For continuity, the first paragraph is repeated from yesterday's post.
America's Second Biggest Bank Failure (continued)
So here is the all-important question. Can we infer from this liquidation analysis of IndyMac that the true value of sub-prime and Alt-A mortgage debt still in the banking system is something less than 50% of stated book value?
I don't have the answer to that question. If anybody does, it is the bankers themselves, and they aren't talking. They do not want to disclose how bad off they remain, even after already writing off more than $300 billion of assets globally (as reported by London's Financial Times). They no doubt must be panicked about what's yet to come.
So how big is the potential problem? My guess is that even bankers really don't know the answer to that question, but there are some estimates worth considering.
Investment guru John Paulson had his hedge-fund correctly positioned to benefit from the sub-prime meltdown, so given this record, his estimates of the problem are probably better than most. According to the Bloomberg he says that "global writedowns and losses from the credit crisis may reach US$1.3 trillion." That estimate seems reasonable in view of the IndyMac experience, given that at least $3 trillion of inferior loans probably remain on bank books at present. Keep in mind too that the amount of inferior loans will grow as economic conditions continue to weaken.
All of this does not bode well for the dollar. The federal government is readying the printing press to create even more dollars to plug the black-hole on bank balance sheets, but there is another black-hole that they need to begin worrying about.
The FDIC deposit fund only has $53 billion of assets, and around 10% or perhaps more of that is now going to be used to bail-out IndyMac. So how safe is the FDIC? How safe is the dollar, or more to the point, how safe is your wealth held in dollars? Not very.
Even putting aside the subprime financial problems yet to come and the countless dollars the federal government will be creating in the future to bail-out other IndyMacs when they hit the wall, consider how rapidly the dollar is already being debased. For example, a 1-year T-bill pays about 2.2% interest, but the CPI is rising at 4.2%. Thus, in one year you have lost 2% of your purchasing power, but probably even more because the true rate of inflation is much higher than 4.2% (John Williams of ShadowStats estimates the rate of inflation is over 10%).
In contrast to this loss of purchasing power from holding dollars, gold has risen seven years in a row at an annualized average rate of 17.4%. This year gold is already up 14.9%, and silver is doing even better. It has risen 26.7% so far this year.
Given that inflation is becoming worse by the day as crude oil and other commodities climb higher and given that the Federal Reserve is not raising dollar interest rates to fight inflation and save the dollar from a collapse, it is safe to expect more of the same from gold (appreciation) and the dollar (depreciation).
The dollar is sitting on the bottom trendline of its recent uptrend channel, threatening to fall into the abyss. Avoid the dollar. Own gold and silver instead.
James Turk, July 11, 2008
Many of these viewpoints regarding gold, silver, and the value of the dollar have been expressed many times in this blog. This is just another confirmation that the US economy is in serious trouble. If you do not take steps to protect yourself and your assets quickly, you may find that it will be too late.
As always, the choice is yours.
For lack of guidance a nation falls,
but many advisers make victory sure.
He who puts up security for another will surely suffer,
but whoever refuses to strike hands in pledge is safe. Proverbs 11:14-15 (NIV)
If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com
No comments:
Post a Comment