The Broken Cycle Part 2: Permanent Intervention

by Jim Willie, CB. Editor, Hat Trick Letter. January 20, 2004

The business cycle is the centerpiece topic among economic discussion, as is the radical stimulus to kick it into gear. Popular expectations are linked closely to events unfolding in a prescribed manner, according to the past cycles. Loose money accessible at low interest rates, the earmark of past cycle stimulus, has built new bigger bubbles. Resolution of past bubbles and distortions has in no way taken place. Regrettably, stimulus has led to every imbalance becoming more dangerously out of kilter. New and more dangerous factors have entered the equation. This cycle is not producing the expected outcomes during the recovery. It is debatable whether a recovery is even in progress, since reality does not often jibe with official statistics. While nothing is similar with past cycles, expectations remain firmly held according "to the business cycle." However, the business cycle has been severely altered by globalization, by debt burdens, by foreign dependence, and by technology itself. A familiar predictable outcome is far from likely. This is not your father's business cycle anymore.

REFLATION CURVE BALL - PROFIT SQUEEZE:

In most economic revival recoveries, reflation carries with it many benefits. The official attempt is to flood the system with newly printed money, to offer ample low-rate credit, and to supply new mortgage funds in quantity. Let nobody forget the source of stimulus, nor the ultimate penalty and cost. The US printing press output (false wealth), in an unfortunate and unavoidable multi-step process, will produce new debt obligations (real lost wealth) and foreign claims on a continual basis for many more months. Recall from Gresham's Law, that bad money pushes out good money. The added combined power (even if false) has in the past typically resulted in some measure of economic renewal. The archetype economic recovery is manifested in:

the resuscitation of pricing power
the re-establishment of profit margins
the revival of capital investment
the return of personal savings, followed by
robust job growth

This time around, all five tell-tale signs are missing. Instead, we see a rise in production costs, and a rise in household costs, with no sign of pricing power.

Troublesome signals abound to proclaim the normally energetic engines have failed to properly function. Commodity prices are rising. Prices of grains, soybeans, metals, energy, these are all making new multi-year highs, thus enlarging production costs and household living expenses. These are hardly desirable outcomes from officially sponsored reflation efforts. The world gold price is rising, traditionally a signal of monetary distress and of price inflation ground swell. That distress has a countervailing USDollar in decline, versus the world major currencies. Our nation vastly accelerates the money supply beyond all economic justification. Japan far exceeds our monetary debauchery and debasement, in defense of their currency, and has done so for years. Without the Bank of Japan assistance, import prices would have jumped significantly already. The European Union is seeing higher federal deficits than are guided by recent agreements. Their central bank is likely to relax on monetary policy soon, in response to the threat placed on its economy from a fast appreciating currency. When that happens, all three (USA, Japan, Europe) will have engaged in the great currency devaluation game, a true race to the bottomless pit. All commodity investments should greatly benefit, as currencies will be sacrificed in order to avert economic recession on a global scale.

Since the US Economy is replete with imported goods, ranging from finished products, to component supplies, to energy resources, to commercial materials, a picture of increased production costs is drawn. These are hardly desirable outcomes from officially sponsored reflation efforts. One can properly conclude that costs (NOT PRICES) across the spectrum are rising in systemic fashion, in response to reflation efforts. Such is the "unintended consequence" of the Federal Reserve's desperate but hailed reflation mission. Typically, pricing power is restored at the same time. But not during this business cycle, not with Asians, especially China, placing their pricing boot heel on America's neck. Wait! There is more unplanned damage.

On the horizon is an OPEC threat of crude oil priced in euro denomination. The non-financial US Economy is nowhere more vulnerable to the declining USDollar than with energy, in particular oil and gas supplies. Recent events surrounding OPEC oil ministers were reported without alarm. The press & media reported intended production cutbacks. They cited ill effects to producer nations and their balance sheets from dollar exposure. They cited an announced higher managed price range for crude oil, in response to dollar exposure. OPEC minister spokesmen even hint of future pricing in euro denomination. The adjusted price interval is in effect a "de-facto euro denomination." This is one of the most important stories in the financial world this year, a May 2003 prediction of mine. It was barely covered by our intrepid lap dogs in the media. Euro pricing by OPEC echoes the identical sentiment put forth by Russian oil leaders this summer. Oil shipments represent a giant slice of world commerce. Settlements are now exclusively made in USDollars. Myriad associated commercial transactions trail what flows in dollar traffic. Downstream, decisions on contracts can easily be swayed toward European vendors instead of American, if euros flow instead of dollars. The impact to higher absorbed energy costs, shipping costs, and transportation costs inside the US Economy would be great, if crude oil rises inversely in price to a persistent US$ decline.

Enter China. Many regard Asia, and specifically China, to be the world's new workshop and service center. This is the invited gorilla at the dinner table, who is taking all the new jobs, usurping all the new capital investment, leveraging profoundly their enormous labor advantage. This is the new scapegoat which incredibly inept, dim-witted, and shallow politicians have begun to attack for supposedly taking American jobs. China is not taking American jobs. The US Congress and US corporations have handed American jobs to China from their absurdly shallow policy. Corporate America eagerly sends jobs to China and other points in Asia, a process still on the fast track. Our leaders openly seek a higher yuan currency, under the mistaken impression that jobs would shift back to the USA. How naïve. These hack politicians understand nothing about the hopeless corner earned by a Strong Dollar Policy. A higher yuan valuation will shift jobs toward other Asian locations, where labor costs are an order of magnitude cheaper than in our overpriced land.

The recent chapter of the great job exodus is an advanced corollary of the Most Favored Nation status granted to China in 1999. US Congress has turned a blind eye to widespread Chinese copyright violations in software, books, and music. Their wages are at a mere 5% of our labor costs. The total lack of health care assistance and workmen compensation keeps labor costs low. US corporations have made colossal investments in China, all voluntary in nature, in order to attempt to capitalize on lower production costs. In the process, human rights and sweat shops are not the priority they once used to be. If the US ever imports human livers from China, perhaps renewed objections would surface.

Furthermore, add India to the argument concerning job migration and the wondrous benefits of globalization. India enjoys a distinct English language advantage over China, thus enabling service centers of diverse types to spring up across western Asia. What has worked for low-skilled centers now is being expanded into the high skilled arena. A wider awesome job threat has cast a shadow over US labor markets, as never before. These emerging nations have multiple layers of labor pools, ready to step forward.

Could it be that official reflation efforts are accelerating the job migration to Asia in pursuit of lower costs? Methinks clearly YES, a story totally overlooked by our press & media. We are building the next Asian powerhouses, who are sure to challenge the USA in geopolitical leadership. After having been pushed into a corner in the last decade, our leaders find the economy under their stewardship uncompetitive, and bloated with debts, the direct effect from an overheated USDollar currency. Reflation has increased costs for American businesses, even as profitability has been under pressure. With continued pricing impediments, and threatening new cost challenges, only improved business order flow has come to the rescue. Corporate response to reflation and its assault on costs has been to accelerate job outsourcing to Asia, a colossal backfire in desperate US policy.

China and India combine to install a tight lid barrier on pricing power. How is a US firm to raise prices on a certain class of finished products when Asian suppliers undercut on price in a drastic fashion? How is a US firm to raise prices when some of their own competitors are benefiting from outsourcing to Asian suppliers? With China's yuan currency regime pegged as fixed to the USDollar, without doubt a brilliant maneuver, China will continue to drain the US Economy of not only jobs, but its wealth. All the while, US firms will see no benefit in pricing power whatsoever. Such is the high cost of globalization and the grant of MFN status to China. Free trade is NOT necessarily a boon to the US Economy, not when currencies and labor costs are entirely disproportionate. Free trade and globalization turbocharged by technology keep the tight lid on pricing, end of story!

American politicians will continue to hammer this mindless theme of taking American jobs, pandering to voters as they prey upon public ignorance. They cannot easily fix the unfixable currency regime, nor its horrendous damage to our thoroughly dislocated economy. Stimulus has spawned speculation and the hint of some growth in our bloated economy. But jobs are the missing piece, an issue of visceral importance to voters. Growing debts cannot easily be dealt with, when income lags. The upcoming US presidential election will bring out the worst in American xenophobia. There is no shortage of either low levels of politician integrity, nor shallow voter intelligence. The upcoming election will expose extreme frustration among workers, who just happen to vote. They will hit the streets with placards and angry slogans, unaware of the true cause of their job loss. China might serve as the continued lightning rod for labor frustration. If politicians continue on this destructive path, many unfortunate consequences will ensue.

Currency mechanisms are too slow to achieve timely remedy to jobs. So the drumbeat of trade protection will sound loudly as presidential primaries heat up. A truly mindless pursuit of China bashing and labor market scapegoating might easily result in painful retaliation by our Asian credit masters. US leaders vastly underestimate the potential weapon that our credit masters could wield on our system, and on our lives. We will lose badly in the trade war game, yet we act with misplaced arrogance. A mere diversion of credit supply would bring about enough of an interest rate rise to detrimentally affect our economy. Added pressure to corporate balance sheets would result in even greater job exodus. In summary, a politically motivated response to labor leakage amidst a highly inefficient economic recovery, prompted by massive and broad stimulus, might lead to Asian retaliation and higher interest rates. Besides, Asians are keenly aware of the exchange-based decline in the $1200 billion USTBond reserves from past surpluses. They have already begun to diversify, and might accelerate that practice if we rattle trade sabers with them foolishly. Former communists are hardly going to act as our benefactors or "bagholders." The result from Asian bond sales would indeed be sand in the gas tank for both financial markets and commerce.

INTERVENTION MUST BE PERMANENT:

Several facts are worth noting about the current so-called recovery and the required actions to bring it about. Monetary expansion with low rates and ample liquidity has been vast. Federal government tax rebates, and other tax benefits have been equally vast. Foreign capital sources have been staggering in volume. Bond carry trade has been critical in putting speculative forces to work, spring-loaded low interest rates being the result. Mortgage agencies have provided primary pools for new mortgages, for refinances, and for home equity extractions. The US Economy depends heavily on consumption, and spending depends on all of the above.

The Greenspasm Fed continues to gauge available time from faulty statistics such as the CPI index, when prowling for price inflation signals. Bond vigilantes are notably absent, having been diverted by official promise of accommodation. Since intervention came into vogue following the 1998 LTCM massacre, vigilantes have gone into hiding. Foreign central banks are holding the buttresses behind the bond dikes, operating in captive fiat cages, even as capital controls may be in an early stage worldwide. The system will not survive without continuation of bond bubbles, which keep the economy limping along. The mainstay of intervention "IV" injections might more appropriately stand for "intravenous."

New legislation has attempted to thwart the exodus of capital from the wealthy among our citizens. Heavy taxes are imposed on those who wish to exit the USA if they meet certain high tax thresholds and asset level requirements, called "preferred taxpayers." It appears that Washington, DC and Brussels have begun to erect new barriers at an early stage, yet another tool to interfere with supposedly free people. They can more onerously be called "capital controls."

The current US Economic recovery arrived late. Typically, a recovery ensues 12 to 18 months after stimulus of a large scale, whether of fiscal or monetary origins. And we saw both types in large doses, implemented over almost three years. The Federal Reserve has engineered an unprecedented monetary expansion, amounting to a 35% increase in the money supply since the year 2000. Actual numbers record an increase from $6.6 trillion to $8.9 trillion. The monetary press cannot stop. These are truly staggering figures to contemplate, never encountered in our brief modern history. In the years 2001 and 2002 we saw virtually nothing in economic growth to show for enormous money growth. Of course, much of the new money offset destroyed money (burned capital) in the form of defaulted debt and related writedowns. Some credit card debt was surely retired, from direct payments and from home equity extractions. Evidence is hard to come by, since on a net basis revolving debt levels have spiraled ever higher.

The USGovt is the other active participant in the stimulus scheme. What many observers euphemistically label as "stimulus" others might correctly call "ruptured" policy which further extends sovereign debt levels well beyond what can ever be repaid. Tax codes have been changed; tax credits have been enabled; tax rebates have been issued. Again a mantra has been chanted, whereby citizens believe our govt should give money away so people can spend it. All the while, our federal deficits display symptoms of governmental bankruptcy. This is lunatic. Foreign credit suppliers, largely from Asia, pick up the tab. The nations in the real "Catch-22" are all squeezed in Asia. They either keep our debt machine in operation, maintaining the external bloodline, or else face a collapse among their customers in the United States of America. Japan, emerging from a 12-year slump, has wasted a record 17.8 trillion yen ($166 billion) this year as of late November to prevent the yen's rise. Bank of Japan officials even went so far as to state publicly their intention to squander an additional $400 billion in this new year, double last year's amount. It appears that central bank action worldwide has turned into desperation.

Few seem to realize that the federal budget process has run completely amok. Non-defense budget items have risen at over a 10% annual rate during the Bushy Administration, wholly atypical for a Republican presidency. Such non-defense growth stands in sharp contrast to the Reagan Administration budget outlays as we emerged from a different recession. Tax and rebate packages have been regarded too frequently as one-time events, and thus belie the label. They must be repeated almost annually, or else a sluggish economic environment reappears. In essence, the king's men in the govt distribute money to its vassals and serfs to spend. Or they permit subjects to keep more of their own money to spend.

Few seem to realize how hyperactive our Federal Reserve has been on a regular basis in artificially engineering low interest rates. By allowing short-term rates at 1.0% and long-term rates in the 4.0% to 5.0% range, the Fed has encouraged a monstrous "yield carry trade" which invites wealthy speculators to engage in heavy profiteering, especially when added leverage is put to use. Applied in the form of futures contracts, with 30-to-1 leverage, the profits can be staggering. Yet no work is done. This constitutes the power center nucleus to the financial industry, a direct skew away from the real economy, directly encouraged by the Fed. In fact, they trumpeted their desire for lower interest rates on long-dated securities back in the middle of 2001. Gangs of speculators licked their chops, eager to launch a new carry trade, not wanting to miss an easy opportunity for fat gains. Bond vigilantes changed uniforms. A transformation is well along, away from genuine work toward speculation and financial engineering. Such a system requires a source of real money in order to continue, and a bagholder to absorb the painful outcome. Is Asia dressed for this sucker's role? Methinks NO.

Fanny Mae is one principal player in this gigantic speculation game. The Office of Federal Housing Enterprise Oversight (OFHEO) now urges at least 30% capitalization for the agency, multiples higher than the current outrageous minuscule capital which controls well over a trillion in debt. Fanny Mae qualifies as a hedge fund, but without any regulatory scrutiny. The Fed advocates little caution, as severe leverage holds our credit markets at low interest rates. Recent data indicates Asian purchases of agency debt has become erratic and unstable, especially by Japan. Is it possible that Japanese officials were browbeaten after they shed $3.2 billion in GSE debt over August and September? Methinks YES. A reversal occurred in October, with over $3.3 billion in such debt repurchased by the Bank of Japan.

The entire US Economy depends on man-made low rates. Few notice a contradiction that debt requirements are staggering, yet interest rates to attract the capital are low. The July bond revolt signaled for resolution. The spirit of last summer's upheaval seems now long forgotten. Tremendous money supply growth, faltering USDollar valuation, and low interest rates cannot co-exist for much longer. A resolution will be demanded by natural forces. Big forces and large imbalances bid for a mammoth spontaneous combustion from deep within the bowels of our financial markets. Where the spark comes from is not known, but it will come. Greenspasm's pride and outspoken arrogance in his defeat of the post-bubble wreckage must now be silenced by natural forces. The Fed's unswerving debasement of the USDollar is an action which invites a magnificent reaction by the natural forces of the free market, an event sure to be delivered.

Large coiled springs, tying up trillions of dollars in notional value, are in place from Treasury carry trades and GSE Agency hedge books alike. The USGovt, the Federal Reserve, and the GSE Agencies together cannot afford for the stimulus to slow, for the leverage to unwind, or for the debt production machinery to abate. To allow an end to such accommodation would gradually pry at the ramparts, and lead to the dismantlement of the entire US Economy in a matter of two years. The greatest financial leverage in modern history fortifies our low interest rates. To relax the coiled spring invites disaster, whose damage would be a quick reversal in housing prices from much higher interest rates. Housing has been too vital for supporting consumption at a national level for a decade, and in particular the last two years. To allow rising rates would jolt that very pillar of support. A jump in short-term rates would deliver a backroom blow to corporate debt structures. Interest rate swaps are everywhere fastened in balance sheets, ready to tear wounds.

The mainstream consensus has the firm belief that stimulus at the hands of the USGovt and the Federal Reserve will be temporary. FOREX markets are gradually latching onto the notion that bold-faced intervention will be ongoing and perhaps permanent. That recognition might be an integral part of the new US$ bear market underway and in full swing. While stocks represent naïve money, and bonds smart money, currencies are the province of the smartest money, while gold is brilliant real money. Thus, traders avidly sell the US$ at every little bounce, as they put on a technical clinic. Intervention must be permanent, or else the entire system completely breaks down, since the distortions, dependence, and leverage are so grand. Intravenous lines stay put.

The heavy weight of debt burdens and job loss might break down consumer spending, even despite continued stimulus and leverage supervision. Evidence has been registered in poor retail data over the holidays, and restoration of car sale incentives as permanent fixtures. Are consumers worried about job security, or are they overloaded with debts, maybe at their limits? Methinks BOTH. Our leaders do not dare discontinue the stimulus, since the system is so vulnerable to interrupted credit and money supply. The Debt Beast must feed, and feed it will. Meanwhile, capital flow data shows distress as foreign money has erratically supplied our nation's economy since September. Official monetization has compensated.

As consumer spending slows, sales incentives expire, govt giveaways end, capital departs, an urgency will descend upon our leaders to retain any and all stimulus measures. They have no choice. Greenspasm has thrown the credit markets a bone. Offsetting the Fed's imprudent continuation of the 1% Fed Funds target, they issued a statement of balanced risk of inflation and deflation (as though they can define either term.) Tax reform ratchets step by step in its implementation from last year's legislation, sure to remain in place. Large "one-offs" are done. Another less weighty test comes right away, in the form of federal extensions to unemployment insurance. The US Congress is working on an extension bill, but Bushy shows little enthusiasm for its passage. He forgets: many voters struggle with job search. Perhaps he intends to rush its passage and appear like a white knight during spring and summer primaries.

Certain ill consequences to the chronic intervention are liable to appear in the new year. The Fed is caught in a box, one of their own making. Greenspasm has unwisely promised more monetary accommodation. His economic heresy has focused since 1994 on the Consumer Price Index as the indication of price inflation's arrival. He publicly states that the window remains open for low rates, since the CPI shows no inflation. He is incapable of measuring price inflation, turning a blind eye to Nasdaq stocks, to the bond markets, and to real estate. The inept Fed overlooks one of the best price inflation indicators in existence, the spread between the 10-yr TNote yield and the TIPS. The Treasury Inflation Protection Security is designed for the free market to gauge price inflation. The spread was at 2.65% recently, double the amount in early 2002. The upsloping Treasury yield curve is another harbinger of price inflation on the horizon. We must speak to these financial engineers and their contraptions. Providing short rates are 1%, money will easily be available for the yield carry trade. Borrowed money will continue to be put to work using leverage on long-dated bonds in the vast credit market machinery. The yield curve will not grow more steep. Leverage will keep it flat, and issue a wrong signal. When control is lost, the entire yield curve will shift upward.

The free market forces could possibly take full charge and countermand the Fed's reckless policy, even though it is an election year in the United States. Bond vigilantes have been notably absent, if not negligent, over the last several months. Have they put aside their duties, lured by the Fed's "green light" on bond speculation? Methinks YES. By trade they are a relentless wolfpack, usually quick to detect monetary irresponsibility and excess. They might have turned into speculators. They might now yield to the 4-year political process. A big issue for me to watch is how voters weigh the enormous discrepancy between official govt statistics attesting to a recovery, versus their collective experiences in clinging to jobs, finding lower paying jobs, and searching in vain for new jobs, or just plain giving up. They now watch costs in their world rise far more than the govt claims, even as credibility in our officials wanes.

If one were to step back, a somber conclusion can be made; it is inescapable. It seems our Dept of Inflation Chairman Greenspasm will continue to undermine and debauch the US$ unless and until the US$ enters free fall and produces a monetary crisis. The USDollar will be fully sacrificed, under the arrogant belief that foreigners will never abandon us as a nation. He will sacrifice it, expecting that carry trade leverage will prevent a long-end breakdown. He will continue his reckless policy until price inflation arrives in a temporary torrent, or until foreigners begin to abandon the US Treasury securities. Monetary policy has failed to achieve any semblance of structural changes which alleviate or rectify the horrendous symptoms. Trade gaps still loom large, uncorrected. Federal deficits have grown larger, beyond the supply tipping point. Debt levels are much higher than three years ago. Big-ticket item demand has been nearly exhausted. The first warning of systemic malfunction will be a US$ failure and rising interest rates. We have not arrived yet at that point. The linchpin might be rising consumer prices, led by food prices, energy prices, and Asian import prices. I have long thought that a dangerous Phase #2 of the US$ Decline would deliver lethal blows to our Treasury Bond market. That phase is characterized by rising world currencies in concert versus the US$. We have reached that point.

Confidence worldwide in the management of the USGovt and our currency is eroding. Vast ineptitude reigns. Iraqi war costs mount and do harm to our federal deficits, raising criticism among our allies. Foreign bank officials openly comment on outsized US federal deficits, without the prospect of repair. Treasury Secretary Snow surprises the currency markets on almost a weekly basis with truly moronic statements. Speaking like a printing press operator, keenly aware of the bogus nature of our world currency, this official currency defender actually said last week that

"A strong currency is one that is hard to counterfeit."

Intervention came into vogue in 1998, when the Russian debt default occurred. As a ripple calamity, the Long Term Capital Management failure threatened the New York financial community. Intervention took place on a massive scale, a precedent setting event in official underwriting by the US$ in international accidents. Heck, the Fed underwrote accidents which never occurred, such as the Y2K Snafu. The stock market went into bubble formation in the next two years. Capital gains tax revenue zoomed. Reduced federal credit needs led foreigners to flock into our stock market and corporate debt market as a consequence. Few observers seem either to have noticed or to attach any importance to the fact that the US Stock market bust occurred during heavy monetary growth, a fact that Keynesians are unable or unwilling to explain. Clearly, it means the Keynesian experiment has failed, and monetary excess has forever destroyed the system. Just how will debt structures be repaired? They will not.

Intervention was mandatory for the US Economy to forestall the effects of a stock bust. Given the widespread huge debts, a recession would quickly degrade into a depression in its aftermath. As a direct result, even larger bond bubbles developed. Intervention and loose official monetary policy have been essential in keeping the credit bubbles inflated for the last two years. IV actions come in the form of monetizing the long bonds, subsidizing the agency debt, rescuing S&P stock indexes near support levels, dumping gold to support the USDollar, and encouraging foreign central banks to monetize the USTBond. Futures contracts and options are the heavy-handed tools of elite civil servants standing guard in sentry duty over the colossal coiled intervention. If this conflagration of interference with the free market system is halted for even three months, the system will go into reverse on a magnificent scale. Sadly, intervention will be permanent.

Greenspasm denies responsibility for the stock bubble and its bust. His rationale was that bubbles are not detectible when in progress. I listen to his topics, not his words. Greenspasm now talks about a USDollar crisis, while henchman Bernanky talks about price inflation. A corrective adjustment is essential, but the mechanisms to arrest the decline are plainly missing, dismantled, and meddled with. The preferred meter of price inflation is absurdly narrow and convenient. They minimize the importance of federal deficits, a huge inflationary factor. The Chairman once called them ten years ago "serious headwinds," when they blew at gale-force, but one half their present magnitude. He seems insufficiently concerned about the trade gap and current account deficit. Despite a 40% drop in the useless but tradeable "anti-euro" DXY index, and an 11% fall in the broad Fed Dollar index, the trade gap is still over 90% of its peak level. He exaggerates the benefits of productivity, a concept he sounds amateurish in speaking about, while promoting the US Economic sham miracle. The only miracle is that the financial engineering experiment has lasted this long, and that confidence abroad has not yet broken down. Years back in his graduate school days, he relished an opportunity to turn back the severe winds of Kondratiev Winter, and now boasts to have overcome the deflationary beast. His battle is nowhere near its conclusion.

Greenspasm's legacy is failing before his eyes, even as his verdict is debated in chambers. The chief spokesman for the US Economy presides over massively deceptive economic statistics. Every single statistic is twisted for political and financial expedience. Most Asian central banks are forced at the barrel of an economic gun to monetize the US Treasury Bond, while Americans sleep. Under attack himself, the man is either blind to reality or a magnificent liar, perhaps both. He regularly contradicts his past research work from years gone by. I suspect he has descended into a bank politician, trapped by his own failure, the magnificent dénouement of bubbles released on the world marketplace over three decades. He plays games with the truth, speaking greek to the US Congress. He stonewalls their legitimate dutiful requests for information on our currency and gold reserves under his custody. He has degraded into a US Debt Salesman, willing to deceive foreigners in order to keep domestic engines chugging with borrowed foreign fuel supplies. Let us not forget the famous words of Hitler's Minister of Propaganda Joseph Goebels:

"Make the lie big enough, and tell it often enough, and people will believe it."

The United States is in the same pickle as Japan in the early 1990s, but our financial leaders conduct business using steroids, amphetamines, heavy leverage machinery, collusion abroad, and heavy-handed tactics. Japan saw their bank system ruined by mortgages tied to inflated real estate prices. The USA is repeating the error in the ruin of mortgage finance, via concentrated Fanny Mae and GSE debt structures as the fulcrum. Our housing values have gone out of control, reflecting a clear sea change in the management of the US Economy. No longer are internal investment and production the foundation for growth. Instead, and perversely, engineered asset bubbles serve as the wellspring to provide unstable liquidity and extractible capital in order to power our economy. We call it "wealth creation," but tragically overlook its fleeting nature. What happens when the source backs up? It cannot back up. A question remains on whether we will suffer Japanese chronic stagnation and deflation, or rather hyper-inflation like Argentine as a result of abandonment by foreign creditors. I suspect a measure of both will be our fate. Until the verdict arrives from the jury within the marketplace, intervention continues. It cannot stop.

DEBT FILLS THE CONSUMPTION - PRODUCTION GAP:

The mantra continues. Keep spending, keep borrowing, keep the US Economy going. In fact, the absolute opposite would eventually enable a real sustained economic recovery, whose elusive key is found in savings and debt level reduction. We have been duped by fallacious economic teachings which seem never to end. The national urging was crystallized in late 2002 after the World Trade Center catastrophe. Our transportation, hotel, and retail industries felt the brunt of the attack's impact. In response, Bushy addressed our vulnerability with a call to arms:

"Go shopping at the malls, do not be afraid, spend your money and protect our jobs, since our economy and way of life depend on you."

Since our economic teachings are fault-ridden and "ass backwards," we must witness a US Economic recovery as weak and fleeting. Any warm-bodied able thinking man or woman can easily dissect the aggregate reported statistics and conclude deep distortions on the strength of this recovery. They are too lazy to bother. Americans, resting oversized bodies on household recliner chairs or management desk leather chairs, do not dig beyond the headlines and capsule summaries, and easily accept baseless economic reports. A paradox exists in the proven textbooks of economic principles, long abandoned by our nearsighted and inventive teams of economic advisors. Unless our nation diverts hard-earned money from spending on toys, trinkets, games, furniture, electronic equipment, and hard items that benefit the production of jobs not at all, unless our nation saves their money in accounts safe from grubby spendthrifts, we will continue to depend helplessly and vulnerably upon foreign sources of credit supply, and our recovery will rest on shaky foundation. Consumption kills recovery.

The rabid forces of consumption continue. Retail sales are watched more diligently than the seacoast in times of war. Sales growth of 1% in December hardly implies robust consumer behavior. While our citizenry regards retail sales as critical, they cannot adequately state the benefits of such sales. I truly believe Wal-Mart is the mortal enemy of American business, its labor, and its industry. Can anyone explain how minimum wage jobs, and stocked shelves from Chinese and other Asian suppliers, benefit our nation? The thought is laughable, even as shopping at Wal-Mart has become a favorite national pastime. I eagerly await the day when the national chain declares their heightened vulnerability to across-the-board price increases, after China repegs to a higher currency level. Let us not forget that our clueless Treasury Secretary embarked on a failed mission in November toward that very purpose. Efforts are put forth in the wrong directions. We no longer know how to create jobs of substance.

Our nation of relentless consumers will literally shop until they drop. The gap between retail consumption and domestic production continues to widen each quarter in recent years. Spending grows while industrial output languishes flat. The difference is made up by additional debt accumulation. In fact, debt service now comprises 78% of the entire GDP in the United States. Nothing is produced in the payment of interest on debts, and thus embodies the spinning of gears without economic locomotion. An excess of vehicle weight (debt) requires colossal amounts of grease (liquidity), thus rendering locomotion (economic traction) as impossible. Nothing is built in the extension of debt. Instead, corporations have for years skewed their operations toward the profit which lies in the credit trade. Debt is absolutely suffocating our lifestyle, our future, our entire economic system, even as it deforms its main structures. Debt is the extreme Achilles Heel of Keynesian unsuccessful policy, and the main device of liberal govt spenders. Ordinarily in a recession, or preliminary to a real recovery, debt is paid down. Not so in the current business cycle. Debts continue to take us over the veritable cliff. Household debt mounts higher, together with personal bankruptcies.

Corporate debt has been transformed in two ways. Investors have accepted much of the risk of rising interest rates, by piling into any bond instrument at all, without any scrutiny or thought. Join this bond rally or miss it, just like with stocks in 1999. Greenspasm has acted like a true Pied Piper in this regard. Signals give investors a false sense of security, as corporate yields, and even junk bond yields enjoy a spread not too far above the revered Treasurys. The massive Fed-driven liquidity push has had a greater impact on bond spreads and bond speculation than anywhere else. In the process, corporations have offloaded substantial risk to investors, if rates should rise. Moreover, with the plethora of interest rate swap contracts having been sealed since 2000, corporations now have exposed themselves to the extreme risk of short-term interest rate increases. It will be interesting to see the end result as rates generally rise later in the year 2004. I believe both bond investors and corporate balance sheets are at high risk. However, investors will be led to believe that rates are heading higher, due to a strengthening economy. One should really be on the lookout for a slowing economy, despite rising interest rates.

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Exploration of silver in Argentina, as well as copper/gold (IOCG) projects in Mexico, and Peru. Anglo American is their partner in Mexico.

Cassidy Gold Corp C$1.15 (CDY.V in Canada, CSYGF for US equivalent) http://www.cassidygold.com/s/Home.asp

With two drill campaigns involving 1608 meters completed in 2003, CDY has confirmed a substantial discovery with intersections of both narrow high grade zones (100 grams gold, over 3.5 meters) and broad consistent lower grade zones (5.12 grams over 27 meters) on their Kouroussa project in Guinea, West Africa. There are numerous additional targets to be drilled in the coming months.

International Barytex Resources Ltd C$1.38 (IBX.V in Canada, IBYXF for US equivalent) http://www.barytex.com

Barytex can earn 75% of a tin/zinc project ($3.5 billion gross metal value) in Yunnan province, China. IBX Chairman Roman Shklanka sold Sutton Resources to Barrick Gold for $525 million, is also chairman of Canico (CNI-TSX) $11.95, with a mktcap of over $370 million. IBX mktcap is under $25 million.

Kenrich-Eskay Mining Corp C$0.83 (KRE.V in Canada, KREKF for US equivalent) http://www.kenrich-eskay.com

KRE holds a 100% interest in thirty-two contiguous mining claims in the Eskay Creek area of British Columbia. The mining claims have the potential of hosting Eskay Creek types of transitional mineralization including gold, silver, copper, lead & zinc.

New Bullet Group C$0.42 (NBG.V in Canada, NBULF for US equivalent) http://www.newbulletgroup.com

John Andrews, former president and chief operating officer of Stillwater Mining ($832 million mktcap) will focus his attention on the exploration of two gold projects in Brazil, and a silver project in Mexico.

Palladon Ventures Ltd C$0.60 (PLL.V in Canada, PLLVF for US equivalent)

Now that George Young's Mag Silver is well on its way, he can turn his attention on PLL's phase two of exploration on four of its gold projects in Argentina. Drilling is scheduled to commence in February 2004. PLL has entered into an agreement to acquire a 65% interest in over 41,000 acres of mineral rights in the western Utah copper district.

Taseko Mines Ltd C$2.00 (TKO.V in Canada, TKOCF for US equivalent) http://www.tasekomines.com

Taseko plans on restarting Canada's largest copper mine (Gibraltar) with a capacity of 80 million pounds per year, and a 15-year supply. In place is a $200 million infrastructure. The Prosperity gold-copper deposit is another project also in development. Gibraltar has 4.7 billion pounds of copper. Prosperity has 2.3 billion pounds of copper and 6.7 million ounces of gold.

The Broken Cycle Series

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials.

Jim Willie CB is the editor of the "Hat Trick Letter" Use the below link to subscribe to the paid research reports, which include coverage of several small cap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, U.S. Dollar, Treasury bonds, and inter-market dynamics with the U.S. Economy and U.S. Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.

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