The fourth branch of the U.S. Government

Most people assume we have three branches of government: The Judicial: the Supreme Court - The Executive: the President - The Legislative: Congress.

Almost unnoticed by most Americans, the US Federal Government introduced a fourth branch to its political structure in 2006.

Who is entirely devoted to dealing with the US’s fiscal house? Some make the argument that a bunch of greedy crooks were appointed, intent on stealing as much of the public’s money as possible with no consequences whatsoever. And Goldman Sachs provided most of the lead characters: Hank Paulson (former Treasury Secretary), John Thain, (former CEO of Merrill Lynch), Robert Rubin (the Chairman of Citigroup), Robert Steel (the head of Wachovia), Ed Liddy (who Paulson put in charge of the nationalized AIG), Mark Patterson (the current Treasury Chief of Staff), Neel Kashkari, (the guy in charge of allocating TARP funds) and let’s not forget Treasury Secretary Tim Geithner.

For details on this fourth element of government, see Rolling Stone article “The Great American Bubble Machine” by Matt Taibbi.

The Future of the U.S. Dollar

America’s trading partners do not have large enough trade surpluses to finance a federal budget deficit swollen to $2 trillion by gratuitous wars, recession, bailouts, and stimulus programs. Moreover, concern over the dollar’s future is causing America’s foreign creditors to seek alternatives to US debt in which to hold their foreign reserves.

• Russia’s central bank now holds a larger proportion of its reserves in euros than in US dollars.
• China has increased its gold reserves by 75% in recent years.
• The governor of China’s central bank is calling for the abandonment of the dollar as reserve currency, using the International Monetary Fund’s Special Drawing Rights in its place.
• China and Brazil are considering bypassing the dollar and conducting their mutual trade in their own currencies.
• Chinese officials [indicated] that neither China nor the entire world has enough spare money to purchase $4 trillion of US Treasuries over the next two years.
• [Meanwhile] War, bailouts, and stimulus plans have pushed the Obama administration’s annual operating budget 50% into the red.
• Federal Reserve Chairman Bernanke thought he could push down interest rates on Treasuries by purchasing $300 billion of them. However, the result was to cause a sharp drop in Treasury prices and a rise in interest rates.
• Every sector of the US economy is in trouble.

As monetization of federal debt goes forward, US interest rates will continue to rise, worsening the problems in the real estate sector. The dollar will continue to lose value, making it harder for the US to finance its budget and trade deficits. Domestic inflation will raise its ugly head despite high unemployment.

The next shoe to drop will be the dollar’s loss of the reserve currency role.

[Excerpt of a review by Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration]

U.S. Debt details at your fingertips

This running chart maps it all out, and it ain't pretty!

Watch as --second by second-- we go further into debt.

National debt, the interest on that debt, the budget deficit; the state of Social Security and Medicare, and more. The information is right here at your fingertips.

You owe your life to the bailouts

The nation’s gross domestic product was $14.2 trillion in 2008.

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year!

Every American household is on the hook for $109,887 for these bailouts.

[Bloomberg]

China's yuan 'set to usurp US dollar' as world's reserve currency

Professor Nouriel Roubini, of New York University's Stern business school, believes that while such a major change is some way off, the Chinese government is laying the ground for the yuan's ascendance.

Roubini argues that China is better placed than the US to provide a reserve currency for the 21st century because it has a large current account surplus, focused government and few of the economic worries the US faces. He also predicts that Beijing will soon want to see the yuan included in the International Monetary Fund's special drawing rights "basket", as well as seeing it "used as a means of payment in bilateral trade."

[The Telegraph]

The Bankers 'Own' the US Congress

Sen. Dick Durbin blurted out on a local Chicago radio station an obvious truth that is rarely spoken:

"The banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

The blunt acknowledgment that the same Wall Street banks that caused the financial crisis "own" the U.S. Congress -- according to one of that institution's most powerful members -- demonstrates just how extreme the institutional corruption is.

[Salon]

IMF warns of still 'deeper recession’ ahead

The global economy is set to decline by 1.3% in 2009, the International Monetary Fund (IMF) says. However, the major economies are predicted to shrink even more. (See chart below) The prospects for the advanced economies are not any brighter in 2010, with an overall forecast of zero growth.

The IMF says this represents "by far the deepest post-World War II recession" with an actual decline in output in countries making up 75% of the world economy. After 60 years as the engine of world growth, the sharp fall in trade is now hitting many of the leading exporting nations, particularly in Asia.

At the heart of the crisis is the continuing overhang of losses in the financial sector, which the IMF now estimates at $4 Trillion, four times higher than it projected just one year ago.

And it warns that the current outlook is "exceptionally uncertain, with risks still weighting on the downside."

[BBC]

World Bank and IMF: Human calamity erupting from economic crisis

The IMF and World Bank have warned that the global economic crisis is turning into a "human calamity". The two Bretton Woods institutions told their 185 member countries that the worst global slump in generations had already driven more than 50 million people into extreme poverty.

"The global economy has deteriorated dramatically ... Developing countries face especially serious consequences as the financial and economic crisis turns into a human and development calamity," the International Monetary Fund and World Bank joint development committee said in a statement.

How to help the developing world cope with the worst global slump since the 1930s Great Depression was top of the agenda for the bank's steering committee meeting that wrapped up the sibling institutions' two-day gatherings.

World Bank president Robert Zoellick also told the news conference, "No one knows how long this crisis will last."

[AFP]

Fed up with the FED (Federal Reserve)

The one villain that has escaped public outrage over the financial crisis is the Federal Reserve.

"The very people who devised the policies that produced the mess are now posing as the wise public servants who will show us the way out," writes Thomas Woods in "Meltdown."

"The Fed was the greatest single contributor to the crisis that unfolds before us," Woods writes, and "more dollars were created between 2000 and 2007 than in the rest of the republic's history."

Already in its sixth week on the New York Times best-seller list, this eminently readable book traces the Fed's role in every financial crisis since this creature was spawned on Jekyll Island in 1913.

Obama is repeating the failed policies of Hoover and FDR, by refusing to let prices fall. Obama, with his intervention to prop up housing prices and Bernanke with his gushers of money to bail out bankrupt banks and businesses are creating a new bubble that will burst even more spectacularly.

[Patrick J. Buchanan, writing in Human Events]

The best way to rob a bank is to own one

Ever wonder about the major conflict of interest in that Henry Paulsen had just been CEO of Goldman Sachs before becoming Treasury Secretary, which means it was his job to regulate the banking industry? And later to investigate it.

On April 3^rd, PBS broadcast an interview with William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s. Black addresses the trillions of dollars that are now being given to the banking industry and answers the question "How do they get away with it?” His response: Fraud!

He ascertains that CEOs of some of these banks and mortgage firms deliberately set out to make bad loans, as a means to increase their own personal income. And this was possible because the Bush Administration essentially got rid of regulation, so nobody was looking. Among the facts he presents:

- Complex instruments were deliberately created so swindlers could exploit them.

- Liars’ Loans were assigned triple-A ratings, which is supposed to mean there is zero credit risk.

- Rating agencies never looked at a single loan file. Fitch, the smallest of the rating agencies, stated "the results [of an investigation] were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

- Secretary of the Treasury Geithner is covering up the fraud, just like Paulsen did before him.

China calls for new international currency reserve to replace the dollar

In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar. Russia recently made a similar proposal.

Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable. A new system is necessary, he said, because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.”

China’s bold idea, released more than a week before world leaders are to meet in London for a global economic summit, also indicates that Beijing is worried that its huge dollar-denominated foreign reserves could lose significant value.

The New York Times

Options for a failed U.S. Economy

A recent Pravda article spells it out:

1. The United States is the largest borrower in the world, the US national debt now exceeding 11 trillion dollars, and continuing to avalanche.

2. With the government taking on the debts of corporations, the corporate debt crisis has thus become the American governmental debt crisis.

3. According to experts, there is high probability of default on US treasury bonds. Some project that the USA has already started on a plan to refuse the dollar in order to avoid debt payments.

4. One analyst concludes that a US default is likely, only after the world finds an alternative to the US dollar. The dollar’s immediate collapse is unacceptable simply because 63 percent of world reserves are saved in dollars, and that would result in a global economic collapse.

5. Analyst Dmitry Abzalov believes that the current situation with the US national debt may end with a new war. The war will destroy excessive liquidity and the current debt. A war boosts the nation’s industry, with recovery based on defense orders.

A planned program of U.S. financial concentration

Paul Craig Roberts, a former Asst Secretary of the Treasury , poses the question “Is the whole point of the bailout to supply taxpayer money for a program of financial concentration?”

Roberts agrees that Professor Michael Hudson (CounterPunch, March 18) is correct that the orchestrated outrage over the $165 million AIG bonuses is a diversion from the thousand times greater theft from taxpayers of the approximately $200 billion “bailout” of AIG.

Eliot Spitzer, the former New York Governor who was set-up in a sex scandal to prevent him investigating Wall Street, pointed out that the real scandal is the billions of taxpayer dollars paid to the counter-parties of AIG’s financial deals. These payments, Spitzer writes, are “a way to hide an enormous second round of cash to the same group that had received TARP money already.”

Meanwhile CNN reports that “Veterans Affairs Secretary Eric Shinseki confirmed that the Obama administration is considering a controversial plan to make veterans pay for treatment of service-related injuries with private insurance” . And you may recall that the Washington Post reported that the Obama team has set its sights on downsizing Social Security and Medicare.

So let's watch the plan unveil.

What of the $10 Trillion stimulus bailout?

As a result of the nation's largest corporations and banks hitting up and continuing to hit up the U.S. government for trillions in taxpayer dollars, the government is on the hook for close to $10 trillion in assorted bailouts.

As they say on the Hill, "a billion here, a billion there ... pretty soon you're talking about real money."

How real? That $9.7 trillion is more than the U.S. government spent on the Louisiana Purchase, the New Deal, World War II, the Marshall Plan and the Vietnam War -- combined.

Imagine if the government had focused on committing 90% of this toward bailing out ordinary Americans instead, in economic help or loans, and “only” gave a trillion or so to the banks and corporations: Uncle Sam could have sent every single U.S. household a check for $80,000. Now that would have stimulated the economy.

Economic Outlook not looking good for 2012 and beyond

The US government under Bush spent close to one trillion dollars, and now the Obama administration is promising to spend trillions in the years to come to stimulate the economy.

Meanwhile, the official US debt is close to 11 trillion dollars and climbing fast. The debt interest alone is becoming untenable. Last year (2008) US government paid $451 billion dollars interest on its debt. Add to this the Medicare and social security obligations and suddenly things look a lot worse than they appear.

In early February, the International Monetary Fund’s chief Dominique Strauss-Kahn said the world's advanced economies -- the U.S., Western Europe and Japan -- are "already in depression”. Gordon Brown, the UK’s Prime Minister also used the word "depression" to describe the global economy, although his aides quickly said it was a slip of the tongue.

Japan’s economy, the second largest in the world, contracted by 12.7 per cent on a seasonally adjusted annualised basis in the fourth quarter. All South East Asian economies are reporting severe slow down or outright contraction. Many believe that China is hiding the extent of the economic contraction of its economy.

Middle Eastern countries have also been severely affected by the financial crisis. Every country has slashed its expenditure with the accompanying slowing growth. Iranians, Saudis, Iraqis, Kuwaitis and others have also been forced to slow down or freeze many projects. One must not forget that many of these countries’ petro-dollars would otherwise be re-circulated back into the US and European economies.

U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs

The U.S. government’s commitment to solving the financial crisis comes to about $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

Forget about the “measily” $787 billion Stimulus package just passed. The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years, and pledged up to $5.7 trillion more.

Only the latest approved stimulus bill, and the $700 billion Troubled Asset Relief Program passed four months ago, and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. The remaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients’ names have not been disclosed. The Federal Reserve so far has also refused to disclose loan recipients or reveal the collateral they are taking in return.

$9.7 trillion would be enough to send a $1,430 check to every man, woman and child alive in the world. It is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

[Bloomberg]

Predicted 15 year impact from worst financial downturn in 100 years

In an extraordinary admission about the severity of the economic downturn, the British PM's closest ally predicted that its effects would still be felt 15 years from now. His comments carry added weight because he is a former chief economic adviser to the Treasury.

He added: "The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years, as it will turn out. … These are seismic events that are going to change the political landscape. I think this is a financial crisis more extreme and more serious than that of the 1930s, and we all remember how the politics of that era were shaped by the economy."

He warned that events worldwide were moving at a "speed, pace and ferocity which none of us have seen before" and banks were losing cash on a "scale that nobody believed possible".

The minister stunned his audience at a Labour conference in Yorkshire by forecasting that times could be tougher than in the depression of the 1930s, when male unemployment in some British cities reached 70 per cent.

[The Independent]

New reserve currency and bankrupt U.S. States?

In his speech at the opening of the World Economic Forum in Davos, Vladimir Putin reminded the that “just a year ago, American delegates speaking from this rostrum emphasized the US economy’s fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years.”

With another swipe at America’s failed economic leadership, and greeted with a roar of applause, Putin also said it is time to get rid of virtual money, false financial reports, and dubious credit ratings. Putin proposed a new reserve currency system to “replace the obsolete unipolar world concept.”

Meanwhile, in the United States, there are currently 46 states of the 50 U.S. States with high budget deficits, many of which could file for Chapter 9 bankruptcy.

Many States are already scurrying to cut State-funded programs, raise taxes, not issue tax refunds to their citizens, and borrow money just to survive in 2009. And unfortunately, many of the same banks the Fed bailed out are refusing to loan money to the States and their Treasury agencies.

It’s very possible we’re about to experience the end of the United States as we know it.

[Source: CNN and Center on Budget and Policy Priorities]

The Billion and Trillion Dollar numbers make us numb-er

Everyone is tossing around the words million, billion and trillion. In that strange intersection of economics and politics, there is a new fashion: Trillion is the new billion.

A billion is a thousand million, and a trillion is a thousand billion.

To provide some perspective on just how big a trillion dollars is, think about it like this: A trillion dollars is the number 1 followed by 12 zeroes. Or you can think of it this way: One trillion $1 bills stacked one on top of the other would reach nearly 68,000 miles (about 109,400 kilometers) into the sky, or about a third of the way from the Earth to the moon.

Americans have become desensitized to just how much money that is. "To put a trillion dollars in context, if you spend a million dollars every day since Jesus was born, you still wouldn't have spent a trillion," McConnell said.

"A million dollars a day for 2,000 years is only three-quarters of a trillion dollars,"adds Temple University math professor and author John Allen Paulos.

Here's another way to look at it.

"A million seconds is about 11½ days. A billion seconds is about 32 years, and a trillion seconds is 32,000 years," Paulos said. "People tend to lump them together, perhaps because they rhyme. But if you think of it in terms of a jail sentence, do you want to go to jail for 11½ days or 32 years or maybe 32,000 years? So, they're vastly different, and people generally don't really have a real visceral grasp of the differences among them."

Perhaps a better way to get a "grasp of the numbers," Paulos said, is to use them to describe the budgets of government programs.

"The [Environmental Protection Agency's], for example, annual budget is about $7.5 billion. So, a trillion dollars would fund the EPA in present dollars for 130 years -- more than a century. Or the National Science Foundation or National Cancer Institute have budgets of $5 or $6 billion. You could fund those for almost 200 years," he said.

Wall Street bailouts estimated to be $6 Trillion

In hopes of stanching the bleeding, the federal government has now spent or put at risk approximately $6 trillion. True, a big part of that number reflects the government's purchase of securities that may actually yield a profit one day.

The best-known aspect of this epic spending spree is the U.S. Treasury's $700 billion Troubled Assets Relief Program, whose remit has included purchasing so-called toxic securities, giving banks cash and helping Detroit automakers avoid bankruptcy.

The Treasury also gave $300 billion in guarantees for struggling Citigroup, poured $200 billion into Fannie Mae and Freddie Mac, and granted an additional $50 billion in temporary guarantees to keep investors from pulling out of money market funds.

The Federal Reserve has also been busy. Central bankers have said they could purchase as much as $1.3 trillion of commercial paper from nonfinancial companies to make sure businesses have the working capital they need in an environment where banks are hesitant to lend. The Fed has committed an additional $1 trillion to a variety of credit facilities designed to encourage banks to loosen up.

Among other federal rescue measures we have the Federal Deposit Insurance Corp.'s decision to guarantee as much as $1.4 trillion in interbank loans, $300 billion for the Federal Housing Administration to insure mortgages in danger of foreclosure and a $150 billion aid package for insurance giant AIG.

The federal government is on the hook for $5 trillion of debt that Fannie Mae and Freddie Mac underwrote. The two companies themselves hold only a third of that debt, so it's unclear what the taxpayer's ultimate liability will be there.

[MSN]

Happy New Year? Certainly not economically!

What can we expect in 2009? Among other things, more financial revelations amongst the results of the IMF’s rigorous assessment of the U.S. financial system.

Under its bylaws, the International Monetary Fund (IMF) is charged with the supervision of the international monetary system. Officials with the IMF however informed Ben Bernanke of a plan that would have been unheard-of in the past: The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.

For seven years, US President George W. Bush refused to allow the IMF to conduct its assessment. Even now, he has only given the IMF board his consent under one important condition: The review could only begin in Bush's last year in office.

Roughly two-thirds of IMF members -- but never the United States -- have already endured this painful procedure. As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team.

The final report on the risks of the US financial system is to be released by 2010 -- and it is likely to cause a stir internationally.

The Great Crash of 2008 turning into the Global Depression of 2009

Several major U.S. firms have declared bankruptcy or begun liquidation, and it's expected that the list of casualties will mount as the final results of 2008 come in.

The Wall Street Journal quoted Mary Delk, a director in the retail practice at consulting Firm Deloitte LLP, confirmed, "This will go down as one of the worst holiday sales seasons on record."

Earlier this week, the top economist at the International Monetary Fund, Olivier Blanchard, warned that continued declines in consumer spending will set off a global depression.

Blanchard told the French newspaper Le Monde, "Consumer and business confidence indexes have never fallen so far since they began. …. It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression."

A third of G8 banks bankrupt, closed or merged in 2009?

Financial analyst Ralph Silva of TowerGroup told CNBC that he expects no less than one third of banks to fail in 2009 and that anything up to a thousand could collapse if they don’t merge.

“In 2009 we’re gonna see one third of the banks in the G8 countries disappear, either being merged, forced or not forced, or completely disappearing,” said Silva.

The analyst predicted that rather than letting banks fail, governments will force them to merge, which would lead to “very few banks owning quite a bit more.”

Watch Video

World Faces "Total" Financial Meltdown

The governor of the Bank of Spain issued a bleak assessment of the economic crisis, warning that the world faced a "total" financial meltdown unseen since the Great Depression.

"The lack of confidence is total," Miguel Angel Fernandez Ordonez , also a governing council member of the European Central Bank, said in an interview with Spain's El Pais daily.

"This is the worst financial crisis since the Great Depression" of 1929, he added.

[AFP]

The Neo-Alchemy of the Federal Reserve

Ron Paul writes: The updated, total bailout commitments add up to over $8 trillion now. This translates into a monetary base increase of 75 percent over the last two months.

This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation. Just as alchemists of the past frequently poisoned themselves with the lead or mercury they were trying to turn to gold, today’s bankers are poisoning the economy with accelerated fiat money creation.

read more

World Bank predicts global gloom

The World Bank has forecast a significant decline in global economic growth in 2009 for both developed and emerging countries. The Bank said a deep global recession could not be ruled out.

The World Bank has also warned that some emerging economies are likely to face serious challenges, including bank failures and currency crises, even if global bail-out plans start restoring confidence in financial markets.

Even the fast-growing emerging giants, India and China, are likely to suffer from the slowdown.

[BBC]

$8.5 trillion of our tax dollars to be used to "rescue" the U.S. financial system

700 billion for the Wall Street bail-out. Another 200 billion there, and then on another given day 800 billion more committed. If you’re like me, you may be finding it hard to keep track of how many billions or trillions the government is spending to “rescue” us.

According to Bloomberg News, over the past 15 months, the US government has pledged anywhere from $7.7 trillion to 8.5 trillion (and counting!) to rescue the financial system! To say the least, “The commitment dwarfs the Treasury Department’s $700 billion Troubled Asset Relief Program.”

Most of the money, about $5.5 trillion, comes from the Federal Reserve, which as an independent entity does not even need congressional approval.

So much for transparency and oversight. So-called regulators continue to commit far more money than Congress agreed to, while refusing to disclose loan recipients or reveal the collateral they are taking in return.

The San Francisco Chronicle writes “Given the unprecedented size and complexity of these programs and the fact that many have never been tried before, it's impossible to predict how much they will cost taxpayers. The final cost won't be known for many years.”

How much is a Trillion Dollars?

Politicians and the media avoid startling us by explaining what “7 or 8 Trillion Dollars” denotes, and so we turn to the occasional blogger, myself included, who attempt to provide a handle on what these colossal figures represent. For example:

• If you had 7.4 trillion pennies, you would have $74,000,000,000, an amount sufficient to buy the New York Times Co. 86 times over.
• 7.4 trillion pennies would stack up 4,671,717 miles high. That's enough to go to the moon and back ten times.
• Just 1 Trillion dollars equals all the assets of all American banks.
• $ 7.7 Trillion is conservatively nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures.
• This amount could instead pay off more than half the country’s mortgages.
• Oh yes, and to come up with this $8.5 Trillion, each American citizen is involuntarily kicking in $27,851!
• 
  

OK, so you get the picture? Here’s another angle you shoppers might relate to.

Spending $1,000 per second, it would take almost three decades to spend 1 trillion dollars! (–And obviously 1 Trillion is only a fraction of $8.5 trillion being offered on our behalf.)

Applying a “trillion” to Time,

1 second multiplied by a Trillion = 31,700 years!

Might that be an indicator how long it may take the children of our children’s offspring to begin to pay off the National Debt?!

See also

U.S. in danger of defaulting on national debt in 2009?

Richard C. Cook, a former U.S. federal government analyst warns:

To try to fix the crisis through bailing out the system, we are now seeing in the U.S. and Europe levels of government borrowing that have not been experienced since World War II. The purpose is to recapitalize a financial system that has destroyed itself through its own greed and folly.

But all this does is defer the bill to future generations who have to pay the enormous compounded interest charges this borrowing entails.

Interest on the national debt in the 2009 federal budget is over $500 billion. (Last year's was $430 billion)

The situation is so bad that many people believe the U.S. may even be in danger of defaulting on its gigantic national debt sometime in 2009.

Former Goldman Sachs chairman prediction: “Worse than the Great Depression”

According to former Goldman Sachs chairman John Whitehead, the current downturn will be worse than the Great Depression. As reported by Reuters:

The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, says former Goldman Sachs chairman John Whitehead.

"I think it would be worse than the Depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system. ... I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. ... I just want to get people thinking about this, and to realize this is a road to disaster. I've always been a positive person and optimistic, but I don't see a solution here."

Economist: “U.S. will soon face a second Great Depression”

By most accounts the US economy is in serious trouble. Robert Reich, an adviser to President-elect Obama, calls it a “mini-depression,” and that designation might be optimistic. The Russian economist, Mikhail Khazin predicts that the “U.S. will soon face a second ‘Great Depression.’”

Khazin points out, as have others such as University of Maryland economist Herman Daly, that consumer debt expansion is the fuel that kept the U.S. economy alive. The growth of debt has outstripped the growth of income to such an extent that an increase in consumer credit and bank lending is not possible.

Consumers are overburdened with debt. This fact takes monetary policy out of the picture. Americans can no longer afford to borrow more in order to consume more.

[Excerpt of an article by Paul Craig Roberts, former Secretary of the U.S. Treasury]

read more

The financial outlook as we enter 2009

US retail sales are ominously the worst in 35 years.

1.2 million U.S. jobs were lost in 2008, and unemployment has soared to 6.5%. And with most economic indicators signaling even more difficult times ahead, job losses will likely deepen and continue through 2009.

Top auto industry executives and the president of the United Auto Workers are asking for additional federal aid for the struggling U.S. carmakers.

General Motors warned Friday that it has only a minimum amount of cash to operate its business through the end of the year, and even with planned restructuring will fall short of cash in the first two quarters of 2009.

Despite receiving a portion of a $25 billion industry bailout from the federal government, Ford said it would cut its R&D budget and eliminate about 10 percent of its white-collar work force.

Collapse of US auto sales points to deep recession

Sales fell by a staggering 31.9 percent last month over the previous year in a further sign the U.S. economy has entered a deep and protracted downturn, threatening the jobs of millions of working people.

At the current rate, automakers expect to sell their lowest number of cars and trucks since 1983. General Motors—which is seeking a government bailout to avert bankruptcy and expedite a merger with number-three US automaker Chrysler—suffered a 45 percent decline in sales.

Adjusted for increases in the US population, last month was the worst since World War II, GM sales analyst Michael DiGiovanni told reporters. “This is clearly a severe recession,” he said.

One or more of Detroit’s Big Three automakers are not expected to survive the crisis. In the 1970s, US carmakers controlled more than 80 percent of the US market, with GM selling more than half the cars. GM, which employed 350,000 unionized workers in 1970, now has fewer than 70,000 blue-collar workers.

As a result of falling demand from steelmakers—a key supplier for all manufacturers—production at 17 of the nation’s 29 blast furnaces is being shut down. “We’re dealing with a situation that could develop into another Great Depression, if not handled properly,” Daniel DiMicco, chief executive of Charlotte, North Carolina-based steelmaker Nucor Corp., told the Wall Street Journal.

U.S. Federal Government Debt vs. Rest of World

Above is a dramatic look at the U.S. federal government debt.

This chart takes the present value of all US Federal Government debt obligations, including unfunded Social Security and Medicare obligations, which at end of 2007 totaled $62.6 Trillion (upper red bar on chart)
[Data source -http://fms.treas.gov/fr/07frusg/07frusg.pdf]

- - And compares that $62.6 Trillion in debt to U.S. GDP, plus to the rest of World's government debt of about $18 trillion (and rest of world's GDP).

Restated: U.S. government debt of $62.6 trillion is 3 1/2 times larger than the sum of the debts of all governments in the world ($18 trillion).

--Yet, the U.S. economy (GDP) is 68% smaller than the rest of the world. (Compare the black bars on this chart)

Resource

Call this a Crisis? We haven't seen nothing yet!

David M. Walker, former U.S. Comptroller General, one man who knows the inside economic picture far better than most, wrote the following in Fortune magazine:

Let's take a look at the potential catastrophe that awaits us once we survive our current crisis.

The entitlements due from Social Security and Medicare present us with a frightening abyss as 78 million Americans come of age. The costs of these current programs, along with other health-care costs, could bankrupt our country. Even if the economy were to grow at the level of 3.2% a year, as it did in the 1990s, they wouldn't come close to addressing our federal financial problem.

The U.S. Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government's huge unfunded promises in our nation's social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $352,000 per U.S. household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years.

China suggests U.S. dollar should be banished from international trade

The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, the official newspaper of China's ruling Communist Party says.

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A few days later, Russian Prime Minister Vladimir Putin proposed that Russia and China ditch the dollar and gradually switch over to national currency payments in their bilateral trade, expected to total $50 billion in 2008. Chinese Prime Minister Wen Jiabao described strengthening bilateral relations as "strategic."

Dollar to be replaced by Chinese currency as the world's "reserve currency"?

The Bush administration and the EU have called for an economic summit to be held by the 20 largest economies sometime after the presidential elections, to create another Bretton Woods wherein control of the global economic system was delivered to those same nations. It's likely, however, that the outcome will turn out considerably different than anticipated.

Already, under China's leadership, 12 Asian nations have agreed to set up an 80-billion-dollar fund to protect their economies from currency-runs, capital flight or other financial disruptions. China has the world's largest reserves at $1.9 trillion followed by Japan at more than $1 trillion. Clearly the two richest nations will set the agenda and play a central role in deciding how best to deal with the global recession.

Thailand's Deputy Prime Minister, Olarn Chaipravat, told Bloomberg News: "The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world."

The 56 Trillion Dollar U.S. Deficit

The former U.S. Comptroller General, David Walker, interviewed by Bill Maher, highlights some astounding numbers that add to the scope of the financial crisis:

The U.S. deficit is actually more like 56 Trillion dollars!

The share of this debt works out to $480,000 for each U.S. household!

Watch the 6 Minute Video

IMF: World on brink of financial collapse

The global financial system is on the brink of a systemic meltdown despite interventions by the US and Europe to stabilize markets, the head of the International Monetary Fund says.

Even with unprecedented actions in major economies, including co-ordinated central bank rate cuts, IMF Managing Director Dominique Strauss-Kahn said those measures had so far failed to calm the situation.

He said the financial crisis had deepened and was now affecting many more parts of the global financial system, including emerging markets, which until now had been shielded from the crisis.

Strauss-Kahn said conditions were likely to remain very difficult, restraining global growth prospects, while credit conditions are set to get tougher and constrain the ability of banks and companies to access funding.

[Reuters]

IMF: “Most dangerous shock in mature financial markets since the 1930s”

The International Monetary Fund, in a World Economic Outlook released today, predicted the United States - the epicenter of the financial meltdown - will continue to lose traction, adding, "The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s." (AP)

Economic equivalent to cardiac arrest

On Wall Street, the panic drove the Dow Jones Industrial Average slipping below the key psychological level of 10,000 for the first time since 2004. The mild euphoria that greeted the passage of the $700 billion bail-out of Wall Street(*) on Friday evaporated as traders digested the more bad news from Europe.

The UK stock market has suffered its worst one-day fall in history as the banking crisis intensified. The FTSE's tumble was mirrored across Europe, as markets in France, Germany, Italy and Spain all recorded heavy falls.

Here's how Nouriel Roubini sees it: "It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly...The Commercial paper market is shut down...Corporations have no access to long or short term credit markets. Brokers are increasingly not dealing with each other. The interbank market is seizing up."

(*) BTW, has anyone even attempted to explain how Secretary of the Treasury Henry Paulson expects to recapitalize the banks--which are loaded up with $2.4 trillion in mortgage-related investments—with the relatively paltry $700 billion from the so-called rescue plan?

Bailout raises the U.S. national debt to $11.315 trillion

Last July, President Bush signed legislation that raised the debt ceiling to $10.615 trillion.

Today he signed the financial bailout legislation passed by the Senate last night that raises the debt ceiling to $11.315 trillion.

Under the Bush Administration, the gross national debt as a percentage of the gross domestic product has hit a 50-year high. The following chart illustrates the trend nicely.



Bush did three things to skyrocket the debt from $5.7 trillion to $10 trillion:
1. He lowered taxes on the rich (by far the biggest item).
2. He invaded Iraq and Afghan-Pakistan.
3. He did not regulate an out-of-control Wall Street.

[ZFacts.com]

Bank Bailouts underway in Europe

Monday's stock market plummet posted the first post-$1 trillion day ever, another ominous record set.

In Europe, Dutch-Belgian banking giant Fortis NV has been partially nationalized with a 11.2 billion euros ($16.4 billion) rescue from the governments of Belgium, the Netherlands and Luxembourg, after investor confidence in the bank disappeared. The Belgian government also announced morning a €6.4 billion ($9.2 billion) plan to rescue faltering bank Dexia, which ran up huge losses in its U.S. operations.

The British government nationalized mortgage lender Bradford & Bingley, taking over the bank's 50 billion pound ($91 billion) mortgage and loan books, the second bank nationalized by the British government. In a similar move, the Icelandic government bought a 75 percent stake in Glitnir, the country's third largest bank, for 600 million euros ($878 million). In Germany, the country's second biggest commercial property lender, Hypo Real Estate Holding AG, secured a multibillion euro line of credit from several banks.

The Irish government said it would guarantee all deposits in Irish banks following a massive drop in the value of Irish bank stocks.

Meanwhile, the Bank of Japan has pumped 20 trillion yen ($192.3 billion) into money markets, amid an effort among the world's central banks to calm worries about a global financial crisis.

Record Dow plunge as bailout bill defeated

In a stunning vote that shocked the capital and worldwide markets, Congress defeated a $700 billion emergency rescue for the nation's financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive without it.

The Dow Jones industrials plunged nearly 800 points, the most ever for a single day. The 777-point decline for the day surpassed the 684-point drop on the first trading day after the Sept. 11, 2001, terror attacks.

[AP]

Ron Paul on the bailout package

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The bailout package that is about to be rammed down Congress’ throat is not just economically foolish. It is downright sinister. ... It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder.

Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters."

The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

[From an article by Republican member of Congress Ron Paul, LewRockwell]

WaMu becomes biggest bank to fail in US history

As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

WaMu, founded in 1889, is the largest bank to fail by far in the country's history.

[AP]

$1,000,000,000,000: The astonishing cost of US government's desperate bid to rid the economy of toxic debt

Business insiders fear the total cost of the bail-out could rise to as much as $1 trillion or $1,000,000,000,000.The plan would give the government broad powers to buy the bad debt of any US financial institutions for the next two years.

The move is part of the largest financial bail-out since the Great Depression and the sum involved is equivalent to almost one third of the British economy.

It also would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion! [What tax payers owed when the debt was "only" 9 Trillion]

[Excerpt of an article by Kate Foster, The Scotsman]

"Days away from a complete meltdown of our financial system"

On Friday morning, Senator Christopher Dodd, the head of the Senate Banking Committee, interviewed on ABC's “Good Morning America.”, revealed that just hours earlier at an emergency meeting convened by Secretary of the Treasury Henry Paulson and Federal Reserve chairman Ben Bernanke, lawmakers were told that "We’re literally maybe days away from a complete meltdown of our financial system.” Dodd added somberly, that in his three decades of serving in public office, he had "never heard language like this.”

The system is at the breaking point, and despite Wall Street's elation from the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt from banks balance sheets, the market is still correcting in what has become a vicious downward cycle. This cycle will persist until the bad debts are accounted for and written off for or until the exhausted dollar-system collapses altogether. Either way, the volatility and violent dislocations will continue for the foreseeable future.

The problems cannot be resolved by shifting the debts of the banks onto the taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to the National Debt, Paulson is just ensuring that interest rates will go up, real estate will crash, unemployment will soar, and foreign central banks will abandon the dollar.

No one has any idea of the magnitude of the deleveraging ahead or the size of the debts that will have to be written down. That's because 30 years of deregulation has allowed a parallel financial system to arise in which over $500 trillion dollars in derivatives are traded without any government supervision or accounting. These counterparty transactions are interwoven throughout the entire "regulated" system in a way that poses a clear and present danger to the broader economy.

The Federal Reserve has lost control of the system. The market is driving interest rates now, and the market is terrified.

[Excerpt of a commentary by Mike Whitney]

As rotten foundations crumble

From pubs in London to bars in New York, everyone is asking the same question: Why is this financial crisis different? The answer is simple albeit not sexy. The rot has set in.

The world's investment banks are basically houses built on pillars of money. Sometimes those pillars are cash, often bonds; these days pillars are made up of derivatives, swaps, options and other frighteningly complex instruments.

But these pillars are the strength that supports not only the bank itself, but also its debts and liabilities. What has happened is that the rot has got into the pillars and no-one noticed. If they were wooden it would be worms. The very financial instruments that make up the core of the banks are questionable.

No-one can say for certain how much these instruments are worth, if anything. No-one knows if counterparties to deals are financially secure and will be around tomorrow. The very structure became doubtful.

[CNN]

Fear grips the market

The Federal Reserve gave a two-year, $85 billion loan to American International Group Inc. (AIG) in exchange for a nearly 80 percent stake in the insurer. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries in 130 countries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.

However, Wall Street stumbled again even after the government bail out.
"People are scared to death," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position?"

He said the fear gripping the market reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country's largest thrift bank.

[AP]

The slow-motion run on retail banks

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Americans are justified to be worried, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis. If nothing else, he says people with accounts exceeding $100,000 in value should spread their money - and the risk - among different firms.

Lehman Brothers: tectonic shifts under the foundations of the U.S. financial system

Three of the top five U.S. investment banks have now fallen victim to the credit crunch.

The demise of Lehman Brothers, the fire sale of Merrill Lynch - the next potential domino in the chain - and news that insurer AIG is asking the Federal Reserve for emergency funding, has sent shock waves around the world.

These really are seismic events. As one commentator put it: “Tectonic plates are shifting under the foundations of the U.S. financial system,” and we’re all likely to feel the ground shake.

Foreigners, not the US Mortgage Market, drove the Fannie - Freddie Bailout

In an interview with The Washington Times, Council on Foreign Relations Geo-Economics Fellow Brad Setser said of the federal bailout of the Fannie-and-Freddie debt: “I suspect this is the first case where foreign central banks [ie China, Japan, Europe, the Middle East and Russia] exercised their leverage as creditors to push the U.S. government to make a policy decision that protected their interests.”

The problem is that the U.S. government has established what could be a costly and ill-advised precedent - the bailout. First it was The Bear Stearns Cos., now it’s Fannie Mae and Freddie Mac, and tomorrow it could be Lehman Brothers Holdings Inc.

FreedomWorks, a conservative non-profit organization that’s based in Washington, characterized the Fannie Mae/Freddie Mac bailout as a deal by politicians that’s nothing more than a transfer of “possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.”

[Excerpt of an article by William Patalon III, Money Morning]

Lehman Brothers, 4th largest US investment bank losses hit world stocks

World stocks have slipped after Lehman Brothers, the fourth largest US investment bank, reported a massive third-quarter loss of about $4 billion. Lehman had already reported losses of $2.4 billion in the second quarter.

The investment bank has already taken $7 billion in credit-related write-downs and losses since the start of the global credit crisis.

No plans for an injection of fresh capital into the bank have been released after a Korean firm backed out of investing.

[Aljazeera.net]

US Treasury adopts orphans Fannie Mae and Freddie Mac

The U.S. government announced plans to place the two mortgage giants, Fannie Mae and Freddie Mac, under “conservatorship” (aka as bankruptcy), the most sweeping government intervention into the financial markets in American history. If these two companies are nationalized, it will add $5.3 trillion dollars to the nation's balance sheet. (And considering the $5.3 trillion in mortgages that Fannie-Freddie own or guarantee, the impact is actually thirteen times greater than the Bear Stearns' failure)

When the U.S. military spends money abroad to fight the New Cold War, these dollars are recycled increasingly into U.S. mortgage-backed securities, because there is no other market large enough to absorb the sums involved. The central banks of China, Japan and Korea are major holders of these securities. Remember, we do not permit foreigners – especially Asians – to buy high-tech, “national security” or key infrastructure.

The Treasury therefore has given informal assurances to foreign governments that they will guarantee at least the dollar value of the money their central banks are recycling. A failure to provide investment guarantees to foreigners would thwart the continuation of U.S. overseas military spending.

The best that this weekend’s bailout can do is to postpone the losses on bad mortgage debts. But this is a far cry from actually restoring the ability of debtors to pay. It is pure hypocrisy for Wall Street’s Hank Paulson to claim that all this is being done to “help home owners.” They are vehicles off whom to make money, not the beneficiaries. They are at the bottom of an increasingly carnivorous and extractive financial food chain.

[Excerpt of interview with Michael Hudson, former Wall Street economist]

$200 billion Interest alone on the enormous U.S. debt

The U.S. government is like anyone with a nearly maxed out credit card: the more debt the country accrues, the more it must pay in interest, which makes it harder to run down the original debt.

And the picture gets worse when the rates go up. That could happen to Uncle Sam if those who buy U.S. debt grow concerned about the country's ability to pay what it owes, or because inflation starts to erode the value of bond yields.

The end result: "Taxpayers have to pay more and more on the national credit card," says Robert Bixby, executive director of a deficit watchdog group, adding that the country paid $200 billion in debt interest last year alone.

Washington is also charging the cost of the wars in Iraq and Afghanistan to its national credit card. So far, the government has spent between $700 billion and $800 billion since 2001.

So exactly how much is a Trillion Dollars?

Dr. Nouriel Roubini of the New York University's Stern School of Business, suggests that the losses of the American financial system will grow to more than $1 trillion.

So exactly how much is a trillion dollars?

That's one million times $1 million. Or one thousand times $1 billion.

An amount that is equal to all the assets of all American banks.

Read more