Saturday, December 3, 2011

MUST WATCH: Chris Martenson’s Presentation at the Gold & Silver Meeting in Madrid

50 Success Classics(Unabridged)

50 Success Classics(Unabridged)

Publisher: Nicholas Brealey Publishing | ISBN 1596590424 | Language English | Audio CD in MP3 / 128 kbps | 623 MB

Genre: EBooks

Discover the books that have already enriched millions. This unabridged guide to the literature of prosperity and motivation surveys 50 of the all-time classics, giving you their key ideas, insights, and applications, everything you need to know to start benefiting from these legendary works.
From rags-to-riches stories of such entrepreneurs as Carnegie, Buffett, and Walton, to master motivators like Zig Ziglar, Brian Tracy, and Napoleon Hill, to such contemporary business blockbusters as Jack Welch, Spencer Johnson, and Robert Kiyosaki, these are the leaders and pioneers who have helped generations of readers unleash their potential and discover the secrets of success.

As you are introduced to landmark works ranging from the classic (Acres of Diamonds, The Science of Getting Rich, The Way to Wealth) to the current (Good to Great, The Millionaire Mind) you will:

* Profit from the lessons of business legends
* Explore the spiritual and financial road to wealth
* Gain powerful insights into success secrets in life and work
* Uncover the strength of the spirit that infuses inspirational tales of personal triumph

50 Success Classics is a must for any listener working towards personal and financial success.

1. Horatio Alger Ragged Dick (1867)
2. Warren Bennis On Becoming A Leader (1989)
3. Frank Bettger How I Raised Myself From Failure To Success in Selling (1947)
4. Kenneth Blanchard & Spencer Johnson The One Minute Manager (1981)
5. Edward Bok The Americanization of Edward Bok (1921)
6. Claude M Bristol The Magic of Believing (1948)
7. Andrew Carnegie Autobiography (1920)
8. Chin-ning Chu Thick Face Black Heart (1992)
9. George S Clason The Richest Man in Babylon (1926)
10. Robert Collier Secrets of the Ages (1926)
11. Jim Collins Good To Great (2001)
12. Russel H Conwell Acres of Diamonds (1921)
13. Stephen R Covey The 7 Habits of Highly Effective People (1989)
14. Michael Dell Direct From Dell (1999)
15. Henry Ford My Life and Work (1922)
16. Benjamin Franklin The Way To Wealth (1758)
17. Timothy Gallwey The Inner Game of Tennis (1974)
18. Robin Gerber Leadership The Eleanor Roosevelt Way (2003)
19. John Paul Getty How To Be Rich (1961)
20. Les Giblin How to Have Power and Confidence In Dealing With People (1956)
21. Baltasar Gracian The Art of Worldly Wisdom (1647)
22. Earl G Graves How To Succeed in Business Without Being White (1997)
23. Napoleon Hill Think and Grow Rich (1937)
24. Napoleon Hill & W Clement Stone Success With a Positive Mental Attitude (1960)
25. Tom Hopkins The Official Guide to Success (1982)
26. Muriel James & Dorothy Jongeward Born To Win (1971)
27. Spencer Johnson Who Moved My Cheese? (1998)
28. Robert Kiyosaki Rich Dad, Poor Dad (1997 )
29. David Landes The Wealth and Poverty of Nations (1998)
30. Jim Loehr & Tony Schwartz The Power of Full Engagement (2003)
31. Roger Lowenstein Buffett: The Making of an American Capitalist (1995)
32. Nelson Mandela Long Walk To Freedom (1994 )
33. Orison Swett Marden Pushing To The Front (1894)
34. JW Marriott Jnr The Spirit To Serve (1997)
35. Margot Morrell & Stephanie Capparell Shackleton's Way (2001)
36. Donald T Phillips Lincoln On Leadership (1992)
37. Catherine Ponder The Dynamic Laws of Prosperity (1962)
38. Cheryl Richardson Take Time For Your Life (1998)
39. Anthony Robbins Unlimited Power (1986)
40. David Schwartz The Magic of Thinking Big (1959 )
41. Florence Scovell Shinn Secret Door to Success (1940)
42. Thomas J Stanley The Millionaire Mind (2000)
43. Brian Tracy Maximum Achievement (1993)
44. Sun Tzu The Art of War (4 th century BCE)
45. Sam Walton Made in America (1992)
46. Wallace Wattles The Science of Getting Rich (1910)
47. Jack Welch Jack Straight From the Gut (2001)
48. John Whitmore Coaching For Performance (1992)
49. Richard Wiseman The Luck Factor (2003)
50. Zig Ziglar See You At The Top (1975)

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The Economist Canada - 03rd December-09th December 2011

The Economist Canada - 03rd December-09th December 2011
English | 144 pages | HQ PDF | 112.00 Mb

read it here

12 Brilliant Value Investing Insights from Seth Klarman

Recently, in a rare in-depth interview with Charlie Rose, Seth Klarman shared the following 12 brilliant nuggets of value investing wisdom.

1. There’s a “gene” for value investing.

Klarman said being a value investor is completely natural for him.

“There’s a gene for this stuff,” he said.

When the market starts to go down, he explained, a lot of people overreact and start to panic.

“For me it’s natural. For a lot of people it’s fighting human nature.”

2. Value investors have to “slow the game down.”

“If you can remember that stocks aren’t pieces of paper that gyrate all the time –they are fractional interests in businesses — it all makes sense.”

He says you have to “slow the game down.”

“I can buy this thing for a huge fraction of what it’s worth. What am I worried about if it goes down a little bit more?”

However, the analysis is the easy part, he said.

3. They realize investing is the intersection of economics in psychology.

“Investing is the intersection of economics and psychology.”

That’s what Klarman tells business school students.

“The economics, the valuation of the business, is not hard. The psychology — How much do you buy? Do you buy it at this price? Do you wait for a lower price? What do you do when it looks like the world might end? Those are the harder things.”

He said with time and experiences those things can be learned, but you also have to have the right psychological make up in the first place, he added.

4. Good value investors know that greed blows you up.

“Value investors have to be patient and disciplined, but what I really think is you need to not be greedy.”

The reason, he explained, is the greedy and leveraged are the ones that blow up.

“Almost every financial blow up is because of leverage,” Klarman told rose.

5. Value investors have to realize leverage can magnify both potential for returns and losses.

Klarman told Rose that he’s been very fortunate to have not really screwed up at work.

“We’ve made mistakes where we underestimated the leverage in a situation.”

Leverage can magnify your returns and your losses, he said.

6. They should balance arrogance and humility.

“You need to balance arrogance and humility,” Klarman said.

“When you buy anything it’s an arrogant act. You’re saying to markets are gyrating and somebody wants to sell this to me and I know more than everyone else so I’m going to stand here and buy it. That’s arrogant,” he said.

“You need humility to say ‘I might be wrong.’”

7. They don’t worry about gyrations in the stock market.

Klarman said he’s not worried about gyrations in the stock market.

That being said, he also confessed that he doesn’t have a Bloomberg Terminal at his desk.

“I don’t care,” he said. “I have a giant pile of papers…I have a computer and a phone.”

8. Value investors ONLY care about market gyrations to score cheaper deals.

Baupost makes medium to long term investments, Klarman said.

“The only reason we care about gyrations is so we can buy something cheaper.”

9. Common sense: They buy when the market is down.

“We benefit from volatility,” he said adding that his fund provides liquidity when people want to sell in a hurry.

However, Klarman emphasized that he does not root for bad times.

“We sort of are with the most opposite. We buy when the market is down. We sell when it’s up.”

10. For value investors, buying is easier than selling.

“Buying is easier. Selling is hard,” according to Klarman.

That’s because it’s difficult to know the exact timing for when to get out.

“You can never tell how big of a bargain you might get tomorrow. You need to buy it and leave a little room to buy more…”

11. Value investors shouldn’t get in bed with bad people.

“Don’t get in bed with bad people,” Klarman said.

OK. That’s not what he really means literally. He’s talking about cheap stocks here.

“A lot of stocks are cheap for a reason,” Klarman said. “A value investor will figure out the reason.”

“Everyone else is sick of management raping and pillaging a company, taking advantage of shareholders,” he said. “There are stocks that have been perennially undervalued because they are run by somebody who fits that profile.”

Good management in a company adds value because they can buy back a stock when it’s undervalued. Bad management will hurt the stock.

“Those are early, but profound lessons. “

12. Instead, they want to form relationships with good people.

“We are looking for people who put the clients first,” Klarman said.

If you put them second, he explained, that’s when the whole thing can blow up.

Ann Barnhardt: The Entire Futures/Options Market Has Been Destroyed by the MF Global Collapse

Jim is joined by Ann Barnhardt, who recently closed her commodity brokerage firm Barnhardt Capital Management after the MF Global collapse. She believes that her client monies were no longer safe in the futures and options markets, and that the entire system has been 'utterly destroyed' by the MF Global collapse.

click here for audio

A Hedge Fund Insider Explains Why Retail Investors Should Flee The Stock Market

Regular readers know that ever since 2009, well before the confidence destroying flash crash of May 2010, Zero Hedge had been advocating that regular retail investors shun the equity market in its entirety as it is anything but "fair and efficient" in which frontrunning for a select few is legal, in which insider trading is permitted for politicians and is masked as "expert networks" for others, in which the government itself leaks information to a hand-picked elite of the wealthiest investors, in which investment banks send out their "huddle" top picks to "whale" accounts before everyone else gets access, in which hedge funds form "clubs" and collude in moving the market, in which millisecond algorithms make instantaneous decisions which regular investors can never hope to beat, in which daily record volatility triggers sell limits virtually assuring daytrading losses, and where the bid/ask spreads for all but the choicest few make the prospect of breaking even, let alone winning, quite daunting. In short: a rigged casino. What is gratifying is to see that this warning is permeating an ever broader cross-section of the retail population with hundreds of billions in equity fund outflows in the past two years. And yet, some pathological gamblers still return day after day, in hope of striking it rich, despite odds which make a slot machine seem like the proverbial pot of gold at the end of the rainbow. In that regard, we are happy to present another perspective: this time from a hedge fund insider who while advocating his support for the OWS movement, explains, in no uncertain terms, and in a somewhat more detailed and lucid fashion, both how and why the market is not only broken, but rigged, and why it is nothing but a wealth extraction mechanism in which the richest slowly but surely steal the money from everyone else who still trades any public stock equity.

From Reddit: I work in Wall Street and work in hedge fund analysis. I'm the only person in my office who supports OWS

This is a self-post, so I'm not trying to karma-whore or anything. I have a message I want to share with anyone who's interested.

I'm writing this in hopes that the OWS movement can have a better understanding of the hedge fund industry and the financial markets. With OWS being the zeitgeist of current politics, I think it's important to know how exactly the hedge funds, along with the financial markets are destroying the 99%.

Hedge funds. These guys are basically the vehicles of choice for ultra-rich people to get into the financial markets, besides family offices and private wealth managers. What are hedge funds? They are funds that have a 1-5 million deposit minimum, cater to the mega-rich, and can invest in anything without regulatory restrictions, use leverage to pump up their exposure by 15x, and pretty much eat up a vast majority of the industry's profits.

These guys invest in EVERYTHING. Instruments you've heard of - stocks, bonds, forwards, futures, currencies, and instruments that you, me, or anyone else have never even heard of, much less know anything about: commodity future swaptions, FRA/OIS swaps, CLOs, exotic future options, p-notes, index/commodity/equity exposures, and a huge array of OTC (over-the-counter) instruments that no regular investor would ever have access to.

Why I bring this up: the financial markets are rigged. 99% of the investing public has access to services such as basic brokerages, 401k/IRA's, mutual funds, pension plans, etc. Some of these services, especially pension funds, will invest into hedge funds, who take an additional 2 and 20 (meaning 2% of assets plus 20% of capital gains).

What this means is that if you go any of the traditional retail routes, you are utterly screwed facing off against the hedge funds.

First, you are paying exorbitant fees. Commissions on every stock trade. Mutual fund managers taking a cut - an annual % cut, as well as a % per profit cut. If these managers (i.e. pension plans) invest in another fund, that fund is also taking another % cut. You're down 2% the minute you invest your money.

Next, if you're doing the investing yourself, you're paying ridiculous spreads. The bid/ask spread of a stock will cause you to be down another 2-3% the minute you buy the stock. For example, if you're buying a share of company at $4.25, you can sell back at only $4.15.

Furthermore, you have absolutely no chance in terms of access to the best services. Hedge funds have a direct line to investment bank's institutional brokerage teams - these are the guys that spend day and night sucking up to hedge funds, trying to get them the best deals at the cheapest rates. This means that while you're buying stocks and bonds, hedge funds are getting special rights, warrants, sweetheart deals, private placement deals, options, bigger discounts on bonds, and much better bulk commission rates and lower spreads on stocks. If you're paying 4.25$ for a 4.15$ stock, they are paying something like 4.16$. And they are eating alive your profits because when the stock goes up to $4.30, they can activate another warrant to purchase 20m shares at $4.25, diluting the value of your shares.

Next, you lack information and exposure. You have no idea what is going on in the market besides what you see on the news - while hedge funds have analysts working around the clock and a bunch of service providers who give minute-by-minute analysis of their portfolio opportunities and weaknesses in all markets with exposures to nearly everything. Meaning, if there is an opportunity in the real estate market (i.e. legislation), it might take you weeks to get in - hedge funds will have gotten in the minute the legislation was passed. Furthermore, when IPOs come out for companies, hedge funds get top billing on the primary market shares - which means investment banks are selling directly to them. Once the secondary market becomes available, hedge funds are up 15-20% on these investments, sometimes within hours.

Finally, you have no capital compared to these hedge funds. The people who invest in these hedge funds are not just the 1%, they are the 0.1%. These are the guys with 500million dollar bank accounts and the ability to do whatever the fuck they want. Hedge funds know this, and they invest without having to care about whether their clients can pay the rent or send their kids to college. All of that is irrelevant. Their sole purpose is to earn money, not to mitigate risk.

What does this all mean? It means the hedge fund industry is making a gigantic proportion of the profits. The top .1% is earning nearly half of the profits in the industry, through not just hedge funds, but other similar vehicles.

The finance industry is a complete scam, designed to funnel money from the 99% investing public into the hands of the top .1%. Sure, some of you will make good money, but stastically, the rest of us will lose, and who is feeding off us? Hedge funds, and the .1%. You have better odds going to a casino and playing slots, the worst-paying game in the house, but still better than the stock market.

Also, the government is in bed with the financial industry. Tax loopholes give hedge funds and other top players the ability to write off losses and not pay taxes on gains for years at a time. For income they derive from the hedge fund (profits), they pay only 15%, rather than the 35% income tax charged to most people earning 80k and above. Meanwhile, you have to pay taxes for not just your own income but also capital gains.

The worst part by far is that the government "encourages" you to put your money into your 401k through 'tax exemptions', which basically puts your money with the lowest tier of the financial industry - pension funds, retail wealth managers, and retail asset managers. These guys have shit strategies like long-only or domestic equity (which means they only invest in American stocks), and have nowhere near the capability and reach of hedge funds. These guys are even more likely to lose your money than you are, and even worse is they will take a 2.35% cut while doing so. And you get penalized when you try to take your money out early. How f***ed up is that.

In other words, if you aren't in the .1%, you have no access to the derivatives markets, you have no access to the special deals that hedge funds and other wealthy investors get, and you have no access to the resources, information, strategic services, tax exemptions, and capital that the top .1% is getting.

If you have any questions about what some of the concepts above mean, ask and I will try my best to answer. I'm a first-year analyst on wall street, and based on what I see day in and day out, I support the OWS movement 100%.

tl;dr: The finance industry funnels money from the masses to the ultra rich, through vehicles like hedge funds which dominate all of the financial markets.

Chinese Economy Crash, No Free Markets, Gov. Manipulation, Gold & More

King World News has released the audio of their interview with Dr. Marc Faber: Editor & Publisher of the Gloom Boom & Doom Report.

Marc is famous for advising his clients to get out of the stock market one week before the October 1987 crash and other great calls. He has also gained a reputation as a contrarian investor. Marc is often quoted in both national, international media and is a frequent speaker on various TV programs. During the 1970’s Faber worked for White Weld & Company Limited in New York City, Z├╝rich, and Hong Kong. He moved to Hong Kong in 1973. He was a managing director at Drexel Burnham Lambert Ltd Hong Kong from the beginning of 1978 until 1990. In 1990, he set up his own business, Marc Faber Limited. Marc was born in Zurich and schooled in Geneva, Switzerland. He studied Economics at the University of Zurich and obtained a Ph.D. in Economics magna cum laude. Marc resides in Thailand and is best known as the author of the Gloom Boom Doom report.

You can listen to the interview HERE. (On the left side of the page, half way down, click on the small purple logo that reads, “Listen to MP3 – CLICK HERE”)

Kyle Bass: ECB Will Print Post-Default

Kyle Bass is out with his latest letter to investors in which he makes the case that the market is incorrectly assessing the situation in the eurozone. He states

“we have all been programmed to think that we will always be saved from default in a post-Lehman world……EU members know that they will be required to print money in order to re-capitalize their systems. The $18 trillion dollar question for the EMU periphery is: Should they (ECB) print before or after a default? We think they print post-default as they come to the realization that printing pre-default without addressing the toxic debt problem would rewind the clocks back to the days of Von Havenstein and then you-know-who.”

Bass is referring to the Weimar hyperinflation and economic depression in Germany during the 1920s which is widely credited with catalyzing Hitler’s rise to power.

How to Get Greater Investment Returns with Less Risk

As a kid, I was scared to death of roller coasters. I never went on them. But in the summer of 1977, peer pressure changed that. The last day of summer camp featured a trip to Six Flags Over Georgia. After riding just about every ride in the park, my cabin -- the Badger Den -- had one left to conquer: the HUGE wooden roller coaster named "The Scream Machine." Every member of the Badger Den was wound up and ready to ride.

Well... just about every member.

I had a dilemma: I was terrified. I was also an 11-year-old in a pack of 11-year-olds. Did I say, "That's OK guys, I'll just wait right here till you get back?" Of course not. That would have been an invitation for humiliation. The kid who wet his bunk was raring to go. How could I not? I gulped. I made a fist. I bowed up. I rode "The Scream Machine". And it was a blast.

Today, I wouldn't say I love roller coasters, but I'll ride them with no fear. I'm partial to the ones that don't do loops, though. I've ridden them, but I can tolerate the ones without loops better than the ones with loops.

A roller coaster is probably the most common analogy used with the stock market. And, like an amusement park, investors can choose which roller coaster they prefer. It's all about a little thing called beta.

What does beta mean?
According to, beta (or the beta coefficient) is "a measure of a stock's volatility relative to the overall market. It is most often calculated using a stock's movements relative to the S&P 500 Index over the trailing 12-month period.."

Think of beta as the tendency of how an investment's return responds to swings in the market. For example, if a stock has a beta of 1, then this implies its price will move with the market. If the beta is less than 1, then the stock will probably be less volatile than the market. A beta greater than 1 indicates the price is likely to be more volatile than the market. Therefore, if a stock's beta is 1.2, then, it would theoretically be 20% more volatile than the market.

Simply put, higher beta means higher risk and lower beta equals lower risk. And in equity investing, typically higher risk can yield higher reward. Right? Well, this may not always be the case. Here's why...

Using some fancy, Morningstar modeling software, I created two baskets of stocks, a high-beta and a low-beta basket, then I ran a 10-year back test. The results were surprising.

A tale of two baskets
Let's create two investors: Fast Freddie and Slowpoke Pete. In 2001, Freddie was still convinced the bull market in growth stocks still had legs. So, Fred allocated $50,000 equally among five stocks: Amgen (Nasdaq: AMGN), Bank of America (NYSE: BAC), Cisco Systems (Nasdaq: CSCO), Starbucks (Nasdaq: SBUX) and Yahoo (Nasdaq: YHOO).

Pete took a different approach. Stocks always made him a little bit nervous, so he would gravitate toward older, stodgier names that paid a dividend. His thinking was that the returns might not set the woods on fire, but he'd get paid something just for showing up. Pete took his $50,000 and spread it evenly among Abbott Labs (NYSE: ABT), Automatic Data Processing (NYSE: ADP), Kimberly Clark (NYSE: KMB), PepsiCo (NYSE: PEP), and Procter and Gamble (NYSE: PG).

How did each basket perform?

The high-beta roller coaster
If Freddie's basket of stocks were a roller coaster, then it would be called "The Whiplash." The portfolio's 10-year beta came in at 1.04, which, considering the benchmark's (S&P 500) beta was 1.00, it doesn't sound all that volatile.

But the numbers tell a different story.

While Freddie's $50,000 grew to $69,533, the average annual total return came in at 3.68%. This includes a blended dividend yield of 1.14%. Freddie's high-beta basket also turned in negative numbers 40% of the time. To top this off, they were two, back-to-back two-year periods: -29.8% in 2001 and -8.6% in 2002; and -27.7% in 2007 and -38% in 2008.

There was an upside, too..Both consecutive two-year down periods were followed by big back-to-back sky-rocketing years: 2003 came in at 79.2% and 2004 was 48.7%, while 2009 and 2010 rocked with 57.3% and 18.4% respectively. Still, that's a lot of up and down for a return that barely beat inflation.

So let's take a look at how Pete's basket did...

The low-beta roller coaster
With a 10-year beta of just 0.47 (54.8% less volatile than Freddie's basket), Pete's $50,000 outgrew Freddie's by 11% to $77,702, bringing the average annual return to 4.15%. This was not a huge gap as compared with the growth basket -- just 47 basis points -- but it's an outperformance nonetheless.

Even more remarkable was that Pete's low-beta portfolio had only two down years in a decade, giving up just 16.1% during the post 9/11 bear market of 2002 and only down 15% during the mauling of 2008.

And what about yields? The low-beta basket paid Pete 215 basis points more, with a blended dividend yield of 3.3%. Granted, soap and toilet paper weren't nearly as sexy as the Internet or frappachinos, but they sure held their ground in a grinding, decade-long secular bear market.

Risks to Consider: Whenever discussing portfolio performance based on backtesting and illustrations, you are always looking in the rearview mirror. Lower volatility doesn't necessarily mean lower risk. Security values can and will go down.

Action to Take--> Evaluating the beta of a stock portfolio is just one aspect of investment selection, however, it is an effective tool in assessing and managing investment risk. This type of data is readily available on most investment websites. Yes, many arguments can be made for and against low-beta investing. But the overriding theme here is that investors can often achieve better results by sticking with boring "forever stocks" (that's what StreetAuthority Co-founder Paul Tracy calls them) -- stocks you can own and sleep well at night, confident you'll earn a good return with little risk. Judging by the numbers, the case for low-beta stock selection is strong, based on performance during a terrible decade for equity investing. Combined with a fundamentally good stock selection, it's an effective way to manage volatility and preserve capital.

How the U.S. Will Become a 3rd World Country (Part 2)

The United States is quickly coming to resemble a post industrial neo-3rd-world country. Unemployment, lack of economic opportunity, falling real wages and household incomes, growing poverty and increasing concentration of wealth are major trends in the U.S. today. Behind these growing problems are monetary inflation created by the Federal Reserve’s monetary policies, federal government deficit spending and the dominant influence of “too big to fail” banks and large corporations in Washington D.C., which has altered the direction of law in the United States. To make matters worse, the U.S. government faces a historic fiscal crisis.

Photograph courtesy of Mitch Cope

High unemployment, lack of economic opportunity, low wages, widespread poverty, extreme concentration of wealth, unsustainable government debt, control of the government by international banks and multinational corporations, weak rule of law and counterproductive policies are defining characteristics of 3rd world countries. Other factors include poor public health, nutrition and education, as well as lack of infrastructure—factors that deteriorate rapidly in a failing economy

Apparently ineffective regulation and relatively little law enforcement action by the federal government in the wake of the sub-prime mortgage meltdown resulted in widespread speculation that special interests had taken priority over the rule of law. Critics have also charged that the federal government’s policies threaten to eliminate what remains of the American middle class.

Accelerating Concentration of Wealth

In response to the economic downturn that began in 2007 and the start of the financial crisis in 2008, the U.S. federal government and the Federal Reserve resorted to a radically inflationary policy intended to save banks and to shepherd the U.S. economy through a recession. Instead, radically inflationary policies greatly increased the concentration of wealth.

Under ordinary circumstances, monetary inflation has the effect of redistributing wealth in favor of those who receive newly created money first. The value of money is reduced as a function of the number of currency units in the economy but recipients of newly created money can spend it before it loses value. In a declining economy, however, the wealth redistribution effects of inflation are magnified.

When the Federal Reserve or the federal government supports banks and financial markets through liquidity injections, bailouts, asset purchases, quantitative easing, etc., the lion’s share of financial support, i.e., newly created money, is captured by the largest financial institutions and by the wealthiest 1% of Americans. Money printing skews the distribution of money over the economy while the value of money, i.e., the purchasing power of wages and savings, is reduced. The overall effect is a wealth transfer from proverbial Main Street to literal Wall Street.

Looming Fiscal Crisis

U.S. government debt and deficit spending have markedly accelerated over the past decade. For example, The U.S. Department of Homeland Security (DHS) was created and the U.S. military grew to 3 million active duty and reserve personnel, not including contractors. Since 2001, the U.S. spent approximately $1 trillion on military expansion while the total cost of the U.S. wars in Afghanistan and Iraq has been estimated to exceed $3.7 trillion.

Although the U.S. federal government remains in denial, the Congressional debt ceiling debate and subsequent U.S. credit rating downgrade on August 5, 2011 were only the tip of the iceberg. In fact, the United States faces a historic fiscal crisis.

As of 2012, the majority of new federal government debt will stem from interest on existing debt. Treasury bond issues totaled $2.55 trillion in 2010, roughly 2x the federal budget deficit of $1.3 trillion. Artificially low U.S. Treasury bond yields, created by the Federal Reserve’s quantitative easing (QE1 and QE2) programs and by its current “Operation Twist,” only slow the rate at which the federal debt balloons.

The U.S. federal government’s fast growing debt is $14.94 trillion, approximately 100% of GDP. Additionally, future liabilities total $66.6 trillion based on generally accepted accounting principles (GAAP accounting) and using official data from the Medicare and Social Security annual reports and from the audited financial report of the federal government.

  1. Medicare: $24.8 trillion
  2. Social Security: $21.4 trillion
  3. Federal debt: $10.2 trillion* (not including intra-governmental obligations)
  4. State, local government obligations: $5.2 trillion
  5. Military retirement/disability benefits: $3.6 trillion
  6. Federal employee retirement benefits: $2 trillion

The eventual insolvency of the U.S. federal government cannot be averted through any combination of taxes, budget cuts or realistic GDP growth. Inflationary policies, i.e., increasing deficit spending by the federal government and debt monetization by the Federal Reserve, would devalue the U.S. dollar and potentially trigger a hyperinflationary collapse of the currency. To stave off the inevitable, interim measures might include tax increases, exchange controls, nationalization of pension funds or other measures similar to those taken in 3rd world countries.

Dominant Corporate Influence

In a 2009 radio interview on Elmhurst, Illinois’ WJJG 1530 AM, Senator Dick Durbin (D-Ill.) explained that “…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.” Senator Durbin was unequivocal in saying that the federal government of the United States is controlled by banks. Simon Johnson, former chief economist of the International Monetary Fund (IMF), had reached the same conclusion one month earlier in his widely read article The Quiet Coup. Johnson explained that the finance industry had effectively captured the U.S. government, a state of affairs typical of 3rd world countries.

Corporate influence over the political process, as well as over the tax and regulatory policies of the United States, is at an all time high. The federal government is the largest single customer in the U.S. economy and, through taxation or regulation, the government can grant or deny market access to private companies and can either prevent or mandate the consumption of their products and services. As a result, virtually every large corporation in the United States seeks to win the government’s business and to steer government tax policies and regulations in their favor. Naturally, politicians who accede to the wishes of particular corporations are given campaign funds to ensure their reelection. In the past decade, the amount of money spent on lobbying has more than doubled and there are currently 24 lobbyists for every 1 member of Congress.

The interdependence of elected officials and the largest U.S. corporations reached a new high with the 2008 bank bailouts. The influence of private corporations and de facto industrial cartels (comprising the largest corporations in each major industry) over tax and regulatory policies creates significant economic distortions that ultimately compromise the sustainability and the stability of the economy. Ideally, the government would be an impartial referee, rather than an active business partner that overwhelmingly favors large businesses over small businesses, despite the fact that small businesses account for the vast majority of American jobs.

Impact on the Rule of Law

Corruption, cronyism and weak rule of law are typical of 3rd world countries. The United States exhibits a clear corporate influence over elections and legislation and, arguably, relatively little law enforcement action where large, legally well-equipped corporations are concerned. Reports of so-called crony capitalism have appeared in the U.S. news media, but the term “corruption” has been avoided, along with discussion of fundamental reforms.

A cursory examination of legal developments over roughly the past decade evidences a pattern in which U.S. federal law systematically favors the largest financial institutions, as well as a paradigm in which financial institutions heavily influence both the regulations that putatively govern their activities and the laws that apply to consumers of their products and services. The financial crisis that began in 2008 and the subsequent response of the federal government appear to follow logically from prior legislative events:

  1. 1999 Gramm–Leach–Bliley Act (GLB). The Act repealed key provisions of the Banking Act of 1933, commonly known as the Glass–Steagall Act. In the aftermath of the Great Depression, the Glass–Steagall Act prevented depository institutions from engaging in high risk financial speculation.
  2. 2000 The Commodity Futures Modernization Act (CFMA). The Act deregulated over-the-counter (OTC) derivatives, such as credit default swaps, referred to by Warren Buffett as “financial weapons of mass destruction.” OTC derivatives were at the heart of the financial crisis that began in 2008 and are the root cause of the “too big to fail” doctrine. The Act preempted state gaming laws that had prevented banks from speculating in OTC derivatives with no connection to underlying assets.
  3. 2001 USA PATRIOT Act. The financial provisions of the Act allow banks to collect additional financial information about account holders, for example, linking business accounts to the personal financial records of business owners, thus weakening both financial privacy and the corporate veil. The Act enhances the ability of creditors to collect and allows federal authorities to monitor financial transactions and to obtain financial records without a subpoena.
  4. 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The Act, which was sponsored by banks and credit card companies, effectively eliminated the concept of a “fresh start” by allowing banks and credit card companies to engage in collections activities, in effect, forever. As a result, small business owners who end in bankruptcy are less likely to ever start another business. The Act places banks in front of bankruptcy courts, creates liabilities for bankruptcy attorneys and contains many widely criticized, anti-consumer provisions.
  5. 2008 Emergency Economic Stabilization Act. The Act, commonly referred to as a “bank bailout,” authorized the United States Secretary of the Treasury to spend $700 billion to purchase distressed assets, especially mortgage-backed securities (MBS). Instead, the funds were given to foreign and domestic banks to offset their risky MBS, OTC derivatives and other losses. The bank bailout set a precedent of socializing losses but keeping gains private. The Act effectively bound the fate of the U.S. Treasury to that of the largest U.S. financial institutions.
  6. 2010 Citizens United v. Federal Election Commission. The Supreme Court of the United States held that corporate funding of independent political broadcasts in candidate elections cannot be limited under the First Amendment, overruling prior case law and guaranteeing the ability of corporations to influence elections without meaningful restrictions. The Court’s decision gave carte blanche to corporations to influence elections, legitimized the interdependence of elected officials and large corporations and created a precedent under which the rights of corporations supersede those of citizens.
  7. 2010 The Dodd–Frank Wall Street Reform and Consumer Protection Act. The Act failed to restore critical provisions of the Glass–Steagall Act, significantly regulate OTC derivatives, break up “too big to fail” banks, prevent another financial crisis and prevent further bailouts. The Act created a Consumer Financial Protection Bureau, but did not repeal any provision of BAPCPA or restore the financial privacy of U.S. citizens removed by the USA PATRIOT Act. The Act failed to provide adequate funding to the government’s watchdogs, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Federal Bureau of Investigation (FBI), potentially hobbling enforcement. The Act has also been criticized for the burden it places on smaller competitors in the financial sector, which could ultimately result in an increased concentration of financial power in “too big to fail” banks.

Critics have alleged that, underlying the sub-prime mortgage meltdown that triggered the financial crisis in 2008 was rampant fraud. Fraud has been alleged at virtually every level from the assessment of property values and credit risk; to the loans themselves and to their securitization as MBS assets; to the ratings of MBS assets as AAA; to hedging or betting against MBS assets in the OTC derivatives market (perhaps including financial firms allegedly betting against MBS assets that they themselves created and sold to clients as AAA assets). After the crisis, a seeming pattern of fraud continued apparently unabated in the robo-signing foreclosure scandal where documents submitted to courts were falsified. Despite an avalanche of alleged crimes under existing federal law, no firm or individual of any significance in the financial crisis has yet been prosecuted.

President Barack Obama said in October 2011 that the mortgage finance practices leading to the economic meltdown were “immoral, inappropriate and reckless … but not necessarily illegal.” Since fraud is, in fact, illegal, critics claim that the U.S. federal government has simply failed to enforce the law. Adding fuel to the fire, the Solyndra loan scandal could be construed to suggest corruption at high levels and the MF Global debacle could be construed as indicative of weak regulation and law enforcement and even of questionable market integrity.

In theory, selective enforcement of the law risks the creation of two sets of laws: one for big banks and corporations, and for their executives, i.e., those with connections in Washington D.C. or on Wall Street, and one for everyone else. Among other things, failure to enforce the law could create an environment in which crime pays, but, for ordinary citizens, hard work, prudent financial decision making, saving and investing for the long term do not.

More than any other aspect of America’s progression towards 3rd world status, the federal government’s low level of law enforcement action where “too big to fail” banks are concerned is perhaps the most insidious because it raises questions of legitimacy and of the social contract. A financial and legal system of moral hazard implies that victims face double jeopardy while they are deprived of legal recourse, i.e., those allegedly defrauded might face inflation and tax burdens stemming from preferential treatment of favored corporations or from further bailouts.

Destructive Tax Policies

In the face of rising government debt, the rapidly shrinking American middle class is the primary target of the U.S. federal government’s tax policies. The eventual extinction of the American middle class would be a key milestone along the road to 3rd world status. Current U.S. tax policies favor the largest corporations and this is unlikely to change in the foreseeable future. Although tax increases exacerbate economic downturns, several tax options have been or are being discussed. However, none of them are likely to be put in place.

  • Increasing taxes on corporate profits would result in job losses in the short term and would affect dividends and share prices in the stock market. Lower dividends or share prices would affect pension funds, including government pension funds.
  • Increasing taxes on capital gains would impact the non-tax-exempt investments of the now retiring “baby boomer” generation and would reduce capital formation thus reducing investment in new businesses or business expansion and hampering job growth.
  • Increasing payroll taxes would cause companies to downsize resulting in job losses and would have a chilling effect on hiring.
  • A Value Added Tax (VAT) is impractical in the United States because countless special taxes already exist at all levels of the supply chain. To prevent unpredictable, disruptive consequences, implementing a VAT would require years of study and comprehensive tax reform.
  • A national sales tax is undesirable because it would overlap and interfere with already existing state sales taxes, which are highly inconsistent across states.
  • Carbon taxes remain possible but they would encumber businesses and result in job losses or reduce hiring.

Chief among the remaining possibilities is the income tax but, according to the Tax Policy center at the Urban Institute, Brookings Institution, 46% of American households will pay no federal income tax in 2011. The reasons include income tax exemptions for subsistence level income, dependents and nontaxable tax expenditures for senior citizens and low-income working families with children.

Assuming that big banks, multinational corporations and the wealthiest 1% of Americans remain off limits in terms of tax policy, the range of income taxed is likely to widen from the current tax on households earning more than $250,000 per year to progressively lower income levels. In fact, the government’s intended revenue source is precisely what remains of the once much larger middle class: professionals, small business owners and dual income families in urban areas, etc. These are the households that have managed to stay ahead of inflation, declining real wages and falling household incomes.

Among other things, U.S. tax policies will erode capital formation within the remnants of the middle class, which is the engine of small business creation and the source of most American jobs. The eventual result will be a three-tier socioeconomic structure consisting of a super rich wealthy class, a much poorer working class and a massive, politically and financially disenfranchised underclass, similar to that of a 3rd world country.

Via Dolorosa

The United States increasingly resembles a 3rd world country in terms of unemployment, lack of economic opportunity, falling wages, growing poverty and concentration of wealth, government debt, corporate influence over government and weakening rule of law. Federal Reserve monetary policies and federal government economic, regulatory and tax policies seem to favor the largest banks and corporations over the interests of small businesses or of the general population. The potential elimination of the middle class could reshape the socioeconomic strata of American society in the image of a 3rd world country. It seems only a matter of time before the devolution of the United States becomes more visible. As the U.S. economy continues to decline, public health, nutrition and education, as well as the country’s infrastructure, will visibly deteriorate. There is little evidence of political will or leadership for fundamental reforms. All other things being equal, the U.S. will become a post industrial neo-3rd-world country by 2032.

Soros: World Financial System on Brink of Collapse

by Brenda Cronin, The Wall Street Journal:

The world financial system not only isn’t functioning, it’s on the brink of collapse, according to investor George Soros.

The Hungarian-born philanthropist [Ed. Note: They meant 'psychopath', not 'philanthropist'], who recently spent time in areas where his charities are active, such as Africa, said he sees a growing bifurcation between emerging and developed countries – and he’s more confident about prospects for the emerging ones.

Despite their assorted problems, including corruption, weak infrastructure and shaky government, developing countries are relatively unscathed by the “deflationary debt trap that the developed world is falling into,” Mr. Soros said at a New York gathering to mark the 10th anniversary of the International Senior Lawyers Project, a group that provides pro bono legal services around the world. Mr. Soros was among those honored by ISLP, for his work as founder and chairman of the Open Society Foundations, which supports democracy and human rights.

The current global financial system is in a “self-reinforcing process of disintegration,” Mr. Soros warned, and “the consequences could be quite disastrous. You have to do what you can to stop it developing in that direction.”

While the economic and fiscal woes of the developed world remain critical, Mr. Soros said his recent travels gave him a sense of optimism about Africa and the Arab world.

“A lot of positive things are happening,” he said. “I see Africa together with the Arab Spring as areas of progress. The Arab Spring was a revolutionary development.”

However, he noted, Hungary’s 1956 revolution changed the political atmosphere but didn’t bear fruit until 1989.

“You can’t expect immediate success but what is happening will have a lasting impact,” he said.

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