Henry Blodgett, Business Insider, 6/2/10 

“If you've never heard of a "Cram Down", you are about to get a first hand lesson on the receiving end of the biggest one in history…

These situations are always governed by the Golden Rule, those with the gold make the rules -- the party putting in the new money names the terms…

Today, in the era of unlimited money printing, there is no gold repayment. We replaced gold repayment with money printing by the privately owned central banks. When a central bank issues money in excess, existing holders of that currency are "crammed down" by the new money coming into the system. Since 1913 when the Federal Reserve was created, over 95% of the value of a dollar has been crammed out of the pockets of savers and into the hands of bankers, politicians and the recipients of the new money.  This slow motion Cram Down is called Inflation and it is the mortal enemy of the saver.  As you are about to see, the motion is about to get a lot faster because there is a new, efficient tool being used to strip value away from savers known as the Bailout.

A number of commentators have estimated we are already into the bailouts to the tune of at least $14 trillion. This is in addition to last week's report in the UK Telegraph (covered in my column HERE) that a well connected banker estimated the next round of "Quantitative Easing" (or QE2 as they now call this round of bailouts) could reach $30 trillion, or about 50% of the world's GDP. Given that this money is, like all fiat currency, issued in the form of debt, how would that extra $30 trillion ever be paid back? When money is issued as debt, there is no end to the need for money to pay the interest on the existing debt (e.g.: if $100 is issued at 5% interest, another $5 of money must be created just to pay the interest, but there is interest on the interest, ad infinitum). As we explored last week, we're now beyond the point of ever paying back the CURRENT debt with anything resembling the value it had upon issuance.

When debtors go deadbeat, they can't even pay the interest, let alone the principal and the U.S. Government might be approaching that point soon, according to B4IN contributor Karl Denninger:

Here's the math.

 This fiscal year (2010) we have approximately $13 trillion outstanding in debt (including "intergovernmental borrowing", that is, Social Security and Medicare.)

Our total debt service is projected (it's not quite over!) to be 4.63% of the budget, or about $165 billion.  That's approximately 7% of revenues, incidentally.

 That's an effective interest rate of about 1.27%.

 Yes, 1.27%.

 Now what happens if we take no more debt at all but rates normalize to 5%?

That would be $672 billion, or about $500 billion more than it is today. Incidentally, that's fifty-two percent of all (personal and corporate) income taxes, up from today's thirteen percent.

Of course the CBO says we will run about $1 trillion in deficits for the next ten years.  Let's presume it's five years, and we'll give it the $1 trillion, although I think that's low - maybe by 25% or more.

So let's add $5 trillion to the total, for $18.5 trillion, and apply a 5% rate to it.

That comes to $925 billion, or dangerously close to all personal income taxes, which are $1.061 trillion.

Got it folks?  All personal income taxes, or if you prefer all FICA and Medicare taxes, will go only to pay interest.

Once you can't pay the interest on a debt, much less any principal, it's game over.  The markets will eventually force the hands of the politicians and raise the interest rates, it's only a matter of time.  But the Federal Reserve will use the money printing press for all it's worth…

Don't underestimate class warfare, either.  Savers are RICH, remember?  With the present administration, it's guaranteed that savers will not get a bailout, but many other politically connected groups will:

States - Meredith Whitney released a new 600 page report detailing this next $ trillion bailout.  States, like everyone else need to remember that there is a price to everything and no free rides, but they really, really, really need the money.

Pensions - States alone could have a $3 trillion shortfall.  Union and corporate pensions have hundreds of billions more they are trying to stick with the taxpayer via the Pension Benefit Guarantee Corp.

FDIC - According to problembanklist.com, the FDIC insures deposits at 7,932 banks with total assets of $13.2 trillion but now the FDIC has a negative reserve ratio, meaning they will also need a bailout in the future, as more banks continue to fail.  There are over 800 banks on the "problem bank list"

Financial Regulatory Reform Bill - Creates permanent bailouts of even more banks - bondholders and banks could need $10-14 trillion.

Nuclear power - Now "dead" with the climate bill in the U.S. congress, you can expect this group to arrive on Capitol Hill with their hands out in the future.  Everyone wants to get in on the bailout action.  All the Green energy people will be right behind them.

Foreign banks - The IMF and large foreign banks will no doubt be the beneficiaries of largesse.  They received billions from the AIG bailout.

Federal Budget Deficits - $2 trillion per year and counting.

Social Security and Medicare - With $107 trillion in unfunded future liabilities, Social Security now takes in less in taxes than it spends.

The biggies....the dark pool of unregulated derivatives...

Naked Credit Default Swaps - credit default swaps are insurance on bonds against the possibility of default.  If AIG could get a bailout, this $36 trillion market (at the end of 2009) would make the AIG bailout look like pocket change.

At some point, there will be a failure and these will be Too Big to Bailout (TBTB)…

However, the rules of engagement have changed in today's amoral climate.  In today's universe of fiat currency, the central bankers just "print" more money, lend it out to the banks in need and avert the liquidity crisis, at least temporarily.  That was the original purpose of the Federal Reserve and some argue it's worked pretty well up till now (others beg to differ).   Ultimately, this lands at the feet of We The People in the form of a currency crisis.  So much money will need to be issued to maintain the system that the currency diminishes in value very quickly.  Those who saved and played by the rules are the "current shareholders" who will become destitute.  The new money will own the whole joint.  This is in fact a Cram Down.

Because a Cram Down changes the ownership structure of a company, this one will change the ownership of the U.S.  Never underestimate the politicians and bankers taking the easy way out.  Printing money and kicking a bigger can down the road is always easier than facing the reality of your debts.

When everyone figures out what's going on -- readers of B4IN are some of the first to understand -- people will dump U.S. dollars around the world in a matter of days and weeks.   Like any Cram Down, there are winners and losers:

Winners - The Preferred Nobility:

Banks, Government transfer payment recipients, Government vendors and employees, Big Politically Connected Business, Friendly foreign governments, Unions

Losers - Commoners:

People who pay taxes (the little people), Small Business, Investors, Savers, People on a fixed income unable to hedge the currency.” (emphasis added)

“Ultimate Bailout: The $100 Trillion Cram Down”
Chris Kitze, Before It’s News, 9/29/10 

The ‘Ultimate Bailout” (AKA The $100 Trillion Cram Down) of which Chris Kitze speaks has already begun. As Graham Summers (Seeking Alpha, 9/28/10) pointed out recently “The Only Reason Stocks have Rallied this Month” (i.e. September, 2010) is that The Fed is juicing the Equities Markets with Massive Weekly POMO additions ($20 Billion in one week in September alone! e.g.).

Indeed, The Ultimate Bailout began with the Bailout of The Mega-Banks (but not Regional and local Banks) in the Fall, 2008. As Henry Blodgett correctly notes, we were told that if we saved the Mega-Banks, they would keep lending to the “Real Economy”. Well, American Taxpayers saved them, but the Mega-Banks lending to the Real Economy is still a mere trickle.

Instead, this Bailout Money has been used primarily to bolster Mega-Banks Balance Sheets, for speculating and for lavish executives pay packages. And several have recently reported record profits.

In fact, the recent Quantitative Easing Bailout (via the aforementioned Massive POMO additions) helps those Designated by Kitze as “Winners”, and, because it results in the dramatic weakening of the Dollar we have seen in the last Month, it results in a de facto confiscation of the Wealth of Savers, Investors, Taxpayers, and Small Business Persons – “Commoners” as Kitze calls us.

Moreover, it is clear that those who already got and continue to receive Bailout Funds will continue to get more, as will other politically powerful “Winners”, unless we “Commoners” do something about it.

In sum, if you are a member of any group in the “Commoners” above, and notice that Investors are, you, (we!) are being set up to suffer from the all-time Largest Cram-Down Shaft Ever – the Hundred Trillion Dollar Bailout.

So what are Investors Political Action Alternatives?

This question needs to be addressed in three parts.

1.      More, perhaps, than ever before Investors need to consider the Financial-Political Contexts of their Investments. In terms of the Investments, and Trades to make in light of Financial-Political Considerations, we address those in general in our recent Articles and, specifically, in our most recent Letters and Alerts, available in the ‘Articles by Deepcaster’ Cache, ‘Latest Letter’ Cache and ‘Alerts Cache’ at www.deepcaster.com, BUT see #3 below.

2.      In terms of the Political System which has facilitated and continues to facilitate this Impending Cram-Down Shaft, what Political Action can be taken to protect us Commoners?

Because Elections in the U.S. are a mere two weeks away, we use the U.S. as an example, although The Principle we enunciate below, is applicable in a wide variety of national and Regional (think Eurozone e.g.) contexts.

In his excellent recently released Book ‘Bought and Paid For”, Charlie Gasparino makes the well-documented Point that most, but not all, thankfully, U.S. Politicians regardless of Party Affiliation have “Sold Out” to the Big Interests, i.e. to the “Winners” per Chris Kitze’s designation.

This Sell-Out is supported by the record – e.g. the U.S. Congress (with support from representatives in both major parties) greatly expanding the power of the Private For-Profit U.S. Federal Reserve in the recent FinReg Bill, and by a load of evidence presented by Deepcaster in recent articles, and by others.

So, can there be any other Guiding Principle for Investors, Taxpayers, Small Business and Savers this Election Season than:

Absent Very Special Circumstances, Vote Out all Incumbents, Regardless of Party! It matters little that the Challengers may be a less-than-ideal, or even lousy, replacements.

The Key Goal here is Turnover. Politicians who have collectively betrayed the Trust of the Citizens whom they ostensibly represent, deserve to be removed.

The Resulting Message will be heard loud and clear:

Those who betray the interests of citizens they ostensibly represent (i.e. us Taxpayers, Investors, Small Business People, and Savers) will be removed from office.

What better message could be sent?

This leads us to our third and Final Political-Financial Guideline.

3.      To the extent possible, obtain and preserve Assets Outside of the Banking/Financial System, or at least somewhat insulated from being Victimized by it. (See our “Opportunities to Escape Paper Wealth into 2011” (10/13/10) in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com.)

Specifically, Gold and Silver, and Agricultural land/Enterprises and commodities in great and relatively inelastic demand are good insulations for the long term.

But the Form in which these Assets are held, and the timing of their Acquisition, is crucial.

For example, Gold and Silver, prices are subject to repeated Price Suppression Attempts by a (recently weakened, but still potent) Fed-led Cartel* of Central Bankers.

*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2009, Special Alert containing a summary overview of Intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2010 Letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.” Attention to The Interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably. 

Even so, Gold and Silver provide the Best Insulation against the ongoing $100 Trillion Cram-Down/Bailout, while providing considerable profit potential as well. 

Best regards,

Deepcaster

October 14, 2010

-- Posted Friday, 15 October 2010 | Digg This Article