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Warning: Nasty Surprises Coming Next Week
by Martin D. Weiss, Ph.D.
09-21-08
America's $47-trillion bubble of debt has burst.
America's $180-trillion balloon of derivatives has popped.
And all the president's men cannot put them back together
again.
Last year, they tried three different mortgage work-out plans.
This year, they tried a massive economic stimulus package. They resorted to
a myriad of unprecedented lending facilities. They even bailed out Bear
Stearns, Fannie Mae, Freddie Mac and AIG. Each attempt was more radical
than the previous. And each attempt failed miserably.
Now, appearing before the American people at the White House
Rose Garden, they've declared that they're going to try again, this
time with an even bigger, more ambitious plan: A structure to buy up the
bad debts of sinking banks ... a guarantee for money market funds ... a
prohibition on certain short selling activities.
And with all this, they say, they're finally going to 'restore
confidence' and 'end the debt crisis.'
But there are a few, not-so-small dangers they're not talking
about plus a few nasty surprises, shocks and wake-up calls coming as early
as next week:
The
fear factor: Their actions are so much more extreme than
anyone expected ... they're inadvertently sending the message to smart
investors and speculators around the world that the crisis must also be far more
extreme than anyone expected. Rather than reducing uncertainty, the
president's men are creating more fear.
The
selling stampede: These investors are more anxious than
ever to sell and get the heck away from risk. They're waiting for the
knee-jerk market rally to end. And they're getting ready to sell with both
hands.
Leading
lenders to water: Millions of Americans continue to default
on their mortgages. Hundreds of millions of homes continue to fall in
value. So the risk of lending today to consumers is astronomical.
With this backdrop, Mr. Bernanke and Mr. Paulson can pump all
the money they want into sick and dying lending institutions, but there's
nothing they can do to get the lenders to drink — to lend that money
to high-risk borrowers.
No
free lunch: Where do the Treasury, the Fed and Congress get
the money? Contrary to popular myth, they cannot just 'print' it out of
thin air. They have to either borrow
the funds from investors or raise
it from taxpayers.
$1-trillion
tab: Just for the rescues and bailouts announced to date, the most conservative estimate
of the bill is $1 trillion. The federal budget deficit is
already projected to be well over $400 billion. These new measures could
easily double and triple that deficit.
What's Next?
On Friday, in a special
edition of Money and Markets, I answered your urgent questions on
Washington's latest moves. Now, let me ask you a couple of questions:
Q: What happens when the government tries to borrow a massive
sum like $1 trillion? You know the answer: They automatically drive up
interest rates ... crowd out other borrowers like corporations, consumers
or local governments ... and make the entire debt crisis far worse.
Q: What happens when the government tries to raise the money with
higher taxes? You know that answer too: Tax hikes can only crush the
already-mangled consumer ... and make the recession far worse.
And This Is Supposed to Be Their Master
Plan to Save
America from More Misery?
Not only won't it work ... but to the degree that it does have some
impact, that impact can only backfire.
Already, on Friday, the interest rate that the U.S. Treasury
must pay to borrow 10-year money surged by 33.2 basis points — one of
the greatest single-day rises in history and an early omen of far sharper
rate rises in the future.
Also on Friday, gold resumed its surge — a warning to
all governments that seek to defy the power of free markets.
These dramatic moves in interest rates and gold are telling
you that if there ever was a time to position yourself for protection and
profit from the next phase of the debt crisis, this is it.
Our recommendation is unchanged: As we've told you from the
outset, every time the
government attempts to fight this debt crisis spurs a temporary rally, you
have a golden opportunity to sell any vulnerable stocks you may still have.
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