Is A Recession In Our Near Future?

One of the best predictors of coming recession is the yield curve. The yield curve represents the difference between short-term interest rates and long-term rates. Normally, we would expect long-term rates to be higher than short-term rates because investors need a higher interest rate to offset the risk of holding a long-term bond. When short-term interest rates go higher than long-term rates, the yield curve becomes inverted.

In the past, this phenomenon occurred prior to a recession. It has accurately predicted recession six out of eight times.

The underlying cause of the inverted yield curve is a tightening of the money supply by the Federal Reserve. Less money, means the price of money (interest rate) goes up. Recently the Feds increased short-term rates to 4.25%. The 10-year bond is currently at 4.4%, so when the FOMC meets again in March, another quarter point increase will shove the short-term rate to 4.5% and unless something drastic happens at the long-term end of the scale, we will have an inverted curve.

Which means that in all likelihood, by the fall of 2006, if not sooner, we will find ourselves in a recession.

Absolute Power Corrupts Absolutely

Lord Actons famous quote is one of my favorites. "Power corrupts and absolute power corrupts absolutely." How true. This is the downfall of all forms of government. When you put someone in power as the head of the government, they believe that they are entitled to special privilege. That for some reason, the laws do not apply to them in the same way. All of a sudden, this person who we voted into office somehow now has extensive knowledge that allows him or her to know what is best for you and I. What we eat, how much we sleep, how we drive, what we put into or onto our bodies, and finally how best to protect us from those bad people "out there."

Do you honestly believe that President Bush has your best interests in mind when he orders wiretaps on you and I without getting a warrant? And don't try to tell me that he needs to be able to act quickly. The federal wiretap law that created the FISA court allows the government to order a wiretap and then ask for a warrant up to two days later. The simple fact of the matter is, our president broke federal law. The power we give our president has corrupted him. He will now stop at nothing.

I remember junior high civics class where we learned about the Russian KGB. We played a game in class where if we could accumulate 50 signatures without getting caught, we would not have to take a test on the unit. However, if we got caught, we had extra homework assigned. The teacher enlisted a few secret informers in each of his classes and none of us were successful in our quest to avoid the test.

It was an eye-opening lesson on how a repressive government controls the people. Guess what folks? America is there now. We have government agencies including the president spying on Americans citizens. We have American citizens being held in prison without due process. We have prisoners of war being tortured in foreign countries even though we signed and support the Geneva Convention.

My prediction is that this Spy-Gate mess will consume the national media for the next several months and could even result in impeachment proceedings. Do you think Dick Cheney will be president? Not a chance. The Valerie Plume investigation is still ongoing. If George goes, my bet is so will Dick.

A tipping point like this would most definitely bring about an economic collapse at least as severe as the one we experienced in the seventies, probably worse. Get your financial affairs in order, before the next shoe falls.

Why Is Gold Money?

Yesterday I asked then question, Do You Own Gold? I gave my reasons why I, and many others, believe that it is important to own some gold as insurance against economic calamity.

I realize that many people may not even understand why gold is important or why it is even considered money. So today I would like to explain.

First, gold has intrinsic value. That means that even if it is not formed into coins, it has value. People continue to find new uses for gold every year. It is the most corrosion-resistant metal known to man. It is the best conductor of electricity. That is why they make gold plated audio cables...no loss of signal. It is beautiful, which is why it is formed into jewelry. There is only so much gold in the world so when we look at all of the uses for gold, we understand why it retains its value.

Gold is easily divisible. This means that it is easy to form it into extremely small coins or heavy golden bars.

It is durable. It will not rot, rust, corrode, break, or evaporate. It is chemically inert, so it will not react with other chemicals.

It is convenient. You can carry your entire wealth in your pocket. Not like having all your money tied up real estate.

It is consistent. 24 Carat gold is the same everywhere. No danger in getting differing qualities.

Finally the most important fact about gold. It cannot be created by governments or banks. Oh, they may try to add impurities, but that is easily discovered. This one fact is why governments and banks bad mouth gold at every opportunity. If you believe what the government tells you, then they have accomplished their goal. I can tell you this, people in China, Japan, and other countries around the world are buying gold. They are concerned about what the governments are doing to their respective paper currencies. As the government increases the supply of paper or digital dollars, the value of those dollars goes down. Gold is not affected by governments except to increase in value relative to the paper dollars.

So, do you own any gold? Well, what are you waiting for?

Do You Own Gold?

I read an interesting piece yesterday from a well-respected investment guru. He informed his readers that he owns gold and has for some time. Basically, there are two ways to own gold, you buy it and hold it. This would be for insurance.

The other way is as an investment. With this gold you are looking at making a return on your investment. This is much harder to accomplish, but over the last three years, this has been a good one.

The insurance is different. You would hope that nothing happens that would force you to use your insurance, but it never hurts to be prepared. Just as most of us pay life insurance premiums and auto insurance premiums, owning gold is like paying an insurance premium. We certainly do not want to die or be involved in an auto accident. Nor do we want to go through a currency or financial crisis of some sort, but the insurance is there, just the same.

Why gold? It is a constant store of value. You see, when the price of gold goes up, it is not that the value of gold has increased, but the value of money has decreased. So instead of keeping all of your money in dollars or some other paper currency, the gold acts as a hedge against loss.

Now I am not saying that you should keep all of your cash in gold, just some of it. A little will go a long way if gold goes anywhere near its natural high based on the amount of dollars floating around the world.

To give you an idea of how high gold could go; look at the purchasing power of gold during the great depression. An ounce of gold could purchase a brand new Bentley automobile or a hotel in San Francisco. Just four ounces purchased 5,400 acres of prime real estate in California.

Please understand that just because the price of these items has risen so high in recent years does not indicate that they are worth that much hard currency (gold). It means that the purchasing power of the dollar has lost almost all of its value.

The dollar has lost 95% of its value since 1913 and if inflation continues at a modest 2-3% over the next 10-15 years, the dollar will lose another 50% of its value. Gold allows you to rest a little easier at night, knowing that you are insured.

And hey, if nothing happens, and the economy continues to chug along, you can always pass down your gold holdings to your children. I do not know of any other type of insurance that you can purchase once and hand down from generation to generation. Do you?

Remember yesterday I talked about our Risk Adjsuted Asset Management System (RAAMS)? And how it has returned a whopping 162% since 2000? Well, only 10% of our portfolio is in precious metals (gold and silver). Want to find out more, click on the link below and receive a free report.


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Revisiting GM

A few weeks ago I wrote about GMs woes and how the future just does not look good. Today I have a few more facts for you to digest. I hope you do not own GM stock or collect a GM pension check.

Here are some numbers:

1. GM monthly sales are down for the fourth consecutive month.
2. GM lost $4 billion in 2004.
3. GM is slashing 30,000 jobs.
4. GM is closing 12 plants to "bring capacity in line with demand."
5. GM's SUV sales are such a disaster it is offering "Red Tag" discounts of $10,000 on some models.
6. GM's market share fell 1.2% in November, to 23.8%.
7. Industry wide vehicle sales fell 15.7 million units, from 16.6 million a year earlier.

Things are not looking too good for our bell weather stock are they? Here is another fact that is hard to escape. It costs GM $2500 more to build a car than it does Toyota. Most of this cost comes from GMs ever increasing medical insurance costs. You see, GM has nearly twice as many retirees as current employees. GM provides pension checks and medical coverage for these retirees. Over the next several years as GM reduces their workforce by 30,000 the percentage of retirees to employees will climb even higher. GM has dug itself into a hole from which there is no escape.

Now their latest news release: GM will increase production in 2006 to 1.25 million vehicles up from 1.18 million this year; a 6% increase. Does anybody see a problem here? Why would you increase production when you are selling less vehicles, trimming your workforce and shutting 12 plants to "bring capacity in line with production?"

There is only one answer; the management at GM is incompetent. They deserve whatever befalls them. Unfortunately, our ever-vigilant government will probably step in and bail them out when the hammer falls. This will only prolong the inevitable. And remember, as GM goes, so goes the country.

As mentioned last week, our Risk Adjusted Asset Management System (RAAMS) indicates that we are in a period of high market risk and therefore we are invested in defensive funds to take advantage of any adverse move. Does it work? Well, since 2000 our portfolio has increased 162%. How have your investments done the last five years?

To find out more about RAAMS, click below for a free report.


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Bear Market to Resume Shortly

If you have read my previous posts, you will know that I believe we are in the midst of a secular bear market. The last secular bear market occurred in the late 1960s and lasted until 1982. Secular bear markets are like secular bull markets, they last a long time. Typically a bear market does not end until stock valuations as measured by P/E ratios drop below what I call the normal range. The average range for P/E ratios historically runs between about 14 and 17. We are currently at about 19.3, which is still a little high. The current bear market will not be finished until we see P/E ratios down in the single digit range. To get there, one of two things must happen. Either the prices of stocks must drop (best bet) or earnings must go through the roof (slim chance).

An article yesterday on Bloomberg Here announced that the housing bubble has burst. Now I don't know if that is an accurate assessment or not, but like I have said before, once these things start appearing in the mainstream press, they tend to become self-fulfilling. I have been predicting this for some period of time simply because of loose credit, low rates, and massive money creation.

Now back to the bear market. As you know, the market does not move in a straight line. Instead it tends to move in waves, up and down. Lately we have been in an up wave. In fact a recent article by Mike Burk here states that all the major indexes closed within 1% of multiyear highs. He claims that this is an indication of a bull market. I disagree. I believe that what we have seen the past several months has been nothing more than a bear market rally. Otherwise known as a bear trap. Don't get caught.

If the housing market takes it in the shorts as I believe it will, then we can look forward to a resumption of the bear market. I certainly hope you have positioned yourself to take advantage of this market environment.

Our Risk Adjusted Asset Management System (RAAMS) indicates that we are in a period of high market risk and therefore we are invested in defensive assets and funds to take advantage of any adverse move. Does it work? Well, since 2000 our portfolio has increased 162%. How has your investments done the last five years?

To find out more about RAAMS, click below for a free report.


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NEW ELEMENT FOUND!

This comes from Gary Halbert, one of the world's best copywriters. You can read more of his writing at http://www.thegaryhalbertletter.com He posts copies of his newsletter free for the reading. Enjoy!


The recent hurricanes and skyrocketing oil and gasoline prices helped to prove the existence of a new element. In early October 2005, a major research institution announced the discovery of the heaviest element yet known to science.The new element has been named "Governmentium."

Governmentium (Gv) has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called 'morons' which are surrounded by vast quantities of lepton-like particles called 'peons.' Since Gv has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A minute amount of Gv causes one reaction to take over four days to complete, when it would normally take less than a second!

Gv has a normal half-life of 4 years; it does not decay; but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutronsexchange places. In fact, Governmentium's mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming 'isodopes.' This characteristic of moron promotion leads most scientists to believe that Gv is formed whenever morons reach a certain quantity in concentration. This hypothetical quantity is referred to as 'Critical Morass.'

When catalyzed with money, Gv becomes "Administratium' (Am) - an element which radiates just as much energy as Gv, since it has half as many peons but twice as many morons.

Platform Companies and The End of The Welfare State

Below is an email I sent to George Ure of UrbanSurvival.com. It concerns comments he made about the increasing issues surrounding global outsourcing and a new book that has been written on the subject. If he replies, I'll post his response tomorrow.

As you read the letter, think about how this could affect you. Are you a production worker or a service worker in an industry that could outsource your job overseas? Are you currently enrolled in a government entitlement program that could disappear in the next 10 years? How will these changes affect your standard of living? How will you prepare for these changes?

Dear George,

As always, I enjoy reading your thoughts on all manner of things economic. This week is no exception. Being away from my desk for a couple of days, I had to go back and catch up. Of interest was the GAO report to congress discussing the issues surrounding global outsourcing. I would direct your attention to a recent book "Our Brave New World" by Charles and Louis-Vincent Gave, and Anatole Koletsky.

While I do not agree with everything they say about how the trend in global outsourcing will affect our economy, they make some interesting observations. First, they see a rise in "platform companies." These are companies which design and market products and services while farming out production to low-cost manufacturers, usually overseas in low-cost labor countries.

They have significantly lower capital costs, no factories to build and maintain, no expensive equipment to buy, and no workers to pay or lay off when the economy slows down. In fact, the authors believe that these "platform companies" are the new growth companies based on how they are organized.

The second and what seems to me, a more important point is their observation that as more companies switch to the "platform company" model, many will begin to realize that they should domicile their research and marketing activities in countries with low marginal tax rates. This benefits the employees as well as the shareholders, but it sounds a death knell for a government that has an ever-increasing appetite for tax revenue to fund operations and pay interest.

In fact this migration has already started. On any given day, the biggest foreign net buyer or seller of US Treasuries is the Caribbean Islands. This is due to some of the largest hedge funds operating in the Caribbean Islands. And it doesn't stop with financial companies. Electronic Arts is incorporated in the Caymans, Hong Kong Land is incorporated in Bermuda. If this trend continues, it will lead to a collapse in tax receipts in countries that do not adjust to this new model. And as you pointed out in your comments following the GAO report, the paradigm shifts ever so slowly.

They conclude that the rise of "platform companies" could lead to the end of the Welfare State. I wonder if the GAO or anyone in government has managed to reach these conclusions?

Hope you enjoyed the letter. If taking charge of your financial future is something you are interested in pursuing, click below and send for my free report, "The Risk Adjusted Asset Management System (RAAMS)."


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As Sure As The Rising and Setting Sun

Markets move in cycles. No one really understands why, but they do. In fact all of nature moves in cycles. I guess it is just natural. The stock market, the bond market, and the real estate market, all move in cycles. As a rule people, and the government in particular, do not like cycles. It is not that they don't enjoy the upswing in the cycle, it's that the downswing always seems so painful.

So, fresh from the pain of a market drop in 1987, the feds create the Plunge Protection Team (PPT) by presidential executive order, a group of government folks, bankers, and large investment houses, who step in to the markets and attempt to prevent or at least slow market drops.

But as Dr. Mises, the great Austrian economist explains, the market cycles are a natural method of cleansing the markets of excesses, which tend to build up during bull markets. By allowing the bear market swings to occur, the system cleans out the malinvestments and directs investments into areas where capital is most needed. Whenever governments interfere with the natural cycle of the markets, the results are bigger swings of greater severity.

The self declared experts at the Fed believe that increasing the supply of money helps to stimulate spending and helps to smooth those cycles. But as history shows, they only prolong the misery. Prior to the 1920's, market drops were, while steep, of a short duration, usually only a year or two in length. After the market crash of 1929, the government increased the money supply and created all kinds of programs to encourage spending. The result was a depression that lasted over ten years. It wasn't until the U.S. entered World War II that we finally began to see a rebound in the economy. Clearly the government's meddling did more harm than good.

Now we find ourselves faced with a similar situation. After the market sell-off in 2000, the government has done everything in their power to bolster the market including increasing the supply of money. The market decline that started in 2000 was just the opening bell, announcing the beginning of a bear market that will probably last at least through 2010. Whether our economy suffers through a severe recession or even depression remains to be seen, but I would say the chances are good that one or both will happen.

What most people fail to realize is that normal volatility is necessary in the markets. It keeps capital flowing into areas where it is needed most and it creates profit for investors. Without volatility there would be no profits. The trick is to position investments in such a way as to take advantage of the current phase of the cycle.

I have been working on a simple, easy to use, system that allows you position your investment dollars to maximize returns while minimizing risk. It does not involve market timing, or any type of stock or option picking. To utilize the basic system only requires about 30 minutes once a year. If you would like to hear more about this revolutionary investment system send me an email to alertinvestor@freefollowup.com.


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Happy Peak Oil…And Thanksgiving

There is news out today, not in the mainstream media mind you, that claims peak oil will officially arrive this Thursday. Not that you should panic or anything. The way this will play out will take years. It will be a slow escalation of prices, but make no mistake, it will happen.

Matt Simmons, an investment banker that specializes in the energy markets, predicts that by 2010, oil will sell for $200 per barrel in 2005 dollars. Let's see, $60 dollar oil equals $2.35 per gallon or so, then $200 oil equals something like $11.00 per gallon gas. Whew! That's a little rich for my blood. Sure makes investing in a hybrid vehicle of some type look like a good idea.

And lest we forget just how dependent we are on fossil fuels, stop and think about how many trucks roll down the highway every day of the year delivering food, clothing, medicines, and other necessities to your fair community.

If you think that GM is in trouble now, imagine what it will be like when no one can afford to drive cars and SUVs because of super high fuel prices. My prediction is that GM won't make it to 2010 in it's current form. The financial cards are stacked too high against it's survival.

By hey, it's the holidays, and we have a big juicy turkey in the oven. Let's eat, drink, an be merry, and not worry about tomorrow.

Economic Data Points to Further Cooling

It is shaping up to be a cold winter economically speaking. Let's look at some of the data. First of all, the Consumer Price Index was reported a slight rise of 0.2% for October and that number made headlines. I mean think about it, even with the rising price of gas, and all of the problems with hurricane damage, 0.2% does not seem like much does it? What the media is really good at is reporting partial statistics in an effort to make things look as good as possible. If you read the entire report the numbers will shock you. For example, energy costs increased by 29.5% over last year. If you calculate an annual rate based on the last three months numbers, you will arrive at something in the neighborhood of 89.3%. Add to that transportation costs increasing by 26.3% and you have the makings of some serious price increases as those costs trickle down through the economy.

Add to these numbers the fact that October housing permits fell by 6.7%, the largest drop since 1999. It appears that the news that has been trickling out about the cooling real estate market is showing up in the official government stats. If real estate continues to slow down, the demand for money will slow and the Fed will have to inject more liquidity into the financial system to keep things afloat.

That brings me to another piece of news that I first read about on Tuesday and now it seems to be showing up everywhere. The Fed announced that they are going to cease the publication of their M3 monetary aggregate statistics. What is M3? Well, it is one of the measures of total money in circulation. Now I admit, most people do not follow the Fed's reporting of M1, M2, and M3 and so may think it doesn't matter. But many people do follow these numbers because they get a feel for how much money the Fed is creating. The softer the economy, the more liquidity the Fed creates in an attempt to keep the party going. I have heard two different views on the discontinuation of the M3 measure.

First, the measure of M3 is no longer relevant because thanks to electronic or digital currency, and low reserve requirements, the banks can create unlimited amounts of money out of thin air. Since very few people actually demand money in hard currency, it is simply a matter of adding numbers to an account electronically. Their logic is that the Fed has no idea how much money is being created out there. Kind of scary eh?

The second view is a little more ominous. There are those that feel that the primary reason the Fed is discontinuing the reporting of M3 is to hide stock market interventions. You see for years there has been a story circulating about a group called the plunge protection team or PPT. It supposedly was created after a presidential executive order was signed into effect by president Reagan on March 18, 1988. The original name of the group was the Working Group on Financial Markets or WGFM. They were formed after the 1987 market meltdown with the idea that the government needed to be able to intervene in the markets during times of high volatility in an effort to smooth the price action. Their primary means of funding their operations is through the use of repos or repurchase agreements. It just so happens that M3 includes the amount of repos, which lately have been fairly significant. So the feeling is among market watchers that the Fed by discontinuing the reporting of M3 will be able to hide their market interventions from the public so as not to cause alarm should it become massive. Sounds like they are preparing for the next leg down in the current bear market.

Everyone who is a free market advocate, including myself, believes that this manipulation by the government only exacerbates the problem. While they may be able to effect the market direction short term, it will only worsen the drop in the future. In fact any intervention by the government in markets or money supply only worsen the problem and cause more pain later, but then you knew that, right?

The Perplexing Puzzle of the Published Passenger Lists

As I promised yesterday, here is the original article by Dr. Gary North about the passenger manifests of the doomed 9/11 flights. Couple the questions raised by Dr. North with the latest research paper from Dr. Smith of BYU and it does cause one to think.

Depending on how old you are, you may remember learning in school about how Russia always lied to their people about us. About how good we were and how bad they were. These revelations along with the recent story about CIA torture camps in Eastern Europe might cause one to wonder just which country is good and which country is bad.

Gary North's REALITY CHECK

Number 82 October 12, 2001


THE PERPLEXING PUZZLE OF THE PUBLISHED PASSENGER LISTS

Maybe you like puzzles. I hope so. I don't like
them. I regard them as a challenge, not a game. I avoid
them because, when I cannot find a solution, my mind won't
stop working on them. Then I get very frustrated. So, I
avoid magic shows, crossword puzzles, and similar brain-
twisters.

Yet I am also a historian with a Ph.D. Historians are
trained to solve puzzles with insufficient pieces.
Historians never have all of the evidence that they would
like in order to come up with a coherent explanation of
what happened. They always want another piece in the
puzzle before they go into print. (Of course, once they go
into print, they will tend to reject any newly discovered
piece that messes up their version of the completed
puzzle.) At some point, they are supposed to come to a
conclusion. They are supposed to make a judgment about
what happened.

I am presently stuck. So, I am sending out this
report. Maybe there is someone my list who can get me
unstuck.

Years ago, I saw a movie, "My Cousin Vinnie." Vinnie
was studying to be a lawyer. He wasn't a good classroom
student, but he had a unique ability. He could figure out
how things fit together. Show him a magic trick, and he
could tell you how the magician did it. Tell him a story
with a missing link, and he could identify where the
missing link was, and maybe what it was. He could solve
puzzles.

I am trying to locate Vinnie.

This puzzle is no game. The United States has gone to
war on the basis of one solution to this puzzle. We have
not yet been told what this solution is.

The puzzle begins with the crash of four airliners.
We must work our way backward from this.

To do this, I decided to begin with official
information that was published 16 days after the attack.
To work my way backwards, I first leaped forward.


ALLEGED HIJACKERS

On September 27, the Associated Press released a story
about the hijackers. The version that I read, published in
the ATLANTA JOURNAL-CONSTITUTION, referred to these men as
alleged hijackers. I shall do the same.

I located this article by using www.daypop.com.
Daypop is the most complete archive of recent news stories
on the Web. Daypop allows you to search for stories that
are up to four weeks old.

I searched for "passenger list" and "hijackers."
Daypop produced three pages of links -- not that many.
Almost all of these links were to the same AP story, which
was published by numerous on-line news sources. Here is
the version I used.

http://www.accessatlanta.com/ajc/terrorism/nation/0927hijackerlist.html

The headline reads: "FBI releases updated list of
alleged hijackers." Above the headline is a link that
says, "Click here to see 19 suspected hijackers." I
clicked it. A large box popped up. It took a while for
the photos to appear. There are 19 photos, along with
names. The names appear to be Middle Eastern -- Arabs.
Most of the men look like Arabs, although a few might pass
as Mexicans. Only one of them looked vaguely like a
European.

They are divided into four lists, according to which
flight they are said to have boarded. There were five men
on American Airlines Flight 77, five on AA Flight 11, five
on United Airlines Flight 175, and four on UA Flight 93 --
the flight that crashed in Pennsylvania.

Let's return to the AP story itself. We read the
following:

As Attorney General John Ashcroft launched a
"national neighborhood watch" with the release of
the photos, FBI Director Robert Mueller
acknowledged that questions remained about
whether an accompanying list contained the true
names of the 19.

"What we are currently doing is determining
whether, when these individuals came to the
United States, these were their real names or
they changed their names for use with false
identification in the United States," Mueller
said.

The FBI director said there was evidence that one
or more of the hijackers had had contacts with
al-Qaida, the network associated with Osama bin
Laden, the exiled Saudi millionaire who is the
Bush administration's top suspect in the attacks.

This story indicates that, as of September 27, the FBI
was not certain whether these suspects had used their real
names. The remainder of the story listed each of their
names, along with possible aliases. The aliases all look
like Arab names.

I have discovered no additional information released
to the general public regarding these suspects.

I now backtrack to the morning of September 11. The
issue that I am trying to deal with is airline security.
To draw rational conclusions about how the alleged
hijackers accomplished their acts of terrorism, we must
begin with airline security.

The United States has now gone to war because of a
breakdown somewhere in airline security procedures. Yet
nobody in government is blaming the specific airlines.
They are blaming the procedures. This is why I want you
mentally to go through the procedures with me. I have hit
a brick wall. I am asking you to help me knock it down. I
will show you how I went through the procedures mentally.
See if you can figure out which step I missed.

Step One is check-in.


STEP ONE: CHECK-IN

On September 11, airline check-in counters were the
only places in the United States that required travellers
to present a photo ID in order to travel. A photo ID meant
(and still means) a card issued by some branch of civil
government. Years ago, the United States government took
the first step toward a national ID card when it mandated
the requirement that all passengers present a photo ID card
before being allowed to get on a commercial airplane.

This means that the tightest security that the typical
American ever confronts is airport security. This is the
model for all other security systems governing the general
public.

Let's go through the check-in routine together.
Pretend that it's September 11, and you are a check-in
agent at either a United Airlines counter or an American
Airlines counter. It is your job to ask the standard
questions. "Did you pack your own luggage? Have you had
it in your possession at all times?" Then you ask for a
photo ID. The name on the ID must match the name on the
ticket. The photo must match the person presenting the
card.

I began with American Airlines, Flight 11. This was
the plane that crashed into the north tower of the World
Trade Center. I began with the list of passengers. This
was not difficult. The passenger lists for all four planes
are posted on CNN's Website.

Click on the link. This is a long link for the
formatting of my newsletter. If it is broken on your
screen, you will have to paste it into your Web browser's
address box. This will take two steps.

http://www.cnn.com/SPECIALS/2001/trade.center/victims/AA11.victims.html

The CNN page says that there were 92 people on board.
I suggest that you print out the list. Part of my exercise
was to count the names of the passengers. Besides, you
never know when a Web page will disappear.

Do you have the print-out in front of you? Count the
names. I get 86 names, including the crew. But the CNN
page says 92 people were on board.

None of the 86 names is an Arab name. This is very,
very strange. First, how did the CNN list-compiler know
that there were 92 people on board? Five of them are not
listed. Second, how did anyone get on board who was not on
the list of ticketed passengers?

To get onto the flight legally, each passenger had to
have a ticket with his or her name on it. Each passenger
had to present a photo ID to the check-in agent. The
check-in agent was supposed to look at the picture and the
person, and then make a judgment. Was it the same person?
If the mandated procedure was followed, the check-in agent
decided that the ticket's name, the photo ID's name, the
photo, and the ID-holder's face all matched. If there was
any doubt, the check-in agent was supposed to ask for some
other form of identification. If there was none, the
person was not allowed to board the plane.

We are told by the United States government that five
Arabs somehow got through this initial screening procedure.
How did they do this? This is puzzle number one regarding
Flight 11. Puzzle number two has to do with the incomplete
passenger list.

Airlines keep a list of passengers on board. This is
for insurance purposes, should there be a crash. It is
also for the purpose of notifying relatives after a crash.
It is also for the purpose of in-cabin screening. "Has
everyone paid who is on the plane?" And, finally, is there
a hijacker on board?

On American Airlines Flight 11, there were no Arab
names on the passenger list. So, how does the government
know who the hijackers were?

Why does CNN's Web page list 92 dead, when there are
only 86 name listed? Who was the non-Arab?

I have seen nothing about government accusations
against American Airlines for substandard check-in security
procedures. In fact, I have seen nothing about the
discrepancy between the published names and the published
numbers regarding how many people were on board.

Let's go to American Airlines Flight 77. This plane
crashed into the Pentagon.

http://www.cnn.com/SPECIALS/2001/trade.center/victims/AA77.victims.html

We are told that 64 people were on board. I count 56,
including 6 crew members. There is no explanation offered
for the absence of 8 names. There is no Arab name on this
list.

Something is definitely wrong here.

What about United Airlines? Did the company's
employees follow the same check-in procedure? Presumably,
they did. I checked Flight 175, which crashed into the
south tower.

http://www.cnn.com/SPECIALS/2001/trade.center/victims/ua175.victims.html

There were 56 people on board, according to CNN's
summation. I printed out the list. I counted the names.
Once again, they don't add up. The summation says there
were 2 pilots, 7 flight attendants, and 56 passengers. I
counted the names. The total is 56 -- the number
attributed to the passengers. Nine names are missing.
None of the listed names is Arab.

This leaves United Flight 93, which crashed in
Pennsylvania. It had 45 people on board, according to the
summation.

http://www.cnn.com/SPECIALS/2001/trade.center/victims/ua93.victims.html

Again, there is a discrepancy. Only 33 names appear
on the list. A dozen names are missing. Among the missing
names are the four Arabs who allegedly hijacked the plane.

So, the published names in no instance match the total
listed for the number of people on board. CNN really
should offer an explanation for this discrepancy.

In no case does an Arab name appear on a list, let
alone one of the alleged hijackers.

How did CNN fail to count the names accurately? Did
the airlines not provide the full list of each flight's
names? Perhaps so.

This raises the next question. How did the airlines
know how many people were on each of these flights? The
airlines must have had a list for each flight. What
possible reason could they have had for not releasing the
full lists? Finally, why are there no Arabs listed on any
of these lists, let alone the specific Arabs identified by
the Attorney General and the head of the FBI in an
Associated Press story?

I do not understand how 19 Arabs could have evaded the
check-in procedures. I also do not understand why every
passenger's name is not on the published lists.

I have seen no other source of the passenger lists.
(Another search word: "manifests.") It has now been over a
month since the attack. Where is a complete list? I don't
know. Where is a complete list of all four flights that
has the alleged hijackers' names on it? I don't know.

Finally, where is some enterprising reporter who is
trying to get answers? I don't know.

What about Step Two?


STEP TWO: ON-BOARD SEATING

There were multiple terrorists in the cabin of each
plane when the plane left the ground. They did not get
there through the ticket-screening system. Or did they?
If they did, then how?

I assume here -- again, maybe I am wrong -- that they
got there through another entrance. Maybe they were part
of the food service team.

These were all cross-country flights. The planes were
loaded with lots of fuel, which is why they were selected:
flying bombs. On cross-country flights, passengers still
are given meals, not just pretzels and soft drinks. The
number of meals is supposed to match the number of people
on board, or at least come close.

Flight attendants have a list of passengers and their
assigned seats. This is to enable them to identify
passengers who have requested special meals, such as kosher
meals. It is also to enable them to identify people who
have not bought a ticket. Flight attendants are supposed
to know who has been assigned to which seat.

It is September 11. Here is the situation: there are
an extra five men on three flights, and four extra men on
Flight 93.

You have already seen the photos of these men. If I
had been a flight attendant, and I saw five extra men who
looked like they did -- young, Arabic, and without tickets
-- I would have asked them to explain why they were on
board. I would not have assumed that they belonged there.

Are we to assume that on four separate flights, none
of the flight attendants noticed that something was wrong?
Are we to believe that they failed to notice that five or
four extra passengers were on board who were not on the
passenger list? Furthermore, these men looked as though
they were of one ethnic group. They all had Arabic
accents, I presume.

Why did the flight attendants ignore all this? There
is no indication from the government that these men took
over all four planes while the planes were still on the
ground. Even if they had, the pilots would not have taken
off if there were hijackers on board. They would have
waited to hear the demands, and the demand to "take off
now" would have been refused by at least one flight crew --
and I believe all four.

We need a theory of the co-ordinated hijacking that
rests on a plausible cause-and-effect sequence that does
not assume the complete failure of both the check-in
procedures and the on-board seating procedures on four
separate flights on two separate airlines. If the
explanation does rely on a theory of check-in procedural
breakdown, where is the evidence?

I have heard no such theory from the government. I
have heard no such theory from the news media. In fact, I
have heard neither the government nor the mainstream media
even mention these perplexing problems. Perhaps you have.
If so, I would like to see the Web link or a reference to
the newspaper or other source where these matters have been
discussed.

I don't mean this or that discussion forum devoted to
conspiracy theories. I mean the mainstream press. It is
very peculiar that the mainstream media and the government
have not offered a detailed theory of how the hijackers
evaded both the check-in procedures and the pre-takeoff
seating procedures.

Perhaps some airline industry publication has dealt
with this. If so, I would like to see the document.

I would also like to see passenger lists that include
every passenger's name. I want to see 19 Arab names on
these complete lists.

If these updated lists are ever released, I want to
see that they match the original lists that were not
released immediately. I want to know that any new names
have not been added retroactively. I want evidence -- from
travel agencies' records and credit card records -- that
everyone on each plane's updated passenger list actually
bought a ticket.

Is this to much to ask? So far, apparently it is.


CONSPIRACY THEORIES

Conspiracy theories are a dime a dozen. Well, not all
of them. We have gone to war based on one of them. But I
don't see how anyone can make an accurate judgment about
who was behind the attacks until he has a plausible
explanation of how the hijackers got onto the planes and
were not removed.

I am not interested in any theory about who did it
until I have a plausible explanation for how he did it.

The key to discovering who planned this attack is
inescapably tied to the procedures used by his agents to do
it.

I don't see how they did it, yet I know that three
planes crashed into highly visible targets. A fourth plane
had veered off course, and it seems plausible that it was
part of a co-ordinated attack. This has yet to be proven,
but it seems plausible.

We keep hearing about plastic knives and box cutters.
But we hear nothing about how these 19 men took plastic
knives and box cutters onto four planes, and no one noticed
that anything was amiss until the planes were in the air.

So, you tell me. How did 19 Arabs get onto these
planes and then remain inconspicuous until the planes were
aloft?


CONCLUSION

I have no conclusion. I told you this at the
beginning. I am stuck.

I am looking for Vinnie. Maybe you're Vinnie. After
you have drawn your own conclusion, and it seems
reasonable, let me know.

But before you do, please run your theory by someone
whose judgment you trust. See if that person thinks your
theory is plausible. See if he or she can pick holes in
it. Don't make me your first guinea pig. I want to be at
least second. Third would be even better.

We need to get the division of intellectual labor
working here. As the Bible says, "Two are better than one;
because they have a good reward for their labour. For if
they fall, the one will lift up his fellow: but woe to him
that is alone when he falleth; for he hath not another to
help him up" (Ecclesiastes 4:9-10).

If you have no logical explanation, join the club.
Maybe you know a potential Vinnie. Use your FORWARD button
to send him or her a copy of this report. Ask for
feedback.

Notice to all would-be Vinnies: with each
forwarding, e-mail software adds either a carrot
-- this is a carrot: > -- or a vertical line.
This pushes the text to the right. If you have
received this after several forwardings, the text
may be difficult to read. You can get a fresh
copy by sending an e-mail to puzzle@kbot.com, or
click this link and then click SEND:

mailto:puzzle@kbot.com

Somewhere out there is a person who can solve this
puzzle. There has to be a solution. I just don't know
what it is.

In future issues of this newsletter, I will report on
any conclusions that look plausible to me.

If you're not yet a subscriber, and you want to
read what some of these conclusions are, you can
subscribe for free. Send an e-mail to this
address: unstuck@kbot.com, or click on the link
and then click the SEND button:

mailto:unstuck@kbot.com

You will receive a welcome letter from me within
a few seconds. It will explain what my
newsletter is all about.

______________________

P.S. Send your proposed solution to solution@kbot.com You
will receive a short autoresponder-generated letter telling
you that I have received it. This way, you will know that
your solution got through to me.

* * * * * * * * * * * * * * * * * * * * * * * * * * * *.

Wag the Dog

Did you ever see the movie? It was a great movie that actually made a point...politicians are not above starting a war to divert people's attention from more pressing issues. The movie was made right after our beloved former president Clinton ordered air strikes on Iraq. As I am sure you recall, this was about the time the Monica Lewinski scandal was getting a great deal of press.

Today, however, I want to suggest that we have been had by another dog wagging president.

Last night, Tucker Carlson interviewed physics professor Steve Jones of Brigham Young University. Dr. Jones has recently released a paper in which he hypothesizes that the twin tower collapse and the subsequent collapse of Tower 7 was caused by explosives that were placed in advance of the airliner crashes.

In reading the paper, Jones makes some excellent points which I would like to share with you today. (You can read the entire paper here.) First, he points out that building 7 was supported by 24 huge steel support columns and 57 perimeter columns. If you watch the video of the collapse, you will note that the building collapsed straight down into its own footprint. Now the official word on the collapse of this building is that there were several fires burning in building 7 and the heat of the fires caused the collapse. Dr. Jones argues that if the fires had been hot enough to cause the structural failure, it would have been an asymmetrical collapse. In other words, it would have toppled over. In fact the only way building 7 could have fallen in the manner it did, is if most or all of the support columns had been pulled at the same time. Remember, a plane did not hit this building and it fell several hours after the others.

His second point is the finding of molten metal in the basements of the buildings. Research has shown that jet fuel does not burn hot enough to melt metal, but thermite, an explosive, produces molten metal as a by-product of the explosion.

Dr. Jones stated on television last night that the jets may have been just a diversion for the explosions that were needed to bring the buildings down.

Pretty stunning stuff, eh?

Couple this information with Dr. Gary North's research into the passenger manifests on the jet planes that crashed into the buildings on 9/11 and a frightening picture begins to emerge. For those of you who have not read Gary North's article, I will post it tomorrow, as his email autoresponder does not seem to be working.

Now, what does this have to do with economics? Well, think back to the state of the economy prior to 9/11. After a huge bull market, the stock market had begun to sell off that summer. Whether you knew or not, the stock market bubble had popped and you better believe they knew it. Remember after the twin towers collapse the markets were closed and before they reopened everybody in the securities industry came out asking Americans to invest and be patriotic. It worked temporarily, but in the end the markets do what they will and down was the market direction of choice.

The tools that I use to measure market risk indicated a high risk environment for the market in October of that year, even after the markets reopened and rebounded slightly before continuing their fall. Ever since the Hoover era, this county's economists have believed that war spending will help pull a country out of an economic slump. So I leave all of this to you dear reader to draw your own conclusions.

Most people will not even read this. They will stop halfway down and believe what they have been told because the alternative is too scary to believe. Most people are so busy living life and paying bills that they have no time to consider the implications of something like this.

The Markets Do What They Will

I enjoy reading a quick newsletter every morning entitled The Daily Pfennig. It is written by Chuck Butler, the president of EverBank in St. Louis and I read it because it focuses on the world currency markets. It is a free publication and you can subscribe here at www.everbank.com. As a quick aside, if you browse the site, you will find that EverBank offers world currency CDs or certificates of deposit. It is a convenient way to invest in foreign currencies through a domestic bank. I have no affiliation with EverBank but in light of our government's desire to inflate our money supply to the moon, foreign currencies are a good place to park some of your hard earned money. You see, in addition to earning a better interest rate, you can also enjoy capital appreciation when the value of the dollar drops.

Anyway, the reason that I write all of this is because Mr. Butler is always on the warpath when it comes to the dollar. He makes a very good argument for why the dollar must go lower. I will tell you that I agree wholeheartedly with Mr. Butler, but as we have seen lately, the dollar has managed to outsmart everyone and charge ahead to new highs. This strength, I believe is going to be short-lived, but it makes an interesting point that everyone should understand. The markets are not always logical. In fact, the irrational exuberance that we saw in the stock market in the late 1990s proves that when people become passionate about something, they will bid the price into the stratosphere. It makes no sense when looking at the situation from a logical point of view. But that is the markets and no matter how sure we are of our position, the markets will do what they choose. Thus the old rule of investing, Don't fight the trend, the trend is your friend.

As an example, back in 1996, I was sure that the markets were overpriced and headed for a major fall. I went to all cash and watched as the markets continued higher for another 4 years before finally turning south. Which is why now I let the market tell me which way it is going to go, I no longer try to second-guess the direction. It is much less stressful and much more profitable.

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New York Real Estate Priced by the Room

A friend of mine just returned from New York. He and his wife helped a lady unpack after moving into a nice 2-bedroom place in one of the Trump buildings. Not that we should care about this except the comment she made to my friend. It seems that right now real estate in New York City is selling for about $1.5 million per room. Thats not a misprint. That is the price per room not per house or condo. So the place this lady bought cost her about $4.5 million. She intends to live there about two years and then sell the place, make a tidy profit, and move back where she came from. I hope everything works out for her in light of the fact that I read yesterday that homes sales on the red hot east and west coasts isstarting to cool.

T-Bill Auction Results

Yesterdays report that the sale of 5 year T-bills was grossly underbid was not the most upbeat news. That would seem to indicate that foreign banks are growing weary of buying US debt. Maybe they know something that you and I dont. Since the government relies heavily on foreign investment to fund our ever-growing budget deficit, this little news item may cause some concern for those folks in Washington and it could mean tougher times ahead for us when we can no longer run down to Wally World and buy cheap baubles made in China.

Imports

Another worrisome note from yesterdays economic news is that the trade gap jumped by 11% in one month. The trade deficit occurs when you buy more than you sell and believe me, for several years now we as a country have been buying a lot more that we are selling. Imports of petroleum products are up 60% on a year to date basis. This is due to the devastation from the storms this year. According to the Minerals Management Service 51% of all Gulf oil production is still shut-in. That means it is unavailable for use.

Complacency Reigns Supreme

I guess more worrisome than all of these factors is simply that most Americans just do not care. We do not care what goes on in otherparts of the world. Many do not care what happens in other parts of the country. We are so consumed with working our tails off so that we can buy more stuff or pay for all the stuff we have already bought. We just dont have time to care about anything else. That explains why, when the government proposes some new legislation or rules that restrict our freedom in the name of safety, we just dont care. As long as we can climb into our brand new SUVs and drive around the country, we really dont care what happens anywhere else. But some day you will care and you will look back, rubbing the sleep from your eyes, and wonder how did we ever let it get this bad.

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Domestic Welfare, Foreign Welfare

Today, I provide you with an article by Dr. Ron Paul, a congressman from Texas. He addresses an issue that I feel very strongly about, Welfare. Welfare or entitlement programs were started in earnest during the depression and they have continued and grown well beyond their original purpose. Entitlement programs do not work in America, nor do they work abroad. In America, welfare is responsible for keeping our poor, poor. 95% of all welfare could be eliminated in this country and we would be better off as a result. As you will read in the article below, the same can be said for this countrys foreign aid (welfare) program.

Deficits at Home, Welfare Abroad

by Ron Paulby Ron Paul

In the wake of Hurricanes Katrina and Rita, and with an ongoing war in Iraq that costs more than $1 billion per week, taxpayers might think Congress has better things to do with $21 billion than send it overseas. Yet thats exactly what Congress did last Friday, approving a useless and counterproductive foreign aid spending bill. Never mind that the total federal debt recently topped $8 trillion, or that a major US city was virtually destroyed only a few months ago. Arrogant is the only word to describe a Congress that cares so little about its own taxpaying citizens while pretending to know what is best for the world.

Consider just a few of the ways your money will be used under the new bill:

· $638 million for the unelected Musharraf government in Pakistan;

· $735 million to continue dangerous drug meddling in South America;

· $150 million for development in Gaza, in addition to the billions we already give the Palestinians every year;

· $110 million for the Middle East Partnership Initiative, ostensibly for economic development, although the recipient nations include oil-rich Kuwait and Saudi Arabia. Why in the world are American taxpayers giving welfare to OPEC governments?

· Over $500 million for various republics in the former Soviet Union. Even as those nations spawn millionaires and even billionaires, Americans are expected to provide welfare for their poor.

· $95 million in new money for the United Nations Democracy Fund, which meddles with foreign governments but never seems to change them;

· $34 million for the pro-abortion United Nations Population Fund, which lectures poor people about having too many children;

· $440 million for international population planning;

· $80 million for the dubious Global Environment Facility run by the World Bank to fund anti-capitalist environmental projects around the world.

Constitutionally, of course, none of this spending is authorized. But there also is a strong moral case to be made against taking money from Americans and giving it to foreign governments. Foreign aid doesnt help poor people; it helps foreign elites and US corporations who obtain the contracts doled out by those foreign elites. Everyone in Washington knows this, but the same lofty rhetoric is used over and over to sell foreign aid programs. Corporate welfare is bad enough, but corporate welfare in the guise of helping poor foreigners is indecent.

In many cases, foreign aid money simply distorts foreign economies and props up bad governments. In countries that pursue harmful economic policies, an infusion of US cash only exacerbates and prolongs problems. No amount of money can help nations that reject property rights, free markets, and the rule of law.

Since American foreign aid programs began in earnest decades ago, tens of billions of US tax dollars have been given to nations around the globe. The utter failure of this money to change things for the better in those nations is no longer in question; even the most earnest advocates deep down must admit the obvious. Most of the recipient nations remain endlessly mired in poverty, political and legal corruption, and cultural malaise.

A rational person would argue that failed aid programs should be eliminated. In Washington, however, failed programs get more money thrown at them. The American public deserves to know why there is room in the budget for foreign aid, when taxpayers face record deficits and debt at home.

November 8, 2005

Dr. Ron Paul is a Republican member of Congress from Texas.

View From the Economic Armchair

There I was sitting in my comfy chair reading about how President Bush has asked congress for $7 Billion dollars to prepare for the possibility of a flu pandemic. A pandemic being far worse than a simple epidemic. My first thought had nothing to do with the fact that no one knows if this particular strain of bird flu is going to mutate in such a way as to become contagious between humans. Currently the only cases recorded worldwide were due to people either eating or coming in contact with infected birds.

No, my first thought was how are we going to pay for this? Now I realize that when you are $8 trillion in the red, and that only counts the on-budget debt, another $7 billion doesnt seem that big a deal, right? Wrong.

The other day I was trying to explain to my 10 year old how much a trillion dollars is. Heres what I have come up with. If you take $1,000 and multiply it 1,000 times, you get $1 million. If you take $1 million and multiply it 1,000 times, you get $1 billion. And finally, if you take $1 billion and multiply it 1,000 times, you get $1 trillion. It's incomprehensible. The human mind cannot fathom numbers that big.

But here's the issue, the government believes that they know what's best for us, their citizens. Our government is no longer by the people, for the people, its by the government, for the government. It all changed with that famous speech, "Ask not what your country can do for you, but ask what you can do for your country." And then they answer their own question, give us over half of everything you make, and a large percentage of everything your leave behind when you die and then we will take care of you and protect you from the big bad terrorists.

Templetons Five Steps to Financial Success

On a lighter note, I read in one of the many newsletters that I receive, a piece about Sir John Templeton's Five-Step Plan for Financial Success. They are remarkably simple, but as he is a billionaire, there must be something to his strategy. Those five steps are:

1. Take calculated risks. This does not mean unusual risks. Just know that return on investment is tied to the risk inherent in the investment. The higher the risk, the higher the supposed return...and also the chance of loss. By calculated, Templeton means that you should always calculate your risk to reward ratio. He has made a fortune doing that for many years.

2. Save, don't spend. Templeton was a big believer in saving. He and his wife always tried to save 50% of their income and live on what was left. He avoided consumer debt and bought his first house with cash.

3. Shop for value investments. He was a master at this. He bought stocks when they were dirt-cheap and nobody else wanted them and then sold them when they went up in price and made millions. He sold short the US dollar when it was obviously over priced and retired after cashing out of that investment.

4. Take advantage of international free markets. Templeton was a strong believer in Austrian economics. He believed that the less intervention by governments, the more efficient the markets. When investing overseas, he always choose countries where a strong free-enterprise system prevailed and he was rewarded handsomely.

5. Minimize your taxes. Templeton made a controversial decision in the 1960s. He decided to renounce his U.S. citizenship and move to the Bahamas where there is no income or investment tax. Amazingly, his investment success improved further when he stopped making investment decisions based on the tax consequences. While I am not advocating people leaving the U.S. to save on taxes, think about how much we hear about maximizing our contributions to tax deferred investment accounts. Because without the ravages of tax, our investments grow that much faster.

These five steps helped to make John Templeton a billionaire. While not everyone can become a billionaire, I believe that these steps should be taken to heart by everyone.

All Bubbles Pop

Do you remember playing with the little bottles of bubbles? Watching all those bubbles drifting off on the wind, higher and higher. If you have had the opportunity to enjoy that experience, you are well aware of what happens eventually to all of those beautiful bubbles. They pop. It is the law of physics. The thin layer of soap grows thinner and thinner until it ruptures and just like that, the bubble is gone forever. Nothing remains except the air that was once contained inside.

Soap bubbles are not the only bubbles that we humans get the privilege to enjoy during our lifetimes. Thanks to almost constant government intervention throughout history, we humans have enjoyed the inflating and then bursting of many bubbles. The most recent being the tech stock bubble of the 1990s. When that bubble popped in 2000, it wiped out trillions of dollars in wealth and ruined what for many would have been a happy comfortable retirement. When the bubble popped all that was left was air.

Today, because of our glorious Federal Reserve and their mistaken belief that they can control the economy, we are watching one of the most beautiful bubbles in history drifting ever higher. That bubble is real estate and we all know what the law of physics says. All bubbles must pop. Make no mistake this one will pop as well and when it does, it will behave as bubbles have behaved throughout history. It will wipe out trillions of dollars in paper wealth and leave nothing but air.

From the numbers provided by the Mortgage Bankers Association, the bubble is still growing, just maybe a little slower. Mortgage applications are still increasing, the purchase index increased again, and the refinance index increased. Now, while the indexes all increased, the percentage of refinance activity decreased and the percentage of ARM activity decreased when compared to all mortgage activity.

With mortgage rates increasing steadily, why the continued strength? I believe there are a couple of reasons. First, people are watching interest rates rise and are afraid of getting nailed with huge monthly payment increases, so they are refinancing to lock in fixed rates. Second, I believe that people have run up large amounts of consumer debt again and are trying to get through another round of refinancing to pay off their high interest debt. Finally, it could be that people are so desperate for cash to support continuing consumption that they are being forced to accept higher interest rates.

But eventually the dance must end and the longer it goes, the more pain will be inflicted when the music stops. Russ Winter of Silicon Investor believes that people will buy in this housing bubble until lending literally seizes up.

Homebuilders are no help either. An astute businessman would look at the steadily increasing inventory of new homes and pull back. Sell off existing inventory and build cash reserves, but instead most home builders are of the "build it or die" mindset.

Despite or maybe in spite of all of this, there are signs of weakening. Lenders are offering amazing rates and terms on home mortgages. Builders are now buying existing homes in an effort to help homebuyers purchase new homes. While we can never know the exact top in the market or the moment when the bubble pops, we can certainly see the beginning of panic on the fringes of the market.

For you and I dear reader, the question is, what is your house worth? Is it overpriced and if the value of your house fell by 30%, would that put you in a negative mortgage situation? If so, you need to take action. In my case, I have 10 years left on my mortgage on a house that I intend to live in for the next 15 to 20 years or longer. Since I have a 15-year mortgage I am paying down the balance rapidly. If, for unforeseen reasons, I needed to sell my house in the next year or two, I could do so at a 40 to 50% discount and walk away debt free.

Whatever you do, do not consider your home a part of your retirement funds. It is not a liquid asset and it will undoubtedly become difficult, if not impossible, to sell in the near future. Plan accordingly. And whatever you do, get off of the refinance merry-go-round. It is a dead-end street that leads to financial destruction.

The Old Serpent of Inflation

He is still on the prowl, seeking who he may devour.

I read today an article by Stephen Roach of Morgan Stanley entitled, "The New Inflation." The basic premise of his article is that there are no mathematical constants with which to predict inflation. The rules have changed. He also points out that the current Fed chairman admits that we are in uncharted territories and that the Fed cannot see bubbles in time to stop them from growing out of hand. The old methods of fighting inflation no longer work.

Maybe they should try Austrian economics. Inflation is easily defined and controlled because inflation is the increase in the supply of money. The Federal Reserve has been increasing the money supply for several years now in ways easily seen and in ways not so easily seen.

The most open way that the Fed increases the money supply is by buying government bonds that the banks hold. This gives the banks more cash to lend and spend.

The Feds also lower the reserve requirements of the member banks. In 1863, with the passage of the National Bank Act, banks were given the opportunity to join a national organization to facilitate in the transfer of notes between member banks. In return, member banks were required to maintain reserve requirements at 25% of notes and deposits.

Today, thanks to loose Fed policy, banks' reserve requirements are below 2%. So for every $100 on deposit, a bank is required to have less than $2 held in reserve. This is not exactly the most secure position to be in; especially if several people decide that they need some or all of their money.

The effect of this loose reserve policy is an increase in the supply of money available for lending. Banks make money by lending their deposits at a higher rate than what they are currently paying, so the motivation for lending those freed up reserves is great.

Now it is true that we have not seen the effects of inflation trickling down through the system as we have in past years, but make no mistake, it is there. A couple of reasons exist for this slowing of the trickle down effect. First of all, the way that the government calculates the inflation rate hides the true inflation rate. As I've written about before, the adjustments and percentages used in the total calculation hides the true inflation rate. This allows the government to pay lower cost of living increases in their entitlement payments.

The second factor is simply an economic one. People like you and I are shoppers. We are always looking for a deal. We are price competitive. When local goods increase in price due to monetary inflation or supply shocks, like the current fuel situation, we will look elsewhere for better prices. Because of an expanding global economy, we have more choices today than ever before. You may have noticed that we hear very little of the "Buy American" program that used to be advertised on TV. That's because the ordinary consumer cannot afford American made products due to price inflation.

Of course, the results of our continually shopping elsewhere for our goods have a downside. Jobs are lost. Companies move production overseas to low labor countries. Our country runs a huge account deficit as we import far more goods than we export.

How bad is inflation? Well since inflation is the increase in the supply of money, let's look at some historical numbers. In January of 1959, the M3 or total measure of money stood at $292 Billion. As of September of this year, M3 stood at $9,958.2 Billion, increase of 3,300 percent.

On a related note, with the price of gold coming off of recent highs, I have read comments that suggest maybe gold is due for a correction in price. Well, dear reader, we cannot predict short-term prices, but we can get an idea of longer-term trends. If we take the high point of gold in 1981 at around $850 per ounce and we plug that number into any of the handy inflation calculators out on the Internet, we arrive at a projected current price of $1950. That number is based on government inflation numbers since 1981. Based on the numbers above, the real price could be much higher.

In light of these facts, folks, I would make sure that part of my investment portfolio contained gold, gold stocks, or gold funds. In my account, the value of my gold stock holdings has increased 162% since 2000, and that is after annual rebalancing to maintain my gold holdings at 10% of my portfolio.

What If There Was No Government?

Today, I provide for your reading enjoyment a great article obout governments. Why they are so strong and why they always fail in the end. I believe that the author answers all of the arguments for keeping the state around and makes some pretty strong arguments for what always happens when the state is in power for too long.

The Stateless Society
An Examination of Alternatives
by Stefan Molyneux

If the Twentieth Century proved anything, it is that the single greatest danger to human life are the thugs of the centralized political State, who extinguished more than 170 million souls during the bloodiest rampage in recorded history. By any rational standard, modern States are the last and greatest remaining predators – and that the danger has not abated with the demise of communism and fascism. All Western democracies currently face vast and accelerating escalations of State power and centralized control over economic and civic life. In almost all Western democracies, the State chooses:

where children go to school, and how they will be educated
the interest rate citizens can borrow at
the value of currency
how employees can be hired and fired
how more than 50% of their citizens’ time and money are disposed of
who a citizen’s doctor is
what kinds of medical procedures can be received – and when
when to go to war
who can live in the country
…just to touch on a few.
Most of these amazing intrusions into personal liberty have occurred over the past 90 years, since the introduction of the income tax. They have been accepted by a population helpless to challenge the endless expansions of State power – and yet, even though most citizens have received endless pro-State propaganda in government schools, a growing rebellion is brewing. State predations are now so intrusive that they have effectively arrested the forward momentum of society, which now hangs before a fall. Children are poorly educated, young people are unable to get ahead, couples with children fall ever-further into debt, and the elderly are finding State medical systems collapsing under the weight of their growing needs – and State debts continue to grow.

Thus, these early years of the twenty-first century are the end of an era, a collapse of mythology comparable to the fall of fascism, communism, monarchy, or political Christianity. The idea that the State is capable of solving social problems is now viewed with great skepticism – which foretells a coming change. As soon as skepticism is applied to the State, the State falls, since it fails at everything except increasing its power, and so can only survive on propaganda, which relies on unquestioning faith.

Yet while most people are comfortable with the idea of reducing the size and power of the State, they become distinctly uncomfortable with the idea of getting rid of it completely. To use a medical metaphor, if the State is a cancer, they prefer medicating it into an unstable remission, rather than eliminating it completely.

This can never work. A central lesson of history is that States are parasites which always expand until they destroy their host population. Because the State uses violence to achieve its ends – and there is no rational end to the expansion of violence – States grow until they destroy civilized interaction through the corruption of money, contracts, honesty, family, and self-reliance. As such, the cancerous metaphor is not misplaced. People who believe that the State can somehow be contained have not accepted the fact that no State in history has ever been contained.

Even the rare reductions are merely temporary. The United States was founded on the principle of limited government; it took little more than a century for the State to break the bonds of the Constitution, implement the income tax, take control of the money supply and the educational system, and begin its catastrophic expansion. There is no example in history of a State being permanently reduced in size. All that happens during a tax or civil revolt is that the State retrenches, figures out what it did wrong, and plans its expansion again. Or provokes a war, which silences all but fringe dissenters.

Given these well-known historical facts, why do still people believe that such a deadly predator can be tamed? Surely it can only be because they consider a slow strangulation in the grip of an expanding State somehow better than the quick death of a society bereft of a State.

Why, then, do most people believe that a society will crumble without a coercive and monopolistic social agency at its core? There are a number of answers to this question, but generally they tend to revolve around three central points:

dispute resolution;
collective services; and,
pollution.
Dispute Resolution

The fact that people still cling to the belief that the State is required to resolve disputes is amazing, since modern courts are out of the reach of all but the most wealthy and patient, and are primarily used to shield the powerful from competition or criticism. In this writer’s experience, to take a dispute with a stockbroker to the court system would have cost more than a quarter of a million dollars and taken from five to ten years – however, a private mediator settled the matter within a few months for very little money. In the realm of marital dissolution, private mediators are commonplace. Unions use grievance processes, and a plethora of other specialists in dispute resolution have sprung up to fill in the void left by a ridiculously lengthy, expensive and incompetent State court system.

Thus the belief that the State is required for dispute resolution is obviously false, since the court apparatus is unavailable to the vast majority of the population, who resolve their disputes either privately or through agreed-upon mediators.

How can the free market deal with the problem of dispute resolution? Outside the realm of organized crime, very few people are comfortable with armed confrontations, and so generally prefer to delegate that task to others. Let’s assume that people’s need for such representatives produces Dispute Resolution Organizations (DROs), which promise to resolve disputes on their behalf.

Thus, if Stan is hired by Bob, they both sign a document specifying which DRO they both accept as an authority in dispute resolution. If they disagree about something, and are unable to resolve it between themselves, they submit their case to the DRO, and agree to abide by that DRO’s decision.

So far so good. However, what if Stan decides he doesn’t want to abide by the DRO’s decision? Well, several options arise.

First of all, when Stan signed the DRO agreement, it is likely that he would have agreed to property confiscation if he did not abide by the DRO’s decision. Thus the DRO would be entirely within its right to go and remove property from Stan – by force if necessary – to pay for his side of the dispute.

It is at this point that people generally throw up their arms and dismiss the idea of DROs by claiming that society would descend into civil war within a few days.

Everyone, of course, realizes that civil war is a rather bad situation, and so it seems likely that the DROs would consider alternatives to armed combat.

What other options could be pursued? To take a current example, small debts which are not worth pursuing legally are still regularly paid off – and why? Because a group of companies produce creditratings on individuals, and the inconvenience of a lowered credit rating is usually greater than the inconvenience of paying off a small debt. Thus, in the absence of any recourse to force, small debts are usually settled. This is one example of how desired behaviour can be elicited without pulling out a gun or kicking in a door.

Picture for a moment the infinite complexity of modern economic life. Most individuals bind themselves to dozens of contracts, from car loans and mortgages to cell phone contracts, gym membership, condo agreements and so on. To flourish in a free market, a man must honour his contracts. A reputation for honest dealing is the foundation of a successful economic life. Now, few DROs will want to represent a man who regularly breaks contracts, or associates with difficult and litigious people. (For instance, this writer once refrained from entering into a business partnership because the potential partner revealed that he had sued two previous partners.)

Thus if Stan refuses to abide by his DRO’s ruling, the DRO has to barely lift a finger to punish him. All the DRO has to do is report Stan’s non-compliance to the local contract-rating company, who will enter his name into a database of contract violators. Stan’s DRO will also probably drop him, or raise his rates considerably.

And so, from an economic standpoint, Stan has just shot himself in the foot. He is now universally known as a man who rejects legitimate DRO rulings that he agreed to accept in advance. What happens when he goes for his next job? What if he decides to eschew employment and start his own company, what happens when he applies for his first lease? Or tries to hire his first employee? Or rent a car, or buy an airline ticket? Or enter into a contract with his first customer? No, in almost every situation, Stan would be far better off to abide by the decision of the DRO. Whatever he has to pay, it is far cheaper than facing the barriers of existing without access to a DRO, or with a record of rejecting a legitimate ruling.

But let’s push the theory to the max, to see if it holds. To examine a worst-case scenario, imagine that Stan’s employer is an evil man who bribes the DRO to rule in his favour, and the DRO imposes an unconscionable fine – say, one million dollars – on Stan.

First of all, this is such an obvious problem that DROs, to get any business at all, would have to deal with this danger up front. An appeal process to a different DRO would have to be part of the contract. DROs would also rigorously vet their own employees for any unexplained income. And, of course, any DRO mediator who corrupted the process would receive perhaps the lowest contract rating on the planet, lose his job, and be liable for damages. He would lose everything, and be an economic pariah.

However, to go to the extreme, perhaps the worst has occurred and Stan has been unjustly fined a million dollars due to DRO corruption. Well, he has three alternatives. He can choose not to pay the fine, drop off the DRO map, and work for cash without contracts. Become part of the grey market, in other words. A perfectly respectable choice, if he has been treated unjustly.

However, if Stan is an intelligent and even vaguely entrepreneurial man, he will see the corruption of the DRO as a prime opportunity to start his own, competing DRO, and will write into its base contract clauses to ensure that what happened to him will never happen to anyone who signs on with his new DRO.

Stan’s third option is to appeal to the contract rating agency. Contract rating agencies need to be as accurate as possible, since they are attempting to assess real risk. If they believe that the DRO ruled unjustly against Stan, they will lower that DRO’s contract rating and restore Stan’s.

Thus it is inconceivable that violence would be required to enforce all but the most extreme contract violations, since all parties gain the most long-term value by acting honestly. This resolves the problem of instant descent into civil war.

Two other problems exist, however, which must be resolved before the DRO theory starts to becomes truly tenable.

The first is the challenge of reciprocity, or geography. If Bob has a contract with Jeff, and Jeff moves to a new location not covered by their mutual DRO, what happens? Again, this is such an obvious problem that it would be solved by any competent DRO. People who travel prefer cell phones with the greatest geographical coverage, and so cell phone companies have developed reciprocal agreements for charging competitors. Just as a person’s credit rating is available anywhere in the world, so their contract rating will also be available, and so there will be no place to hide from a broken contract save by going ‘off the grid’ completely, which would be economically crippling.

The second problem is the fear that a particular DRO will grow in size and stature to the point where it takes on all the features and properties of a new State.

This is a superstitious fear, because there is no historical example of a private company replacing a political State. While it is true that companies regularly use State coercion to enforce trading restrictions, high tariffs, cartels and other mercantilist tricks, surely this reinforces the danger of the State, not the inevitability of companies growing into States. All States destroy societies. No company has ever destroyed a society without the aid of the State. Thus the fear that a private company can somehow grow into a State is utterly unfounded in fact, experience, logic and history.

If society becomes frightened of a particular DRO, then it can simply stop doing business with it, which will cause it to collapse. If that DRO, as it collapses, somehow transforms itself from a group of secretaries, statisticians, accountants and contract lawyers into a ruthless domestic militia and successfully takes over society – and how unlikely is that! – then such a State will then be imposed on the general population. However, there are two problems even with this most unlikely scare scenario. First of all, if any DRO can take over society and impose itself as a new State, why only a DRO? Why not the Rotary Club? Why not a union? Why not the Mafia? The YMCA? The SPCA? Is society to then ban all groups with more than a hundred members? Clearly that is not a feasible solution, and so society must live with the risk of a brutal coup by ninja accountants as much as from any other group.

And, in the final analysis, if society is so terrified of a single group seizing a monopoly of political power, what does that say about the existing States? They have a monopoly of political power. If a DRO should never achieve this kind of control, why should existing States continue to wield theirs?

Collective Services

Roads, sewage, water and electricity and so on are also cited as reasons why a State must exist. How roads could be privately paid for remains such an impenetrable mystery that most people are willing to support the State – and so ensure the eventual and utter destruction of civil society – rather than cede that this problem just might solvable. There are many ways to pay for roads, such as electronic or cash tolls, GPS charges, roads maintained by the businesses they lead to, communal organizations and so on. And if none of those work? Why, then personal flying machines will hit the market!

The problem that a water company might build plumbing to a community, and then charge exorbitant fees for supplying it, is equally easy to counter. A truck could deliver bottled water, or the community could invest in a water tower, a competing company could build alternate pipes and so on. None of these problems touch the central rationale for a State. They are ex post facto justifications made to avoid the need for critical examination or, heaven forbid, political action. The argument that voluntary free-market monopolies are bad – and that the only way to combat them is to impose compulsory monopolies – is obviously foolish. If voluntary monopolies are bad, then how can coercive monopolies be better?

Due to countless examples of free market solutions to the problem of ‘carrier costs’, this argument no longer holds the kind of water it used to, so it must be elsewhere that people must turn to justify the continued existence of the State.

Pollution

This is perhaps the greatest problem faced by free-market theorists. It’s worth spending a little time on outlining the worst possible scenario, and see how a voluntary system could solve it. However, it’s important to first dispel the notion that the State currently deals effectively with pollution. Firstly, the most polluted resources on the planet are State-owned, because State personnel do not personally profit from retaining the value of State property (witness the destruction of the Canadian cod industry through blatant vote-buying). Secondly, the distribution of mineral, lumber and drilling rights is directly skewed towards bribery and corruption, because States rarely sell the land, but rather just the resource rights. A lumber company cannot buy woodlands from the State, just the right to harvest trees. Thus the State gets a renewable source of income, and can further coerce lumber companies by enforcing re-seeding. This, of course, tends to promote bribery, corruption and the creation of ‘fly-by-night’ lumber companies which strip the land bare, but vanish when it comes time to re-seed. Auctioning State land to a private market easily solves this problem, because a company which re-seeded would reap the greatest long-term profits from woodland, and so would be able to bid the most for the land.

Also, it should be remembered that, in the realm of air pollution, governments created the problem in the first place. In 19th century England, when industrial smokestacks began belching fumes into the orchards of apple farmers, the farmers took the factory-owners to court, citing the common-law tradition of restitution for property damage. Naturally, the capitalists had gotten to the State courts first, and had more money to bribe with, employed more voting workers, and contributed more tax revenue than the farmers – and so the farmers’ cases were thrown out of court. The judge argued that the ‘common good’ of the factories took precedence over the ‘private need’ of the farmers. The free market did not fail to solve the problem of air pollution – it was forcibly prevented from doing so through State corruption.

The State, then, is no friend of the environment – but how would the free market handle it? One egregious example often cited is a group of houses downwind from a new factory which works day and night to coat them in soot.

When a man buys a new house, isn’t it important to him to ensure that it won’t be subjected with someone else’s pollution? People’s desire for a clean and safe environment is so strong that it’s a clear invitation for enterprising capitalists to sweat bullets figuring out how to provide it.

Fortunately, since we have already talked about DROs and their role in a free market, the problem of air pollution can be solved quite easily.

If the aforementioned group of homeowners is afraid of pollution, the first thing they will do is buy pollution insurance, which is a natural response to a situation where costs cannot be predicted but consequences are dire. Let’s say that a homeowner named Achmed buys pollution insurance which pays him two million dollars if the air around or in his house becomes polluted in some predefined manner. In other words, as long as Achmed’s air remains clean, the insurance company makes money.

One day, a plot of land upwind of Achmed’s house comes up for sale. Naturally, his insurance company would be very interested in this, and would monitor the sale. If the purchaser is some private school, all is well (assuming Achmed has not bought an excess of noise pollution insurance!). If, however, the insurance company discovers that Sally’s House of Polluting Paint Production is interested in purchasing the plot of land, then it will likely spring into action, taking one of the following actions:

buying the land itself, then selling it to a non-polluting buyer;
getting assurances from Sally that her company will not pollute;
paying Sally to enter into a non-polluting contract.
If, however, someone at the insurance company is asleep at the wheel, and Sally buys the land and puts up her polluting factory, what happens then?

Well, then the insurance company is on the hook for $2M to Achmed (assuming for the moment that only Achmed bought pollution insurance). Thus, it can afford to pay Sally up to $2M to reduce her pollution and still be cash-positive. This payment could take many forms, from the installation of pollution-control equipment to a buy-out to a subsidy for under-production and so on.

If the $2M is not enough to solve the problem, then the insurance company pays Achmed the $2M and he goes and buys a new house in an unpolluted neighbourhood. However, this scenario is highly unlikely, since the insurance company would be unlikely to insure only one single person in a neighbourhood against air pollution – and a single person probably could not afford it!

So, that is the view from Achmed’s air-pollution insurance company. What about the view from Sally’s House of Polluting Paint Production? She, also, must be covered by a DRO in order to buy land, borrow money and hire employees. How does that DRO view her tendency to pollute?

Pollution brings damage claims against Sally, because pollution is by definition damage to persons or property. Thus Sally’s DRO would take a dim view of her polluting activities, since it would be on the hook for any property damage her factory causes. In fact, it would be most unlikely that Sally’s DRO would insure her against damages unless she were able to prove that she would be able to operate her factory without harming the property of those around her. And without access to a DRO, of course, she would be hard-pressed to start her factory, borrow money, hire employees etc.

It’s important to remember that DROs, much like cell phone companies and Internet providers, only prosper if they cooperate. Sally’s DRO only makes money if Sally does not pollute. Achmed’s insurer also only makes money if Sally does not pollute. Thus the two companies share a common goal, which fosters cooperation.

Finally, even if Achmed is not insured against air pollution, he can use his and/or Sally’s DRO to gain restitution for the damage her pollution is causing to his property. Both Sally and Achmed’s DROs would have reciprocity agreements, since Achmed wants to be protected against Sally’s actions, and Sally wants to be protected against Achmed’s actions. Because of this desire for mutual protection, they would choose DROs which had the widest reciprocity agreements.

Thus, in a truly free market, there are many levels and agencies actively working against pollution. Achmed’s insurer will be actively scanning the surroundings looking for polluters it can forestall. Sally will be unable to build her paint factory without proving that she will not pollute. Mutual or independent DROs will resolve any disputes regarding property damage caused by Sally’s pollution.

There are other benefits as well, which are almost unsolvable in the current system. Imagine that Sally’s smokestacks are so high that her air pollution sails over Achmed’s house and lands on Reginald’s house, a hundred miles away. Reginald then complains to his DRO that his property is being damaged. His DRO will examine the air contents and wind currents, then trace the pollution back to its source and resolve the dispute with Sally’s DRO. If the air pollution is particularly complicated, then Reginald’s DRO will place non-volatile compounds into Sally’s smokestacks and follow them to where they land. This can be used in a situation where a number of different factories may be contributing pollutants.

The problem of inter-country air pollution may seem to be a sticky one, but it’s easily solvable. Obviously, a Canadian living along the Canada/US border, for instance, will not choose a DRO which refuses to cover air pollution emanating from the US. Thus the DRO will have to have reciprocity agreements with the DROs across the border. If the US DROs refuse to have reciprocity agreements with the Canadian DROs – inconceivable, since the pollution can go both ways – then the Canadian DRO will simply start a US branch and compete.

The difference is that international DROs actually profit from cooperation, in a way that governments do not. For instance, a State government on the Canada/US border has little motivation to impose pollution costs on local factories, as long as the pollution generally goes north. For DROs, quite the opposite would be true.

Finally, one other advantage to DRO’s can be termed the ‘Scrabble-Challenge Benefit’. In Scrabble, an accuser loses his turn if he challenges another player’s word and the challenge fails. Given the costs of resolving disputes, DROs would be very careful to ensure that those bringing false accusations would be punished through their own premiums, their contract ratings and by also assuming the entire cost of the dispute. This would greatly reduce the number of frivolous lawsuits, to the great benefit of all.

The idea that society can only survive in the absence of a centralized State is the greatest lesson that the grisly years of the Twentieth Century can teach us. Our choice is not between the free market and the State, but between life and death. Whatever the risks involved in dissolving the central State, they are far less than the certain destruction which will result from its inevitable escalation. Like a cancer patient facing certain demise, we must open our minds reach for whatever medicine shows the most promise, and not wait until it is too late.

October 24, 2005

Stefan Molyneux [send him mail] has been an actor, comedian, gold-panner, graduate student, and software entrepreneur. His first novel Revolutions was published in 2004, and he maintains a blog.

Copyright © 2005 LewRockwell.com

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