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February 7, 2009

Issue 32  -  "Stimulus" Won't Work

Congress is busily formulating and arguing over a "stimulus" plan that is now approaching $1 trillion dollars. This will be a veritable smorgasbord of items from tax cuts to infrastructure. There's one problem, it won't work. The problem is not a shortage of buying and spending, it's a shortage of saving and capital investment. One cannot recover from a consumption caused recession by spending more. We, as a country are broke.

If someone comes up to you and says, "I just lost my job, I have $50,000 in credit card debt and my car is being re possessed," do you pause, and then tell him what he really needs is to remodel his kitchen and put in a new pool. That would be insane. Yet, that is exactly what congress is saying will get the United States out of their problems. Let's build some new roads and bridges. There is NO chance that this will extract us from this quagmire. In fact, it will DELAY any recovery we do have.

The main issue is that things are much, much worse than officialdom is reporting. Prime example number one from the Daily Mail:

"Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.

City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse. The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.

Only frantic behind-the-scenes efforts averted financial meltdown.  If the moves had failed, Mr Brown would have been forced to announce that the Government was nationalizing the entire financial system and guaranteeing all deposits.

But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure.  The build-up to 'Black Friday' started on Monday, October 6, when the FTSE 100 dropped by nearly eight per cent as bad news on the economy started to multiply. The following day, Chancellor Alistair Darling began all-night talks ahead of an announcement on the Wednesday that billions of pounds of taxpayers' money would be used to pour liquidity into the system.  But shares continued to plummet, turning into a rout on the Friday when the FTSE crashed by ten per cent within minutes of opening.  Both Royal Bank of Scotland and HBOS were nearing complete collapse - but Lord Myners, who built up his fortune during a long career in the City, said the problems ran far wider.

The threat to the system was so severe that the Bank of England was forced to contact RBS's creditors in New York and Tokyo to persuade them not to withdraw their funds, but it is not known which other banks faced a run on their reserves.

'We faced the very real problem of how banks could stop depositors from withdrawing their money,' a Treasury source said yesterday.

'The banks themselves were selling their share holdings, accelerating the stock-market falls, and preparing to shut up shop. Mortgages would have been sold on and savers would have been spooked, to put it mildly. It would have been chaos.'  After a weekend of crisis talks, which concluded at dawn on the Monday, it was announced that Lloyds TSB was taking over HBOS, supported by £17billion of taxpayers' money, and RBS would receive an injection of £20billion - prompting the resignation of RBS's infamous chief executive, Sir Fred 'the shred' Goodwin. Share prices at last started a small rally.

Ruth Lea, economic adviser to the Arbuthnot Banking Group, said last night that it was 'highly irresponsible' for Lord Myners to reveal the scale of the problems because it could serve to further wreck already fragile levels of confidence.  'We are not out of the woods yet,' she said. 'I fear for Barclays, after the fall in its share price, and Lloyds has been damaged by the HBOS takeover.'  She added: 'If it was panning out in that way, then the Government would have had no choice but to step in and nationalize the entire financial system.'

Angela Knight, chief executive of the British Bankers Association, said: 'The issues related only to HBOS and RBS. To imply that all the banks would have gone under is wrong. It is complicated.'  Lord Myners also said that bank executives had been 'grossly over-rewarded' during the 'golden days' of big bonuses. 'They are people who have no sense of the broader society around them,' he said. 'There is quite a lot of annoyance and much of that is justified.'"

This is one of the top seven largest economies on the planet and they were almost dead. Gone, just like Iceland. Three hours! If that doesn't convince you of the fragility in our corrupt system and make you want to own some gold then I don't know what will.

Our country, due to it's reserve currency status is lasting WAY longer than is warranted by the fundamentals. We are bankrupt and planning on charging another trillion dollars on the ole credit card. The Treasury is actually worried about getting enough buyers for our debt so they are adding auctions. I believe this is just so they can hide their activities over a larger number of events.

The housing market also merely APPEARS to be getting better. There are numerous reasons for this but this reprieve will not have any lasting legs and we are destined for another major fall. Check this out if you're not sure:


"Apparently about 70 percent of fore closures in its database have not yet been listed on the MLS. I'm wondering why? Why are the banks sitting on all these properties instead of listing them for sale?

Okay, a couple of possibilities:

The inventory of foreclosed properties has just exploded so rapidly and in such high volumes that the banks can't process it all as fast as they would like to.

In a lot of cases it's taking longer to process the fore closures themselves and the homes are getting trashed. Before the bank puts the house up for sale it has to do all the repair work, and now more repair work is needed.

Now here's a possibility that is a bit more disturbing. Rick Sharga of RealtyTrac says he can't get anyone to confirm it but he can't get anyone to deny it either:  "The lenders are simply trying to defer the losses to a later date, because having to recognize the losses short term might pose severe risks to the banks in question."

What does that mean? Well, when the properties are taken back by the bank at auction, they are often taken back for the value of the mortgage on the property. The bank puts in the bid for the value of the current mortgage and essentially pays itself back what it lost on the loan, and of course gets the house for all its trouble. In good times, the bank could profit by selling that house for more than the value of the loan, but not these days. The trouble now is just the opposite. On so many of these foreclosed homes, the property is actually worth far less than the mortgage on it. So the bank is taking it back at the mortgage value and not writing it down.

"Untold numbers of these properties sitting on banks accounting ledgers where the imputed value is considerably higher than the market value," says Sharga. And unfortunately nobody knows what that market number is."

So the banks have foreclosed on houses and are only listing 30% of them? When these hit the market down we go again. Not to mention the large quantity of option ARMs waiting to start resetting in early 2010. Think that's not so bad? Think that's manageable? After all, how many foreclosed houses could their possibly be? It's not that simple. The fore closures are a small portion of the inventory overhang waiting to just engulf the market. How many houses are out there? How about 19 MILLION!

"Record 19 Million U.S. Homes Stood Vacant in 2008

Feb. 3 (Bloomberg) -- A record 19 million U.S. houses stood empty at the end of 2008 as banks seized homes faster than they could sell them and prices continued to fall.  Vacant homes in the fourth quarter increased by 6.7 percent from the same period a year ago, the U.S. Census Bureau said in a report today. The vacancy rate, the share of empty homes for sale, rose to 2.9 percent in the quarter, the most in data that goes back to 1956.

The worst U.S. housing slump since the Great Depression is deepening as fore closures drain value from neighboring homes and make it more likely owners will walk away from properties worth less than their mortgages. About a third of owners whose home values drop 20 percent or more below their loan principal will "hand the keys back to the bank," said Norm Miller, director of real estate programs for the School of Business Administration at the University of San Diego.

"When you're underwater and prices continue to fall, you tend to walk," Miller said in an interview. "It's a downward spiral that's tough to stop because it feeds on itself. Fore closures encourage other fore closures and falling prices discourage buying."…


So there are a virtual tsunami of homeowners waiting for the "right" time to sell. This unfortunately, won't come anytime soon. Let's look at a chart that shows the long term appreciation of houses in the U.S.:


What this shows is that the acceleration of easy credit in 2000 caused a parabolic spike in home prices that is NO WHERE near done correcting. Prices are going to fall another 10-50% depending on your geographical location. This assumes that we merely fall back to the long term trend. History suggests that parabolic spikes over shoot the norm when correcting so the prices could fall more. There is no way to know for sure.

What can be known is what is currently happening. States are going to face tougher and tougher challenges in the coming months and years. California is already broke.

"California goes broke, halts $3.5 billion in payments

02/02/2009 @ 10:47 pm

Filed by Stephen C. Webster

California, the eighth largest economy in the world, is broke.

"People are going to be hurt starting today," said Hallye Jordan, speaking on behalf of the state Controller. "There's no money."

Since state legislators failed to meet an end of January deadline on an agreement to make up for California's $40 billion budget gap, residents won't be getting their state tax rebates, scholarships to Cal Grant college will go unpaid, vendors invoices will remain uncollected and county social services will cease.

At least, temporarily. Services and payments will resume once state legislators come to an agreement on the budget."

The largest state is now broke and the proposed solution?  Let's go further into debt? Unfreaking believable. The ineptness is astounding.  Now factor in the newly announced information that our debt is approaching the stratosphere. How high?
From the Federal Reserve via
"On a C-span interview, Richard Fisher, the President and CEO of the Dallas Federal Reserve claims that the current, long term unfunded liabilities of the U.S. Government is $88 trillion dollars.

Yes, this is $88,000,000,000,000 in current long term unfunded liabilities (you know details like Social Security, Medicare and Medicaid).

If you're having trouble coming to grips with this figure, we'll break it down for you:

approximately 300 million Americans
future liabilities $88 trillion,
current deficit $10.6 trillion
This years deficit $2 trillion

Total $100.6

Roughly 156 million pay federal taxes so the average debt of a U.S. citizen is $639,000. So for a family of 4 the liability is 4 x $639,000 = $2,556,000."

Have that lying around anywhere? Didn't think so. The dollar is toast. Got gold?