US Economic Outlook 2008 - 2011 Randy S. Economicrot . blogspot .com

Agenda Money Fed Reserve US Dollar – World’s Reserve Currency Inflation Debt Housing Bubble Current and Future Economic Outlook What to do

Money

Fed Reserve

US Dollar – World’s Reserve Currency

Inflation

Debt

Housing Bubble

Current and Future Economic Outlook

What to do

Money — what is it? Money is a good that acts as a unit of account, a store of value, and a medium of exchange

Before the development of Currency, people had to barter to obtain the goods and services they needed -- but bartering had its flaws Commodity money eventually replaced bartering for advancing economies Colonialists, for example, used beaver pelts and dried corn as currency for transactions. They were widely desired (and therefore valuable), but they were also durable, portable and easily stored. Another example of commodity money was the U.S. currency before 1971, which was backed by gold. Bartering & Commodity Money

Before the development of Currency, people had to barter to obtain the

goods and services they needed -- but bartering had its flaws

Commodity money eventually replaced bartering for advancing economies

Colonialists, for example, used beaver pelts and dried corn as

currency for transactions. They were widely desired (and therefore

valuable), but they were also durable, portable and easily stored.

Another example of commodity money was the U.S. currency before 1971,

which was backed by gold.

Fiat Money In a fiat money system , money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. Nixon removed the US Dollar from the Gold standard in 1971 – thus changing the US dollar from a Commodity money to a Fiat currency In a fiat monetary system, there is no restraint on the amount of money that can be created. This allows unlimited credit creation Initially, rapid growth in the availability of credit (money) is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices. In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit This is where we are today

In a fiat money system , money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it.

Nixon removed the US Dollar from the Gold standard in 1971 – thus changing the US dollar from a Commodity money to a Fiat currency

In a fiat monetary system, there is no restraint on the amount of money that can be created. This allows unlimited credit creation

Initially, rapid growth in the availability of credit (money) is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices.

In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit

This is where we are today

Federal Reserve Banking System The Federal Reserve Act was railroaded through Congress at 4:30 am on Monday, December 22, 1913 Numerous members absent/sleeping & many who voted for the Act didn’t really understand what they were voting for President Woodrow Wilson, p ressured by political/financial backers, signed Fed Reserve Act into law on Dec 23 rd & stated : We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world -- no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men. Federal Reserve Act transferred US money supply and banking system controls from Congress to a private banking elite These private bankers could now create money from nothing, loan it to our Gvt. & charge interest (our federal income tax system) for privilege of doing so

The Federal Reserve Act was railroaded through Congress at 4:30 am on Monday, December 22, 1913

Numerous members absent/sleeping & many who voted for the Act didn’t really understand what they were voting for

President Woodrow Wilson, p ressured by political/financial backers, signed Fed Reserve Act into law on Dec 23 rd & stated :

We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world -- no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.

Federal Reserve Act transferred US money supply

and banking system controls from Congress to a

private banking elite

These private bankers could now create money from

nothing, loan it to our Gvt. & charge interest (our

federal income tax system) for privilege of doing so

"Give me control of a nation's money and I care not who makes the laws." Mayer Amschel Rothschild (1744 -1812) Godfather, Rothschild Banking Cartel Europe "Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they have done or ever will do good." John Adams(1735-1826) Founding Father, 2nd US President “ If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, (i.e., the "business cycle") the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.” Thomas Jefferson, US President 1801-1809 I believe that banking institutions are more dangerous to our liberties than standing armies. Thomas Jefferson,1816 "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." James Madison (1751-1836), Father of the Constitution, 4th US President It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." Henry Ford (1863-1947) Founder of Ford Motor Company Quotes on Federal Reserve Banking

"Give me control of a nation's money and I care not who makes the laws." Mayer Amschel Rothschild (1744 -1812) Godfather, Rothschild Banking Cartel Europe

"Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they have done or ever will do good." John Adams(1735-1826) Founding Father, 2nd US President

“ If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, (i.e., the "business cycle") the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.” Thomas Jefferson, US President 1801-1809

I believe that banking institutions are more dangerous to our liberties than standing armies. Thomas Jefferson,1816

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance." James Madison (1751-1836), Father of the Constitution, 4th US President

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." Henry Ford (1863-1947) Founder of Ford Motor Company

US Dollar – World’s Reserve Currency British Pound Sterling was primary reserve currency 18 th & 19th centuries The Bretton Woods Accord, Post World-War II, established US dollar as the newest world reserve currency All currencies would trade in relationship to the US Dollar and the dollar would be tied to a gold standard at $35 oz. (dollar was said to be “good as gold”) Major problems with gold standard in the 1960’s Foreigners demanded gold for payment of debt, rather than US dollars Understood the US was printing far more money, to finance Vietnam conflict and fund new social programs, than was available in US owned gold reserves A worried President Nixon abolished the Bretton Woods accord in August 1971 Dollar/Gold standard was removed – US Dollar became a Fiat Currency Currencies around the globe went into turmoil; dollar lost ½ value vs. gold in 1 yr Needed a new solution to reestablish faith and trust in the falling US Dollar The US-Saudi Arabian Joint Commission on Economic Cooperation of 1974 Agreed that any country purchasing oil from OPEC had to pay in U.S. dollars Oil importing countries now had to earn or borrow dollars to pay for their oil This 1974 act reestablished the dollar as the global monetary instrument and oil replaced gold as the basis for a strong dollar OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks.

British Pound Sterling was primary reserve currency 18 th & 19th centuries

The Bretton Woods Accord, Post World-War II, established US dollar as the newest world reserve currency

All currencies would trade in relationship to the US Dollar and the dollar would be tied to a gold standard at $35 oz. (dollar was said to be “good as gold”)

Major problems with gold standard in the 1960’s

Foreigners demanded gold for payment of debt, rather than US dollars

Understood the US was printing far more money, to finance Vietnam conflict and fund new social programs, than was available in US owned gold reserves

A worried President Nixon abolished the Bretton Woods accord in August 1971

Dollar/Gold standard was removed – US Dollar became a Fiat Currency

Currencies around the globe went into turmoil; dollar lost ½ value vs. gold in 1 yr

Needed a new solution to reestablish faith and trust in the falling US Dollar

The US-Saudi Arabian Joint Commission on Economic Cooperation of 1974

Agreed that any country purchasing oil from OPEC had to pay in U.S. dollars

Oil importing countries now had to earn or borrow dollars to pay for their oil

This 1974 act reestablished the dollar as the global monetary instrument and oil replaced gold as the basis for a strong dollar

OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks.

INFLATION — what is it? Wikipedia defines Inflation as : a rise in the general level of prices over time. It may also refer to a rise in the prices of a specific set of goods or services (e.g. energy, food, housing, etc). In any case, inflation is measured as a percentage in the rate of change of a price index . But that inflation definition (like most others you will find) is like putting the cart before the horse. Inflation is caused by a net expansion of money supply that “ causes ” rising prices -- by devaluing a currency Stated differently: the expansion of a nation’s money supply increases available currency beyond the proportion of available goods and services – causing more dollars to chase the same number of goods/services. Thus it creates a supply/demand situation that drives prices higher. In Reality:

Growth of US Money Supply 1959-2005 Came off gold standard here $10 Trillion $700 Billion

Growth of US “Fiat” Money 2004 + Fed is printing money at 20% annual rate; money supply to double in 4 years Yes, $14 Trillion Dollars! Yes, a 20% rate of growth !

INFLATION-1900-2000 2000 Dollar worth $.4 Cents compared to 1900 dollar Additionally, since 2000 the US Dollar has lost a further 60% vs. EURO Bottom Line: Today’s dollar worth ~ 2 cents vs. 1900 Dollar

2000 Dollar worth $.4 Cents compared to 1900 dollar

Additionally, since 2000 the US Dollar has lost a further 60% vs. EURO

Bottom Line: Today’s dollar worth ~ 2 cents vs. 1900 Dollar

Actual Inflation Rate Today Government States “core” inflation is 4%, but our wallets and bank accounts feel differently. Why? Because our wallets/accounts know better Today’s actual rate of inflation (as measured w/metrics abandoned in the 80’s) is 12% and growing (recall – inflation is caused by monetary growth) By understating inflation, the US Gvt. pays its obligations (Social Security, Welfare, Pension Benefits, Military Pay/retirements, Medicare obligations, and even foreign held debt) with significantly devalued dollars over time

Government States “core” inflation is 4%, but our wallets and bank accounts

feel differently. Why? Because our wallets/accounts know better

Today’s actual rate of inflation (as measured w/metrics abandoned in the

80’s) is 12% and growing (recall – inflation is caused by monetary growth)

By “understating” Inflation US GDP is “overstated” Gvt’s “massaged” figures say we’re not in recession The Real figures say we are in Recession ** Negative Growth **

Total Credit Market Debt Came off gold standard here 2008 is ~ 400% - Debt ~ $53 tril - GDP ~ $13 tril

Total US Debt Through 2007 Note that income hasn’t kept up with Debt levels

US Personal Savings Rate

Housing Bubble

Some Housing Bubble Causes Alan Greenspan’s “easy money” policies of the 90’s created massive speculation and NASDAQ bubble Maestro would cut rates and inflate at any sign of trouble: US Stock Market Crash of 1987 Japan’s Economic Crash 1990 LTCM Hedge Fund Collapse 1994 Asian Currency Crisis 1997 Russian Bond Default 1998 Several other issues of the time NASDAQ bubble popped/followed by 9/11 & recession Trillions wiped out (fear for deflation/depression) Caused Alan Greenspan and the Government to Panic Cut rates 13 times and held interest rates at 40 year low (1%) Printed/injected lots of new money into banking system US consumers able to borrow money very cheaply

Alan Greenspan’s “easy money” policies of the 90’s created massive speculation and NASDAQ bubble

Maestro would cut rates and inflate at any sign of trouble:

US Stock Market Crash of 1987

Japan’s Economic Crash 1990

LTCM Hedge Fund Collapse 1994

Asian Currency Crisis 1997

Russian Bond Default 1998

Several other issues of the time

NASDAQ bubble popped/followed by 9/11 & recession

Trillions wiped out (fear for deflation/depression)

Caused Alan Greenspan and the Government to Panic

Cut rates 13 times and held interest rates at 40 year low (1%)

Printed/injected lots of new money into banking system

US consumers able to borrow money very cheaply

Housing Bubble Causes (cont.) Mortgage Loan Securitization Banks bundled/sold mortgage loans to investors (your retirement plan, hedge funds, other countries, etc) Made quick money on both sides of the transaction Low risk – they didn’t own the loan Significantly relaxed lending/underwriting standards Bank didn’t care if people couldn’t qualify – note to be sold Allowed more people qualify for homes they couldn’t afford Many qualified on teaser rate ARMs & stated income (no-qual) Banks even pushed pick-a-payment (exploding ARM) & NINJA loans Appraisers encouraged to embellish home values If house didn’t appraise for requested amount – appraiser blacklisted and never used again for future business Supply/Demand imbalance Lots of cheap new money chasing dwindling supply homes

Mortgage Loan Securitization

Banks bundled/sold mortgage loans to investors (your retirement plan, hedge funds, other countries, etc)

Made quick money on both sides of the transaction

Low risk – they didn’t own the loan

Significantly relaxed lending/underwriting standards

Bank didn’t care if people couldn’t qualify – note to be sold

Allowed more people qualify for homes they couldn’t afford

Many qualified on teaser rate ARMs & stated income (no-qual)

Banks even pushed pick-a-payment (exploding ARM) & NINJA loans

Appraisers encouraged to embellish home values

If house didn’t appraise for requested amount – appraiser blacklisted and never used again for future business

Supply/Demand imbalance

Lots of cheap new money chasing dwindling supply homes

History of Home Values 1890 benchmark factoring out inflation

US Mortgage Rate Reset Chart We’re here today (Note: 6-9 month lag to future foreclosures) Exploding ARMs to be next wave; many were “pick-your- payment loans”

Current/Future Outlook (1) Credit/Debt bubble is popping; Housing market plummeting Resets/Foreclosures & Inventory Increasing; won’t subside till 2011+ (Extremely Deflationary in Nature) Mortgage Securitization Market is FROZEN SOLID (can’t sell) Marked to “Model” Assets (CDO, MBS, SIV’s, etc) losing value quickly Default ratios much higher than “Models” anticipated Projected default levels prevents establishment of a “price floor” Auto/credit card defaults increasing – this securitized debt is also failing (Extremely Deflationary in Nature) Many Banks are Insolvent (Securitized, Tier-III, off balance sheet assets far surpass underlying Banking System Capital ) Banks unwilling to lend to each other; lending standards much tighter Compounding the housing dilemma – fewer buyers for larger inventory HELOC’s being yanked back by the $ Billions Auto loans and credit cards to follow suit New credit will become very scarce in the future Projected 45% cut in credit card credit lines by 2010 (Extremely Deflationary in Nature)

Credit/Debt bubble is popping; Housing market plummeting

Resets/Foreclosures & Inventory Increasing; won’t subside till 2011+

(Extremely Deflationary in Nature)

Mortgage Securitization Market is FROZEN SOLID (can’t sell)

Marked to “Model” Assets (CDO, MBS, SIV’s, etc) losing value quickly

Default ratios much higher than “Models” anticipated

Projected default levels prevents establishment of a “price floor”

Auto/credit card defaults increasing – this securitized debt is also failing

(Extremely Deflationary in Nature)

Many Banks are Insolvent (Securitized, Tier-III, off balance sheet assets far surpass underlying Banking System Capital )

Banks unwilling to lend to each other; lending standards much tighter

Compounding the housing dilemma – fewer buyers for larger inventory

HELOC’s being yanked back by the $ Billions

Auto loans and credit cards to follow suit

New credit will become very scarce in the future

Projected 45% cut in credit card credit lines by 2010

(Extremely Deflationary in Nature)

Current/Future Outlook (2) Government and Federal Reserve are in a state of PANIC Trying to fight the aforementioned “Deflation” with new “Inflation” Cutting rates, printing new money and injecting into banking systems Over $1 Trillion in financial injections since Aug 07 (Highly Inflationary in Nature) Banks using this money to shore up balance sheets – not as capital for new loans like the Fed wants New “unprecedented” Federal Reserve lending mechanisms recently enabled to help shore up bank balance sheets Trading toxic/securitized Tier-III garbage for Gvt. Treasuries (Highly Inflationary in Nature) Gvt.& Fed will eventually have to rescue bond, housing & various other markets via Taxpayer funded bailouts Expect more stimulus checks to be cut for the masses “ Money from Helicopters” (Highly Inflationary in Nature)

Government and Federal Reserve are in a state of PANIC

Trying to fight the aforementioned “Deflation” with new “Inflation”

Cutting rates, printing new money and injecting into banking systems

Over $1 Trillion in financial injections since Aug 07

(Highly Inflationary in Nature)

Banks using this money to shore up balance sheets – not as capital for new loans like the Fed wants

New “unprecedented” Federal Reserve lending mechanisms recently enabled to help shore up bank balance sheets

Trading toxic/securitized Tier-III garbage for Gvt. Treasuries

(Highly Inflationary in Nature)

Gvt.& Fed will eventually have to rescue bond, housing & various other markets via Taxpayer funded bailouts

Expect more stimulus checks to be cut for the masses

“ Money from Helicopters”

(Highly Inflationary in Nature)

Current/Future Outlook (3) Growing worldwide demand for oil straining supply lines Swiftly developing industrial economies like China and India taking a much larger oil market share than in years past World can extract and bring to market 87Mb Daily; using 86Mb Daily Many older “whale oil fields” are in a rapid state of decline Many new oil finds are small in scale and difficult/expensive to extract New finds not keeping up with increasing global demand IRAN no longer accepts Dollars for oil; opened their own oil Bourse Feb 08 Very negative for US Dollar and oil pricing Vietnam, Qatar & Kuwait all recently de-pegged from US Dollar With Dollar peg, they have to print money as fast as we do Inflation is raging internal to their own domestic economies OPEC threatening to de-peg and also to price oil in Euros Currently demanding more “Devalued Dollars” for same tangible product Increasing demand from China, India, etc, plus falling dollar are the reasons why we are now seeing $135 barrel oil Huge negative implications for US Dollar and the future price of oil

Growing worldwide demand for oil straining supply lines

Swiftly developing industrial economies like China and India taking a much larger oil market share than in years past

World can extract and bring to market 87Mb Daily; using 86Mb Daily

Many older “whale oil fields” are in a rapid state of decline

Many new oil finds are small in scale and difficult/expensive to extract

New finds not keeping up with increasing global demand

IRAN no longer accepts Dollars for oil; opened their own oil Bourse Feb 08

Very negative for US Dollar and oil pricing

Vietnam, Qatar & Kuwait all recently de-pegged from US Dollar

With Dollar peg, they have to print money as fast as we do

Inflation is raging internal to their own domestic economies

OPEC threatening to de-peg and also to price oil in Euros

Currently demanding more “Devalued Dollars” for same tangible product

Increasing demand from China, India, etc, plus falling dollar are the reasons why we are now seeing $135 barrel oil

Huge negative implications for US Dollar and the future price of oil

Current/Future Outlook Bottom Line: US cost of living to rise/standard of living to fall The housing market will NOT recover soon (expect 2011+) Gvt and Fed are trying to fight “Deflation” with new “Inflation” At 20% annual growth rate, expect Money Supply to double in 4 years Expect dollar’s purchasing power to be halved (at least) during same period Inflation to increase significantly (food, energy, oil & imports more expensive) Dollar’s status as World’s reserve currency in serious jeopardy Currently at lowest levels in history & potentially going much lower If OPEC drops the Dollar Peg (likely) – major dollar problems If oil is exchanged for Euros vs. dollar (possible) – massive dollar problems If Asians and OPEC dump their $6 Tril in dollar reserves/bond holdings Expect a hyperinflationary blowout! If Gvt/Fed are unsuccessful in reopening credit markets soon Expect “MAJOR” recession w/potential for economic depression ~ 2011+

US cost of living to rise/standard of living to fall

The housing market will NOT recover soon (expect 2011+)

Gvt and Fed are trying to fight “Deflation” with new “Inflation”

At 20% annual growth rate, expect Money Supply to double in 4 years

Expect dollar’s purchasing power to be halved (at least) during same period

Inflation to increase significantly (food, energy, oil & imports more expensive)

Dollar’s status as World’s reserve currency in serious jeopardy

Currently at lowest levels in history & potentially going much lower

If OPEC drops the Dollar Peg (likely) – major dollar problems

If oil is exchanged for Euros vs. dollar (possible) – massive dollar problems

If Asians and OPEC dump their $6 Tril in dollar reserves/bond holdings

Expect a hyperinflationary blowout!

If Gvt/Fed are unsuccessful in reopening credit markets soon

Expect “MAJOR” recession w/potential for economic depression ~ 2011+

What to do? Get out of debt Don’t take on any new debt Stay conservative (volatile markets in future) Don’t speculate (flipping houses, get rich quick, schemes, etc) Be thankful you have a job – try to keep it! Many layoffs coming in the not so distant future Take a proactive role in your financial future Save money for potentially difficult times ahead If you can afford it, as a hedge against inflation and the devaluing dollar, buy some physical Gold and Silver for the rainy days & potentially years ahead!

Get out of debt

Don’t take on any new debt

Stay conservative (volatile markets in future)

Don’t speculate (flipping houses, get rich quick, schemes, etc)

Be thankful you have a job – try to keep it!

Many layoffs coming in the not so distant future

Take a proactive role in your financial future

Save money for potentially difficult times ahead

If you can afford it, as a hedge against inflation and the devaluing dollar, buy some physical Gold and Silver for the rainy days & potentially years ahead!