Saturday, October 25, 2008

Remain calm, all is well.

Below is a VERY SCARY chart from the Federal Reserve's website that has just been updated, which plots the "non-borrowed reserves of depository institutions" or in oversimplified English: "how much actual money banks have available to return to the people with bank accounts."

Now remember, the Federal Reserve is a private, for profit corporation with a no-bid government "contract" to print our money. At this point, the Fed has agreed to accept not just U.S. Treasuries as collateral from other banks, but dodgy, sketchy commercial paper that cannot be sold for more than 10-40 cents on the dollar. By the way, this dodgy collateral is losing value by the day as home values continue to plunge and people are scared to invest in these exotic instruments of mass financial destruction. How will the banks pay all the money they borrowed back to the Fed? What will the Fed do when this dodgy collateral loses even more value while it is still on their balance sheet?

I'm not saying banks are a lousy investment right now (although they are), I'm saying that banks are bankrupt and have no money. They took all the money we "gave" them in the form of deposits, leveraged up to the hilt in a rampant gambling scheme, and lost all of our money. The Fed is trying to bail them out, but make no mistake about it, the Fed will not risk their entire franchise to save all the banks.

So, when the banks continue to fall like dominoes, the FDIC will step in and guarantee all the deposits. But where will the FDIC get the money? Perhaps another bailout package?

Perhaps anyone making over 100 dollars a year should donate it all to the government and the FDIC. It would be patriotic as hell! Then, the government can give the citizen-donated money to the banks and the banks can loan the money back to us at a low, low interest rate (but hurry, this special rate won't last!). Of course, the congressional bill to accomplish this will require that 20-30% of the donated money must be used to bribe the congress to pass the bill they wrote, so we won't be able to get all the money lent back to us after we donate it. Such is the cost of freedom, but dammit we're American and we're the greatest!

I'm not trying to slam just America, because this is a global monetary system gone mad. How can almost everyone in the world accept that money can be printed into thin air, backed by nothing, and that this can lead to a stable system? The boom and bust swings are getting wilder, not tamer, since we gave the Federal Reserve the keys to our monetary kingdom. Bust dead ahead and it will be vicious, violent, and unprecedented. Remember, the Great Depression was not an event, but a long, drawn out process.

People who think gold bugs are crazy need to look in the mirror. A gold standard for money is a leash on unchecked government power and unchecked government spending. The leash is broken and a big, rabid government dog is on the loose and hungry for blood (and our wallets). If gold is a stupid investment, why does our government (and every other major government in the world) hold and own so much of it? Do what we say, not what we do? Why did the U.S. government make personal/private gold ownership illegal for 40 or so years? Is gold really that dangerous and, if so, why?

Bottom line: common sense is gone and the stock market is going to follow it into oblivion before we can have a meaningful recovery. If you haven't done so already, use the coming stock market rally to get out of general stock market investments (all stocks other than gold stocks). I prefer a heavier allocation to gold than cash (though I hold both), because the system backing our cash is much more fragile than anyone holding the reigns of power (or campaigning for office) knows and/or cares to admit.

Wikinvest Wire