Peter George EM84 Central Bankers

8/8/2019 Peter George EM84 Central Bankers

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B A N K E R S in a

JACKSON HOLEWhat to do? Print or die!

Investment Indicators from Peter GeorgeTuesday, October 7, 2008

SUMMARY..................................................................................................................................................................41.0 THE BANKERS MEET.......................................................................................................................................6

1.1 ONE MANS MEAT.ANOTHER MANS POISON .................................................................................71.2 WORLD ECONOMY AT A TIPPING POINT ..........................................................................................91.3 COLLAPSE OF THE US SUBPRIME MARKET.......................................................................................91.4 CONTAGION SPREADS TO EUROPE AND THE REST .....................................................................121.5 HOW BAD CAN IT GET IN THE US?.......................................................................................................141.6 THE LIMITS OF MONETARY POLICY ....................................................................................................161.7 IS IT TIME TO ABOLISH THE FED? ........................................................................................................18

1.8 AN EMERGING RESCUE STRATEGY ....................................................................................................201.9 PRINTING VERSUS BORROWING..........................................................................................................24

2.0 A PROPHETIC CONCLUSION ...............................................................................................................252.1 PROPHETIC SHORT TERM PROSPECTS FOR GOLD .......................................................................262.2 THE COLLAPSE OF CAPITALISM ..........................................................................................................262.3 AN IRANIAN CLIMBDOWN BY CHRISTMAS? .....................................................................................272.4 ZUMA WILL NEVER BECOME PRESIDENT OF SOUTH AFRICA...................................................272.5 A PROPHETIC FUTURE FOR THE SOUTH AFRICAN RAND ...........................................................282.6 PROPERTY PRICES IN CALIFORNIA A REBOUND POSSIBLE? ................................................282.7 A NEW VEHICLE WILL EMERGE FROM FORD ...........................................................................282.8 CHINA TO BECOME AMERICAS FRIEND ............................................................................................29

3.0 LATEST PICK SIX IN GOLD AND ENERGY ..................................................................................303.1 WHY SHOULD GOLD TAKE OFF OR COMMODITIES RECOVER? ................................................313.2 LATEST NEWS ON THE WRITERS PICK SIX ..................................................................................33

(1) AFGOLD Current price R1.75 ($.20) Projected end April 2009, R3.10 ($.44) based ongold rising from $840 to $1300 and the Rand strengthening from R8.50/$ to R7.00/$...............33(2) RANDGOLD Current price R13.00 ($1.53) Projected end April 2009 R26.00 ($3.71) basedon gold rising from $840 to $1300 and the Rand strengthening from R8.50/$ to R7.00/$. ........34(3) GOLDFIELDS - Current price R70.25 ($8.26) Projected end April 2009 R135.00 ($19.28)based on gold rising from $840 to $1300 and the Rand strengthening from R8.50/$ to R7.00/$............................................................................................................................................................................35

(4) SALLIES - Current price R0.64 ($0.08) Projected end April 2009 R1.10 ($0.16) based on asharp recovery in prospects for the world economy and therefore the prices of allcommodities. SALLIES sneaks in as an energy stock because it is used in the uraniumenrichment process. ....................................................................................................................................36(5) SASOL - Current price R314.00 ($36.90) Projected end April 2009 R475.00 ($67.00) basedon a sharp recovery in prospects for the world economy and therefore the prices of allcommodities, PARTICULARY oil..............................................................................................................37

(6) URANIUM ONE - Current price R15.50 ($1.82) Projected end April 2009 R37.00 ($6.40)based on a sharp recovery in prospects for the world economy and therefore the prices of allcommodities, PARTICULARY oil and uranium. ....................................................................................37

CONCLUSION TO THE PICK SIX - A LAST MINUTE ENTRANT! ..............................................................38(7) CONVERGENET - - Current price R1.10 ($0.13) Projected end October 2009 R2.40 ($0.34)based on a rising stream of infrastructure contracts throughout Africa. .....................................38

A FINAL NOTE ........................................................................................................................................................39


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BANKERSin aJACKSON HOLE

What to do? Print or die!

Investment Indicators from Peter GeorgeTuesday, October 7, 2008

ScriptureSurely the Sovereign Lord does nothing without first revealing his plan to his servantsthe prophets.Amos chapter 3, verse 7

Issue

No.84


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What affect will the above scenarios have, first on the prices of gold and commodities,second on South Africas political and economic future?

After endeavouring to analyze each of the above THREE topics, the writer will presentthe outcomes he believes are most likely. These will initially be analytically determined.Thereafter the writer will support his predicted outcomes with independently obtainedprophetic confirmations. In doing so he will draw on sources he has found reliable inthe past. Absolute certainty in the realm of the prophetic will always remain elusive butcould nonetheless introduce an interesting and unusual perspective at a time of generalconfusion. As Paul says in 1 Corinthians chapter 13 verse 9:

For we know in part and we prophesy in part, but when perfection comes, theimperfect disappears.

Until perfection comes, one has to make do with the imperfect. The writer will trust Godto do the rest. The scripture quoted from the book of Amos at the outset, gives one theconfidence to believe God will always impart wisdom to those who ask. Whatever theresult, it should prove an interesting and enlightening experience for many whove

never been exposed to the prophetic before. In order to save time for those underpressure, the writer sets out his conclusions below.

A. Global MarketsFollowing carefully coordinated fiscal and financial interventions on a massive globalscale, potentially exceeding THREE TRILLION dollars for the US alone, world marketswill defy the pessimists and recover. European and Asian Banks will rapidly followAmericas example. A potentially calamitous collapse in property prices will largely beaverted as mortgage markets receive direct support, and are even subsidized. AsChina cuts rates, eases bank lending, and launches a major infrastructure program,commodity prices will recover. As the worlds FIAT money system prints and lends tosave its fractional reserve banking monster, inflation will resume but at an acceleratedpace. In comparison to the threat of deep depression, it will prove to be a relativelyminor problem. Naturally, long term bond rates will begin to rise in response. Be carefulof Bonds. By Christmas of this year, the price of GOLD could have risen to between$1100 and $1200 an ounce. By April 2009, the price should be $1300. In the wake ofeconomic stimulus programs, commodity prices will spike back to pre-crash levels,though not as fast or as sharply as gold. Get gold and commodity stocks while theblood is flowing in the streets. Watch oil if the US attacks Iran by the end of January.The price would then double from its recent $90 a barrel, down to around $180 by early2009. Bear in mind, US stocks of crude are low, stocks levels of petrol, the thinnestthey have been since 1990!

Within a four year period the price of GOLD could be $3500, the price of OIL between$250 and $300. The FIAT money system may well by then have been replaced byreturn to a modified form of the GOLD Standard. The Automobile Industry will be on itsway to large-scale production of the ELECTRIC CAR. Over the medium term, US OILimports could eventually HALVE, significantly reducing the countrys trade deficit.

B. US/Israeli confrontation with IranThe probability of this happening by end January would appear to exceed 50%. Thereare prophetic confirmations that Iran is heading for a major humiliation before the nextUS President takes office. The US has certainly given her every warning to cease her


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open threats against the tiny nation of Israel, and to open her nuclear installations toUN inspection. The latter process was intended to preclude the possibility of Iranbuilding the bomb. She has secretly attempted this before, so no one believes herprotestations to the contrary. Islam condones lying to deceive the infidel in all mattersstrategic.

C. Jacob Zuma will NOT become PresidentMounting internal conflicts and increasing disarray within the ruling ANC, suggest thegrowing likelihood of splinter groups developing within the Party, following the oustingof President Mbeki. This will weaken the ANCs position ahead of the April 2009elections. Rising disaffection with the Partys performance on a number of fronts couldfurther exacerbate popular support. Zuma himself might well fall victim to a move by theLeft Wing of the Party being the Communists and COSATU (The Trade Unions) - tocall for a full investigation into the ARMS Deal. Their purpose would be to punish Mbekiand those of his inner circle accused of hogging the spoils of corruption. The writerbelieves that whether or not he goes to jail, Zuma will soon be put out to grass. IfMotlanthe withdraws, he could be superseded by someone of the likes of TokyoSexwale. Tokyo is a billionaire businessman who recently delegated all corporate

responsibilities to competent executives such as Lazarus Zim, a senior ex-Anglo man,and Mark Wilcox. Tokyo has effectively become a politician-in-waiting. By May2009, as gold rises sharply and confidence is restored to the Presidency, the RAND willbe trading below R7/$. At the time of writing it last traded around R8.75!

1.0 THE BANKERS MEETOn Friday August 22nd 2008, Central Bankers gathered from around the world. Theycame to participate in the Federal Reserves annual economic symposium at theholiday resort of Jackson Hole, Wyoming. A lot had happened since the last time theymet and the name of the place aptly described the predicament they were in. It was anasty Jackson Hole. They were confronted by two very different choices, each ofwhich carried pitfalls.

i) The first was to allow a growing economic storm to build momentum, leavingthe final result to the workings of a long-established free market system. Inthis way they would continue to ensure that whatever lessons needed to belearnt would in due course find their mark. None would escape theconsequences of foolish, greedy, or dishonest behaviour. The inevitableoutcome would be a painful, multi-year economic depression.

ii) The second, and far more difficult choice, would be to challenge widelyaccepted principles of capitalism, through monetary and fiscal interventionson a scale never before entertained by an American government. Led by USauthorities, central banks and ministers of finance would seek to injecthundreds of billions of dollars or their equivalent in other currencies, intohands of suffering banks, frightened taxpayers, and insolvent, panickinghomeowners. None of this had as yet been spelt out.

In the absence of intervention there was a growing minority who felt that uncheckedmarket forces would rapidly drive the countries whose affairs they managed off aneconomic cliff. They maintained there was only so much a banks monetary policy couldachieve by cutting rates to stem recession especially an economic crisis triggered bymassive bursting bubbles in housing and credit. Referring back to the lessons of the


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Great Depression they recalled that once a man burnt his fingers taking on excessivedebt, he wouldnt easily be persuaded to repeat the exercise, even if rates were laterreduced. Banks who survive if they survive will become equally cautious. Theeconomist Keynes called it a desire forLiquidity Preference. In todays conditions,investors only want US T-Bills or a government guarantee. In September, they drove 3-month US T-Bill rates to zero. The most risk-averse went for gold, boosting the price ahundred dollars in a single day. They took the view that Americas banking system wason verge of collapse and deposits were no longer safe.

Instead of allowing the current crisis to slide into depression, patterns of economicbehaviour have to change. Different forces will be required to drive a nations economy.In the US it can no longer be credit-based consumption. In recent times 25% ofAmericas Gross Domestic Product was financed on credit! Within 24 months the focusmust switch to infrastructure spend by government and states alike. Instead of buildinghouses, workers will need to be constructing, roads, bridges, and railways. When thewriter visits his daughter in Chicago he observes that the roads are in considerablyworse condition than those South Africa. There has been no major expenditure sincethe late 1950s and early 1960s.

As Fed Chief Bernanke welcomed guests with an opening speech he had everyreason to feel a trifle embarrassed. A year earlier he had ventured that financialdamage from a then incipient sub prime crisis would likely top out below $100 billion.Twelve months later the figure was already over $500 billion and rising. Half the outflowstemmed from rescue operations in the US alone, where analysts like Don Rich werepunting ultimate costs to approach $3 trillion! Little did investors appreciate that morethan half of Americas financial toxic waste had been sold off to unsuspectingEuropean and Asian banks.

The downturn soon began to spread like a tsunami but each country claimed to have adifferent plan for dealing with it. Many underestimated the severity of what was brewing.

Their schemes would in time prove grossly inadequate.

Hopes, that emerging markets would decouple from a US slowdown, had beendashed at the outset. Chinas growth looked unstoppable but international investors,who hopped from the Dow to a roaring Shanghai Index, suffered a vicious 65% haircutin months. By staying put they would have escaped with a far less painful 16% shave.At least the Chinese Yuan had strengthened against the American dollar. Those whohad the misfortune to trot across the Atlantic to the UK suffered a double whammy.While the London FT index suffered a similar 16% fall to the Dow, a subsequent sharpcrack in the pound had doubled this loss to 32%. That was a month ago. Today thedamage is far worse, at least another 12% all round.

1.1 ONE MANS MEAT.ANOTHER MANS POISONQuotationIt was the best of times; it was the worst of times.Charles Dickens A Tale of Two Cities

In an attempt to lighten the moment for his banking friends, Bernanke drewencouragement from the recent slide in commodity prices. He hoped it would temperrising costs for food and energy. It was the two items US statisticians convenientlyexclude from their measure ofcore inflation. But as every housewife knows: its


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them what bites the hardest! A commodity crack was the scenario Bernanke hadrelied on when rejecting earlier calls for higher interest rates to snuff inflation. Financialhawks were adamant he should rather play it tough. Instead he focused on the risks togrowth by cutting rates from 5% to 2%. More effectively, he persuaded the Treasury todistribute $150 billion worth of fiscal largesse by way of tax rebates over a four monthperiod.

The ECB, amongst others, was initially disparaging of what they termed anunnecessary US panic. However, as Americas growth briefly perked up to an annualrate of 3.3%, Europe fell off its arrogant, know-all perch and slipped toward recession.Most of its members are there already. The rest draw closer by the week.

Financial markets were quick to acknowledge the Feds wisdom. In less than eightweeks, the EURO crashed from a July 2008 near-double top of $1.60, to an earlySeptember twelve month low of $1.38. Most forget that eight years ago the EURO wasbarely above $.80. It had doubled in less than a decade. No surprise then that on theMcDonald Hamburger Index of comparative buying power, the EURO should betrading even lower, down at $1.25!

This is the moment to revert back to the heading of the section one mans meat beinganother mans poison - and the famous quote by Charles Dickens, from his Tale ofTwo Cities: It was the best of times; it was the worst of times. What the wealthyindustrialized nations of the West today denounced as commodity inflation, theunderdeveloped countries of Africa and South America welcomed as a long-awaitedchange in their terms of trade - with erstwhile colonizers! An extract from an article inthe Financial Times published the weekend of the bankers meeting in Wyoming,portrayed the perspective of the poor people of Paraguay:

Take record commodity prices, add a subtropical climate that gives farmers fiveharvests every 24 months and vast tracks of virgin arable land, and it is no

surprise that tiny Paraguay has emerged as one of the big beneficiaries of theglobal food crisis.

The above statement lends credence to the first half of Dickens quote:

It was the best of times.

For some it certainly was and, despite a stiff 20% correction in commodity prices, it stillis. Until a month ago many farmers were still enjoying the best of times. Othersdisagreed. For countries like America- the worlds biggest grower of corn butdependant on costly imports of oil which at one point had trebled in two years from $50a barrel to $147:

It was the worst of times.

Where does this leave global markets? Despite a vicious correction in oil, from $147 abarrel down, at one point, to $88, the decline proved temporary, aided by the impact ofhurricane Ike. The latter eventually did more damage to offshore oil installations thanits infamous predecessor hurricane Katrina. Goldman Sachs reduced its Decemberforecast from $149 to $115. They should know. Three months ago there was a story tothe effect that they, JP Morgan, and Morgan Stanley, had jointly invested in 45m barrels


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of physical crude in a hole in the ground at Rotterdam. As markets slid lower, the rallyterminated, breaking towards $85. Despite the latest retreat, $115 by Christmas stilllooks possible. If either the US or the Israel attacks Iran, it will prove conservative.

Long term growing demand will eventually drive the price through the roof if MattSimmons theories on Peak Oil prove correct. He maintains production will never againexceed 86m barrels a day. The rapidly industrializing nations of India and China willthen face the prospect of never being able to match the consumption patterns of a onceoil-rich West. The cause of their discomfort will be shrinking supplies from largelyageing fields.

1.2 WORLD ECONOMY AT A TIPPING POINT

On June 30th,2008, the Bank of International Settlements otherwise known as theBankers Bank - issued its Annual Report. The BIS described the world economy ashaving reached a Tipping Point. Without actually mentioning the word depression,they implied the scales stood delicately balanced between the twin evils ofinflationand historic periods ofeconomic stress. They referred as far back as the financial

crisis of 1873, but then made specific reference to the extended downturn whichfollowed the credit-fuelled boom of the late 1920s.

In the three months which followed the publication of their prediction of impendingdoom, the scales look increasingly to have tipped away from inflation. As country aftercountry slides into recession, the bursting of a massive credit bubble threatens todestroy the international financial system. The risk has become a global depressionaccompanied by levels of unemployment which have not been seen since the nineteenthirties. Recent bank panics have increased the likelihood of a global market crash.Round the world, the scale of Central Bank and Treasury interventions needs toescalate beyond imagination. In doing so it will threaten the very foundations ofcapitalism, belief in free markets, and limited government all long-held principles

proudly espoused by the United States when evangelizing previous adherents toCommunism.

The countries of Africa have long coped with levels of unemployment approaching 40%.Rural, land-based populations, held together by an extended family system whichsupports those in trouble, can still survive. However, were such a fate to befall theindustrialized nations of Europe or America, it would rapidly generate untenable chaos.Why chaos, and how realistic is the threat?

One needs to go back to where it all began - the bursting of the US housing bubble.

1.3 COLLAPSE OF THE US SUBPRIME MARKETIt is helpful at this point to hark back to an earlier article by the writer, No. 80, publisheda year ago on September 18, 2007. It was entitled:

CREDIT IMPLODES BANKERS PRINT GOLD WINS

On the front page was a picture of a Crying House. See below:


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The report dealt with the origins of the subprime crisis, describing how Bernankespredecessor, Alan Greenspan, had attempted to counter the collapse of the internetbubble. The method he chose cutting rates to the bone, though right at the time was

allowed to continue too long. By then it morphed into unrestricted lending to would-behome-owners who lacked the means to pay. Part of the blame rests with the ClintonAdministration which twelve years earlier encouraged Fannie Mae and Freddie Mac tomake available 100% bonds to previously disadvantaged families, 60% of whichwere American Negroes.

Greenspans overt approval of what took place more than a decade later, wassubsequently responsible for creating two even bigger bubbles, one in housing, theother in credit. When both finally burst, the world entered what threatens to become themost dangerous asset deflation in history. Heres what the writer said a year ago. Skipit if you remember:

Some financial commentators now acknowledge that in the wake of the tech crash ofMarch 2000, Greenspan deliberately created a countervailing asset bubble in thehousing market. His purpose was to boost domestic consumption to offset therecessionary effects of an accelerating slump in equities. He faced a tough set ofcircumstances. By the end of 2000 the NASDAQ had halved. A year later the Dowfollowed suit, sliding 38%. Between January 2001 and June 2003, the Fed Chairmanresponded by dramatically cutting interest rates from 6.5% to1%. This was the lowesttheyd been since 1959. The sudden appearance of artificially cheap mortgage ratesencouraged home ownership. House prices began to rise sharply. Within a short spaceof time lenders were successively making bigger and bigger loans against the sameproperties as they flipped from one owner to the next. As values soared first-time

buyers were being offered bonds which exceeded 100% of the price to give scope foralterations.

As prices continued to rise, existing home owners discovered they could accessmortgages as if they were ATMs drawing cash whenever they felt the desire tospend. Lenders encouraged them to take holidays overseas, buy motor cars, and makealterations whatever struck their fancy.

Greenspan drove his audience further over the cliff of recklessness with a speech hemade on 23rd February, 2004. He was addressing the Credit Union National


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Association in Washington and used the occasion to tell them of a Fed study into thecost of servicing mortgages. He said investigation showed many homeowners couldhave saved tens of thousands of dollars in the last decade if they had switched fromhigh-cost fixed-rate mortgages, into ARMs (adjustable-rate mortgages). Under ARMs,which then made up only 28% of total mortgages, borrowers could expect lower initialrates but ran the risk of higher payments down the line if rates in the broader economy

later rose. These were his words:American consumers might benefit if lenders provided greater mortgageproduct alternatives to the traditional fixed-rate mortgage.

Joseph McKenzie, Deputy Chief Economist at the Federal Housing Finance Board,then elaborated on the choices now available:

There are lots of innovative programs, especially targeting low-income and first-time buyers.

Amongst these innovative programs was the so-called teaser bond. They offeredlow introductory teaser rates that reset substantially higher after a period of time usually two years. First-time buyers were often incapable of understanding the full

impact of the medium-term monthly costs of financing this type of mortgage. They hadeven less chance of grasping the compounding effects of what would happen in theevent of a sharp rise in the general level of interest rates. First-time buyers were in forsome nasty shocks. From when Greenspan made his speech, the popularity ofadjustable-rate mortgages rose sharply. Up to 75% of first-time buyers eventually fellfor his ploy.

In retrospect Greenspans advice proved disastrous. He failed to tell avid listeners whatwould happen if long term rates went up in response to economic recovery and risinginflation. Four months after delivering his pearls of wisdom to an unsuspectingaudience, the Chairman of the Federal Reserve actually began the process of RAISINGrates himself. The first hike took place on June 30th, 2004. Between then and June

29th, 2006, he and his successor, Ben Bernanke, lifted rates 17 times, taking the FedFunds discount figure back up to 5.25% from its starting point of 1%. Bernanke onlytook over in January 2006 so most of the damage took place under Greenspan.Looking back, one can probably pin point the start of the housing crash to the monththe Fed announced its final rise June 2006.

A more serious indictment of Greenspan relates to his famous 1996 description of theDows then new high of 6,000 as being a case ofirrational exuberance. In a FedOpen Market Committee meeting he conceded there was an Equity Bubble, admitted

that tightening margin requirements would stop it, but nevertheless declined to doanything. An article by David Blake in the FT of 19/9/08, entitled Greenspans sinsreturn to haunt us, quotes the previous Fed Chairmans comments at the time:

I guarantee that if you want to get rid of the bubble, whatever it is, that will doit.

Blake explained that when Greenspan later defended the Feds inaction, he claimed inthree speeches made since that:


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Tightening margins would not have worked.

The Fed Chief had changed his tune. The writer believes Greenspan came underpressure from Wall Street and Investment Banks to leave well alone as all had theirsnouts in the trough and were making millions in a roaring bull market in equities. Twoyears later the Dow peaked at almost double Greenspans 1996 level of 6,000 which hehad originally condemned as irrational exuberance. It topped out at 11.800. Eightyears of inflation later it trades below 10,400. Assuming a low inflation rate of 3% a yearwould put the cumulative real cost at around 25%, taking the effective value of the Dowdown to 8,850. Not a great investment.

Blake then described a second incident when, in 1998, the head of the CommodityFutures Trading Commission expressed concern about the massive increase in over-the-counterderivatives the very instruments at the heart of the latest crisis.Blake says Greenspan suggested new regulations risked disrupting the capital markets.When it came to the housing bubble, Blake says that before it burst, Greenspanrepeatedly maintained:

Housing is a safe investment because prices do not fall.

By August 2007, Dr Robert Shiller, Professor of Economics at Yale University hadalready suggested that the current house price slide in the US could turn out worsethan the 30% average decline experienced in the Great Depression. Together witheconomist Karl Case, Shiller developed the Case-Shiller home price index, Americasmost authoritative source for home price trends. A year later Shiller pointed out thattheir index had already fallen 20% in two years from its June 2006 peak to end June2008. It takes little imagination to pencil in a further nominal drop of 10% in each of thefollowing two years. That would take cumulative damage to 40%. Assuming three yearsof so-called core inflation at a mere 3.3% a year would lift the real cost of the implosionto 50%! If left unchecked it could well happen.

1.4 CONTAGION SPREADS TO EUROPE AND THE REST

While few areas in the world can match the 40% twelve month collapse of propertyprices in California, the shock of delayed contagion has been worse for those inEurope. The scale of recent declines in the UK housing market is a case in point.During the last decade the British enjoyed a trebling in the prices of their homes. Theyhave now experienced the biggest drop since 1990. In the past 12 months values fellmore than 12%, averaging 1% a month. The coming year could produce an equal orgreater decline as events play catch-up with trends in the US. Capital Economicsexpects a 35% nominal drop by end 2010, converting to a real decline of 45%, aftertaking account of inflation. The announcement of the initial first year crack prompted asharp warning from British Chancellor of the Exchequer, Alistair Darling:

The Economic conditions facing Britain are arguably the worst theyve been in60 years and voters are pd off with Labours handling of the economy.

His uncontrolled outburst caused sterling to post a new low under $1.77. It remindedthe writer of an Englishmans canny forecast back in November 2007. The writer andhis wife were in Hongkong attending a Christian conference. While enjoying a cup of


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coffee in a restaurant they got into conversation with a British asset manager. Whenasked his strategy for the year ahead he smirked and replied:

ABS!

When invited to explain, he spat out:

Anything But Sterling!

When challenged to justify such blunt advice he predicted the pound would fall to $1.70within a year. At the time it was trading at a multi year high of$2.11. He gave hisreasons. They were cogent. With London being the financial hub of Europe, and manyclaim the world, a spreading sub prime meltdown would cause enormous layoffs in thecapital citys financial community. When combined with an expected nationwidemeltdown in housing and British property prices are particularly susceptible - it wouldinflict greater overall damage on the UK economy than most anywhere else. It was hardto fault his logic and in retrospect hes been remarkably accurate. The pound is close tothe level he predicted. As of now its $1.76.

Britain and the US are not alone. Many thought both Europe and Emerging nationswould decouple. Instead Europe is currently slowing faster than the US. Hence theEUROs precipitous fall from $1.60 in July to $1.37 by early September, as the USenjoyed a relative fillip in the wake of its one-off fiscal stimulus of $150billion totaxpayers. Today the whole of Europe is grinding to a halt. By the end of SeptemberGermany had experienced two full quarters of contraction. In eight months the Irisheconomy has swung from dream to disaster. With a dramatic downturn in housing andconstruction, tax receipts have shriveled. This caused Irelands budget deficit to trebleand its market to implode. The country drastically needs a fiscal stimulus and apackage of tax cuts, but this would cause them to run foul of European Unioncommitments on fiscal discipline. What are they to do? Full obedience to EU rules andregulations appears increasingly unattractive, hence their reluctance to comply. A weekago their market slumped 8% in a single day. Since then, the Irish government hasissued a blanket guarantee to depositors of all Irish banks. Britains furious as theirbanks watch customers flee across the Irish channel in search of maximum safety.

Meanwhile the European Central Bank blathers on about the dangers of inflation. Thelonger they delay taking action, the harder they ultimately get hit by recession. This inturn will cause the dollar to strengthen again, especially with the latest short term rallyin the EURO having played itself out. Can the US economy continue to display greaterresilience? It will only happen as a result of a more interventionist economic strategy.Congress initially said no to the Treasurys $700billion bailout strategy. The Dow then

fell 775 points in a single day. The Senate gave in first, after the pill was sweetenedwith tax concessions worth $100billion. Second time round, shocked by the panic andanger which followed their initial rejection, Congress changed its tune.Unlike the US Federal Reserve, which is expected to steer a careful path between thetwin posts of promoting growth and controlling inflation, the ECBs sole mandate has todate been the avoidance of an inflation rate higher than 2%, irrespective of short termpain. Until the flashing light of inflation has been totally turned off, they vowed to paylittle or no attention to the risks of recession. By then it could be too late. In Spain,where unemployment slid to 8% in 2007, the government now expects a rise to 11% byDecember 2008, and 12.5% by end 2009.


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Outside the US and Europe, a tsunami of recession is spreading there too. A fortnightago, for the first time in 7 years, the Aussies cut bank rate 25 points to 7%, as growthslowed to a virtual halt. Their Kiwi neighbours are already in recession and cut for thesecond time.

China remains one of the few fortunate exceptions. Last years frenetic 12% growthrate has moderated to a relatively enviable 10% in response to tighter governmentrestrictions on lending by banks. In the process the countrys inflation rate has almosthalved from 8.9% in February to 4.9% by August. Satisfied with these results, theauthorities are ready to launch new policies to reignite growth. Apart from planning to liftcurbs on lending, they plan a significant boost to public expenditure. In July Chinastrade surplus notched up a new record, $28 billion for a single month. Even wereexports to slip, the country has plenty of capacity to boost local consumption and raiseimports. Its in the interests of the US that they do. Last week China cut rates for thefirst time in six years. Simultaneously their central bank reduced required commercialbank liquidity ratios. The countrys substantial balance of payments surplus places it ina powerful position to boost domestic consumption should exports decline. Budget

surpluses are equally vibrant. In the first half of 2008 they rose 33%. The trick would beto persuade the average Chinese family to save less. They will only do so ifgovernment improves social security, enabling workers to feel more confident aboutpensions, health and education. Any country in Europe would be only too happy toshow them how its done!

Why is China so important? If they and the other so-called BRIC countries Brazil,Russia, India and China maintain their growth rates, then commodity prices will soonrecover from what will then prove to have been a stiff but temporary correction.

1.5 HOW BAD CAN IT GET IN THE US?

Before addressing the action required to avert a serious recession, one needs to reflecton what could happen if things are allowed to slide.

A year ago the US property market was worth around $20trillion. Mortgage debtscurrently total $11.4 trillion, half owned by Fannie Mae and Freddie Mac with a claimednet market value of $5.6 trillion. More important, the two entities are responsible forfunding upwards of 70% of all new mortgages some say as much as 90%. A 30%crack in the housing market would wipe more than $3.3 trillion off the equity values ofthose with mortgages. If half the loss was attributable to owners with 70% to 100%bonds, lenders could lose up to $1 trillion through potential foreclosures. The greaterpart of this damage would afflict the Feds recently acquired agents, Fannie andFreddie. Were that to happen, budgeted bail out costs of $100 billion each would provelaughably inadequate. Multiply both by five.

How can one make such a prediction? US legislation allows borrowers whose housevalues have slipped under water in relation to an outstanding mortgage, to hand theirkeys to the bank and walk away. Lenders have no recourse to an owners remainingassets. Its called joining the jingle chain. The ease with which this can be doneencourages property foreclosures and contributes to forced-selling. Estate agentsclaim that upwards of 70% of foreclosures come from walkers most of whom dontbother to inform the bank prior to them abandoning ship. Its been estimated that in


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excess of a third of those who bought properties in the last five years now owe MOREon their mortgages than the houses are worth. For those who bought at the June 2006peak, the figure rises to 45%.

In addition to the above, American households owe a further $2.5 trillion in credit carddebt. In a serious deflation at least a quarter of this amount could conceivably go up insmoke. It would hike the total loss from an initial estimate of $1 trillion to at least $1.5trillion.

Thats before one gets to look at corporations. Some estimate the losses here couldexceed those in the housing market, particularly if the crisis in the financial sectorbegins to impact the real economy. In a recent issue of the FT Anousha Sakoui fromREUTERS reported:

The amount banks have lent to companies has HALVED as a result of the globalfinancial crisis, and evidence is growing that credit facilities are being providedon a SHORTER-TERM basis.

Whereas five-year maturities in the US from 2005-2007 made up 56% of loans, thefigure has crashed to below 20%. Syndicated lending in Europe, the Middle East andAfrica has fallen 49% over the last year, and 70% in the last quarter compared to thesame period nine months ago. Banks need help!

It is reported that in the event of a serious recession, losses here could escalate rapidlyand become substantial. Tack on another $trillion for the US alone. If added to the$1.5trillion for housing and credit cards, it would gobble up $2.5trillion for the non-financial sector alone.

As an example of corporate fragility, take the US motor industry. In the absence of afurther slowdown, they are seeking a $50 billion bailout to stay solvent and restructure.

They have already been offered $25billion. If they are to stand any chance ofdeveloping fuel saving vehicles such as the electric car, government will have to cometo the party with the balance. An amount of $25billion will only cover anticipated lossesfor the next 24 months. In a major recession it could double again. Thats just the motorindustry.

For Japan, declining vehicle sales to the US have already caused cut exports by 22%.This is the first seasonally adjusted trade deficit Japan has experienced since 1980! Nowonder the Yen is stable versus the dollar!

Then there are American states and counties verging on bankruptcy. Municipalborrowing costs have soared. Even New York City faces paying 9% for long term

money. They have decided to wait. California is asking for federal help to the tune of$7billion.

Finally there is the financial sector. US Treasury Secretary Hank Paulsons s muchvaunted $700billion fund to buy up toxic debt another word for distressed assets would only suffice as a first step in saving the banking system from a near meltdown.Paulson has suggested a reverse auction whereby lowest offers get bailed out first.They would naturally take the greatest hits. Book values would collapse from notionalvalues of 90-100US cents on the dollar to 20US cents and less. Bank balance sheets


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would be seriously impaired. Those in the know reckon the damage would total at least$500billion. Fed Chief Bernanke has suggested offering the banks theoretical-value-to-maturity for their dodgy assets, instead offire sale prices. Voters are not amused.Republican Senator Jim DeMint from South Carolina reported to the JointCongressional meeting:

Ive never seen people so angry. Our calls are a hundred to one against thisbailout. They dont trust the government.

The problem is that the tougher the prices offered, the bigger the hole it will leave inbank balance sheets. Given the current fragile climate, only the strongest would thensucceed in attracting fresh capital. Note how quickly the Robber Barons of the GoldCartel -Goldman Sachs and JP Morgan were able to benefit at the expense of theirweaker, less connected brethren. Goldman was able to suck in $5billion of fresh capitalfrom Warren Buffett! Lehman on the other hand went down. Not to be outdone, JPMorgan grabbed Washington Mutual, the countrys largest savings and loan company,for a mere $1.9billion. Shareholders and bondholders lost everything. The rest will hangout to dry unless the Treasury or JP Morgan comes to the party. In the case of Bear

Sterns the Treasury chipped in $29billion. The public wont stand for any more opengifts. In future they will insist they either do it by way of Preference shares, or equity. Inthe case of AIG, Treasury was forced to acquire 79% of the companys equity. Downthe line, in years to come, government can dispose of these and other stakes,eventually making a profit. For the present they would have to come up with hard cash at least $500billion to replenish gap left by current paper losses.

It is not impossible to envisage an overall combined loss for the US alone at $3 trillion.In support of that amount, Professor Nouriel Roubini of New York University estimateda $1trillion hit for the mortgage market alone:

The losses for the financial system from people WALKING AWAY could be of

the order of ONE TRILLION dollars when the entire capital of the US bankingsystem is only $1.3 trillion. You could have most of the US banking system wipedout, so this is a total disaster.

US policy makers need to make walking away less attractive, but in the absence ofincentives and a rewrite of existing contracts, it will never work and is only part of theproblem.

Five months ago the Treasury implemented a one-off fiscal stimulus by handing out$150billion worth of tax checks. Economic growth briefly recovered to an annual rate of3.3%. A week ago, as the effects of the stimulus wore off, US retail sales resumed theirslide. This in turn caused the dollar to weaken and gold to bounce. Whats the answer?Does the world face depression or is there a way out? Doomsayers are predicting amassive sell-off in the Dow. A recent crack lopped 1000 points off in three days, takingthe index down to 10,400. Other markets fell in sympathy. They recovered when theFed announced its latest $700billion rescue package. When Congress voted againstthe Paulson package, the subsequent one-day sell-off was vicious. From initially beingagainst the package, the public is gradually getting the message. We are living indangerous times. Whats the solution?

1.6 THE LIMITS OF MONETARY POLICY


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The strident response of the British Chancellor of the Exchequer to the collapse in theUK property market and the onset of recession was in part an expression of frustrationwith the relentless inflation-fighting tactics of the Bank of England. Although not asfervent as his European counterparts at the ECB, Mervyn Kings failure to cut rates hasbeen driving British politicians in the ruling Labour party crazy Darling in particular. In

the end they are the ones who carry the can for an economys dismal performance.

Darling should have learnt from the experience of his friends across the Atlantic.Despite the Fed cutting its discount rate from 5.25% down to 2% - ultra low comparedto the UKs present 5% - its had no visible impact on either demand for credit or itscost. Lenders are increasingly in trouble, verging on bankruptcy through the collapse inhousing and its effect on mortgage values. Banks are unwilling to lend further funds atlower rates, even if balance sheets allowed it and the cash was available. In fact prior tothe US Authorities latest round of interventions, financial markets froze completely.Despite the Feds lowering of interest rates, mortgage costs have actually increased.No one wants to lend. Even if they did, few wish to borrow except those who cantrepay.

Despite rescuing Bear Sterns, Fannie Mae, Freddie Mac, and more recently Americasbiggest insurer AIG, the Feds odd decision to dump Lehman Brothers set off a panic.In retrospect it was foolish. Who would in future qualify for a government bailout? Moreand more institutions were in trouble, house prices continued to slide. Suddenly theentire DERIVATIVE market began to implode. Those involved attracted massive short-selling. Share prices halved overnight. The uninitiated responded by banning all formsof short-selling, from naked, without scrip, to legitimate even when scrip is borrowed.

At latest count there were 117 financial institutions on the Governments danger list buta derivative meltdown would have had much wider and more serious ramifications.Some analysts placed the total value of outstanding derivative contracts at $62 trillion!

The financial world had become nothing more than a sophisticated gambling den andnot that smart if most were now in trouble! Despite these growing risks financial hawksstill urged both Government and Fed to walk away from Lehman Brothers and anyoneelse who threatens to fall. In principle it would normally be seen as good discipline toallow fools to suffer. The practice aligns perfectly with text book free marketeconomic theory. Those who make mistakes ought to bear the consequences. In thiscase however the outcome could potentially be far more serious than most envisage. Ifone major bank is allowed to collapse, it would trigger a run against all. (With the nearcollapse of Fortis in Europe, it has in fact just happened!)

In what is called the fractional reserve banking system no bank keeps more than5% in cash. Without outside help from either the Fed or Treasury - not one of themcould withstand a run in todays environment. The Fed and Treasury acting in concerthave no option but to pump and bail. Hence the Treasurys recent decision toguarantee ALL money market funds as they were swamped by massive cashwithdrawals when it became apparent one of them had lent a huge amount to Lehmanand would battle to survive.

What makes matters worse is that in a credit-based money system, the credit given andtaken represents the actual MONEY SUPPLY. As credit begins to shrink, so does theoutstanding supply of money. What follows is lower demand, falling prices, DEFLATION


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and ultimately recession or depression. Therefore, in some way or another, the moneysupply has at least to be kept constant, preferably increased at a modest rate. How canthis happen if the economic climate begins to deteriorate, or worse, becomes fragile asis true today? Markets are filled with fear and panic.

1.7 IS IT TIME TO ABOLISH THE FED?

In any rescue operation, and in the absence of a gold standard, money has to beprinted. Before the writer puts forward his rescue strategy, it is as well to see who willbe responsible for carrying it out, and why. In the US the function of physically printingmoney or creating it digitally, is the role of the Federal Reserve. What is the Fed andwho owns it?

The Federal Reserve is privately owned as is South Africas own Reserve Bank!The Fed also has its limits. Its $800 billion balance sheet has already been encumberedto the tune of $550 billion. Having to rescue one more major bank would stretch the Fedto breaking point. It could never cope with anything approaching a $3trillion bailout!That might prove a blessing in disguise and could provide the best solution of all! It

would create an opportunity for Congress to nationalize the Fed and relegate it tobeing a branch of Treasury. Through an Act of Congress the Treasury would buy out allprivate shareholders at par or less. It would place the American people back in controlof their financial destiny for the first time since 1913.

That was the year the Fed was set up and a set up it was indeed.

A private group of wealthy men, led by Senator Nelson Aldrich, maternal grandfather toDavid Rockefeller, bribed would-be American President, Woodrow Wilson, to approve aplan to place control of Americas money supply in the hands of private lenders. J.Pierpont Morgan and Andrew Carnegie were amongst them. Morgan dominatedfinance, Carnegie steel, Rockefeller monopolized oil. In return for Woodrow Wilsons

compliance they agreed to support his bid for President. Needless to say Wilson wonand in December 1913, when most members of Congress were on vacation prior toChristmas, the Federal Reserve Act was passed. It remains in total conflict with theAmerican Constitution as set out below. Those who gave their assent had certainly notread the small print. It gave the Fed the right to print, and print big!

Yet Article 1, Section 8, of the American Constitution, states that:

Congress shall have the power to CREATE money and regulate the valuethereof.

Despite the above provision, the new Act gave the Federal Reserve the right to usurpthe American peoples constitutionally entrenched right to print theirown money.Instead, as Ellen Brown says in her magnificent book, WEB of DEBT:

While the national money supply would be PRINTED by the US Bureau ofEngraving and Printing, it would be issued as an OBLIGATION or DEBT of thegovernment, owed back to the private Federal Reserve with INTEREST.


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Having ordered the funds to be printed at virtually zero cost to itself, the Fed would thenuse the funds so created out of thin airto purchase Government Bonds. The statewould then owe the funds back to the privately owned Fed with INTEREST.

Since then Americas entire money system has become CREDIT-BASED. Through thecharging of interest, the money supply of the US has perforce to INCREASE adinfinitum. Even in the absence of real growth in the economy, the money supply wouldnormally continue to grow simply to cover recurring interest.

The Federal Reserve Act was passed on December 22nd, 1913. President WoodrowWilson signed it into law the next day. He later regretted his actions and before he diedis reported to have said:

I have unwittingly ruined my country.

The Feds subsequent management of the economy in the two decades that followedwas less than exemplary. They encouraged the stock market bubble of the roaringtwenties. They then mismanaged the collapse. They tightened monetary policy when

commodity prices had already begun to decline. At that stage there was not theslightest hint of inflation. Instead the Fed became totally pre-occupied with attempting toquell speculation on Wall Street and stem outflows of gold to France. By July 1928 thediscount rate in New York had been raised to its highest level since 1921. During thetwo months which followed the cyclical peak of August 1929 to the crash of October,production, wholesale prices and income, fell at annual rates of 20%, 7.5% and 5%,respectively.

The Fed later eased but too late. Finally, in October 1931, as gold outflows resumed,the Reserve Bank of New York raised its discount rate TWICE in a month. It was thesharpest rise in so brief a period through the Feds then history to date. It triggered aspectacular increase in bank failures and runs, with 522 commercial banks closing

their doors in October 1931 alone.

By the end of the decade of depression half of all US commercial banks had eitherclosed or merged. Historians of the period point out that under the institutionalarrangements that existed between banks PRIOR to the establishment of the Fed, bankfailures of this nature would never have occurred. The large banks that regularlyintervened before the founding of the Fed, now felt that protecting smaller brethren wasno longer their responsibility. The extinction of bank deposits led to an abnormally largeDECLINE in the stock of money. This in turn caused greater DEFLATION and declinesin output than would otherwise have occurred. Following the death of Benjamin Strong,Governor of the Federal Reserve Bank of New York, the Feds biggest member, thecountrys Central bank became leaderless and lacking in expertise.

Fortunately, current Fed Chief Ben Bernanke is an expert on that particular period ofeconomic history. When called on in November 2002, to speak on the occasion ofMilton Friedmans ninetieth birthday, he gave credit to the man who had taught himmuch of what hes learnt about Fed mistakes during the first two decades of its rule. Heclosed with the following admission and promise:

Let me end my talk by abusing slightly my status as an official representative ofthe Federal Reserve. I would like to say to Milton and Anna: Regarding the Great


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Depression. Youre right, we did it. Were very sorry. But thanks to you, we wontdo it again.

Bernanke only took over as Fed Chief in June 2006, four years after his speech.Thanks to mistakes made by his predecessor Greenspan, Bernanke faces an economiccrisis potentially far greater than his early predecessors of the 1930s. He will needevery lesson of history he has garnered through years of study. By the grace of Godhes an expert in the problem his country now faces. That wont necessarily protecteither him or his counterpart at the Treasury, Hank Paulson, from making mistakes.What he will certainly implement is a revised form of the deflation strategy described inhis lecture of 2002. His most famous quote is set out below but it cost him dearly:

Like gold, U.S. dollars have value only to the extent that they are strictly limitedin supply. But the U.S. government has a technology, called a printing press (or,today, its electronic equivalent), that allows it to produce as many U.S. dollars asit wishes at essentially no cost. By increasing the number of U.S. dollars incirculation under a paper-money system, a determined government can alwaysgenerate higher spending and hence positive inflation.

The above statement gained Bernanke the nickname ofHelicopter Ben. However,until the international money system returns to being founded on an old-fashionedStandard of Golf, wild swings in money supply will always be possible under a debt-based financial system. As the credit bubble implodes and inter-bank lending freezes,money supplies shrink fast and furiously.

In the same breath that economists predict deflation, they viciously attack proposedFISCAL and FINANCIAL interventions by Treasury and Fed alike. For any free-marketeconomist committed to minimal government and capitalism, most of the suggestionsfor dealing with the growing crisis in the US and elsewhere, reek of socialism at itsworst. Unfortunately, the capitalist dream has spiraled out of control and lost its right to

continue unhindered. Too many innocent victims will be crushed in its wake ifgovernment stands back. In the same breath, socialists, communists and left-winginterventionists are sickened at having to bail out bankers and wealthybusinessmen. What can and ought to be done?

1.8 AN EMERGING RESCUE STRATEGY

As the writer was preparing to tackle this, the most challenging section of his article, hecame across a newspaper commentary which seemed particularly relevant. It hadnothing to do with finance but everything to do with effectively handling a problem.

If theres a RUNNING TAP in a room, do you mop up, or CLOSE the tap?

Treasury Secretary Henry Paulson ex CEO of Goldman Sachs has urged Congressto ante up $700 billion to buy toxic debt from beleaguered banks. Hedge funds havebeen excluded. As urgent and as necessary as his plan may be, Paulson is onlyaddressing an effect, albeit the most serious in the very short term. The Democratswill most certainly approve it, but are expected to insist on changes. The first would bea plan to grant assistance to homeowners facing foreclosure. They reason from ahuman perspective. Why should homeowners be left to suffer when wealthy bankers


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are bailed and rescued some to walk away with multi-million dollar retirementpackages?

The writer is convinced there is an even stronger argument for assisting homeownersand it has nothing to do with morals. The MORTGAGE INDUSTRY was, and remains,the original RUNNING TAP. It triggered the sub prime meltdown and gets worse withevery passing month. Turn it off first. It needs to be addressed and fixedsimultaneously and not just for political purposes. Doing it will certainly help make abank bailout more palatable, but theres a far more important reason.

If matters are allowed to slide, $3trillion worth of overall damage looks to be a fair andreasonable estimate. Then rather spend the SAME amount upfront, split three ways, tobail out each sector in turn. Given time, half the cost could ultimately prove to havebeen of a TEMPORARY nature and will likely be recouped over the next five to sevenyears. Spending it today would save the system and spare millions of peopleunnecessary pain and suffering. Here are FOUR possible steps which the writerbelieves are collectively necessary to affect an overall economic rescue:

STEP 1. A $1TRILLION, TWO PART, BAILOUT FOR BANKSPart 1 would involve the purchase of assets. Let all know that the Treasury will only payfire sale prices. This will reduce the upfront cost from $700billion to $500billion.

Part 2 would require a compensatory injection of fresh capital to cover realized losses.This could be done either by way of equity or convertible preference shares, whichmight prove less risky. The government would acquire a number of major stakes inquoted financial groups. Warren Buffett has already shown the way with GoldmanSachs.

If management was either retained or strengthened, as the economy recovered, shareprices would follow. Over time government could dispose of the assets it will acquire

through auction and the equity it will pick up via rights issues. The act of rescuing theoverall economy would rapidly restore confidence to the mortgage and housing sectors.In due course, there would be others like Warren Buffet prepared to throw in privatefunds as well, reducing the burden on government.

STEP 2. RESCUE MORTGAGES BY BAILING OUT HOMEOWNERSHaving acquired control of Fannie Mae and Freddie Mac, the two largest issuers ofmortgage loans, the Treasury can immediately reinstate TEASER BONDS. Cut themortgage rate for all homeowners in trouble. Reduce it by HALF for a fixed five yearperiod. Where necessary reduce the initial size of the mortgage if nothing else worksand the current book loss already exceeds 25%. In exchange, homeowners would berequired to sign an amended mortgage agreement. This would forbid them from

walking away at the end of the period or earlier, unless government lending agencieshad prior claim on all remaining assets in the event of a loss. This would go a long wayto prevent abuse by those who previously could have settled but chose to walk instead.It would give all concerned both an incentive and an enhanced ability to stay in theirhomes.

At the end of five years, homeowners would have saved approximately 3% a year ininterest, being 15% in total. Five years of renewed inflation, at around 5% a year, wouldhave added a 25% to the money value of most properties by the end of the period.Together with the 15% saved on interest, homeowners would have enjoyed a 40%


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cushion. All concerned would have a far better prospect of surviving intact. Cost to theTreasury by way of interest subsidies, would amount to 15% of Fannie and Freddiestotal mortgage book of $5.6 trillion. This works out to $840 billion. Add a furthermaximum injection of $160billion to cover a limited number of mortgage write downs,where values had fallen more than 25%. The trillion dollartotal would equal theamount reserved to rescue the banking sector. However, it might well reduce the scaleof banking sector damage by addressing the underlying problem.

There would be one significant difference. The value of fire sale assets purchased byTreasury would rapidly appreciate, as would the equity value of capital infusions. Why?Because, the rate of housing foreclosures would drop dramatically, restoring confidenceto both the sub-prime market and related derivatives. Blatant fraud would be anothermatter.

STEP 3. BOOST THE ECONOMY VIA FISCAL INJECTIONS TO TAXPAYERSSome five months ago the Treasury posted millions of $600 checks to taxpayers,costing $150billion in total. It effectively boosted the economy back to a 3.3% positiveannualized rate of growth over a four month period. The program needs to be repeated

SIX more times over the next two years. It would cost a further$900 billion. Anadditional $50billion needs to be given to the motor industry, by way of low costmedium-term convertible preference shares. This would enable GM, Ford, and Chryslerto survive and thrive at a time of great opportunity. The imminent arrival of the world-wide launch of the ELECTRIC CAR would ensure that American motor manufacturersstay on TOP as the industry enters a dramatic new phase of its history. Over time itwould enable the US to cut its imports of crude by half. It would also make it possiblefor US manufacturers to regain some of the ground theyve lost to internationalcompetition. The writer will explain how this is possible in his next article which willfocus on prospects for the ELECTRIC CAR.

Financial assistance to the motor industry at the present time would over the medium

term help the US trim its overall trade deficit. It would specifically help the country to cutits dependence on imported oil at a time when medium term prices are otherwise set toescalate. It would also reduce Americas dependence on unfriendly sources of oil.Europe would be well-advised to follow suit. It would help them limit their need to cow-tow to an increasingly power-hungry Russia.

STEP 4. PLAN A MAJOR INFRASTRUCTURE PROGRAMTwenty five percent of Americas Gross Domestic Product is credit based. The growingliquidity crisis will cause much of that to fall away. Habits will change. People willbecome more frugal. They will learn to avoid debt like the plague. In order to maintainthe countrys Gross Domestic Product, falling consumption has to be replaced bygrowing investment. Americas infrastructure is in dire need of renewal. Over the next

two years, as the economy recovers under the stimulation of tax checks, both FederalGovernment and States need to draw up plans to fix roads, bridges, railways, harbours,and airports. Later on, as the launching of the ELECTRIC car becomes a reality, thecountry will need to renew much of its electrical wiring as well. Multiple distributionpoints will have to be established at filling stations and private houses. The governmentought to budget to spend at least another $2 trillion a year from 2011 onwards. This willfill the gap as debt-based consumption fades.

The cost of the above four interventions would initially approximate the likely ultimatecost of doing NOTHING - except the outcome would be substantially different and


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considerably more preferable. To the extent that it COMPENSATES for the destructionof credit-based money which would otherwise take place, it would not be inflationary.

Clearly the PERCEPTION of inflation would increase. However, if the interventions arecarefully managed, far from causing a collapse of the dollar standard, it would serve asan example which Europe and Asia would do well to follow. As US growth recovers,offshore investment would continue to flow in, thereby continuing to cover the tradedeficit.

There is no doubt that the FIAT money system as a whole will gradually beundermined by increasing inflation but it need not be of the hyperinflationary variety ifjudiciously controlled. Over time those in authority will come to realize that crises of thisnature can in future be avoided only if debts are strenuously controlled and papermoney rooted once again on a foundation of gold. Certainly the gold price itself wouldincrease dramatically. If it rapidly DOUBLED it would do no more than CATCH UP withwhere it ought to have been had the likes ofGoldman Sachs and JP Morgan not sorigorously set out to control and suppress it at the behest of the Fed. As more and morepeople are made aware that the Fed is privately owned and that the above two entities

are major shareholders, their actions will be watched far more closely.

Here is an example of their latest gambit to hammer precious metals:

On July 8, 2008 those who belong to the GATA camp Gold Anti Trust ActionCommittee - were made aware of the US Authorities latest clandestine efforts tosuppress the prices of gold and silver. It helps give a false measure of support tothe central banks FIAT money system. Ted Butler and others discovered thatthree unknown banks probably Goldman Sachs, JP Morgan, and another - hadcollectively sold short 8 million ounces of gold, between $920 and $970 anounce. The same three banks had simultaneously sold short 139 million ouncesof silver at around $19 an ounce.

A month later, by August 8 - and $150 lower - the gold had been repurchased.The silver is taking somewhat longer. However in the process, the price of silverwas smashed down from $19 to an intra-day low of around $10.50! This occurredat a time when markets were collapsing and precious metals would normallyhave attracted investment attention as havens of safety in a storm.

In fact the proof of the pudding in relation to the veracity of the above allegationslies in what happened to the PHYSICAL markets for both metals. As the futuresmarkets were both being CRUSHED, there arose an inexplicable SHORTAGE ofcoins and bars. Government MINTS ran out of stock and were forced to suspendsales. Premiums were and still are - being paid for physical supplies at a time of

great financial uncertainty. Yet the futures markets told a completely differentand CONTRADICTORY story.

It is common cause among members of GATA that Goldman Sachs and JP Morganhave been leading the suppression charge for a decade. It is therefore with someamusement that one observes the speed with which both banks vigorously objected toconcerted SHORTING of their respective stocks during the latest meltdown in thefinancial sector.

A worldly observation might be:


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What goes around comes around.

A more appropriate biblical comment would be:

What you sow is what you reap.

Isnt God a God of justice!

1.9 PRINTING VERSUS BORROWINGThe Treasurys latest bailout plan cannot possibly be financed by the Fed. They simplydont have the balance sheet to support the amount required. Is this not now the perfectoccasion for members of Congress to stop playing games? Declare timeout for the Fed,but in the nicest possible way. Pay them off and close the page. Why play games withissuing bonds to the Fed when their payment is simply printed out of thin air? Danger tothe Government Bond market would be far less than that posed by the increasingprospect of excessive debt resulting from a bailout. It would not require finding lenders.Nor would it add one cent to the national debt. Printing to counteract DEFLATION

would not even be inflationary.

The current economic crisis presents a heaven sent opportunity to question the meritsof allowing the Fed to remain in private hands. In terms of the US Constitution, the rightto create and print money belongs to the people. It should never have been placed inthe hands of private individuals. There is no way the Feds existing balance sheet canmagically expand from a current level of $800billion worth of largely toxic debtinstruments, to the additional $3trillion now required to bail out nation. While mostreaders might think the writer has lost his marbles, consider the following extract fromEllen Browns excellent book referred to earlier and known as: WEB of DEBT

The idea that the federal debt could be liquidated by simply printing up money

and buying back the governments bonds with it is dismissed out of hand byeconomists and politicians on the ground that it would produce Weimar-stylerunaway inflation. But would it? Inflation results when the money supplyincreases faster than goods and services, and replacing government securitieswith CASH would not change the SIZE of the money supply. Federal securitiesare ALREADY money. They have been money ever since Alexander Hamiltonmade them the basis of national money supply in the late eighteenth century.Converting federal securities into U.S. NOTES would not cause prices to shootup because consumers would have no more money to spend than they hadbeforeIf the government were to BUY BACK its own bonds with cash, theseinstruments representing financial value would merely be converted frominterest-bearing notes into non-interest-bearing LEGAL TENDER. The fundswould move from M2 and M3 into M1 (cask and checks), but the TOTAL moneysupply would remain the SAME!.....That is very different from what happenstoday. When the FED uses newly-issued Federal Reserve Notes to buy backgovernment bonds, it does not void out the bonds. Rather they become thereserves for issuing many times their value in new loans. The new cash createdto buy them is added to the money supply as well. That highly inflationary resultcould be AVOIDED by simply authorizing the government to buy back its ownbonds and taking them OUT of circulation.If the Federal Reserve were a truly


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FEDERAL agency there would be no need to back its dollars with governmentbonds.

How about that then? Isnt Ellen Brown brilliant? All those Democrats, panicking aboutthe rising cost to taxpayers of an imminent FED bailout, could relax if the above wasimplemented. As for a new FED being less INDEPENDENT, how can PRIVATEbankers be independent anyway? They must inevitably have a PRIVATE agenda oftheir own. Now is the time for Democrats to act in the interests of taxpayers. However, ifits true that Obama is already being funded by Goldman Sachs, he will of courserefuse. If both Presidential candidates are members of the Council on ForeignRelations, the bankers have them in their clutches already. Maybe Palin can do it?

2.0 A PROPHETIC CONCLUSION

The above is a pictorial demonstration of a young man listening to Jesus. In the NewTestament Book of 1 Corinthians, chapter 14, verse 1, it says as follows:

Follow the way of love and eagerly desire spiritual gifts, especially the gift ofPROPHECY.

Again in 1 Corinthians, but this time chapter 12, verses 8 to 10, the nature of the NINEspiritual gifts available to every Christian believer is clearly defined. Over the years thewriter, in his walk with the Lord, has always encouraged Christian friends to developetheir spiritual gifts. In the Mens Breakfast Group that he runs with a team of leaders,known as ROTOP or Round Tables of Prayer, he frequently invites men and womenwith a notable prophetic gift to come and minister. In the process all present graduallylearn to discern which words are of God and which are not. No one of course isinfallible.


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Over the years the writer has met a number of people whose ministries have been quiteoutstanding. Their ability to hear Gods voice has been unusually accurate.

For present purposes the writer will restrict the topics covered to those relevant to thisarticle. The first and most interesting concerns the short and long term prospects forGOLD.

2.1 PROPHETIC SHORT TERM PROSPECTS FOR GOLDA young friend with a powerful prophetic gift, first name Andre, and man the writer hasknown for some years, rang a month ago with a simple question. Where did the writerthink the price of gold would be by the end of March 2009? A year ago the writer hadopenly stated he thought the price would touch $1050 by July 2008, and reach $1200by the end of December 2008. In the event it briefly touched $1030 in March. Fromwhere the price was sitting at the time his young friend phoned, either side of $800 anounce, the writer thought hed stick to his figure of $1200 but take advantage of theextra three months. The young man was not in the financial business but this was thereply he gave:

Thats interesting Peter. This has never happened to me before, but I felt Godtell me GOLD would be $1300 by the end of March 2009.

A week later the writer mentioned what had happened to a friend in the assetmanagement business, but a person who regularly attends a prophetic school. Hisresponse was a confirmation. He related how the man who teaches them, first nameRory, preached at a church in January. During his address he said:

God has shown me that during the coming year a number of major internationalinstitutions will go broke.

A month later he told his pupils in a training meeting:

I felt God show me that the price of Gold would rise to between $1100 and $1200by Christmas 2008.

Together the above two prophecies indicate a strong likelihood that the price of Goldwill rise sharply from mid-October onwards, reaching at least $1100 by Christmas, andprobably $1300 before the end of April 2009. Measured from golds price of $828 spot,on Friday, October 3, the next 3 months should see a minimum 33% move to $1100 byChristmas, and the next 7 months a 57% move to $1300. With everything else inmeltdown mode, the outlook for gold looks pretty good.

2.2 THE COLLAPSE OF CAPITALISMAt about the same time the writer received the first prophetic word on gold, he wasasked to meet a middle-aged man who wanted advice on economics. He said he knewnothing about the subject but God had given him a strange prophetic word which hewanted to pass by the writer. He felt God say to him that:

Capitalism is about to collapse.


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He asked if it was possible. At that stage the extent of the financial crisis was beginningto impact the writers thoughts as he began to research for his article. He thereforeresponded:

I think you may have heard God correctly.

That was two months ago. Had one put those thoughts to paper then they would havebeen viewed as totally off the wall. Not anymore. The extent of intervention explodeswith every passing day. It certainly helped the writer clear his mind of all preconceivedideas with regard to what was theoretically acceptable for an erstwhile believer in freemarkets. Now its happening and massive intervention is the only way to go, otherwisewell all be back in a barter economy.

2.3 AN IRANIAN CLIMBDOWN BY CHRISTMAS?Back in July the ex-South African Kim Clement, now resident in California, had a wordfor what would happen in the Middle East this Christmas:

This could possibly be one of the greatest Christmases ever for the troops in

Iraq and Afghanistan. I will embarrass Iran. Twice I will embarrass Iran asitattempts to do something against Israel. Watch how this Christmas will besome of your greatest victories, says the Spirit of the Lord.

The above word doesnt necessarily imply a military strike. It could be that the threat ofa major US attack becomes so real that Iran simply capitulates, aided and abetted byinternal political pressure against the current president.

2.4 ZUMA WILL NEVER BECOME PRESIDENT OF SOUTH AFRICASubscribers may recall the writers article No. 81, entitled:

ZUMAS PHYRRIC VICTORY, ANCS MOMENT OF TRUTH, YOUNG WHITES CANRELAX.

It was dated February 12, 2008. The writer laid out two options for South Africas would-be President. The first involved him telling the truth, going to jail for a brief spell, butlater becoming President. He failed the test, choosing instead the path of delay anddenial. At the time the writer was certain he would take a leap of faith and allow God tochange him. It was disappointing when he chose otherwise. A year ago an Americanprophet, Lauro Adamo, visited South Africa. Amongst other things he said the following:

The man they think will be President will not be President.

At the time it seemed he was off beam but the sudden ousting of Mbeki hasdramatically changed the picture. The ANC called Mbeki to account and forced him toresign. They nominated ZUMAs right hand man, Kgalema Motlanthe, to fill the role ofPresident for a brief eight month period until elections in May 2009. It has givenMotlanthe an immense advantage and an opportunity to win the hearts of the people inthe interim. If erstwhile ZUMA supporters choose to implement Judge Nicholsons callfor a full investigation of the Arms Deal, both ZUMA and Mbeki could go down together.If not jailed, their reputations will both be irrevocably damaged, certainly enough topreclude ZUMA from public office. Even if nothing happens, it would appear thatZUMAs day is probably over.


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2.5 A PROPHETIC FUTURE FOR THE SOUTH AFRICAN RANDThe same American prophet referred to above had an amazing and very encouragingword for South Africas long term economic future.

I foresee 100 years of prosperitythere is coming a time in the future when the

RAND will become stronger than the EURO.

This is now the third time the writer has heard prophets forecast a strong future for theRAND. On the two previous occasions they both concerned the RAND becomingstronger than the dollar. Collectively they promise both economic strength throughrising prices for gold and commodities, but as important they foresee growingconfidence in the countrys political future. On both counts they ought to giveencouragement to young whites who have refused to emigrate. Those who have leftSouth African shores already may in time have cause to return. Do it soonest, first lossbest loss!

On the topic of the RAND, the writer believes that by the end of March 2009, South

Africas currency ought to have strengthened back from R8.75/$ at the time of penningthis, to R7/$ - a positive20% move, good for foreign investors as well.

2.6 PROPERTY PRICES IN CALIFORNIA A REBOUND POSSIBLE?In an earlier part of this article the writer referred to the recent 40% collapse inCalifornian property prices, experienced since the June 2006 peak. The prophet KimClement now lives in California. He felt God giving him a word of encouragement for hisstate. It runs completely COUNTER to the worst case scenario predicted for Americanproperty prices and the nations economy. However, if a radical fiscal strategy were tobe implemented with immediate effect, Clements vision would not be impossible. Hereis what he felt God telling him:

Property, property, property, property is going to be yours, says the Lord. Therehas been attack against your property, there has been attack against your homesand your houses- to tear down your walls and to pull you out and minimize yourfaith. God has said Enough. Now I say to you, property, property, property,property four times you will be restored, says the Lord. By March of 2009 it willbe a COMPLETE opposite to what it is now,says the Lord.

Certainly if any fiscal intervention is to work, it must target both the housing market andthe real economy not just the financial sector.

2.7 A NEW VEHICLE WILL EMERGE FROM FORDIn line with the writers own thoughts on the subject, Clement has a word regardingAmericas motor industry, specifically FORD.

There will be a new vehicle that will emerge from FORD as it joins forces withanother motor company. It shall be something that shall stand next to everyEuropean car.

If Clement is correct it might well be that FORD beats its American rivals to the post bylaunching an ELECTRIC car before anyone else! Those who are scathing in their


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criticism of the US Administrations planned $25billion bailout of the nations motorindustry may in time have cause to reconsider.

It seems the moment has arrived for Americans to learn some tricks from the French. Itwas the countrys current President, Sarkozy, who in earlier days as Minister of Financesaw fit to intervene on behalf of French engineering giant ALSTOM, then verging onbankruptcy. Five years ago Sarkozy made the salvage of ALSTOM the lynchpin of anindustrial strategy. Paul Betts commented in the FT last week:

The French INTERVENTIONIST way of fixing industrial problems, seems toachieve better results than the American way. The US also appears to havereached the same conclusion at least judging by the way the government isnow INTERVENING to save everybody, from the bankers on Wall Street to thehard-pressed carmakers of Detroit.

Capitalists and free market ideologues of which the writer til recently was one arehaving to learn new tricks!

2.8 CHINA TO BECOME AMERICAS FRIENDFinancial analysts have long seen China as a rising threat to the international powerand influence of the United States. Their buildup of substantial dollar holdings viasurpluses on trade account theoretically places China in a position to call America toaccount. The countrys rapid industrialization and double digit growth rates haveastounded economists. Chinese manufactured goods have flooded the world. Fewhave been able to compete with her low manufacturing costs and fast improving quality.Effectively Chinas rising foreign exchange reserves are tantamount to her lending theUS huge amounts of money. So why should China wish to become Americas friend?

The industrialization of China was largely made possible because US companies werewilling to transfer whole factories and know how to an educated labour base. Twenty

million Chinese workers a year have been pouring in from rural areas, getting properjobs and acquiring skills they never had before. They rapidly learnt to manufacture thesame products at a fraction of US costs. This enabled American companies to competeon a global basis, gain new markets, and make substantial profits. There are still 200mrural Chinese waiting to join the flow to the towns. Increasingly the factories are beingbrought to where they live. To date it has been a win win situation for all concerned.An erstwhile communist government has learned to adapt to capitalism, stayed inpower, and dramatically raised the living standards of its people. As her people becomemore sophisticated, they will also become more demanding. Any major hiccups togrowth will rapidly lead to disaffection with those in government. It is overwhelmingly inChinas interests to allow the deal to continue for at least another decade. That is whyKim Clement was led to say:

Watch out China is about to arise. For the Lord Christ on high has entered inbeyond the Wall. China, you will fall into MY hands. I will shake the Kingdom ofdarkness and show them MY Son. America! America! Do you know what I haveplanned? There is hope, for China will take your hand. Together you will stand. Iwill shake their enemies from them so that they will not look to the soil of theMiddle East. Instead God says: I will surprise you by what I do with Asia andthe United States of America. Pray for China for I will raise them up. They need afriend. Will you, will you, will you (America) be their friend?


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From having persecuted Christians for so long, it would appear as if a massive revivalis about to break out in China. If this is the case, they certainly wont be turning to eitherRussia or the Middle East any more.

3.0 LATEST PICK SIX IN GOLD AND ENERGY

The last occasion on which the writer discussed his PICK SIX was back in February ofthis year. The stocks and their respective prices were as set out in Table 1 below. TheRand/Dollar currency rates ruling on 12 Feb 2008 were R7.70$ versus R8.50/$ at thebeginning of October. The 17% fall in the Rand since August 4 when the ratestrengthened to R7.25 was largely attributable to a similar 17% crack in the CRBIndex of commodity prices. Most of that was due to a 12% strengthening in the Dollarversus the EURO. In less than 8 weeks the EURO fell from $1.56 to $1.37 as Europeslid into recession and the ECB began to ponder the growing need to cut rates.

TABLE 1Stock Price - 12 Feb 2008 Price 1 Oct 2008

Gold Price $916 (R7053) $840 (R7140)

(1) AFGOLD R2.45 ($0.36) R1.75 ($0.20) (- 29.0%)

(2) RANDGOLD R18.00 ($2.40) R13.00 ($1.53) (- 28.0%)

(3) GOLDFIELDS R107.00 ($13.80) R70.25 ($8.26) (- 35.0%)

(4) SALLIES R0.56 ($0.07) R0.64 ($0.08) (+14.0%)

(5) SASOL R350.00 ($45.00) R314.00 ($36.90) (-10.0%)

(6) URANIUM ONE R51.00 ($6.50) R15.50 ($1.82) (- 70.0%)

Average decline - 26%

The average 26% decline experienced in the Rand prices of the writers PICKSIX in Gold and Energy stocks as shown above, reflects a sharp 22% fall in theCRB Index of commodity prices since July. Gold is down 18% from a mid March

peak of $1030, to a current level of $840. Oil is down 37% from $147 a barrel inMarch, to $93 on October 1. Copper is down 33%, Uranium prices have more thanhalved but over a much longer period. Now observe TABLE 2 below, the writersprojections for the NEXT seven months to the end of April 2009.


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TABLE 2Stock Current Price 1/10/08 Projected Price 30/4/08

R8.50/$ R7.0/$Gold Price $840 (R7140) $1300 (R9100)

(1) AFGOLD R1.75 ($0.20) R3.10 ($0.44) + 77%

(2) RANDGOLD R13.00 ($1.53) R26.00 ($3.71) + 100%

(3) GOLDFIELDS R70.25 ($8.26) R135.00 ($19.28) + 92%

(4) SALLIES R0.64 ($0.08) R1.10 ($0.16) + 72%

(5) SASOL R314.OO ($36.90) R475.00 ($67.00) + 51%

(6) URANIUM ONE R15.50 ($1.82) R37.00 ($6.40) + 138%

Average Projected Rise by end April 2009 + 88%3.1 WHY SHOULD GOLD TAKE OFF OR COMMODITIES RECOVER?The writer is projecting an average appreciation of 88% for his PICK SIX in gold andenergy stocks over the next 7 months. Is it possible and why should it happen?

a. THE CASE FOR GOLDIf one goes back to the illustration on the front page of this article, BANKERS in aJACKSON HOLE, the answer to the Bankers problem is given as:

PRINT or DIE!

In ot

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Peter George EM84 Central Bankers