If you want to retire or buy your way out of the massive pain ahead, you
need
to know the nature of the financial monsters lurking out there so you can
consider
how to dodge the beasts.
As if we didn't have enough to worry about with Peak Oil coming, closer at
hand
is the general bad state of the financial markets, which are at a tipping
point now.
Energy shortages may be the trigger that knocks everything over.
- Warren Buffet believes that an explosion in derivatives contracts could
create
serious systemic risks - that derivatives are time bombs waiting to
explode the
economic system.
- Outstanding derivatives contracts - excluding those traded on exchanges
such
as the International Petroleum Exchange - are worth close to $85 trillion.
- Some derivatives contracts, Mr Buffett says, appear to have been devised
by
"madmen". He warns that derivatives can push companies onto a
"spiral that can
lead to a corporate meltdown", like the demise of the notorious hedge
fund Long-Term
Capital Management in 1998.
- Large amounts of risk have become concentrated in the hands of
relatively few
derivatives dealers ... which can trigger serious systemic problems
- Derivatives also pose a dangerous incentive for false accounting.
The profits and
losses from derivates deals are booked straight away, even though no
actual money
changes hand. In many cases the real costs hit companies only many years
later.
- This can result in nasty accounting errors. Some of them spring from
"honest"
optimism. But others are the result of "huge-scale fraud", and
Mr Buffett points to
the US energy market, which relied for most of its deals on derivatives
trading and
resulted in the collapse of Enron.
Federal Debt
------------
The long-term economic health of the United States is threatened by $53
trillion in
government debts and liabilities that start to come due in four years when
baby
boomers begin to retire. The "Greatest Generation" and its
baby-boom children
have promised themselves benefits unprecedented in size and scope. Many
leading
economists say that even the world's most prosperous economy cannot
fulfill these
promises without a crushing increase in taxes — and perhaps not even
then.
A USA TODAY analysis found that the nation's hidden debt —
Americans'
obligation today as taxpayers — is more than five times the $9.5
trillion they
owe on mortgages, car loans, credit cards and other personal debt.
This hidden debt equals $473,456 per household, dwarfing the $84,454
each
household owes in personal debt.
Glass-Steagall act no longer in effect
--------------------------------------
After the 1929 market crash, the Glass-Steagall Act was enacted to keep
banks
doing the business of banks, and not getting into the stock market or
insurance
business. This act has slowly been eroded to the point where
it's non-existent.
Now you have banks doing everything, including gambling with energy
derivatives.
http://qv3.com/policypete/policypete.htm
Distribution of Wealth
----------------------
The top 1% of the wealthy in this country own a hugely disporportionate
amount
of the wealth, which is one of the reasons people believe the 1929 crash
was precipitated.
Fiat Currency not backed by anything real, like gold or oil
-----------------------------------------------------------
Subscribe to Daily Reckoning, read Bill Bonner's "Financial Reckoning
Day".
Stock Market Overvalued
-----------------------
Historically, the P/E (Price to Earnings) Ratio of stocks has been
15.
The last time I looked, the S&P was at 26, NASDAQ at 100
Wars are Inflationary
---------------------
We are likely to bleed our finances to death until the oil runs out in the
Middle
East to keep the oil flowing. This will be a huge drain on the
economy.
Massive Corporate and Governmental Fraud
----------------------------------------
As those of you who saw the movie "The Corporation" know,
corporations act as if they were psychopathic individuals. The have
no choice: the corporate charter states that they must do what will
benefit the stockholder. So even if the CEO wants to save the environment,
he can't if it will cost the shareholders any money. And if breaking
the law is cheaper than the fines that will result in the unlikely event a
corporation is caught, then the odds are the law will be broken.
Enron was just the tip of the iceberg. Read Joel Bakan's "The
Corporation:
The Pathological Pursuit of Profit and Power" for details, and Marion
Nestle's "Food Politics" for how corporations corrupt our
governmental bodies. (There are many books on this....
ECOLOGICAL INSTABILITY by Lester Brown
--------------------------------------
Throughout most of human history, we lived on the earth's sustainable
yield--the interest from its natural endowment. But now we are consuming
the endowment itself. Our existing economic output is based in part on
cutting trees faster than they grow, overgrazing rangelands and converting
them into desert, overpumping aquifers, and draining rivers dry. On much
of our cropland, soil erosion exceeds new soil formation--slowly depriving
the land of its inherent fertility. We are taking fish from the ocean
faster than they can reproduce.
"We are releasing carbon dioxide (CO2) into the atmosphere faster
than the earth can absorb it, creating a greenhouse effect. Rising
atmospheric CO2 levels promise a temperature rise during this century that
could match that between the last Ice Age and the present," notes
Brown in PLAN B, which was funded by the U.N. Population Fund.
Bubble economies are not new. American investors got an up-close view of
one when the bubble in high-tech stocks burst in 2000 and the NASDAQ, an
indicator of the value of these stocks, declined by some 75 percent. The
Japanese had a similar experience in 1989 when the real estate bubble
burst, depreciating stock and real estate assets by 60 percent. As a
result of the bad-debt fallout and other effects of this collapse, the
once dynamic Japanese economy has been dead in the water ever since.
The bursting of these two bubbles most directly affected people living in
the industrial West and Japan. But if the bubble that is based on the
overconsumption of the earth's natural capital bursts, it will affect the
entire world.
Thus far the consequences of most excessive natural capital consumption,
such as aquifer depletion, collapsing fisheries, and deforestation, have
been local. But in sheer number and scale these events are now reaching a
point where they may soon have a global effect. Food appears to be the
economic sector most vulnerable to setbacks, largely because the
impressive production gains of recent decades were partly based on
overpumping and overplowing. Overpumping is historically recent because
powerful diesel and electrically driven pumps have become widely available
only during the last half-century or so. Aquifers are being overpumped in
scores of countries, including China, India, and the United States, which
together account for nearly half of the world grain harvest.
Overpumping creates a dangerous illusion of food security because it is a
way of expanding current food production that virtually ensures a future
drop in food production when the aquifer is depleted. In the past, the
effects of aquifer depletion on food production were confined to
less-populated countries, like Saudi Arabia, but now they are becoming
visible in China.
After a remarkable expansion from 90 million tons in 1950 to its
historical peak of 390 million tons in 1998, China's grain harvest dropped
to 330 million tons in 2003. This drop of 60 million tons exceeds the
grain harvest of Canada. Thus far China has offset the downturn by drawing
on its vast stocks of grain. It can do this for perhaps another year or
two, but then it will be forced to import massive quantities of grain.
Turning to the world market means turning to the United States, the
world's largest grain exporter, presenting a potentially delicate
geopolitical situation in which 1.3 billion Chinese consumers, with a
$100-billion trade surplus with the United States, will be competing with
U.S. consumers for U.S. grain, driving up food prices.
Water shortages, such as those in China, are becoming global, crossing
national boundaries via the international grain trade. Countries facing
water shortages often import water in the form of grain. Since it takes
1,000 tons of water to produce 1 ton of grain, this is the most efficient
way to import water. Grain has become the currency with which countries
balance their water books. Trading in grain futures is now in a sense
trading in water futures.
Consumer Debt
--------------
October 3, 2003 Spending our way to disaster: The consumer debt bubble in
the United States could make the stock bubble seem like nothing. By Justin
Lahart NEW YORK (CNN/Money) - The American consumer has become deeply
addicted to spending, running up ever higher levels of debt in order to
live in a fashion that is beyond his means. And the world has become
equally addicted to the consumer continuing to burn through cash.
It's a dangerous situation -- potentially a bubble that dwarfs even the
U.S. asset bubble that burst in 2000 -- and it will be a challenge for
policy-makers to keep it from ending badly.
Real Estate Bubble
------------------
Money & Investing: Home Sick by A. Gary Shilling
Most people don't see housing as overblown, just benefiting from strong
demand. Nevertheless, this is a classic bubble. You know that when
investors believe there's no place else to go. The same argument was used
for owning ridiculously overpriced stocks in the late 1990s. Another
indication: Loads of folks are aboard. Home ownership rates for people
under 25 leaped from 18% in 1997 to 23% in 2001.
Like any speculation, the housing bubble feeds on itself. Rising prices
encourage new buyers to rush in before they go even higher. And higher
prices allow homeowners to use their accumulated equity to buy costlier
homes. Price jumps also encourage more leverage. A decade ago, the home
equity of Americans with mortgages was 21% of their abodes' market price;
continual refinancing and home equity lending have reduced it to 16%.
Credit Card Debt
----------------
Credit Card Debt Trap & Rising Interest Rates
THE PLASTIC TRAP Soaring Interest Compounds Credit Card Pain for
Millions By PATRICK McGEEHAN
When Ed Schwebel was whittling down his mound of credit card debt at an
interest rate of 9.2 percent, the MBNA Corporation had a happy and
profitable customer. But this summer, when MBNA suddenly doubled the rate
on his account, Mr. Schwebel joined the growing ranks of irate cardholders
stunned by lenders' harsh tactics.
To some cardholders and consumer advocates, credit card companies are
acting like modern-day loan sharks, strong-arming their customers to pay
more - with no legal limit on how much they can charge.
In eight years, the major card companies have increased the fee charged to
cardholders for being even an hour late with a payment to $39, from $10 or
less.
Duncan MacDonald, who, as a lawyer for Citibank was involved in its
successful case for deregulation of fees before the United States Supreme
Court in 1996, now says he fears that he helped to unleash a monster. Mr.
MacDonald said federal bank regulators should investigate the fairness of
universal default and some of the banks' harsh penalties.
Fannie Mae, Freddie mac
-----------------------
These are UN-INSURED agencies, and most money market funds, many mutual
funds, and other financial instruments have a substantial portion of their
holdings in these. If these agencies fail to any extent when the
housing
bubble pops, you may lose money. See the two links below for more
info.
- May 22, 2004 Financial Sense NewsHour Radio & Net Talk Show
Presenting Catherine Austin Fitts w/ Jim Puplava Webcast. Catherine Austin
Fitts was a former Assistant Secretary of Housing-Federal Housing
Commissioner in the first Bush Administration.
http://www.scoop.co.nz/mason/stories/HL0405/S00268.htm
Pension fund looting
--------------------
If your pension was converted to the cash balance system, you've probably
lost a lot of money, more than you may realize. Try to find people
at work who were grandfathered in to get a sense of how much, and get the
names of other people at work who might be interested in a class action
law suit. Then contact Lieff, Cabraser, Heimann, and Bernstein in
SF.
SSN & Medicare underfunded
---------------------------
Nov. 24, 2003 The $44 Trillion Abyss from Fortune magazine
SPECIAL REPORT ON THE U.S. ECONOMY
Just How Much Is $44 Trillion? It's more than four times the GDP of the
U.S. It would buy three Hummer H2s for every person in the U.S. Or it's
about 1,500 times the personal fortune of Bill Gates.
Last fall Paul O'Neill, then Secretary of the Treasury, wanted a simple
answer to a thorny question: How prepared was the nation today to pay all
its future bills? Two government experts worked for months to calculate
the answer. Their findings, which shocked even them, were never
published—-the Bush administration made sure of that. The reason for the
silence was that by the time the two researchers had completed their
study, O'Neill had been thrown out of the Treasury and replaced by the
more politically astute John Snow. No savvy administration power player
would dare point out, right in the middle of tax-cut season, that there
was a huge hole in the country's finances—-a $44 trillion hole.
How the expected budget shortfall of $44.2 trillion* breaks down
Source............... Amount
Social Security...... $ 7.0 trillion
Medicare ........... $36.6 trillion
Other................ $ .6 trillion
Weak Dollar
-----------
Because of everything above.
