I am very concerned about the bank rescue plan that is being approved by Congress. It posed the risk of reducing the value of the dollar, wiping out the national debt, and it may not even work. At the same time, there are alternatives.
Because of this bailout bill of $ 700 billion more over the next two years, you can expect to see the value of the dollar fall, bonds fall, and gold skyrocket. The question we must ask ourselves now is how bad will inflation be? Will it turn into a hyperinflationary explosion that will totally destroy the value of the dollar and wipe out the savings of millions of Americans? Will the Fed ever say we should fight inflation by raising interest rates to 20% or more, as the Fed did in 1980, or will it let the value of the dollar literally drop to zero? These are the final stages of the game that we are heading to now. I don’t know what will happen in the end, but I will prepare for either possibility.
Now Bernanke and Paulson said that if the plan was not enacted, the economy would collapse. On Saturday I watched FOX News do a morning special on the crisis hosted by Neil Cavuto. Bush delivered a radio address in support of the plan, and Cavuto’s attitude seemed to be “Bush is a great leader. If we don’t do this plan, there will be a Great Depression. We must support Bush, so trust him and obey.” Hank Paulson appeared on Meet the Press on Sunday and, in response to serious questions about the plan, basically said that this is a crisis and that this is the only option we have. The talking points seem to be that we must accept this plan or we will have a depression.
Well, none of this is true. There are alternatives to simply buying all the bad debts off the balance sheets of all these banks. Not all of the country’s banks are bankrupt, but the problem is that many of the largest banks are burdened with bad debts, and losses that are hidden due to accounting gimmicks, that banks have stopped lending to each other. That is the essence of a credit crisis. There is a trust issue, but this is not the only way to fix it.
A banking crisis occurred at the beginning of the Great Depression, but Franklin Roosevelt and the government did nothing like what is proposed today. They did not rescue the banks. What Roosevelt did was declare a bank holiday. He closed the banks. for about a week.Then he had officials go to all the banks and examine their finances to determine which banks were really bankrupt, which ones were fine, and which ones could be saved with a little money. When the bank holiday ended, banks that were bankrupt did not reopen and those that were good did.
Trust was restored, because depositors now knew whether their bank was doing well or not, and it was not necessary to put the financial future of the entire country at risk to do so. It costs just a penny. Yes, some people lost money. Many banks collapsed, but the dollar did not drop to zero and future generations did not suffer from debt. The credit freeze ended in a week.
The same could be done now as an alternative. But this is not a plan that Goldman Sachs or Morgan Stanley would like. And the bankers own Bernanke, Paulson, and the leadership of Congress. They are the top contributors to both John McCain and Barak Obama. In an age where there are alternatives to what is being done, none are being presented to the American people. It is a lie to say that the only option we have is to do what Paulson and Bernanke propose or we will have a Great Depression.
What is being planned does not have to happen. And we can solve this crisis without bailing out all the banks and without putting the solvency of the entire country at risk. We need real leaders and not fake leaders. We need people to talk. We need you to pick up the phone and call your congressmen. You need to send a letter to your local newspaper. You must act right now.
On Saturday, the Secretary of the Treasury presented his plan to Congress and posted a “fact sheet” on his website. I have not heard anyone comment on this, but within the plan there is a request for total immunity from lawsuits. The plan states: “Clerk’s decisions pursuant to authority cannot be reviewed … and cannot be reviewed by any court of law or administrative agency.”
This is absolutely outrageous as it places the Secretary of the Treasury above the law. Even the president can be brought to court, remember Bill Clinton. Nixon had to be pardoned not to have to go to court. Our entire system of government is built on checks and balances, but this bill eliminates all of that when it comes to the Secretary of the Treasury. It’s a crazy take on power. Who knows what measures it can propose or carry out in the future with these new powers?
This is the dangerous path the government has now set us down. Politicians and the Federal Reserve are willing to put the savings of all Americans at risk to protect the banks.
According to the Wall Street Journal, “The central bank is taking a potentially large risk: If these assets fall in value or default, it may be on the hook, because the Fed cannot claim anything more than collateral as payment. The assets are safe. and the measure is a temporary measure to provide liquidity to the market. “
In other words, the Fed could totally destroy its balance sheet and bankrupt the country; the Fed could risk putting the US dollar into a hyperinflationary death spiral.
We have to think about this possibility and that is something that I am going to spend time thinking about this week. In short, you want to protect yourself by running out of US dollars and other assets that will appreciate in value if the dollar goes down, of course that means gold and physical gold if possible. It also means stocks, currencies, and even real estate, although you wouldn’t be a real estate buyer all the way down to real estate, maybe next year. And for stocks in a hyperinflationary environment, investing in foreign stocks would be better than investing in US stocks. What you don’t want is cash in savings accounts and money market accounts. That kind of money should be in physical metals. Even if the worst case scenario doesn’t happen, you can surely bet that there will be a continued decline in the dollar, a rise in inflation, and a rise in gold prices for the next two years. Position yourself for that and you will benefit no matter what happens.
I have had a very uncomfortable feeling about the financial markets in the last few days. One that I’ve never had before. The feeling is not the fear of it falling, but rather that a lot of integrity has somehow been removed from the markets.
It is almost as if the markets cannot be trusted right now, because of what the government has done and how it has acted in the past week. I hardly feel comfortable investing in the United States anymore. By setting this bailout plan and suddenly banning short selling of bank stocks, the government has shown me that it can and will do anything for banks, will change investment rules without notice, and is incompetent. This is very disturbing.
Take, for example, the short-selling restrictions on bank stocks that the SEC announced last week. It seems that short selling is being used as a convenient scapegoat to distract people from the real cause of the banking crisis: incompetent management of banks that made stupid investment decisions, a government that encouraged their reckless behavior, and a SEC that allowed them to play with their balance sheets for years. People warned that Fannie and Freddie were playing accounting games for years and the regulators sat there and did nothing.
The truth is that short sellers play a positive role in the market by providing liquidity. Options traders, market makers, and long / short funds use short selling to hedge positions. For example, many times when you buy an option, a floor trader or market maker will have a short position on the other side to cover the option that they created and sold for you. By banning short selling, the SEC blew up a lot of these guys and for whatever reason I doubt they’ll get a bailout. But they won’t just take a lot of liquidity out of bank stocks by banning short sales.
If bank stocks end up falling again after this rally, there will be no shorts to buy to close your positions on the way down. Another fall in bank stocks would end up being faster and much more pronounced than the one we have just seen. By banning short selling, the SEC has made the financial markets even more dangerous and has proven itself totally incompetent. You don’t seem to understand the markets and you don’t know what you are doing.
After making their short sale announcement, regulators announced that they would nearly double the margin requirements for gold futures contracts. In an instant, the rules of the gold game changed.
It makes me very uncomfortable investing and trading in the US markets when the SEC does something like this. Who knows what rule changes might happen in the future. It is almost as if the integrity of the stock market is taken away. I’m short on US bonds right now, having been in the right position at the gap last week, but if bonds go into a death spiral, who’s to say the SEC won’t ban bond short selling?
It is very difficult to make investment or business decisions in this type of environment. It’s like trying to hit with a blind umpire.
In the future, I plan to buy more stocks outside of the United States. Many of the stocks I buy are mining stocks that are also listed in Canada. In the future, when I buy them, I will simply buy them directly from Canadian exchanges rather than one of the American exchanges, mainly due to the potential danger of a fall in the dollar. There are also ETFs on exchanges outside of the US that track the S&P 500 and individual equity sectors. If you live outside of the US, it would be better to buy them in the future than to buy US ETFs.
By owning foreign stocks, if the dollar falls in value against the currency of that country, then I will benefit from a fall in the dollar. If you just kept buying everything in the US and then one day in the future the dollar went into a hyperinflationary spiral, you’d be screwed. It is important to start diversifying your investment in US dollars and securities.
Now there are many brokers in the US that allow Americans to buy the stock directory of foreign exchanges. Etrade now has this ability. Penntrade and Mytrack allow their clients to shop on Canadian exchanges, while Interactive Brokers provides access to virtually all major world markets. If your broker does not allow you to do this, then you may consider moving to one of these brokers. As for foreign money markets and CDs, you may want to visit Everbank.com. It may even be worth considering opening a brokerage account abroad to protect yourself from the risk of one day facing capital controls.
Time to think about diversifying off the US dollar.
