The Day The Earth Stood Still

By Howard Ruff
The Ruff Times
Oct 3, 2008

Some years ago when we lived in Washington, D.C., we went to see a new science-fiction movie, The Day the Earth Stood Still, at the RKO Keith Theater, located across the street from the White House. As the movie opens, a huge flying saucer is landing on the ellipse, south of the White House.

Ironically at that moment in the real world, some police cars or fire trucks were going right past the theater with their sirens blaring, at the same time we were watching this flying saucer land on the screen. It felt like there was actually something serious going on.

As the movie progressed, the actor, Michael Rennie, came out of the flying saucer with a huge robot and announced that he was an ambassador from a Federation of Planets who were worried about the war-like tendencies of this planet and were there to impose peace on us, which he later did by stopping all electronic and mechanical devices - airplanes, trains, cars, etc.

When we left the theater, I had to reassure myself that everything was still working - that we could still get on a real world bus or streetcar and go home and it would all work normally.

I've never forgotten that dramatic day. What we have seen in the last few weeks equals what happened - the earth has stood still.

Wall Street, as we have known it all my life, no longer exists. Merrill Lynch has been bought out, as well as Washington Mutual. Fannie Mae and Freddie Mac, Bear Stearns and AIG are gone, and Lehman Brothers is bankrupt and has collapsed. But the major issue before us is that this Democrat-controlled government has taken over everything we used to call "Wall Street." With the aid, assistance and encouragement of President Bush, Uncle Sam is trying to buy $700 billion worth of rotten assets so they can control Wall Street.

What rotten assets would they buy? It seems that one of the issues behind the collapse of the mortgage industry has been the Democrats forcing mortgage lenders and brokers over the years to issue mortgages that can never be repaid as part of their social policies to create "affordable mortgages" to create "an ownership society."

So Congress rushed in to create unenforceable mortgages which are unlikely to be paid - mortgages where you could start with a low teaser rate and kick the ball three or four years down the road to where the stated interest rate would rise so they couldn't be paid. Also, no documented income required, no down payment!

I have warned you repeatedly against falling for this scam. I told you to only accept a fully-funded, fixed-rate mortgage. If you took my advice, you are watching with bemused silence the soap opera in Washington.

Today Wall Street and the securities industry have been socialized by Congress and the Democrats are firmly in control. $700 billion will buy up the bad mortgages that people can't pay and alter the terms to stop foreclosures so everyone, no matter how unworthy, can own a house they can't lose, whether they can make the payments or not.

So how do I feel about this?

I can't tell big-government politicians what to do and what will work. I'm not that smart, and they wouldn't listen anyway. My job is to figure out what will really happen and then help you middle-class Americans deal with the world as it is and profit from it.

The irony is that they may have created a problem beyond the ingenuity of human leadership; so big and perverse that there is no real solution short of spending billions to buy up bad assets.

So who is to blame for this mortgage disaster?

1) Blame congress, including compliant Republicans, for the "ownership society."

2) Blame the Federal Reserve for keeping interest rates so low for years that anyone could get a mortgage under the relaxed terms - buy a home with a mortgage that could never be repaid - creating a real-estate bubble.

3) Blame perverse laws passed by Congress divorced from any reason to buy votes.

4) Blame individuals who signed up for mortgages that they could never repay.

5) And blame those who want to bail them out by buying their mortgages and readjusting the terms so they don't get thrown out of the home they can't afford and should not have bought!

This is supposed to fix the problem.

It may kick Wall Street and the banker's problem down the road, but it won't fix America's problem. Everything you have been reading in newspapers and seeing on TV is aimed at saving a few favored executives on Wall Street and the tattered reputations of the politicians who created this problem.

Throwing Money at Problems

The end result? How does Congress usually fix a big problem? The only way they know is to throw money at it. They create the money out of nothing. They vastly expand the money supply. One of the immutable laws of the financial universe is that when you expand the supply of a paper currency, you create monetary inflation.

I don't know how to fix Wall Street's problem, nor do the politicians with all their posturing. But I do know how to take advantage of what is happening! I'll say it again; when the government throws money at a problem, they create monetary inflation. The vast expansions of the money supply that we are seeing dwarfs anything we have seen in our lifetimes.

With that as the reality, whether or not you think you know how to solve Wall Street's problem is irrelevant. The reality is you can now profit from the sure thing - monetary inflation.

Monetary inflation means we will wake up one day in the grip of a huge price inflation. As Will Rogers said, "Invest in inflation, it's the only thing that's going up."

In this artificial environment, you can easily turn small amounts of money into big fortunes if you know a few simple things to do. Let them play their crazy Washington games.

GAAP

How did all these giant institutions fail so abruptly?

One of the causes of Wall Street's problems is the answer to the question: What happened all of a sudden to their balance sheets? The villain is Generally Accepted Accounting Principles (GAAP).

In recent years, changes in GAAP required banks and brokers to "mark to market" the investments on their balance sheet. When the diminished value of real-estate assets which had been packaged and securitized so that banks and brokers could invest in them became obvious, no one knew how to value them. Under GAAP they had to "mark to market," which means they had to mark them down to zero. There was no market price, because there were no buyers or sellers.

In the real world we know that most mortgages will be paid. But rather than ascertaining value based on normal cash flow, because there was no market they had to mark these assets down to zero and trillions disappeared from balance sheets overnight.

When a bank or brokerage house balance sheet is deeply impaired, they have to raise additional capital. When that is happening to everyone, who will loan you money? Consequently, the balance sheets just plain disappeared.

What to Do

You are lucky to have an old hand like me around. I have lived through the inflation of the '70s when we made fortunes on inflation hedges. Most financial advisors are too young to have even been around then, and you are adrift without a rudder.

When I wrote How to Prosper During the Coming Bad Years in the 21st Century, I had concluded that the world was coming back around to where it used to be in the '70s for the same reasons, only more so. So rather than writing a whole new book (I write books for part of my income), I would simply update the big best-seller that I wrote back in 1978 (2.6 million copies) because the principles were again the same. I only had to update it for the 21st century.

This is the book that we give every new subscriber and every renewed subscriber who doesn't already have it.

Will the principles that worked back then work again? Yes, they will work again because the principles that are close to eternal as financial principles can be.

Advice

Here is the advice I am updating now.

1) Prices will rise sharply due to monetary inflation, which eventually results in price inflation!

Today I received an email from Money News.

"The earthquake will come via a collapse in the market for U.S. government bonds as domestic and foreign investors realize that the only way Uncle Sam can meet his future spending obligations is to print massive quantities of money," warns Boston University economist Laurence J. Kotlikoff.

"The result will be sky-high inflation and interest rates and, most surely, a prolonged reduction in output and employment."

"This could happen today. It could happen tomorrow. But it will happen here just as it has happened in every other country that tried to spend far beyond its ability to pay," he writes.

Nevertheless, Kotlikoff figures the real total debt of the government right now is $70 trillion. Never mind the personal debts - credit cards, mortgages, cars, and other loans - Americans would face as our economy heads, potentially, into a deep recession.

Compare that figure to the entire U.S. economy, which amounted to $13.8 trillion in total economic output in 2007.

And don't forget the automakers and airlines who want us to give them a few billion dollars.

"If we keep our promises to the retiring baby boomers, we'll be paying out $4 trillion a year that we don't have for decades," says Kotlikoff.

2) Normal commerce is crippled by inflation. The commodities you ordinarily will be able to buy whenever you want, at the price you want, may not always be there, as inflation has driven up the cost of fuel so the trucks will find it harder to pull up to the back door of your local store and restock the shelves.

You must turn a liability into an asset. Prices will rise higher and higher. How do you turn this into an asset? By buying things now while they are still relatively cheap, storing them away and then consuming them later when prices are higher.

This includes every commodity you would buy at your local store, ranging from food, to diapers, to soap, to auto parts, to everything else.

Some people call this "hoarding." So be it! I don't want to be politically correct by not "hoarding" if I will be hungry and my family will not be able to eat. In the real world, so few people will take my advice I will have little impact on the rest of the world.

(By the way, Karen Varner is still very helpful with planning food storage or 24-hour kits. You can call her at (801) 225-0948 or email her at your72hrkitlaby@yahoo.com. You're welcome!)

3) How do you take Will Roger's advice and invest in inflation because it's going up? Several investments will benefit.

Gold and Silver

The stars of the show are gold and silver, with the emphasis on silver. Why will they boom?

Historically, the world is littered with dead paper currencies. Major currencies disappear about every 70 years, and historically at these times, people have instinctively turned to precious metals because gold and silver coins have a long history as money.

We have been using them as money since before Roman times, and metal coins protect you against inflation because they boom. They do not increase in price; the currency diminishes in value in relation to them and precious metals reflect this phenomenon.

Gold gets all the headlines, but the real star will be silver. Gold is not as much of a monetary commodity except in the theoretical sense as backing for paper currency.

Silver has been actual money. When the Romans conquered Spain, they took over the Spanish silver deposits lying relatively close to the surface. Silver coins were the basic currency of Rome, and for centuries it was valuable because that was the only kind of money there was. But then the Roman Senate decided they had to gain the support of the populace. They were beginning to sleep under bridges and needed to be entertained housed and fed.

So they built the coliseum and began to show bouts between lions and Christians (lions 200, Christians zero). "Bread and circuses" were the watchwords of the day, and as soon as the Roman Senate made the decision to cater to the mob, they had to figure out how to stretch the money when the silver mines began to run out.

They started out by making silver coins thinner and smaller, and then clipping the corners, then mixing them with base metals. People caught on real fast, and they wanted more coins in return for their goods and services ("rising prices?").

This monetary inflation turned serious when the far-flung Roman legions began to distrust the value of the currency in which they were paid. So the Roman legions began to desert. Monetary inflation brought down the Roman Empire and made it impossible for them to defend themselves when, centuries later, the barbarians were at the gates.

Then we invented the printing press.

Paper to Money

How did paper currency first begin? It started out as warehouse receipts for gold and silver in the warehouse (bank). If a duke or noble wanted to conduct a war, he would simply go to the warehouse and take out some of his gold and silver and use it to pay the troops and buy weapons.

They soon discovered that rather than going to the bank and getting the metal, it was easier just to pass the receipts around so the other guy could go get the metals.

In other words, the warehouse receipts began to be accepted as currency representing the coins. It seemed like a good idea at the time.

Paper started turning into money when the warehouse owners (bankers) realized that nobody knew how many receipts there were, and they began to create more receipts than there was money and passing them around as if they were backed by real metals. After all, who would know?

Soon, and it didn't take long, people began to look upon the paper receipts as though they were real money. It was convenient. It was a lot easier than going to the bank and getting the metal.

Eventually, as paper lost its relationship to actual stored metals, governments began to ignore the fiction that it was a warehouse receipt.

In the U.S., the receipts backed the gold in the warehouse, and individual countries could bring their receipts to the Federal Reserve gold window and exchange them for gold.

However, soon we had created so many receipts that we began to lose too much gold at Fort Knox. So President Nixon yielded to reality and closed the gold window. He gambled that nations would look upon the currency as money and that decision would be accepted. He was right.

Since Nixon closed the gold window, there is no gold backing for the paper. The paper is considered money all by itself. The race was on. The restraints were gone.

Congress found that they could buy votes by the simple act of creating paper currency. The paper currency has undergone lots of evolution since then. With the birth of the computer, they don't even have to print anything. Only about five percent of the so-called Money Supply is actually minted, printed or coined. The rest of it is on the computers of banks.

Politicians found they could buy votes by simply creating more receipts through modern means. That's where we are now.

Congress is engaging in an orgy of vote-buying, driven by socialist dogma. That's what is at stake with this crazy attempt to create $700 billion to buy up defunct mortgages.

The capper on this deal was when mortgage lenders discovered they could package thousands of mortgages into bonds and sell them for investment then re-loan the money again, and again.

The fed cooperated by keeping interest rates at one percent per year to prevent an economic collapse. American suckers bought in and got easy mortgages to buy property in areas like Las Vegas, Arizona, Florida, and Southern California, and real-estate prices soared.

Eventually, of course, this could not be sustained, and the real-estate bubble has burst.

I saw a picture of the Democratic leaders of Congress: Harry Reid, Barney Frank, and Nancy Pelosi (aided by George Bush) doing their best to look like they were heroes on a horse in the public square, bragging about how they would solve Wall Street's problem by getting banks to buy up these rotten assets, establishing a market value for them.

In a rare display of common sense, Congress has chosen not to fall for the scam. As this is written, we (and they) don't know what the heck they are going to do. But we do know the Federal Reserve has issued billions of dollars to favored firms so that some chosen bankers can buy up other institutions, buying the rotten assets so the old world can continue.

They are trying to maintain a sick society by eliminating the voter's consequences for stupidity. This is why I have placed the biggest blame on the suckers who fell for the deal and bought homes they really could not afford.

Congress wants to buy up these securitized mortgages, change the terms, and ensure that people don't get thrown out of their homes. If they succeed, it might work for a while, but America has so far said no.

What will be the result? I don't know, but no solution is being proposed that doesn't involve the creation of money and an inflationary spiral.

When you combine this with the fact that other socially acceptable entitlement programs, like Social Security, Medicare and Medicaid, are unsustainable and can only be maintained by creating money, we have a lead-pipe cinch guarantee of more inflation in the future.

It has already started. Look at the recent prices in the super market. Look at the recent price of oil and gas.

Prices will not go straight up. Take oil for example, the price has recently plummeted. Of course, it jumped again once the so-called bail-out failed. But it is possible that oil may fall to as low as $60 per barrel temporarily, but that doesn't matter. If inflationary prices retreat temporarily from time to time, you can buy now at low prices to later consume at higher prices.

Gold and silver will do extremely well. Silver has several things going for it:

1) It has always been a real monetary metal, which naturally responds to inflationary pressures.

2) It is a critical industrial metal, with over 2,000 industrial uses.

3) There is no stockpile of silver sitting around to be dumped. It's all gone; used up by industry. So it is immensely price sensitive.

There are those like Ted Butler who have alleged that the price of silver has been manipulated and kept artificially low, and they are probably right. I don't completely understand Ted's reasoning, but I won't argue with him. The point is that it is artificially cheap and should be bought now.

The Stock Market

Stay away from the stock market generally. Avoid blue chips and most mutual funds, as they are an endangered species. This week's decline of 777 points in the Dow is a harbinger of the future. The stock market is not a single entity. It has many independent pieces, and some aspects of the stock market should prosper.

1) Uranium mining stocks. In the quest for cheaper energy, we will build nuclear plants. If they proceed with the nuclear plants that are on the drawing board or under construction today, there is only half enough uranium above ground to provide their needs. So buy the mining stocks, I added one more to the list this week. The Investment Menu should boom for years.

2) Oil service companies such as Schlumberger and Halliburton. We will drill for oil off shore, and the companies that build and service the oil rigs will do very well indeed. In the long run, they are an excellent bet.

We will be exploiting oil sands in Idaho, Utah, Wyoming and Colorado. I haven't identified yet the best stock buys in that area, but stay tuned. By the next issue, I should have a list for you.

There is a lot of controversy over oil sands. They could be disasters environmentally, so I'm holding off a bit, but we will drill for oil off shore.

In the meantime, we will watch with interest what dumb thing Congress finally decides to do. It will be done by throwing money at the problem and creating runaway inflation.

I repeat again what Will Rogers said, "Invest in inflation; it's the only thing that's going up."

Howard Ruff
email: corporate@rufftimes.com
website: www.rufftimes.com

Howard J. Ruff, the legendary author and financial advisor, has re-edited and re-issued his 1978 mega bestseller, How to Prosper During the Coming Bad Years, still the biggest-selling financial book in history, with 2.6 million copies in print. He is founder and editor of The Ruff Times financial newsletter. This article is from The Ruff Times. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio. (You can learn about it here). The Ruff Times has served more than 600,000 subscribers - more than any financial-advisory newsletter in the world. His updated and revised book, How to Prosper During the Coming Bad Years in the 21st Century, is in book stores or at www.rufftimes.com. You can get it free when you subscribe to The Ruff Times, or if you buy the book at your favorite bookstore, you can deduct $10 from the subscription price.

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