BAILOUT NATION:
Truth AND Consequences

Part I: America's #1 Question: "Is My Money Safe?"
Part II: How Will This Bailout Affect The U.S. Dollar
Part III: What To Do If This Bailout Does Not Work

Introduction

"The way to crush the middle class is to grind them between the millstones of taxation and inflation" -Vladimir Lenin

By the time you read this report Congress will finalize the biggest bailout in American history. The Bush administration repeatedly warned Americans that the U.S. financial system would sink into Great Depression-style chaos unless it approved a $700 billion bailout plan, which has become the latest political hot potato in the U.S. presidential campaign.

CNBC reports, "The Treasury plan would push Washington's potential bailout tab to $1.8 trillion, to absorb bad mortgages and other assets from bank or other institution balance sheets to keep the financial system from collapsing."

It is almost a forgone conclusion for both the Democratic and Republican parties that free markets, smaller government and individual responsibility have failed. Massive, new government programs, funded with fistfuls of freshly printed debt-based money, will keep us great.

We believe that type of attitude is a guaranteed formula for a decline in America. Government in its current condition has failed.

The recent financial crisis has the brilliant minds in D.C. calling for a trillion-dollar bailout of a system run amok. Everyone, from the president and his secretary of the Treasury to the speaker of the House, now seems to think that without this bailout the economy will fall into irreparable disarray.

Is the system truly that vulnerable? If so, failure is inevitable. It is just a question of when unless serious and painful changes are made. There is no easy way out.

The calls for new regulations and multiple layers of bureaucracy can be heard across the land. Yet why do the markets need regulation in the first place? Because the regulations currently in place were never enforced. What would make anyone accept the notion that new regulations will perform any better than the old ones?

If the average American spent as much time studying and analyzing their investments and savings as they do "American Idol" dials and busy signals, we would not need regulations. Truly free markets would reward well-run institutions. They would punish, and ultimately eliminate, poorly run or high-risk companies that care more about their CEO than they do their customers and investors. We have criminal rules for criminal activities, but we apparently refuse to use them.

Regulations are designed to protect people who either don't have the ability or are too lazy to protect themselves. If I have my money in the bank, a mutual fund, a money market or gold, isn't it my responsibility to make sure I choose a safe institution?

The systematic dumbing-down of America and the lack of respect toward education is frightening. We teach children how to read, write and count. We teach them how to put condoms on bananas. But do we teach them a thing about money or the banking system? How about teaching a kid how to balance a checkbook or the proper use of credit? What about the Federal Reserve System of fractional banking?

We need not look any further than the current government fear-fueled, knee-jerk reactions of last week to see just how incapable the government is of fixing the underlying fundamentals that led to the panic on Wall Street.

After injecting $250 billion into world markets in three days and proposing what will easily be another $750 billion in new programs, the Dow Jones Industrial average ended the week where it began. One would think the market would have responded a bit better given the amount of money thrown at the problem.

Imagine if a trillion taxpayer dollars had been injected directly into the housing market, gold market or oil market? Take your pick. That market would have exploded. Yet the Dow ended unchanged after massive government intervention.

The answers we need will not be found in more deficit spending and more debt. Quite the opposite. We need less of both, and we need it now.

An honest analysis of the current crisis will reveal plenty of culpability for both sides of the aisle. So it is time to stop the politics and start the leadership. To watch McCain blame Obama and vice versa is disgusting. To hear Pelosi blaming Bush like a broken record is getting old.

If Wall Street or Main Street need a bailout, we should not allow the politicians to create more money or take on more debt. The recent rhetoric used to instill fear in America must stop. The comparison of our current problems with the Great Depression is ludicrous.

In 1929, unemployment was almost 26 percent. Today it is 6.1 percent. Have you been to a high-end restaurant recently? They are packed wall to wall with young people spending money like it is water, as they text on their $300 Blackberry while their $40,000 BMWs are parked with the $20-a-car valet. Give me a break. We are not even close to a depression. Yet if the politicians spend all this money we don't have, their fear-laced words will become a self-fulfilling prophesy.

If our leaders are serious about change and are willing to implement it, they should immediately reduce government spending. It is the only action that will produce meaningful results. Start by having every department reduce their budgets by 15 percent within four years. Instead of two government employees wasting half the day doing nothing, there will be one. This should be done in all areas of government other than those necessary to keep the population safe against attack.

The departments who cannot make the reductions should either be eliminated or bid out to the private sector. Efficiency is the mother's milk of the private sector and should be demanded at the federal level as well. Free enterprise has proven time and time again the private sector's ability to provide services in a more cost effective way than government.

Corporate tax rates, which are the second highest in the world, should immediately be reduced to encourage American businesses to keep jobs in America while hiring new employees. Entice corporations through tax incentives for implementing training programs and spending capital on infrastructure as was proposed in the stimulus package back in February.

All taxes, personal and investment, should remain at current levels, permanently. This will allow for long-term planning and give all Americans a stationary target on one of the highest expenses in all of our budgets, while at the same time spurring more prudent investments.

Nothing would send a stronger signal that America is serious about the future. We have already witnessed what the world thinks about our panicked "solution" of throwing money at the problem. Foreign investors ran to gold and treasuries last week in unprecedented numbers. Short-term treasuries have not seen these prices since the London Blitz in 1940. Millions around the globe moved money to safe havens.

The system desperately requires a fresh injection of confidence, NOT debt. These steps will restore confidence only as the world can depend on fiscal responsibility from the world’s largest debtor.

Everyone wants to see the government get its act together, not saddle the taxpayer with another couple trillion dollars of debt. The market is demanding accountability and transparency, not additional regulation. Our leaders need to walk the talk. Words are cheap. Actions are always more effective.

So this year we have a choice. We can elect the most popular guy and his team, cross our fingers and hope he will get us through another four years. Or we can send a signal that says we are ready to make the sacrifices necessary to get back on track. But only if we have a leader who will reduce wasteful spending, enforce current rules and regulations and keep us safe.

That is the role of government. Nothing more, nothing less.

Part I: America's #1 Question: "Is My Money Safe?"

Today investors are very concerned about the safety and value of their financial assets while Wall Street ponders the fate of its most established brokerage and insurance companies.

After the recent 1,000-point drop in the Dow, an emergency behind-closed-doors meeting was held with members of Congress, the Treasury, the Fed and the President. Subsequently it was announced that legislation would probably be enacted to transfer the liabilities of bad mortgage instruments from banks and brokerage companies to the government.

It appears we have come full circle since 1980 when we experienced another financial crisis. At the time inflation was double digits and foreigners were losing confidence in the US dollar. Fed chairman Paul Volcker boldly began raising interest rates up to 20% to squelch inflation and restore confidence. Today investors are once again looking to the government to restore confidence in the financial markets.

The proposed government bailout appears to be a temporary fix and adds to a long-term debt problem. Over the last 25 years we have witnessed the greatest accumulation of debt in world history. We were dismayed when Reagan’s commission scoffed at the return to a gold standard. Those of us involved in the rare coin and precious metals market have warned about excessive debt leading to severe inflation, higher costs of living, and a weaker US dollar. Our antagonists have argued that excessive debt will lead to deflation and hence a stronger dollar.

With the bailout of Fannie Mae and Freddie Mac, AIG, Bear Stearns and the recent Resolution Bailout; the $64 Trillion Dollar question of inflation or deflation has finally been answered! Peter Schiff, President of Euro Pacific Capital, wrote on 9/19/08, “While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities…So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value.”

The government’s abandonment of the gold standard and establishment of the Federal Reserve have proven to be disastrous. The result has been unsound monetary policies with trillions in unfunded liabilities, and an overdependence on foreign creditors. Today we are expected to believe the government’s “Resolution Bailout” will cure Wall Street’s ills and restore confidence in the economy. I believe the plan will shift the liabilities to the saver and taxpayer while exemplifying moral hazard.

LeMetropoleCafé.com reported on 9/19/08, “The President’s new bailout plan to be a Patriot Act for the economy. Both pieces of legislation are being rushed through Congress as emergency actions with little time for scrutiny. Both acts rewrite the rules of how the country operates. Just as the Patriot Act compromised individual political freedom, the bailout compromises economic freedom. Never again will the market determine the big winners and losers; henceforth the government will, in its infinite wisdom decide which firms will live or die. As a political matter, the new structure is unlikely to function well. As Milton Friedman said, ‘If you put the Federal Government in charge of the Sahara Desert in five years there’d be a shortage of sand.’”

The obvious question one should ask is; where will the hundreds of billions or trillions come from for this bailout? History teaches us when federal government needs immediate cash and has over borrowed; it turns to the printing press. The Federal Reserve buys US bonds and infuses cash into the system. This is called monetization of debt and is the root cause of inflation.

Jim Sinclair of JSMineset.com wrote on 9/19/08, “Today's reported potential infinite bailout of all and any portends, if adopted, is the largest increase in dollars outstanding since the Jurassic Age... It closely models actions undertaken regarding the production of currency liquidity seen in the Weimar Republic."

So today we embark on a new stage in American financial history. It appears the government’s “Resolution Bailout” will temporarily calm the markets but mortgage our financial future. This program will weaken the dollar and insure higher costs of real assets such as housing and automobiles. Higher costs of living will be the burden for our children and grandchildren, as well as those looking toward retirement or those on a fixed income.

Now that the $64 trillion question has been answered in terms of inflation; there is no doubt as to what action a proactive investor must take. Bill Murphy, GATA chairman and proprietor of LeMetropolecafe.com, on 9/19/08, “Once the dust settles, most everyone with half a brain is going to go out and buy gold and silver.. The small gold and silver markets will not be able to handle the demand without sending their prices sharply higher”.

Citigroup metals analysts, John Hill and Graham Wark wrote on 9/19/08, “We have been surprised that gold has been so heretofore quiet, and have expected a much strong and more immediate response to the government takeover of GSE [Government Sponsored Enterprises]/mortgage insurance entities, and broker-deal bankruptcies…It is notable that hard-core goldbugs have been proven correct in the decade-long contention that an overwhelmingly vast and complex pool of nested financial derivates would ultimately result in cascading defaults and ruin for major portions of the banking system. Frankly, we're surprised that gold is not already at $2,000 per ounce.”

The Swiss America strategy to keep your money safe is simple. Proactive investors should go onto their own gold standard, by taking possession of numismatic gold and silver coins and precious metals. The gold price correction from over $1000/oz. in March 2008 to $875 today gives investors another opportunity to buy undervalued real assets. The country’s economic problems will continue to make headlines for years and into the next decade. Swiss America will continue helping individuals protect their hard-earned savings, while limiting investors’ exposure to the next financial crisis.

Part II: How Will This Bailout Affect The Dollar

"What I envisage as this credit crisis goes turns into a full-fledged global economic slump is that half the world resorts to currency devaluation in a scramble to stave off recession and cling to market share. This will be very good for gold," reports Ambrose Evans-Pritchard at London Telegraph.

So far in 2008 we have seen, in the dead of night, five major government bailouts, none of which had more than a few days' positive effect on the markets. Each was done by powerful men in powerful places in the wee small hours. At the end of the next day, a few were made rich while the many were handed the bill. Each new bailout has further driven the value of U.S. dollar lower.

First there was Bear Stearns. Then IndyMac bank. Fannie and Freddie followed rapidly. Then AIG and finally the mother of all bailouts, Wall Street itself. All were engineered while the markets were closed.

How many more bailouts have to occur before someone asks the questions no one wants to ask? Is this a systemic problem and where does it end?

It is no surprise to those of us who warned about the drunken credit binge on Wall Street that the day of reckoning would come. What we never anticipated was the reward in store for the gluttons who caused the damage.

Bear Stearns was sold to JPMorgan on March 17; billions of equity was transferred to the balance sheet of one of the top five banks in America while the liabilities were guaranteed by the government (a.k.a. the taxpayers). Through the use of very complicated devices the government moved to save the system. The executives of Bear walked away with bonuses and severance packages. Disaster temporarily averted.

On July 11, IndyMac was taken over by the government due to a "run on the bank" which depleted deposits literally overnight. With $100 million leaving each day, the feds had no option other than to shut the doors. The $52 billion FDIC rescue fund was tapped for $4 billion-$8 billion to pay off depositors and 4,000 employees lost their jobs overnight as IndyMac became runnerup to the largest bank collapse in history (Continental Bank in 1984). Net result: The banking system is saved for the time being.

Fannie and Freddie were seized by regulators Sunday after weeks of speculation that both were suffering losses far beyond their ability to cover. Voices like Bill Gross from PIMCO, with $800 billion in bonds, made clear their intention to stop buying bonds unless the Treasury acted to provide an implicit guarantee for all Fannie and Freddie obligations.

Is the system broken? And if so, who benefits as a result?

If the problems we are now witnessing are systemic and can potentially develop into a far worse crisis than anyone expected, what level of loss should the public be responsible for? Should we the people be on the hook for an unlimited amount of liability while not participating in any of the reward? At its face that seems very unfair, but as I was told at an early age, life is not always fair.

There is an even bigger question in all of this. How many commercial banks, investment banks and mortgage guarantors can the government take over before we as a country are forced to create money to meet all the obligations represented by these takeovers? It is not as if the government has surpluses from which to draw all the needed capital to meet these obligations. We will have to borrow or print it.

What if General Motors, Ford and Boeing need to be bailed out? What about airlines, drug companies, insurance companies ... shall I go on? We cannot and should not adopt a bailout mentality without first considering the long-term ramifications for the country as a whole.

Currently we are running about a $500 billion dollar annual budget deficit. This will be added to the national debt which currently stands at $9.6 trillion. Will run the national debt to $15 trillion, $20 trillion? And that doesn't even take into account the off-budget debt, reflected in future Medicare and Social Security obligations, which now exceeds $50 trillion. At what point will the U.S. dollar have any value if we can never pay any of it back?

U.S. dollar losing safe-haven status

The U.S. dollar has always been the currency the world turns to when there is trouble. The dollar has always represented safety, but can it maintain that trust if we just continue to print, borrow and move dollars around from balance sheet to balance sheet ad infinitum?

We cannot continue employing the broken business model our current financial system represents. It doesn't work. We cannot leverage, inflate and deflate forever. There comes a day of reckoning when people will not tolerate the abuse of a system to enrich a few while decimating many.

For the first time in the post-World War II era, the American dollar is susceptible to competition from a currency based in an identifiable and universally accepted value. A currency that cannot be created out of thin air. Is such a currency available? Not yet. But you know the old saying, "Necessity is the mother of invention."

Right now the world has three very strong and prosperous countries competing on the world stage with huge amounts of capital, natural resources and gold that could easily, if they so chose, create a currency much like Europe did in the euro. But this time it could be backed with oil and gold.

Russia, China and the Arab nations are sitting on an enormous amount of oil, gold and U.S. dollars. What if those nations forged agreements (much like NATO, WTO, etc.) and offered an "ARC" dollar fully backed by gold or oil? (The holder of the currency could actually exchange the currency for a specified amount of gold or oil.)

A note is a promise to pay. For years in America a Federal Reserve Note (currency) was a promise to pay gold and silver at the Treasury. Today it is a note to pay debt. Debt that is exploding and can apparently be wiped away by the Fed overnight or, worse yet, transferred to the backs of American workers in the form of tax on future labor. But what if a group of nations offered a currency that had no recurring liability attached to it but actual "money" in the form of the ultimate currency (gold) or the ultimate natural resource (oil)?

In the past we would view such a prospect as preposterous. Today it may well become a reality. Currently talks are under way with the Gulf Monetary Authority for just such a system.

If we think the government is capable of bailing everything and everyone out of every financial mess that may occur then we are fools. And perhaps we are being viewed as such by very hostile nations that would welcome the deterioration of our position and would not flinch at our total demise.

In short, we have fattened our hearts in the day of slaughter and now is the time to acknowledge and accept that each of us is solely responsible for our own future. Not the government. The time of discussing the problems has come and gone. Now is the time to devise a plan and put it into action.

Understand that the only answer to avoiding a meltdown is either a new currency or runaway inflation. To quote Harry Shultz, "If Bush bails them all out, the die will be cast for inflation unseen in the West since 1923 Germany. If no bail:1929. Gold helps you out either way."

You can either ignore the obvious or act upon it.

Ignorance is produced in ignoring the facts. It makes one ignorant. Acting upon the facts makes one wise, which is wisdom. This will be a time when many will prefer to deny what they see around them and hope against hope that the system will fix itself.

It will not.

Here’s a good analogy: a person (the system) having a massive heart attack, a heart attack resulting from years of abuse of the victim's own body. He is rushed to the hospital where the doctors (the Fed) work feverishly to save his life. They are successful and the patient lives. The doctors then sit the patient down and explain that while they saved his life, without major lifestyle changes the patient will have another heart attack and die. He must immediately stop smoking, eliminate fatty foods and exercise daily. The patient refuses.

Thus is our system. This is not the first crisis. It will not be the last. The system is not willing to do what is necessary to get better, so it is time to diversify assets out of dollars and into tangible assets.

Part III: What To Do If This Bailout Does Not Work

Economists warn that America's debt trap will soon snap shut on millions, but it's still not too late to protect your wealth from the coming financial tsunami. A little known economic malaise from the 1970s is now back: "stagflation" – stagnant economic growth coupled with a rapidly increasing cost of living.

In the 1970s, stagflation grew out of the OPEC oil embargo that caused oil prices to quadruple. Inflation surged and economic growth was stunted. Today a similar picture seems to be emerging. Investors are hoping a slowing economy will bring inflation back under control, but we already have a lot of inflation gushing down the pipeline.

Inflation today is rampant in big-ticket items such as health care, utilities, insurance, higher education, food, energy, and until recently, home prices. A historic commodity boom has doubled agricultural and energy prices while wages lag far behind. Factory profit margins are being squeezed by soaring energy, raw material and transportation costs. Trade balances are negative in oil-importing nations like the U.S.

'A weapon of mass destruction'

Rising inflation, together with the worst housing market in over a decade, appears to support the growing stagflation argument. Here are a few recent quotes that say it all:

- "The July inflation data had a strong stagflationary feel to it," said ING economist Dimitry Fleming to The London Times.

- "There's no doubt we're in a period of stagflation now,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York, according to Bloomberg.

- "Stagflation is nothing less than a weapon of mass destruction aimed at the livelihoods not only of the elderly and those on fixed incomes, but also on students, the unemployed, families, and almost everyone who has a job in the producing economy," reports Market Oracle.

Europe is also facing a major slowdown, but their ECB central bank, like the Fed, fears economic recession more than inflation. This has created fresh worries about stagflation and has pushed investors to view the U.S. as the lesser of evils. This explains why the dollar recently strengthened against the euro.

I.O.U.S.A. – an empire of debt

Many Americans no longer value the unalienable rights of "life, liberty and the pursuit of happiness" endowed to us by our Creator and affirmed by our nation's founders. They instead value the pursuit of higher credit card limits, mortgages, debt and deficits. Worse yet is the moronic economic worldview that promises we can miraculously spend, rather than save, our way to wealth.

U.S. consumers, as well as the government, are slowly drowning in a sea of debt as a brand new documentary film titled "I.O.U.S.A." details. The film's inspiration comes from the 2006 book "Empire of Debt: The Rise of an Epic Financial Crisis" by William Bonner and Addison Wiggin of Daily Reckoning.

"Empire of Debt" co-author Bill Bonner explains stagflation this way: “The Keynesian economics practiced by governments and central bankers depends on deception. As more money and credit is introduced into the economy – as "stimulus" – it is mistaken for real wealth. Consumers think they have more money to spend; businessmen think they have more customers; investors think they see more profits. Deceived, they happily expand the economy. As time goes on, however, prices catch up to the funny money and the consumer wakes up to the fact that he or she is no better off than before. So, gradually, the old trick stops working. Money and credit may pour in, but no one is fooled. Instead, prices rise, while the economy goes limp.”

Here's what former U.S. Comptroller General David Walker, featured in "I.O.U.S.A.," told the Wall Street Journal: "When the baby boom generation starts retiring, that will bring a tsunami of government spending that we are not prepared for. We are in a $53 trillion hole. And that hole gets deeper $2-3 trillion a year automatically, even if you have a balanced budget."

Stop walking up a down escalator

With unemployment rising, income growth in today's weak job market is also falling. Investors who rely on fixed income or interest income from T-Bills are also facing negative growth due to the rapidly rising cost of living.

In the 1950s, a single wage-earner could support a family while the wife stayed home and looked after the children. They could buy a house, a car and household appliances, go away on vacation, and send the kids to college. Today both husband and wife must work just to make ends meet. Saving for the future is now a lofty goal.

And yet, there are actions individuals, families and groups can take right now in their own lives to offset the negative effects of today’s stagflationary environment. Here are a few humble suggestions:

1. Don’t borrow: The U.S. is suffering from a chronic debt addiction of monumental proportion. We've now amassed $1 trillion in bad mortgage debt, $1 trillion in weak consumer credit card debt and nearly $10 trillion in government debt. Debt enslaves us to an economic system in a chronic state of collapse. Learn to live within your means.

2. Own hard money: If you have money, put a portion of it into tangible assets before the dollar’s value is further destroyed by inflation. Precious metal and U.S. rare coin prices recently corrected and today represent an excellent value buy for both safety and long-term growth.

3. Think for yourself: Search for reliable information about the economic and political situation. Read books and turn off the TV and video games. Discuss ideas and issues with your kids, family and friends.

4. Develop new skills: Learn to be more self-reliant. Do your own household repairs. Grow and cook your own food. Shop at thrift stores. Start your own part-time business.

5. Become politically active: Register, vote and demand honest elections. Support politicians with integrity, who favor smaller government, lower taxes and the Constitution. Reread the Constitution as a reminder of your rich American heritage. Demand changes in accordance with your core values.

6. Fear not, God is in control We tend to be overwhelmed by external forces such as government, corporations, banks, credit ratings, the economy, media, armies and technology. In reality, God is the only source of power in the universe. The more we realize God's presence, the less we fear externals. By God’s grace we can reverse the trend from being a bailout nation to being a blessed nation again.

DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.