Future of the U.S. (and the EU)

I received an email yesterday from Q Wealth Report alerting me to a blog post that I think is insightful. They suggested recipients forward their e-mail to "friends who may benefit from this information."

I'm trying to do them one better, yet honor their intentions. I am reproducing here the majority of Peter Macfarlane's post but including the majority of their "sales" text--at least to honor their [marketing] intent even while sharing at no cost the (in my opinion) useful insights:

Yesterday, 30th November 2011, something very significant happened that I would like to inform you about. It was briefly reported in the mainstream media, but was not analyzed correctly.

Lots of people have asked me recently if the Euro was going to collapse. Yesterday the answer to this question became very clear to me. I can now confidently make predictions. Is the Euro going to collapse? The answer is both yes and no. Allow me to explain. . . .

DICTATORSHIPS IN EUROPE, SUSPENSION OF CONSTITUTIONAL RIGHTS IN THE USA

Against my own advice to follow the big picture and avoid being distracted by day-to-day news, I got caught up in following the recent Euro crisis. Granted, it has certainly been quite spectacular. Italy’s and Greece’s democratically elected governments have been replaced by technocrats. The amazing thing is that most people don’t appreciate the severity of two EU governments effectively being replaced by dictatorships controlled from outside those countries. (Spain’s decisive change in government is more positive, the result of a landslide general election, and generally makes me more positive on Spain’s future.)

In the same way, most people don’t seem to appreciate the significance of Senator John McCain introducing an amendment on Tuesday that allows the American army to arrest and intern American citizens forever without the right to trial [I wrote about the subject yesterday here--JAH]. Call me old fashioned, but the mere fact that such a proposal could even be debated in the US Senate shocks me on one level . . . never mind the fact that it could actually pass. When I grew up, this was something we would have expected of the Soviet Union, not the USA. I think it was James Madison, the primary author of the US constitution, who said “If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy.” [Not actually. Or, at least, the statement cannot be confirmed. But Madison said very similar things. For example, "Perhaps it is a universal truth that the loss of liberty at home is to be charged against provisions against danger, real or pretended from abroad" (Letter to Thomas Jefferson (1798-05-13); published in Letters and Other Writings of James Madison (1865), Vol. II, p. 141) or "The means of defence agst. foreign danger, have been always the instruments of tyranny at home" (Speech, Constitutional Convention (1787-06-29), from Max Farrand's Records of the Federal Convention of 1787, vol. I [1] (1911), p. 465). --JAH]

. . . All this theatre distracted me from my own insight. I can now confidently say that the Euro will not appear to collapse. It will continue to exist in some form or another. Why? Because the Federal Reserve will not let the euro collapse. To do so would trigger a dollar collapse. . . .

Here are some selected quotes from Bloomberg and The Street (here and here) published yesterday, that tell the story:

The Federal Reserve, Bank of Japan, European Central Bank, Swiss National Bank, Bank of Canada and Bank of England have joined together to make more dollars available at cheaper prices in an effort to ease liquidity strains in financial markets.

Central banks agreed to establish temporary bilateral currency swap arrangements “so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant,” the Fed said today in a press release, calling the agreement a “contingency measure.”

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., called the bilateral arrangements “a novel step and a curious feature of today’s announcement” that “are apparently being set up as a backup plan in the event of a worsening in global financial conditions.”

So rather than European operations of Citigroup Inc. or Morgan Stanley seeking euros from the ECB, the Fed could contribute to euro liquidity by doling out loans to those institutions in the U.S.

Europe isn’t facing a liquidity crisis. The world is facing a structural solvency crisis in which businesses, governments and individuals have all borrowed money — and made promises — that cannot be repaid unless more money is printed (or, more specifically, until more credit is issued).

This actually strikes me as more than a little ‘curious.’ So now the Fed is going to start bailing out American banks with Euros???!!!

It doesn’t make a lot of sense . . . unless you go back to my original stealth devaluation premise, described in this Q Wealth article from November 2010 as well as earlier articles.

NO, THE EURO WILL NOT COLLAPSE

I take yesterday’s news as a clear signal that the euro is not going away any time soon. It will probably maintain approximately its current exchange rate against the dollar, give or take a few points. It is even likely to gain a bit, since this new multi-currency form of quantitative easing is clearly based on printing more dollars, not euros. So looked at from this point of view, I say the euro is not going to collapse.

One could certainly argue that America is bailing out Europe on one level. But I don’t really buy that either. America desperately needs to devalue the dollar as being the only hope of ever repaying debts. America is not in a better shape than Europe. The European crisis is nothing more than a distraction from a much bigger problem.

YES, THE EURO WILL COLLAPSE

On the other hand, in reality the euro already has collapsed, and it has a lot further to go. Looked at it from this point of view my answer is ‘yes, sure, the Euro will collapse.’ It’s just that the US and Canadian dollars, the yen, the pound sterling and the Swiss Franc are all going down the toilet too, in a co-ordinated global effort, at much the same speed. The central bankers are just hoping that the population won’t notice.

Of course, people are beginning to notice that something is wrong – very wrong. Grass roots citizen movements like the Tea Parties and the the ‘Occupy’ movements effectively share the same goal: to change a system of government that has become thoroughly corrupt, dysfunctional and despotic.

DECISIVELY CLOSER TO ONE GLOBAL CURRENCY

Yesterday we moved decisively closer to one, global currency, with the governments of major western economies all making this concerted move. Let’s look at how the euro came into existence, and consider the parallels with what we are seeing today wit the US, Canada, Japan, Switzerland, UK and the EU… According to Wikipedia:

In 1971, US President Richard Nixon removed the gold backing from the US dollar, causing a collapse in the Bretton Woods system that managed to affect all of the world’s major currencies. The widespread currency floats and devaluations set back aspirations for European monetary union. However in March 1979 the European Monetary System (EMS) was created, fixing exchange rates onto the European Currency Unit (ECU), an accounting currency, in order to stabilise exchange rates and counter inflation. It also created the European Monetary Cooperation Fund (EMCF).

That last organization sounds suspiciously similar to the European Financial Stability Fund (EFSF). Anyway, time passed, and internal bickering in Europe continued. Fast forward to 1999.

The currency was introduced in non-physical form (traveller’s cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the national currencies of participating countries (the Eurozone) ceased to exist independently in that their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro.

It was not until several years later that the euro as we now know it came into being. Still, a lot of people don’t want to give up the old currencies. As an aside, for example, I found this interesting:

Efforts to secure the return of German coins continue. In 2005, Deutsche Telekom modified 50,000 pay phones to take Deutsche Mark coins, at least on a temporary basis. Callers were allowed to use DM coins, at least initially, with the Mark pegged to equal one euro, almost twice the usual rate.

I suggest you take time to reflect on this precedent. I don’t have all the answers, but we do seem to be getting closer and closer to a situation where the US dollar, the euro, the pound and other currencies become ‘mere non-decimal subdivisions’ of a global currency unit. These things take time and are not immediately obvious. You should, however, be very scared by this prospect.

WHO ARE THESE CENTRAL BANKERS?

And who are these Central Bankers? Are they pawns of the Morgans, the Rothschilds, the Queen, the church, the Obamas, the corporatists, the globalists, creatures from Jekyll Island . . . ?

I really don’t care. If someone tries to mug me on the street, my instinct will be either to defend myself, or to make a pragmatic, fast decision that it’s smarter to comply with the attacker’s demands. But I certainly won’t be worrying about the pedigree of the attacker. The same applies here.

All I can say, is these people clearly have the support of all branches and forms of all major governments. That’s right, those nice people like Senator McCain who want the right to lock you in jail and throw away the key, without having to worry about trifling details like the facts of the case. “Facts,” says McCain, “are stubborn things.”

HOW LONG CAN YOU REMAIN LEGAL?

The time has certainly come – as if you are being mugged – to panic, then quickly and calmly to do whatever is necessary to save yourself and your family. If you can’t physically move yourself directly out of danger fast, the safest course of action is to keep up all appearances of complying with the attacker’s demands. That way you can stealthily move assets and family members out of harm’s way.

Where possible, you should not just maintain the appearance of compliance. You should actually be compliant. That is still possible, just. In The Q Wealth Report, we frequently give you details of compliant offshore banking and investment structures.

However, you should keep in mind that one day soon, the time might come when it is impossible to remain compliant. Hidden currency and exchange controls like FATCA are hastening this day. When that day finally arrives, you will be forced to make possibly the most difficult decision of your life – do you break the law, or do you allow the government to pillage your assets? If you are not very careful, you might end up doing both.

PROTECTING YOURSELF WITH A SECOND CITIZENSHIP

There are ways to protect yourself. Obtaining a second foreign passport for you and your family is one of the best. This will give you the option of renouncing your existing citizenship later. It’s very relevant for US citizens now, but could also be relevant for citizens of other countries that, out of desperation, will try to follow the US lead and tax even their non-resident citizens on worldwide income. FATCA will put the information required to do this at their fingertips.

Look at the example of Uruguay. Uruguay long taxed its residents only on domestic income. But last year, they suddenly announced that forthwith, Uruguayan residents would also be taxed on income from overseas investments. To paraphrase the President, he said the only reason they hadn’t taxed overseas income before was that they didn’t have the means to do so. The signing of a series of tax information exchange agreements, ironically under the pressure of the OECD who considered Uruguay a tax haven, had changed this. [And] now, with these treaties, they did have access to information on the overseas holdings of Uruguayans. So they started taxing.

The UK, Canada, France or Australia could turn around and do the same thing tomorrow – and in the current climate, rich tax exiles would undoubtedly be a politically popular target.

You’ll find more information on second passports here and in almost every issue of The Q Wealth Report.

BUY PHYSICAL GOLD

Gold already shot up yesterday on the news of the new multi-currency QE program. Physical gold stored in a safe, offshore jurisdiction is undoubtedly one safe store of value. As I said in my original stealth devaluation articles, those who look at gold as their base reference currency, rather than as a simple investment, will see the real crash of the euro, the dollar, the pound et al.

Don’t be fooled into buying things like the Gold ETF. Find out why in our Free Gold Report.

OFFSHORE BANK ACCOUNTS TO AVOID THE GLOBAL STEALTH-DEVAULATION CONSPIRACY

As bad as government-issued fiat money is, you’ll probably need to keep some in the short term at least. For this reason, we recommend opening a multi-currency bank account somewhere offshore (that is, outside your home country and its immediate sphere of influence). This way you can keep money out of the big currencies, in the money of nations that are not participating in the global stealth devaluation conspiracy.

This will give you access, for example, to offshore credit and debit cards that work across the board – always provided plastic payment cards continue to be accepted, bearing in mind that emergency currency controls could cut them off at any time.

Further information on the practicalities of how to open an offshore multi-currency bank account, including anonymous numbered accounts (yes – they still exist!) and offshore corporate bank accounts, is available in Q Wealth’s Practical Offshore Banking Guide. The 2011 edition is currently available for download in our Members’ Area, and will be replaced before the end of the year with the drastically updated 2012 edition.

READ Q WEALTH REPORT

There’s a lot more I could say about practical strategies for protecting your assets, but I’ll save that for the articles my colleagues and I write regularly in The Q Wealth Report and our series of exclusive special reports. . . .

If you’re not ready to make a monetary commitment yet, please consider signing up for our free newsletter and/or free sample reports on important topics that are available at this site. Remember there is no obligation, you are free to unsubscribe at any time, and we will not pass your e-mail address to any third parties.

To conclude on a positive note, as I said at the beginning, the crisis we are just entering now will result in huge transfers of wealth, more than we have seen in our lifetimes. Those who keep their savings in fiat money will lose most of it. Those who invest their fiat money smartly and quickly, while it still buys things that are of value, stand to make almost obscene profits.

I don't know how "positive" that last paragraph is. Though it certainly bothers me to think I may be on the "wrong" side of currency devaluation!

I keep reading this kind of stuff. I keep posting. But will I take action? When?

Is your bank likely to fail?

I just came across this article about risky banks. It lists the riskiest ones--organized alphabetically by state.

I haven't heard too much about the current banking crisis. Nothing like the S&L crisis of the late '80s. Of course, that's because it is nowhere near as large . . . yet. (According to Wikipedia, "Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance." Meanwhile, "From 1986 to 1995, the number of federally insured savings and loans in the United States declined from 3,234 to 1,645." The "U.S. General Accounting Office estimated cost of the crisis to around USD $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government from 1986 to 1996." --By contrast, there have been all of just over 300 bank failures so far in the last three years--25 in 2008, 140 in 2009, and 149 so far in 2010, and the cost to the FDIC and/or federal government has been just under $60 billion.)

Still, it can't hurt to be aware of the risks you face. As the risky banks article--updated as of a week ago--notes,

In a typical year, a bank should expect to lose about 32 cents for every $100 it lends. Right now, however, banks are losing $2.64 on $100 in loans.

This problem is made worse by bank's deteriorating financial condition. At the beginning of 2007, banks had $1.80 in cash reserves for every dollar of loans that were past due. So even if all those loans went belly up -- and not all past-due loans will -- the banks were more than covered. Today, banks have only about 80 cents for every dollar of problem loans.

And, of course, that is banks in general.

So how can anyone tell if a bank is at risk of failing?

The FDIC does not release its problem loans list, it only says how many banks are on it. But using a special ratio that measures a bank's problem loans (the precursor to the loans that are eventually charged off), investors can determine with a high degree of accuracy whether their bank is safe.

It's called the "Texas ratio." It was developed by a financial wizard at RBC Capital Markets named Gerard Cassidy, who used it to correctly predict bank failures in Texas during the 1980s recession, and again in New England in the recession of the early 1990s.

The Texas ratio is determined by dividing the bank's non-performing assets by its tangible common equity and loan-loss reserves. Tangible common is equity capital less goodwill and intangibles. As the ratio approaches 1.0, the bank's risk of failure rises.

With only 3 exceptions, every bank that has failed in the second or third quarter has had a Texas ratio greater than 0.90.

There are an awful lot of banks with Texas ratios over 0.90! There are 94 with ratios over 2.00!

Check out the list and do a "Find" on your bank's name. "And if your bank has a high or even a higher-than-average Texas ratio, then for heaven's sake go in tomorrow and close your accounts. It's always best to get out of Dodge ahead of the posse."

The state of America's biggest banks: Zombies, Walking Wounded, Risky but Proud, or Hidden Gems?

I thought this article was interesting: The Top 12 U.S. Banks: From Zombies to Hidden Gems. Is yours one of these? (Ours is. "Risky but Proud.")

For the closest parallel to the current financial panic . . . go back to 1873

Scott Reynolds Nelson, a professor of history at the College of William and Mary, has written an intriguing paper that urges analysts to abandon the idea that the current financial panic is most closely parallel to the Great Depression.

According to most historians and economists, that depression had more to do with over-large factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now.

Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.

I found the details Nelson puts forward quite fascinating . . . and I appreciate having my financial time horizon pushed back another 60 years.

Check out The Real Great Depression in The Chronicle of Higher Education, "The Chronicle Review" for October 17, 2008: Volume 55, Issue 8, Page B98.

D*mn it feels good to be a banksta!

Youch!

A banksta rap song. (Warning: crude lyrics . . . apparently in the style of what I understand is called gangsta rap. --Sorry about my cultural illiteracy. I have never really listened to that kind of music . . . except, perhaps, in cringing disgust as some guy drives up in an over-amped, super-bassed car. . . .)

The song, I think, is an appropriate put down of the money-bags on Wall Street and in Washington who have shaken down the American public for hundreds of billions of dollars.

Insane SEC policy that, perhaps more than anything else, led to the banking crisis . . .

An "unbelievable" SEC [Securities and Exchange Commission] policy agreed to in 2004 led to massive over-leveraging of the United States' largest brokerage and investment banking houses.

I don't understand why I never heard of this before. But it is certainly upsetting . . . and, in my opinion, worthy of criminal censure of the primary participants--both those who profited directly from it as well as those who obviously abdicated their oversight responsibilities.

“We have a good deal of comfort about the capital cushions at these firms at the moment,” [said] Christopher Cox, chairman of the Securities and Exchange Commission, [on] March 11, 2008.

As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.

[But then, d]rained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.

Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks.

How could Mr. Cox have been so wrong?

Read the story of an April 28, 2004, meeting of the five-member Securities & Exchange Commission at which the biggest brokerage and banking houses asked for an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on.

One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.

“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.” . . .

After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt.

In other words, if the market declined by only 3%, Bear Stearns would become completely devoid of all assets.

Other firms didn't quite leverage to the same degree, but they went far beyond what they had been permitted to do prior to the decision. . . .

You can read the entire stinking story at the New York Times.

Poor bankers are having to fly Economy class . . . and the airlines are hurting more than ever

Merrill Lynch & Co., UBS AG and JPMorgan & Chase Co. are telling senior bankers in Asia to fly coach on short-haul flights and reduce non-essential travel as they step up cost cuts, officials at the firms said.

UBS advised bankers this month to travel economy class for flights of up to five hours, two officials at the biggest Swiss bank said, asking not to be identified because it's an internal policy. Merrill employees have been told to travel economy for flights of as much as three hours since mid-September, two executives at the firm said. . . .

JPMorgan, the biggest U.S. bank, has requested senior bankers fly economy on flights of less than three hours since late August, said an official who declined to be identified. . . .

Royal Bank of Scotland Plc, which ceded majority control to the U.K. government this month, in an Oct. 16 memo asked workers worldwide to fly economy on regional routes and to cut back on travel, said an RBS banker who's seen the document. RBS spokeswoman Hui Yukmin declined to comment.

HSBC Holdings Plc's Asia unit asked its Hong Kong department heads and branch managers to cut travel expenses by 15 percent to 20 percent next year, two officials at the bank said, citing a Sept. 23 memo sent by Chief Operating Officer Jon Addis. . . .

And so it goes.

Poor guys. No more free alcoholic beverages, oversized seats, or extra legroom on short-haul flights!

So sad.

. . . But it really does put the pinch on the airlines, since First and Business Class travel normally provides such a large proportion of their income (and, therefore, profits).

More at Bloomberg.com.