Curried Wealth Building
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April 3, 2010
Issue 90  -  Things Your
Friends Don't Know
 
This week I thought I'd take a break from my regular format and cover a few facts I've accumulated over the last few months.  These are in the category of things that 99% of the public don't know.  So let's jump right in:
 
1.  It took the U.S. nearly 200 years to reach $1,000,000,000,000 in debt. Last month, we added over 1/5 of that amount.  ONE MONTH!
 
This is the elephant in the room.  There is no "recovery" in the traditional sense of things, only a debt fueled surge that must end in tears.  There is no way that one can "charge" oneself into prosperity.  I was listening to a podcast this past week and the guest was making the claim that the debt was irrelevant because the other countries of the world had "no where else to go.  What are they going to buy instead?"   This is a valid point, but only up to a limit.  People will not continue to pour money into a sinking ship if the bow is just about to go under.  At some point, the debt will be too high and then the answer to the gentleman's question will be ANYTHING!
 
2.  47% of  working Americans have less than $10,000 accumulated for retirement.
 
This was the story as talked about in contraryinvestor.com:  
 
Monitoring personal income is simply a must do exercise in terms of taking the ongoing “temperature” of the real US private sector.  Personal income is the key to consumption and the key to the deleveraging process.  Finally, you probably saw the relatively dramatic Employee Benefit Research Institute retirement poll that was released a few weeks back stating that 47% of the folks polled had saved less than $10,000 for retirement.  No worries, 27% had less than $1,000.  As you know, we have not even brought up the term savings in the entire discussion.  But we will just ahead.  Again, the character, tone and rhythm of changes in personal income circumstances is critical as we move ahead.  Critical to the real economy.   For now, Wall Street is still gorging on the Fed sponsored liquidity feast of a lifetime.  It simply is what it is.  And there is nothing wrong participating in that as long as we are able to identify the reality of what is driving the real economy and financial asset prices at any point in time.  We hope that as long as we can see this reality, we can all the better manage risk in investment decision making.  As Matt Damon, as Jason Bourne, remarked in one of the Bourne series of movies, the first thing he did when entering a room was to become immediately aware of the location of all of the exits.  Absolutely applicable to the risk management process in the here and now.
 
Of course, the exits are gold and silver.
 
3.  The GDP growth in relation to debt has turned negative.  Look at this chart:
 
 
 
I've seen this referred to as the chart of the century and it just may well be.  What this shows is that we have reached the point of "pushing on a string".  Added debt is now not contributing anything to the GDP.  This is the plan of Congress!  Perhaps they didn't get the memo.  Not only is the debt not adding to GDP, but it is now subtracting from it.  Extraordinary.  In fact, this has NEVER happened.
 
4.  Capital controls were just implemented.
 

It's Official - America Now Enforces Capital Controls

Submitted by Tyler Durden on 03/28/2010 14:27 -0500


It couldn't have happened to a nicer country. On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration's millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions - Subtitle A—Foreign Account Tax Compliance, institutes just that.
 
In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation's domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It's the law. If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose - the law now says no. Capital Controls are now here and are now fully enforced by the law.
Let's parse through the just passed law, which has been mentioned by exactly zero mainstream media outlets.
Here is the default new state of capital outflows:
 
(a) IN GENERAL.—The Internal Revenue Code of 1986 is amended by inserting after chapter 3 the following new chapter:
‘‘CHAPTER 4—TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS
‘‘Sec. 1471. Withholdable payments to foreign financial institutions.
‘‘Sec. 1472. Withholdable payments to other foreign entities.
‘‘Sec. 1473. Definitions.
‘‘Sec. 1474. Special rules.
‘‘SEC. 1471. WITHHOLDABLE PAYMENTS TO FOREIGN FINANCIAL INSTITUTIONS.
‘‘(a) IN GENERAL.—In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.
 
If you can't get your capital out of the country, the government basically owns you.  Bye bye property rights.  This is the continued closing off of the exits.  You are being boxed in.  They are funneling you in to the stock and bond market while at the same time crushing the precious metal markets to make them unattractive.  This is a HUGE hint that inflation, not deflation, will be the ultimate outcome for the U.S.
 
To illustrate this further, the hearings about precious metal manipulation by the CFTC last week saw produced this interesting fact:
 
5.  The Wall Street Journal had one story on the hearings and it was done BEFORE they happened.
 
Here are some details from Tim Iacono:
 
Not being much of a conspiracy theorist, last week’s hearing by the CFTC (Commodities Futures Trading Commission) on futures market trading for metals was a subject of some interest to me, but the news flow since that time has been rather remarkable – if for no other reason that none of the news seems to be flowing in the mainstream media.
In fact, a search at the Wall Street Journal on “Gensler” (CFTC Chairman Gary Gensler would surely be included in any report) produces only this one item from before the hearing.
You’d think that, if a news organization that normally finds time to report on the most arcane of financial market goings-on saw fit to publish a story before the hearing was held, they’d also figure it was worthwhile to let their readers know what happened at the hearing.
Apparently not.
The one story($) that the search did turn up quickly gets to the heart of the argument against imposing position size limits for metals markets – the real question that the hearing was attempting to answer:
Imposing new speculative trading limits on metals futures contracts is unwarranted and could have an adverse impact on U.S. markets, some exchange and bank officials will tell the Commodity Futures Trading Commission Thursday.
Later in the story they mention that GATA (Gold Anti-Trust Action Committee) chairman Bill Murphy was planning to speak though, curiously, they failed to mention him by name and then, even more curiously, they followed this mention up with almost three times as many words bashing those, like Murphy, who allege manipulation in these markets.
One of the staunchest believers in the allegations of gold manipulation—the chairman of the Gold Anti-Trust Action Committee—will testify as well.
But others, including the CME’s Mr. LaSala and John J. Lothian, a commodity trading advisor, futures broker and the head of a well-known markets newsletter, will urge the CFTC not to pay attention to arguments that there has been manipulation.
“Those who believe gold and silver markets are manipulated to keep prices low are nothing more than politically opportunistic rent seekers in my book,” Mr. Lothian planned to say. “They are parasites on the body public profiting from selling fear and seeking political change that will benefit their world view and related market position.”
Now, that’s some stunningly unbalanced reporting on a subject that, admittedly, anybody anywhere near Wall Street  probably doesn’t want to contemplate – that markets are rigged. But, in the broader scheme of things, wouldn’t it be better to just let “those crazy gold bugs” have their day and be discredited once and for all if they really are as nutty as the WSJ would have us believe?
 
This is THE financial publication of Wall Street.  It is published by Dow Jones.  That IS the stock market.  You don't think they have a vested interest in keeping the farce going?  A story before the hearings, but none covering what actually happened?  Given the fact that a whistleblower basically PROVED that the silver market is rigged and that the price is set based on unbacked paper promises?  NO COVERAGE!!!!!  Do they have to hit you over the head with a mallet?  Doesn't sway you information is being filtered?  How about the fact that all television interviews with the whistleblower and Bill Murphy of GATA were all CANCELED after the hearings?  Five interviews in all...just canceled.  PLEASE buy some silver and gold!  They are as close to can't lose bets as you will EVER see. 
 
6.  The government basically runs the mortgage market and now will run the student loan market.
 
Fannie Mae and Freddie Mac which are now run by the federal government, have well over 50% of all mortgages and now thanks to a little understood provision in the health bill, will drive private banks out of the student loan market.  Peter Schiff, a candidate for senator in New York wrote it up like this:
 
Take the recent student loan reforms that were slipped into the health care bill. Obama wants to reduce the cost of providing student loans by taking the profits out of the industry. According to Obama, student loans are too expensive because banks profit from making them. If the government nationalizes the function, we would apparently bring down costs by eliminating those pesky profits.
 
This is a Marxist argument, pure and simple. If true, it would apply to all industries, not just banking. States like Cuba and North Korea would be the envy of the world, as they prohibit profits across the board. The truth is that profits, earned from free-market competition, keep cost down. By taking the profits out and putting the bureaucrats in, any incentive to provide better service or lower costs is eliminated. It's not hard to predict that student loan costs will now rise faster than ever.
 
That is clearly not the result we want. To solve the problem, people must understand that college tuitions are so expensive specifically because the government has guaranteed student loans (see my video blog on this topic for a detailed explanation). Guaranteed loans don't mean more access to education, but rather that universities are free to charge more per pupil than if their customers were paying out-of-pocket.
 
Obama's plan only serves to remove more market forces and creates an even bigger moral hazard.  Under the new rules, students will be required to repay a much smaller portion of what they borrow. As a result, students will be willing to borrow even greater amounts of cash to pay inflated tuitions, making it that much easier for colleges and universities to raise them.
 
Also, since the government will actually be loaning the money directly, rather than simply guaranteeing private-sector loans, the Treasury will actually have to borrow the money itself before it can re-lend it to students. I suppose the irony of going into debt to loan money never registers in Washington. Further, as this bill will cause tuitions to rise even faster, it will necessitate even larger loans that will produce even greater taxpayer losses when the loans end in default or forbearance.
 
Whether it is in education, housing, health care, automobiles, insurance, or banking, greater government involvement in the economy means higher prices, lower productivity, more bailouts, bigger deficits, increased taxes, diminished industrial capacity, fewer private sector jobs, less freedom, and a falling standard of living.
 
 
Peter hits it right on the head here, the government involvement will drive costs at schools higher, not lower.  Anytime something is subsidized by the government, the prices go up.  This is simple economics.  And the irony of borrowing money to lend it to someone else never does click in for the powers that be.  Obviously, this will lead to higher tuitions, because the student has no incentive to look for a lower tuition, because he is, in effect, putting it on his credit card.  Add in the youthful naivety of the average college age student, and there is no way to avoid blowing up these yokes of debt to bigger and bigger proportions.
 
 
 7.  The U.S. government spent $328 billion dollars in February. 
 
This is more than in any one month of our country's history and it only had 28 days.  This is $3,280 per non-government employee.  ONE MONTH!  What were the revenues?  $1,070 per non-government employee.  That's incredible.  To give you an idea how much faster the debt is accelerating under Obama, here is a chart showing debt per citizen:
 
 
 
 
 
8.  China is the fastest growing gold accumulator in the world.  Oh, and they've been lying about how much gold they've discovered.
 
This story from ZeroHedge:
 

WGC Releases China Gold Report - "A New World Of Opportunity" As PBoC Expected To Buy Gold, Chinese Gold Mines Become Depleted

Submitted by Tyler Durden on 03/29/2010 09:05 -0500


The World Gold Council spares no praise for the imminent surge in demand in China.
 
"The World Gold Council (WGC) believes that gold consumption in China will continue to catch up with the rest of the world following the deregulation of the Chinese gold market in 2001. Demand from China’s two largest sectors (jewellery and investment) reached a combined total of 423 tonnes in 2009 but domestic mine supply contributed only 314 tonnes during the same year. This Shortfall creates a “snowball” effect as China’s gold industry may not be able to keep pace with the annual leap in domestic consumption despite rising to be the world’s largest gold producer since 2007. Although the country’s appetite for gold has grown, making China the second largest consumer in the world, demand in China per capita has a lot of catching up to do to equal that of Western economies. In jewellery, the Chinese per capita consumption is one of the lowest at 0.26gm when compared to countries with similar gold cultures. If gold were consumed at the same rate per capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to as much as 4,000 tonnes in this sector alone. Nearterm inflationary expectations and rising income levels are likely to support the investment case for gold as an asset class, especially given that Chinese consumers are high savers and are looking to gold to protect their wealth.
 
Keep an eye out on what the PBoC will do if and when it finally decides to readjust its gold holdings.
 
The People’s Bank of China (PBoC) is also playing an increasingly supportive role for gold on the demand side. PBoC’s gold holdings are currently at 1.6% of its US$2.4tn total reserves – a fraction by international standards. If PBoC decides to rebalance its books to its recent peak gold holding as a proportion of reserves of 2.2% in Q4 2002, WGC estimates it could account for a total incremental demand of 400 tonnes at the current gold price.
 
Will supply meet demand at current prices? Negatory ghost rider. Existing gold mines are expected to be exhausted in six years. Oops.
 
WGC analysis shows that, structurally, supply growth in China could be challenging unless there is more funding directed to exploration. Assuming the US Geological Survey’s figures are correct, China may exhaust existing gold mines in just six years. Despite the strong Yuan, total production costs have also risen by more than 30% in the last six years due to higher input costs (such as energy and labour) and lower ore grades. The outlook for gold in China remains positive and WGC believes that the balance between demand and supply in the Chinese gold market will continue to be in disequilibrium. In the longer term, if China continues to grow at near to the current rate in economic and wealth terms, gold consumption in China will continue to expand and has the potential to double during the next decade.
 
 
 This story shows how smart the Chinese are.  Instead of announcing that they are buying or selling gold like our supposedly smartest guys in the room politicians, they do the exact opposite.  The old saying that, "he who has the gold makes the rules," will play out someday in the not so distant future. 
 
 
9. Government estimates for programs are ALWAYS too low.   (Ok, your friends probably know this one, but I just couldn't pass this story up.)
 
The National Inflation Association today issued a warning to all Americans of a potential outbreak of hyperinflation in the U.S. by year 2015 caused primarily by the healthcare bill and rising interest payments on our national debt.
 
Medicare was created in 1966 at a cost of $3 billion per year and the House Ways and Means Committee estimated in 1966 that in 1990 the cost of Medicare would reach $12 billion per year. Instead, the actual cost of
Medicare in 1990 was $107 billion (792% more than what was projected) and today Medicare costs $408 billion annually. In 2003, the White House Office of Management and Budget estimated that the Iraq War would have a total cost of $50 to $60 billion. So far, we have already spent $713 billion on the Iraq War (over 1,000% more than what was projected).
 
The Congressional Budget Office is estimating that the healthcare bill will cost $940 billion over the next 10 years, but if history is any indication, the actual cost will likely be several trillion dollars. NIA believes the healthcare bill will be the final nail in the coffin of the U.S. economy and will just about guarantee that we will see hyperinflation by the year 2015.
The U.S. government last week reported a record monthly budget deficit for February 2010 of $220.9 billion. Total tax receipts for the month were only $107.5 billion compared to outlays of $328.4 billion. The total U.S. deficit for the first five months of fiscal year 2010 was $651.6 billion, with tax receipts of $800.5 billion and outlays of $1.45 trillion. The deficit was up 10.5% for the first five months of fiscal year 2010 over the same period in fiscal year 2009.
 
We are now at a point where if the U.S. government taxed Americans 100% of their income, the tax receipts generated would not be enough to balance the budget. Likewise, if the U.S. government cut 100% of its spending including defense, but kept paying Social Security, Medicare and Medicaid, we would still have a budget deficit. NIA believes it will be impossible for the U.S. to have a balanced budget ever again.
 
These are just mind boggling numbers.  Estimates for the future costs of programs are at least 5 times too low!  God help us if this occurs with health care.  Due to the lack of real reform in the bill, like telemedicine, the odds are great that this will cost much more than promised.  What's telemedicine you say?  From urbansurvival.com:
 
If the Obama plan was really serious about delivering care the health reform act would have mandated that all states accept telemedicine.

I mean this deadly seriously because I was talking to a doc friend about this yesterday (he's one of the real Good Guys in healthcare) and I asked him "Why not leave your practice and launch into telemedicine - you could serve a lot more people at a much lower cost...why between tele-docs and tele-meds we could trounce healthcare costs to near zip.

"Oh no, George: What you don't understand is that tele-medicine was lobbied actively against by the medical community even though it could dramatically reduce costs and you're right...it could spawn a whole new industry of PC-USB home medical devices like ECG's which your friends with the OPENECG project have adapted to cell phones.  It threatens the franchise."

"So you're saying it's the doctors who are being roadblocks to innovative telemedicine?"

"Well, through their lobbyists and the big pharmaceutical outfits - sure - that's why the bans on practicing telemedicine outside of any state you're not licensed in have been enacted almost everyone...."

"Oh, fer cryin' out loud...why aren't we solving the core problem?"

"You got me..."

This is sad.  Here is a GENUINE way to save money, that was lobbied against by the doctors.  How many simple exams could be handled by a computer with a camera?  "Put the camera up to your mouth and say ah.  Looks like strep throat, I'll email the scrip to the pharmacy of your choice."  This will eventually become the way things are done.  Unfortunately, this has been delayed by years by the idiots running things now.  (and that includes republicans too)
 
10.  If the temperature and humidity are just right, waves can freeze when they hit the air.  Don't believe me?  Here's proof, have a great week!