Monday, August 8, 2011

It Is Now Official: The Emperor Has No Clothes

"During times of universal deceit, telling the truth becomes a revolutionary act."
 -George Orwell

The emperor has no clothes...
United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative

We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

We have also removed both the short- and long-term ratings from CreditWatch negative.

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

April 2011:  Peter Barnes of Fox News interviews US Treasury Secretary Tim Geithner:

Peter Barnes: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.”

“No risk?” Barnes asked.

“No risk,” Geithner said.

Why is this guy still in office?  Why was he even given the job?  Because he used to work for Goldman Sachs AND The New York FED.

After SOARING as high as $1715 overninght in ASIA, Gold opened on the CRIMEX at 8:20AM est at $1701, and promptly sold off.  Why is that not a surprise?  Oh, I'm certain everyone was taking profits to cover further margin calls in the equity markets...

Is it just a coincidence that the Euro began selling off hard FIVE MINUTES after the London markets opened this morning at 3AM est?  The Euro sells off, the US Dollar goes up.  If this is not evidence of a serious problem with the fiat currencies, I don't know what is.  The Euro AND the US Dollar are both as worthless as used toilet paper...The Teeter-Totter Of High Finance.

Many will look at the rise in the price of Gold overnight versus the rise in the price of Silver and wonder why Silver appears stuck in the mud.  They would be mistaken.  As of 8:45AM est, Silver was up 3.16% to Gold being up 2.25%.  Look no further that the Gold Silver ratio that is sitting at 43.03 this morning, for why Silver's perceived gains are so small.  Of course we must never lose sight of the fact that the Silver market is massively rigged by the banks...continue to expect the unexpected when it comes to movements in the price of Silver.

Have no doubt, however, that those that claim to "be in charge" of the western financial markets - the bankrupt G-7 - will do EVERYTHING in their power to deny the truth about their debt markets, and "try" to continue suppressing the prices of both Gold and Silver:

From Zero Hedge
The Finance Ministers and Central Bank Governors of the G7 on Monday made the following statement ahead of the opening of trade in Asian markets and following the downgrade of U.S. debt on Friday:

In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.

Highlights from the just released G-7 statement:

G7 Says Will Take Every Action to Stabilize Financial Markets
G7 says it will commit to secure liquidity in market
G7 will cooperate closely on currency market actions
G7 says it will be in close contact next few weeks
G7 says disorderly moves in markets hurt economy
G7 says currency rates should be decided by markets

But the winning bullet point of the year is...

G7 says currency rates should be decided by markets

As the G7 commences the biggest market intervention in history to prevent the final Ponzi unwind...

Note the last word of the opening paragraph of the G-7 statement: "confidence".  And the first three letters of that word spell?  That's right folks, "CON"!  The G-7 just announced that they are committed to seeing their CON-GAME perpetuated. 

The Precious Metals markets view the G-7 statement for what it really says:  "GLOBAL QE TO INFINITY AND BEYOND!"

"We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth."


Like a heroin junkie, or an alcoholic, the USA in in denial that it has a debt problem.  No sooner are they accused of being debt abusers do they begin to make excuses and look to blame others for their eye-opening debt downgrade.

Read the entire text of the S&P downgrade at the link posted above.  This downgrade is just the first of many interventions to come regarding Uncle Sam's debt habit, before he is forced into rehab.

So the first thing the US does upon the release of the debt downgrade is claim that S&P made a $2 TRILLION math error in it's calculations, and that their debt downgrade is flawed. S&P’s Analysis Was Flawed by $2 Trillion Error, Treasury Says How can the US claim that S&P made a math error, when ALL the numbers used in their calculations are "just estimates" from the Congressional Budget Office [CBO]?  The excuses...

The White House, the US Treasury, the US Congress, and the US financial news media all attacked S&P for their unfounded debt downgrade of the USA.  Nevermind the fact that S&P warned them all ahead of the debt-ceiling debat, that a debt downgrade would be forthcominging if the US Government did not cut spending by $4 TRILLION in conjunction with raising their debt ceiling.  The denials...

From Zero Hedge 
Yesterday we showed that when it comes to projections, the CBO's own track record makes S&P shine in comparison. Apparently this fact was not lost on S&P itself which sent out a note explaining which "clarified assumption used on discretionary spending growth." Basically, as S&P says, "Our ratings are determined primarily using a 3-5 year time horizon. In the near term horizon, by 2015, the U.S. net general government debt with the new assumptions were projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption – a difference of $345 billion." So yes, while by 2021 the difference could be $2.1 trillion based on the CBO's current baseline model, the truth is that the CBO's own estimate on revenue and spending projections in a decade will likely have a +/- $10 trillion margin of error. So does anyone really care? In essence all S&P did was point out what Zero Hedge and others have been saying: that a "deficit cutting" plan which is massively back end loaded and has about $20 billion in cuts over the next year is absolutely without credit or merit. And the disingenuity on the side of Treasury to believe that someone would think otherwise is simply appalling. That said, while the markets look set to crash very shortly, the overabundance of catalysts means that it will be more than just the downgrade that throws risk into a tailspin. Although prepare for an all out onslaught by the Treasury on S&P as a scapegoat. After all in USSAA(negative outlook) it is never our fault: it is always someone else's.

From Zero Hedge
While we reserve judgment for S&P's effectiveness at being accurate in anything they do (they are, after all a rating agency and as such they goal seek results to comply with what their paying groupthink seeking customers demand), we would like to redirect to the modest topic of CBO predictive efficiency (the organization that is at the basis of the current credibility spat between Treasury and S&P, and which, incidentally has created the baseline forecast against which the debt ceiling compromise plan is supposed to cut $2.1 trillion over the next decade), by pointing out according to the same CBO back in 2001, net US indebtedness in 2011 would be negative $2.436 trillion, the ratio of debt held by the public to GDP would be 4.8%, total budget surplus would be $889 billion, and GDP would be $16.9 trillion. We won't comment on the error interval in CBO forecasts when compared to actual 2011 results, and we most certainly won't comment on the idiocy of the Treasury chastising someone, anyone, for erring, or disputing, forecasts.

By Dave Kranzler, The Golden Truth
The entire discussion in the public media forums - all of them - has focused on whether or not S&P's math agrees with the Government's. This is complete political bullshit being tossed out there in order to deflect attention from being focused on the REAL problems, which are the REAL reasons for the downgrade. Let's put the math discrepancy issue to bed quickly: the Government's forward projections for our debt levels, spending deficits and GDP growth have been tragically wrong for decades. As points out: back in 2001, the Government projected that "net US indebtedness in 2011 would be negative $2.436 trillion, the ratio of debt held by the public to GDP would be 4.8%, total budget surplus would be $889 billion, and GDP would be $16.9 trillion."

Hmmm...just looking at that dismal forecasting, and knowing that GDP is light from the projections by about $3 trillion - or about 25% - the indebted level is off by over 500% - and the budget surplus forecast was retarded, do Obama and Geithner really have any credibility by which to question S&P's mathematical prowess? And what really kills me is that everyone is discussing just the new debt levels AFTER the debt-limit deal. Why are we not including the $7 trillion in GSE (FNM/FRE/FHA) debt that the Government has guaranteed? This IS part of our debt load. The new debt level therefore is NOT $16 trillion, it's $23 TRILLION. So Obama and Geithner can take their arguments and shove them up their respective asses.

The Truth of the matter is that Obama should rightfully be wearing this rating downgrade because he was elected on promises to try and change and fix all the damage done by previous Administrations. But Obama has done nothing because he has failed to exercise any leadership. He is probably one of the weakest Presidents in the history of this country. He campaigned by gloriously reading a bunch of grandiosities off of a teleprompter and made himself out to be some sort of reincarnation of FDR and Martin Luther King. Instead, he's proved to be nothing more than a dirty dish rag for the corporate, banking and defense industry interests that control our Government. The only CHANGE that Obama helped usher in is a rapid decline in the American standard of living. Obama never really had a true plan of action to address the real problems facing this country. Or if he did, he failed to exercise the true leadership that his idols - FDR and Dr. King - exercised in order to make those plans happen. Instead we are left with a President who is really what was voted in to office: someone who has never been in a position of leadership and someone who lacked a demonstrable track record of achievement. In other words, we voted for failure and that's what we have. And those who still hold faith in Obama are the ones who believe in Santa Claus, the Easter Bunny AND the tooth fairy.

As for the ratings downgrade itself, we got what we deserved, only we deserved to have it happen a lot sooner and we deserved a much more severe downgrade. I saw this coming 10 years ago and started buying gold and silver back then. Many people saw this and warned of this many years before I figured it out. We were all laughed at and ridiculed by all the Santa Claus believers. Well, now we - the Santa Claus disbelievers - are having the loudest laugh, but not the last laugh. The last laugh will be reserved for when the U.S. dollar finally collapses. As I've said many times in this blog, Orwell is smiling in his grave...

When Risk-Free Becomes Risk-Certain
By Jeff berwick, The Dollar Vigilante
What many don't understand is that this entire western financial system is a completely artificial, non free-market system. If it was a free-market, the Federal Reserve wouldn't exist.

The whole financial infrastructure constructed over the last century all has one big, gaping fallacy at the heart of it: the entire edifice is based on US Government debt - Treasury bonds - and the idea that these scraps of paper are "risk free".

Nary a bigger lie has ever been told. Of course, if you are so foolish as to think the US dollar never depreciates and that it will always exist then you could fall for the trick.

This is the set-up. They say that a 30 year Treasury bond with a nominal value of $1 million will be paid back in 30 years with $1 million. And this, actually, is true. The rub is, however, that what you can buy for $1 million today looks nothing like what you can buy in 2041 for $1 million. Today you can buy a very nice house almost anywhere in the world for $1 million. In 2041, your $1 million will just get you confused looks and people looking on the internet to see what a "US Federal Reserve Note" is. You might get "something" for it, but it likely won't be much... maybe enough to buy a sandwich at The Museum of Fiat Currencies.

Yet, this is what is the foundation of the entire system. The lie that Treasury Bonds are "risk free" because, when worse comes to worst, Helicopter Ben can always print up more Federal Reserve Notes to give you back your money.

That is why what happened Friday sent reverberations throughout the entire world's financial structure. Nothing fundamentally changed. The US Government has been broke for a while. The US dollar has been headed towards worthlessness since 1971. But, just by someone from within the financial structure actually saying that maybe everything isn't as it seems, it shocked the world.

It's because, at this point, as Ben Bernanke has repeatedly stated, it's just a con-game. It's only about confidence. He has repeatedly stated that confidence is critical. The entire system is bankrupt. But, as long as no one says it is, then maybe they can keep the game going.

The CONfidence game.  The World has caught on to this US Treasury/Federal Reserve Ponzi Scheme.  Unfortunately, the US Congress and the American citizens will be the last to figure it out.  It was the same when Rome fell.  The Romans were left wondering, "How did this happen?" 

Former Federal Reserve Chairman Alan Greenspan acknowledged that S&P’s downgrade “hit the self esteem of the United States” but said U.S. Treasury bonds are still a safe investment.

“This is not an issue of credit ratings,” Greenspan said. “The U.S. can pay any debt it has because we can always print money to do that. So, there is zero probability of default.”

Print money to pay it's debts...  The emperor indeed has no clothes.

Hard assets are the likely benefactors of the U.S. sovereign debt downgrade on Friday. U.S. Treasury debt was sent to the minor leagues on Friday by Standard & Poor’s and is now rated AA+.

Joel Smolen, hedge fund manager at Axion Capital in San Rafael, says hard assets like gold, silver and equities of mining and metals companies in countries like Australia and Brazil are the places to be following the U.S. credit downgrade.

Lou Gerken of Gerken Capital in San Francisco says gold is going to $2,000 an ounce, an record. It closed Friday at $1,648 for the August futures contract.

“Maybe over the short run Treasurys will be okay, but if you consider what the government backs in terms of state funding then it’s going to hurt municiaplities a lot down the road. Maybe in the next week or two we won’t see much pain, but over the long term you will see a change in market thinking in bonds. I have a feeling that the J&Js of the world and the IBMs and the Apples are going to have a more attractiveness to bond investors because of the cash they carry,” Smolen says, which makes servicing debt a piece of cake.

“It’s not going to take too many sovereign wealth funds to decide that it’s better to move into gold and silver than dollars, and I think there will be some purchase of equities in hard asset companies in the days ahead,” Smolen says.

BREAKING NEWS [though not unexpected]

WASHINGTON (AP) -- Standard & Poor's Ratings Services on Monday downgraded the credit ratings of Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt.

The agency also lowered the ratings for: farm lenders; long-term U.S. government-backed debt issued by 32 banks and credit unions; and three major clearinghouses, which are used to execute trades of stocks, bonds and options.

All the downgrades were from AAA to AA+. S&P says the agencies and banks all have debt that is exposed to economic volatility and a further downgrade of long-term U.S. debt. Their creditworthiness hinges on the U.S. government's ability to pay its own creditors.

Monday's downgrades of the mortgage giants Fannie and Freddie reflected their "direct reliance" on the U.S. government, S&P said.

Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. As part of a nationalized system, they account for nearly all new mortgage loans. Their downgrade might force anyone looking to buy a home to pay higher mortgage rates.

Officials at Standard & Poor's say they will also indicate shortly how local and state governments will be affected by their decision on Friday to lower the long-term U.S. debt from AAA to AA+.

From Zero Hedge
The first of many gold price upgrades is here, as Goldman's David Greely finally catches on to what has been all too obvious to anyone with a frontal lobe: "Gold prices hit a new record high last week, closing at $1,663/toz on August 3. Despite this rally, the rise in gold prices has continued to lag the plunge in US real interest rates, with 10-year TIPS yields trading below 30 bp. With our US economics team lowering their outlook for US economic growth, implying US real rates will remain lower for longer, and with sovereign debt issues in both the United States and Europe intensifying, we are raising our gold price forecasts to $1,645/toz, $1,730/toz, and $1,860/toz on a 3, 6, and 12-month horizon, respectively." Next up: everyone else.

The last word today goes to Sam Houston.  Tomorrow, after the dust settles a bit, I will look at SIlver and Gold prices reaction to the downgrade of US debt.

By Sam Houston
The U.S. Treasury borrows money by issuing bonds.  Because it has a massive spending problem and can't live within its means it runs a perpetual and ever expanding deficit.  The deficit is financed by issuing more bonds.  This process is currently going parabolic as the U.S. debt load is expanding at an alarming rate.

The U.S. stopped minting quarters and dimes out of silver in 1964 and it removed the gold backing of its dollars in 1971. There is now nothing backing the dollar. It is pure paper as is every other currency in the world.

The bonds are mostly purchased by fund managers, foreign governments, and by the Federal Reserve. The foreign governments purchase the bonds with dollars amassed from trade surpluses with the U.S., and the Federal Reserve buys its bonds with dollars created out of thin air with a bookkeeping entry.

By purchasing the bonds, the Fed enables big government spending to expand unchecked. Without the Fed buying bonds, interest rates would rise and it would be a natural check on the ability of congress to spend money it doesn't have. The additional interest expenses caused by the higher rates would prevent the government from spending borrowed money recklessly. Enter the Federal Reserve buying the bonds with no check on their dollar creation from being backed by gold and silver and you have the crisis that we are living though today.

The debt ceiling fiasco was a predictable show where the Democrats and Republicans pretend to be opposing political parties battling it out. In reality, they are both big government statists more than happy with the status quo. The real battle is between the big government types and the small government constitutionalists led by Ron Paul.

The ability for the U.S. government to finance it's spending profligacy will not be affected by the debt downgrade. In a free market, rates would already have been much higher than they currently are and would have jumped even more on the news. In this Fed controlled environment rates may rise in the short term but it is all noise, The bottom line is the Fed can and will continue to purchase the bonds. As long as this continues the U.S. runs no risk of outright default. The dollars borrowed from previous bond issues will be paid back. All that needs to happen is new debt issues and a willing Federal Reserve to buy them with the magic of money creation.

The trade off for this money creation will be massive inflation and a crashing dollar. This downgrade, combined with the congress increasing the debt ceiling with provide cover for the Federal Reserve to begin QE3. They may not call it that, but it will happen.

An additional easily predictable result of the downgrade will be for a call for the U.S. government to increase it's tax revenues. Look for tax hikes, and sooner than we think.

So what does the debt downgrade mean? In the short term volatility and a call for higher taxes. In the long term it is just another nail in the dollars coffin and another step on the road to much higher prices for everything. As the talking heads in main stream media look for a cause of this crisis, it is important to remember the culprit is of course the Federal Reserve.

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