And for as long as holding cash keeps destroying wealth, investors everywhere will spurn money in favor of anything that offers a capital gain. Many short-term fund traders will also keep buying gold futures, thinking it's part of some "Reflation Rally". But a handful of investors will buy physical bullion instead, fearing the day when money's bear market shows up in non-monetary assets. Gold's "safe haven" status will then come into its own.

Bill Bonner, Daily Reckoning
We wonder who owns the $23 billion of New Century Financial debt...and who owns the rest of the debt in the subprime area? We wonder too, who owned the $2.5 trillion worth of equity value that disappeared last week? Surely, there’s some more ‘big impact’ lurking out there...still waiting to hit someone.

Richard Daughty, the Mogambo Guru
So why hasn't gold risen? If you are the kind of person who wisely gets clues from the soundtrack, then you have noticed that the background is filled with the sound of cackling and muted screams of pain and horror. Thus you are prepared when the honeyed voiceover says "Evil people are doing evil things with our economy and money. And manipulating the price of gold to keep it from rising alarmingly, which would provide stark testimony of their staggering incompetence, is just a relatively benign part of their nefarious activities!"

And by this I mean the infamous Plunge Protection Team, where the Treasury, the Federal Reserve, big banks and unnamed others all get together to bail us out of any market mishap by buying, buying, buying, using money created by the Federal Reserve expressly for the purpose. And you can be sure that they are out there, right now, doing exactly that thing, in response the to recent market losses. And furthermore, the market will obediently go up as long as they keep buying, buying, buying and all the money floods into the economy, which will also, theoretically, benefit from this deluge of new spending, and thus, they think, mission accomplished, applause, applause, applause.

But whether or not they succeed this time or not, their efforts to prevent the collapse of such a preposterous economy will one day fail, and the dollar will fall to relative worthlessness, and money and wealth will be lost by the supertanker-full, and there will be misery and suffering to extents beyond your nightmares. This is the classical end to an eternally-classic situation; a government spent a country into bankruptcy.

John Embry, Sprott Asset Management
If a deflationary episode is to be avoided, one of the costs will most assuredly be accelerating inflation in a textbook case of ever more paper chasing a limited amount of real goods and services. In the face of this I find it fascinating that many pundits acknowledge the longer-term attractiveness of gold but persist in trying to call short-term corrections. In markets as seriously manipulated as gold with the incredibly powerful fundamentals that it possesses, trying to be cute on corrections strikes me as a real mug’s game. The good news on the manipulation front is that it has become so blatant that it is revealing distinct signs of desperation, a necessary precursor to its eventual cessation.

Bill Fleckenstein, Fleckenstein Capital
This credit collapse is an unequivocally important event. Because the ability of anybody with a pulse to get a loan for any amount is what drove the real estate market, and the real estate market is what drove the economy. Sometime in the next three to six months, the real-estate market will basically just freeze up. Of course, inventories are going to explode and prices will eventually drop rather dramatically as a vicious cycle feeds on itself.

Steve Forbes, Forbes Magazine
Commodities are the first to feel monetary mistakes. The best barometer of these, historically, has been the price of gold. In 2004 its rolling ten-year average was under $350 an ounce. Today it's up more than 80% from that level, hovering between $625 and $700 an ounce.

Remember that famous quote by John Maynard Keynes: "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

The latest debauching of the currency is indeed being misdiagnosed by almost everyone. Higher oil and gasoline prices are blamed on greedy oil companies and the voracious consumption of India and China. These two countries are also blamed for sending other commodities into the stratosphere. The Fed's culpability has been ignored.

Bill Gross, PIMCO
With construction laborers about to hit the unemployment lines and the unemployment rate in jeopardy of rising more than the Fed feels comfortable with, an ease as soon as mid-year may be in the cards. I have a strong sense as well, that mortgage credit availability is in the midst of a cyclical squeeze due to subprime defaults and “better late than never” moral suasion/congressional supervision of mortgage bankers. This should not only continue to floor the housing sector but dampen consumption, as the combined effect of layoffs and Mortgage Equity Withdrawal, “withdrawal” produce a 2% or less real and a 4% or less nominal economy. Those numbers when extended for three or four quarters (which they now have been) are the stuff leading to output gaps, rising unemployment, declining inflation, and an easing in overnight Fed Funds rates.

Michael Hodges, Grandfather Economic Report
We should not be mad at foreign interests. We are the ones borrowing from others so we can consume beyond our own production and savings, thereby creating unprecedented debts and trade deficits PLUS excessive government spending. While America's debt used to be nearly all owed domestically, increasingly huge portions are now controlled by foreign interests. America, therefore, is less and less independently in control of its economy- - not a nice bequest we are creating for our children and grandchildren.

Eric Janzen, iTulip
Since 1960, the U.S. economy has only experienced one recession not associated with a major decline in housing permits, the 2001 recession that followed the dot com and telco crash. The U.S. economy has never failed to experience a recession after housing permits issued declined more than 25% year-over-year. No exceptions. The new permits data show permits below the 25% Y-o-Y decline level and falling.

Christopher Laird, PrudentSquirrel
Again, I have to emphasize that as this world liquidity crisis spreads, central banks will fall behind trying to stem it. You will be amazed at how fast the economies slow, and how soon the big layoff notices start popping up. Soon, the economy will be in a vicious consumer led recession that could even lead to a world depression and deflation. I really don’t believe the central banks will be able to stem things this time from a cycle of economic slowing leading to falling consumer confidence and consequent deflationary pressures in the US and Japan. Ultimately China will follow, and soon too, because China definitely is set up for a deflation for its own reasons (massive mal investment -10% of their businesses are making money, did you know that? Massive hidden banking losses, massive local speculation in stocks and real estate that are presently getting wiped out).

The only way central banks even have a hope of temporarily stemming a stock led decline into a depression, if things get bad enough, is through literally monetizing the entire world stock markets! Who knows, the US and Japanese plunge protection teams may try it….They won’t succeed.

Robert McHugh, Main Line Investors
There has been a multi-year Broadening Top forming in the Dow Industrials, which is nearly identical to the same Broadening Tops that occurred just prior to stock market plunges in 2000, 1987, 1986, 1973, 1966, 1957, and 1929. Same pattern. In each instance, prices took forever to peak, then plunged. The 2007 version is now starting its plunge. The recent carnage is simply the first small degree wave of what should be a protracted and severe decline throughout most of 2007. Stock market declines often forecast recessions. Once a recession is common knowledge (it already has started), the plunge in Blue Chips will accelerate. Common knowledge will occur once banks are attacked by real estate loan, heat-seeking examiners. Common knowledge will occur once public companies start restating earnings. Common knowledge will occur once bankruptcies hit the news. As it deepens, jobs will be lost, politicians will be thrown out, savings will disintegrate. You know the routine. The only way out of this mess will be a massive and drastic Dollar devaluation, accomplished through the printing and distribution of trillions of dollars to households across America. Fiscal policy is already too much of a mess to be counted on to stop this recession. Another war will just make matters worse. No, this time it will take monetary hyperinflation the likes of which America has never seen before.

Gretchen Morgenson, New York Times
On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.

What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21.

The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago. Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.

Doug Noland, Prudent Bear
Those believing that they are examining sound economic “fundamentals” should ponder the possibility that they are actually observing distorted signals (i.e. robust earnings growth, abundant liquidity, low Treasury yields, narrow Credit spreads, booming tax receipts, easily financed twin deficits, etc.) from a system embarked on an unsustainable financial path. At some point, financial crisis will force through a wrenching adjustment period. One can expect this process to be instigated and shaped by a radical change in the global liquidity backdrop and the flow of finance.

Ron Paul, Texas Congressman
When it comes to Social Security and Medicare, the federal government simply won't be able to keep its promises in the future. That is the reality every American should get used to, despite the grand promises of Washington reformers.  Our entitlement system can't be reformed- it's too late.

The official national debt figure, now approaching $9 trillion, reflects only what the federal government owes in current debts on money already borrowed. It does not reflect what the federal government has promised to pay millions of Americans in entitlement benefits down the road.  Those future obligations put our real debt figure at roughly fifty trillion dollars- a staggering sum that is about as large as the total household net worth of the entire United States.  Your share of this fifty trillion amounts to about $175,000.

The answer to these critical financial realities is simple, but not easy: We must rethink the very role of government in our society.  Anything less, any tinkering or reform, won't cut it.

Julian Phillips, Gold Forecaster
There is no true haven from the $ in other currencies. In a crisis they will try to cling to each other, with some being forced to lower or raise their exchange rates with important trading partners. But essentially they are all in the same boat together.

Jim Puplava, Financial Sense
The United States—and the rest of the world by extension—is facing the biggest energy crisis in history. It is a crisis that we are completely unprepared for and one our leaders or the media are unwilling to acknowledge. From politician to citizen, our eyes remain wide shut.

Nouriel Roubini, Roubini Global Economics
So now that the subprime disaster is too big for anyone to ignore the new conventional wisdom is to try to minimize the extent of the problem. The new consensus view is that “this is only a sub-prime niche problem that is contained and will have no spillover and contagion effects to other mortgages, to the credit market, to the economy and to the US growth rate”. This new consensus is as wrong as the systematic ignorance since last summer by the consensus of that unfolding housing, mortgage, financial and economic train wreck.

Richard Russell, Dow Theory Letters
My gold position is not for sale. I'm a systematic buyer, not a panic-stricken seller.

Steve Saville, Speculative Investor
All government interventions designed to improve the workings of the economy have unintended adverse consequences, and in its efforts to bring about a massive increase in the production of ethanol the US Government might have unwittingly set in motion a chain of events that will simultaneously put upward pressure on commodities and downward pressure on financial assets (stocks and bonds). As discussed in previous TSI commentaries, the reason is that increases in grain prices resulting from the surge in ethanol-related demand for these commodities will lead to across-the-board increases in food prices. This, in turn, will likely cause inflation expectations to rise, thus putting downward pressure on bond prices (upward pressure on long-term interest rates) and prompting wage-earners to demand more money from their employers to offset cost-of-living increases. As a result, equity valuations will potentially be hit by the 'double whammy' of rising interest rates and shrinking profit margins.

Peter Schiff, EuroPacific Capital
The current train wreck unfolding in the sub-prime lending sector provides a good preview as to what will happen to the entire credit-financed bubble economy when the funding dries up. Contrary to the self-serving rhetoric of Wall Street and housing industry shills, the entire mortgage sector is not insulated from sub- prime. In fact, sub-prime is just the tip of the credit iceberg. Beneath the surface lie similar problems in Alt-A and prime loans, where borrowers also relied on adjustable rate mortgages to purchase over-priced homes that they could not otherwise afford.

With the sub-prime market drying up, most first-time home buyers will be unable to buy. Without those ‘starter-home” buyers, the trade-up buyers (most of whom have the ability to make down-payments and are therefore considered "prime borrowers") will be unable to sell their existing homes, and hence unable to trade up. This brings down the entire house of cards. Home prices must collapse, affecting all homeowners, regardless of their credit ratings.

Since home equity has been the principal asset collateralizing that credit, how can consumers keep borrowing and spending when housing prices fall? I heard one commentator on CNBC claim that the U.S. economy was in great shape except for housing. To me that’s like a doctor telling a patient that he is in great health, except for the javelin sticking out of his chest. If housing is going down, there is no way on earth the entire economy does not get caught in its undertow.

Ned Schmidt, Value View Gold Report
U.S. monetary policy continues to be set as if the U.S. lives in economic isolation from rest of the world. Investors, consumers, governments outside the U.S. simply remain outside the analysis of the U.S. economic situation. Despite the downplay by many cable news gurus, the U.S. mortgage & housing bubble is pushing the U.S. economy into recession. The second major asset bubble bust in seven years is now about to crush the U.S. economy. This focus on solely domestic concerns means the Federal Reserve might attempt to lower interest rates. Such an action would ignore the response of the forex market and foreign investors. The U.S. dollar would slump immediately to a new low, setting the stage for the entire Gold/Silver/Gold stock complex to move upward in a new leg in the bull market.

Mike Shedlock, Mish’s Global Economic Trend Analysis
It's comments like those from Greenspan that seriously make me wonder if he is senile.

James Turk, GoldMoney
There have been hundreds of experiments with fiat currency throughout history, and invariably, they all end badly. The reason is simple – there is no discipline on the process of creating fiat currency. The currency is therefore always issued in excess, which erodes the purchasing power of the currency through an insidious process we call inflation, and I use the word insidious purposefully. Not one person in a thousand recognizes inflation’s pernicious effects.

The US dollar became a fiat currency in August 1971, when its formal link to gold was broken, thereby ending the monetary system that had prevailed in this country for 180 years.

Jim Willie, Hat Trick Letter
The current housing bubble & bust serves as vivid testimony of the failure and inability for free people to manage money and a monetary system, without the discipline and rigorous enforcement of a gold standard. When we run out of new available bubbles to puff, we will earn a new system, which is most likely to be less friendly and less gentle with liberties and freedom. Like now!

© 2007 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.