The causes of this crisis are now so obvious to most Americans it’s almost insulting to reiterate these truths. But for posterity’s sake here I go – our banking system, with the blessing of our government vis-a-vis the repeal of the Glass-Steagall Act, ratcheted up bank profits on the backs of our paychecks by way of our mortgage payments, auto loans, student loans, credit cards, and any other form of interest bearing instrument they could conjure up to suck the lifeblood out of this nation. And if that weren’t bad enough then they went out and leveraged the crap out of the whole thing with credit default swaps and special purpose vehicles and financial derivatives creating a shadow economy of $600 trillion dollars. When it all went down the toilet they turned on us, cried foul to the incumbent administration with their own boy sitting at the helm of the US Treasury and then put the screws to the very people they’d just taken for a ride – the American taxpayer. The middle class. The people who just wanted to taste the American dream being sold to them in every bank branch and at every cocktail party and barbecue and television commercial across this land. Everybody wanted in. Hell, Alan Greenspan dangled exotic mortgages in front of an entire nation just so he wouldn’t have to suck it up after the Dot-Com bubble crashed and he was faced with a little old recession. And the sickest thing is that our government is so stupendously stupid they let these bankster whores get away with it all. Every one of these mega-morons should be on trial for fraud or at the very least banned from any involvement in the financial markets for perpetuity.

Fiat currency is now our undoing. The US congress voted the Federal Reserve Act into existence in 1913 and since that time we have seen the US dollar eroded to a worth of 5% of its original value. We stood idly by as Nixon unilaterally shut the gold window in 1971, untethering the dollar from any anchor to reality. No wonder the French hate us. It was because they wanted to convert their dollars to gold Nixon told them to pound sand. How do you like that for balls? I wonder what the Chinese are thinking right now. I’ll tell you what their thinking. They just moved about a billion people from the rice patties into the cities to man their newly built shod factories where they produce products half as good as what Americans can make and then charge a quarter the cost. They’re thinking holy shit. How do we keep a billion people making stuff if the Americans aren’t there to buy it? You think we have a problem on our hands. Just wait until the orders stop rolling in to China and all those assembly workers have to move back out into the rice patties. I’ll bet a thousand bucks they see revolution before we do. They just got their first taste of capitalism and they ain’t gonna want to go back to the stone ages. Just like we don’t want to go back to work.

Over the course of the last few decades the middle class of our society has become acutely aware of economic bubbles, corporate corruption, government cronyism, and a wall of deception built in the name of the almighty dollar. The facts are the facts. The gap between the rich and poor in the US has never been wider. This entire nation was duped into the belief that if you had things, like a bitchen house, or a cool car, or took expensive vacations that you were rich. Not so. Somewhere along the way we forgot that debt was a claim on our future income. A liability no matter how you dressed it up, with teaser rates, no annual fees, no income documentation to qualify, it was all just a claim on our future. Well the future is here. The four horsemen of the apocalypse bear down on us every waking moment. Their coming for their claim. And they want our souls.

This crisis began when banks pushed exotic mortgages as a means to realize a dream. The institutions that sprung up around this colossal ruse churned trillions of dollars into new homes made of sticks and stucco. When the mortgage machine was running full blast US dollar reserves parked overseas flowed back into this country as fast as you could say “escrow”. Free market capitalism, however perverted this chapter was, was working. However, when it went bust the free market broke down. The Fed stepped in and replaced the arms-length buyer. Our central bank is now the sole purchaser of mortgages in the US. All prices are hence distorted as the free market no longer exists. US GDP is about $13 trillion dollars. The Fed has already purchased $1.0 trillion in MBS directly and about another trillion in toxic assets. This cannot go on forever. This is known as monetizing debt and will lead to a form of financial destruction the likes of which will make the Great Depression look like a day at LegoLand.

This is it. There is no other game in town. When the Fed quits buying mortgage backed securities from Fannie Mae, Freddie Mac, FHA, and whoever the hell else is still stupid enough to be lending into this clusterfuck, it’s game over. System collapses. Markets evaporate. All wealth gone. Martial law. Riots. Every man for himself. Perhaps the greatest revolutionary soul in all history, Thomas Paine, wrote as the opening line in his series of pamphlets, The Crisis – “These are the times that try men’s souls.” The Crisis was written during the American Revolution and cut to the heart of the ideas and beliefs of great men who chose freedom over tyranny. And if you don’t think that our modern system of selective taxation and fractional reserve banking with a secretive privately owned central bank and the fiat currency of which they force you to accept is not tyranny, then we are of a different opinion.

It is a federal crime to walk into a grocery store and pay for your food with gold. If that isn’t tyranny, I don’t know what is. What is it going to take for this country to wake up, pull our collective thumb out of our ass, and march on the streets of Washington? I’ll tell you what I think it’s going to take. First, it’s going to take real estate values to finally capitulate once and for all to the overwhelming negative forces that so far have been held at bay by the Federal Reserve. Second, it’s going to take the US population to wake up and realize that the unemployment rate is twice what the government reports. Third, when what is left of our savings and 401k money is gone and we have nothing left to sell on Craig’s List we’re going to see a lot of desperate people taking to the streets.

Had the Federal Reserve not bailed out the banks by swapping perfectly good US Treasuries for worthless toxic assets, had they not stepped in to become the sole buyer of mortgages in the US, had they not bailed out every imaginable banking misstep our entire economic system would have collapsed at their feet. Isn’t that the definition of failure?

Do everything you can to convert all your assets to cash or cash equivalents. Do not hesitate to buy physical gold and silver even at current prices. Prepare for the worst. Hope for the best. Vote every incumbent politician out of office barring (R) Ron Paul and (D) Alan Grayson. The Federal Reserve has got to go. They have pulled the biggest heist in the history of our planet and we sit idly by cheering them on to do more. Are we really that stupid?

Finally, if you don’t believe my ramblings then visit ShadowStats.com read the open content section and browse the headlines of the subscriber section. I am a paid subscriber to this site and have found it to be the only sanctuary of truth in the midst of this manufactured fog.

Once again the wheels of deception go round, and round. It appears the Obama administration is continuing the official cycle of half-truths and lies and other such misrepresentations so as to mask the agenda of US dominance throughout the physical and financial world – a dominance that our government and central bank are prepared to pay for at any cost and at the expense of others. We’re ramping up the troop count in Afghanistan. We’re spending our way into oblivion. We’re exporting inflation at the risk of own peril. But on a more positive note, weekly jobless claims just came out and by the grace of God they were better than expected. As a matter of fact jobless claims have improved for five straight weeks if you believe the Bureau of Labor Statistics. I don’t. I believe unemployment continues to deteriorate in the US at an alarming rate and that our government is flat out lying to us. I believe the actions of our leaders are criminal to say the least and that the ramifications of their misdeeds will lead to such destructive consequences in this country that we will be ill-equipped to understand the events as they unfold over the course of the next few years.

On the cursory subject of unemployment John Williams of Shadowstats.com has this to say in his most recent report:

Employment and Unemployment Not Improving
Despite Distortions from Seasonal Factors and Revisions

Updated Outlook: The Economic Downturn Is Ongoing. Just in time to boost the confidence of Holiday Season shoppers, the Bureau of Labor Statistics (BLS) announced a 0.2% downturn in the November Unemployment rate, with November payroll employment virtually unchanged. Those results are nonsense, if taken literally. As discussed in Commentary 262, the better-quality series that underlie the government’s employment and unemployment reporting are show ongoing deterioration, particular the various help-wanted advertising and purchasing managers surveys.

Important to keep in mind is that the severity and duration of the current economic downturn — unprecedented in the post World War II era — has led to serious data distortions, particularly tied to seasonal adjustments. Such was noted recently by the Federal Reserve for some of its series, where patterns of sharp variations in reporting of activity a year ago — now being built into current seasonal-adjustment factors — are anything but regular seasonal patterns. Giving the BLS the benefit of the doubt on the unemployment rate, October’s above-consensus reported 0.4% surge in the headline unemployment rate likely was spiked by bad seasonals, which reversed in the November reporting. Such was touched upon in Commentary 262 on the outlook for today’s report. The upturn in the unemployment rate should return with December’s reporting.

Shadowstats.com reports real unemployment at 21.8%. That is greater than 1 in 5 people in the US out of a job. Add to this alarming statistic the number of people in and around the housing industry, from construction laborers, to real estate agents, to escrow officers, to loan officers and carpet installers, and small business owners numbering in the millions that support the housing industry all of which have seen their incomes decline dramatically as a result of this historic crisis. As a nation we are hemorrhaging blood at an alarming rate. Our jugular vein has been severed and the surgical team charged with our care knows only to pump more blood into the body, rather than seal the wound. My question to them is how long can we bleed?

The disconnect between the stock markets and what we know to be the underpinnings of this crisis should set alarm bells ringing in every US household but somehow this is not the case. An entire nation has been lulled into believing that somehow, someway, the rabbit’s going to pop out of the hat at any moment and we’ll all be saved. Everything will turn around. Our home values will skyrocket again, our 401k plans will recoup their losses, and everyone will go back to work selling homes to each other. This is simply not going to happen. The US housing market depended on foreign countries churning their dollar surpluses back into this country in the form of mortgage-backed-securities and US treasuries and if it weren’t for the quick printing Fed our foreign friends would have been stiffed on every home loan that ever flowed out of this debt ridden mortgage factory. Face it, the world got burned. Everyone knows it. Securitized lending is dead and it’s never coming back – at least not in time to save our sorry asses.

From RealityArbiter.com

The fact is that unemployment far exceeds what the media and government portray and even THEY admit it’s going to get worse in 2010. Hooray for the jobless recovery though! Maybe we should all go out and buy up as many stocks as we can. Goldman can pay their bonuses. GM can rise from the grave and Ben Bernanke will look like a hero as he exports inflation all around the globe. On the other hand, how about we don’t do any of those things. How about we do the exact opposite and protect our assets from lies and fraud. Taking that one step further it is a safe bet that we WILL in fact get hit to the downside again at some point – we’re just NOT sure when.

The root of this crisis was a nationally accepted policy of over-lending, over-borrowering, over-spending, and over-leveraging all of it fueled by unaffordable mortgage payments, car payments, and usury revolving debt. Foreclosures have yet to peak. Cash-for-Clunkers was a circus sideshow and our national credit card is tapped. Thank God almighty we can print our own money though. Otherwise our stock markets would reflect their real value, our banks would all be shut down, and our homes and everything else financed by this perverse system of fiat money and fractional reserve banking would come crashing down on us like Tiger Wood’s wife swinging a golf club at our head.

Final thought. Maybe taking a golf club upside the head is what we all need? I mean, think about it – maybe it was like we thought we were all doing the oiled up dream girl in the bikini this whole decade. And we need a good crack in the head with a nine iron to knock some sense into us and realize we were sleeping with these four fatties all along.

The foundation on which capitalism is built is known as the free-market, wherein a seller of goods seeks out a buyer in need of those goods and the two parties agree on a price to complete the exchange. Price is determined by mutual agreement and is set in terms of value measured in modern standards by way of fiat currency. When the transfer of goods is complete the free market has thus functioned properly. The buyer is in receipt of the goods they desired and the seller possesses the currency of which they can now go transact for whatever goods or services they desire. We do not live in this type of free market.

The Federal Reserve has decided that they alone set market price. As evidenced by their purchasing 80% of all MBS in the US they have become the de facto sole buyer in our modern form of capitalism. Anyone who would willingly strap into this ride is a fool. You are being set up for slaughter. There is no other way to view our present situation.

In modern terms capitalism had morphed into something completely different than would be recognized by its original architects. We exist in a system of finance capitalism wherein the major purchases of which average people need to make just to keep pace with the rest of society must be purchased with the aid of borrowed money from lending institutions that have the power to create interest bearing commercial money – money that is loaned into existence. On the flip-side, all other money is created by the Federal Reserve and again, it is loaned into existence vis-a-vis the issuance of US Treasury Securities – debt instruments of which bear interest to the holder.

When the Federal Reserve, the Obama administration, or the main stream media reports that the housing market has stabilized they are in fact, lying. I don’t care if they can’t wrap their pea-sized brains around the fact that you can’t replace a free-market buyer with the creator of money and expect the price quotient to reflect market terms. Seventy-percent of US GDP is based on consumerism and the majority of consumerism is based on the wealth-effect American’s have as reflected in the value of their homes. And when the Fed became the sole purchaser of agency mortgages in the US they became the de facto buyer of all US homes in an attempt to prevent the free-market from functioning. To say that the present US housing market resembles any fair market terms is simply ludicrous. The Fed however will argue that as they exit the mortgage pimping business other pimps will re-enter the market as MBS buyers and housing prices will remain stable. This is absolute hogwash.

Tab 9 – Federal Reserve Balance Sheet – Factors Affecting Reserve Balances- November 19, 2009

Everything around you from the Dow Industrial Average to the value of your home, to the food in the grocery store or gas at the pump, all of it is in a distorted state of flux wherein the real value of such things cannot be known. Had the Fed not purchased a single MBS in the wake of September 2008 the entire real estate market would have collapsed along with the perverted fractional reserve banking system that surrounds it. Technically, the system has collapsed. It is merely on life support for now. We all know this. Yet we turn our heads as if somehow, some way, the Federal Reserve will pull the proverbial rabbit out of its ass and we’ll all stand by in amazement wondering, “Now how did they do that?”

The largest asset most American’s purchase in their lifetime is their home. The largest debt-load they carry is again wrapped up in their home. When both the price or value of these homes and the underlying mortgages become distorted by a misguided central bank policy wherein the central bank alone becomes the arbiter of fair market value – that, is an unsustainable model in direct conflict with every basic tenet of free-market capitalism. Participating in this market in any fashion is like making love to a blow-up doll – you know the air is going to leak out of her at some point, but you keep pumping her like there’s no tomorrow. Sooner or later the Fed will have let the air out of the doll. And any allure that made-up hussy had will vanish as she deflates to the floor, once and for all.

The Federal Reserve has become a mockery, an Alzheimer’s patient wandering the lawn of the asylum hiding their own Easter eggs for a hunt they will later forget the location of each egg they hid, let alone what Easter means anyway. They are virtually making this up as they go along. And we’re letting them do it. Bernie Madoff should be so proud. It’s the Ponzi scheme to end all Ponzi schemes – hide the fair-market-value of the world’s largest banking system. Buy a trillion dollars of MBS – prop up the falling homes. Maybe no one will notice we’re social engineers and that we just dismantled free-market capitalism.

There is no fundamental rooting in this stock market rally from the March 2009 lows. There is no consumer with an increasing wage base to justify confidence in any kind of so-called economic recovery. We are in the midst of a consumer credit contraction unlike anything seen even in the Great Depression – and it’s accelerating. 48 states are underfunded and will soon be knocking on the US Treasury’s door. Commercial real estate is imploding. All stimulus programs were temporary in overall effect, if effective at all. Less than one percent of loan modifications have been resolved and will only prove in the end to be futile. Unemployment is twice what the BLS is reporting. The dollar is under siege. And finally, we are about to see the next leg down in residential real estate. This one will be the death knell. It will either come when the Fed quits buying MBS or when the vintage 2005-2006 Alt-A mortgage pools incinerate.

It’s game over when the Fed bows out of the MBS buy program. It will be every man for himself, literally. Below is an excerpt from Scopelabs.net Market Insight section of their RealityArbiter.com web-site:

Scopelabs Insight – Thursday, November 19, 2009

US Markets -

11/19/2009 – The benchmark Standard & Poors (S&P) 500 closed down (14.90) to settle at 1,094.90 (a 1.34% decline).

The 50% retracement of the S&P 500 from its (13-year) low of 676 (set on March 9, 2009) to its all-time high of 1,565 (set October 9, 2007) draws near – see graph. Depending on how one graphs the Fibonacci retracement, the pattern points to (approximately) 1,120 as the 50% mean. Hence, a very logical short-term market top could be in place. If this 50% retracement is significantly breached to the upside, the next and always very important Fibonacci retracement number (of 61.8%) stands at 1,229.

So, from a risk management standpoint the potential upside in the S&P (to 1,229) based on today’s close (of 1,094) is positive 12%.

Conversely, a 50% (negative) retracement from the top of this rally would take the index back down to 893 – which for the bulls should be a logical support target as a buyer. 893 equates to an 18% downside risk from today’s close, not including event driven and/or systemic problems that we at Scopelabs see as a more acute in probability versus March when the market was at its all-time lows.

So, you’re a 3-to-2 dog going long vs. short here (i.e., the S&P is out of gas).

Scopelabs Insight originates from Greg Simmons, a prop trader living on Maui who made prescient market calls long before the names Peter Schiff and Nouriel Roubini became widely known. See 2003 Thesis and The Next One Could Be Worse to hear from a guy who’s been dead on since 2000 and is calling for near Armageddon in the markets when the Fed pulls out of their MBS buy program.

The question anyone with any money in the markets needs to be asking at this moment is not will there be another market meltdown but rather what will trigger the next market meltdown? The Wall Street Journal reported this morning that one in four US homeowners is underwater in their home, meaning they owe more than the home is worth. We could take this one step further and claim that an even greater number of Americans are underwater in general, meaning they owe more in debt, both secured and unsecured, than the liquidation value of their gross assets. Then of course there is America on the whole. No mystery there, as a nation we owe much more than our liquidation value. Mired in debt we infected our own house, and that of the world, and now we deal with the ramifications. Or do we?

In hindsight, when in February 2007, HSBC wrote down $10.5 billion in Sub-Prime losses, the first major financial institution to do so, what happened? The Dow Jones Industrial Average rallied to its all time high on October 9, 2007, of 14,164, shrugging off month after month of market shattering news as if the Sub-Prime write downs were nothing more than a historical anomaly. But it wasn’t a mere anomaly, it was a systemic, catastrophic omen portending an ominous future. Subsequently, the credit markets that make up this global system of interdependency were decimated and in September of 2008 the whole thing came crashing down. But this is all academic.

On March 9, 2009 the Dow closed at 6,547.05, its lowest point since April 15, 1997. On that same day the S&P 500 closed at 676.53, its lowest point since Sept. 12, 1996, and the the Nasdaq composite closed at 1,268.64, its lowest point since Oct. 9, 2002. We have since recouped about 50% of these losses – a bounce from the bottom as it were. But the systemic problems that gave birth to these events have not been fixed. Some would argue they have been exacerbated. The American household, that backbone that provides seventy percent of our GDP, is in crisis. And now we are left to ask the namesake question of this article’s title. What will trigger the next market meltdown?

This crisis began in the US housing market and the debt of which is it is comprised. The short term Sub Prime loans that triggered the crisis, those 2 and 3 year ARM’s have since run their course. But the greater problem, those of the vintage 2005 and 2006 Alt-A persuasion made up of Option ARM’s and 5/1 Interest Only ARM’s, looms out there like the mother of all hurricanes approaching the Hawaiian islands. A storm bearing down on a hapless landmass which has nowhere to run. The storm will hit. Its trajectory is right on target. And all efforts to seed the clouds will do nothing to dissipate the impact.

There is your trigger. The only question is time. Greg Simmons, a prop trader and owner of RealityArbiter.com, warns of an S&P market top in his most recent update.

The 50% retracement of the S&P 500 from its (13-year) low of 676 (set on March 9, 2009) to its all-time high of 1,565 (set October 9, 2007) draws near – see graph. Depending on how one graphs the Fibonacci retracement, the pattern points to (approximately) 1,120 as the 50% mean. Hence, a very logical short-term market top could be in place. If this 50% retracement is significantly breached to the upside, the next and always very important Fibonacci retracement number (of 61.8%) stands at 1,229.

The markets rallied to their all-time highs after HSBC started the Sub Prime ball rolling. The markets bounced back after Lehman and September 2008. The markets are pregnant and ready to birth another correction. The only question is when.

Regardless of what the main stream media is reporting on the state of the US economy, if you ask the average person you’ll most likely hear something completely different – like our situation is abysmal. I say this out of my own personal opinion formed by talking to men and women I know, some of them single, some married, some with kids and some without a care in the world. I also point to recent conversations I’ve had with regional banks here in the state of Hawaii where I was making inquiries regarding REO management practices and loss mitigation efforts here in the Hawaiian Islands. I spoke mostly with mid-level managers responsible for the day-to-day oversight of bank-owned and pre-foreclosure properties, in addition to mortgage servicing managers.

While I am not in a position to divulge any direct sources I can offer my anecdotal assessment of the responses I heard. And my assessment is this – here in Hawaii, a state that typically lags behind the contiguous US with respect to real estate cycles, the foreclosure and default rate is spiraling out of control. The banks are not reporting nor proceeding with foreclosures due to their inability to absorb the losses. They are understaffed, flying blind, and completely incapable of dealing with the situation at hand. This, in my opinion, is primarily due to a gross misconception on their part that they can forestall the liquidation process of non-performing assets while they wait for the real estate market to rebound.

Even more shocking than the market related issues was the revelation that no bank that I spoke to had any formal loan modification procedure or program in place for their portfolio loans. My guess is that these regional banks, ill-equipped to deal with the onslaught of non-performing assets coming down the garbage chute, will be forced to liquidate their rotten apples to “Vulture Funds” already preying on banks who’ve been slow to react to this crisis. In addition, all signs point to another wave of foreclosures on the way. Stupidly, regional banks here in Hawaii (and nationwide) are waiting for a recovery that will never come and like a killer whale going nuts on its trainer at Sea World this next foreclosure wave will cause these already bleeding banks to finally capitulate and be gobbled up by the likes of JP Morgan and Bank of America.

These recent conversations I had prompted me to pull some data and take a look at where we are – a confirmation mostly but sobering nonetheless.

Here are some updates:

From MarketWatch

By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) — After several months of improvement in housing, manufacturing and sales, the U.S. economic recovery appeared to sputter in October, leading investors and analysts to re-evaluate whether their forecasts were too rosy.

The economic data to be released in the holiday-shortened week ahead could provide a few more “what-were-we-thinking?” moments. All in all, though, the data shouldn’t kill hopes for modest growth while we wait for the private sector to start hiring again.

Last week, a “reality check” rippled through the markets following weak data on housing starts and industrial production, said Nigel Gault and Brian Bethune, U.S. economists for IHS Global Insight. They expect further “mixed and somewhat ambiguous” reports in the coming week, but, on whole, they say “the evidence is still positive and continues to point to a nascent recovery” that will need “strong policy support” for some time.

When a central bank cuts interest rates to zero they are both encouraging and enticing investors to take risks that they might not otherwise take in a normal policy environment. Hence, we see these dramatic moves in the dollar, gold, other commodities, and the US markets in general. The goal of zero interest rates is to drive asset appreciation again. But when the underlying debt service which support these assets is insufficient the intended re-inflation will be mixed until it ultimately fails.

As of this morning the S&P 500 is within 13 points of its market top based on a Fibonacci retracement of 50% from the March 2009 lows. The next highest Fibonacci number of 61.8% would put a market top at approximately 1,220. The S&P is running out of ZIRP gas and is poised for a correction.

Below are two separate takes on the US Unemployment picture. First is the official BLS report. Second is the Real Unemployment statistic from Shadowstats.com. You be the judge.

Bureau of Labor Statistics Shows 10.2% Total Unemployment for October 2009

Shadowstats.com Shows Total US Unemployment at 22.1%

Here’s a look at the US Dollar Index

The Dollar Is Effectively Worthless – Zero Hedge

From Zero Hedge – A picture is worth a thousand Krugman essays, which is why we present a chart comparing the US Monetary Base (and by subtracting Reserve Balances with Fed Reserve Banks, Currency in Circulation), and the Fed’s holdings of MBS and Agency paper (worthless GSE/FHA garbage). In summary: Currency in Circulation: $920 billion; MBS/Agency Holdings: $997 billion. The dollar in your pocket is now entirely backed only by worthless, rapidly devaluing and subsidized housing.

GLD Shares ETF ‘04 to Present

Gold is through the roof

Case-Shiller US Home Price Index

This crisis began in the failing of a fiat currency system, was exacerbated by the Fed’s reckless monetary policies, and was ignited by the mother-of-all-asset-bubbles know as the Sub Prime Mortgage Crisis. As I have always said this crisis was sparked by housing and will end in housing. Regardless of the minor recent bounce on the Case-Shiller Index the foreclosure numbers are growing and the shadow inventory that looms is daunting. There is nothing the Fed nor the Obama administration can do at this point but put Band-Aids on severed arteries.

We are about to witness the greatest financial shock the world has ever seen. It will make the initial shot across our bow in August 2007 and subsequent first blood in September 2008 look like child’s play. Anyone who knew what these events truly meant, and what fundamental systemic underpinnings drove them, could within some measurable degree of accuracy predict the outcome. Since the Sub Prime crisis morphed into the Financial Crisis we have literally been in a waiting game. We stood by, dumbfounded, stunned, disbelieving as we watched the first volley of victims fall. People with bad credit, people who’d extended themselves by leveraging their income with two and three year Sub Prime ARM’s were the proverbial lambs. But then people with not-so-bad credit started to fall behind. Then people who drove BMW’s, and Mercedes, and who took trips to exotic places, they too began to suffer the pain. The real estate market did not come back. Free money was no longer free.

We now sit on top a powder keg known as Alt-A mortgages, primarily made up of Option ARM and 5/1 ARM mortgages. It is a ticking time bomb. The banks know it. The Obama Administration knows it. The Fed knows it. Yet they can do nothing to extinguish the fuse. The bomb will go off. It’s timer is set for sometime before, during, or after 2011. The number of people who will quit making their mortgage payments or fall severely behind will number in the tens of millions. This is on top of the already staggering numbers that continue to grow every day. Unemployment, measured by people out of a job or their self-employed incomes seriously impeded, will breach thirty-five percent.

I don’t know to make this any more clear to my American brothers and sisters, but we are in a de facto state of war. The banks are consolidating power. They have taken control of the US Treasury by way of the Federal Reserve and they are holding a gun to our head loaded with our own future. I fear we are on a path to rioting in the streets. Though I pray that our revolution will happen in the voting booth.

In April of 2009 I wrote an article titled; How Five Banks Took Over the United States of America (also see Archives). Since that time we have suffered the continued erosion of our economy and witnessed the criminal public deception by our entire financial sector, the Federal Reserve, the US Treasury, and both our previous and newly elected President. To say that a war against the US citizenry is not underway is to not have a grasp on reality. From – How Five Banks Took Over the United States of America (April, 2009):

I recently read the Office of the Comptroller of the Currency report on Bank Trading and Derivatives Activities for Q4 2008 and shortly thereafter the Public-Private Investment Program Fact Sheet. What struck me when I read these reports were the following two points; first, the OCC Derivatives report has five commercial banks holding 96% of all notional derivatives outstanding – or $192 trillion dollars of a $200 trillion market. A market which if forced to take the ‘mark-to-market’ hit they are unwilling to take, would mean their end. As a result these five banks are essentially clogging the world’s credit markets. Second point, per the Geithner plan Treasury will designate only five asset fund managers to oversee the entirety of the PPIP Legacy Securities portion of the plan. Five banks clogging the system and five banks to be appointed as asset fund managers by Treasury. A coincidence? I doubt it. The graph to the left shows the concentration of derivatives by category and then by distribution between banks. The top five banks in declining order of importance are; JPMorgan Chase at $88 trillion in derivatives, Bank of America with $38 trillion, Citibank holding $32 trillion, Goldman Sachs with $30 trillion, and at number five the merged Wells Fargo -Wachovia Bank holding a combined $5 trillion. Number six is Britain’s HSBC Bank USA hold $3.7 trillion in derivatives.The spreadsheet below details the gross fair (dollar) value of outstanding derivatives as distributed between these top five banks (and then others). Remember, if the derivative market collapses, so does the world. Chaos, riots, anarchy, pretty much the worst imaginable scenario – or so they say.

Jesse at Jesse’s Crossroads Cafe has done an updated piece on the current state of the derivatives bomb – excerpt below:

Well, the boom is over, so what about now?

The current notional value of derivatives on US commercial banks’ balance sheets is $203 trillion. 97% of these ($196 trillion) sit on FIVE banks’ balance sheets, according to a recent report from that very same Office of the Comptroller of the Currency.

It is obvious from this report that Goldman Sachs is by no means a bank, and deserves no consideration as such. It is a hedge fund. In general, Wall Street is out of control.

When the Alt-A time bomb goes off the derivatives inextricably tied to it will look like Hiroshima all over again. Except this time it will be felt worldwide. Tick, tick, tick…

Barack Obama ran for the U.S. Presidency on a passionate but simple premise that he alone embodied the so-called change America desperately needed. Probably the coolest political player to come along since John Kennedy, Barack Obama, savvy to the bone, quietly side-stepped the Clintononian political wrecking-ball as he tip-toed his way into the Oval Office with nary a public scratch, let alone any substantive toe-to-toe confrontation, the kind that exposes the true candidate behind the public charade. Face it, we elected a guy based on a catch-word and a nice smile. His underlying agenda will only become known as events unfold. He gives great speech though. Change. Smile for the camera. What the hell were we thinking?

Watching my country fall from its last vestiges of global respect as this economic train wreck careens into the station is humbling to even the most casual observer. Maybe humbling isn’t the right word, perhaps a more appropriate word is, embarrassing. It’s like watching Reagan claim he didn’t recall Oliver North ran coke for the Contras. Or maybe Bill Clinton swearing up and down on national television, “I never had sexual relations with that girl.” And don’t forget Weapons of Mass Destruction – I think old George W. is out in that Iraqi desert right now, making good use of his retirement years scouring that oil-soaked wasteland with a metal detector he bought on Craig’s List, “I know they’re here dammit, I just know they’re here.” There are some things in our American cultural past that are downright embarrassing. Think Nixon, Watergate, “I am not a crook.”

The only thing of which I am convinced is that from the ashes of this calamity will rise our next national embarrassment. Will the bearer of this cross be Barack Obama? Maybe. Although I think Ben Bernanke is the most likely character. Geithner is the obvious third choice with Paulson and Bush bringing up the rear. Come to think of it, Glass-Steagall was repealed under Clinton, Rubin, Summers, and Greenspan but they’re out of the spotlight now and besides, the ill-informed apathetic American citizenry hasn’t passed a history exam since 1913, so those three boomers and their four-eyed grandpa will get a hall-pass for sure. Most Americans don’t even understand the rudimentary building blocks of this crisis other than the manufactured snippets they remember from some glossed-over CNN report on how great a job the new President is doing and how he brought our nation back from the brink of martial law. Ironically, the only thing that prevented us from collapsing into anarchy was the quick printing Fed. Kudos Ben – at least for now.

The problem with Americans today is that we think like Americans of old. We desperately cling to the idea that people in government fight for our best interests. While this may have been true back in the days of Jefferson or Jackson, the modern truth is that politicians exist for one reason and one reason only, to get re-elected so they can keep being politicians. We are oblivious to the fact that in a global and domestic sense America is simply a marketplace. We are voters, consumers, and taxpayers. Pawns to be manipulated at the whim of people in authority. Where are the leaders who watch out for us?

The oligarchs in this country figured out decades ago that goods assembled overseas with cheap labor could net higher profit margins back home. Bankers netted their windfall financing the front end of this tectonic transition then earned a double-whammy on the back end in the form of consumer financing for goods whose price tags were out of reach for the average American household. Enter the thirty-two percent APR credit card, the zero-down home loan, the HELOC, the Liar Loan, the Get-A-Free-Mercedes-If-You-Buy-This-House-Now-Rebate. I mean, come on, banks shoved every imaginable leveraged financing option down our collective American throat then jacked us on the interest rate if our FICO scores weren’t high enough. And finally, behind it all stood the Fed and U.S. Government repealing laws and printing money to get the party rocking.

Let’s admit a simple truth here. If it weren’t for quantitative easing, ZIRP, and the bailout printing press this nation would already be holding fire-sales on everything from commercial buildings to entire states. “Buy Arizona for a thousand bucks!” We’re so in debt we owe debt on top of debt. And to make matters worse our government robs from the public trusts of Social Security and Medicare and now they want to set up Universal Health Care. Why don’t they just take out an ad that reads, “Most Powerful Western Government Would Like to Leverage Your Paycheck To Then Provide Shitty Medical Services As We Pillage Yet Another Public Fund.” Obama promised transparency. In my opinion he’s delivering.

Bankers are obvious crooks. Our government however is much more sly than their money-peddling counterparts. Our government partakes in every chicane of trickery and public accounting shell-game so as to perpetuate their control over the public domain. On the surface this may not sound so bad. However, when government treads on private toes, their boundary is exceeded. If they are allowed to implement universal healthcare it will lead to a diminished quality of life for every American (except Goldman Sachs employees) and yet another compounding fiscal mess for future generations.

We just watched Fannie Mae and Freddie Mac exposed as the frauds they are – public troughs at which the richest and wealthiest people in the world gorge themselves. Now we’re supposed to believe that government can take over healthcare and magically deliver better service than the private sector? Please. The repeal of Glass-Steagall notwithstanding, had Fannie and Freddie never existed we would not find ourselves in our present quagmire. The same will play out for government run healthcare.

Barack Obama has one motivation and one motivation only in implementing universal healthcare. Money. Obama set aside in his 2010 fiscal budget a “reserve fund” of $634 billion as a “down payment” on the costs of universal healthcare coverage over 10 years. This amount is precisely two-thirds of the anticipated $1.0 trillion dollar price tag over ten years. Think about this for a moment. Our government has never gotten anything right with respect to any fiscal prediction they’ve ever made – ever. What makes you think the cost is going to stop at $1.0 trillion? On that note, why does anyone need a “down payment” of two-thirds in the first place? Could it be the money has already been earmarked for something other than its ostensible purpose? Say for instance, to use it as collateral against which to repay the Fed? Sounds plausible to me.

Let’s consider that the two biggest public trust funds (Social Security and Medicare) are already bankrupt, which they are, and let’s further agree that the two biggest GSE’s (Fannie and Freddie) were mismanaged under the supposed watchful eye of our government and these too, are bankrupt. Now let’s assume that the Federal Reserve, after gobbling up a few trillion dollars in worthless assets by the time this whole fiasco is over, wants their money back. Who do you think they’re going to get it from? The banks? Good luck. They’re bankrupt too. So the Fed will turn to the U.S. taxpayer. However, the U.S. government is going to be too squeamish to raise taxes to pay the Fed back directly by way of a “Fed Repayment Tax”, so what to do? What to do? I know, create another public slush fund under the guise of a tax-based healthcare system and skim a few trillion off the top over the next decade to pay back Guido the bankster. That’s it! Problem solved.

For anyone who doubts our government’s intention in creating another public trust fund read the following report – The Wegelin Report. Then read this article – The Real Crisis Yet to Unfold.

The public fund that will surround universal healthcare will be no different than a blank checkbook for which government can first deplete, then overdraw, again, and again, and again. That’s what they do.

There you are, sitting at a blackjack table splitting aces, throwing down a few more black chips at a hundred bucks a pop on each side of the spit confident you’ve just made a high probability wager. Faded into your inebriated memory is the rage you felt the day before when you wheeled your leased Mercedes out of the driveway and headed east on your Vegas whoring trip. You know the day – it was when when that ass-crack wielding plumber handed you an eight-hundred dollar bill after two hour’s work patching-up that busted water main. That son-of-a-bitch. He’s probably friends with Alan Greenspan. But that was three hundred miles and a blurring procession of cocktails ago. Now you’re here, bellied up to a green felt-covered table and staring at a few thousand dollars of compression molded clay casino chips in front of you treating them as if they had no value in the real world. The only value they have in Vegas is that they got the attention of that blonde wet dream with the ten thousand dollar bolt-ons across the room who you non-chalantly pretend not to notice but your pathetic nutsack is already off the bar stool headed her way.

I love Vegas. Where else on this planet do you stand a chance of actually beating the house AND getting laid within minutes of cashing-in at the cage? Wall Street you say? Good luck pal. Those robber barons are the only ones doing any screwing in that game. They’d rather have you believe you’re too stupid to do what they do. Which is ironic – because all they do is steal. And it’s all sanctioned by the US Government and the Harvard Business School.

Each month you go to your mailbox and stare dumbfounded at your Smith-Barney-Merrill-Lynch-Goldman-Sachs-Bear-Stearns-Now-Defunct brokerage statement wondering what all those crazy numbers mean. Exasperated, you mutter, “Oh well, I guess I’ll just let it ride.”  With your masterful investment decision under foot you shove the crazy numbers statement on the bottom of the mail heap and pull out this month’s Maxim. Carmen Electra topless. Nice.

If Wall Street and Vegas used stacks of gold coins in lieu of placid statements and casino chips to represent your profit or loss in hard terms, terms you could actually see, feel, and become passionate about, sensitive to the fact that this is real, I am responsible for that stack of gold – then I’m afraid the boys from Harvard and the dealers from The Strip would have a lot tougher time separating you from your hard earned money.

I of course exaggerate when I say anyone would be dumbfounded by a 401k or brokerage statement but I say it to make this point – Wall Street and the Federal Reserve want you desensitized as to the real worth of money. The Fed doesn’t want you walking around with gold, in love with its brilliant glow and allure as a store of value. They want you walking around with meaningless, uninspired, dispassionate pieces of paper the value of which they control.  Even better, they’d rather have it all digitized.  What am I talking about?  We’re almost there now.

When it comes to the wholesale desensitization of the public’s attachment to the underlying value of their money – this mostly overlooked strategic component is integral to Wall Street’s and the Fed’s ability to separate you from your money. It is such a benign concept that it goes completely unnoticed by an entire nation but so powerful in the hands of those who would use it to their advantage that they can rob millions, billions, and even trillions of dollars from whomever they please.

Sometimes the best way to communicate an abstract concept is to tell a story. Below is an unedited audio clip of my conversation with prop trader Greg Simmons wherein we are discussing the content of an upcoming article – and this one too. The clip is almost eleven minutes. I encourage you to listen to all of it. In doing so you will hear the story of a woman who was the eleventh employee of AOL. She was Steve Case’s personal secretary and she retired with $80 million dollars in stock options. Greg was advising her how to preserve and grow her wealth – to be sensitive of putting her wealth at risk. His strategy was sound. He had her best interests in mind. However, along came another Wall Street trader. His interest was only the money and his strategy to desensitize this woman of risk. One year later the $80 million dollar AOL woman had nothing. Listen.

[display_podcast]

It’s a sad story. One that I’m sure victims of Bernie Madoff can empathize with. And oddly, one now that we can all relate to as we watch Wall Street and our government trample over what used to be the American dream.

The Federal Reserve does not want you to understand the nature of financial markets, credit, or money itself. The US Treasury does not want you to understand the ramifications of perpetual deficit spending and runaway national debt. And what is becoming abundantly obvious is that Wall Street doesn’t want you to understand they’re role in any of it, nor do they want you to question the notion that these masters of finance are there to grow your money – because they’re not. The Fed, the US Treasury, and especially Wall Street exist for one purpose and one purpose only – to rob you of any discretionary funds you may have lying around after you’ve covered the basic necessities of sustaining life under the economy which they control.

It is a game of wit, of cat and mouse, and of fraud disguised as trust. However, the veil of secrecy that has masked this illusion is slowly being pulled back by the ire of a disgruntled public. With every headline of corporate mismanagement, Madoff-esque frauds, and the fiscal ineptitude of our government the layers of manufactured deception are being peeled away to expose the organized financial desensitizing of an entire nation.

Finally, a 401k statement cannot be exchanged for bread at the grocery store. A brokerage account statement may as well be a roll of toilet paper. The fact of the matter is that the Fed, the US Treasury, and most of all those blood suckers of Wall Street don’t want you to ever take your money out of their game. Not out of your 401k, not out of this economy, and especially not out of their fiat money and into gold, or silver, or anything that’s real. Because if you did – how would they steal it back from you? At gunpoint?

Karl Denninger is perhaps one of the most methodical thinkers when it comes to understanding and then articulating the present challenges facing the U.S. economy. Below is a video of Karl which sums up our current state of affairs. Enjoy.

For the full text article visit – Deflationary Collapse Imminent