Seriousness of World Economic Recession…

          The list depicted are the countries who are entering into economic recession due to the global crisis…Iceland is first hit…15 membered Euro countries announced on 15th officially with Germany and Italy are first to enter into recession…

Ukraine, Pakistan and Argentina are proving to be almost as vulnerable as Iceland. They borrowed money without real collateral to back those loans. And the industries responsible for making the payments are collapsing…

Emerging Market Opportunities?

Having just accepted aid from the IMF, Hungary barely avoided sliding into national bankruptcy. And only a $15.9 billion IMF rescue package – bolstered by billions more from the European Union and the World Bank - prevented it from happening.

Analysts at Morgan Stanley estimate that capital flows to emerging economies could fall to $550 billion in 2009 from around $750 billion in 2007 and 2008. Such a sharp drop would hit economies that rely heavily on foreign finance: more than 80 developing countries are likely to run current-account deficits of more than 5% of GDP this year.

Countries do go bankrupt. Iceland is not the first (and will not be the last). Russia was declared bankrupt in 1998, Argentina in 2001 and Germany has a history of going more than once…

The problem is national bankruptcy would probably lead to massive inflation. This is demonstrated by the central bank of Iceland, which increased its prime rate by six points to 18 percent last week. Venezuela, where inflation is also high, is now offering 20 percent to stimulate interest in its government bonds.

And Argentina - having seized some US$29 Billion in private pension funds – has bond offerings yielding upwards of 30%! It’s worth noting; however, that the last time bond yields were this big in Argentina was in the aftermath of an epic bond default in 2001.

In the coming months, you’ll see more and more countries offering these huge double-digit bond yields. Most of these bonds will be coming from emerging markets that are already in trouble due to stifled capital flow.

David Newsman, Market Analyst

That’s because these hitherto privately managed companies have suddenly (and dangerously) acquired a major new stockholder – the United States government.

“I’m from the government…and I’m here to help you.”

Understand that when we say “the government” we mean bureaucrats, public employees and political appointees, who for the most part couldn’t make it in the private sector. If you enjoy standing in line at the Department of Motor Vehicles, you’ll love this new fascist business model.

Americans are now being asked to pretend that these political appointees suddenly are endowed with more business acumen and wisdom than the managers of the businesses that they are “bailing out.”

The massive bailouts supposedly justified by the current economic crisis have made them experts. And with the billions in taxpayers’ cash come the strings, if not the chains.

But the real threat to private America enterprise, (aside from the stupidity of some of its own mangers), comes from unprincipled politicians in the U.S. Congress.

As I recently wrote: “The federal government’s plans to spend trillions propping up banks large and small, along with recent bailouts, as well as guarantees, to support the auto industry, business loans, money markets and bank lending, represents the most sweeping government intrusion into the nation’s business and financial markets since the Great Depression (1928-1942) – and perhaps ever in history.”

Political Power Play: One step closer to absolute power

There is every proof that the antics of the likes of Senator Chris (“Sweet Heart Mortgage Deals”) Dodd (D-CT) and Rep. Barney Frank (D-MA) seriously contributed to the housing mortgage collapse, as these worthies led the parade for abundant Freddie Mac and Fannie May backing for billions in questionable mortgages.

Now these same politicians are leading demands in Congress for micro-management and restrictions on the recipients of federal bailout funds. They want to control executive pay at banks, curb meeting expenses considered to be too luxurious, and who knows what else.

Granted, these modest demands are all for the protection of the taxpayer, but where does it end? When will private enterprises no longer be obligated to follow government mandates? At what point does the disastrously inefficient artifice of state yield control back to the market?

David Brooks put his finger squarely on the crux of the matter: “But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.”

BOB BAUMAN, Legal Counsel

G-20 opens – It’s time to revamp Financial Institutions not tightening regulations…

The decisions of G-20 are  opening markets futher, regulating and evaluating financial institutions, curbing salary packages of the CEOs, review the credibility of credit rating institutions and evaluating the global accounting standards etc…Is it not right time to renovate and revamp the gloabl financial institutions and systems to create a new economic world order…let’s think it over, innumerable solutions awaiting to seize the opportunity of recession…

International Labor Organisation predicting 210 million jobs could be lost next year,

it would further open the global economy to trade, and therefore greater growth and jobs.

The measures included regulating areas of the financial markets that exacerbated the crisis, improving transparency and accountability, evaluating global accounting standards and in-principle support for curbing the vast salary packages of the highest-paid financial executives. Prudently, the leaders agreed to review the credit ratings agencies and the accuracy of their assessments of the reliability of financial institutions.

“intensified international co-operation among regulators, and the strengthening of international standards”.

“regulation is first and foremost the responsibility of national regulators“

“We recognise these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems,”

Cycle of Credit expansion and Credit bubble burst: How to Profit from Stock market Schizophrenia

Lunacy dominates world stock markets, as a tug of war ensues between fear and greed. For two wildly fluctuating months, stock and real estate markets bounced down the stairway that easy credit built. Then on Tuesday, greed was king for a day. The market exploded into one of its biggest rallies in half a century, with the Dow Jones industrial average closing up 10.9%. Does the rally signal a bottom in this schizophrenic market? Well, unfortunately there’s no way to know except in hindsight.

Sowing the Wind & Reaping the Whirlwind We don’t need hindsight to know that the current meltdown was inevitable. It is the consequence of events that began a century ago with the birth of the engine of 20th century boom and bust: the Federal Reserve. Nor were the effects of the new central bank immediately apparent. The effects of credit expansion didn’t show up the next day or the next month. It took more than a decade for the credit creation to result in the Roaring Twenties and the Crash of 1929. Again, the famous October 29 market selloff didn’t cause an economic catastrophe the next day…or the day after that, or even the year after that. It took three years for the Great Depression to truly grip the nation, triggering more government action - the abandonment of the gold standard and massive federal bailouts. Again, the results weren’t instantaneous. It took decades to inflate another boom, and reach the monetary crises of the 1970s. Economic theory can predict the consequences of credit expansion, but only in hindsight can we see the timing as the consequences unfold. Today’s economic storms are the consequences of seeds first planted a century ago. And once again – as the credit bubble collapses – new seeds are being sown. The official budget deficit for the fiscal year that ended September 30, 2008, was $455 billion, but most private analysts say the current fiscal year will end with a gap of one trillion dollars. How are the presidential contenders planning to deal with rising deficits? Both John McCain and Barak Obama promise tax cuts and increases in government spending. It won’t show up tomorrow, but vast government deficits ahead guarantee that price inflation will demolish the purchasing power of the dollars that fearful investors are so eager to lend to the U.S. government. When will the market bottom, and when will price inflation roar? We won’t know that except in hindsight, but both will happen. Buy When Blood is Running in the Streets But how deep should the blood be? Only value investing can provide the clue. As markets are gripped by fear or euphoria – plunging one day and soaring the next – it’s clear that very few are following the advice of the most successful long-term investors of the past century. Money masters like John Templeton, Benjamin Graham, Peter Lynch and Warren Buffett piled up enormous profits throughout one of the most tumultuous centuries in history, and their advice is there for all to follow. Benjamin Graham, said it clearly in The Intelligent Investor, “Don’t get carried away by enthusiasm. Don’t get carried away by despondency. …Know in advance that you are going to have to live through bear markets.” Let me re-tell Graham’s parable from his book, The Intelligent Investor. Imagine owning shares of a small business that cost $1,000, and every day your partner named Mr. Market knocks at your door and announces what he thinks those shares are worth that day. He offers either to buy your shares or sell you more at that price. Even though the business is trudging along without significant change, each day his opinion is wildly different. Frequently Mr. Market’s enthusiasm or his fear seems completely divorced from anything happening in the business and his valuation seems ridiculous. One day he offers to buy or sell you shares for $2,000 each, and a week later he makes the same offer for $500. Should you let Mr. Market’s wild enthusiasm or shaking fear determine your view of the intrinsic value of the business? That’s obviously irrational. As Graham puts it: The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. …He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.” Since we can never know in advance whether shares will be higher or lower tomorrow, the only rule to follow is to accumulate them when they are significantly underpriced by value analysis. Mr. Market is definitely letting his fear override his reason, and is making us offers that become increasingly difficult to refuse. As was the case after 1929, there are great opportunities being born out of the chaos. Don’t let Mr. Market’s trembling hands cause you to lose sight of the outstanding values he’s offering. A sound and lasting investment strategy requires searching for assets that have true value and will retain it – those include all types of commodities that will rise in price as money falls in value, currencies that are not being debased, and ownership of profit-making companies that have not fallen into the trap of trying to leverage profits through debt.  by John Pugsley, Chairman and Co-Founder of The Sovereign Society

US vs Iraq – A war waged with borrowings…costs $4.5 trillion by 2017

 

Joseph E. Stiglitz, the nobel prize winner economist in his latest book estimated along with harvard prof. Linda J. Bilmes that the government has borrowed $1 trillion — much of it from overseas lenders — to finance the war. By 2017, he said, the country will have added $2 trillion to the national debt to cover Iraq war expenses. That means additional interest payments for taxpayers…

The war which failed to find Weapons of Mass destruction as claimed by Mr. President, sapping the strength of US economy…taxpayers has already spent $607 billion to pay for the war through next september..The Joint Economic committee of both the houses of Congress estimated that the war would cost Americans between $3.5 to $4.5 trillion ny 2017..it includes disability aid and health care to war veterans..Iraq war raised oil price by $10 a barrel costing Americans $250 million a day…lose-lose war know??? The moral is Never fight a war on wrong claims…It’s not child’s play…Surprisingly India never went out and waged war against any country in its 5000 years of civilization…I recommend you all to read the book

Economic Emergency Survival Guide

As the global economy implodes, governments throughout the world have responded…

In the United States, Congress, the Securities & Exchange Commission, the Treasury Department, and the Federal Reserve Board have imposed various emergency measures intended to shore up the economy.

Congress has approved a US$810 billion (is that right?) Wall Street bailout, now enacted into law by President Bush. The SEC has banned short selling of financial stocks. The Fed has traded hundreds of billions of dollars of banks’ distressed mortgage debt in for Treasury bills.

However, we’ve only seen the tip of the iceberg when it comes to measures the government can impose in dealing with this crisis. Today, without further legislation, the President can at the stroke of a pen declare a “state of national economic emergency” of potentially unlimited duration. Once he does so, under existing law and precedent, he may:

• Impose a national banking “holiday” closing all U.S. banks or restrict and ration cash withdrawals and the cashing of checks or drafts. President Franklin Roosevelt used this authority in 1933 to closet the U.S. banking system after a run of bank failures.
• Shut down all stock and commodity exchanges. President Wilson invoked this authority in 1914 to shut down U.S. financial markets for four months.
• Impose punitive taxes on inbound or outbound foreign investments. President Kennedy invoked this authority in 1962 to shrink U.S. capital deficits and support the U.S. dollar.
• Investigate, regulate, or prohibit the importing, exporting or holding of currency, securities or precious metals. President Franklin Roosevelt used this authority in 1933 to order the sale of all privately held gold in the United States to the federal government. President Nixon invoked similar authority in 1972 to end the ability of foreign central banks to exchange U.S. dollars for gold.

With few exceptions, the U.S. Supreme Court has repeatedly upheld such seemingly unconstitutional takings as legitimate uses of the president’s war or emergency authority.

I don’t believe President Bush will assert any or all of these powers unless he feels that he has no choice. However, one event that he won’t be able to ignore would be if the U.S. dollar were to suddenly and sharply decline in value.

The dollar has sharply rebounded in value against other currencies in the last few months. However, foreign central banks hold more than US$3 trillion in U.S. dollars. You can imagine what might happen to the value of the dollar if these central banks begin selling dollars en masse.

we’ll look at what you can do to insulate yourself from such far-reaching and powerful efforts.

If you have property that you believe may be at risk for some future expansion of emergency or wartime controls, you can still legally take action to protect it. Here are some ideas:

• Transfer funds outside the United States and outside the U.S. dollar. It’s still possible to legally transfer funds from the United States, but that may not last if the U.S. imposes foreign exchange controls. This could occur in the event of another terrorist attack on the United States, or if the U.S. dollar falls sharply due to a terrorist incident or financial panic. That possibility may seem remote at the moment, because the U.S. dollar has appreciated sharply in the last few weeks in response to the global economic crisis. But this gives U.S. investors a rare opportunity to invest offshore and convert their dollars to foreign currencies – or to gold – at the most attractive exchange rates in more than a year.
• Use offshore structures to hold non-U.S. investments. This strategy may not only provide protection against domestic judgments, but may also provide a legal means to avoid future foreign exchange controls.
• Hold investments that aren’t subject to U.S. jurisdiction. Your investments located within the United States are the most vulnerable. But foreign investments may also be vulnerable, particularly those denominated in U.S. dollars. The least vulnerable foreign investments are foreign real estate and gold, silver or collectibles held outside the United States. Certain contractual relationships, such as insurance contracts and trusts, may also be configured to avoid U.S. jurisdiction.
• Avoid electronic transactions in U.S. dollars through U.S. clearing networks. Most electronic transfers of U.S. dollars clear through a U.S. clearing bank and ultimately the Federal Reserve. U.S. courts have ruled that funds involved in such transactions are subject to U.S. jurisdiction and thus to possible confiscation. A growing number of countries have set up dollar clearing facilities to clear their own domestic U.S. dollar electronic transactions. Such foreign clearing networks are at far less risk from the U.S. legal system than U.S. clearing networks.
• If you’re a foreign investor with U.S. interests, assess your risk to U.S. emergency or war controls. Investors from any country accused of “sympathizing with” or “harboring” terrorists are at particular risk. So are investors in countries or financial institutions through which terrorists have been accused of operating bank and trust accounts.
• U.S. persons not wishing to live under emergency controls are understandably interested in relocating to lower profile jurisdictions. Many countries welcome affluent retirees or other financially self-sufficient persons.

The prospect of emergency financial controls may appear to be remote. But they’ve been imposed many times in U.S. history. And, as this financial crisis deepens, they may be imposed once again.

The Next “Perfect Storm” is Already Brewing in the US

For the last week, eyes across the nation have been focused on Hurricane Gustav and its frightening potential. But even as we breathe a sigh of relief at the now “tropical depression” Gustav, new dangers emerge on the horizon in the form of Hanna, Ike and Josephine.

But the activity in the tropics only serves to distract Americans from the real threat; the ‘perfect storm’ brewing in the U.S. financial system.

It is a financial storm the likes of which we’ve never seen. And weathering this storm will take preparations that you may not have considered in the past.

Specifically, I’m talking about offshore banking.

Drowning in Trillions of Debt

As of April 2008, the total U.S. federal debt was approximately US$9.5 trillion.
That figures out to be US$31,600 for every man, woman and child in America. When you add in unfunded obligations of programs such as Medicaid, Social Security, Medicare, etc. this debt figure rises to a total of US$59.1 trillion.

In 2007, the U.S. public debt was 36.9% of our Gross Domestic Product while the total debt figured out to be 65.5% of GDP. Those numbers place the once mighty USA in line with third world countries that are also in hock up to their eyeballs.

If you want to get the whole picture of where America stands economically, check out the documentary film “I.O.U.S.A.” It’s an eye-opening experience.

What you’ll find is a country drowning in debt at both personal and government levels… and ample reason to be concerned about the solidity of our once-trusted financial institutions.

Is Your Bank Safe?

If you have been paying even scant attention to the news, you know about the housing mortgage crisis, the bank failures, the investment houses, banks and mortgage companies writing off billions of dollars.

Last Friday officials closed the 10th commercial bank this year. It was a small bank in Georgia with US$1.1 billion in assets. The problem? You guessed it, rising loan defaults. The FDIC now has 117 banks on its danger list that could fail. The probability of a large number of these banks actually failing is quite large.

As most depositors know, the basic insurance limit on U.S. bank deposits is US$100,000 in a single bank. If you know the rules well, however, it is possible for a single person to extend that coverage to more than US$500,000 at one bank. This can be done by utilizing multiple account ownership categories (private, commercial, business, investment) since the US$100,000 insurance limit applies by account category and per account holder.

My colleague, David Newman, Market Analyst for The Sovereign Society, explored the role of the FDIC in an excellent article, “Who Really “Insures” the FDIC?”

By all means, as David suggests, make sure your savings are in a domestic American bank that has maximum FDIC insurance coverage. And make sure you understand FDIC rules so you get maximum coverage.

But if you want to diversify your liquid assets internationally…if you want maximum financial privacy (the kind you can no longer find in the United States)…and if you want to enjoy the equivalent of FDIC insurance in other major economies…then you should consider the option of offshore banking today.

Not Just for the Rich Anymore

Not too long ago, only the wealthiest investors could benefit from having an offshore bank account. Only the richest of the rich could afford the fees and legal advice associated with going offshore.

Now, after dramatic changes in international banking and communications, even a modest offshore account can be your quick, inexpensive entry into the world of foreign investment opportunities.

Although the IRS tries to discourage offshore banking, having an offshore account is fully legal and can help you build financial structures to increase your wealth legally and protect your assets.

An offshore bank account is also a highly effective and economic way to achieve your legitimate financial goals – and many offshore banks are a lot more financially secure than some American banks these days.

Aside from safety, a foreign bank account can be employed as an integral tool in an aggressive offshore wealth building strategy.

Offshore banking is also a big business worldwide. Recent estimates calculate that as much as US$5 trillion is stashed in nearly 40 offshore banking havens that impose no taxes. Many of these same havens also guarantee deposits, have less onerous regulations, guarantee privacy, and cater to nonresidents. One third of the entire world’s private wealth is stashed in Switzerland alone!

The Sovereign Society has contacts with a network of leading banks from Switzerland to Singapore, from Panama to Hong Kong. We’ll be pleased to help you shield your assets and increase your privacy and profits – by going offshore. And now – more than ever – is an ideal time to move from idea to action, as that “perfect storm” moves ever closer to the U.S. financial system, and to you.

BOB BA’UMA’N, Legal Counsel

The Worst Worldwide Recession in 20 Years

The economic slowdown now threatening the United States and other industrialized economies will probably lead to the worst recession in almost 20 years.

The world economy will continue to struggle with the heavy burdens of rising food and energy inflation. On top of that, industrialized nations are facing deflation in housing and bank credit. And all the while, consumption will continue to erode because consumers will save more and spend less to address balance-sheet erosion.

For the first time in the post-WWII era consumers are facing a bizarre mix of lethal food and energy price inflation and deflation (or declining prices) in real estate and financial assets (stocks and bonds).

Never in the post-war period have consumers and investors alike faced such a challenging environment. We’ve simply never had to deal with two powerful economic forces converging with lightening speed.

Deflation, not inflation, does far more destruction to consumers and the global economy. That’s because debt burdens become increasingly difficult if not impossible to finance.

That’s the lesson of the 1997-1998 Asian economic crisis, the Russian ruble collapse in 1998 and now, the credit and real estate deflation attacking the United States and Western Europe since August 2007.

Inflate or Die

In a typical deflation environment, credit “bubbles” deflate. This process or monetary phenomenon can take several years to control until finally the forces of inflation eventually win. At that point, global central banks usually try to print their way out of economic distress.

The only way to beat deflation or an environment of rapidly declining prices is to expand bank credit like there’s no tomorrow. That’s what Asian central banks did in 1998 and the United States started in 2001.

The last U.S. deflation, back in the 1930s, was eventually cured by the Second World War. The war led to renewed economic production as the United States converted from a sleepy, peaceful country to a wartime economic juggernaut.

But today, the sub-prime crisis has morphed into a diabolical monster as it spreads from one facet of credit to the next. In the process, debt deflation or credit destruction is now underway.

The entire gamut of credit deflation reads like a bad movie script – and it’s still unfolding.

Bank credit continues to tighten in the United States and Europe, particularly in the United Kingdom, Ireland and Spain. As a result, default rates are now rising for companies and consumers.

Credit card delinquencies are surging and even top-notch investment-grade companies are being denied credit. Corporate bond spreads trade at multi-year highs, banks’ capital ratios have plunged amid a blizzard of unprecedented losses, and mortgage markets are hemorrhaging.

The Debt Deflation Strategy

According to data from Morgan Stanley, only U.S. Treasury bonds posted gains during the last deflation or Great Depression of the 1930s. Gold, however, might have gained in value had FDR not confiscated ownership in 1933.

In my view, gold along with the U.S. dollar would post significant gains versus most assets, including foreign currencies in a debt deflation.Silver, however, might not appreciate as strongly as gold in a severe recession.

 

Silver remains mostly an industrial metal and I doubt it would appreciate in the same context as gold during price deflation. That’s because industrial demand for silver would collapse in a hard recession, unlike gold – viewed universally as a surrogate currency and a long-term store of value against fiat currencies.

Other commodities, including oil, are unlikely to rise in value if the current economic situation deteriorates further. There’s no historical case to be made for holding raw materials in a debt deflation. Not even China will save commodities from a major decline.

High quality Treasury bonds and non-financial A and AA-rated corporate bonds are also ideal hedges against credit destruction. As interest rates collapse amid an outright deflation or severe recession, long-term debt prices should rise markedly. Avoid junk bonds and any other category of bonds that aren’t of the highest quality.

 

The U.S. dollar is also poised to rise vis-à-vis most currencies as the recession unfolds. That’s because foreign economies lag behind the U.S. credit squeeze by about 12 months and will increasingly find debt deflation at their doorstep.

Foreign central banks will begin cutting interest rates in 2009 to offset rapidly deteriorating output. That makes the dollar more attractive on a relative basis because the Fed has already aggressively reduced lending rates to boost growth. That’s certainly not the case in Europe and Asia.

Get Out of Dodge While You Can

I would also consider opening a foreign bank account to hold some gold and U.S. dollars as a safe-haven strategy.

It is not unfathomable that some sort of foreign exchange control may arise over the next few years. If that happens, it will restrict your overseas transfers and stop individuals from opening a foreign account. The British government imposed such controls in the early 1970s during an economic crisis. It can happen again.

I have little faith, apart from the above short list of strategies, that other assets will protect investors. Debt deflation is the absolute worst nightmare for investors, central banks and the general populace.

The key is to protect what you have. At some point, as the crisis eventually subsides, great bargains will beckon in distressed debt, bankruptcy reorganization securities, common stocks and real estate.

For now, I’d brace for some difficult years ahead and start planning for a hard economic landing. In a worst case scenario, it’s better to be safe than sorry.ERIC ROSEMAN, Investment Director

The Great American Bail Out, Costs, repercussions, and the End of US domination

Inflate or die. That’s the Federal Reserve’s mantra since the sub-prime credit crisis first hit the investment scene last August. Since then, this crisis has taken a destructive path and pummeled global equity and bond markets along the way. Global banks have also lost a combined US$1.6 trillion worth of stock market capitalization since last August. That makes this past year the worst year-over-year loss in history. Before it’s all over, Americans, Sovereign Wealth Funds (SWFs) and other investors will pay an astronomical price to rescue the battered U.S. financial system. The Death of a 24-Year-Old Bull Market The bull market for financial services stocks first began in 1982. And this bull market hit a crushing dead-end in August 2007. It will be years before this sector fully recovers. Let’s start with banks. Right now, large and small banks are desperate to recapitalize their smashed-out balance sheets. They continue to dilute shareholder equity through massive rights offerings and new issues. Dividends have been sliced and diced. Since last August, banks have written off or lost a cumulative US$476 billion during the worst credit crisis in a generation. The Last Nail in the Coffin for Financials We’re Postponing, NOT Avoiding Systemic Risk Over the last 12 months, the Federal Reserve and the U.S. Treasury have dreamed up and orchestrated spectacular bailouts to preserve the financial system and avoid systemic risk. But what are they really achieving? Long-term the consequences of the Fed’s actions will be horrendous. In the not-too-distant future, you’ll see existing and future generations of Americans paying dearly for our leaders rescuing one financial institution after another. There is no “avoiding” systemic risk. The final consequence of Morale Hazard is a larger, more threatening financial panic down the road. When the government bails out institutions and nationalizes failed enterprises, they only increase long-term inflation. For starters, they have to pay for those bailouts. So the government ultimately turns to taxpayers to fund the expansion of credit. By interfering with capitalism’s natural progression, the government delays its own financial reckoning. In my opinion, an insolvent institution must be allowed to fail. Morale hazard has played a major role on Wall Street and at the Bernanke Fed since March. Investors and analysts have seriously questioned the Fed’s unorthodox role as lender of last resort. What business does the central bank have to collateralize a failed institution’s almost worthless debt with Treasury securities? That’s what the Fed did with Bear Stearns Cos. in March. The Fed did the same thing for other troubled but unnamed investment banks and banks over the same period. Is Morale Hazard Justified? Is a bailout justified if that institution mismanaged its business model? More importantly, should the government rescue a financial firm in the interest of deterring systemic risk? It’s true that the Bear Stearns bailout deflected a major financial panic. But what really happened there? Contrary to most financial news reports in March, several large hedge funds were in the process of liquidating their accounts at Bear Stearns (Bear Stearns was a leading prime broker for hedge funds). One of the largest hedge funds in the world actually sparked a run by other hedge funds to get out of Bear Stearns. The entire gamut of players scrambled to get their assets out before it was too late. There’s no doubt a major global financial panic would have ensued on March 17 without some sort of rescue. In July, the government officially assured investors that Uncle Sam would guarantee GSEs or Government Sponsored Enterprises, Fannie Mae and Freddie Mac. Prior to Secretary Treasury Paulson’s assurances in mid-July, markets were reeling at the prospects of a Fannie and Freddie collapse. Again, a failure of both mortgage giants would have caused sheer panic in global markets because of the significant role they play in mortgage financing, debt issuance, and liquidity to banks. So some will argue it was a good short-term solution…but at what cost? The Piper Will Come Calling – Eventually Bailouts and Morale Hazard have been highly subjective topics among investors and policymakers since March. In the end, the United States will have to finance these and future financial bailouts with enormous amounts of credit, mostly from taxpayers. It’s inevitable that all this credit will eventually drain on the economy, American capital markets, and ultimately the dollar. The United States is already losing its financial supremacy to London, Frankfurt, Hong Kong, Singapore, and Dubai this decade. Capital flows to safe, tax-efficient shores. We’re likely to see new regulations in the U.S. as a consequence of the sub-prime mortgage debacle and other banking oversights. As a result, the United States will increasingly lose more market share to other international financial capitals. Eventually, other financial systems will also feel strained by America’s slow but progressive financial dilution. The United States still plays a vital role in global finance. So it would be naïve to think Dubai or Singapore won’t be affected by another major U.S. financial crisis in the future. That’s why I continue to buy gold. All governments are tied in one form or another to each other as global trade and capital flows have grown increasingly inter-connected. There’s no safe-haven overseas ahead of the next major crisis. The dollar and other mismanaged currencies are just a bunch of drinks shaken and stirred by a warped bartender. Fiat paper is a poor store of absolute value compared to gold and other tangible assets like oil and gas. Hedge your future with gold and other hard assets – paper money won’t protect your purchasing power from the upcoming inflationary storm in the United States and eventually, everywhere else. ERIC ROSEMAN, Investment Director