U.S. Economy Headed for Disaster?

© 1999 Discerning the Times Digest and NewsBytes
Tom McDonnell, Economist
In vetoing tax reform legislation and issuing threats of veto over various Congressional budget cuts, President Clinton has repeatedly stated that the U.S. economy is headed in the right direction and should not be changed in midstream. However, given Clinton’s proven track record for dishonesty and lack of integrity, this assurance is highly suspect.

"...central banks could call in their gold reserves causing a possible collapse in the U.S. banking system."

All economic indicators point to an America that is now living in a false, credit driven economy. On the consumer side, household debt as a proportion of income has moved from 67 percent to 82 percent. Mortgage debt as a percent of income has moved from 38 percent to 62 percent. Personal savings has fallen from six percent of income to negative 1.4 percent, and one-third of all savers have money borrowed against their 401(k) retirement plan.

The corporate side of the picture paints an even darker picture. Since 1997, corporations have been maintaining their returns-on-equity by leveraging their balance sheets. Corporations are retiring assets early and taking debt out on those assets in order to show favorable return-on-equity, which then draws investors into the stock market. Over the past year, corporations have retired $305 billion of equity and issued $418 billion in debt on those assets. While this slight-of-hand paper transfer shows a $723 billion profit on the balance sheet, it actually means that corporations are forgoing tomorrow’s production capacity for today’s consumption.

Despite this corporate leveraging, the stock market is showing severe signs of stress. The three most important indicators of stock market health are dividend yields, price/earning ratios and book-to-market value. Dividend yields, the best indicator of market health, have ranged from 2.5 percent to 8 percent historically and have averaged 4.5 percent. Today these yields have fallen to 1.2 percent. To put this figure in perspective, dividend yields fell to 2.9 percent in 1929 and 2.7 percent in 1987 just before the stock market melted down. Price/earning ratios and book-to-market values are also screaming warnings of danger to stock market investors.

Monetary irresponsibility under the Clinton administration has now reached epic proportions. To fuel his credit driven economy, the President has thrown off all the brakes on the Federal Reserve’s printing of money. In the last three years M1, M2 and M3 money supplies have increased more than they did during the entire period from 1986 to 1996. Normally, such an increase in money supply would result in noticeable inflation. This inflation, however, has been temporarily masked by distortions of the crude economic indicators that the government is using to track inflation, and by a flood of cheap imported product that is breaking the backbone of American industry. America’s trade deficit in the past year reached unprecedented levels.

Monetary irresponsibility does not end with the printing of money, however. Around 1994 a new central banking practice became prevalent—the leasing of federal gold reserve. Most Americans are unaware that the Federal Reserve Bank is a private corporation. Therefore, the Board of Governors appointed by Congress has no authority over the leasing of gold by the Federal Reserve. Because the U.S. dollar has not been backed by gold reserves since 1972, and since remaining gold reserves technically belong to the stockholders of the Federal Reserve Corporation, these stockholders can lease gold reserves to intermediary banks at their discretion.

While it is not known who the stockholders of the Federal Reserve are because of its proprietary nature, it is widely accepted that they include the larger banking interests controlled by the Rockefeller, Morgans and Rothchild empires. It is estimated that over 10,000 metric tons of the 14,400 metric tons of gold held within all Federal Reserve Banks worldwide has been leased out to intermediary banks. These banks have then sold the gold for cash that is in turn loaned out to investors and consumers. As collateral on the gold taken in loan, intermediary banks have procured derivatives with gold mining companies for gold to be mined at some time in the future.

It is estimated that 70 percent of the Federal Reserve’s gold supply has been leased, con- verted to cash, and in- vested in the stock mark- et. It cannot be repaid and may lead to a crash after the first of the year.

The practice of gold leasing has pumped additional trillions of dollars of credit into the economy and stock market. Since these are loans, they must be repaid. But there is a major problem. Not only do the banks not have physical possession of the gold, there is currently more gold on paper than there is actual supply of the commodity, either today or in the foreseeable future. This practice has left the U.S. banking system extremely vulnerable. Should some catastrophic event occur such as Y2K or the escalation of conflict in Korea, Taiwan or Russia, central banks could call in their gold reserves causing a possible collapse in the U.S. banking system.

That may be about to happen. Gold analyst Reginald Howe warned on December 9, 1999 that "European central banks are in a panic mode." They are "cobbling together another bailout of the Fed," claimed Howe. "The day of reckoning is rapidly drawing near for both the Euro and the bullion banks," he concluded.

Unprecedented levels of consumer debt, corporate leveraging of assets, and gold leasing by Federal Reserve Banks have left the American economy in an extremely perilous position. If allowed to continue, our overextended economy will correct itself through skyrocketing hyperinflation, severe depression or complete collapse. This administration’s economic policies have led this nation to a cliff overlooking poverty and global vulnerability if drastic measures are not taken soon. As Earnest Hemingway once stated, "Ask not for whom the bell tolls. It tolls for thee." V

Tom McDonnell is an economist and Board Member of Sovereignty International, Inc.

Editors comment: It is noteworthy that the U.S. economy could be deliberately collapsed at any time. Should that happen, tens of millions of homeowners would default on their mortgages, precipitating cascading bank failures in the resulting cash flow crunch. The ownership of the homes and property would then default eventually to the Federal Reserve Corporation. The Rothchilds, Rockefellers and Morgans would finally own most of the property of the U.S. and probably the world—making world domination a reality. mc