(MartinArmstrong) “Politicians everywhere are sitting on their hands because they believe that if they do nothing and maintain the status quo mixed with austerity to save the bankers somehow we will grow our way out of this one as before. The problem is they fail to distinguish between a private generated financial crisis and a Sovereign Debt Crisis where they are the problem.

The people are just not to be given a right to vote on any of this and if the system can grow out of it, in two years everyone will forget about it – that’s the plan. To clarify why I have been critical of the austerity in Greece and the property taxes, Schumpeter describes the Business Cycle as a force of Creative Destruction. These are periods of tremendous economic transition. It is one thing to impose property taxes and insist upon government reducing its work force that sound like solid conservative economic advice for Greece. However, that presumes there are private sector jobs waiting in the wings.  What is taking place in Greece is that there is no private sector alternatives at this time. Laying people off is one thing. To impose then property taxes that are due irrespective of income then subjects those same people to massive waves of foreclosures for failure to pay the tax. The US Great Depression was so bad NOT because of the stock market crash, but (1) the sovereign debt crisis that wiped out savings and reduced capital in the USA contributing to over 3000 bank failures, and (2) the Dust Bowl that eliminated agrarian jobs when agriculture accounted for 40% of the civil work force resulting in the ‘hobo’ lifestyle.  It was WWII that provided the  ‘transition’ reducing unemployment and transformed farmers into skilled labor. The Great Depression after the Panic of 1857 was followed 4 years later by the US Civil War, which was also the ‘transition’ at that time relieving unemployment.

Today, there is no plan. There is no transition, only austerity. The politicians are doing NOTHING whatsoever for any reforms they reject because it would change the way they have been doing business since WWII. Italy’s debt is bigger than Spain, Portugal, and Greece combined.  It is too big to be bailed out and there is no PLAN B to even address what happens if sitting on their hands blows up in everyone’s face? Stay away from ALL government debt! This is a wave of Creative Destruction. We are in a transition to a completely new world ahead.”

Full Story: Italian Head of State Pledges to Resign Schumpeter’s Creative Destruction? (MartinArmstrong)

(MartinArmstrong) “Government Is Living in a State of Denial.  They speak, see & hear nothing of a debt crisis. .. Italy is the third largest bond issuer and nobody in government has figured out that this a Sovereign Debt Crisis yet?  What Government FAILS to understand is they are the PROBLEM!

Because government is the PROBLEM, they live in a state of denial and cannot correct the situation for they cannot objectively look at themselves. Instead, they attack the people. Fannie Mae asks for $7.8bn as losses continue. Morgan Stanley has been accused over mortgage bond issues and MF Global goes bust exposing the truth that SEC & CFTC never audit the NY banks and are incapable of detecting that they may be trading with client’s money.

.. the whole theory upon which the banking system has been constructed is unsound. Banks take short-term and demand deposits and lend long-term. When a financial crisis unfolds, a run on banks emerges because people want their money. Since the bank’s obligations are short-term to demand but their assets are loans of medium to long-term, they don’t have the cash and fail.  For you see, banks were not supposed to lend out your money.  ..  Banks began as merely a place to store your assets. They were not intended to lend your money out to someone else. When they realized they could make profit doing so, the scam eventually became the standard operational procedure. Formulae were then devised to calculate at any one time how much ‘reserves’ did they have to retain for normal operations. That was worked out with experience settling on 6%. So if they retained 6% of deposits as cash, they could cover normal business withdrawals with no problem. The problem became during a crisis and everyone wanted their cash and the bank simply does not have that cash and you end up with a bank run. It is ironic that what began as a scam simply became institutionalized. This is WHY the entire financial system is dependent upon CONFIDENCE!

What is unraveling even more quickly is the fear that banks will be hit with panic runs because of their holdings in sovereign debt. After a 50% haircut in Greek bonds, now it has become trendy not only to sell Italian bonds but also to publicly announce they have done so to try to maintain CONFIDENCE of their depositors.  The very reason politicians have suppressed the right of the people to vote and have forced austerity upon the people, has been to maintain the confidence of their bankers. But in the end game, the bankers exist based upon the confidence of the people in their sound management of their deposits.

.. The people may be shut out of the polls denied democracy when it is needed most, but the FREE MARKETS will respond as capital votes in its own self-interest that does not match the political nonsense.

SEQUENCE OF AN ECONOMIC PANDEMIC

At first blush, how capital responds depends entirely upon the (1) monetary system and (2) the freedom of capital movement. In a closed economy, the first reaction is to buy ALL tangible assets. These tend to be everything from durable commodities (metals), art, coins, stamps, and gold (assuming it is not a gold standard of some sort). This is the category I refer to as  ‘moveable assets’. The second tier of assets tend to be real estate that I refer to as ‘fixed non-movable assets’ meaning their value is limited to the territorial jurisdiction of the nation. In a non-communist nation, stocks and corporate bonds will also attract capital as a safe place to park funds.  In an open-economy where capital is free to leave, then the first blush is to FLEE to a different land in which case the local assets, including stocks and corporate bonds, will initially crash. This is typically indicated most pronouncedly in the collapse of the local currency against world currencies or in this case rise in the dollar vs decline in euro. They eventually swing back ONLY after the crisis manifests in a new currency or a debased/devaluation of the local currency takes place. The capital-flows will the swing back in the opposite direction.

Under today’s circumstances, the first blush response will be for capital to flee Europe and run to the United States as a safe port parking in US government paper. This is likely to further the deflationary effects within the United States by ensuring interest rates remain low as they did during the Great Depression for the same reason. However, banks are living off of the largest spreads perhaps in modern history so while rates of interest on cash will decline further and move in real terms NEGATIVE after inflation, banks should NOT be expected to lend money more easily. They will maintain their huge profit margins. Therefore, the first blush of the  Sovereign Debt Crisis in an open society tends to be currency based rather than even movable assets.

During the inflationary boom into 1929, gold declined in purchasing power for assets were rising against gold. During the collapse, the value of money rose (gold) as assets declined. Under a gold standard, the value of gold in fact DECLINES with inflation and RISES with deflation.

So for now, we are in the first blush mode where capital will fee to the dollar rather than assets and that may confuse the hell out of a lot of people. Therefore, under the current conditions, gold need not rise on the first blush for the bulk of capital will flee to the dollar. On the second swing where capital flees all currency, then we will see the Private vs Public assets manifest meaning they will rise as expressed in terms of currency.”

Full Story: Government is Living in a State of Debt Denial (MartinArmstrong)

Click for Nov 11, 2011 Martin Armstrong Radio Interview (FSN)

Upon speaking with many traders and investors over the years, I found it rather surprising how many of them had almost no clue how the Dow Jones Industrial Average ($INDU) really works, or even less how it is calculated.  If you want to succeed, you better know the subtle rules and intricacies of the games you’re playing.  Understanding how an index as critical as the DOW is calculated would certainly fall into that category.  Ironically, it is so shockingly simplistic, you will like have an “aha” moment as you understand why (besides inflation), the DJIA tends to exhibit such a strong upward bias.

While most broadly followed market indices today are “cap-weighted”, such as the S&P 500, the Nasdaq, and the Wilshire, the DOW is a “price-weighted” index (as are all of the DOW indices).  In a “cap-weighted” index, large price moves in the largest components have a much more dramatic effect on the value of the index.  So, if you have a company such as Apple that now has a market cap north of $300 Billion, you can see how much greater an effect that one company can have on an index over many other components.  However, you can make a point that such size brings clout, huge liquidity, and a huge shareholder base, so this potentially justifies its extra weight.

Regardless of any criticism you may have on the “cap-weighted” approach, the “price-weighted” method used to calculate the DOW will leave you with even more room for question.  Equal importance is placed on all stocks in the index, with each company’s stock price adjusted by a divisor, then added together.  The net effect of this is that share price alone becomes the most important criteria for maximum effect on the value of a “price-weighted” index!  For example, if you have a $10 Million company trading at $200/share, and a $100 Billion company trading at $20/share, the $10 million company will effect 90% of the value of the index, and an equal move in the $100 Billion company will effect a mere 10% of the index value.

The DJIA divisor is updated periodically and adjusted to offset the effect of stock splits, bonus issues, dividend payouts, or any changes in the companies that form the index.  When the DOW was originally created back in 1896, there were only 12 initial components that were simply divided by 12.  In 1928, the number of stocks was raised to 30.  Now, let’s say that our most expensive stock is currently trading at $100 and it has a 2:1 split to $50/share and causes the index to drop by 10%.  The divisor is used to readjust the index to its pre-split level.  This is all well and good, except for the fact that all these changes over the years have reduced the divisor to miniscule levels that now have a HUGE multiplier effect.  This dramatically increases the overall volatility of the index, especially with a large price move in a high-priced component.

For example, in June, 2009, General Motors and Citigroup were removed from the index, and Cisco and Travelers took their place.  With so many splits and changes over the years, the current divisor value is now a tiny 0.132129493.  In layman’s terms, for every $1 change in the price of a stock in the average, you can expect to see a 7.57 point change in the DJIA index (1 / 0.132129493).  So take a moment to think about this in terms of the 30 DOW stocks.  Most of the movement you see on a daily basis is caused by the top few highest price stocks, which currently include IBM (leading way ahead at $175/share), followed by CAT (at $107/share), and then CVX (at $105/share).  Bank of America is at the bottom of the list at around $10.50/share.

Now think how much easier it is to get a $1 price move on a $100 stock versus a $10 stock, and it’s pretty easy to see how index volatility can explode when a high-priced component exhibits a large change in price.  In addition, the more component stock prices increase, the more volatile the index becomes, and the greater the likelihood we will routinely see moves that average several hundred points a day.

You may have figured that with this technique, the DOW also seems inherently rigged to continually move higher.  For those pundits who’ve called for DOW 1,000 again and again, take a moment to think about this possibility.  Besides the obvious effects of inflation, how could that really ever happen?  Every time a few stocks in the index fall heavily out of favor (or are on the verge of bankruptcy), they are replaced with much more solid companies, trading with much higher stock prices, and generally at a time when the market has already experienced a large correction.  In fact, had you simply bought the DOW after the component-change announcement was made in June 2009 (or even better, a few of its highest price components), you would have fared quite well in the market since then.

Great video presented by Timothy Terrell at the Mises Circle at Furman University: “The Coming Currency Crisis and the Downfall of the Dollar”.  For those who are interested in better understanding fiat currencies and reckless inflation from a history perspective, this video provides a terrific overview.

You’ll also gain a better understanding of  the magnitude of damage and theft inflation perpetrates against a country’s people (and especially against its middle and lower classes who least understand its disruptive effects).

Everyone’s thrilled when Apple’s iPad2 provides a greater bang for the buck for less money than the original.  So why do governments and central banks try and convince people that higher prices are good for everything else?

This awesome and quick video explains quantitative easing in a simple and easy way for everyone to understand, and it’ll keep you laughing (or crying) the whole way through…

One note, granted this video hits heavily on Ben Bernanke, it’s certainly not all his fault – not by a long shot.  Living beyond our means can only go on so far, and politicians are more than happy to take advantage of public sentiment to fulfill their own agendas and help their “friends” through gargantuan spending programs and greater controls enacted under the guise of serving the “greater good”.

]]> http://www.vlogolution.com/hot/2010-11-15-quantitative-easing-video-explains-q-e-2-in-terms-everyone-can-understand/feed/ 1 http://www.vlogolution.com/hot/2009-07-22-bailouts-lifelines-and-bank-rescues-will-cost-23-trillion/ http://www.vlogolution.com/hot/2009-07-22-bailouts-lifelines-and-bank-rescues-will-cost-23-trillion/#comments Wed, 22 Jul 2009 15:32:01 +0000 http://www.vlogolution.com/hot/2009-07-22-bailouts-lifelines-and-bank-rescues-will-cost-23-trillion/

If you spent a million dollars a day since the birth of Christ, it still wouldn’t even amount to ONE trillion dollars.  However, a series of bailouts, bank rescues and other economic lifelines could end up costing the federal government as much as $23 trillion, the U.S. government’s watchdog over the effort says – a staggering amount that is nearly double the nation’s entire economic output for a year, with our most recent GDP figures coming in just over $14 trillion.

That’s more than the total amount spent by the U.S. on all the wars it has ever spent, even accounting for inflation. By comparison, going to the moon in 1969 cost an estimated $237 billion in current dollars, and the entire Depression-era Roosevelt relief program came in at $500 billion (according to Jim Bianco of Bianco Research).

These figures are considered worst-case scenarios, and that’s where we find the most humorous part of this story. According to Treasury spokesman Andrew Williams, “The $23.7 trillion estimate generally includes programs at the hypothetical maximum size envisioned when they were established.  It was never likely that all these programs would be ‘maxed out’ at the same time.”

That’s interesting… I mean, what are the odds that something like this could ever happen?! Somehow the universe likes to test us on the one in a billion odds that everything will likely happen at the same time, especially where money is concerned. Perhaps that’s because when you combine monetary weapons of mass destruction such as huge leverage, unlimited reckless spending, wild levels of borrowing, and a non-stop printing press, history has proven over and over again that there is always a day of reckoning, usually triggered by a single event that causes all the other dominoes to collapse one after the other in a giant waterfall-type debacle.

But once it’s here, watch for all the news stories blaming speculators, or republicans, or democrats, or the rich, or the Chinese, or whoever else would make a good target for finger-pointing away from those who are always responsible.  The real culprits usually include most politicians (democrats and republicans), along with the secret group of people you’ll never hear about who control them through bribes lobbying, favors, or simply because they are too powerful, wealthy, and politically well-connected to risk alienating.

If the democrats screw things up, the republicans will come in and continue the same ‘ole game.  When they screw up, it goes right back to the same few democrats that are once again presented to the public for “consideration”.  And thus the circle of destruction continues, with no one having any accountability beyond their ability to slip past the next election.

Don’t worry, though, the odds that all their shenanigans backfiring on us all at the same time is virtually nil.  Just like when Ben Bernanke flat out told us that he had no doubt the subprime crisis would be easily contained, with little spillover or no to other areas of the economy.  Uh oh, I suppose “virtual nil” still means there is a chance…

With many Americans slowly waking up to the reality that our government and banking system are entirely under the control of a criminal elite of private bankster crooks, Ron Paul has once again taken it upon himself to push for an audit of the Federal Reserve, the outcome of which would likely be so incomprehensibly shocking that the Fed may finally be forced to shut down for the greater good of our country and its citizens.

The Federal Reserve was originally created under the guise of being an “impartial” entity separate from the government that could be called upon to stabilize our economy in times of panic, while protecting and maintaining free market principles.  The sick twisted irony is that the Fed is the precise antithesis of what free markets are really about.  And since the Fed’s inception, it has done nothing but DESTABILIZE our economy with increased volatility by manipulating interest rates, along with leverage ratios used by the banks (in cahoots with those who control the Fed and the SEC).

It still boggles my mind that the SEC implemented the “Pattern Day Trader” rule to “protect the little guy” by forcing more active traders and investors to maintain at least $25,000 in a trading account or face severe trading restrictions.  I guess the SEC also forgot that they came into power largely because a big part of the 1929 crash was caused by the extension of 10:1 credit to investors (which couldn’t have happened without the Fed’s easy money policies).  So to make amends, the SEC goes on to serve and protect “the little guy” some more by allowing ONLY the largest (and most politically-connected) “too big to fail” investment banks pump up their balance sheets with over 40:1 leverage.

(read more...)]]> http://www.vlogolution.com/hot/2009-05-25-join-ron-pauls-drive-to-audit-the-fed-and-shut-it-down-with-hr-1207/feed/ 3 http://www.vlogolution.com/hot/2009-05-13-ny-hard-assets-conference-review-2009/ http://www.vlogolution.com/hot/2009-05-13-ny-hard-assets-conference-review-2009/#comments Wed, 13 May 2009 12:48:34 +0000 http://www.vlogolution.com/hot/?p=460

While I didn’t have a chance to get down to the NY Hard Assets Conference in New York City May 11th-12th, Daryl Montgomery of the NY Investing Meetup did attend. Honestly, I counted on him releasing a good summary and review of the conference so that I could focus on trading and managing positions in this crazy market! (did I say that out loud?!) He didn’t let me down, and wrote an excellent summary of the conference on his blog, along with his take of the “experts” in attendance and their “predictions”. It’s definitely worth reading the full article. Some key points are included below:

(read more...)]]> http://www.vlogolution.com/hot/2009-05-13-ny-hard-assets-conference-review-2009/feed/ 1 http://www.vlogolution.com/hot/2009-03-26-im-out-of-toilet-paper-hits-10-million-views-on-youtube/ http://www.vlogolution.com/hot/2009-03-26-im-out-of-toilet-paper-hits-10-million-views-on-youtube/#comments Thu, 26 Mar 2009 06:00:45 +0000 http://www.vlogolution.com/hot/?p=344

“I’M OUT OF TOILET PAPER!!!” just reached 10 million views on YouTube – thanks everyone for all your comments and support, we couldn’t have reached anywhere near that level without you!

I.O.U.S.A. is a film that boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. The film has been a huge hit, getting rave reviews from Roger Ebert and others. This is a 30-minute condensed version of I.O.U.S.A. designed specifically for watching and sharing on the web – for free. Learn about the staggering amount of money – $53 trillion – in financial obligations owed by the federal government to foreign investors and to every single American in the form of pensions, health benefits, Social Security and Medicare. Click here to watch on YouTube.
(read more...)]]> http://www.vlogolution.com/hot/2008-12-09-iousa-one-nation-under-stress-understanding-the-national-debt/feed/ 0 http://www.vlogolution.com/hot/2008-09-22-aig-butterflies-commercial-parody-hope-to-still-be-here/ http://www.vlogolution.com/hot/2008-09-22-aig-butterflies-commercial-parody-hope-to-still-be-here/#comments Sun, 21 Sep 2008 22:00:00 +0000 http://www.vlogolution.com/hot/?page_id=186

With the constant stream of unprecedented Federal bailouts of “AAA-rated” Wall Street companies, this parody of a recent AIG commercial featuring worry-free butterfly watching seems most fitting given the collapsing house-of-cards of one “rock-solid” institution after another… Watch at your own risk, or more prescient, risk your money in these institutional Behemoths at your own peril… When all’s said and done, who’ll be left to bail out the United States of America and its people? Who’s for REAL CHANGE?

Music: “Twinkle” by VannWestfold
]]> http://www.vlogolution.com/hot/2008-09-22-aig-butterflies-commercial-parody-hope-to-still-be-here/feed/ 78 http://www.vlogolution.com/hot/2008-03-13-marc-faber-says-fed-and-ben-bernanke-are-like-a-bartender/ http://www.vlogolution.com/hot/2008-03-13-marc-faber-says-fed-and-ben-bernanke-are-like-a-bartender/#comments Wed, 12 Mar 2008 22:00:00 +0000 http://www.vlogolution.com/hot/?page_id=163

An interesting interview with Daryl Montgomery of the New York Investing Meetup (http://investing.meetup.com/21), discussing how foreign markets such as China have fared since the Fed’s last rate cut, along with the potential global repercussions to come.
]]> http://www.vlogolution.com/hot/2007-10-25-global-perspectives-on-the-decline-and-fall-of-the-us-dollar/feed/ 0 http://www.vlogolution.com/hot/2007-02-27-learn-the-reasons-why-the-dow-dropped-250-points-in-one-minute/ http://www.vlogolution.com/hot/2007-02-27-learn-the-reasons-why-the-dow-dropped-250-points-in-one-minute/#comments Mon, 26 Feb 2007 22:00:00 +0000 http://www.vlogolution.com/hot/?page_id=66

]]> http://www.vlogolution.com/hot/2007-02-27-learn-the-reasons-why-the-dow-dropped-250-points-in-one-minute/feed/ 0 http://www.vlogolution.com/hot/2006-04-19-no-inflation-you-too-can-make-a-22-million-percent-return-in-the-stock-market/ http://www.vlogolution.com/hot/2006-04-19-no-inflation-you-too-can-make-a-22-million-percent-return-in-the-stock-market/#comments Tue, 18 Apr 2006 22:00:00 +0000 http://www.vlogolution.com/hot/?page_id=18

No Inflation? – So what’s up with the Exploding Money Supply! The fed inflates our money, reduces our buying power, but at least they can let us know the current level of M3!
Also, learn how you too can make a 2,210,369% return in the stock market!
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