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Just in the past few days, the United States has moved dramatically closer to the final fork in the road that I set forth in my online video of April 7th:
Either a prolonged, agonizing depression that dooms our country to decades of stagnation, decline, and poverty … or a painful-but-shorter depression that paves the way for a wholesome, sustainable recovery.
Either a government that pursues the dogma of “too-big-to-fail” to the bitter end, rewarding wild risk-takers and punishing taxpayers … or a government that pro-actively guides the natural process of failure, rewarding those who save for the future and can reinvest in America.
I’ll tell you which way we’re headed — and how it will impact your investments — in a moment. But first, an update on what we’re doing about it:
Yesterday, we printed out your petitions appealing for the better scenario; and tomorrow, I will deliver them to Capitol Hill.
I had hoped readers would sign at least 10,000 petitions; instead, they signed 53,547. I had hoped we’d get a good number from the most populous states; instead, we got large participation from all 50. I had expected only U.S. residents would join; instead, citizens residing overseas joined from 45 different countries around the world.
The most urgent and pressing issue …
What to Do With Failed Corporate
Giants, Monoliths, and Mammoths
The great dilemma today is not just companies that have already filed for Chapter 11 like Chrysler … but also those that would be in bankruptcy today had it not been for taxpayer bailouts — Fannie Mae, Freddie Mac, Merrill Lynch, General Motors, Citigroup, AIG, and others.
The great debate is not merely what to do with big companies that have already hit the skids … but also how to deal with those that could meet a similar fate in the not-too-distant future — Ford, JPMorgan Chase, Wells Fargo, Goldman Sachs, SunTrust, Fifth Third Bank, and many more.
And the greatest challenge of all will not be strictly about the failure of giant corporations. It will also be about the next big shoe to fall — the failure of the U.S. government to fund its bailout follies without severe consequences.
Where do we stand? I see two phases in the evolution of this crisis:
Current Phase: Prolonged Agony
Right now, we have nearly all the pain of failure but little hope of resolution. And nowhere is this “worst-of-both-worlds” outcome clearer than in the Chrysler failure …
First, despite the infusion of another $4.5 billion in taxpayer money to finance Chrysler in bankruptcy, its Chapter 11 filing last week is wrecking havoc on the auto industry anyhow:
- We have a supposedly “temporary” — but TOTAL — shutdown of Chrysler production, pushing U.S. auto-parts suppliers to the edge of bankruptcy and disrupting the flow of parts to General Motors and even Ford.
- We see Chrysler auto dealers going broke in large numbers.
- And we see a new phase in the collapse of auto financing, as lenders recoil in horror.
Second, despite massive commitments of taxpayer funds to back up the warranties on millions of Chrysler and GM automobiles, consumer confidence in the ailing auto industry has plunged, helping to drive all auto sales even deeper into the gutter.
Every major auto maker, whether failing or not, has reported dramatic sales declines from year-earlier levels: Not just Chrysler, which got whacked with a massive 48 percent loss in sales … but also General Motors, down 33 percent … Toyota, down 42 percent … and even Ford, supposedly better off, suffering a 32 percent hit to sales.
Third, despite hopes and assurances that the Chrysler bankruptcy will be “quick and easy,” we can already see signs of an imminent barrage of creditor lawsuits and claims hitting the courts. Their demands: Liquidate the company! Sell off the assets! Distribute the cash based on the contractual pecking order that gives first dibs to secured creditors!
In sum, we have BOTH a huge burden to taxpayers AND widespread pain for all those who rely on the auto industry for their livelihood!
In the final reckoning, the bailouts have bought nothing more than prolonged agony.
Next Phase: Tougher Love
The true pessimists of our time are those who assume the current pattern will simply continue indefinitely.
These pessimists include former U.S. Treasury Secretary Paulson, who literally dropped to his knees last September to beg Congress for $700 billion to save the nation from a Wall Street meltdown.
They include Treasury Secretary Geithner, who’s so terrified of bank failures that he’s zealously pursuing the crazy goal of guaranteeing ALL bank credit.
They include Federal Reserve Chairman Ben Bernanke, who’s so plagued by Depression-era nightmares that he’s been willing to abandon the Fed’s history, destroy the Fed’s balance sheet, and sell the nation’s monetary soul to the devil of unbridled money printing.
Plus, among them are all the Wall Street pundits and cheerleaders chanting for more.
In contrast, I am an optimist in this sense: I am very confident their days are numbered and our nation will soon step up to the tougher task of truly putting this crisis behind us.
My optimism is not derived from wishful thinking or armchair philosophizing. It’s steeped in practical, hard-nosed realities:
Hard-nosed reality #1
The market is not dead!
Even the most elaborate of government bailouts are not immune to powerful market forces. That’s why Fannie Mae and Freddie Mac shares plunged to zero. That’s why Bank of America and Citigroup shares have lost over four-fifths of their peak value (even after the recent rallies). And that’s why Chrysler finally wound up in bankruptcy court last week, despite repeated government promises to the contrary.
“Isn’t the government fighting to intervene massively in the market?” you ask.
Yes, of course. But fighting is one thing; winning is another. The undeniable fact is that the markets are not dead. They’re still alive, kicking, and massively powerful. Despite delusional bureaucrats who may think otherwise, it’s the marketplace — and not their mad-science experiments — that’s ultimately driving the course of history.
Hard-nosed reality #2
Easy to promise, hard to deliver!
Anyone in power can step up to a podium, make speeches, and say they’re going to spend or lend trillions of dollars. But even if directives are written and laws are passed, what’s promised on paper is not the same as what actually happens in practice.
Right now, for example, the total tally of the government’s bailout operations and commitments is $14.7 trillion. But among that, only $2.5 trillion has actually been spent or lent so far. Meanwhile, in 2008 alone, U.S. households lost $12.8 trillion according to Fed data, or over FIVE times the bailouts thus far.
Hard-nosed reality #3
No free lunch!
Anyone who thinks all the funding for the bailouts is going to simply appear out of thin air must also believe in the tooth fairy. The facts:
- Congress cannot raise taxes without sinking the economy even faster.
- The Treasury can’t borrow the money without driving interest rates through the roof for everyone.
- And the Federal Reserve can’t print the money without destroying global confidence in the U.S. dollar and credit markets, gutting the economy even more.
Each of these — singly or in combination — will sabotage the same bailouts they’re seeking to finance. Each, even if pursued initially, will soon backfire.
Hard-nosed reality #4
The truth always comes out!
Last week, I told you about Six Egregious Lies perpetrated by Washington and Wall Street.
But I also showed you how the truth has already begun to pour forth — via leaked confidential memos, such as AIG’s confessions of a likely insurance industry collapse, and dire official forecasts like the IMF’s latest prediction of a massive global decline.
Hard-nosed reality #5
Not everyone is stupid!
There is a fast-growing, informed minority — skeptical investors and independent citizens — now rising in rebellion against federal bailouts.
That’s why our petition drive against senseless bailouts has been such a resounding success!
That’s why, two months ago, Thomas M. Hoenig, President of the Kansas City Federal Reserve, defied his own chairman … declaring that the “too-big-to-fail” doctrine has failed … recommending regulatory tough love for any failed bank, no matter how big. (See his paper “Too Big Has Failed.”)
That’s why, one week ago, FDIC Chairman Sheila Bair demonstrated equal defiance against her fellow regulators, stating, point blank:
“The notion of ‘too big to fail’ … is a 25-year-old idea that ought to be tossed into the dustbin …
“[It has] eroded market discipline for those who invest and lend to very large institutions. And this intervention, in turn, has given rise to public cynicism about the system and anger directed at the government and financial market participants. …
“Everybody should have the freedom to fail in a market economy. Without that freedom, capitalism doesn’t work. … Ultimately, this would benefit those better managed institutions and make the financial system and the economy stronger and more resilient.”
Finding it hard to believe that one of our nation’s top regulators is openly attacking the shaky thesis underlying most of the government’s bailout operations? Then read her speech for yourself.
This doesn’t mean we agree with everything these voices stand for. But it does go to show how the days of unlimited bailouts are numbered … and the epic fork in the road is now rapidly approaching.
The Consequences for Investors
This is bad news for investors who are again taking risks — and good news for all Americans willing to make the sacrifices needed to get this crisis over with as soon as possible.
It means that:
- The supposedly “too-big-to-fail” banks like Citigroup or corporations like General Motors WILL ultimately be allowed to fail after all; their shareholders, wiped out; their creditors, suffering massive losses.
- In the stock market, the seven-week rally we’ve seen will end; the financial stocks will give up all their gains and the broad averages will plunge to new lows.
- Credit markets will freeze up once more, the government’s stimulus package will be overwhelmed, and any pause in the economic decline will be over.
But it also means that any temporary revival of inflation will soon die … the dollar will ultimately remain viable … and we can still look forward to a real recovery in the future.
That’s why I’m optimistic and why I’m delivering over 53,500 petitions to Washington tomorrow.
In the meantime, here’s what I suggest you do:
First, review my one-hour video of April 7. (To download it now, click here.)
Second, get your savings to safety. Just follow the instructions in my free report on banking survival.
Third, if you haven’t done so already, learn how to convert this great crisis into an equally great profit opportunity for yourself and your family with my new book, The Ultimate Depression Survival Guide, now #2 on both Wall Street Journal and New York Times bestseller lists.
I don’t make any money from the sales of the book, because I am donating all of my royalties to a national charity, the Campaign to End Child Homelessness. (Click here for our press release.) But I am confident it will help YOU make money both during and after this crisis.
Good luck and God bless!
Martin
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