Making Unique Observations in a Very Cluttered World

Thursday, 23 July 2009

Scams And Bailouts The Cause of World Depression

Reading - Scams And Bailouts The Cause of World Depression http://tinyurl.com/xiam007

economic destruction of America a real threat, debts too massive for paper to absorb, mysteries still surround Madoff, the Goldman scam, 57 banks have now gone under this year, families struggle to pay college bills, TARP a mystery to taxpayers, no stability at AIG, jobless benefits drying up for workers

The US Illuminists are gambling big. This is the most dangerous part of their strategy, namely, how to take down America and the dollar without destroying themselves in the process, both financially and politically. They are going to get smoked. Even now the stock, bond and commodities markets are spiraling out of their control, and their new outrageous salaries and bonuses are about to be debauched as they are left holding the bag with huge positions in dollar-denominated paper assets. They will try to dump this paper without sending gold and silver on a moon-shot, but they are doomed to failure. The amounts of paper assets and debt are simply too massive, and the commodities markets and other tangible assets are too small to absorb these gargantuan sums of money and credit without exploding to the upside. Just keep buying gold, silver and their related shares on the dips, and you just can't lose in the long term. The trend is your friend. Gold and silver are trending up, and stocks, bonds and derivatives are trending down - way down!!!

About two months ago our sources informed us that the US government had begun sending large amounts of cash to embassies throughout the world to be exchanged for local currency. We have had a number of reports that this in fact has been the case.

Having been involved in counterintelligence and for some 50 years in economics and finance, I believe this is a precursor to problems centered around the US dollar.

It was just a few months ago that the USDX was 89.5. The USDX is a dollar index, and is computed by using a trade-weighted geometric average of six currencies and their weights are: the euro 57.6%; the Japanese yen 13.6%; the British pound 11.9%; the Canadian dollar 9.1%; the Swedish Korona 4.2% and the Swiss franc 3.6%.

We recommended the sale of the dollar at 89.5. It recently closed at 79.5.

We believe that between now and the end of October that the USDX could fall to 71.18, its former low of 18-months ago. At that time a number of businesses outside the US were refusing to take US dollars and we believe that will happen again, and that is what the Treasury Department is anticipating and the reason for sending the cash to the embassies for conversion to local currencies.

We also believe these events could precipitate a short bank holiday in the US due to disruption of capital flows in and out of the US and concern if not panic in the US banking community. We also believe the government will use such events as a trial run for a future major banking shutdown. They will be interested in the public’s reaction as a precursor to what might happen in the future if there were a major banking shutdown.

Americans are well aware of the Madoff scandal, but procedures used in his conviction leave many unanswered questions.

Conspiracy charges were never brought against Mr. Madoff. We had information we published just prior to the story breaking of what Mr. Madoff had been doing. Our contacts not only gave us the story, but details of how the funds were transferred from NYC to Israel and other offshore locations, such as the Cayman Islands, Belize and Switzerland. There were many wire transfers and also the physical transfer of bearer bonds to these locations.

What was interesting was Mr. Madoff’s association with veteran officers in the US military. That leads us to intelligence sources that have told us that Mr. Madoff was operating his scheme with elements of the CIA, the Russian-Israeli mafia and the Mossad. This would explain Mr. Madoff’s closed trial.

A number of banks were used in the operation. The Israeli Discount Bank, Bank Leumi, Bank of New York, Chase and Citibank’s private banking facility.

There is no question funds were being used by government agencies just as were those of AIG.

For his efforts Mr. Madoff received 150 years in prison, a ludicrous sentence under the circumstances. The nature of his trial was unusual. No media coverage, no attempt to charge any co-conspirators and no effort that we are aware of to recover funds, except for a billion here and a billion there. You don’t run a scheme like this out of your back pocket. Many on Wall Street knew what was going on and scores of others were involved. In the case of following the money all the court has to do is check with the NY Federal Reserve and the Treasury Department, both of which have access to every money wire out of his company and the banks he used. That would be too easy or is the avenue deliberately not being pursued. Then there is the case of the SEC, which knew for years a scam was being perpetrated. They were served up proof positive of a scam and did nothing to stop it. That tells us higher up in government they were told hands off, look the other way. The whole episode stinks, just like BCCI, Iran-Contra and Nugan-Hand, all CIA scam operations.

Mr. Madoff was convicted on 11 criminal charges – none of which included conspiracy. In other words, who assisted you in your criminal acts? Strangely the court had no interest in uncovering who else was involved. Thus far only a few billion dollars have been recovered.

The only reason Mr. Madoff turned himself in and pleaded guilty to all 11 counts of criminal activity was to protect his co-conspirators by not having to testify and government willingly allowed that. Mr. Madoff kept insisting he acted alone. After 28 years on Wall Street we ca hardly believe that. None of his family was charger, yet they had to know what was going on.

There are just too many unanswered questions that government and Wall Street have been all too willing to sweep under the rug.


There is absolutely no question that Goldman Sachs is a criminal enterprise and that they have co-opted our government.

We believe that they have been involved in massive unlawful activity using a program that may have been given to them by the government. The program is a major front running device that capitalized in picking up trades by snipping them out in nanoseconds and opportuning the system with a program no one else has. The Street has been and is furious that the media, regulators and our duly elected are not even discussing what could be the second biggest scam and abuse of our times. The biggest is the suppression of gold and silver prices.

Worse yet, few people realize that exchanges actually pay firms to trade against order flow when they act as a “supplementary liquidity provider.” Exchanges pay firms ¼ of a penny if they provide liquidity when an order appears in the system. This is an extra incentive to front run order flows. Can you imagine that this is a policy of the NYSE, led by the pirates at Goldman Sachs?

During the past two weeks, since these revelations, we have heard nothing from the SEC and their course of action. If something is not done nobody in their right mind would want to trade on our markets again.

If there is, as we suspect there is wrongdoing, this scam is bigger than Madoff and Stanford combined. Due to the position that the NYSE allowed Goldman to be placed in, they have a virtual monopoly on the NYSE’s Supplemental Liquidity 2 Provider Program.

It is Nasdaq’s view; these irregularities reveal that the NYSE’s true motivation for these SLP operations is to discriminate among its members and to burden some member’s ability to compete with the NYSE. This is as sinister as it gets.

We spent 28 years on Wall Street and we know that when a firm has an 87.5% trading accuracy record, something unnatural is going on. That is Goldman Sachs followed by JPMorgan Chase and Citigroup.

It was only six months ago Goldman received $10 billion from the US Treasury and relied on government guarantees to issue debt. This, in part, was how such enormous profits were made, up 64% year-on-year. As well, the government, via the Fed, stepped in and had the taxpayers pay $13 billion of AIG debt to Goldman, their part of a $105.4 billion rescue. This program has allowed Goldman to make record profits in the middle of a depression, some $27 billion a year.

As usual the media refuses to dig in and get the story we and a few others have dug up. Nor, as expected, has the SEC done anything.

The cat got out of the bag with the arrest of Russian-American programmer Sargey Aleynikov, by Goldman and the FBI. Goldman contends Aleynikov tried to steal Goldman’s secret code, which would unlock Goldman’s method of front running stocks, and commodity trades.

What is really important about this arrest is that Goldman said, ”There is a danger that someone who knew how to use this program could use it to manipulate markets in unfair ways.” We ask, is that what Goldman was doing?

Goldman has been able to read data on trades before they are committed. They place their buys and sells according to that nanosecond, thus, allowing them to essentially steal boatloads of money every day from traders and others worldwide. Goldman has been able to front run any transaction, stealing pennies in each transaction.

Will Goldman continue to steal from the public, or will they be forced to abandon the program, which would allow markets to return to normal? A curtailment of this program could put a major crimp in the market manipulations of the US government via the “Working Group on Financial Markets.”

In addition, why does Goldman have a federal exemption for VaR Calculations? They are using the Fed Board’s Market Risk rules used for state member banks and bank holding companies and the risk based capital rules. It seems some are more equal then others.

We might add that Goldman is the major force behind CAP and Trade legislation, the carbon market scam that will enable them to make billions trading. Goldman owns 19% of the Chicago Climate Exchange. CCX is also 10% owned by Generation management, a firm founded and chaired by Al Gore and co-founded by Goldman’s ex-CEO Hank Paulson. Passage of this legislation will lead to a 20% tax increase for every American taxpayer.

There is no genius in what Goldman Sachs has been doing. They control our government in that they were able to get the latest version of the Inslaw/PTECH/PROMIS software and front run the market including their own clients and too, at the same time, fulfill the demands of the market manipulations by the “Working Group on Financial Markets” of both stock, commodity and gold and silver markets. These people are lowlife white-collar scum. Goldman Sachs is simply a criminal enterprise as is our government.

Profits are good, but when they are supported by government guarantees or insured deposits, taxpayers have a special interest in how companies conduct their business. Goldman’s license to steal should send shivers down the backs of every hard working American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs.

This administration and the previous one have done nothing to address fundamental reform of the structural problems that got us into trouble in the first place. The Fed, banking and Wall Street caused all the problems and they are supposed to be fixing them, which they are not doing. They are just further looting the system.

The WSJ thinks this is great fun and says we should impose a tax, an FDIC-style bailout tax, for those too big to fail. This is unbelievable.

It could be Goldman has stopped using its program, because the market is trading naturally or organically. The changes occurred exactly on the day the NYSE had “computer problems” and extended trading 15 minutes. We ask, was it to make configuration changes in the networking infrastructure? Did the NYSE get cold feet? Or did the treasury call and tell them to stop allowing Goldman its preferred advantage?

The way to solve this front running is to have the FBI and SEC subpoena all market exchanges and every participant who had or has equipment collocated on the NYSE infrastructure submit all operating software operating on every machine connected to the infrastructure for immediate forensic investigation to see if any participants were “sniffing” traffic and front running orders.

This is a serious matter. It is a matter of stealing from every market participant by government, the NYSE and Goldman Sachs. If we were to get a serious investigation we will find that the Treasury, the Fed, Goldman and the NYSE were involved in actions to enrich Goldman and at the same time to keep the stock market from collapsing.

Large, urban teaching hospitals - including hospitals that are the biggest engines in the Boston economy - are facing the possible loss of hundreds of millions of dollars under national healthcare reform as rural lawmakers on Capitol Hill wage a fight to win more federal cash for their local institutions.

Big hospitals affiliated with medical schools around the country receive heftier reimbursements for treating elderly patients covered by Medicare, part of a government policy that rewards them for maintaining things such as trauma centers and burn units, as well as for training future generations of doctors.

Rural members of Congress, however, angry at what they see as an unfair advantage to glitzier facilities in cities, are demanding a bigger share of the pie for smaller hospitals, which serve remote populations and often struggle to survive.

The intense competition is among the key political subplots in the debate over expanding healthcare coverage to more than 46 million Ameri cans with no insurance. Although Republicans have stronger representation in the nation’s heartland, it’s not simply a red state-blue state divide. Plenty of rural Democrats think the current system - which favors facilities such as Massachusetts General Hospital in Boston and Mount Sinai in New York - is unfair.

The FDIC Friday night Financial Follies had regulators last Friday shutting down the Temecula Valley Bank, in Temecula, California, with $1.5 billion in assets and deposits of about $1.3 billion and Vineyard Bank of Rancho Cucamonga, California with assets of $1.9 billion and $1.6 billion in deposits.

Two smaller banks were First Piedmont Bank of Winder, GA., with $115 million in assets and $109 million in deposits, and BankFirst, based in Sioux Falls, SD., with abut $275 million in assets and $254 million in deposits. That is 57 banks that have gone under this year that they admit to.

The June index of leading indicators continued to march higher as the U.S. economy has moved closer to recovery. The leading index increased 0.7%last month, after a revised 1.3% gain in May, the Conference Board reported Monday.

May's increase was originally reported as 1.2%.

Economists surveyed by Dow Jones Newswires had expected an increase of 0.7% in the June index.

"The recession has been losing steam since the spring, although very large job losses continue," said Ken Goldstein, economist at the Board.

Interest rate spreads, building permits, stock prices and jobless claims were among the positive contributors to the June index. Real money supply and nondefense capital goods orders were negative contributors.

The coincident index fell 0.2%in June, after a revised drop of 0.3%in May. May's decline was first reported as 0.2%.

The lagging index dropped 0.7%in June, after a revised 0.4% decline in the prior month. The May drop was originally reported as 0.2%.

Almost a third of U.S. private colleges expect freshman enrollment to decline in the 2009-2010 school year as families struggle to pay bills and hold down debt, according to a survey.

Fourteen percent of schools surveyed from May 18 to June 19 predicted new undergraduate student enrollment would fall more than 5 percent, the National Association of Independent Colleges & Universities, a Washington trade group, said today in a statement. Forty-four percent of the schools said tuition deposits for the semester that starts in September declined from a year ago.

U.S. taxpayers may be on the hook for as much as $23.7 trillion to bail out financial companies, according to Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

Barofsky made the estimate in testimony prepared for a congressional hearing tomorrow.

No officer or agency of the United States shall have any authority to require the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, the Federal Housing Finance Board, or the National Credit Union Administration to submit legislative recommendations, or testimony, or comments on legislation, to any officer or agency of the United States for approval, comments, or review, prior to the submission of such recommendations, testimony, or comments to the Congress if such recommendations, testimony, or comments to the Congress include a statement indicating that the views expressed therein are those of the agency submitting them and do not necessarily represent the views of the President.

U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

The Treasury’s $700 billion bank-investment program represents a fraction of all federal support to resuscitate the U.S. financial system, including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today.

“TARP has evolved into a program of unprecedented scope, scale and complexity,” Barofsky said in testimony prepared for a hearing tomorrow before the House Committee on Oversight and Government Reform.

Treasury spokesman Andrew Williams said the U.S. has spent less than $2 trillion so far and that Barofsky’s estimates are flawed because they don’t take into account assets that back those programs or fees charged to recoup some costs shouldered by taxpayers.

“These estimates of potential exposures do not provide a useful framework for evaluating the potential cost of these programs,” Williams said. “This estimate includes programs at their hypothetical maximum size, and it was never likely that the programs would be maxed out at the same time.”

Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

Williams said the programs include escalating fee structures designed to make them “increasingly unattractive as financial markets normalize.” Dependence on these federal programs has begun to decline, as shown by $70 billion in TARP capital investments that has already been repaid, Williams said.

Barofsky offered criticism in a separate quarterly report of Treasury’s implementation of TARP, saying the department has “repeatedly failed to adopt recommendations” needed to provide transparency and fulfill the administration’s goal to implement TARP “with the highest degree of accountability.”

As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report.

“This administration promised an ‘unprecedented level’ of accountability and oversight, but as this report reveals, they are falling far short of that promise,” Representative Darrell Issa of California, the top Republican on the oversight committee, said in a statement. “The American people deserve to know how their tax dollars are being spent.”

The Treasury has spent $441 billion of TARP funds so far and has allocated $202.1 billion more for other spending, according to Barofsky. In the nine months since Congress authorized TARP, Treasury has created 12 programs involving funds that may reach almost $3 trillion, he said.

Treasury Secretary Timothy Geithner should press banks for more information on how they use the more than $200 billion the government has pumped into U.S. financial institutions, Barofsky said in a separate report.

The inspector general surveyed 360 banks that have received TARP capital, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. The responses, which the inspector general said it didn’t verify independently, showed that 83 percent of banks used TARP money for lending, while 43 percent used funds to add to their capital cushion and 31 percent made new investments.

Barofsky said the TARP inspector general’s office has 35 ongoing criminal and civil investigations that include suspected accounting, securities and mortgage fraud; insider trading; and tax investigations related to the abuse of TARP programs.

The largest U.S. conglomerate reported earnings on Friday that beat expectations despite a drop in revenue that was more dramatic than Wall Street had predicted. Those earnings reflected the pay-off from major cost-cutting over the past year, a greater reliance on the high-margin service business but also a sharp drop in the company's tax rate.

Thanks to higher loss provisions at the company's hefty GE Capital finance arm, the company's tax rate fell to 7 percent from 16 percent a year ago, a change that helped the bottom line, but which some investors consider a sign of poor "earnings quality."

While companies across the economy are cutting jobs, closing facilities and looking for any other ways to bring costs in line with falling revenue, some investors note there is a limit to how long companies can rely on belt-tightening to hold up their profits.

"It's not sustainable," said Peter Klein, senior portfolio manager at Fifth Third Asset Management, which owns GE shares. "The story of the second quarter is that a lot of companies are reporting better- than-expected earnings, but it's coming all through the middle."

The largest U.S. conglomerate reported earnings on Friday that beat expectations despite a drop in revenue that was more dramatic than Wall Street had predicted. Those earnings reflected the pay-off from major cost-cutting over the past year, a greater reliance on the high-margin service business but also a sharp drop in the company's tax rate.

Thanks to higher loss provisions at the company's hefty GE Capital finance arm, the company's tax rate fell to 7 percent from 16 percent a year ago, a change that helped the bottom line, but which some investors consider a sign of poor "earnings quality."

While companies across the economy are cutting jobs, closing facilities and looking for any other ways to bring costs in line with falling revenue, some investors note there is a limit to how long companies can rely on belt-tightening to hold up their profits.

"It's not sustainable," said Peter Klein, senior portfolio manager at Fifth Third Asset Management, which owns GE shares. "The story of the second quarter is that a lot of companies are reporting better- than-expected earnings, but it's coming all through the middle."

American International Group Inc.’s trading partners may force the insurer to bear the risk of losses on corporate loans and mortgages for years beyond the company’s expectations, complicating U.S. efforts to stabilize the firm, analysts said.

European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves. The firms may keep the contracts to hedge against declining assets rather than canceling them as AIG said it expects the banks to do, according to David Havens, managing director at investment bank Hexagon Securities LLC.

“For counterparties to voluntarily terminate those contracts makes no sense,” Havens said in an interview. “There’s no question that asset values have soured on a global basis. With the faith and credit of the U.S. government backing those guarantees, why would they give that up?”

Gov. Ed Rendell has urged legislators to pass a bill to extend benefits.

Gov. Ed Rendell said 17,800 Pennsylvanians exhausted their jobless benefits in the week that ended Saturday, the first big wave of Pennsylvanians to do so. He urged legislators to pass a bill to extend the benefits.

Around the country, the number of people exhausting their benefits is piling up. By the end of September, more than 500,000 people will exhaust their benefits checks, with the biggest groups in Pennsylvania, California and Texas, according to estimates by the National Employment Ladvocacy group for low-wage workers based in New York City.

The Coming Great Government Debt Default

Reading - The Coming Great Government Debt Default http://www.marketoracle.co....

Gary North writes: Have you ever heard this argument? "The national debt is too high. We are laying an enormous burden onto our children."

It is misleading. In what way? Because our children, like Atlas in Ayn Rand's novel, will shrug. They will send Congress a message: "No more."

Congress always responds to immediate threats regarding future sanctions. Whenever Congress thinks the voters will remember a vote at the next election, and will probably impose negative sanctions on incumbents, Congress always sees the light. "When we feel the heat, we see the light" said Senator Everett Dirksen a generation ago. His observation still holds true.

Our children are not going to pay off the suckers – us – who naïvely thought they could pass on the Old Maid of government debt to them.

Here is economic reality. Taxpayers and Treasury debt buyers are paying for all of the benefits that voters enjoy as recipients of government-funded programs. Voters are not transferring these costs to future generations. Costs are inescapably the same as benefits. If we receive present benefits, someone pays for these benefits in the present. The only questions are these: Who Wins? Who loses? How soon?

Economists despair about their inability to get across this simple idea: we consume only present goods.

Economics students nod their heads in agreement with the professor. "Yes, yes; we know that." But they don't know it. As soon as they start to vote, they forget.


When you catch your child with his hand in the cookie jar, you can be certain of one thing: he is after a present cookie. You can also be sure of something else: he does not intend to replace that cookie. He is driven by the desire for present gratification.

When you think of "child with its hand in the cookie jar" think "Congress." The difference is, a child will not respond to being caught with these words:

"This is in the best interests of the nation."
"We are acting as an agent of the People."
"Everyone deserves a fair share."
"We owe it to ourselves."
"We promise to replace this cookie with two cookies of equal or greater value in ten years."
Think of national economic production as a cookie factory.

People are employed to produce cookies. They eat cookies, but they also make cookies.

If they made no cookies, could they eat cookies? Only those cookies already in the cookie jar.

If, because of a war, the government tells the public that from now on, "we must support the troops," this means that those at work in the cookie factory must send cookies to the troops. The troops will be consuming cookies. They will not be producing cookies.


In his radio address to the nation on December 9, 1941, President Roosevelt did his best to substitute the inspirational word "privilege" for the economically correct word, "sacrifice." This was a way to describe costs as benefits.

On the road ahead there lies hard work – grueling work – day and night, every hour and every minute.
I was about to add that ahead there lies sacrifice for all of us.

But it is not correct to use that word. The United States does not consider it a sacrifice to do all one can, to give one's best to our nation, when the nation is fighting for its existence and its future life.

It is not a sacrifice for any man, old or young, to be in the Army or the Navy of the United States. Rather it is a privilege.

It is not a sacrifice for the industrialist or the wage earner, the farmer or the shopkeeper, the trainmen or the doctor, to pay more taxes, to buy more bonds, to forego extra profits, to work longer or harder at the task for which he is best fitted. Rather it is a privilege.

It is not a sacrifice to do without many things to which we are accustomed if the national defense calls for doing without it.

A review this morning leads me to the conclusion that at present we shall not have to curtail the normal use of articles of food. There is enough food today for all of us and enough left over to send to those who are fighting on the same side with us.

But there will be a clear and definite shortage of metals for many kinds of civilian use, for the very good reason that in our increased program we shall need for war purposes more than half of that portion of the principal metals which during the past year have gone into articles for civilian use. Yes, we shall have to give up many things entirely.

And I am sure that the people in every part of the nation are prepared in their individual living to win this war. I am sure that they will cheerfully help to pay a large part of its financial cost while it goes on. I am sure they will cheerfully give up those material things that they are asked to give up.

In other words, the cookie jar would soon suffer a substantial increase in demand from people who were no longer engaged in the production and distribution of cookies.

He predicted that those Americans who were still involved in the production of cookies would cheerfully eat fewer cookies, for the sake of the troops. But, just in case this cheerfulness waned, the President oversaw the creation of the War Production Board, which came into existence on January 16, 1942. It set up a rationing system.


When a member of the military dies in action, he pays the ultimate price. There is no deferral of payment. He is gone. He has to be replaced. Someone else must now put his life on the line.

There is no bond market for human lives. During World War II, there is no illusion among Gold Star Mothers that this cost of the war could be passed on to a future generation. A grave marked the end of that particular generation wherever the occupant had not fathered a child.

In Europe, tens of millions of civilian graves marked the reduction of the size of future generations. There was no bond market for these productive assets, either.

What voters understand clearly with respect to the most productive assets – human beings – they do not understand with respect to all other productive assets.

A crashed airplane, a burned-out tank, a demolished jeep: they are all junk. They are all finished as assets. They were paid for, but they are worthless now except as scrap metal on a battlefield. They must be replaced.

What is the difference between the productivity of a burned-out tank and the men who died in that tank? Scrap metal value. The burned-out tank may be worth more than the remains of those who died inside it. We do not like to think this way, but from the point of view of economics, it is true.


In a popular war, there is a war bond market. The mark of an unpopular war is the absence of any war bond market. The last American war bond market was in World War II.

The U.S. government sold war bonds in World War II. The total by the end of the program in 1946 was $186 billion – in early 1940's dollars – a gigantic amount. The War Finance Committee and the War Advertising Council spent more money on this ad campaign than any other in the history of American advertising.

But why did the government sell them? If the cost of the war in men and material was paid for by those on the battlefield who suffered and died, as well as by the folks back home who had to reduce their consumption, what did the war bond produce of economic value? A war bond could not reduce the loss of human life. It could not reduce the number of burned-out tanks. In short, a war bond could not reduce the cost of the war.

Then why sell them?

The reason was motivation. The cookie jar was being depleted, day by day. This meant that replacements were necessary. Folks back home who were engaged in war production would have to reduce their consumption. This output had to replace whatever had been lost.

Let us return to the three crucial questions. Which folks would have to cut back? Which folks wouldn't? For how long?

The war bond drives persuaded half of the folks back home to forego present income for the sake of future income. Income in what form? Pieces of paper with dead politicians' pictures on them? No. The promised future income would be America's survival as an independent nation. The appeal made by the government to buy war bonds was not the promise of personal economic gain in the future. It was to win the war by supporting the troops.

Then who were the winners? Those Americans who refused to buy war bonds and who saved their extra money to make down payments on unimproved land, especially in the Los Angeles area or in Westchester County, north of New York City.

The bond sellers never explained how buying a war bond supported the war effort. They did not say the following:

"Buy a war bond so that you will not be tempted to use your money to compete in the consumer goods market. That would drive up consumer goods prices. The government has imposed price controls on these goods. But if you will not buy war bonds, you will be tempted to spend the money in the black market. We're onto you. We know that privilege has long since turned into sacrifice, and you are tired of so much sacrificing. We are selling war bonds to re-kindle the sacrifice motivation. This will keep you out of the black market. This will in turn lower the costs of whatever the government buys."
Today, no one in government is so naïve as to try to sell war bonds. There are costs, but these costs are funded by Congress through taxes and the sale of conventional Treasury debt. Instead of war bond drives, the Treasury sells bonds to Asian central banks and American investors.

Buyers of long-term bonds are concentrated in the life insurance industry. Life insurance companies buy long-term bonds to cover long-term legal liabilities. What are these liabilities? To pay dollars. This is not a legal liability to pay dollars of constant purchasing power. Just dollars.


The government promises to pay off holders of Treasury debt. The government's debt has a AAA rating. Note: So did lots of subprime mortgages.

The government sells its debt as a way to keep from having to raise taxes to pay for government programs.

Who pays for these programs? Taxpayers and buyers of Treasury debt.

When are these costs imposed? Today.

What has been transferred to Treasury debt investors? A promise to pay dollars in the future. Not dollars of constant purchasing power. Just dollars.

Question: "What is the difference between a cashed Social Security check and crashed warplane?" Answer: "The plane does not vote."

Do present costs get transferred to future taxpayers? No; they are paid for by present taxpayers and investors.

Then what do present investors receive? IOU's. Lots and lots of IOU's. Issued by whom? Congress. As the Mogambo Guru would say, "hahahahaha."

Let's get this straight. We are not transferring present costs to future generations. We are pressuring Congress to write present IOU's for future repayment. We are transferring present costs to present investors in IOU's issued by Congress.

As to whether any future generation decides to pay off these IOU's is up to them. But if you look at a chart of the IOU's in relation to present tax revenues, it seems a bit far-fetched to imagine the future taxpayers will pay off these debts. After all, we aren't. Congress runs an official $1.8 trillion on-budget annual deficit, this sends a message: "We prefer that investors pay today's costs." Why should this change?

It will not change.

What will change is the willingness of investors to pay for today's costs in exchange for low-interest IOU's.


In Clint Eastwood's movie, Flags of Our Fathers, there is a scene that stands out as one of the most illuminating scenes in the history of America's movies on World War II.

The three surviving military personnel who were in the second Iwo Jima flag-rasing photo – the rigged one – are stateside. They are skeptical about their role as heroes. They don't see that they did anything special.

The Marines' press secretary informs them that they are there to sell war bonds. This seventh war bond drive was expected to fail before the flag photo captured Americans' hearts. He did not say, "If we can't sell bonds to the public, the Federal Reserve System will be the only buyer, and it will have to create the money out of nothing, which will produce shortages, because of higher prices in the black market," but that was the implication. The patriotism aspect of buying bonds is long gone. Today, the sales pitch is safety.

"Investors will get their money back. The market is liquid. Investors can get their money back at any time. Yes, rates are low. Yes, the Federal Reserve System doubled the monetary base in 2008 to keep alive the bond market. But this market is trustworthy. Price inflation is not a threat."
Implied message: it will never be a threat. But if it ever becomes a threat, you can sell your bonds and get your money back.

This means that the IOU's of our fathers, which were never paid off, but were merely rolled over by selling more IOU's, have set the pattern. The patriotism is gone; the market for rolled-over Treasury debt is with us still. When it comes to government debt, the World War II song that most closely matches the market is "Roll Me Over."


All costs are present costs. It is only a question of who pays them and why.

Anyone who says that we are passing on present costs to future generations does not understand economic cause and effect.

We are told that we are using politics to leave a massive debt to our children. Really? Which children? The typical taxpayer? He or she can vote. As soon as this tax burden grows too heavy, the voters will demand that it be reduced. Congress will then sell more debt, just as it always does.

At some point, that debt will not find a market. The great default will then take place. At that point, Congress's IOU's will become IOU Nothings.

The Great Default is coming. Count on it.