The Day The Earth Stood Still

[Anonymous]

Decent look at what is going on, although I don't agree 100% with his statements, like saying:
"This is why I have placed the biggest blame on the suckers who fell for the deal and bought homes they really could not afford."  

I disagree with that and a few other things, but overall a nice article.  I have said it in the past (even though I'm too poor to do it, LOL), get silver, not gold.  My main reasoning has been that 'they' control the gold more than 'they' control silver, there is more silver in existence, it is always the currency of exchange, not gold.  Most of the gold is in their hands, but silver is not under their paws in the same ratio as gold.

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The Day The Earth Stood Still
Oct 3 2008 2:47PM
Howard J. Ruff

Some years ago when we lived in Washington, D.C., we went to see a new science-fiction movie, The Day the Earth Stood Still, at the RKO Keith Theater, located across the street from the White House. As the movie opens, a huge flying saucer is landing on the ellipse, south of the White House.

Ironically at that moment in the real world, some police cars or fire trucks were going right past the theater with their sirens blaring, at the same time we were watching this flying saucer land on the screen. It felt like there was actually something serious going on.

As the movie progressed, the actor, Michael Renney, came out of the flying saucer with a huge robot and announced that he was an ambassador from a Federation of Planets who were worried about the war-like tendencies of this planet and were there to impose peace on us, which he later did by stopping all electronic and mechanical devices – airplanes, trains, cars, etc.

When we left the theater, I had to reassure myself that everything was still working – that we could still get on a real world bus or streetcar and go home and it would all work normally.

I've never forgotten that dramatic day. What we have seen in the last few weeks equals what happened – the earth has stood still.

Wall Street, as we have known it all my life, no longer exists. Merrill Lynch has been bought out, as well as Washington Mutual. Fannie Mae and Freddie Mac, Bear Stearns and AIG are gone, and Lehman Brothers is bankrupt and has collapsed. But the major issue before us is that this Democrat-controlled government has taken over everything we used to call "Wall Street." With the aid, assistance and encouragement of President Bush, Uncle Sam is trying to buy $700 billion worth of rotten assets so they can control Wall Street.

What rotten assets would they buy? It seems that one of the issues behind the collapse of the mortgage industry has been the Democrats forcing mortgage lenders and brokers over the years to issue mortgages that can never be repaid as part of their social policies to create "affordable mortgages" to create "an ownership society."

So Congress rushed in to create unenforceable mortgages which are unlikely to be paid – mortgages where you could start with a low teaser rate and kick the ball three or four years down the road to where the stated interest rate would rise so they couldn't be paid. Also, no documented income required, no down payment!

I have warned you repeatedly against falling for this scam. I told you to only accept a fully-funded, fixed-rate mortgage. If you took my advice, you are watching with bemused silence the soap opera in Washington.

Today Wall Street and the securities industry have been socialized by Congress and the Democrats are firmly in control. $700 billion will buy up the bad mortgages that people can't pay and alter the terms to stop foreclosures so everyone, no matter how unworthy, can own a house they can't lose, whether they can make the payments or not.

So how do I feel about this?

I can't tell big-government politicians what to do and what will work. I'm not that smart, and they wouldn't listen anyway. My job is to figure out what will really happen and then help you middle-class Americans deal with the world as it is and profit from it.

The irony is that they may have created a problem beyond the ingenuity of human leadership; so big and perverse that there is no real solution short of spending billions to buy up bad assets.

So who is to blame for this mortgage disaster?

   1. Blame congress, including compliant Republicans, for the "ownership society."

   2. Blame the Federal Reserve for keeping interest rates so low for years that anyone could get a mortgage under the relaxed terms – buy a home with a mortgage that could never be repaid – creating a real-estate bubble.

   3. Blame perverse laws passed by Congress divorced from any reason to buy votes.

   4. Blame individuals who signed up for mortgages that they could never repay.

   5. And blame those who want to bail them out by buying their mortgages and readjusting the terms so they don't get thrown out of the home they can't afford and should not have bought!

This is supposed to fix the problem.

It may kick Wall Street and the banker's problem down the road, but it won't fix America's problem. Everything you have been reading in newspapers and seeing on TV is aimed at saving a few favored executives on Wall Street and the tattered reputations of the politicians who created this problem.

Throwing Money at Problems

The end result? How does Congress usually fix a big problem? The only way they know is to throw money at it. They create the money out of nothing. They vastly expand the money supply. One of the immutable laws of the financial universe is that when you expand the supply of a paper currency, you create monetary inflation.

I don't know how to fix Wall Street's problem, nor do the politicians with all their posturing. But I do know how to take advantage of what is happening! I'll say it again; when the government throws money at a problem, they create monetary inflation. The vast expansions of the money supply that we are seeing dwarfs anything we have seen in our lifetimes.

With that as the reality, whether or not you think you know how to solve Wall Street's problem is irrelevant. The reality is you can now profit from the sure thing – monetary inflation.

Monetary inflation means we will wake up one day in the grip of a huge price inflation. As Will Rogers said, "Invest in inflation, it's the only thing that's going up."

In this artificial environment, you can easily turn small amounts of money into big fortunes if you know a few simple things to do. Let them play their crazy Washington games.

GAAP

How did all these giant institutions fail so abruptly?

One of the causes of Wall Street's problems is the answer to the question: What happened all of a sudden to their balance sheets? The villain is Generally Accepted Accounting Principles(GAAP).

In recent years, changes in GAAP required banks and brokers to "mark to market" the investments on their balance sheet. When the diminished value of real-estate assets which had been packaged and securitized so that banks and brokers could invest in them became obvious, no one knew how to value them. Under GAAP they had to "mark to market," which means they had to mark them down to zero. There was no market price, because there were no buyers or sellers.

In the real world we know that most mortgages will be paid. But rather than ascertaining value based on normal cash flow, because there was no market they had to mark these assets down to zero and trillions disappeared from balance sheets overnight.

When a bank or brokerage house balance sheet is deeply impaired, they have to raise additional capital. When that is happening to everyone, who will loan you money? Consequently, the balance sheets just plain disappeared.

What to Do

You are lucky to have an old hand like me around. I have lived through the inflation of the '70s when we made fortunes on inflation hedges. Most financial advisors are too young to have even been around then, and you are adrift without a rudder.

When I wrote How to Prosper During the Coming Bad Years in the 21st Century, I had concluded that the world was coming back around to where it used to be in the '70s for the same reasons, only more so. So rather than writing a whole new book (I write books for part of my income), I would simply update the big best-seller that I wrote back in 1978 (2.6 million copies) because the principles were again the same. I only had to update it for the 21st century.

This is the book that we give every new subscriber and every renewed subscriber who doesn't already have it.

Will the principles that worked back then work again? Yes, they will work again because the principles that are close to eternal as financial principles can be.

Advice

Here is the advice I am updating now.

   1.

      Prices will rise sharply due to monetary inflation, which eventually results in price inflation!

      Today I received an email from Money News.

      "The earthquake will come via a collapse in the market for U.S. government bonds as domestic and foreign investors realize that the only way Uncle Sam can meet his future spending obligations is to print massive quantities of money," warns Boston University economist Laurence J. Kotlikoff.

      "The result will be sky-high inflation and interest rates and, most surely, a prolonged reduction in output and employment."

      "This could happen today. It could happen tomorrow. But it will happen here just as it has happened in every other country that tried to spend far beyond its ability to pay," he writes.

      Nevertheless, Kotlikoff figures the real total debt of the government right now is $70 trillion. Never mind the personal debts – credit cards, mortgages, cars, and other loans – Americans would face as our economy heads, potentially, into a deep recession.

      Compare that figure to the entire U.S. economy, which amounted to $13.8 trillion in total economic output in 2007.

      And don't forget the automakers and airlines who want us to give them a few billion dollars. "If we keep our promises to the retiring baby boomers, we'll be paying out $4 trillion a year that we don't have for decades," says Kotlikoff.
   2.

      Normal commerce is crippled by inflation. The commodities you ordinarily will be able to buy whenever you want, at the price you want, may not always be there, as inflation has driven up the cost of fuel so the trucks will find it harder to pull up to the back door of your local store and restock the shelves.

      You must turn a liability into an asset. Prices will rise higher and higher. How do you turn this into an asset? By buying things now while they are still relatively cheap, storing them away and then consuming them later when prices are higher.

      This includes every commodity you would buy at your local store, ranging from food, to diapers, to soap, to auto parts, to everything else.

      Some people call this "hoarding." So be it! I don't want to be politically correct by not "hoarding" if I will be hungry and my family will not be able to eat. In the real world, so few people will take my advice I will have little impact on the rest of the world.

      (By the way, Karen Varner is still very helpful with planning food storage or 24-hour kits. You can call her at (801) 225-0948 or email her at your http://www.rufftimes.com.