2008 can be best described as the year of crisis. Each crisis was managed by some form of monetisation and explained away by the multilevel cheerleaders as "the bottom". I am still trying to work out how a debt problem can be solved by more debt, but that's a topic for another day. When you sit back and look at the crisis beginning with Northern rock in August 2007, it is very clear that each problem increases in size and the interval between events is diminishing. Despite the CNBC muppets, financial insiders and government calling a bottom I'm not so sure. An Obama rally for a few months maybe but we have not seen the ultimate bottom yet.

Ask most financial experts and they will say with a high degree of confidence that most of the "bad news" is now behind us and markets have fully discounted the consequences so 2009 shapes up as a bullish year for stocks. After all central banks and governments have saved us from the abyss several times: subprime, Bear Stearns, Fannie & Freddie, Northern Rock, IndyMac Bank, AIG, Lehmann Brothers, Iceland, Madoff etc etc. We have had bailouts, nationalisations, shotgun mergers, stimulus packages, infrastructure spending programs, interest rate cuts, monetisation of debt, quantitative easing and money printing Wiemar style. Add in Obama as the saviour of the free world and how could things not be on the improve?

The financial world is full of opinions about the future that are completely wrong and never held to account. As an example last years Barron's economic round table included some of the best and brightest financial minds providing a forecast for the S&P500 by year end 2008. The highest forecast was 1750 and the lowest was 1500. With 2 trading days remaining in 2008 the S&P sits at about 850. A fair miss! However when you think about the incentives for the so called experts in the financial industry their overly bullish bias should not be a surprise. After all they and the firms they work for generate much more income in rising markets than falling ones.

Another aspect of this bullish bias played out in an almost comedic fashion in 2008. CNBC, the chief cheer leading investotainment channel, presented guest after guest who predicted the bottom was in. Full credit to their consistency of purpose as evidently the bottom was in for stocks at Dow 13,000, 12,000, 11,000, 10,000, 9000 and finally 8,000. Lead muppet Larry Kudlow and his goldilocks economic theory is such a goose I am surprised that CNBC management still roll him out. Again when you look at the incentives, CNBC profitability is enhanced when market participation is highest, and that occurs in rising markets. Their bullish bias should be no surprise.

Finally we come to the Treasury and the Fed. What a year. Hank Paulson and Ben Bernanke have been the commanders in chief of cheer leading. The worst was behind us after subprime and Bear Sterns, Fannie and Freddie are fine and well capitalised, housing prices have bottomed, the American economy is not in recession, the banking system is sound and the now famous "give me a bazooka but I won't need it" speech. As Jim Rogers so eloquently puts it "if I came onto Bloomberg 100 weeks in a row and was completely wrong would you invite me back?" Who is holding these guys to account? Some of the statements made under oath by Bernanke and Paulson mean they are liars or stupid, and I'm fairly certain you don't become Treasury Secretary of Chairman of the Fed being stupid. To be fair, markets are a confidence game so some level of optimism in a crisis is warranted but in reality the multi level cheer leading and unwillingness to take short term pain will have much larger consequences in the future.

So what might be the next crisis? I think Credit Default Swaps (CDS) will be the big story of 2009. CDS will dwarf all previous crisis events and if the cheerleaders run out of fingers to plug holes in the dyke 2009 will be an historic year for all the wrong reasons. Please read the following article on CDS Derivatives by Ellen Brown and then ask yourself a few simple questions:

1. Have the experts, media or governments called it right so far?
2. Are the problem events diminishing in size or time interval?
3. Do you think Madoff is the only ponzi scheme? (think US government)
4. When the game of musical chairs stops who will be holding the toxic derivatives?
5. How can governments pay for all the bailouts without raising taxes?
6. Are you aware bail outs, monetisation, quantitative easing, stimulus etc equals money printing?
7. Are you aware money printing equals inflation?
8. Are you aware inflation is a hidden tax?
9. Are you aware gold and silver are best way to protect your family and wealth
10.Do you know time is running out to act?

IT’S THE DERIVATIVES, STUPID!
Ellen Brown, September 18, 2008

“I can calculate the movement of the stars, but not the madness of men.”
– Sir Isaac Newton, after losing a fortune in the South Sea bubble

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”

Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?

The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.

The Anatomy of a Bubble
Until recently, most people had never even heard of derivatives; but in terms of money traded, these investments represent the biggest financial market in the world. Derivatives are financial instruments that have no intrinsic value but derive their value from something else. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets.

“The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing.”1 They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services. In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling. But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.” Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked. But the cost was an increase in risk to the financial system as a whole.2

Since then, derivative trades have grown exponentially, until now they are larger than the entire global economy. The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars.3 How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in.

Credit default swaps (CDS) are the most widely traded form of credit derivative. CDS are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes. In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims.

And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down. Players who have “hedged their bets” by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets.

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.” It is also why the banking system cannot let a major derivatives player go down, and it is the banking system that calls the shots. The Federal Reserve is literally owned by a conglomerate of banks; and Hank Paulson, who heads the U.S. Treasury, entered that position through the revolving door of investment bank Goldman Sachs, where he was formerly CEO.

The Best Game in Town
In an article on FinancialSense.com on September 9, Daniel Amerman maintains that the government’s takeover of Fannie Mae and Freddie Mac was not actually a bailout of the mortgage giants. It was a bailout of the financial derivatives industry, which was faced with a $1.4 trillion “event of default” that could have bankrupted Wall Street and much of the rest of the financial world. To explain the enormous risk involved, Amerman posits a scenario in which the mortgage giants are not bailed out by the government. When they default on the $5 trillion in bonds and mortgage-backed securities they own or guarantee, settlements are immediately triggered on $1.4 trillion in credit default swaps entered into by major financial firms, which have promised to make good on Fannie/Freddie defaulted bonds in return for very lucrative fee income and multi-million dollar bonuses. The value of the vulnerable bonds plummets by 70%, causing $1 trillion (70% of $1.4 trillion) to be due to the “protection buyers.” This is more money, however, than the already-strapped financial institutions have to spare. The CDS sellers are highly leveraged themselves, which means they depend on huge day-to-day lines of credit just to stay afloat. When their creditors see the trillion dollar hit coming, they pull their financing, leaving the strapped institutions with massive portfolios of illiquid assets. The dreaded cascade of cross-defaults begins, until nearly every major investment bank and commercial bank is unable to meet its obligations. This triggers another massive round of CDS events, going to $10 trillion, then $20 trillion. The financial centers become insolvent, the markets have to be shut down, and when they open months later, the stock market has been crushed. The federal government and the financiers pulling its strings naturally feel compelled to step in to prevent such a disaster, even though this rewards the profligate speculators at the expense of the Fannie/Freddie shareholders who will get wiped out. Amerman concludes:

“[I]t’s the best game in town. Take a huge amount of risk, be paid exceedingly well for it and if you screw up -- you have absolute proof that the government will come in and bail you out at the expense of the rest of the population (who did not share in your profits in the first place).”4

Desperate Measures for Desperate Times
It was the best game in town until September 14, when Treasury Secretary Paulson, Fed Chairman Ben Bernanke, and New York Fed Head Tim Geithner closed the bailout window to Lehman Brothers, a 158-year-old Wall Street investment firm and major derivatives player. Why? “There is no political will for a federal bailout,” said Geithner. Bailing out Fannie and Freddie had created a furor of protest, and the taxpayers could not afford to underwrite the whole quadrillion dollar derivatives bubble. The line had to be drawn somewhere, and this was apparently it.

Or was the Fed just saving its ammunition for AIG? Recent downgrades in AIG’s ratings meant that the counterparties to its massive derivatives contracts could force it to come up with $10.5 billion in additional capital reserves immediately or file for bankruptcy. Treasury Secretary Paulson resisted advancing taxpayer money; but on Monday, September 15, stock trading was ugly, with the S & P 500 registering the largest one-day percent drop since September 11, 2001. Alan Kohler wrote in the Australian Business Spectator:

“[I]t’s unlikely to be a slow-motion train wreck this time. With Lehman in liquidation, and Washington Mutual and AIG on the brink, the credit market would likely shut down entirely and interbank lending would cease.”5

Kohler quoted the September 14 newsletter of Professor Nouriel Roubini, who has a popular website called Global EconoMonitor. Roubini warned:

“What we are facing now is the beginning of the unravelling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank-like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank.”

The risk posed to the system was evidently too great. On September 16, while Barclay’s Bank was offering to buy the banking divisions of Lehman Brothers, the Federal Reserve agreed to bail out AIG in return for 80% of its stock. Why the Federal Reserve instead of the U.S. Treasury? Perhaps because the Treasury would take too much heat for putting yet more taxpayer money on the line. The Federal Reserve could do it quietly through its “Open Market Operations,” the ruse by which it “monetizes” government debt, turning Treasury bills (government I.O.U.s) into dollars. The taxpayers would still have to pick up the tab, but the Federal Reserve would not have to get approval from Congress first.

Time for a 21st Century New Deal?
Another hole has been plugged in a very leaky boat, keeping it afloat another day; but how long can these stopgap measures be sustained? Professor Roubini maintains:

“The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure. . . . [P]lugging and filling one hole at [a] time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.”6

We may soon hear that “the credit market is frozen” – that there is no money to keep homeowners in their homes, workers gainfully employed, or infrastructure maintained. But this is not true. The underlying source of all money is government credit – our own public credit. We don’t need to borrow it from the Chinese or the Saudis or private banks. The government can issue its own credit – the “full faith and credit of the United States.” That was the model followed by the Pennsylvania colonists in the eighteenth century, and it worked brilliantly well. Before the provincial government came up with this plan, the Pennsylvania economy was languishing. There was little gold to conduct trade, and the British bankers were charging 8% interest to borrow what was available. The government solved the credit problem by issuing and lending its own paper scrip. A publicly-owned bank lent the money to farmers at 5% interest. The money was returned to the government, preventing inflation; and the interest paid the government’s expenses, replacing taxes. During the period the system was in place, the economy flourished, prices remained stable, and the Pennsylvania colonists paid no taxes at all. (For more on this, see E. Brown, “Sustainable Energy Development: How Costs Can Be Cut in Half,” webofdebt.com/articles, November 5, 2007.)

Today’s credit crisis is very similar to that facing Herbert Hoover and Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s ploy failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.

The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the Pennsylvania provincial government, which originated the money it lent, the RFC had to borrow the money first. The RFC was funded by issuing government bonds and relending the proceeds. Then as now, new money entered the money supply chiefly in the form of private bank loans. In a “fractional reserve” banking system, banks are allowed to lend their “reserves” many times over, effectively multiplying the amount of money in circulation. Today a system of public banks might be set up on the model of the RFC to fund productive endeavors – industry, agriculture, housing, energy -- but we could go a step further than the RFC and give the new public banks the power to create credit themselves, just as the Pennsylvania government did and as private banks do now. At the rate banks are going into FDIC receivership, the federal government will soon own a string of banks, which it might as well put to productive use. Establishing a new RFC might be an easier move politically than trying to nationalize the Federal Reserve, but that is what should properly, logically be done. If we the taxpayers are putting up the money for the Fed to own the world’s largest insurance company, we should own the Fed.

Proposals for reforming the banking system are not even on the radar screen of Prime Time politics today; but the current system is collapsing at train-wreck speed, and the “change” called for in Washington may soon be taking a direction undreamt of a few years ago. We need to stop funding the culprits who brought us this debacle at our expense. We need a public banking system that makes a cost-effective credit mechanism available for homeowners, manufacturing, renewable energy, and infrastructure; and the first step to making it cost-effective is to strip out the swarms of gamblers, fraudsters and profiteers now gaming the system.

Today marks the 4 year anniversary of one of the wost natural disasters in human history. On December 26th 2004 a Tsunami, caused by an earthquake in the Indian Ocean, devastated heavily populated coastal areas of Asia and Africa. According to the United Nations 229,866 people are lost, dead or missing as a direct result of the Tsunami. Including delayed impacts, such as disease and fatal injury, the death toll is estimated to be greater than 350,000.

Our thoughts and prayers go out to the individuals, families, communities and nations impacted by this horrific event.

At the time no warning systems existed in the Indian Ocean. If initial seismology readings were connected to a warning system most people would have had 30 minutes to several hours to evacuate to higher ground. The death toll could have been dramatically lower. Today Tsunami warning systems have been established across the Indian Ocean and connected regions.

Even without this early warning system the death toll could have been dramatically reduced. Tsunamis have a very distinct behavioural pattern. The first part of a tsunami to reach land is a trough (draw back) rather than a crest of the wave, the water along the shoreline may recede dramatically, exposing areas that are normally always submerged. This can serve as an advance warning of the approaching tsunami.

As I reflect on the warnings and terrible consequences of the Asian disaster, I can’t help draw parallels to an inflation tsunami headed our way. The warning signs have been there all along: loose monetary policy, asset bubbles, competitive currency devaluations, bail outs, excessive debt and leverage, lax or even corrupt regulatory oversight, excessive government and manipulated asset markets.

Jens O Parssons in the Dying of Money: Lessons of the Great German & American Inflations (Wellspring Press, 1974, p.71) best describes the initial ignorance, early warning signs and final consequences of inflation.
"Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation"

For the many deflationists out there take particular note of the Parssons comments re faltering prosperity and tightness of money. This is a normal phase of inflation. Using the tsunami parallel first the ocean disappears (draw back) and its all sand for miles in front of you then out of nowhere appears a giant wall of water 10 stories high.

Right now most people are standing on the beach saying “where has all the water (cash) gone?” Those well studied on the patterns of tsunamis understand what this signals and have moved their families to higher ground by protecting themselves with physical gold and silver.

The tragic events in Iceland should be a clear warning as to what lies ahead for many western nations. Years of excessive debt, leverage and reliance on a service based financial economy has resulted in a collapsing house of cards. At the core this is a currency crisis. Over time the crisis manifests itself as a range of financial, economic, social and political problems. Here's a simplistic view of the various stages:

Stage 1 - loose domestic monetary policy
Stage 2 - easy access to foreign credit
Stage 3 - asset bubbles in stocks and housing
Stage 4 - booming financial services economy
Stage 5 - asset price growth decelerates
Stage 6 - foreigners start to withdraw credit
Stage 7 - government compensates with monetary and fiscal stimulus
Stage 8 - currency weakens
Stage 9 - asset prices start to decline
Stage 10 - unemployment increases
Stage 11 - foreign credit withdrawal accelerates
Stage 12 - monetary and fiscal stimulus accelerates
Stage 13 - foreign credit withdrawal accelerates
Stage 14 - currency decline accelerates
Stage 15 - interest rates increase
Stage 16 - domestic prices for food and basic necessities increase
Stage 17 - asset price declines accelerate
Stage 18 - scarcity of foreign imported goods
Stage 19 - scarcity of basic necessities
Stage 20 - civil unrest
Stage 21 - government legislated price controls
Stage 22 - chronic food and basic necessity shortages
Stage 23 - hyperinflation
Stage 24 - economic collapse
Stage 25 - riots and social structure collapse
Stage 26 - political instability and demand for change
Stage 27 - rise of an extremist leader
Stage 28 - legislative/constitutional change giving government more power
Stage 29 - blame is externalised
Stage 30 - external conflict

The following article from Bloomberg would suggest Iceland is around stage 20. Where do you think the US, UK, Australia and New Zealand might be?

(Bloomberg) -- It was the week before Christmas in Reykjavik, and all through the town Eva Hauksdottir led a band of 60 whistle-blowing, pan-banging, shouting demonstrators.

“Pay your own debts,” they yelled as they visited one bank office after another in Iceland’s capital. “Don’t make the children pay.”

When she isn’t leading one of the almost daily acts of protest in this land devastated by the global financial meltdown, Hauksdottir sells good luck charms made from the claws of ptarmigans, a local bird, and voodoo dolls in the form of bankers. She says she expects to lose her home, worth less than when she bought it two years ago, after the amount she owes jumped more than 20 percent.

Unrest following the end of a five-year economic boom is overshadowing the holidays in a country of 320,000 near the Arctic Circle, where the folklore is filled with magic, trolls and elves. Expansion ended with the collapse of the U.S. subprime mortgage market. The fallout in Iceland may presage civil disruptions elsewhere, as job losses multiply and credit bills come due. Few nations can count themselves safe, says Ian Bremmer, president of the New York-based Eurasia Group, which analyzes political risk for businesses.

“As people have their expectations changed radically, you can have protests come out of nowhere,” even in developed countries, Bremmer said.

‘Maybe Axes’

Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.

Hauksdottir, the owner of a Reykjavik witchcraft shop, says over a cup of thyme and juniper tea that only civil disobedience can force banks to stop collecting debts that people can’t pay.

“We’ll use our voices, and then if we have to we’ll use our hands, and maybe axes,” Hauksdottir says.

At Reykjavik’s half-built concert hall, a symbol of the good times that juts from the harbor toward the North Pole, the visitor center is closed to visitors. The principal owner, Landsbanki Islands hf, failed in October. Marketing director Thorhallur Vilhjalmsson says he’s making ends meet on severance pay.

“Iceland right now is like Chernobyl after the blast,” Vilhjalmsson says. “It looks normal, but there’s radiation.”

Kicking Down Doors

The protests may escalate as bills come due and severance pay runs out for those who lost jobs at the three biggest lenders, including Landsbanki, the second-largest, says Stefan Palsson, a historian. He once led the Campaign Against Militarism, opposing NATO bases in the 1960s.

He said he’s surprised ordinary people are backing activists once considered “hooligans.” There was public outrage three years ago when environmentalists poured yogurt over aluminum representatives to protest a new plant.

“Now you have protesters kicking down doors at police stations, and respectable elderly people saying ‘Well, they’re young and full of enthusiasm, and anyway, they’re right!’” he said.

Inflation rose to 18.1 percent this month, and the International Monetary Fund predicts that Iceland’s economy will shrink 9.6 percent next year. The Washington-based global lender of last resort put together a rescue package for the country worth as much as $5.3 billion last month.

No-Debt Ethics

The decline in the krona and surge in prices are creating a triple whammy for borrowers whose home loans are typically linked to inflation or foreign currencies. Households owed more than double their disposable income at the end of 2006, almost twice the level in the U.S., according to the IMF.

Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, “Independent People,” by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: “I don’t owe anyone a penny.”

That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church.

“I grew up learning that you work for what you get, but kids today just get what they want,” Asgeirsson says. “Now I can hear parents say ‘No, my little boy, it’s not that easy.’”

Ultra bullish news from Lemetropole Cafe. Goldman Sachs, the gold supression cartel leader, has shifted from net short to net long gold. This is an extremely significant occurance for gold.

In the December 18 session on the TOCOM Goldman Sachs COVERED an absolutely gob-smacking 1,307 gold short contracts which reduces their short position to just 495 contracts and leaves their long position unchanged at 1,337 contracts and makes them NET LONG – REPEAT, NET LONG 842 contracts. This is an absolutely stunning development! This is the largest net long position they have held ever since I have been tracking the TOCOM data which is almost 3 years. Considering Goldman’s role in the Cartel and links to the Treasury this is of earth shattering significance. It should also be noted that for ANY trader to be buying 1.3 tonnes of gold in a single day it deserves attention, when it is Goldman Sachs it has special significance.
There are more and more signs that the gold market is about to make a very big upwards move.

by John Browne, Euro Pacific Capital

The Federal Reserve estimates that in the past year losses in real estate, stocks and mortgages have sucked out some $7.2 trillion of wealth from the U.S. economy. Some are now putting the figure at $20 trillion. A massive recession is starting and will likely spread throughout much of the world. These forces have exerted their classic strong downward pressure on the price of gold.

In addition, the $700 billion TARP fund to salvage the American financial system, and large amounts spent by other governments to protect their own banks, has greatly reduced the fear of a financial breakdown. As a result, the financial panic insurance value of gold was largely eroded, adding further downward price pressure.

2008 was a volatile year for gold. Prices have gyrated quite violently between the $700's and $1,000, or by some 25 to 30 percent. This volatility alone acts as a depressing influence on gold prices as it discourages the belief that gold is a credible investment.

The world's major governments long have sought to eradicate gold as a monetary measure in order to remove the last vestiges of monetary discipline and to clear the field for massive government over-spending and inflation.

In 1968, the London Gold Poll was abolished. In 1978, America forced a further move, via the IMF, to write gold out of the international money supply. In August 1971, President Nixon broke the U.S. dollar-gold exchange link.

In September 1999, the United States, while being careful to keep its own gold stocks intact, led other major nations, in the first of two so-called 'Central Bank Gold Agreements' to flood the gold market with sales of gold.

In 1999, the central banks held some 33,000 tonnes, or one quarter of all mined gold. The effect of government gold sales was potentially very bearish for gold.

Gold market observers, who have studied the pattern of IMF gold sales, allege that the sales are timed to cause the maximum volatility in the price of gold, to discourage investment.

More recently, there are allegations that the Government has allowed certain institutions to engage in massive naked short selling of gold and silver. This has caused distortions in the gold price that do not reflect genuine market pressures. In short, they amount to market manipulation.

A fair conclusion is that gold is cheap and that its present price does not truly reflect market conditions.

On December 16th, the Fed announced, as we have long forecast, a further cut in interest rates to between zero and 0.25 percent. It also announced 'unlimited' support to buy assets from beleaguered institutions.

The amount of debt and new money injected into the economy should progressively raise inflation alarm bells. The fire of future inflation is being stoked alarmingly, but the recessive forces of deleveraging are concealing it temporarily.

The Fed looks desperate. This could lead to feelings of panic and upward pressure on the gold price.

Investors should also especially be concerned as to who will repay these massive debts. The conventional answer of politicians is "taxpayers". But this is a serious understatement. Any depreciation of the U.S. dollar means that every American citizen and every single holder of U.S. dollars throughout the world will suffer from monetary loss and a severely reduced standard of living.

In 1934, facing a depression President Roosevelt first confiscated gold from every American. Then, he unilaterally devalued the U.S. dollar by 75 percent against gold.

At a stroke, FDR wiped out 75 percent of the dollar denominated debt of the U.S. Treasury.

As both President-Elect Obama and Fed chairman Bernanke are students of FDR, we face the real possibility of a massive devaluation of the U.S. dollar against gold in 2009.

Finally a break out!

It's been hard work but both gold and silver made their much anticipated break outs to the upside this week. Despite some weakness later in the week, the Friday closes for both metals is extremely constructive for a continued move higher.

Silver

Silver was particularly strong this week bursting through the $10.60 level (on its 5th attempt) then rallying to our next resistance level of $11.39. A pull back later in the week tested and held $10.60 (a very bullish sign) before closing at $10.84. The MACD & RSI indicators remain bullish. With $10.60 behind us and one attempt at $11.39 already I am extremely confident of a my $13.66 target before years end. Give it took 5 attempts to break $10.60 level it should become strong support on the downside. I remain bullish on silver unless we see a weekly close below $8.93.

Silver USD weekly (click on chart for larger view)

Gold

Gold also broke its long standing overhead resistance of $830 racing as high as $888 early in the week. Like silver, a retest and hold of the old resistance level is bullish, however I would have liked to have seen a close a bit higher than the $836 settling price. The old 1980 high of $850 may be a bit of a hurdle for gold but seeing how easily it broke this number on Tuesday that price level may now be insignificant. I am still confident of a break to $900 next week and around $1000 by years end.

Gold USD weekly (click on chart for larger view)



Gold in Australian Dollars

The Australian dollar moved in tandem with gold this week meaning little change from last weeks close. Importantly it held the $1226 level to close at $1230. Whilst the technical set up is not as bullish for gold in AUD the current distribution pattern is a healthy sign that normally results in a continuation of the preceding trend. That means up. After checking the AUD/USD FX charts today I cant see a break much beyond 0.72 (based on long term technical resistance) so if this were to hold and gold hit USD $1000 by year end our long standing $1400 Gold in AUD target remains achievable. Even if it does not reach our target by Dec 31st it wont be long into 2009 before we see $1400 and higher.

Gold AUD weekly (click on chart for larger view)

Bullionmark now publishes live and interactive charts for all the key gold and silver metrics. You can find them on the menus under "chart centre" or on the following links:

Spot Gold

Spot Silver

Gold to Silver ratio

Silver to Gold ratio

Dow Jones to Gold ratio

Dow Jones to Silver ratio

XAU gold and silver stock index

Australian dollar spot

In 2005 Congressman Ron Paul asked Alan Greenspan:
"Would there be any advantage, at this particular stage, in going back to the gold standard?"

Greenspan's answer:
I don't think so, because we're acting as though we were there……… So I think central banking, I believe, has learned the dangers of fiat money, and I think, as a consequence of that, we've behaved as though there are, indeed, real reserves underneath the system."

Comment:
This is exactly the mechanism. The COMEX is used as a way to "fix" the gold to dollar exchange rate as would happen under a gold standard. The MAJOR difference is that it is done with paper gold, gold that does not exist! As Greenspan says "we've behaved as though there are, indeed, real reserves underneath the system". Isn’t that the truth?!!! They have behaved as if they could actually provide the gold backing their huge short positions! But the game is coming to an end. Madoff’s Ponzi scheme worked for decades until people wanted their money back. The Gold suppression scheme has worked for decades but will now fail because people want physical gold. There in lies the difference between "behaving as if there are real assets" and "actually having real assets". The bluff is in the process of being called.

Very soon for JP Morgan, HSBC, Goldman Sachs, Deutsche Bank, Citigroup and the US government it will be checkmate!

Got gold?

by Peter Schiff, Euro Pacific Capital

As the multi-billion dollar Ponzi scheme orchestrated by Wall Street insider Bernard Madoff unravels in the media spotlight, the nation is being presented with a rare opportunity to understand the true nature of many of our most cherished financial structures. Hopefully we have the wisdom to connect the dots.
Although the $50 billion loss engineered by Madoff is truly a staggering accomplishment (and was done using old-fashioned fraud rather than the mathematical wizardry that has characterized Wall Street’s recent larcenies) the size of the scheme pales in comparison to the multi-trillion dollar Ponzi structures run by the United States government. In fact, rather than looking to jail Madoff, President-elect Obama should consider making him our new Treasury Secretary. If not that, at least make him the czar of something!
Madoff’s inspiration came from Charles Ponzi, the Italian-born American immigrant who promoted an investment plan in the early 1900s’ that traded postal coupons. Rather than paying investors from legitimate investment returns, Ponzi hit upon the innovative idea of paying out early investors with money collected from new investors. By creating an illusion of success, interest in his investment plan ballooned. Over time the schemes have become known by many other names, such as chain letters or pyramid schemes. They are united by the fact that they always fail in the end.
When the influx of new investors inevitably slows to the point where distributions to current investors can no longer be maintained, investors look to withdraw funds. When this happens, the entire structure falls apart. The profits received by those who “invested” early as well as any funds skimmed off by the promoter, are offset by all the losses of those who came late to the party.
To a large extent, the same concept has driven the major asset bubbles of the last decade. Given the ridiculously high valuations seen by tech stocks and real estate during their respective booms, the only way the bubbles could be perpetuated was if newer “investors” could be found to pay even more outrageous prices (the greater fool). But when these new buyers balked, the whole structure crumbled. Although there was no Ponzi or Madoff to orchestrate these manias, the entire financial and economic apparatus of the country had successfully convinced the public that “investments” in tech stocks and condominiums were bullet proof and that the supply of new buyers was endless.
Unfortunately, the Ponzi economy doesn’t stop there. A chain letter is no more viable when run by governments than when run by private citizens. However, government orchestrated pyramids have the advantage of required participation. As a result, they can maintain the illusion of viability for several generations. But the longer such schemes operate the larger will be the losses when they ultimately collapse.
The Social Security Administration runs its “trust funds” with precisely the same methods used by Madoff and Ponzi. As money is collected by from current workers, the funds are then dispersed to those already receiving benefits. None of the funds collected are actually invested, so no investment returns are ever generated. Those currently paying into the system are expected to receive their returns based on the “contribution” made by future workers. This is the classic definition of a Ponzi scheme. The only difference is that Ponzi didn’t own a printing press.
The United States Government runs its own balance sheet based on the Ponzi principal as well. Our national debt always grows and never shrinks. As existing debt matures, proceeds are repaid by issuing new debt. Interest payments on existing debt are also made by selling new debt to investors. The whole scheme depends on an ever growing supply of new lenders, or the willingness of existing lenders, to continue to roll over maturing notes. Of course, as was the case with Madoff, if enough of our creditors want their money back, the music stops playing.
In Madoff’s case, the rug pulling was provided by the huge financial losses suffered by some of his clients in other non-Madoff investments. When enough of these clients looked to sell some of their apparently well-performing Madoff assets to help offset such losses, the scam collapsed. The same thing could befall the United States Government. Now that China and our other creditors are looking to spend some of their U.S. Treasury holdings to stimulate their own economies, look for a similar outcome with even more dire implications.
The main difference is that while Madoff took elaborate steps to conceal his scheme, the U.S. government operates in broad daylight. It truly is amazing how faith in government is so pervasive that many can believe that politicians will succeed where private individuals fail, and that governments are somehow immune to the economic laws that govern the rest of society. Like those unfortunate to have been duped by Madoff and Ponzi, the world is in for a rude awakening.

Human Freedom Rests on Gold Redeemable Money

by Hon. Howard Buffett U.S. Congressman from Nebraska and father of Warren Buffet.

Reprinted from The Commercial and Financial Chronicle 5/6/1948

"Congressman Buffett stresses relation between money and freedom and contends without a redeemable currency, individual's freedom to sustain himself or move his property is dependent on goodwill of politicians. Says paper money systems generally collapse and result in economic chaos. Points out gold standard would restrict government spending and give people greater power over public purse. Holds present is propitious time to restore gold standard.""Is there a connection between Human Freedom and A Gold Redeemable Money? At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere."But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty. You see, gold is mobility, gold is a passport to move across borders."Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom."In that case then certainly you and I as Americans should know the connection. We must find it even if money is a difficult and tricky subject. I suppose that if most people were asked for their views on money the almost universal answer would be that they didn't have enough of it."In a free country the monetary unit rests upon a fixed foundation of gold or gold and silver independent of the ruling politicians. Our dollar was that kind of money before 1933. Under that system paper currency is redeemable for a certain weight of gold, at the free option and choice of the holder of paper money."

from LeMetropole cafe

JUST IN … OK, here’s the latest on the coming JP Morgan blow up.
The information I sent your way yesterday was re-confirmed today. The lack of trust in the financial world over counterparty risk is "accelerating." This is forcing "remaining contracts" of all kinds, especially in the Over The Counter markets, to be "settled."
What is stressed to me is that it is a "currency" problem … so I did my best to nail that down. It has to do with the dollar, US interest rates, AND gold and silver, which represent a SUBSTANTIAL part of the JP Morgan derivatives book … and it is TRILLIONS and TRILLIONS … the magnitude of the problem is that large.
JP Morgan, the Fed’s bank supposedly can’t handle it, so the US Government is stepping in … and the only way the Fed can handle the GROWING problem, is to PRINT money. BUT, they can’t PRINT the money fast enough.
And yes ... this a major reason why the dollar is suddenly falling apart. If I, WE, know … much of the BIG MONEY has to know and they are dumping dollars as fast as they can, ergo the dollar is TANKING, and will continue to tank.
The Madoff mess, and $50 billion catastrophic loss, could not come at a worse time for the US Government and JP Morgan. Our government knows they CANNOT let Morgan fail and they are going all out to prevent that from happening. However, the Madoff scandal, and loss of capital, has those fearful of counterparty risk problems accelerating their exit from dealings with Morgan and other US institutions, in which they have dollar based, counterparty contracts. It is so bad that word to me is that the US cannot "waste time" on the relatively insignificant Madoff "disintermediation" nightmare, the JP Morgan problem is so MONSTROUS … because disintermediation is spreading like a horrible, malignant cancer and the numbers are mounting daily.
So, what are we left with? Bernanke’s helicopter drill is NOW in effect. The problem is Bernanke needs B-47’s or some gorilla plane like that. We have talked about this sort of scenario in MIDAS for some time. Well, we are here for sure and it is in play (Bill H and others have been all over this).
What will be critical for JP Morgan to stay afloat is for the Fed to be able to print money fast enough to meet the demand of those closing out contracts with Morgan.
The bottom line: HYPERINFLATION is upon us, or the eve of hyperinflation is.
As far as I know, no one else out there is delving into the JP Morgan mess. The insiders are trying to keep this horror show as quiet as possible.
One more thing, I asked my source about "settling" in regards to gold and silver contracts. Let the shorts cover I said. To cover anywhere near here, after THEY forced the prices down and caused billions of dollars of spec losses, would be more than just a travesty of justice, It would open the potential for hundreds of billions of lawsuits for what would be clear cut fraud by the concentrated shorts who took the market down the past many months. It is one thing to have gold go $1500 bid overnight (or in a few weeks) and silver go $30 bid, and then declare a force majeure (unable to deliver for unforeseen reasons) after letting the free markets play out until there is a legitimate reason WHY something HAS be done. It is another to force settlement of gold and silver contracts in what Dennis Gartman calls a BEAR MARKET!
Now, I am not saying that this gold/silver settle scenario is in the cards at this point in time, so don’t go running to the CFTC, and others, and raise a ruckus, it is just something to be aware of. In the meantime, it seems to me that owning as much gold, silver and the shares is the way to go. That’s where my head is.

Bullionmark comment

It is important to understand that JP Morgan is the primary agent for the US Treasury and the majority shareholder of the Federal Reserve. I have long used the JP Morgan share price as a proxy for the battle between the "invisible hand" and free markets. The recent JPM shareprice suggests something big is brewing. JPM on behalf of the US government sits on the other side of trillions in derivatives that hold up stock prices, hold down interest rates and crush precious metal prices. You dont have to be Einstein to work out the implications of a blow up here. Even if the US government can facilitate an orderly unwind the consequences to the markets will be cataclysmic. That is unless you own gold or silver!

by Theodore Butler

We live in perilous financial times. If you are not alarmed with the flow of financial events, then you are just not paying attention. The problems are serious and growing, the solutions limited. It’s as if everything that could go wrong, has gone wrong. I’d much prefer to write of a growing domestic and world economy, with increased demand for silver. But financial and economic headwinds have converged to interrupt world growth.
What does this portend for silver? As I have written recently, the current bad news is good news for silver. That’s due to silver’s unique dual role as a vital industrial commodity, as well as an age-old investment asset that the world has always turned to when times get tough. When times are good, silver can be compared with natural resources, like copper and oil. When times are bad, silver should be compared to gold as a financial lifesaver. Sad to say, times are bad. To highlight just how bad, I’d like to reference some recent events and what I think they portend for silver.
There is a worldwide flight into assets of quality. This is no minor event, it is a tsunami. In the past week, demand for four-week U.S. Treasury Bills, considered by many to be the ultimate flight to quality asset, was so great that investors bought them at auction for the lowest yield in history - zero percent. In other words, investors in these securities were willing to forgo any return on the $30 billion purchased, for the promise of the return of the principal amount. The demand for the return of principal for these securities was so great that investors bid for four times the amount actually sold. None of us has ever witnessed this kind of demand for such low-yielding securities. Safety is the name of the game.
It is easy to see why the safety of one’s financial assets is suddenly all-important. The news is truly rotten and wealth is disappearing before our eyes. It is estimated that already more than $10 trillion ($10,000 billion) of value has been lost in the world market decline so far. Governments around the world, including the U.S., have responded with trillions of dollars of bailouts, stimulus and massive deficit spending programs. The scale and scope of the destruction of asset values and the offsetting financial injections are almost beyond our ability to grasp. Mind-boggling is not an overstatement.
Unlike government securities and unlike gold, the value of silver is sharply lower this year. That decline is not the result of the selling of physical silver, but of the paper variety on the COMEX. In fact, compared to gold, the physical shortage and premiums on various forms of retail silver are higher and delays in some cases are longer. This may prove that physical silver is tighter than gold. The price decline in silver, relative to gold, indicates silver is dramatically undervalued to gold.
This is not a knock on gold. All the conditions appear in place for a big gold price rise. The market structure on the COMEX, the growing physical demand, the palpable fear in the air, all point to gold as an important go-to asset. Gold holds no counterparty risk and that’s especially relevant in the current climate. All the positives about gold apply to silver, in spades. Silver is rarer and scarcer than gold and it sells for less than 1.5% of the price of gold. So, if you like gold, you should love silver.
Gold is finite and there are physical limitations on creating more. Compare this to the infinite amounts of paper and electronic money being created out of thin air. Recently, I have read sober analysis that suggests gold will be priced at multiples of its current price due to the rapid expansion of monetary reserves. Take those same calculations and apply them to a comparison of gold versus silver. This is an oversight that creates a special opportunity for those that investigate the facts. Dollar for dollar, there is 400 times more gold than silver in the world. Let that one fact sink in and everything else will fall into place.
The next time you read of hundreds of billions, or trillions of dollars of bailouts and government simulative spending, remember there is only $10 billion of silver bullion in the entire world. And very little of that is available for sale, as it is strongly held by true silver believers. The inevitable rush to safety into such a small pool of metal will send the price soaring.
Warning Signs
By now, the world is aware of the largest Ponzi scheme in history, the alleged $50 billion fraud by Bernard Madoff, a fixture on Wall Street for almost 50 years, and of special significance for silver. Madoff was widely respected and trusted by his clients. The pain of betrayal compounds the financial devastation. Knowing you have been cheated makes it much worse. Victims include well-known individuals, charitable organizations, hedge funds and banks. It is said to be the largest investment fraud in history. This will only accentuate the flight to safety. The more people reflect on this episode, the more they will be motivated to buy gold and silver. For thousands of years, gold and silver have been trusted assets in times of distrust. Silver (and gold) may go up or down, but they can’t defraud you.
There are some remarkable similarities between the Madoff fraud and the manipulation that I have alleged in silver for the past 20 years. Both have occurred over long periods of times. Both involved sophisticated investors, including individuals and institutions. Both occurred under the nose of government regulators expressly created to prevent such frauds - the SEC in the Madoff fraud and the CFTC in the silver manipulation. Both regulators were given numerous public warnings of wrongdoing for many years. Both agencies neglected to look into the allegations or investigated and found nothing wrong.
Of course, there are differences. All are now aware of the Madoff fraud while only a few thousand are aware of the COMEX fraud. It is not a mainstream media event. The SEC is under intense and well-deserved criticism for its failure to regulate and terminate the fraud. Criticism of the CFTC will come in the future.
Another difference between the Madoff and COMEX silver frauds is that evidence of fraud was largely concealed by Madoff, while the evidence of fraud in COMEX silver is contained in government data. There was no readily available public data that would have made it easy to see that Madoff was running a fraud. Some sophisticated investors did investigate and steered clear after performing their due diligence. In silver, the data contained in the CFTC’s Bank Participation and Commitment of Traders Reports are all that a reasonable person needs to see. These freely accessible reports clearly indicate a concentrated short position in COMEX silver far beyond anything held in any other commodity. Rather than offer a plausible explanation for how one or two U.S. banks holding 25% of the annual world production of any commodity could not be manipulating, the CFTC instead stalled and began a drawn out investigation during which silver investors were devastated.
Sadly, for Madoff investors, it is too late. For silver investors, it is starkly different. The manipulation has caused prices to nosedive, but this same fraud promises phenomenal future returns. When the Madoff fraud was revealed, it was all over, the money was gone. In silver, when the fraud is universally recognized, the payday for silver investors will have just begun. We will then have embarked on the long-term journey of sharply higher prices that rewards all silver investors properly positioned. With Madoff, not being in was the key. With silver, being in is all that matters. Make sure you are in.
The only real risk facing silver investors is how you hold your metal. This Madoff affair should wake up metals investors holding pool or certificate accounts with no serial numbers. Hold your silver in your personal possession or in bona fide storage. The storage facility should be separate and distinct from the sales agent. The big problem with Madoff is that he held everyone’s funds. When he went under, everyone’s money went under with him. As certain as I am of silver’s coming price advance, I am equally certain that many silver investors will lose their money by holding bogus accounts. You have one of the great opportunities of a lifetime with silver. Don’t expose your profit potential to unnecessary risk.

Bullionmark comment

I agree with Teds assessment that bullion is best held in personal posession. However this is not really a practical solution for many especially in silver. Segregated and allocated metal in private storage vaults are an ideal solution as is the Perth Mint Depository program. Much rumour has been spread about the Perth Mint but after detailed meetings with the Mint management in Perth last week, I am of the strong view that the Mint is fully hedged and a safe place to store metal. It is backed by the Western Australian government. Bullionmark holds much of its metal on an allocated basis at the Perth Mint but also uses private vaults in Sydney and Melbourne. Diversification is important. I have published several articles on the issue of storage and encourage you to re read before making a final decision on storage of your metal.

http://www.bullionmark.com/2008/10/bank-vault-safety.html

http://www.bullionmark.com/2008/10/paper-v-physical.html

http://www.bullionmark.com/2008/10/storing-at-home.html

The following article hightlights a worrying global trend - resource nationalisation. In a world of resource scarcity and tax revenue shortfalls expect to see more countries impose rules and taxes that essentially nationalise assets or profits from mines. Whilst I am very bullish on gold and silver mining stocks you should carefully consider the risks. The great thing about physical bullion in your possession is that it is no one elses liability.

article from AAP

Indonesian politicians have passed a new mining law that will give the mineral-rich nation greater control over its resources.
Analysts warn it could deter investment by multinational corporations.
Indonesia has some of the world's most abundant reserves of coal, copper, gold, tin and nickel.
It has lured mining giants like Denver-based Newmont Mining Corporation, Freeport-McMoran Copper & Gold and the Rio Tinto Group - most of whom arrived before the 1998 ouster of longtime dictator Suharto.
Critics say deals signed under the notoriously corrupt regime offered contracts to large foreign miners that lasted far too long, some running until 2041.
The new law, approved on Tuesday after three years of squabbling in parliament, will in some cases limit areas of exploration, a move intended to benefit small and medium-sized firms.
It also requires companies to seek separate permits for each phase of mining activity, from seismic surveying and exploration to feasibility studies and construction - reversing the previous system of one-stop contracts.
The law has yet to be signed by the president, a formality that normally takes 30 days.
Newmont executives wanted to study the new law in detail before commenting, spokesman Omar Jabara said.
Legislator Sonny Keraf said the law "will serve the nation's best interests" by creating certainty and boosting mining revenues.
But industry experts said it could end up chasing away large-scale investors, putting the future of the industry at stake.
Among other things, it requires investors to process all mining products into metal locally, whether by setting up their own smelters or by using others, something that would sharply increase operating costs.
"How are we going to attract big investors with regulations like this?" asked Priyo Pribadi Soemarno of the Indonesia Mining Association.
"It's a very unfriendly law."
Newmont has no refinery for Indonesian operations, and Jabara said that issue must be resolved, possibly by contracting a refinery in Indonesia to process its ore.
Jeffrey Mulyono, a chairman of Indonesia's coal producers' association, said he expected a sharp decline in investment, which hit $US1.5 billion ($A2.16 billion) last year, up from $US900 million ($A1.29 billion) in 2006.
"This could force some companies to pull out," he said, adding that dragged-out deliberations over the new law had already created uncertainty among miners, including British-Australia mining giant BHP Billiton Ltd, which abandoned a $US4 billion ($A5.75 billion) investment plan earlier this year.
Under the new law, existing companies operating with a contract of work have one year to comply with the new system.
They have five years to begin processing their mining products into metal domestically.

By F. William Engdahl

The Federal Reserve has bluntly refused a request by a major US financial news service to disclose the recipients of more than $2 trillion of emergency loans from US taxpayers and to reveal the assets the central bank is accepting as collateral. Their lawyers resorted to the bizarre argument that they did so to protect ‘trade secrets.’ Is the secret that the US financial system is de facto bankrupt? The latest Fed move is further indication of the degree of panic and lack of clear strategy within the highest ranks of the US financial institutions. Unprecedented Federal Reserve expansion of the Monetary Base in recent weeks sets the stage for a future Weimar-style hyperinflation perhaps before 2010.

On November 7 Bloomberg filed suit under the US Freedom of Information Act (FOIA) requesting details about the terms of eleven new Federal Reserve lending programs created during the deepening financial crisis.

The Fed responded on December 8 claiming it’s allowed to withhold internal memos as well as information about ‘trade secrets’ and ‘commercial information.’ The central bank did confirm that a records search found 231 pages of documents pertaining to the requests.

The Bernanke Fed in recent weeks has stepped in to take a role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program (TARP). The difference between a Fed bailout of troubled financial institutions and a Treasury bailout is that central bank loans do not have the oversight safeguards that Congress imposed upon the TARP. Perhaps those are the ‘trade secrets the hapless Fed Chairman,Ben Bernanke, is so jealously guarding from the public.

Coming hyperinflation?

The total of such emergency Fed lending exceeded $2 trillion on Nov. 6. It had risen by an astonishing 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA. They did so knowing that on the following day a dramatic shock to the financial system would occur because they, in concert with the Bush Administration, had decided to let it occur.

On September 15 Bernanke, New York Federal Reserve President, Tim Geithner, the new Obama Treasury Secretary-designate, along with the Bush Administration, agreed to let the fourth largest investment bank, Lehman Brothers, go bankrupt, defaulting on untold billions worth of derivatives and other obligations held by investors around the world. That event, as is now widely accepted, triggered a global systemic financial panic as it was no longer clear to anyone what standards the US Government was using to decide which institutions were ‘too big to fail’ and which not. Since then the US Treasury Secretary has reversed his policies on bank bailouts repeatedly leading many to believe Henry Paulson and the Washington Administration along with the Fed have lost control.

In response to the deepening crisis, the Bernanke Fed has decided to expand what is technically called the Monetary Base, defined as total bank reserves plus cash in circulation, the basis for potential further high-powered bank lending into the economy. Since the Lehman Bros. default, this money expansion rose dramatically by end October at a year-year rate of growth of 38%, has been without precedent in the 95 year history of the Federal Reserve since its creation in 1913. The previous high growth rate, according to US Federal Reserve data, was 28% in September 1939, as the US was building up industry for the evolving war in Europe.

By the first week of December, that expansion of the monetary base had jumped to a staggering 76% rate in just 3 months. It has gone from $836 billion in December 2007 when the crisis appeared contained, to $1,479 billion in December 2008, an explosion of 76% year-on-year. Moreover, until September 2008, the month of the Lehman Brothers collapse, the Federal Reserve had held the expansion of the Monetary Base virtually flat. The 76% expansion has almost entirely taken place within the past three months, which implies an annualized expansion rate of more than 300%.

Despite this, banks do not lend further, meaning the US economy is in a depression free-fall of a scale not seen since the 1930’s. Banks do not lend in large part because under Basle BIS lending rules, they must set aside 8% of their capital against the value of any new commercial loans. Yet the banks have no idea how much of the mortgage and other troubled securities they own are likely to default in the coming months, forcing them to raise huge new sums of capital to remain solvent. It’s far ‘safer’ as they reason to pass on their toxic waste assets to the Fed in return for earning interest on the acquired Treasury paper they now hold. Bank lending is risky in a depression.

Hence the banks exchange $2 trillion of presumed toxic waste securities consisting of Asset-Backed Securities in sub-prime mortgages, stocks and other high-risk credits in exchange for Federal Reserve cash and US Treasury bonds or other Government securities rated (still) AAA, i.e. risk-free. The result is that the Federal Reserve is holding some $2 trillion in largely junk paper from the financial system. Borrowers include Lehman Brothers, Citigroup and JPMorgan Chase, the US’s largest bank by assets. Banks oppose any release of information because that might signal ‘weakness’ and spur short-selling or a run by depositors.

Making the situation even more drastic is the banking model used first by US banks beginning in the late 1970’s for raising deposits, namely the acquiring of ‘wholesale deposits’ by borrowing from other banks on the overnight interbank market. The collapse in confidence since the Lehman Bros. default is so extreme that no bank anywhere, dares trust any other bank enough to borrow. That leaves only traditional retail deposits from private and corporate savings or checking accounts.

To replace wholesale deposits with retail deposits is a process that in the best of times will take years, not weeks. Understandably, the Federal Reserve does not want to discuss this. That is clearly also behind their blunt refusal to reveal the nature of their $2 trillion assets acquired from member banks and other financial institutions. Simply put, were the Fed to reveal to the public precisely what ‘collateral’ they held from the banks, the public would know the potential losses that the government may take.

Congress is demanding more transparency from the Federal Reserve and US Treasury on its bailout lending. On December 10 in Congressional hearings by the House Financial Services Committee, Representative David Scott, a Georgia Democrat, said Americans had ‘been bamboozled,’ slang for defrauded.

Hiccups and Hurricanes

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system. The Freedom of Information Act obliges federal agencies to make government documents available to the press and public.

In early December the Congress oversight agency, GAO, issued its first mandated review of the lending of the US Treasury’s $700 billion TARP program (Troubled Asset Relief Program). The review noted that in 30 days since the program began, Henry Paulson’s office had handed out $150 billion of taxpayer money to financial institutions with no effective accountability of how the money is being used. It seems Henry Paulson’s Treasury has indeed thrown a giant ‘tarp’ over the entire taxpayer bailout.

Further adding to the troubles in the world’s former financial Mecca, the US Congress, acting on largely ideological grounds, shocked the financial system when it refused to give even a meager $14 billion emergency loan to the Big Three automakers—General Motors, Chrysler and Ford.

While it is likely that the Treasury will extend emergency credit to the companies until January 20 or until the newly elected Congress can consider a new plan, the prospect of a chain-reaction bankruptcy collapse of the three giant companies is very near. What is being left out of the debate is that those three companies account for a combined 25% of all US corporate bonds outstanding. They are held by private pension funds, mutual funds, banks and others. If the auto parts suppliers of the Big Three are included, an estimated $1 trillion of corporate bonds are now at risk of chain-reaction default. Such a bankruptcy failure could trigger a financial catastrophe which would make what has happened since Lehman Bros. appear as a mere hiccup in a hurricane.

As well, the Federal Reserve’s panic actions since September, by their explosive expansion of the monetary base, has set the stage for a Zimbabwe-style hyperinflation. The new money is not being ‘sterilized’ by offsetting actions by the Fed, a highly unusual move indicating their desperation. Prior to September the Fed’s infusions of money were sterilized, making the potential inflation effect ‘neutral.’

Defining a Very Great Depression

That means once banks begin finally to lend again, perhaps in a year or so, that will flood the US economy with liquidity in the midst of a deflationary depression. At that point or perhaps well before, the dollar will collapse as foreign holders of US Treasury bonds and other assets run. That will not be pleasant as the result would be a sharp appreciation in the Euro and a crippling effect on exports in Germany and elsewhere should the nations of the EU and other non-dollar countries such as Russia, OPEC members and, above all, China not have arranged a new zone of stabilization apart from the dollar.

The world faces the greatest financial and economic challenges in history in coming months. The incoming Obama Administration faces a choice of literally nationalizing the credit system to insure a flow of credit to the real economy over the next 5 to 10 years, or face an economic Armageddon that will make the 1930’s appear a mild recession by comparison.

Leaving aside what appears to have been blatant political manipulation by the present US Administration of key economic data prior to the November election in a vain attempt to downplay the scale of the economic crisis in progress, the figures are unprecedented. For the week ended December 6 initial jobless claims rose to the highest level since November 1982. More than four million workers remained on unemployment, also the most since 1982 and in November US companies cut jobs at the fastest rate in 34 years. Some 1,900,000 US jobs have vanished so far in 2008.

As a matter of relevance, 1982, for those with long memories, was the depth of what was then called the Volcker Recession. Paul Volcker, a Chase Manhattan appendage of the Rockefeller family, had been brought down from New York to apply his interest rate ‘shock therapy’ to the US economy in order as he put it, ‘to squeeze inflation out of the economy.’ He squeezed far more as the economy went into severe recession, and his high interest rate policy detonated what came to be called the Third World Debt Crisis. The same Paul Volcker has just been named by Barack Obama as chairman-designate of the newly formed President’s Economic Recovery Advisory Board, hardly grounds for cheer.

The present economic collapse across the United States is driven by the collapse of the $3 trillion market for high-risk sub-prime and Alt-A home mortgages. Fed Chairman Bernanke is on record stating that the worst should be over by end of December. Nothing could be farther from the truth, as he well knows. The same Bernanke stated in October 2005 that there was ‘no housing bubble to go bust.’ So much for the predictive quality of that Princeton economist. The widely-used S&P Schiller-Case US National Home Price Index showed a 17% year-year drop in the third Quarter, trend rising. By some estimates it will take another five to seven years to see US home prices reach bottom. In 2009 as interest rate resets on some $1 trillion worth of Alt-A US home mortgages begin to kick in, the rate of home abandonments and foreclosures will explode. Little in any of the so-called mortgage amelioration programs offered to date reach the vast majority affected. That process in turn will accelerate as millions of Americans lose their jobs in the coming months.

John Williams of the widely-respected Shadow Government Statistics report, recently published a definition of Depression, a term that was deliberately dropped after World War II from the economic lexicon as an event not repeatable. Since then all downturns have been termed ‘recessions.’ Williams explained to me that some years ago he went to great lengths interviewing the respective US economic authorities at the Commerce Department’s Bureau of Economic Analysis and at the National Bureau of Economic Research (NBER), as well as numerous private sector economists, to come up with a more precise definition of ‘recession,’ ‘depression’ and ‘great depression.’ His is pretty much the only attempt to give a more precise definition to these terms.

What he came up with was first the official NBER definition of recession: Two or more consecutive quarters of contracting real GDP, or measures of payroll employment and industrial production. A depression is a recession in which the peak-to-bottom growth contraction is greater than 10% of the GDP. A Great Depression is one in which the peak-to-bottom contraction, according to Williams, exceeds 25% of GDP.

In the period from August 1929 until he left office President Herbert Hoover oversaw a 43-month long contraction of the US economy of 33%. Barack Obama looks set to break that record, to preside over what historians could likely call the Very Great Depression of 2008-2014, unless he finds a new cast of financial advisers before Inauguration Day, January 20. Required are not recycled New York Fed presidents, Paul Volckers or Larry Summers types. Needed is a radically new strategy to put virtually the entire United States economy into some form of an emergency ‘Chapter 11’ bankruptcy reorganization where banks take write-offs of up to 90% on their toxic assets, that, in order to save the real economy for the American population and the rest of the world. Paper money can be shredded easily. Not human lives. In the process it might be time for Congress to consider retaking the Federal Reserve into the Federal Government as the Constitution originally specified, and make the entire process easier for all. If this sounds extreme, perhaps revisit this article in six months again.

by Adrian Douglas

The article that appeared in the Financial Times today and circulated by GATA is very significant. What is especially significant is the necessity to supply disinformation
http://www.ft.com/cms/s/0/077b765c-c77c-11dd-b611-000077b07658.html?nclick_check=1
QUOTE
"Traders have been hearing talk that the gold market could face a potential squeeze at the end of this year if market participants with futures position on New York's Comex exchange decide not to roll over their positions, because of concerns about counterparty risk and opt for physical delivery instead. But dealers dismissed the threat of a squeeze, pointing out that Comex gold stocks stand at 8.5 million ounces, well above the five-year average of almost 6 million ounces. ..."
END
The 8.5 million ozs which is referred to here is the total COMEX inventory. This includes gold that belongs to customers who are storing it on the exchange. The amount that is registered to dealers, and therefore available for delivery, is only 2.846 Million ozs. The delivery notices that have been issued so far in December total 1.26 Million ozs which is 44% of the available deliverable gold. This assumes that the gold registered to dealers is totally unencumbered which is not necessarily a good assumption in the fuzzy accounting world that is now a Wall St. reality.
What is very telling is that the reason for investors taking delivery is given as "counterparty risk". They could have said that it was due to investors "wanting the safe haven of gold in times of financial crisis" etc etc. Stating unequivocally "counterparty risk" as the reason high delivery demands are occurring is the first reference to the possibility of COMEX going into default that has appeared in the mainstream press. It is also of note that it appeared in the FT which is traditionally anti-gold.
The pieces of the puzzle are falling into place.
The CB’s are selling only a fraction of their WAG allowance
Coin melt bars are showing up on the wholesale market indicative of the bottom of the barrel
The US mint is rationing coins
The Perth Mint has suspended taking orders for any bullion products
Retail dealers are sold out and only small quantities of PM’s are available
The traditional major shorts on TOCOM have covered their massive short positions
Prices in the retail market are very much higher than COMEX spot
Significant reduction in Contango has been observed and even some backwardation
A disconnect has formed between COMEX paper gold trading and physical gold markets
Ever since July when one or possibly two US banks sold short 10% of the annual global gold supply and 20% of annual global silver supply (as confirmed by reporting issued by the CFTC) the COMEX price has been disconnected from the physical market and has become the last bastion of the multi-year gold price suppression scheme. Without a doubt the hammering down of the paper gold price made many leveraged speculators head for the exits, as demonstrated by the fact that the Open Interest has reduced by 50%. However, the investors who remain are not leveraged and unfortunately for the Gold Cartel are taking delivery from the COMEX. Talk of a squeeze due to "counterparty risk" will no doubt encourage more investors to take delivery. We will probably see Contango in the further out months reduce and gold be purchased in the cash market as investors switch from future IOU’s to real metal. This may even provoke a much more pronounced Backwardation than we have already seen in recent days.
Make no mistake about this. We are seeing the early signs of a gold rush like the world has never seen before. Investors do not take physical delivery of gold to sell it back for a 10% profit. The inflation adjusted high of gold in 1980 is today $2500. However, today we are in the midst of a global financial crisis the likes of which we have never witnessed in the whole of recorded history. Simultaneously every country in the world is hell bent on currency destruction as an anti-dote to too much debt creation. What is gold worth in such a scenario? Who knows but it is multiples of where it is now. The precious metals that are being taken off the market will not see the light of day again for a long time. The Central Banks have almost stopped selling gold and mine supply is dropping year after year.
My unique analysis methods at www.mareketforceanalysis.com indicate that gold and silver are at very good buy points. Gold and silver are selling for almost their cost of production so the downside is severely limited because no commodity can trade below its cost of production for very long because producers go out of business thereby reducing supply which increases the price.
An ex-FED Governor, Lyle Gramley, appeared on Canadian TV yesterday and hinted that a big upward revaluation of gold may figure heavily in the Fed's attempt to rescue the U.S. economy.
This suggests that it is in the hands of the FED. If the shorts on COMEX get squeezed and COMEX defaults on physical delivery, the market not the FED, will decide the true value of gold.
How many times do you get advance warning of what will likely be the trade of the century? There is no such thing as a risk free trade but I think this is as good as it ever gets!
Investors should take physical delivery and not be leveraged. This way you will make sure you are around for payday and you will put more pressure on the shorts who have fraudulently sold gold and silver that they are unable to deliver.
Whether there is a massive squeeze on the COMEX in December or February is irrelevant. The Gold Rush is on!
When gold and silver become unavailable prices will have to go up by multiples. The beaten up mining sector will reach new highs. When the precious metals are not available in bullion form the next best alternative for investors will be companies who dig them out the ground.

It all starts with peoples' understanding of inflation. Today, inflation is commonly understood as an ongoing, persistent rise in the economy's price level. Such a definition is based on the "index regime" put forward by Irving Fisher (1867–1947). Here, price-level stability is understood as a rise in the economy's price level — usually represented by a consumer price index — of less than or around 2% on an annual basis. If inflation remains around this level, people are said to enjoy price (level) stability.
Austrian-minded economists would reject such a definition as erroneous and even denounce it as a deliberate attempt to confuse the public about the very forces at the heart of the erosion of the exchange value of money.
They would point out that money is a means of exchange, and that any change in its supply necessarily influences money's exchange value vis-à-vis goods and services.
Take, for instance, an economy in which the money stock is kept constant. To get hold of additional money, market agents would have to exchange goods and services against money. A growing supply of vendible items relative to the money supply would work towards reducing their prices in money terms.
Now consider the case in which an economy's stock of money can be increased through bank-credit expansion — the feature of today's government-controlled money-supply monopolies. Market agents can obtain additional balances through bank loans without being obliged to surrender scarce resources. The additional demand financed by the increased stock of money would lower the exchange value of money vis-à-vis tradable goods.
It is against this background that Ludwig von Mises not only defined inflation as an increase in money supply (and, consequently, deflation as a decline in the money stock); he also foresaw that the confusion about the very nature of inflation would work in favor of inflationism:
Inflation … means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term "inflation" to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. It follows that nobody cares about inflation in the traditional sense of the term.


A money system doomed to fail
Nowadays central banks, the agents of governments' money-supply monopolies, are willingly supplying virtually any amount of credit and money demanded by market agents as long as consumer price inflation remains close to "target levels." However, such a monetary policy is inflationary from the Austrian viewpoint.
Inflation has not become visible to many, though. In recent years a strongly growing credit and money supply has increasingly inflated prices for stocks, real estate, etc., and has to a much lesser extent shown up in consumer prices. To make things worse, the ensuing "asset price inflation" has been widely hailed as a "wealth effect," said to be positive for production and employment.
Like traditional consumer price inflation, asset price inflation can be expected to encourage misallocation of scarce resources, inducing malinvestment. What is more, an inflation boom can only be sustained if the illusory stimulating effects inflation provokes remain in place. If inflation slows down, the inflation boom would sooner or later collapse.
Austrians economists would diagnose that the relentless increase in credit and money supply is at the heart of the inflation boom; the rise in (asset) prices is just its symptom. So if credit and money supply growth slow down, it doesn't take much for Austrians to expect a recession, even deflation.
However, recession and deflation — undeniably costly in terms of a loss in output and employment — would be the economic adjustment processes needed for bringing the economy back to equilibrium via changes in relative prices.
It would not take much to expect that government-controlled central banks, when having to decide between keeping inflation in check or preventing recession, would most likely opt for growth, whatever it takes, even at the expense of a loss in the purchasing power of money.
Once the crisis unfolds, or is merely feared to unfold, the public starts calling for even lower interest rates and even more credit and money. "Cheap" credit and money is widely seen as a recipe for avoiding recession and deflation. Central bankers are unlikely to stand in the way of such calls.
All the more so as mainstream economics would consider the lowering of interest rates — whatever the effects on credit and money supply might be — a policy of "best practice" as long as consumer price inflation remains within an "acceptable level."
The real value of gold
Current credit market turbulences are not only a direct result of an (asset price) inflationary monetary policy delivered in the past. The unfolding symptoms of the crisis — that is, growing concerns about the solidity of the banking sector and the outlook for economic growth — are also paving the way for an even more inflationary policy.
Against this background it is no wonder that investor interest in gold has returned. To what level might the paper-money price for gold rise? Those expecting hyperinflation would expect the exchange value of paper money against gold to approach, or become, zero.
What about those who expect inflation to become high, but not so high that it would make paper money lose its money function altogether? Clearly, this question is rather difficult, if not impossible, to answer. The more recent monetary history might provide some guidance, though.
The latest experience with "unacceptably" high consumer price inflation was in the early 1970s and 1980s, when people become concerned about the reliability of the "unfettered" government paper money standard. So what was the equivalent of the gold price in today's US-dollar purchasing power back then?
Mainstream economists would use the consumer price index to deflate the nominal US-dollar price of gold to come up with a "real" — that is inflation-adjusted — US-dollar price of gold. Using the CPI for deflating the nominal US-dollar gold price would suggest a "real" gold price of around US$1,700 in the early 1980s.
However, Austrians may prefer to use the stock of money, or the stock of bank credit, as an appropriate measure of inflation. Deflating the nominal US-dollar price of gold by the stock of M2 and bank credit, respectively, would suggest that the real gold price rose to US$3,000 and US$5,000, respectively, in the early 1980s.

Hypothetical "real" gold price in US$ per troy ounce

From the Ludwig von Mises Institute

Against this background, the current US-dollar price of gold would, despite the recent price increase, still appear to be cheap. Even if hyperinflation seems unlikely to many at this juncture, Mises looked through human beings' rational ignorance vis-à-vis the government-controlled paper money — and his words could be taken as a support for the possibility that gold may well continue its appreciation vis-à-vis paper money:
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

With 10% swings in opposite directions in the last two weeks precious metals have shown why they are not for the faint hearted investor. The anticipated MACD cross over occured in both gold and silver on Tuesday sparking a strong rally.

Silver in USD

Silver recovered all of last weeks drop with an 11% rally. Again the $10.60 level proved strong resistance with price dropping back to $10.27 by Fridays close. With four tests of the $10.60 level behind us and a weekly MACD cross over now in place I expect a break out for silver as soon as next week. As previously stated any break will be powerful. Expect a brief pause at $11.43 and a then a fast move to my year end target of $13.66. Major downside support remains at $8.93.

Silver in USD (Click on image for larger chart view)




Gold in USD

Gold gained about $70 or 9.3% for the week to settle at $822, right on the 50 day moving average. $830-$850 remains strong resistance but the technical set up remains extremely bullish for a break out as early as next week. With last weeks washout now behind us I remain committed to a target of around $1000 by year end. My expectation of a near 20% rally inside two weeks shows how bullish the technical set up is right now. On the downide $770 remains key support.

Gold in USD (Click on image for larger chart view)

Gold in AUD

In AUD terms gold held the key support level of $1168 and rallied to close at $1236, just above the 50 day moving average. whilst the technical set up for gold in AUD terms is less bullish than USD, I still expect $1400 gold by year end. Support remains $1226 (weak) and the $1168 (moderate).

Gold in AUD (Click on image for larger chart view)