Bill Bonner, Daily Reckoning

One of the great innovations of the lending industry during this period was that it broke the link between the person who made the loan and the person who would suffer the loss if the loan went bad. That was what made the housing bubble possible. While the marginal lumpen took out I.O. low-doc ARMs, the hedge fund, pension fund and insurance fund geniuses bought MBSs – mortgage-backed securities. The securities were backed by the mortgages, which were in turn backed by the imaginary incomes of the borrowers and inflated house prices.

The credit agencies rightly judged the quality of the mortgages as less than perfect BBB and then with the miraculous powers of modern finance these same mortgages were put into MBSs and turned into triple-A credits! This transformation of bad credits into good ones, in front of the very eyes of Ph.D. mathematicians and hedge fund quants, must be rated along with Christ's performance at the marriage of Cana, where the Nazarene turned ordinary tap water into wine. Scientists often suggest that the Gospels lie. But as to the veracity of modern finance, they are mute.

Chris Ciovacco, Ciovacco Capital Management
In the financial press, the appeal of gold is often portrayed as a way to protect yourself from "end-of-the-world" events. The press tells us that people buy gold because they are fearful. There is no question that there is some truth to that concept. However, I would argue that the real appeal of gold is that it enables you to protect yourself from constant money creation which erodes the purchasing power of paper currencies. The U.S. dollar, as measured vs. a basket of foreign currencies via the U.S. Dollar Index, has lost roughly 30% of its purchasing power since July of 2001. The endless creation of credit and the dollar's decline has not gone unnoticed by many investors. These investors have flocked to gold.

Peter Cooper, AMEInfo.com
So far the US has organized an orderly devaluation of the US dollar which has fallen by almost a third in value this century. However, in all market mechanisms there comes a tipping point where a trend becomes a rout - and it has to be said that expecting global creditors to continue to accept falling real debts is not sustainable. This is why an authority as eminent as Paul Volcker forecasts a dollar crisis within the next two-and-a-half years, and why he is unwilling to extend that timeframe according to recent statements. But surely that also makes investment in gold and silver a one-way bet for this period?

Richard Daughty, the Mogambo Guru
If we speak of gold, how can we not speak of silver? And so, if you want another reason to buy silver, since I seem to always be screaming that you should buy silver and it hasn't done any good, then read the essay "Silver in clothing keeps odors away" by Michael Rubinkam at the Associated Press, and maybe you will get with the program.

For one thing, if you have ever listened to one of your kids say "Ewww! Don't put your stinky feet near me/in the same room as me/ in the same state as me/ I hate you", then you, too, are probably self-conscious about the odor of your feet. So rejoice in that silver-impregnated socks prevent odors! If nothing else, this should send the sales of these socks soaring, sending the price of silver soaring, making me (as a holder of silver) rich, rich, rich, allowing me to run for office, get elected and use the power of government to crush my enemies! So how close are we to that sweet dream of self-righteous vengeance, as measured by the "silver per sock ratio"?

Well, the amount of silver in one pair of these socks, says the article, is 1/100 of an ounce. So a stinking million pairs of socks is 10,000 ounces of additional consumption of silver per year. A hundred million pairs of socks per year, which I think is globally conservative, is another million ounces of silver consumed per year! And this does not include shirts, shoes, or underwear with embedded-silver material! And you can count on the military to increase consumption of silver-impregnated materials, as silver in soldier's clothing not only eliminates the smells, fungi, bacteria, viruses and icky crap that plague soldiers, but it is actually "a first line of defense against shrapnel wounds, because any of the silver fabric that becomes embedded in the wound 'actually starts treating the wound,' according to the company founder."

The clothing itself not only helps heal the wound, but will also maintain a relatively sterile area around the wound by virtue of the remaining protective clothing? Man, oh man! And you can be sure that it is not just the American army that is looking at this stuff and saying, echoing the sentiments of The Mogambo, "Man, oh man!"

Bill Fleckenstein, Fleckenstein Capital
Part of me thinks that the current mini-mania in equities is a response to Fed-induced liquidity. And yet, when I discuss with my good friend Jim Grant what the big central banks of the world are doing -- Japan's, the United States' and Europe's -- he suggests that they really aren't spewing out liquidity as aggressively as people think. Of course, if they were, one might expect commodities to be on more of a run than they have been. To me, they seem to be suggesting that the world economy is slowing down at the margin. Therefore, I've concluded that what we may have is the illusion of a liquidity fest. The stock market is acting as though there's an enormous fire hose of liquidity gushing forth -- when, what might actually be the case, is that a wanton derivatives/credit/lending mania is in full force.

Markets in motion may stay in motion. If, however, the source of the propulsion is mispriced and badly structured credit, things can come to a sudden stop. But if that were to occur, the Fed at some point would ride to the rescue with plenty of liquidity. That is the point of my pet saying that in a social democracy with a fiat currency, all roads lead to inflation. No matter how you examine the milieu, it seems that all roads lead back to gold. When the world's central banks are forced into a real print-athon, gold will truly explode. And the more they drive up the financial markets via their efforts -- that is, if they can drive up the financial markets -- the faster gold will go up.

Clive Maund, CliveMaund.com
The dollar plunged with startling ferocity late last week, driven by heavy selling. This was very bearish action that signals panic, and the probable onset of a severe downtrend. A break below the crucial support at 80 on the dollar index is expected to mark the transition from a clandestine unloading of dollar assets to an all-out stampede to "get what you can for them" before it's too late.

The conditions leading to an inevitable dollar panic sell-off did not come about overnight. They are the result of years of abuse, principally by the Federal Reserve of the US, which has created a veritable blizzard of dollars, and the universal acceptance of this "funny money" has, up until now, allowed the United States to freeload economically on the rest of the world, living way beyond its means. The exponential growth in dollars has been and is created electronically at the touch of a button, so that paying for anything is never a problem, whatever you want you simply print the extra money to pay for. Because foreigners have so far played along with this game, they are now widely, and to some extent understandably, regarded as stupid. However, it is a dangerous mistake to underestimate the mental capacities of other peoples. The Chinese, in particular, have an ancient and deep culture, and when it comes to strategic considerations, can outthink - and outflank virtually anyone. So what's going on? - why have they accepted a mountain of paper and IOU's over many years in exchange for real hard work and a vast quantity of real tangible products? The Chinese, and others, have done this to carry them over a bringing period during which they have built up their economies and infrastructure. Their goal - which they are fast moving towards - is to arrive at the point where there is sufficient domestic and regional demand that they no longer need to rely on orders from countries like the United States. At this point - which we may arrive at sooner rather than later - things will become very dangerous for the US dollar, and the situation is actually far worse than many now believe, because the Chinese and others are preparing to WRITE OFF THEIR DOLLAR ASSETS AS A BAD LOSS - they will try to get what they can for them, of course, but otherwise will be ready to fall back on domestic and regional demand and tough it out, thus severing the umbilical with the United States, which will be left stranded, with no takers for its funny money, a gutted manufacturing base, astronomic debts and fiscal chaos, and a huge military it can no longer afford to service.

Nigel Maund
For the majority of home owners, they are now "lobster potted" for the rest of their lives in the 21st Century's version of the Victorian treadmill. Welcome to modern debt controlled serfdom, where if you lose your job, either through retrenchment or illness, you lose your home. It has become a veritable "Sword of Damocles", or a stick with which to beat recalcitrant labor into a bloody pulp, should they ever prove restless or disobedient. The ruthless and faceless plutocrats who benefit vastly from this incredible and dreadful scheme must be laughing on their return to a status of demagogic power which is the modern equivalent of the Roman or the Medieval European Aristocracy at its exploitative worst.

The mortgage weapon forms an integral part of the armory of the so called New World Order (NWO) as it seeks to accumulate wealth and power to control people by stealth. Other tools include the explosion of credit card debt where people have been encouraged to spend to the limit of their cards. If they can manage this limit, then the credit envelope is just expanded to encourage them to spend to the absolute limit of their debt servicing capacity incurring "loan sharking" interest rates in doing so.

Michael Nystrom, Bull Not Bull
The shorting opportunity of a lifetime is near.

Jim Puplava, Financial Sense
Only after hyperinflation will we get deflation. But we’re nowhere close to that now, that’s a few years out. What we get next in my opinion for a 3 to 6 month period is disinflation as manufacturing inventories are brought down, lowering prices, so headline inflation comes down. You’ve got low energy prices, falling from let’s say 78 down to the $59 a barrel. That’s going to work its way through the headline numbers, and what you’ll have then is that perceptions on Wall Street will start shifting focus away from inflation, to slowing economic growth and deflation which is really going to be nothing more than disinflation.

Stephen Roach, Morgan Stanley
This limited [housing] decline should hardly be surprising -- construction activity almost never turns on a dime. In most cases -- Thailand being a notable exception in 1997 -- builders tend to complete the pipeline of previously initiated projects even as the outlook sours for new construction. That tends to support employment in the homebuilding sector long after the demand underpinnings of the cycle have turned. The latest trends in the US labor market bear that out. Since peaking in February 2006, employment in the homebuilding sector -- namely, residential building and residential special trade contractors, combined -- has contracted by a mere 2.8%; this reverses only 12% of the outsize run-up in hiring that occurred in these industries since early 2001. In other words, the homebuilding sector is still basically staffed for the boom. As existing projects are completed, I suspect there will be a sharp fall-off of headcount in this once frothy industry -- with important implications for the state of the overall labor market, income generation, and personal consumption.

Richard Russell, Dow Theory Letters
I just placed a one dollar bill on my desk, and next to it I placed a hundred dollar bill. What's the difference between the two bills?

Both bills are composed of the same thing -- linen and cotton. So what's the difference. The difference is the writing on the two bills. Both say they are legal tender "for the payment of all debt, public and private." The only real difference between the two items is that the Treasury states that one will pay off a dollar of debt while the other will pay off a hundred dollars of debt.

Thus, this nation's money has been degraded to the point where the writing on a piece of paper tells you what the thing is worth. This is money by government edict or by fiat. Intrinsically, neither bill is worth a damn thing. And ultimately, they'll both end up as bookmarks or museum pieces.

Steve Saville, Speculative Investor
If our short-term expectations for gold and commodity prices prove to be in the right ballpark then bond futures will most likely tank over the coming few months.

Peter Schiff, EuroPacific Capital
Americans are not producing wealth, but merely consuming the wealth produced by others. When Americans go shopping this Christmas season (primarily spending borrowed money on imported goods), classic economic theory holds that the principal benefit goes not to the U.S. but to those who supply the goods. In exchange for their production, they receive interest and dividend paying assets (dollars, bonds, stocks, etc), which should provide future wealth. Americans in return accumulate depreciating consumer goods and piles of external liabilities that must be serviced and repaid. So Americans squander the wealth of their parents while their vendors amass it for their children.

However, the classic economic theory may not actually be in play as the liabilities our "trading" partners are now accumulating will likely be repaid in currency with severely diminished purchasing power. Trade normally involves the exchange of real stuff for real stuff. As illustrated by our yawning trade deficits, we now have a system where real stuff is simply exchanged for currency, which in effect represent IOU's for future stuff. However, rather than being a source for future spending, the currency must be horded indefinitely. As the Chinese and Japanese clearly understand, any attempt to use their vast amount of dollar reserves would cause their theoretical value to collapse. Therefore they continue to accumulate more rather than to admit the extent of their prior folly.

The sad reality is that it is foreign producers that will eventually have the last laugh. Sure we will screw them by repudiating our debts through inflation, but in the end they will enjoy all of the abundance of their productive capacity and we will suffer the wide-spread shortages that result from our lack of it. Their standards of living will soar just as ours plunge.

Mike Shedlock, Mish’s Global Economic Analysis
Rest assured a massive "Credit Event" is coming. When it happens, no matter how bad it seems at the time, try to remember that it will be a good thing. Unless and until there is a total and complete repudiation of these excesses, the ultimate consequences will just keep rising. The sooner we have a debt purge the faster the recovery will be. Japan fought deflation for 18 years. Is the U.S. doomed to follow suit?

This is NOT the golden age of financing, unless of course you have been investing in gold on account of it.

Martin D. Weiss, Safe Money Report
I’m in London, in transit for our return flight to Florida, and I have a brief, but painful, message for you this morning: 

We’re going to lose the war in Iraq.

This is hard to swallow, I know. But it seems blatantly obvious to everyone except those who have the most to lose.

Every single newspaper on this side of the Atlantic is headlining the deepening chaos in Iraq. Even the sentencing of Saddam on Saturday, heralded in the U.S. as a victory, is likely to deepen the sectarian strife and inflame the anti-American insurgency, according to the Wall Street Journal’s Europe edition this morning.

In Washington, most politicians now seem vividly aware of the crisis — not to mention the sweeping impact it’s likely to have at the polls tomorrow. But, strangely, the movers and shakers on Wall Street still seem oblivious to the impact the war could have on investors. The Iraq war is the elephant in the living room. Investors look at it but don’t see it. They feel its presence but don’t want to touch it.

Among the various scenarios that U.S. military strategists are now painting, here’s the one I believe to be the mostly likely:

Phase 1. In the wake of spreading violence, the moderate, pro-American government factions fall from power in Baghdad. In their place, Moktadr al Sadr, leader of the radical anti-American factions in the current government, comes to power.

He compels the U.S. army to pack up and leave.

He transforms all, or most, of Iraq into a fundamentalist Shiite Republic similar to Iran’s.

He forges a holy Shiite alliance with Iran’s Mahmoud Ahmadinejad, and they aim for religious, political, military and economic supremacy over the entire region.

Phase 2. Between them, Iraq and Iran control more petroleum reserves than Saudi Arabia. Their combined armies, including the U.S.-trained and U.S.-equipped forces in Iraq, also challenge Saudi’s military might. Together, they aggressively pursue an agenda to depose traditional Sunni leaders in nearly a dozen Muslim nations.

Phase 3. There thus emerges a new axis of power — extremely radical, extremely destabilizing and powerfully resistant to foreign pressure. This axis of power, in turn, wields tremendous leverage over the global oil market and the financial destiny of the West as a whole.

How likely is this scenario? Highly likely! And those that agree with me are no longer such a small minority.

© 2006 John Rubino
DollarCollapse.com  |  Financial Sense Editorial Archive

John Rubino is the author of The Coming Collapse of the Dollar (co-written with James Turk), How to Profit From the Coming Real Estate Bust (Rodale, 2003), and Main Street, Not Wall Street (William Morrow, 1998). A former Wall Street financial analyst and columnist with theStreet.com, he currently writes for Fidelity Magazine and CFA Magazine He lives in Moscow, Idaho. Contact by Email.