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Thursday, May 31st, 2007
Volume 6, No. 10
2 Articles, 16 pages
1. The Case of Mr. Guthrie, Bilking the Elderly & Many Others
2. "Are We Headed Toward Another Great Depression"?
1. THE CASE OF MR. GUTHRIE, BILKING THE ELDERLY & MANY OTHERS
BY
CHARLES DUHIGG
InfoUSA advertised lists of “Elderly Opportunity Seekers,” 3.3 million older people “looking for ways to make money,” and “Suffering Seniors,” 4.7 million people with cancer or Alzheimer’s disease. “Oldies but Goodies” contained 500,000 gamblers over 55 years old, for 8.5 cents apiece. One list said: “These people are gullible. They want to believe that their luck can change.”
As Mr. Guthrie sat home alone - surrounded by his Purple Heart medal, photos of eight children and mementos of a wife who was buried nine years earlier - the telephone rang day and night. After criminals tricked him into revealing his banking information, they went to Wachovia, the nation’s fourth-largest bank, and raided his account, according to banking records.
“I loved getting those calls,” Mr. Guthrie said in an interview. “Since my wife passed away, I don’t have many people to talk with. I didn’t even know they were stealing from me until everything was gone.”
Telemarketing fraud, once limited to small-time thieves, has become a global criminal enterprise preying upon millions of elderly and other Americans every year, authorities say. Vast databases of names and personal information, sold to thieves by large publicly traded companies, have put almost anyone within reach of fraudulent telemarketers. And major banks have made it possible for criminals to dip into victims’ accounts without their authorization, according to court records.
The banks and companies that sell such services often confront evidence that they are used for fraud, according to thousands of banking documents, court filings and e-mail messages reviewed by The New York Times.
Although some companies, including Wachovia, have made refunds to victims who have complained, neither that bank nor infoUSA stopped working with criminals even after executives were warned that they were aiding continuing crimes, according to government investigators. Instead, those companies collected millions of dollars in fees from scam artists. (Neither company has been formally accused of wrongdoing by the authorities.)
“Only one kind of customer wants to buy lists of seniors interested in lotteries and sweepstakes: criminals,” said Sgt. Yves Leblanc of the Royal Canadian Mounted Police. “If someone advertises a list by saying it contains gullible or elderly people, it’s like putting out a sign saying ‘Thieves welcome here.’ ”
In recent years, despite the creation of a national “do not call” registry, the legitimate telemarketing industry has grown, according to the Direct Marketing Association. Callers pitching insurance plans, subscriptions and precooked meals collected more than $177 billion in 2006, an increase of $4.5 billion since the federal do-not-call restrictions were put in place three years ago.
That growth can be partly attributed to the industry’s renewed focus on the elderly. Older Americans are perfect telemarketing customers, analysts say, because they are often at home, rely on delivery services, and are lonely for the companionship that telephone callers provide. Some researchers estimate that the elderly account for 30 percent of telemarketing sales - another example of how companies and investors are profiting from the growing numbers of Americans in their final years.
While many telemarketing pitches are for legitimate products, the number of scams aimed at older Americans is on the rise, the authorities say. In 2003, the Federal Trade Commission estimated that 11 percent of Americans over age 55 had been victims of consumer fraud. The following year, the Federal Bureau of Investigation shut down one telemarketing ring that stole more than $1 billion, spanned seven countries and resulted in 565 arrests. Since the start of last year, federal agencies have filed lawsuits or injunctions against at least 68 telemarketing companies and individuals accused of stealing more than $622 million.
“Most people have no idea how widespread and sophisticated telemarketing fraud has become,” said James Davis, a Federal Trade Commission lawyer. “It shocks even us.”
Many of the victims are people like Mr. Guthrie, whose name was among the millions that infoUSA sold to companies under investigation for fraud, according to regulators. Scam artists stole more than $100,000 from Mr. Guthrie, his family says. How they took much of it is unclear, because Mr. Guthrie’s memory is faulty and many financial records are incomplete.
What is certain is that a large sum was withdrawn from his account by thieves relying on Wachovia and other banks, according to banking and court records. Though 20 percent of the total amount stolen was recovered, investigators say the rest has gone to schemes too complicated to untangle.
Senior executives at infoUSA were contacted by telephone and e-mail messages at least 30 times. They did not respond.
Wachovia, in a statement, said that it had honored all requests for refunds and that it was cooperating with authorities.
Mr. Guthrie, however, says that thieves should have been prevented from getting access to his funds in the first place.
“I can’t understand why they were allowed inside my account,” said Mr. Guthrie, who lives near Des Moines. “I just chatted with this woman for a few minutes, and the next thing I knew, they took everything I had.”
Sweepstakes a Common Tactic
Investigators suspect that Mr. Guthrie’s name first appeared on a list used by scam artists around 2002, after he filled out a few contest entries that asked about his buying habits and other personal information.
He had lived alone since his wife died. Five of his eight children had moved away from the farm. Mr. Guthrie survived on roughly $800 that he received from Social Security each month. Because painful arthritis kept him home, he spent many mornings organizing the mail, filling out sweepstakes entries and listening to big-band albums as he chatted with telemarketers.
“I really enjoyed those calls,” Mr. Guthrie said. “One gal in particular loved to hear stories about when I was younger.”
Some of those entries and calls, however, were intended solely to create databases of information on millions of elderly Americans. Many sweepstakes were fakes, investigators say, and existed only to ask entrants about shopping habits, religion or other personal details. Databases of such responses can be profitably sold, often via electronic download, through list brokers like Walter Karl Inc., a division of infoUSA.
The list brokering industry has existed for decades, primarily serving legitimate customers like magazine and catalog companies. InfoUSA, one of the nation’s largest list brokers and a publicly held company, matches buyers and sellers of data. The company maintains records on 210 million Americans, according to its Web site. In 2006, it collected more than $430 million from clients like Reader’s Digest, Publishers Clearinghouse and Condé Nast.
But infoUSA has also helped sell lists to companies that were under investigation or had been prosecuted for fraud, according to records collected by the Iowa attorney general. Those records stemmed from a now completed investigation of a suspected telemarketing criminal.
By 2004, Mr. Guthrie’s name was part of a list titled “Astroluck,” which included 19,000 other sweepstakes players, Iowa’s records show. InfoUSA sold the Astroluck list dozens of times, to companies including HMS Direct, which Canadian authorities had sued the previous year for deceptive mailings; Westport Enterprises, the subject of consumer complaints in Kansas, Connecticut and Missouri; and Arlimbow, a European company that Swiss authorities were prosecuting at the time for a lottery scam.
(In 2005, HMS’s director was found not guilty on a technicality. Arlimbow was shut down in 2004. Those companies did not return phone calls. Westport Enterprises said it has resolved all complaints, complies with all laws and engages only in direct-mail solicitations.)
Records also indicate that infoUSA sold thousands of other elderly Americans’ names to Windfall Investments after the F.B.I. had accused the company in 2002 of stealing $600,000 from a California woman.
Between 2001 and 2004, infoUSA also sold lists to World Marketing Service, a company that a judge shut down in 2003 for running a lottery scam; to Atlas Marketing, which a court closed in 2006 for selling $86 million of bogus business opportunities; and to Emerald Marketing Enterprises, a Canadian firm that was investigated multiple times but never charged with wrongdoing.
The investigation of Windfall Investments was closed after its owners could not be located. Representatives of Windfall Investments, World Marketing Services, Atlas Marketing and Emerald Marketing Enterprises could not be located or did not return calls.
The Federal Trade Commission’s rules prohibit list brokers from selling to companies engaged in obvious frauds. In 2004, the agency fined three brokers accused of knowingly, or purposely ignoring, that clients were breaking the law. The Direct Marketing Association, which infoUSA belongs to, requires brokers to screen buyers for suspicious activity.
But internal infoUSA e-mail messages indicate that employees did not abide by those standards. In 2003, two infoUSA employees traded e-mail messages discussing the fact that Nevada authorities were seeking Richard Panas, a frequent infoUSA client, in connection with a lottery scam.
“This kind of behavior does not surprise me, but it adds to my concerns about doing business with these people,” an infoUSA executive wrote to colleagues. Yet, over the next 10 months, infoUSA sold Mr. Panas an additional 155,000 names, even after he pleaded guilty to criminal charges in Nevada and was barred from operating in Iowa.
Mr. Panas did not return calls.
“Red flags should have been waving,” said Steve St. Clair, an Iowa assistant attorney general who oversaw the infoUSA investigation. “But the attitude of these list brokers is that it’s not their responsibility if someone else breaks the law.”
Millions of Americans Are Called
Within months of the sale of the Astroluck list, groups of scam artists in Canada, the Caribbean and elsewhere had the names of Mr. Guthrie and millions of other Americans, authorities say. Such countries are popular among con artists because they are outside the jurisdiction of the United States.
The thieves would call and pose as government workers or pharmacy employees. They would contend that the Social Security Administration’s computers had crashed, or prescription records were incomplete. Payments and pills would be delayed, they warned, unless the older Americans provided their banking information.
Many people hung up. But Mr. Guthrie and hundreds of others gave the callers whatever they asked.
“I was afraid if I didn’t give her my bank information, I wouldn’t have money for my heart medicine,” Mr. Guthrie said.
Criminals can use such banking data to create unsigned checks that withdraw funds from victims’ accounts. Such checks, once widely used by gyms and other businesses that collect monthly fees, are allowed under a provision of the banking code. The difficult part is finding a bank willing to accept them.
In the case of Mr. Guthrie, criminals turned to Wachovia.
Between 2003 and 2005, scam artists submitted at least seven unsigned checks to Wachovia that withdrew funds from Mr. Guthrie’s account, according to banking records. Wachovia accepted those checks and forwarded them to Mr. Guthrie’s bank in Iowa, which in turn sent back $1,603 for distribution to the checks’ creators that submitted them.
Within days, however, Mr. Guthrie’s bank, a branch of Wells Fargo, became concerned and told Wachovia that the checks had not been authorized. At Wells Fargo’s request, Wachovia returned the funds. But it failed to investigate whether Wachovia’s accounts were being used by criminals, according to prosecutors who studied the transactions.
In all, Wachovia accepted $142 million of unsigned checks from companies that made unauthorized withdrawals from thousands of accounts, federal prosecutors say. Wachovia collected millions of dollars in fees from those companies, even as it failed to act on warnings, according to records.
In 2006, after account holders at Citizens Bank were victimized by the same thieves that singled out Mr. Guthrie, an executive wrote to Wachovia that “the purpose of this message is to put your bank on notice of this situation and to ask for your assistance in trying to shut down this scam.”
But Wachovia, which declined to comment on that communication, did not shut down the accounts.
Banking rules required Wachovia to periodically screen companies submitting unsigned checks. Yet there is little evidence Wachovia screened most of the firms that profited from the withdrawals.
In a lawsuit filed last year, the United States attorney in Philadelphia said Wachovia received thousands of warnings that it was processing fraudulent checks, but ignored them. That suit, against the company that printed those unsigned checks, Payment Processing Center, or P.P.C., did not name Wachovia as a defendant, though at least one victim has filed a pending lawsuit against the bank.
During 2005, according to the United States attorney’s lawsuit, 59 percent of the unsigned checks that Wachovia accepted from P.P.C. and forwarded to other banks were ultimately refused by other financial institutions. Wachovia was informed each time a check was returned.
“When between 50 and 60 percent of transactions are returned, that tells you at gut level that something’s not right,” said the United States attorney in Philadelphia, Patrick L. Meehan.
Other banks, when confronted with similar evidence, have closed questionable accounts. But Wachovia continued accepting unsigned checks printed by P.P.C. until the government filed suit in 2006.
Wachovia declined to respond to the accusations in the lawsuit, citing the continuing civil litigation.
Although Wachovia is the largest bank that processed transactions that stole from Mr. Guthrie, at least five other banks accepted 31 unsigned checks that withdrew $9,228 from his account. Nearly every time, Mr. Guthrie’s bank told those financial institutions the checks were fraudulent, and his money was refunded. But few investigated further.
The suit against P.P.C. ended in February. A court-appointed receiver will liquidate the firm and make refunds to consumers. P.P.C.’s owners admitted no wrongdoing.
Wachovia was asked in detail about its relationship with P.P.C., the withdrawals from Mr. Guthrie’s account and the accusations in the United States attorney’s lawsuit. The company declined to comment, except to say: “Wachovia works diligently to detect and end fraudulent use of its accounts. During the time P.P.C. was a customer, Wachovia honored all requests for returns related to the P.P.C. accounts, which in turn protected consumers from loss.”
Prosecutors argue that many elderly accountholders never realized Wachovia had processed checks that withdrew from their accounts, and so never requested refunds. Wachovia declined to respond.
The bank’s statement continued: “Wachovia is cooperating fully with authorities on this matter.”
Some Afraid to Seek Help
By 2005, Mr. Guthrie was in dire straits. When tellers at his bank noticed suspicious transactions, they helped him request refunds. But dozens of unauthorized withdrawals slipped through. Sometimes, he went to the grocery store and discovered that he could not buy food because his account was empty. He didn’t know why. And he was afraid to seek help.
“I didn’t want to say anything that would cause my kids to take over my accounts,” he said. Such concerns play into thieves’ plans, investigators say.
“Criminals focus on the elderly because they know authorities will blame the victims or seniors will worry about their kids throwing them into nursing homes,” said C. Steven Baker, a lawyer with the Federal Trade Commission.
“Frequently, the victims are too distracted from dementia or Alzheimer’s to figure out something’s wrong.”
Within a few months, Mr. Guthrie’s children noticed that he was skipping meals and was behind on bills. By then, all of his savings - including the proceeds of selling his farm and money set aside to send great-grandchildren to college - was gone.
State regulators have tried to protect victims like Mr. Guthrie. In 2005, attorneys general of 35 states urged the Federal Reserve to end the unsigned check system.
“Such drafts should be eliminated in favor of electronic funds transfers that can serve the same payment function” but are less susceptible to manipulation, they wrote.
But the Federal Reserve disagreed. It changed its rules to place greater responsibility on banks that first accept unsigned checks, but has permitted their continued use.
Today, just as he feared, Mr. Guthrie’s financial freedom is gone. He gets a weekly $50 allowance to buy food and gasoline. His children now own his home, and his grandson controls his bank account. He must ask permission for large or unusual purchases.
And because he can’t buy anything, many telemarketers have stopped calling.
“It’s lonelier now,” he said at his kitchen table, which is crowded with mail. “I really enjoy when those salespeople call. But when I tell them I can’t buy anything now, they hang up. I miss the good chats we used to have.”
2. "ARE WE HEADED FOR ANOTHER GREAT DEPRESSION"?
My talks with Elaine Meinel Supkis
By Mike Whitney
| "The blue collar class which is the backbone of any society, is so oppressed and crushed under debts here in the US, they see no hope, being hired for a lifetime in some industry, they have been told, they must fend for themselves and be rootless, moving from job to job across the country or if displaced, removing themselves entirely via crime or death. No longer being asked to be part of a specific community, they are told; they must be more flexible and move from region to region, a leaf in a thunderstorm in the gutter of life". Elaine Meinel Supkis |
Question: I've been getting get more and more e-mails from people who are worried that the policies of the Bush administration will bring about a severe economic downturn or, perhaps, even another Great Depression. Do you believe that the problems in the real estate market, the falling dollar, the massive current account deficit, or the shaky hedge fund industry are likely to cause major meltdown?
E.M.S. : Great Depressions like the one that hit in 1929 are very rare. They usually happen only after two great empires exhaust their finances. WWI involved two of the biggest industrial powers in a massive death-struggle that didn't destroy their industries but wrecked their currencies and beggared their workers. Russia was a major empire but a minor industrial power so when the workers there revolted, the loss of this sector's industrial base had much less impact than the collapse of Germany's currency and its huge war debts.
This chart is from one of my most dog-eared books, one of the greatest works explaining relative power and why empires collapse, 'The Rise And Fall Of The Great Powers' by Paul Kennedy. This chart shows how England, the leading nation in the world, supposedly the richest, spent the most money during that grinding, depressing stalemate of a war.
Germany spent $3.9 billion less than England. Inflation since 1913 has been ferocious. This probably would represent well over several trillion dollars in today's currency. Even today, no nation can take a financial hit that big and stay solvent. Europe's industrial production fell 30% and the US, fattened off of billions of dollars of loans to all parties in Europe, lived high and mighty during the 1920's. But with industrial production lagging, Europe spiralled downwards. The US cheerfully gave everyone more and more loans and the promise of being repaid was fantastic! Why, these were basically AAA subprime loans.
Then Germany couldn't pay and kept asking for better terms. This was OK with the US but not with bankrupt England or France. So they demanded full payments and Germany defaulted. This triggered the Great Depression. Even though the US was now the world's largest manufacturing power, our currency was mostly for home use so the British had to keep the pound strong. Trying to do this made things worse.
And so it is today: our empire won't retreat from its distant borders but these same borders are bankrupting us for we never recovered from the Vietnam War, we literally papered over the mess which remained and continues to poison our nation. The military/industrial complex is not making us rich, it is making us poorer. And the paper being laid over all this is the same paper the Germans used in 1924 to paper over their own bankruptcy: printed money.
When an empire does what we are doing today, society falls apart. And if this happens, there is no easy way out. Individuals can avoid the worst by avoiding debts but outside of that simple thing, there is no other answer. Of course, the true answer is a strong working class that believes in unity and not underselling each other. Alas, the USA has a long and tragic history of slavery. And the legacy of this culture divides the nation and half loves slavery and enables wretched working conditions and thinks the road to wealth is via cheap labor.
Germany has an advantage here: their recent attempt at slavery, the Nazi empire, was a total disaster and they don't want a repeat. I only wish the USA felt the same way. For no nation gets very rich for very long if the working class is poor and can't work their way into the middle class.
Question: Would you explain what is meant by “reserve currency” and how it serves the greater political interests of the United States? Do you think that preserving “dollar hegemony” was an important part of the decision to go to war with Iraq?
E.M.S.: It may sound trite but thinking about great banking matters as if it is one's own bank account no matter how small, works. Namely, it is dangerous for anyone to live life where everything is juggled and there isn't a penny to spare. Then something bad happens and boom. You go bankrupt. This is why savings accounts matter and why inflation is so deadly. No one in their right mind keeps a savings account because it can't grow, it shrinks!
The Federal Reserve was set up to maintain a reserve funds that supposedly wouldn't be touched by politicians. But alas, this is a fiction. Just like your own bank account, if one is married and sharing an account and one party keeps raiding it and spending it on guns and cars or fur coats or whatever, it runs out of funds and then something bad happens like a hurricane hits, and the cupboard is bare.
In the case of empires, a way to gage solvency is, how big is their own reserves compared to the size of these same currency reserves held by potentially hostile rivals? In the case of the USA, we send dollars out as fast as we can print them. If too many people getting this flood of money, around $800 billion a year now!!!!!! If they don't keep a big chunk in bank vaults, the value of the dollar drops. So they keep it in reserve, in case of a 'rainy day'. Like 9/11.
And if we think of these funds as boats, then China has Noah's Ark, Japan has an aircraft carrier, Europe has a holiday cruise liner, Russia has a very fancy yacht and the USA has a rowboat made out of an old bathtub. That is leaking.
China has $1.3 trillion in its reserves and is therefore, King of the Mountain. Japan has $900 billion and is no longer holding new currency so all the red ink in trade is no longer staying away, it is floating back home to here, as inflation. Europe has about $600 billion and Russia, $330 billion. The USA has only $66 billion and the numbers released today by the Federal Reserve shows that number is DROPPING. Yikes.
Question: President Bush has said that he intends to make his tax cuts “permanent” even though they have produced enormous deficits. At the same time the Federal Reserve has kept interest rates below the real rate of inflation and increased the money supply to approximately 10% per annum. Are these policies designed to maintain a healthy economy with a potential for strong growth or are they the means for transferring wealth from working people to the “very rich”?
E.M.S.: How do they 'transfer' wealth? Through unfair taxes. Under Reagan, American workers, worried about the eventual baby boomer retirement event horizon, decided to double taxes on Social Security. This pile of money was instantly, less than a year later, leaped upon and devoured by our corrupt government. They instantly gave unfair tax cuts to the upper incomes and basically used SS excess funds to pay for the government.
This worked OK until Bush took over. He and the GOP have run up debts so high, they added half a trillion a year in red ink and over the last six years, this is nearly $3 trillion and our national debt stands at nearly $9 trillion. During the last major money crisis, the 1972 collapse of the Bretton Woods concord, we had a national debt of not even $1 trillion. We have not had 900% inflation so I would say, this debt that the GOP rang up consisted of taking taxes out of the hides of the working class and handing it on a golden platter to the rich who, incidentally, buy bonds.
But no more! Today, the chief buyer of bonds is the Treasury itself. Next is China!
Question: Will you explain how the inflationary policies of the Federal Reserve are causing the stock market to soar and what the potential dangers are for the global economic system?
E.M.S.: Oh, that is so simple! In 2003, interest rates were dropped to 1% despite inflation of +5%. Instantly, the value of all assets shot upwards as bankers moved money along as fast as possible since the Fed undercut their own interest rates! So mortgages were below the rate of inflation. But this didn't make enough money so banks and other entities offered loans to bad risks who had to pay a higher rate. As inflation rages, they need to give loans to worse and worse customers who pay over 11% interest!
Alas, the fly in this ointment is exactly that: risky customers can't pay back loans! They go bankrupt and everyone acts like a good little domino and over they fall, one after another. Right now,the crashing sound of dominoes falling is like the hissing of waves on a distant shore but it is rapidly approaching. We can certainly hear it coming.
Question: Last week, reports showed that US manufacturing unexpectedly rose in March. However, the Financial Times said that, “The rise in the ISM index is impossible to square with either the regional surveys released over the past few weeks or our medium-term yield-driven model. We think it is quite likely that in their next iterations the ISM will drop sharply.” Do you think the government is deliberately falsifying data on manufacturing to make the economy look stronger than it really is? Could they be doing this in areas as well, such as money supply, inflation, employment, and GDP?
E.M.S.: Do alligators bite? Of course, they lie all the time. Some things were sacred and they didn't lie about them. The M3 data that shows how much money the Fed prints as well as how much is in circulation, etc, just last year, they announced, 'No one is really interested in these numbers and they are too hard to compile.' Like a drunken, gambling spouse declaring there is no need to balance the check books or look into the bank accounts, so it is here. Many people yelled about the M3 numbers being suppressed but to no avail, of course.
Onwards! Since they are lying about basic bank accounting, they have to lie about everything else or people will figure out, something smells rotten in Denmark, DC.
They redrew the rules for figuring out inflation so it no longer tracks inflation. This is so they can cheat retirees and have fake interest rates and thus, steal from granny and gramps and starve school children while lining their own pockets.
Question: Do you believe that the extraordinary “police-state” measures enacted by the Bush administration (Patriot Act, Military Commissions Act, repeal of habeas corpus, NSA “surveillance” of American citizens without court order) are intended to address the threat of terrorism or the social disorder that may arise in response to an economic collapse?
E.M.S.: They planned this for a long, long time. Do note that the 'war on drugs' was launched as we lost the Vietnam War. Thanks to inflation and a collapsing currency as well as a sudden hike in oil prices due to the US hitting the Hubbert Oil Peak here in 1972, there was great unrest. I saw some of this right up close. Once, when the lights went out in NYC during a thunderstorm of all things, riots and looting spread like wildfire. My community was nearly burned to the ground and all the businesses destroyed.
This, the rulers fear a lot. But no number of police can stop it if it happens. I have seen up close when a whole city revolts. More than once, including in Europe in 1968. The new, right wing French President will learn this the hard way next year. There will be riots and insurrections there.
Question: Can you explain--in simple “layman’s” terms--the effect of Japan’s low interest “carry trade” on the U.S. stock market? Is this practice inflating the value of securities in foreign markets? What are the risks? How is it affecting the euro?
E.M.S.: Europe lends money for more than 5% interest. So does the USA now although the financiers are getting worried about this and are egging on the Fed to lower rates back down to 1%. This is pure insanity. Japan has near zero inflation because they have decided to utterly destroy the purchasing power of the people in Japan who are living worse and worse off if they are below the top 20%. Many are now homeless. It is pathetic.
The world's #2 economic power that holds the world's #2 FOREX reserves can't give pay raises to anyone earning below $10 an hour because this will 'cause inflation' and so they get to live on the street and starve. Great. Anyone can eliminate inflation by enslaving the workers. Then they get cut out of the profits entirely and can't buy things and thus, can't cause inflation!
This is the plan being readied for us! We get to live in shanties while the rich live in palaces. And we won't buy anything while they have a zillion servants earning practically nothing. Sort of like England, circa 1914.
Bush and his gangsters hosted the Queen of England who loves him because he is making her very rich via Carlyle. And the royals of England didn't care if they starved their subjects who lived like savages under the rule of the royals. We are sliding backwards, not moving forwards here.
Question: Consumer spending is 70% of US- GDP, and yet, workers wages have not kept pace with the real rate of inflation. This has led to increased borrowing on the part of the American consumer. Now that housing prices have flattened out; consumers can no longer draw on their home equity for their spending. This has resulted in a huge spike in credit card spending. For example, “first-quarter profits at MasterCard surged 70% to a record $214.9 million following a 19% jump in transactions.” (Peter Schiff) As the weary American consumer is forced to curtail his spending, GDP will shrink and foreign investment will dry up. Are we likely to see “capital flight” from American markets or are foreign investors still confident in America’s resilience?
E.M.S.: In most places, housing prices are falling by 30%! All the people who responded to ads about getting cheap loans are now discovering they can't use their homes as ATM machines and simply re-finance over and over again. The house is supposed to be an asset: if you have to sell it to pay bills or move because of a job situation, if the debt is greater than the selling price, you go bankrupt. And this is happening all over the place now. And it will impact on buying.
Last year, Americans took out half a trillion in extra loans on the house! The surge in MasterCard (gads, Snidely Whiplash!) charges is because banks are no longer giving loans to people who are too deep in debt. The money that flowed there is flowing into the stock market just like it always does during the first half of an inflationary binge.
The second half is when the stocks collapse like they did in 1974. Then we see a 5 year bear market. Housing markets ALWAYS take 5+ years to recover from a bubble. But this last bubble launched by 1% Fed interest rates will take 20 years to recovery in most places.
Question: You have stated in your blog that the Federal Reserve is “buying back its own debt”. Would you explain how this works and whether it is intended to confuse the public about the real value of their currency?
(In your blog you say: “The US is the fulcrum for world trade. As the yen goes down (the yuan is so low, even as it gains, it is very minimal), the euro goes up. This is crushing the dollar because the US is printing money like mad to keep commerce flowing at home since it is bleeding red ink in trade and in government spending. Most of the bonds issued by our own government are bought by our own government. The only entity to buy much of that on the open market today is China. Japan is selling its hoard of US bonds.)
E.M.S.: Yes, aside from forcing Social Security to buy government bonds, the Treasury sells them to the Feds. This is Peter selling to Paul who then gives it back to Peter only it shrinks in value during this time. The Fed and Treasury can play this game to infinity. The only country to nearly reach that upper limit was Germany in 1924. They added more and more zeros to the money they printed every hour, day and night until they ran out of room on the bills. Literally! Then they simply cancelled the money! Bang. It was gone. Forever.
If no one stops us, we will do this just the same way.
Question: Wall Street reacts with wild enthusiasm every time two mega-corporations merge. These mergers always seems to generate boatloads of new credit from maximizing leverage and “creative financing”.. You say in your blog that this is “also a sign of impending collapse. For every pfennig of this is debt-loaded and is seeking a stable currency and high interest rates.” What do you think are the hidden dangers of these mergers?
E.M.S.: That happened in Germany, too. Everyone merged as money moved faster and faster and inflated more and more. Bubbles inflate because currency inflates. They are one and the same. And mergers are caused by money bubbles.
Question: What do you think the real rate of inflation is?
E.M.S.: Inflation is around 10% now. How do we know? The Federal Reserve just demanded banks hold 10% of their currency rather than rush it out the door. This reserve ratio is always a good indicator of inflation. In China, it was raised to 11% last week. Japan sets theirs at 0%, of course. They are insane.
Question: Is there a chance that the dollar could collapse?
E.M.S.: I hate to say this but I have a whole book of dead currencies my family has collected this last 180 years. From 1848 to today, in the USA, Germany, China, Japan, etc. Many 'pay the holder in gold' bonds. All worth something as historic documents but all ended up being worthless. Hope springs ever eternal and bad money is like winter: it always is around the corner.
Question: In 1966, Alan Greenspan wrote an article called “Gold and Economic Freedom” in which he described the events leading up to the stock market crash of 1929 and the Great Depression. In his essay he says:
“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.”
Hasn’t the Federal Reserve created similar “speculative imbalances” today through its increases in the money supply, its low interest rates, and the massive liquidity it pumped into the housing bubble? And, haven’t the deregulatory policies of the Fed exacerbated our current account deficit---forcing US exports to compete with countries that artificially lower the prices of their manufactured goods by manipulating their currencies?
If the economic policies of the Federal Reserve and the Bush administration are deliberate, than how can we say that the destruction of the dollar and the subsequent crushing of the American middle class are accidental?
Greenspan’s essay proves that he fully understood the implications of “excess credit” and “excessive paper reserves” and yet he persisted with the same destructive policies for 6 years. So---Is the housing bubble merely the “unintended consequence” of the Fed's policies or is it the clearly calculated goal?
E.M.S.: Hahaha. The preacher telling us how to avoid the evils of drug abuse and hanging out with prostitutes comes to mind, doesn't it? The very moralists warning us about our sins are usually the worst sinners.
I'll never forget Congress praising Greenspan and telling him they should stuff him and use him as a scarecrow for this would mean no one would ever question him about finances! Well, I say, hang him high. He is a criminal. He destroyed our economic might. Treason, it is! And all those people who betrayed us in order to make a mighty empire on our backs and bank accounts should be held accountable! There is no excuse for this mess! It was fixable. But alas, too many people are making too much money off of it the way it is now and they won't stop no matter what. Just like their latest imperial wars: endless.
I wish I could say something happy here but history is a bitch who laughs at us all. We should listen to her.
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