The Sky's The Limit

I have been vacationing in the "Land Of 10,000 Lakes". I apologize to readers who have missed my bold commentary.


Hasn't this blow up of the financial system been outlandishly rewarding for those of us that have stood beside the Truthsayer Gold thru thick and thin? The government sponsored bailout proposed by the Three Stooges of High Finance is absurd. Paulson, Bernanke, and Cox have got to be joking. $700 BILLION will not even begin to fix this mess. Not to mention the fact that they don't even have the money. They're fear mongering aimed at strong-arming the Congress into giving them authority they do no deserve is probably the most alarming aspect of this entire event. The US Congress has been completely derelict in their duties to the American people since the beginning of this "financial crisis". It is high time they stand up to these crooks and defend what is left of the wealth of this nation lest it be stolen and squandered by these flim-flam men of Wall Street.


Q. Will these new government actions end the crisis?


A. No. It may buy a bit of time for some banks. But now that the nation's $47-trillion debt balloon and $180-trillion derivative bubble have burst, no amount of legislation can restore them. Nor can the government legislate a bull market in stocks or an end to the recession.
- Martin D. Weiss, Ph.D.
http://www.moneyandmarkets.com/Issues.aspx?Washington-declares-war-on-debt-crisis-What-to-do-2283


Why the Magnitude of the Mortgage, Debt and Derivatives Crisis Overwhelms The $700 Billion Bailout Plan Now Under Discussion in Congress
Last week, the President, the Treasury Secretary and the Federal Reserve Chairman announced their view that Congress must get to the root of the debt crisis in America by providing a broad solution that truly puts the crisis to an end.


However, the magnitude of the crisis afflicting mortgages, other debts and derivatives clearly overwhelms the $700 billion bailout proposal currently under discussion. To better understand the magnitude of the problem ... First and foremost, we urge members of Congress to disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC).


The FDIC's list has only 117 institutions with $78 billion in assets. But given the current proposal for a $700 billion bailout, it is clear that Administration officials tacitly recognize that the FDIC list understates the problem. There are many more financial institutions at risk or in need of assistance with their toxic paper.


How many more? We believe a more accurate count comes from our analysis of: (a) the derivative risks assumed by major banks, (b) the mortgage holdings of the largest regional banks and (c) all banks and thrifts with TheStreet.com's financial strength rating of D+ (weak) or lower. Based on this analysis, we believe:


1,479 FDIC member banks are at risk of failure with total assets of $2.4 trillion.


In addition, 158 savings and loans are at risk with $756 billion in assets.

In sum, banks and S&Ls at risk have assets of $3.2 trillion, or over 36 times the assets of banks on the FDIC's watch list.

These numbers alone indicate that the $700 billion contemplated for the bailout plan could be severely inadequate.


Second, Congress should seriously consider the facts ...
http://www.moneyandmarkets.com/Issues.aspx?To-Congress-Please-Do-Not-Spread-the-Panic-2298


US Government to secure mortgage market
The U.S. Treasury Department has promised “hundreds of billions” to save the US markets using its own reserves.


President Bush approved the use of existing authorities by Treasury secretary Hank Paulson to make available as necessary the assets of the Exchange Stabilisation Fund for up to $50 billion to buy more illiquid mortgage assets.


When the Government bailed out the the Government Sponsored Enterprises it promised to buy illiquid mortgage backed securities, but this announcement extends that pledge.


The ESF was created after the Great Depression and uses the US gold reserve as collateral for financial stability.


The plan will involve Fannie Mae and Freddie Mac increasing their purchases of mortgage assets. The Government will also expand its own purchase programme for mortgage backed assets, which was announced recently, to help increase the availability of capital for more mortgages.
http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=173208


I found this brief story to be quite revealing, and alarming. It prompted me to research the "ESF", Exchange Stabilization Fund. For that we turned to Wikipedia. It was most interesting to learn that the ESF as of August 31, 2008 has TOTAL ASSETS of ONLY
$ 49,966,629,808.33 . As in LESS THAN $50 BILLION Dollars. I guess that would explain then the "availability" of "up to $50 Billion to buy more illiquid mortgage assets. " The Exchange Stabilization Fund, the PPT's market manipulating kitty, has less than $50 BILLION in it? YUP! It says so right here on it's government web site: http://www.treas.gov/offices/international-affairs/esf/esf-monthly-statement.pdf


Exchange Stabilization Fund
Introduction

The Exchange Stabilization Fund (ESF) consists of three types of assets: U.S. dollars, foreign currencies, and Special Drawing Rights (SDRs)1. The financial statement of the ESF can be accessed through the links on the right hand side to either "Latest Financial Reports" or "Finances & Operations."


The ESF can be used to purchase or sell foreign currencies, to hold U.S. foreign exchange and Special Drawing Rights (SDR) assets, and to provide financing to foreign governments. All operations of the ESF require the explicit authorization of the Secretary of the Treasury ("the Secretary").


The Secretary is responsible for the formulation and implementation of U.S. international monetary and financial policy, including exchange market intervention policy. The ESF helps the Secretary to carry out these responsibilities. By law, the Secretary has considerable discretion in the use of ESF resources.


The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s, the Act provides in part that "the Department of the Treasury has a stabilization fund …Consistent with the obligations of the Government in the International Monetary Fund (IMF) on orderly exchange arrangements and an orderly system of exchange rates, the Secretary …, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities."
http://www.treas.gov/offices/international-affairs/esf/


Exchange Stabilization Fund
From Wikipedia, the free encyclopedia


The Exchange Stabilization Fund (ESF) is a branch of the United States Treasury Department which manages a portfolio of domestic and foreign currencies for the purpose of foreign exchange intervention. This particular arrangement (as opposed to having the central bank intervene directly) allows the US government to influence the exchange rate without affecting domestic money supply.


The U.S. Exchange Stabilization Fund was established at the Treasury Department by a provision in the Gold Reserve Act of 31 January 1934. It was intended as a response to Britain's Exchange Equalisation Account[2]. The fund began operations in April 1934, financed by $2 billion of the $2.8 billion paper profit the government realized from raising the price of gold to $35 an ounce from $20.67. The Act authorized the ESF to use its capital to deal in gold and foreign exchange in order to stabilize the exchange value of the dollar. The ESF as originally designed was a creature of the Executive Branch not subject to legislative oversight.

The Gold Reserve Act authorized the ESF to use such assets as were not needed for exchange market stabilization to deal in government securities. The Fund had no statutory authority, however, to engage in other activities that it began to undertake. The principal such extraneous activity it devoted itself to was lending dollars to politically favored governments.


In 1938-40, the director of the Division of Monetary Research, Harry Dexter White, worked on a proposal for loans to Latin America and participated in plans for an Inter-American Bank, which did not materialize. The plan for an Inter-American Bank, however, inspired White’s first draft of the subsequent plans for the International Monetary Fund and the World Bank that White prepared in 1941 at Secretary of the U.S. Treasury Henry Morgenthau’s direction.
http://en.wikipedia.org/wiki/Exchange_Stabilization_Fund


The US Government clearly has it's back against the wall now. The weight of this "financial crisis" to heavy to bear, and clearly overwhelming the governments resources. One must ask how the government is going to bail out the bad debts of all these banks using the country's Gold Reserves as collateral.

As discussed in my post For What It's Worth on September 11, 2008, the value of the US Gold Reserves is hardly equal to it's debt load. Let alone large enough to use as collateral in further loans to stabilize the world financial markets. It is absurd to even suggest it is possible, or lead the public to believe that these Three Stooges of High Finance can fix anything.

Recall:

According to the International Monetary Fund’s Official World Gold Holdings report, the U.S., at December 2007, held 8,133.5 tonnes of gold, or 75.3% of the world’s central bank holdings. That’s 261.5 million troy ounces, valued at $209.2 Billion at US$800 per ounce.

With $10 Trillion of Debt already on the books following the Fannie/Freddie bailout, it's clear beyond a shadow of a doubt that the US Governments debt to equity ratio hardly qualifies it to borrow $1 TRILLION more that it doesn't have the collateral to cover. It would stand to reason then, if the US Government is going to back this gigantic bailout with the country's Gold Reserves, it is going to need a much higher Gold price in order to raise the value of the collateral it wishes to borrow against. One would have to believe then that the days of suppressing the price of Gold may have finally ended, and judging by the Governments growing debt load, the sky may be the limit as to the future price of Gold.

Gold and Silver have now entered areas of technical price resistance on their respective charts. Gold at 892, and Silver at 13.75. Both are seeing some profit taking early this morning in Asia. Dips in price are buying opportunities at 860 Gold, and 12.60 Silver. A small bounce in the Dollar and retreat in Oil prices here may briefly cap recent gains in the Precious Metals. Look to add to positions or establish new positions on reactions in price.