Paul Volcker

Peter Schiff Predicts Gold ‘Going A Lot Higher’ As Trump Fed Draws From ‘Well Of QE’

In a post yesterday about Swiss-born investment advisor/money manager Marc Faber, I noted that the the publisher of the monthly investment newsletter The Gloom Boom & Doom Report reportedly told atendees at a recent investment conference that the U.S. economy “is not doing well” and that he predicted U.S. President-elect Donald Trump will be a “Keynesian” and money printer. This reminded me of an appearance last week by fellow “crash prophet” Peter Schiff on the CNBC TV program Futures Now in which the economist, financial broker/dealer, and author talked about a Federal Reserve under a Trump administration. Schiff warned viewers:

I think they’re going to go back to the same monetary stimulus that failed and is the reason that Donald Trump was elected. A lot of people believe that simply electing Donald Trump solves all the economic problems that are the reason that he was elected. But the problems haven’t been solved and they can’t be solved unless we’re willing to bite the bullet and allow a painful economic restructuring that is going to be necessary to pave the way for real economic growth. But I still think we’re going to go back to the “well of QE.” And that we’re going to get more stimulus. We’re going to get another quantitative easing. And I still believe that the Fed might reverse course and start cutting rates again, even as inflation accelerates…

“Huge bond bear market just beginning”
CNBC Video

The CEO of Euro Pacific Capital mentioned earlier in the segment that “inflation is accelerating at a much faster pace than the Fed is nudging up interest rates.” Within such an environment, gold could shine. Schiff added:

Gold benefits from inflation. The only way that you might undermine gold with inflation is if you have a Paul Volcker-style reaction from the Fed where they agressively raise interest rates to try and restrain it. And that’s not even conceivable that we could do that due to the enormity of the debt that we have. So if people understand that yes, we’re going to get more inflation, but there’s nothing the Fed can do about it but make the problem worse, then people see that there’s a lot of reasons to be buying gold. And certainly 1,200 has acted as pretty solid support. So the fact that we pulled back from 1,320-1,330 on the eve of the Trump victory back down to this support I think provides a good buying opportunity for people to buy more gold. Because I do think it’s going a lot higher during the Trump presidency.

By Christopher E. Hill
Survival And Prosperity (

(Editor’s notes: Info added to “Crash Prophets” page. A qualified professional should be consulted prior to making a financial decision based on material found in this weblog. If this recommended course of action is not pursued, then it must be understood that the decision is the reader’s and the reader’s alone. The creator/Editor of this blog is not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information contained herein.)


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Peter Schiff Warns Of Coming Inflation, Accompanying Propaganda

“Crash prophet” Peter Schiff sees inflation getting worse in America. And with it, Washington, the Fed, and the mainstream media spinning rising prices as something that’s beneficial for the general public. The Euro Pacific Capital CEO and Chief Global Strategist added a new entry Tuesday on his YouTube video blog The Schiff Report, and warned viewers of the following:

It’s going to get worse. And, what is the Fed going to do about it? Because the problem is, no matter how high that inflation number gets, they can never admit it’s a problem. Because if they admit that it’s a problem, they’ve got to do something about it. But they can’t do anything about it. Because if they want to fight inflation, what tools do they have? Just one. They’ve got to raise interest rates, which means they’ve got to end quantitative easing. And in order to raise interest rates, they’ve got to start selling their bonds and their mortgages back into the market. That will collapse the real estate market, collapse the stock market, send the economy into a sharp recession, and bring about a financial crisis worse than 2008. So because they can’t do that, they can’t do anything. So they’re going to have to tolerate inflation, no matter how high it gets. They’re going to have to convince us that it’s good for us, no matter how high it gets. They’re going to say, “Oh, well, maybe it’s transitory,” “It’s because of the weather,” “Oh, you know, we had such low inflation for so long, we need a few years of higher inflation to even it all out.” Who knows what kind of excuses Janet Yellen is going to come up with to rationalize why whatever the inflation number is- no matter how high it is- it’s always going to be a good thing?

But I wonder if the media- if the guys at Bloomberg or the guys at The New York Times or the AP or the Financial Times– will ever see through this charade. Will they ever see through this smokescreen and come out and call the Fed out on this? Will they ever say, “You know what, we’ve got too much inflation- this is not good. Do something about it.” And when the Fed doesn’t do something about it, that’s going to be a big problem for the dollar. Because that’s when people realize that this is QE Infinity, that inflation is never going to stop, that the dollar’s value is going to erode away in perpetuity. That’s when the bottom drops out of the market. That’s when the real crisis comes in. Because now the dollar really starts to cave, and puts more pressure on the bond market. That means the Fed has to print a lot more money. A lot more dollars that nobody wants to buy the Treasuries that nobody wants to keep the market from collapsing. That accelerates the inflationary spiral, and puts the Fed in a real box. Because then, it just can’t print the dollar into oblivion. It can’t turn it into monopoly money. Then it has to slam on the breaks. Then it has to really jack up interest rates. Not just a few hundred basis points- ten percent, fifteen percent, twenty percent. Paul Volcker style. Of course, the medicine won’t go down nearly as smoothly as it did back then. Not that it was so great tasting- we had a pretty bad recession in 1980. But that’s nothing compared to what we’re going to go through, because we have a lot more debt now than we had then- it’s not even close. We don’t have the viable economy. We don’t have the trade surpluses or the current accounts surpluses. And we don’t have a federal government that has a long-term financing on the national debt. It’s all financed with T-bills. And we have all these adjustable rate mortgages. We have all these corporations, individuals that are so levered-up. We’ve got all these student loans and credit card debt. We have all this stuff that we didn’t have back in the 1980s that we’re going to have to deal with- thanks to the Fed.

“Media Reports Rising Food Prices as Positive News”
YouTube Video

By Christopher E. Hill
Survival And Prosperity (


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Paul Volcker-Led Group: Illinois Could Have Trouble Meeting ‘Its Population’s Basic Needs’

Any remaining doubts I may have had about my home state of Illinois being in bad shape are gone after reading a new report from the non-partisan, Paul Volcker-led State Budget Crisis Task Force. In June 2011, former New York Lieutenant Governor Richard Ravitch and former Federal Reserve Chairman Paul Volcker assembled the task force to examine threats to near- and long-term fiscal sustainability in six U.S. states: California, Illinois, New Jersey, New York, Texas, and Virginia. From the “Summary” portion of the Report of the State Budget Crisis Task Force: Illinois Report that was released Wednesday:

Illinois’ budget is not fiscally sustainable. Despite recent progress and difficult choices, it is still in a deep hole. It cannot simultaneously continue current services, keep taxes at current levels, provide all promised benefits, and make needed investments in education and infrastructure. All of the major threats identified by the Task Force in its July 2012 report have contributed to Illinois’ current problems and will contribute to future budget-balancing struggles.

Illinois has the worst unfunded pension liability of any state, an estimated $85 billion. It has underfunded its pension systems since the early 1980s. Contributions now must escalate rapidly if Illinois is to honor promised benefits; by fiscal year 2015, pension costs (and related debt service) could take up one-fourth of the state’s resources. Illinois will not be able to fund other priorities unless it adopts serious pension reform.

Medicaid enrollment and expenditures in Illinois doubled between 2000 and 2011, growing far more rapidly than tax revenue. In June 2012 the state made major changes that reduce spending, but rising health care costs and the aging population will continue to drive costs upward. Without further reform, unsustainable Medicaid growth will crowd out other essential areas of the budget.

Illinois’ debt is also crowding out the budget. In 2003 Illinois sold a record-breaking $10 billion in pension obligation bonds, and again in fiscal years 2010 and 2011, the state sold bonds to cover its required contributions. The result of pension borrowing is that Illinois’ debt per capita is one of the highest of any state. Over 60 percent of Illinois’ total outstanding debt is due to pension bonds.

Illinois has compounded its challenges with poor fiscal management and opaque budgeting. At the onset of the 2008 financial crisis, Illinois was essentially insolvent. In the years leading up to the crisis, Illinois borrowed and shifted money across years and funds to “balance” the budget, without providing sustainable resources to pay for ongoing commitments. Budget gimmicks became a standard practice. The state has perennially pushed its bills off to the future; at the start of fiscal year 2013, unpaid obligations from prior years were approximately $8 billion. Illinois did all this without any sort of long-term financial plan to restore balance, and without reserves. Illinois has been doing backflips on a high wire, without a net.

Narrow, eroding tax bases have contributed to Illinois’ fiscal difficulties. State tax revenues were stagnant for at least a decade before the recent recession. Illinois enacted a major, temporary, income tax increase in 2011, but the additional revenues are being offset by reductions in federal American Recovery and Reinvestment Act of 2009 (ARRA) monies. Income tax revenues will not keep up with growth in the aging population because Illinois exempts retirement income. Other tax bases — on corporate income, cigarettes, and motor fuel — have been eroding and failing to keep up with economic growth. Illinois’ sales tax rates are high, but its base is narrow and the state taxes relatively few services. Illinois tax revenues are not likely to grow enough to meet future needs.

Federal deficit reduction threatens Illinois, as other states. Federal dollars account for approximately a quarter of the state’s all-funds budget and, after the expiration of federal stimulus spending, currently are $14.8 billion. Federal aid matches about 50 percent of Illinois’ Medicaid spending, and constitutes about 35 percent of the budget of the Department of Human Services, 30 percent of transportation, 20 percent of K-12 education, and 20 percent of spending for environment and natural resources. Federal spending cuts will put these programs at risk.

Illinois’ aging and deteriorating infrastructure is in urgent need of immediate repairs to meet basic standards of public safety. Beyond that, it needs expansion and modernization to accommodate future growth. Over the next several decades, Illinois’ infrastructure needs will likely exceed $300 billion, yet the state does not have a comprehensive plan to address this critical need. There are real costs associated with underfunding of infrastructure: shipping and travel delays, congestion, pollution, and diminished economic growth.

The state’s fiscal problems affect local governments in Illinois by shrinking revenue transfers at a time when these monies are most needed. The state has also proposed shifting funding responsibility for teachers’ pensions from the state to local school districts. This would eliminate some incentives that can drive pension costs upward, but would put considerable pressure on local finances. Local governments struggle with their own revenue problems, unfunded pension liabilities, and bond rating downgrades. The state does minimal monitoring of local government finances, and budget cuts could further reduce this oversight.

Illinois’ past fiscal choices and future threats challenge the state’s ability to meet its population’s basic needs, let alone accommodate future growth. Infrastructure is deteriorating. Education is threatened. Public safety, public health, and care for the needy all are at risk. Taxpayers and the state’s competitiveness are also at risk.

Illinois needs to make tough choices — now…

“Illinois’ past fiscal choices and future threats challenge the state’s ability to meet its population’s basic needs.”

Basic needs? That’s pretty bad.

This report comes on the heels of an analysis by the Tax Foundation, a non-partisan tax research group, in which Illinois residents were found to pay the 11th highest state-local tax burden in the United States in fiscal year 2010.

Early in 2011, Illinois Governor Pat Quinn hiked personal income taxes 67 percent.

It will be interesting (scary?) to see where the “Land of Lincoln” stands in next year’s Annual State-Local Tax Burden Rankings, when FY 2011 is factored in.

You can read the entire State Budget Crisis Task Force report on their website here (.pdf file).

You can view the latest Tax Foundation tax-burden rankings on their website here.


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GATA Official: 80 Percent Of Gold World Thinks It Owns Doesn’t Exist

A number of Federal Reserve Chairmen, dating back some generations- Arthur Burns, Volcker, Alan Greenspan- have been documented as acknowledging in so much that there has been manipulation of gold.

– CNBC TV news anchor Bernie Lo, on the June 21, 2012, installment of The Call

Over the years I’ve heard claims that the gold price is being manipulated by central banks and the powers-that-be. But the assertion of gold price manipulation that Chris Powell, Secretary/Treasurer of the Gold Anti-Trust Action Committee Inc. (GATA), made on the CNBC TV show The Call the other week is extraordinary. Powell told CNBC viewers:

We try to persuade investors, Bernie, that if they’re purchasing gold, they better get real gold. Metal. They should not get paper gold and keep it within the banking system. There’s a huge naked short position in gold around the world. My estimate is perhaps 75-80 percent of the gold the world thinks it owns doesn’t exist. It’s just a claim on a bullion bank that is underwritten basically by central banks.

If it’s not in your hand, or if it’s not in an allocated account in a vault that’s outside the banking system, you probably don’t really own gold

I do wonder what the value of the price of gold will be if the world ever discovers that 80 percent of the gold it thinks it owns doesn’t exist. There may not be enough zeros in the world to put behind the gold price then.

(Editor’s note: Italics added for emphasis)

“Central Banks Manipulate Gold Markets”
CNBC Video

(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)


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The Crash Prophets Revisited, Part 3

(Editor’s note: Part 1 located here; Part 2 located here)

Concluding the three-part series of posts entitled, “The Crash Prophets Revisited,” back on June 21, 2007, I discussed what past and present (at that time) government and Federal Reserve officials were predicting what the future had in store for the U.S. economy. That summer, former Treasury Secretary Robert Rubin was worried about unsound fiscal conditions and the negative impact it might have on the U.S. dollar, U.S. Comptroller General and head of the U.S. General Accountability Office (GAO) David M. Walker was touring the country warning about the “fiscal black hole” Washington had dug itself through reckless borrowing from overseas lenders, and how it was going to get a lot worse from a fast-approaching “demographic tsunami” of retiring Baby Boomers. Finally, former Federal Reserve Chairman Paul Volcker was predicting that the United States’ dependence on foreign money raised the risk of a crisis in the dollar as soon as the next two and a half years.

Almost four years later, all three continue to worry about the direction the United States is heading.

Robert Rubin

Jane L. Levere wrote on the Daily Finance website about President Clinton’s Treasury Secretary and current co-chair of the Council on Foreign Relations Robert Rubin on March 17. Rubin had just participated in a public conversation on the U.S. economy at New York City’s 92nd Street Y. From that piece:

“If you compare where we were to a year ago, we really are in much better condition,” says Rubin. “There are indeed a goodly number of positives.” But there are also, he says, “serious headwinds” in the form of possible impediments to growth. Rubin says these obstacles include “our long-term fiscal trajectory (which) is horrendous, unsustainable and dangerous” and undermines confidence — as well as state and local government deficits “that are going to be have to be closed by their constitutions.” Contributing to those figures, he says, are rising oil prices and high unemployment — which Rubin estimates at 16%, if temporary workers and people who have entirely dropped out of the workforce are included.

“The probabilities are very unclear,” he says. “While the most likely outlook may be the more positive forecast that many forecasters now have, there is a very real chance that what actually happens could fall short of that.

Rubin says that, as an investor, he is concerned about “low-probability events which, if they occur, could have huge consequences” — events such as a resurgence of terrorism, possibly in a politically unstable and nuclear armed Pakistan. He also warns the U.S. fiscal deficit could cause a crisis in the bond market, that in turn could have “severe effects on our economy.”

“It’s not inconceivable that something goes wrong in Europe,” Rubin notes. Adding that if default happens there, “that could have ramifications elsewhere.” But he admits the future is far from clear: “This is the most uncertain and complex time in my adult lifetime in trying to make judgments about what is going to happen either in the short term or the long term.”

(Editor’s note: Italics added for emphasis)

Levere noted the former co-chairman of Goldman Sachs’ longer-term outlook for the country. She wrote:

Looking at the longer term, Rubin says although the U.S. has “a dynamic society” and “tremendous comparative advantage in the global economy…the real question comes down to our political system and whether it will meet its multiple challenges, most particularly putting our fiscal house back in order… and creating the resources necessary for the public investment that is requisite for competitiveness and growth.”

David M. Walker

I’ve talked about the former Comptroller General and head of the Government Accountability Office from 1998 to 2008 David M. Walker before. These days, Walker serves as the CEO of the Comeback America Initiative (CAI), a Bridgeport, Connecticut-based project that seeks to “promote fiscal responsibility and sustainability by engaging the public and assisting key policymakers on a non-partisan basis in order to achieve solutions to America’s fiscal imbalances.” CAI hopes to “keep America great and the American Dream alive for future generations.” Discussing the prospect of raising the federal debt ceiling, Walker wrote in the Connecticut Post last Friday:

In essence, raising the debt ceiling is simply recognizing the federal government’s fiscally irresponsible practices of the past. But while failure to raise the debt ceiling is not a viable option given our current fiscal state, we must take concrete steps to address the government’s lack of fiscal responsibility. We must also do so in a manner that avoids triggering a massive disruption and a possible loss of confidence by investors in the ability of the federal government to manage its own finances. Such a loss of confidence could spur a dramatic rise in interest rates that would further increase our nation’s fiscal, economic, unemployment and other challenges.

The recent decision by Standard & Poor’s, one of the leading credit-rating agencies, to downgrade the long-term outlook on U.S. debt is yet another market signal that elected officials must begin to work together to put our finances in order before the markets force it to. Other recent signals have included the reduced appetite of foreign investors for longer-term U.S. debt and the decision of PIMCO, a global investment firm, to divest its U.S. debt holdings.

In fact, the only player with any real appetite for longer-term U.S. debt in recent months has been the Federal Reserve — and such involvement on their part essentially amounts to government self-dealing. Such self-dealing serves to help the economy in the short-term while increasing longer-term risks and potentially delaying needed fiscal reforms.

In order to begin to restore fiscal sanity, Congress should increase the debt ceiling limit in exchange for one or more specific steps designed to send a signal to the markets, and the American people, that a new day in federal finance is dawning. To be credible, any such action must go beyond short-term spending cuts for the 2012 fiscal year.

One possible step could include agreeing on a set of statutory budget controls that would come into effect in fiscal 2013. Such controls should include specific annual debt/GDP targets with automatic spending cuts and temporary revenue increases in the event the annual target is not met. In my view, a ratio of three parts spending cuts, excluding interest savings, to one part revenue would make sense.

This debt/GDP target concept, which I have been advocating both publicly and privately in recent months, gained additional momentum last week when President Obama endorsed it in his April 13 fiscal speech. It also seems to be gaining some momentum in Congress. It just may be a nonpartisan approach that can gain bipartisan support in order to help ensure that our elected officials do not play “chicken” with the nation’s debt ceiling limit as they did in resolving federal funding levels for fiscal 2011. After all, playing “chicken” with the debt ceiling would be like playing with a tactical nuclear weapon. If it explodes, it would come with a huge amount of collateral damage, including harming U.S. credibility.

(Editor’s note: Italics added for emphasis)

Failure to make progress on the debt situation soon could lead to a major crisis. Walker told CNBC’s Squawk Box on March 24:

I think we’re going to have an adult conversation. We just need to have it sooner rather than later before we have our own U.S. debt crisis. You know, a U.S. debt crisis could come within the next two to three years. We have huge interest rate risk. We have the lowest average maturity of any sovereign nation or major nation on debt. We have historically-low interest rates. We’re adding debt at record rates. We have to rollover a great amount each year. Our largest holder of our debt is the Federal Reserve. I mean, that’s not an arm’s length transaction. And QE2 is supposed to expire on June 30. Wake up Washington- we’ve got a problem. It’s time to come to work.

Paul Volcker

Maggie Caldwell of the Wilton Bulletin (Connecticut) recently reported on former Federal Reserve Chairman Paul Volcker’s visit to Stamford, Connecticut, on April 12. Volcker spoke to the local business community about the state of the economy and where it might be headed. From her April 22 article:

Faced with the worst economic downturn since the Great Depression, the U.S. economy traditionally bounces back from recession periods with gains of 4% to 6% in a quarter. Not so in this case, Mr. Volcker said, adding the economy is making a labored crawl to approach 2% to 3% growth, what he termed a “slog.”

So what are the prospects for a real pick-up in the economy?

It won’t come out of consumption and probably not out of manufacturing, though there has been a rise in productivity in the latter, he said. The problem is manufacturing represents an “increasingly smaller proportion of the economy… not enough by itself to carry us carefully to prosperity and low unemployment,” Mr. Volcker explained.

The recently retired chairman of President Obama’s Economic Recovery Advisory Board voiced his concerns about the U.S. banking system and the threat it poses to the global financial system. Caldwell wrote:

With the breakdown in the banking system followed by the subsequent federal bank bailout, Mr. Volcker said higher capital standards must be placed on banks and other financial institutions to protect the system and ultimately the taxpayer. The old problem of “too big to fail,” where the system becomes unstable and the government steps in to save it, is one that must be addressed, he said…

While splitting up the banks may not be feasible, Mr. Volcker argues that regulations must be placed on these behemoth financial institutions to protect the global financial system. Any bank that is FDIC-insured, meaning it gets subsidized by the federal government, should not be making risky deals with great amounts of assets. It’s just too big a gamble, he said, leaving the whole system in jeopardy.

“[These banks] should not be involved in risky business. Don’t do it with the protected sector where the government is indirectly or directly subsidizing the institution,” he said. Banks should instead maintain their focus on customer needs, economic needs and the constructive role of banking in the financial system, not speculative activities.

“I think it is destructive mixing up those types of activities with what we used to think of as ordinary banking,” he said. Enforcing these types of resolutions, however, must be accepted worldwide to keep banks from simply relocating to avoid policing. “It won’t be enforced if other countries don’t follow,” he said.

Finally, Volcker sees a redistribution of economic power in the coming years. Caldwell added:

The United States still boasts the world’s largest economy. However, China —and the rest of the world — is quickly catching up.

Mr. Volcker said the world he grew up in was vastly different than the one we find ourselves in today. After World War II, “everybody wanted dollars, everybody wanted help from the U.S. They respected us for our financial system and our governing system,” he said. There was a recognition of American leadership. For 100 years, the United States was the largest manufacturer in the world. Now China has eclipsed that number and its economy is growing at a staggering rate of 7% to 11% per year. In two to three decades, Mr. Volcker said, China’s economy will be as big as the United States’.

“Not per capita, but the economic force in the world will be quite different,” he said, especially coupled with the sheer size of the population of these emerging countries, three billion to our one billion in the developed world.

In summary, back in June 2007 I identified a number of influential individuals from the worlds of finance and government who predicted financial turmoil ahead for the United States. Revisiting these “crash prophets” almost four years later reveals that substantial concerns remain for Warren Buffett, Jeremy Grantham, Jim Rogers, Robert Rubin, Gary Shilling, George Soros, Paul Volcker, and David M. Walker over the nation’s economic well-being. Especially in the future.

Uncertain times, indeed.


Levere, Jane L. “Rubin, Paulson Give Mixed Forecast on U.S. & Global Economic Recovery.” Daily Finance. 17 Mar. 2011. ( 25 Apr. 2011.

Walker, David M. “Raise debt ceiling – then clamp down.” Connecticut Post. 22 Apr. 2011. ( 25 Apr. 2011.

Caldwell, Maggie. “Volcker talks about the economy.” Wilton Bulletin. 22 Apr. 2011. ( 25 Apr. 2011.


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The Crash Prophets

Vice President Dick Cheney says that his boss, President George W. Bush, has no need to apologize to the American people for not doing more to head off the financial calamity, saying no one saw the crisis coming.

During an interview Thursday with The Associated Press in his West Wing office, Cheney defended the administration’s performance on an economy that is growing weaker daily and which recently collapsed in spectacular fashion. Cheney said that “nobody anywhere was smart enough to figure it out.”

-Associated Press, January 8, 2009

Crash Prophets
June 14, 2007

Yesterday I read an article on MarketWatch that I want to share with you. Mutual funds columnist Paul Farrell wrote “‘Pop!’ Bubbles are great for America!” in response to author Daniel Gross’ new book Pop!: Why Bubbles Are Great For The Economy. In all fairness, I haven’t had a chance to read the book yet. But from what I’ve heard so far, Gross argues that economic bubbles and their subsequent popping are not to be feared, as innovation and infrastructure are utilized in the bubble’s aftermath to spur new economic growth. Rather than placing a positive spin on this “creative destruction,” Farrell sympathizes with the Main Street investors squashed by the popping of these bubbles. More importantly, he points out several prominent market watchers who are warning us that we are in the midst of economic bubbles today.

Richard Bookstaber, a risk manager and derivatives designer, played a role in the 1987 Wall Street crash and 1998 LTCM collapse. In his new book, A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation, he says, “The financial markets that we have constructed have become so complex. And the speed of transactions so fast that apparently isolated actions and even minor events can have catastrophic consequences.” In the Wall Street Journal on May 18, Bookstaber warned, “The odds are pretty high that we’ll see other dislocations that match the type of turmoil we saw with the crash in 1987 and with the LTCM crisis- Any one derivative, with some exceptions, may be easy to track. But by the time you layer a lot of them one on top of the other, it becomes increasingly complex, so a small, unexpected event can propagate in surprising and nonlinear ways — and there’s no way to anticipate all these possible events.”

Peter Bernstein, a Wall Street legend who encouraged Bookstaber to write his book, is also deeply worried about the threat posed by derivatives. Bernstein, author of the just-released Capital Ideas Evolving and 1992’s Capital Ideas, fears derivatives because of the number of inexperienced investors (speculators) utilizing them. Farrell adds, “Meanwhile, the irrational exuberance of all the inexperienced masses continues blowing the bubble while “playing” with $370 trillion in derivatives worldwide.”

Legendary value investor Jeremy Grantham, chairman of the global investment management firm Grantham Mayo Van Otterloo (GMO), said in a recent letter to shareholders we are now witnessing the first global bubble in history, covering all asset classes. “From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!” Grantham adds, “Everyone, everywhere is reinforcing one another. Wherever you travel you will hear it confirmed that ‘they don’t make any more land,’ and that “with these growth rates and low interest rates, equity markets must keep rising,’ and ‘private equity will continue to drive the markets.’”

Finally, economist Gary Shilling says the United States is fast approaching a financial storm in his INSIGHT newsletter. He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces, according to Farrell, are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst. But like Bernstein, Bookstaber and Grantham, he also feels the “speculative excesses” of private equity deals may preempt the subprime blowup. In addition, Bookstaber fears that financial derivatives and hedge funds will prick the bubbles. Regardless, the most important thing to realize is that a number of threats exist simultaneously, thereby increasing the odds for a major financial crisis in the United States and beyond.

To be continued…

Crash Prophets, Part 2
June 15, 2007

In yesterday’s blog post, I talked about how some market watchers, specifically Richard Bookstaber, Peter Bernstein, Jeremy Grantham, and Gary Shilling, are warning of a fast-approaching U.S. financial crisis. Continuing the theme of “crash prophets,” today’s post focuses on legendary investors George Soros, Warren Buffett, and Jim Rogers, and what each is saying about the future of the U.S. economy.

George Soros is a Hungarian-born billionaire investor, philanthropist and author. The American businessman is known as “The Man Who Broke the Bank of England” as he earned $1.1 billion after speculating on the British pound in 1992, believing it was overvalued. He is also recognized for his involvement with the Quantum Fund, one of the most successful investment funds ever with an average annual return of 31% throughout its 30-year history. Back in January 2006, George Soros told an audience in Singapore that, “The soft landing (for the U.S. economy) will turn into a hard landing. That’s why I expect the recession to occur in 2007, not 2006.” Soros explained that a slowing U.S. housing market would be the catalyst for a U.S. recession in 2007. Back on June 2, 2007, AME Info quoted Soros as saying, “I believe the global economy has been sustained by a housing boom that took on the characteristics of a bubble,” and he cautioned, “I expect an initial soft landing to turn into a hard one when the slowdown does not end.” On the U.S. and global economy, “A slowdown in the United States will be transmitted to the rest of the world via a weaker dollar. That is why I expect a worldwide slowdown starting in 2007.” Finally, Mr. Soros stated that, “The savings of the world are sucked up into the center to finance over consumption by the richest and largest country, the United States. This cannot continue indefinitely and when it stops the global economy will suffer from a deficiency of demand.”

Warren Buffett, “The Oracle of Omaha,” is a famous investor, head of Berkshire Hathaway, and also the world’s second richest man. On October 26, 2003, Warren Buffet wrote a piece for Fortune entitled “Why I’m not buying the U.S. dollar.” Although a little dated, this article, and Buffett’s subsequent bet against the dollar, gives us insight as to where Mr. Buffett thinks the U.S. dollar and economy are going. Buffett said, “I started way back in 1987 to publicly worry about our mounting trade deficits — and, as you know, we’ve not only survived but also thrived. So on the trade front, score at least one “wolf” for me. Nevertheless, I am crying wolf again and this time backing it with Berkshire Hathaway’s money.” Regarding his actions on the U.S. dollar, he explains, “And my reason for finally putting my money where my mouth has been so long is that our trade deficit has greatly worsened, to the point that our country’s “net worth,” so to speak, is now being transferred abroad at an alarming rate.” On the United States having avoided a financial crisis so far, Buffett says, “We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that’s the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades. The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary — and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card’s credit line is not limitless.” Finally, Mr. Buffett closes with a warning to all those who think the trade deficit is just another obstacle that can be overcome. “We still have a truly remarkable country and economy. But I believe that in the trade deficit we also have a problem that is going to test all of our abilities to find a solution. A gently declining dollar will not provide the answer. True, it would reduce our trade deficit to a degree, but not by enough to halt the outflow of our country’s net worth and the resulting growth in our investment-income deficit.”

Jim Rogers is a legendary commodities trader who picked the bottom of the commodities bull market in 1999. He is also one of the co-founders of the Quantum Fund, along with George Soros. Of the three investors profiled, Rogers is the most vocal regarding the direction the U.S. is headed. In a Reuters article on December 16, 2006, Jim Rogers talked about the future of the U.S. dollar, and predicted, “It’s only a matter of time before the beleaguered U.S. dollar loses its status as the world’s reserve currency and medium of exchange.” He added, “The dollar is a terribly flawed currency- You should hold as few dollars as possible. The dollar’s decline would go on for years to come.” In an interview with iTulip on April 3, 2007, Rogers said that a U.S. recession will occur soon. “I see a recession, and for a variety of reasons. Automobiles are in recession. Housing is in recession. There’s been an inverted yield curve for a while. You have a slowdown in business spending. The subprime mortgage and junk bond markets are a disaster happening or waiting to happen in the financial area. There are plenty of things going on. Plus we’ve had recessions every four to eight years since the beginning of time, so there’ nothing unusual about the fact that we’re about to have another one.” On housing, Jim Rogers is especially bearish. In the same iTulip interview, he responded to a question about the housing downturn and the consensus of economists that the correction is largely over by replying, “It has a good long way to go because never before in American history have so many people been able to buy houses with no money down. Even during the 1920s when the banks first tried interest-only mortgages borrowers at least had to put some money down. This time a lot of borrowers have put no money down on interest only mortgages. The results will be much worse.” In a May 14, 2007, Reuters article, he predicts an eventual U.S. real estate crash. Rogers said, “You can’t believe how bad it’s going to get before it gets any better.” He adds, “It’s going to be a disaster for many people who don’t have a clue about what happens when a real estate bubble pops- Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it’ll be worse because we haven’t had this kind of speculative buying in U.S. history.”

“When markets turn from bubble to reality, a lot of people get burned.”

To be continued…

Crash Prophets, Part 3
June 21, 2007

In the previous “Crash Prophets” posts, we examined the U.S. economic outlook of key market watchers and investment legends. Today, the focus is on U.S. government and Federal Reserve officials, both past and present. Specifically, I am talking about former Treasury Secretary Robert Rubin, U.S. Comptroller General and Head of the U.S. General Accountability Office David Walker, and former Federal Reserve Chairman Paul Volcker.

Robert Rubin served as Treasury Secretary under President Bill Clinton. On January 22, Rubin appeared on the Charlie Rose television show and talked about the U.S. economy becoming increasingly unsound, and the need for “excruciating decisions” to be made. He explained, “I think we face [huge] challenges. I think we can do very well in what is really a transformed global economic environment with the rise of China and India. But- I think we’re on the wrong track on almost every front right now, regardless of how you allocate the political responsibility, and what I’d like to see the new Congress do- and I think they’ve gotten off to a very good start in this respect- is to address those challenges.” Rubin added, “I think we’ve got to re-establish sound fiscal conditions- so we have an environment conducive to growth, and also to avoid the dangers that, as [Federal Reserve Chairman] Ben Bernanke said very recently in his congressional testimony, [underlie] unsound fiscal conditions. I think that’s a tremendous threat to the global economy.” Regarding the deficit and its threat to the dollar, the former Treasury Secretary predicted, “If the current account deficit doesn’t change, then at some point something is going to have to give. It seems to me that it’s very likely there’s going to have to be an adjustment of the dollar. The way to minimize the adjustment that you need is to have sound policy.” In a videotaped message for a dinner hosted by the Concord Coalition in New York last November, Mr. Rubin emphasized that the U.S. budget situation needed to be addressed now because the government was just 5 years away from “rapid acceleration” in spending related to Social Security and Medicare.

The tremendous financial burden brought on by entitlements also frightens David Walker, who is basically the nation’s accountant-in-chief. Walker is touring the United States through the 2008 elections, and according to Bloomberg, is “talking to anybody who will listen about the fiscal black hole Washington has dug itself, the ‘demographic tsunami’ that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.” His speaking tour includes economists and budget analysts from across the political spectrum. The message they are conveying is that if the U.S government continues to conduct business as usual in the coming years, the national debt ($8.8 trillion as of today) could reach $46 trillion or more, adjusted for inflation. Every year of inaction adds $2 trillion to $3 trillion, according to Walker. With the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses for these two programs are about to increase significantly. In addition, the U.S. government has spent the last few years racking up debt and borrowing money from foreign lenders. If overseas investors lose their enthusiasm for purchasing U.S. debt, the result will be higher interest rates in the United States. A large jump in interest rates would be a disaster, in which case some economists predict the federal government would print money to pay off its debt, leading to runaway inflation.

Known for his stance against inflation, Paul Volcker was Federal Reserve Chairman from 1979 to 1987 and the predecessor of Alan Greenspan. At a dinner hosted by the Concord Coalition in New York last November, Volcker predicted that the United States’ dependence on foreign money raises the risk of a crisis in the dollar as soon as the next two and a half years. He said, “It’s incredible people have gone on so long holding dollars… At some point, you will get a situation where people have had enough.” Foreign investors now own about half of the $4.4 trillion of Treasuries outstanding. On April 10, 2005, Volcker talked about the U.S. economy in the Washington Post, and said, “Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks— call them what you will… What really concerns me is that there seems to be so little willingness or capacity to do much about it.” He added, “As a nation we are consuming and investing about 6 percent more than we are producing. The difficulty is that this seemingly comfortable pattern can’t go on indefinitely… I don’t know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.” Finally, Volcker speculated, “I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.”

Robert Rubin, David Walker, and Paul Volcker insist that the U.S. government must act now to prevent a U.S. financial disaster. As the former Federal Reserve Chairman recalled, “A wise observer of the economic scene once commented that ‘what can be left to later, usually is— and then, alas, it’s too late.’ I don’t want to let that stand as the epitaph of what has been an unparalleled period of success for the American economy and of enormous potential for the world at large.”


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Paul Volcker Leaving Obama Advisory Role?

The U.S. expansion appears on track. Europe and Japan may lack exuberance, but their economies are at least on the plus side. China and India — with close to 40 percent of the world’s population — have sustained growth at rates that not so long ago would have seemed, if not impossible, highly improbable.

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks — call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it…

I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

-Paul Volcker, former chairman of the Federal Reserve from 1979 to 1987, in a Washington Post piece from April 10, 2005

Surprise, surpise? It’s being reported that Paul Volcker is stepping down from chairing an economic advisory board in the Obama White House. For those of you who followed, Volcker was one of my original “crash prophets.” From Bloomberg’s Hans Nichols and Yalman Onaran today:

Paul Volcker is leaving as chairman of a presidential advisory board that’s being reshaped to have more of a business-outreach mission.

Volcker, 83, was kept out of discussions on how the President’s Economic Recovery Advisory Board, which brought together business executives to come up with solutions to the economic crisis, might function next or who its new members might be, according to a person with knowledge of his views.

President Barack Obama is planning to reconstitute the board when its term expires next month and Volcker, a former Federal Reserve Board chairman, leaves, according to another person familiar with administration deliberations.

Regrettably, Volcker and his board seemed destined to be window-dressing rather than advisers to the Obama administration. Nichols and Onaran added:

Volcker, known for taming inflation in the 1980s, was disappointed with the way his advisory group became a public relations tool for the White House as its meetings with the president were televised live, making honest discussion difficult to conduct, the person familiar with his views said.

The group moved most of its work to subcommittees to get around that, presenting Obama with advisory reports on matters from financial reform to economic revival, and cut its full group meetings to about every six months…

Volcker had rocky relations with Obama’s top economic staff from the start. Although the former Fed chief was in Obama’s circle of advisers early in the 2008 election campaign, he lost much of his influence when the newly elected president chose Lawrence Summers to head his National Economic Council….

Volcker complained about getting face-to-face meetings with Obama more than a dozen times to make his case in areas ranging from financial regulation to tax reform.

Even Nichols and Onaran’s assertion that Volcker had much influence with the newly-elected president is disputable. According to the Washington Post in their website:

Volcker brought instant credibility to President Barack Obama’s 2008 presidential campaign. His weighty experience helped dispel the notion that Obama lacked the economic credentials to become chief executive during the worst economic crisis since the Great Depression.

No stretch of the imagination is required here for one to believe Volcker might have been brought on-board if only to bolster public confidence in a new White House short on business experience but head-deep in economic problems.

Furthermore, it is well-known that Volcker was an outsider in a White House that consisted of top economic adviser Larry Summers and Treasury Secretary Timothy Geithner. Newsweek’s Michael Hirsh observed back in February 2009:

Summers and Geithner are good friends and tennis partners, and if there is any friction between them, it hasn’t surfaced. President Obama appears to be mindful of Summers’s reputation for dominating the room, and he wisely created a separate advisory panel under former Fed chairman Paul Volcker, the old sage who solved the last major economic crisis, in the ’70s and early ’80s. Summers welcomes the Volcker panel as advisors, but he observes, with a hint of Larry-like disdain, that it is not going to be making policy.

Time to wrap-up shop today. The sun is setting- in more ways than one it seems.


Nichols, Hans and Onaran, Yalman. “Volcker Sidelined as Obama Reshapes Economic Advisory Panel.” Bloomberg. 6 Jan. 2011. ( 6 Jan. 2011.

Hirsh, Michael. “The Reeducation of Larry Summers.” Newsweek. 21 Feb. 2009. ( 6 Jan. 2011.


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