating that their appetite has been sated. Bilateral and multilateral trade agreements are being made that bypass the use of the dollar for international trade.

One thing is clear — we cannot rely upon the government to act in the best interests of the people. Already, President Obama has moved to give the Federal Reserve even more power to control the people’s credit and financial resources. According to a June 18 article in the Wall Street Journal, “The central bank would win power to monitor risks across the financial system, and sweeping authority to examine any firm that could threaten financial stability, even if the Fed wouldn’t normally supervise the institution.” This is not a new plan; it was floated as a trial balloon during the Bush administration. As early as March 2008, then Treasury Secretary Paulson was proposing to “give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.”

Ostensibly that would be done to prevent the errant financial institutions from repeating their sins of the recent past, but more likely it will have the effect of suppressing any private initiative that might compete with the financial cartel. The Fed is, after all, a private company run by the bankers for the bankers. A recent Reuters article is critical of Obama’s move because of the Fed’s lack of accountability. It is a plan that seeks to preserve at all costs the credit monopoly that exists under the central banking regime and to perpetuate the looting of the economy by monetization of federal government debts and other ultimately worthless “assets.”

During the Great Depression, President Franking Roosevelt, upon taking office in 1933, declared a “bank holiday.” He ordered all banks to close. Many of those banks never reopened and many people lost their savings. He also demanded that all Americans turn in their gold holdings in return for paper currency, which was one of the biggest robberies in history up to that time. Some pundits are predicting that another such bank holiday is being planned to put the brakes on price increases, once they begin in earnest, by depriving people of access to their savings, as was done in Argentina in 2002.

Governments that mismanage money invariably use the force of law to prevent the sheep from escaping from the shearing pen (or the slaughter house). So long as people are completely dependent upon political money and banks, they will docilely (or grudgingly) accept whatever “solutions” the political leadership puts forth, and do whatever the government demands of them.

Fortunately there is a way out. The primary purpose of money is to facilitate the exchange of goods and services in the markets. But it is possible to mediate the exchange process without using political money as the payment medium, and without borrowing from banks.

There is plenty of precedent for this sort of cashless trading. It involves a process of direct credit clearing among associated buyers and sellers. During the Great Depression the entrepreneurial middle class in Switzerland organized themselves into the WIR Economic Circle Cooperative. After 75 years, the WIR clearing circle continues to thrive with more than 60,000 member businesses trading the equivalent of about US$1.3 billion per year.

The past four decades have seen the emergence of a new industry comprised of commercial trade exchanges, sometimes called “barter” exchanges, that act as “third part record keepers” enabling the same sort of direct credit clearing for thousands of businesses in cities around the world. Efforts at the grassroots by social entrepreneurs to localize exchange and finance have been similarly widespread in many communities over the past twenty-five years.

Measures to properly reform the money and banking system by political means have about as much chance as the proverbial snowball in hell. However, what is possible, and what seems to be gaining traction to transcend the dominant system, is the materialization of voluntary, private initiatives that enable the cashless exchange of goods and services. As these systems continue to improve, proliferate, and scale up, they will provide a pathway toward a sustainable economy, greater local control, and a better quality of life for all.

Thomas H. Greco, Jr. is the director of the Community Information Resource Center, which he founded in 1992. CIRC is a nonprofit consulting organization and networking hub dedicated to economic equity, social justice, and community improvement, specializing in community currency and mutual credit design, development, and implementation. His newest book is The End of Money and the Future of Civilization.

http://www.alternet.org/workplace/141281/how_bad_will_the_economy_get_really,_really_bad/?page=1

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1998 Russia

Declining productivity, an artificially high fixed exchange rate between the ruble and foreign currencies to avoid public turmoil, and a chronic fiscal deficit were the background to Russia’s financial meltdown in 1998. The economic cost of the first war in Chechnya that is estimated at $5.5 billion was also a cause.

Prior to the culmination of the economic crisis, the government-issued GKO bonds policy had been described as similar to a Ponzi scheme, with the interest on matured obligations being paid off using the proceeds of newly issued obligations.

Two external shocks, the Asian financial crisis that had begun in 1997 and the following declines in demand for (and thus price of) crude oil and nonferrous metals, impacted Russian foreign exchange reserves. A political crisis came to a head in March when Russian president Boris Yeltsin suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet in March.

The Asian crisis and political event rattled investor confidence caused foreign investors to sell off Russian stocks, bonds, and took a flight out of rubles.

The amount of GKO at some $150 billion was not a cause of concern for a $1 trillion economy. But with over 30% of GKO owned by foreigners, the foreign selloff caused havoc in equity, bond and the ruble.

Russian broad equity index down 90%+ from late 1997 to October 1998

Ruble went from 5 to 1 USD to 30 to 1 USD in June 1999

After the equity panic bottom in October 1998, Russian equity index, measured in rubles rebounded strongly in part thanks to the depreciating ruble.

However, measured in US dollars, Russian stocks didn’t make full recovery till some 5 years later.

2001 Argentina

In 1998, Argentina officially entered a recession, which lasted for three years and ended in a collapse as fears of the devaluation of the peso led to bank runs. This brought about grave amounts of protest and violence affecting many people and companies, causing several deaths.

In 2001 Argentina had US $100 billion of national debt, which is approximately 40% of its GDP. While the amount is containable relative to its GDP, the Argentines made a mistake of denominating its debt in US dollars. With shrinking current account surplus, the country wasn’t able to raise dollars to pay debt principal and interests in 2001 and eventually repudiated on the foreign debts. The fixed exchange rate was removed and the peso was quickly devalued. The exchange rate was then left to float, causing further devaluation (about 4 pesos per dollar)

Argentine equity index dived 60% in 2001

Peso went from 1 to 1 USD to 4 to 1 USD in early 2002 after the government allowed the Peso to float.

Although Argentine Equity Index recovered fully in 2002 in nominal terms, it wasn’t till 2004 before the stocks come back to pre-crisis level in US dollar terms.

Today USA

The US just experienced the biggest debt blowup known to man. Trillion dollar plus mortgage debts had to be bailed out. Lehman Brothers, Merrill Lynch, Bear Stearns, Countrywide, Fannie/Freddie’s have all become history. Even the American icon Citibank was brought to its knees at $1 before the government bailout. S&P500 was halved in 12 months.

America is privileged to have its dollars serving as the world’s reserve currency. America’s debt is denominated in dollars, which can be printed at will by the Fed. And printing is what the Fed did.

The Fed has printed over 1.5 trillion dollars to bail out various groups.

S&P 500 responded positively to monetary easing as it rose 40% since March in nominal terms. It shouldn’t be surprising to see the index recover to pre-crisis level. Equities have to rise as in Russian and Argentine cases, when currencies had been massively devalued.

In real terms however, when S&P 500 is measured in gold in the chart below, it likely takes many years before the index recovers.

Where does the dollar go from here?

When foreign investors took flight from Russian rubles and Argentine pesos, the dollar was the beneficiary. When global investors took flight from the dollar, which currency benefits?

Gold is the ultimate antithesis to the dollar. Gold is liquid, universally recognized, limited in quantity. Just like Russians and Argentines trying to anchor their currencies to the dollar, the US government devised various ways to slow down the rise of gold prices to maintain dollar’s soundness. However the massive money printing by the Fed and fast-eroding confidence in the dollar by international investors might just be the key to drive gold past the all illusive $1,000/oz level and not look back.

As we saw in the past crisis in Russia, Argentina, Thailand, and Brazil; equity markets eventually do return while the devalued currency never regained strength. The US case is no different. Further rebound by the equity market in nominal terms can be seen albeit with extreme volatility, and we will likely witness a 4-digit gold price in 2009 that will never look back. As the Chinese saying, crisis is spelled danger + opportunity. There is still time to diversify out of dollars before the world recognizes the dollar’s permanent debasement and demotion of status. Visit goldmau.com and sign up for our free market and stock updates.

John Lee, CFA
http://www.goldmau.com
jlee@goldmau.com
1.800.965.6404

ABOUT THE AUTHOR

John Lee, Mau Capital Management

John Lee is the founder and principal of Mau Capital Management and the portfolio manager of a mining equity hedge fund. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. Mr. Lee has a keen interest in the history of money and economics, and has previously studied under Mr. James Turk, a renowned authority on the gold market.

If you would like to receive subscription of Mr. Lee’s Stock Chart of the Week and 4 other famous newsletters for the price of $89.95/3 months, click here to find out more. http://new.goldmau.com/stockchartsubscribe.php

This product is intended to facilitate the proliferation and widespread use of silver and gold barters (bullion coins) and silver and gold barter scrips (certificates) as BARTER. It is jam-packed full of helps that allow anyone, or any group, to easily and quickly establish local commodity currencies based on, backed by, and redeemable in (in the case of barter scrips), the precious metals gold and silver. If you are a business owner, you are invited to add yourself to the list and get started now accepting hard currency as barter. And if you are an individual that wants to barter with silver and/or gold, you are invited to get yourself some barters. All entrepreneurial individuals around the country are also invited to become dedicated barter distributors. If you need information about the barters and barter scrips, or would like to learn how to establish local currencies in your area, there are free educational tools available. Send comments, suggestions, feedback, encouragement or inquiries to barterlist@live.com.  You can also contact me directly by calling (760) 743-2553.  Ask for Kelly.
Copy of How to Create a Community Currency

Each month, the US Treasury publishes its International Capital account, (TIC) which foreign currency traders and bond dealers use to gauge the flows of money from around the world, into and out-of the US-capital markets. The demand for a nation’s bonds and stocks, combined with international trade flows for goods and services, plus behind the scenes intervention by central banks, all act in concert to influence the foreign exchange market which handles $4-trillion per day.

A surplus in TIC inflows is generally seen as a positive for the US-dollar, because it signals that foreigners are willing to increase their holdings of US-securities, displaying greater confidence in the currency. On the other hand, a TIC deficit is generally interpreted as bearish for the US-dollar, because it means that foreign inflows into the US aren’t sufficient enough to fund government borrowing. http://www.safehaven.com/article-13381.htm

From the prefix tri-, meaning three + -illion (from million); i.e. a million million million.
Coined by Jehan Adam in 1475 as trimillion.

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A personal note from Blogmeister Mark. “A bad day today is signaling ugly times ahead for the US of A”

I awoke to the cheerful over caffeinated voice of the morning news. CNN news cheerleader Kiren Chetry was the first thing I heard around 7AM EST. This is what she said:

“Ahead this morning on CNN, why the President’s LATEST Trillion dollar bail out plan is a good deal for your money!”

I don’t care what they say, who said it or on what channel…plain and simple…the TV news people are lying to your face. We’ve all know this for years now, but their chatter has just never come to such an idiotic level no….such a humorous level of blab. All the Whitehouse press, all the Obama volunteers and all the happy thoughts you can muster will never again create any kind of long term success with more than $10 Trillion in debt. Everyone knows it.

This is a cruel joke being played on all Americans and those who hold US Federal Reserve Notes (money). I’m shocked this is happening but at the same time, I’m not surprised. Greedy bankers, Wall Street Jocks and credit bubbles have led the world to this day. It is over for the dollar. I don’t care if you believe me or not, I’m tired of preaching about it. If you snooze on this one, you will lose big. It’s time to stock up the Central American home and keep my head down. I advise all of you to do the same. Don’t call me a year from now I don’t want to hear it.

Here’s Bob Moriarty, one of the smartest guys around posting to 321gold….