Either that, or the world’s largest banks engineered a takedown of gold for the purpose of staving off  Zero Hour… for now.

As you’ll recall from these pages in March, “Zero Hour” is the name we give to the moment when the price of real, physical gold in your hand starts to break away from the quoted price on the commodities exchanges.

That is, the “physical price” becomes much higher than the “paper price” on CNBC’s ticker. The catalyst, we suggested, would be when a major metals exchange defaults on a gold or silver contract — settling in cash, instead of metal.

To be clear, Zero Hour did not take place when gold’s paper price plunged $150 in only two trading days — Friday, April 12, and Monday, April 15.

But what happened after that plunge hints at what the aftermath of Zero Hour would look like. Real metal suddenly became very hard to come by. We chronicled the worldwide scramble, in real-time, in The 5 Min. Forecast…

• The Chinese Gold and Silver Exchange nearly ran out of bullion on Friday, April 19
• There were reports of a “massive wave of physical gold buying” in Dubai
• Monthly sales of U.S. Gold Eagles fell just short of a 26-year high during April.

Result: If you wanted real metal, you paid a substantial premium over the paper price. In silver, these premiums were off the charts. On Thursday, April 25, spot silver was $23.94… but a Silver Eagle from a major online dealer would set you back $29.54 — as high as the paper price before the mid-April crash!

Meanwhile, the premium on “junk silver” — U.S. dimes, quarters and halves dated before 1965 — sits at four-year highs, according to coin dealer Richard Nachbar. Usually, these coins trade at a small discount to the paper price of silver. Now? As the chart nearby shows, they fetch a 17% premium over spot… and that’s wholesale!

“The April gold crash,” sums up Agora Financial’s own Byron King, “was the beginning of emancipating real gold from paper gold. We’re about to see a ‘real’ price for gold, coming from the bottom up, not the top down. I suspect that we’ll see a solid price rise for gold over time. The market bullies who deal in paper products have just punched themselves in the nose.”

Meanwhile, if you’re still skeptical that “Zero Hour” is a real possibility, there’s new and compelling evidence.

Sprott Asset Management chief Eric Sprott believes Zero Hour is made inevitable by Western central banks “leasing” their gold to commercial banks at less than 1% a year. The commercial banks then sell that gold and plow the proceeds into higher-earning investments.

“Now,” Sprott writes in a new white paper, “our long search for the ‘smoking gun’ to prove our hypothesis appears to have finally materialized.”

The evidence lies in the monthly trade data from the Census Bureau. The December 2012 report revealed net gold exports of $2.5 billion — almost 50 tonnes. This staggering number prompted Sprott and his team to dig through the figures as far back as they exist — all the way to 1991.

The data show that net exports from 1991-2012 totaled 5,504 tonnes.

Here’s the problem: During that same period, U.S. supply mine production and recycling totaled 7,532 tonnes, while demand was 6,517 tonnes. That left only 1,015 tonnes available for export.

Where did the other 4,489 tonnes come from? “The only U.S. seller that would be capable of supplying such an astonishing amount of gold,” says Mr. Sprott, “is the U.S. government, with a reported gold holding of 8,300 tonnes.”

Yikes.

“If the Sprott analysis is accurate,” says our friend and Crash Course author Chris Martenson, “there’s a lot of missing gold in the U.S. equation, and it had to come from official sources, either of U.S. origin or belonging to other countries. Either way, the leased gold represents a tremendous liability of the Fed and the bullion banks to which it was loaned.”

“In this context,” Mr. Martenson continues, “the gold slam begins to smell like an operation designed to shake as much gold as possible out of weak hands so that the bullion banks can begin to recover it to square up their accounts.

“GLD, the gold ETF that so many small investors participate in, is one large, obvious target,” he adds, “as it was sitting on 1,350 tonnes as of January 2013.”

Sure enough, by the end of April, more than 250 tonnes of that total were gone. On the chart nearby, you can see how the drain on GLD’s inventory neatly tracks the paper price of gold.

“Gold and silver,” Mr. Martenson suggests, “are getting closer to the day when you or I will not be able to purchase physical bullion at any price.”

“I don’t even look at gold as gold anymore… they securitized it,” CNBC’s voluble Rick Santelli said on March 27 — weeks before the big beat-down.

“If things [went] badly in the world that I used to observe as the gold bug, the gold would end up in the hands of the gold bugs. If things go badly now, they’re going to end up with checks from ETFs! Sorry, it’s not the same. The reign of [paper] gold is the Ayn Rand end product. To me, that’s over. Game, set, match.”

The endgame is getting closer. “What I believe is going to happen, probably in the not too distant future,” says Eric Sprott’s right-hand man John Embry, “is that the pricing mechanism of the gold and silver markets will swing to the physical market, which cannot be manipulated, because, basically, either you’ve got it or you haven’t.

“Whereas the paper market has been set up specifically so that it can be manipulated. I would not be too concerned about that, even though they’ve got the upper hand to date. I think that their power is going to be sharply eroded in the very near future.”

But that’s when you won’t be able to get any metal at any price. Best act before then: “The current sell-off in gold,” says Eric Sprott, “should be viewed not with extreme trepidation, but as an unbelievable opportunity to buy the metal at an artificially low value.”

Regards,

Addison Wiggin
for The Daily Reckoning

P.S. We’ve been tracking the gold price pretty closely ever since our friend and mentor, Bill Bonner, announced his Trade of the Decade back in 2000 — sell stocks on rallies; buy gold on dips. And while that turned out to be a tremendous trade, it’s only a small part of the much larger story about our favorite yellow metal… Subscribers to The Daily Reckoning email know this better than anyone. If you’re not already a subscriber, we suggest you sign up for free, right here.

“It’s clear that the 2008 crash remains a psychological burden to most investors. So they continue to categorize any rising asset price as a bubble.”

Heh. Greg has always taken a more well-traveled road than we have. We hope he’s right… but we’re more hopeful he doesn’t see what we write here today.

It’s just that we can’t help ourselves. The news cycle this morning was so…well….bubbly.

Before we even started today’s issue this morning, an email landed in our inbox from the young man charged with overseeing our social media. “#Nikkei is trending on Twitter right now” he wrote, confirming what we suspected.

Seconds later, we opened the markets page on the Financial Times’ site to see the headline: “Nikkei Plunge Sparks Retreat From Risky Assets.”

“Global stocks are in sharp retreat, led by a savage plunge in Tokyo, as traders are spooked by the prospect of reduced central bank support and a slowing Chinese economy.”

After one heck of a six-month rally, the Nipponese index dropped 7.3%, the biggest day’s drop in the past two years.

Is it a turning point or a small correction? Who knows… we’re just entertained that it was only a few short hours before we heard the news that we saw the latest cover of The Economist:

Now, that’s awkward…

You don’t need us to tell you about gravity, dear reader — markets that go up eventually get pulled down… but for some deep-seated reason, when a serious financial publication prints a cover and headline like this, we become skeptical.

It doesn’t make us any less skeptical that all other areas of the economic environment look so gloomy except for stock market, which appears to heavily depend on the globe’s central bankers.

Don’t just take our word for it, either:

“The Shanghai Composite dipped 1.2%, the Hang Seng Index fell 2.5% and the ASX 200 in Australia lost 2%,” wrote FT, “after they got their first chance to react to Federal Reserve chairman Ben Bernanke’s comments that monetary stimulus could be scaled back…”

You’ll recall yesterday we gave our two cents about the chance of Bernanke tightening… if you missed it, here’s a two-word summary: fat chance.

St. Louis Fed president James Bullard seems to think so too. Reuters reported that he said the Fed wasn’t “that close” to tightening its policy soon after Bernanke’s comments.

Will the Fed change its policy? Who cares.

As our own Ryan O’Connor puts the next correction: “This will be a long and painful process — the exact opposite of the euphoria created by credit expansion… eventually, economic reality and markets will collide.”

Regards,

Addison Wiggin
for The Daily Reckoning

P.S. We don’t talk bubbles for bubbles’ sake… we actually believe that the big bust could shake your financial security to the core. We don’t want it to happen to you. That’s one of the reasons we write the Daily Reckoning each day… and why subscribers to our daily email are in a unique position to do something about it. Click here now to join them and find out for yourself.

We have ourselves kvetched that the nitpicking of Bernanke’s testimony to Congress is but a “pointless commotion” and yet, we confess, we couldn’t help but watch.

The anticipation was palpable. The Dow, already up 40 points before Bernanke uttered a word. Then, the lights dimmed, silence fell and the curtain lifted…

“A premature tightening of monetary policy could lead interest rates to rise temporarily” Mr. Bernanke pontificated, “but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further… High rates of unemployment and underemployment are extraordinarily costly…”

It was like watching a foreign film…we couldn’t quite understand him, so we made sure the subtitles were on.

Bernanke: Easy money isn’t going anywhere anytime soon…

The dollar jumped… the Dow climbed another 100 points… and gold curled up alone in the corner. Whimpering.

Fortunately, fickle Fed watchers stayed tuned.

“If we see continued improvement” Bernanke mumbled on, “and we have confidence that that’s going to be sustained, then we could, in the next few meetings, we could take a step down in our pace of purchases.”

Bernanke: But we could tighten, too.

That was all it took. The Dow dropped back to where it started. Gold dropped down to $1,357.

There were enough “ifs,” “coulds” and commas in his statement to make even our own corporate attorney’s heads spin, thereby fulfilling its mandate.

“The lender of last resort should remain ambiguous,” we paraphrase professor Kindleberger’s description of the Fed’s role in supporting an otherwise fragile economy.

The only safe assumption is this: Given a choice, Bernanke will likely strangle the currency (your money)… in favor of “strengthening” the economy, the employment rate… the relative calm of the political environment (IRS be damned)…. and the banking system.

Still, while not yet at the nosebleed heights of those years, the banking sector is starting to resemble the runup to the banking crisis of 2008.

“Securitization,” reports CNBC this morning, the demon from which mortgage backed securities were spawned prior to 2008, “has hit volume of $225 billion,” logging 365 deals in 2013. That’s already a third of the pre-crisis record.

“Shadow banking”, another indication of risk tolerance, has risen above traditional banking levels for the year. Loans among firms willing to do business “outside the normal channels” have surpassed $16 trillion — more than the $15 trillion in total assets in traditional deposit banks… and “more than double the $6 trillion in corporate bonds” (figures, again, from CNBC).

Corporate debt has, well, returned to the upward pre-crisis trend as well.

The zugzwang point approacheth.

And so it goes in the crackup boom.

Regards,

Addison Wiggin
for The Daily Reckoning

[Ed note. The Zugswang was originally published in the Daily Reckoning on May 22, 2013. If you're not receiving the Daily Reckoning by email, you're missing out on at least 2/3 our your best opportunities. For a free copy of The Trade of The Decade, subscribe to the Daily Reckoning for free, here.]

If you’re a typical American family, your “health” will set you back $20,728 every year. That figure comes gratis of Milliman, a benefits consulting group. A base-model Toyota Camry… the typical family’s most-popular make? It costs $22,055.

Milliman’s numbers account for only the premiums and out-of-pocket costs. Heaven forbid you actually get sick.

Back in 2006-07 while researching and filming our documentary I.O.U.S.A., we made the intimate discovery that health care for an aging society… not just, but mostly in the United States… is by far the biggest driver of deficits, debt and default — for families… and businesses… corporations… and the entire nation.

“In America,” wrote an expatriate in an email, “workers are held hostage to jobs they hate because working independently or taking early retirement means no access to health care unless you are willing to pay $1,000 a month for insurance. International health insurance costs me less than $100 a month.”

Last July, the Supreme Court decided that the Frankenstein piece of legislation known as “Obamacare” jibes with the vision of the Founding Fathers. We all know the end result. The federal government can now force you to buy health insurance from a private company.

The trouble for you… and me, frankly…. is more profound. Let’s say you don’t give two proverbial defecates about the politics of the situation. Let’s also say you’re trying to figure out how to deal with the rising cost of education, food, gas, heat etc., all while your stock investments and house “value” decline… what are you supposed to do?

Unfortunately, the only thing up for debate in 2009-10 when the Patient Protection and Affordable Care Act was being hashed out in closed-door committee hearings was by what means the government would enable insurance and pharmaceutical companies to fleece patients and taxpayers. So now we’re left to our own devices.

The good news? You don’t have to expatriate to take your health care into your own hands. While we can’t possibly address every issue on our plate at the moment — the Fed, Goldman Sachs, two-party electoral charades, spoiled milk — we can address one critical item.

We’ll expose the scams that make U.S. health care the costliest in the world.

“Extraction” by One of the Nation’s Most Powerful Interest Groups

New Yorker Beverly Weintraub is one of the “lucky” ones. She has employer-provided insurance.

Last year, her teenage son choked on a piece of turkey. He spent four hours in the emergency room — a physical exam, sedation, endoscopy and removal of the offending poultry.

For these services, the hospital billed her insurance company, Aetna, $22,214.92.

Aetna agreed to pay only $2,885.67. And the hospital cheerfully settled for that amount. Ms. Weintraub was out of pocket about $800.

“How could those numbers possibly be reconciled?” she wrote. Being employed as a reporter for the New York Daily News, she set out to find answers.

What she found first is that her story is commonplace. “There are the sky-high costs that a hospital will claim reflect its expenses, and the much-lower fees it accepts under contract with insurance companies.”

“What’s missing from this complex web,” Weintraub writes, “is any hint of what the services a patient received actually cost.”

That’s by design. For the U.S. health care system is yet another mechanism of “extraction.” “Washington’s empire,” economist Paul Craig Roberts reminds us, “extracts resources from the American people for the benefit of the few powerful interest groups that rule America.”

The health care complex is surely one of the most powerful… and the utter lack of “price transparency” is what allows them to retain that power.

“The rates that insurance companies pay,” Weintraub writes, “are negotiated based on what they believe a hospital’s true costs are. But then those rates are jacked up an average of 30-50% to make up for money that hospitals lose in treating patients who don’t have private insurance — which is the majority of them. So to make up the difference, they overcharge patients who are insured. This practice is called cost-shifting.”

Cost-Shifting: A Double-Barreled Scam… and How You Pay for Both Barrels

Ms. Weintraub tells a good yarn… but it’s incomplete. Cost-shifting takes place in the form of two insidious scams, patiently described to us by Dr. G. Keith Smith, an Oklahoma City MD who’s doing his level best to undermine the practice.

The first scam is called “uncompensated care.” To understand how it works, it helps to know a rough breakdown of who is treated in a typical hospital:

• About 50% are covered by either Medicare or Medicaid… which don’t pay for the full cost of treatment

• About 10% have no insurance at all. For obvious reasons, they too typically don’t pay full freight

• About 40% have private insurance. They carry the burden for the other 60%.

At the end of each year, many hospitals collect money from an “uncompensated care pool” — funded by federal and state taxes and typically administered by a state government. “That creates the perverse incentive for hospitals to issue fictitiously insane bills,” says Dr. Smith.

“Let’s say they charge $100 for an aspirin for which they pay a penny. They collect $5 [from insurance], and claim they lost $95. That $95 goes into the ‘uncompensated care’ pool and helps them get this rebate at the end of the year.” It also, Smith explains, helps many hospitals maintain the fiction of not-for-profit status.

If you’re a taxpayer, you pay for this.

The second scam involves the insurance scheme known as preferred provider organizations, and is called “PPO re-pricing.” Here too there are perverse incentives: Insurance companies, contrary to popular belief, have zero desire to keep costs to a minimum. “The bigger the bill the insurance company receives, the more money they make,” says Dr. Smith.

“If a large hospital submits a bill to an insurance company for, say, $100,000, and the insurance company pays $22,000 of it, the insurance company then goes back to the employer who provides this insurance product to the employee and says, ‘Look what we did for you; we saved you $78,000.’ The employer, as part of his contract, pays the insurance company a percentage of that fictitious savings.”

If you have employer-provided health insurance, you pay for this. Were it not for the insurance company’s cut, you’d have a bigger paycheck.

Private Equity Scamming Medicaid: When “Extraction” Is More Than a Figure of Speech

We ran across one recent instance in which the “extraction” carried out by the healthcare industry is literal.

“Dental management-services companies,” many of them backed by private equity, are cashing in on Medicaid spending for dentistry — which exploded by 63% between 2007-10.

Result: Medicaid-eligible kids are pulled out of classrooms and undergo dental procedures without their parents’ knowledge or permission. “I was absolutely horrified,” Stacy Gagnon told Bloomberg. The Camp Verde, Ariz., mother was shocked when her 4-year-old son came home from school, having undergone two baby root canals, received two crowns and 10 X-rays — none of which she says he needed.

This practice is so blatant — and costly — that in some cases, the bureaucrats are intervening. “Management companies are at the center of a U.S. Senate inquiry,” Bloomberg reports, “and audits, investigations and civil actions in six states.”

Cost-Shifting’s Biggest Victims: Why You Can’t Afford to Be Uninsured

Meanwhile, “the only people who are actually billed such astronomical sums are the uninsured,” says reporter Weintraub, citing figures from Medical Billing Advocates of America.

“If an uninsured patient can pay even a fraction, it will still far exceed the cost of treatment. So hospitals will gladly settle for a lesser amount — and may even helpfully offer a payment plan or high-interest loan.”

If you have no insurance, you pay through the nose. Little wonder that medical bills are the catalyst for 60% of personal bankruptcies, according to a 2009 study in The American Journal of Medicine.

Which gets us back to this question: What is the actual cost of that “$100,000″ procedure? About $7,000-8,000. For everything. Including the facility, surgeon and anesthesia charges.

That’s what Smith would charge you at his outpatient surgery center in Oklahoma City… a lone outpost of “price transparency” within U.S. borders.

Smith and his facility are one possible solution if you want to break free of the whole sordid cost-shifting system. But if you need a procedure that requires more than a one-night stay, you’re out of luck. No open-heart surgery or major abdominal procedures there.

So it won’t solve all our problems, but at least it’s a start.

Sincerely,

Addison Wiggin
Original article posted on Laissez Faire Today

The scene: a House Ways and Means Committee hearing on Capitol Hill.

We happened to catch this particular piece of political theater as we were getting ready to leave our hotel in Sao Paulo for the return trip to Baltimore. Even in Brazil, the spectacle of our Internal Revenue Service targeting “tea party” groups for special consideration drew attention.

If you didn’t catch it, we’ll give the gritty details in two minutes (or less): Former acting head of the IRS Steven Miller was tied to the whipping post on Friday, and flogged endlessly by members of both parties for authorizing IRS bullying of conservative and religious activist groups.

“You know what?” Rep. Kelly gnarled, lash in hand. The IRS “can do almost anything they want to anybody they want anytime they want. This is very chilling for the American people… get a letter from you folks, or a phone call. It’s with terror that you look at it. And now this kind of reconfirms that.

“I gotta tell you, where you’re sitting, you should be outraged, but you’re not. The American people,” he pressed on, speaking for a whole nation as only politicians seem to be able to channel the will to do, “should be outraged, and they are…

“This is a huge blow to the faith and trust that the American people have in their government.”
At this point, we thought he might snicker himself at the absurdity of what he was saying. But onward he crept.

“Is there any limit to the scope of where you folks can go?… This committee has nothing to do with political parties. It has to do with highly targeted groups. This reconfirms everything that the American public believes.”

Less than provoking laughter, Kelly’s tirade did something we can only imagine happens as rarely as the genuine “glee” of a professional streetwalker; it drew applause from the cheap seats.

While we were in Sao Paulo, we met with a group of gentleman who’d several years ago launched a newsletter on the “Agora model” because there were no such letters in the market. After five years of writing, editing, publishing and marketing the letter, they closed up shop.

“You have no idea how expensive and difficult it is to run a business in Brazil,” Fernando, one of the gentleman suggested. “It takes 3,000 man-hours just to comply with tax filings here.” He referred to Brazil as “the France of South America”. Bureaucrats, tax lawyers, social charges and unions abound. (Lucky for us, we’re engaged in businesses in both countries!)

“What do you have to complain about?” Fernando asked referring to the IRS hearings? “Americans take their tax authorities so seriously. Of course, their motives are political! Why would you think otherwise?!”

Heh.

We republish Rep. Kelly’s reproach less because it provided entertainment while we prepared for the 12-hour journey back home. Rather, we would like to know the answer to his unspoken question: From under which fetid igneous formation did these IRS slugs slither?

Who gives their lives to shaking down fellow citizens to fund political objectives they don’t share? All the while patting themselves on the back for what an efficient “voluntary” tax system we Americans enjoy.

Ha. Ha. Ha.

“Moderate libertarianism may be capturing the fancy of an overtaxed,” Ralph Benko wrote in Forbes.com this morning, “fed-up-with-debt-fueled grandiose government, war-weary, live-and-let-live Republican base and American people.”

Maybe. Maybe not.

Our good friend Ralph Benko has always had a much higher faith in the political process than we do. With all due respect to Ralph’s intent, we should note he gives much of the credit for the rise of moderate libertarianism to the junior senator from Kentucky, Rand Paul.

“We didn’t arrive into this ‘Grandiose Government’ pickle absolutely positively overnight. Sen. Paul and others seek to lead us on the path out and to safety. It will make their job easier if we better understood how we ended up in this gutter in the first place. The road toward serfdom was a long and winding one.”

The American story is lousy with stories of the struggle between the political class and the innovators and wealth creators who actually built the nation. We suspect the political farce over what motives the IRS had in being heavy handed with “conservative” groups will make an interesting footnote in that history. But not necessarily rise to the level of game changer.

Regards,

Addison Wiggin
for The Daily Reckoning

The Wall Street Bar.

We were on Rua Jeronimo da Veiga in Sao Paulo’s Itaim Bibi district, “the new financial district,” in town.

The Wall Street Bar sports a replica of the Merrill Lynch bull from Lower Manhattan above its doorway. “Inside, beers are priced based on their popularity at evening,” Rocky explained. Rocky Vega has been providing guidance in our new partnership with the local independent research firm Empiricus. Rocky is also adept at addressing our desire to sample the local fare wherever we happen to travel.

Says the bar’s website: “The Wall Street Bar concept is inspired by the international power and influence of New York City stock exchanges. An LCD ticker lining the walls registers the rising and falling popularity of the various beers by adjusting prices on tap. The future-forward establishment also allows you to select and order beer and music through touch-screen tabletop devices.”

“If a particular beer,” Rocky explains, “like Skol, the local favorite, is popular that night… the price goes up. Just like a stock does during the trading day.”

“Great. So are we going in?” we said walking toward the bull.

“No. This place is lame.” Apparently, the new systems don’t exactly work. The bar was empty.

We ended up in a local outdoor cafe with banana trees and various leafy tropical plants, Brazilian hostesses (ahem) and locally inspired cuisine.

Better.

Empiricus draws inspiration from their Greek philosophical namesake: Sextus Empiricus. “Sextus Empiricus is an ancient thinker,” says co-founder of the firm Rodolfo Amstalden. “He’s the father of the so-called philosophic school of skepticism. He’s always inquisitive about stuff. He views the world as empirical facts, much more reliable than Platonic theories. Empiricus deconstructs mainstream idealized fallacies through reality, plain and simple. That’s what we try to do with our financial research. The skepticism of Main Street while looking at Wall Street.

“We’re called Empiricus because we’re skeptical about the financial mainstream, and we’d rather have our feet on the ground of companies than our minds on theoretical spreadsheets.”

Boots on the ground. Proof of concept. Ready, fire, aim. These are strategic concepts we share. Who knew we’d find them expressed so well in Portuguese in South America? Rocky, apparently.

On a macro basis, Brazil seems like a good bet.

Growth in Brazil at twice the U.S. rate right now. Unemployment is a fairly solid 5%, compared with 7.6% in the U.S. (according to the BLS). Public debt run up by the Brazilian government is a fraction of what U.S. elected officials ignore on a daily basis in the United States.

The stock market in Brazil got whacked in 2008-09 like everywhere else. High-net-worth individuals actively engaged in managing their own money dropped 25%, from near 700,000 to just over half a million. Slowly over the past two years… 100,000 individual investors have crept back into the water.

We’ll continue to update you on what we discover here in Sao Paulo this week. For now, let’s return to the domestic UFC cage match between government bungling in public debt versus an explosion of cheap energy in the continent’s midsection.

“What if the Pentagon didn’t have to worry so much about Middle East oil?” says our own Byron King, on the scene in London, where the International Energy Agency (IEA) released their report promising U.S. energy independence as soon as 2030. Heh. “We’re finding out right now.”

This proposition has been easier for folks to entertain since housing busted and the financial crisis reversed the “wealth effect” in 2008. With that in mind, let’s take a look at the logic of the American Empire and what you can expect in the year(s) ahead.

“Great empires, such as the Roman and British, were extractive,” economist Paul Craig Roberts observed recently. “The empires succeeded because the value of the resources and wealth extracted from conquered lands exceeded the value of conquest and governance.”

We explored a similar theme in our 2006 book, Empire of Debt. But unlike empires of the past, the American Empire has a logic all its own.

“America’s wars are very expensive,” says Roberts, stating the obvious. “Bush and Obama have doubled the national debt, and the American people have no benefits from it. No riches, no bread and circuses flow to Americans from Washington’s wars.”

In the big Iraqi oil auction of 2009, for example, even as U.S. helicopters droned overhead, the oil minister gave out zero contracts to American firms. Not one. And we spent at least $3 trillion on war — $2.9 trillion more than Team Bush’s original budget. So much for paying for war with “oil profits.”

Russia was actually the big winner here. So what gives? The American Empire has perverted the Roman mantra “Veni, vidi, vici” (I came, I saw, I conquered) into the odd imperial slogan, “We came, we saw… we borrowed!”

The results from this turn of phrase are less than desirable. Again Roberts:

“Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America. The military-security complex, Wall Street, agribusiness and the Israel lobby use the government to extract resources from Americans to serve their profits and power. The U.S. Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1%.

“That is how the American Empire functions,” concludes Roberts. We agree. To grow, the American Empire is always looking to inflate the next bubble. These serial bubbles each have the effect of “extracting” wealth from the citizens — in the form of bigger mortgages, heftier credit card statements and stuffed stock portfolios. The “extracted” money is, over time, passed from the wallets of citizens to the pockets of the well connected.

For confirmation of this assertion we need look no further than the top o’ the 1%, the Oracle of Omaha. Peter Schweizer of Reason reckoned in an exposè published last year on Warren Buffett that this folksy fellow “needed the TARP bailout more than most.”

Let’s run through the numbers. Berkshire Hathaway firms in total received $95 billion in TARP money. Berkshire, you’ll recall, held stock in Wells Fargo, Bank of America, Goldman Sachs and American Express. Not only did these companies receive TARP funds… they also dipped into the FDIC’s treasury to back their debt. Total bailout: $130 billion. TARP-enabled companies accounted for 30% of the Oracle’s publicly disclosed stock portfolio.

He’s definitely one of the top beneficiaries of the big bank bailout. And to sharpen the sting, he even got a better deal to help ailing Goldman Sachs than our own government. Buffett got a 10% preferred dividend while the Feds got all of 5%. He cleaned up with $500 million a year in dividends. Without the bailout, you can bet many of his stock holdings would have gone near-zero instead.

Contrast that with a blog post from Rosemarie Jackowski, a community activist at Dissident Voice. She’s describes her experiences working with the underclass in a small town in Vermont.

“In Bennington, there are three very distinct classes,” writes Jackowski. “First, there are the ‘fancy people.’ They are the ones who rule and control everything. They are on the boards — the hospital board, the library board, the select board, the school boards. They have the power — even the power over life and death. They, occasionally during a medical crisis in the hospital, make the decision to pull the plug or allow life to go on.”

We hear you. At first, we were prepared to dismiss the piece as another bleeding heart diatribe… but she goes on to describe a theme very familiar to our readers.

Then there is the large group of ordinary citizens. Some are blue-collar workers. Most work hard. Love their families. And have had family in Vermont for generations. They acknowledge the class system in conversation often. They call it the ol’ boys network — cronyism.

The third group consists of those who are in need. Those on the bottom of the economic pile. At the conference, some of the most-impressive comments were made by a poor mother of two disabled children. She talked about the oppressive avalanche of redundant paperwork required to get any tiny benefit. The social services system is designed by nameless, faceless, unelected bureaucrats. It is setup to assure maximum job security to the workers in the system. To a struggling family, it often feels like an attack of the “paper churners.” Being poor is a full-time job.

More and more “ordinary citizens” are faced with the challenge of joining this third group of government dependents… or choosing to join the ranks “nameless, faceless, unelected bureaucrats” just to survive.

Case in point: “In the most recent Census,” writes co-author Samantha Buker in The Little Book of the Shrinking Dollar, “48% of America qualifies as ‘low income.’ There are more Americans living under extreme poverty than have ever been recorded.

“Since 2009, we’ve added another 4 million souls to the category of low income to below the poverty line. That’s 146 million people in America who aren’t consuming much aside from ever-increasing applications for food stamps.”

In November 2008, food stamp applicants topped 30 million for the first time in history. We’re still posting “record highs,” having added over 16 million more names (and counting…) to the food stamp list.

Does this sound like a nation of ripe, robust citizens ready to be drained for the benefit of the national coffers? Au contraire. Sounds like another case in which our Empire will hand out more than it’s taking in.

Again.

In her post, Ms. Jackowski provides a list of 35 ways poverty robs you of your dignity. Here are just a few:

“Poverty means living with shame.”

“Poverty means working three jobs and still not ‘making it.’”

“Poverty means that you go to work when you are sick. Worse than that, you send your children to school when they are sick.”

“Sometimes poverty means that you skip meals so that your children can eat.”

“Poverty means that your housing is never secure…”

“Poverty means following all of the rules. Then graduating with oppressive student debt so that the president of UVM can be paid $447,000 per year.”

It’s Jackowski’s final mention of extraction — the student debt fiasco — that worries us. This bubble that has already taken flight. Now it’s flying dangerously close to a few pins.

Just like with housing, this is one hell of a bubble. And when it bursts, it’ll invite another crew of crony capitalists to the Beltway, who will soon be lining up for bailouts. I urge you to grip your wallet with both hands and prepare for the worse.

Sincerely,

Addison Wiggin
Original article posted on Laissez Faire Today

Today the Dow rose above 15,000 for the first time. Tonight’s news headlines will be all about the 15,056 close.

Corporate profit margins are at all-time highs, too. What’s not to love?

Last month that J.P. Morgan’s first quarter earnings went up 33%, Citigroup’s net income rocketed by 30% and Bank of America’s earnings increased sevenfold year over year.

In today’s episode of the Daily Reckoning, we give you an opportunity to explore the soft underbelly of “the crackup boom” and if you’re so inclined, to do something about it.

“Some people are still saying that companies are suffering from ‘too much regulation’ and ‘too many taxes’.” The erstwhile tech stock promoter, Henry Blodget kicks us off. “Maybe little companies are, but big ones certainly aren’t. What they’re suffering from is a myopic obsession with short-term profits at the expense of long-term value creation.”

At the same time, “companies are paying employees less than they ever have as a share of GDP. Nor do they employ as many Americans as they used to.”

Blodget’s observations are likely true, but we suspect they’re merely symptoms of a greater disease.

Our friend Ralph Benko forwarded on a link this morning to a new documentary online.

After a cursory look at Breaking Inequality we’re confident the young filmmakers were inspired, at least in tone, by our own I.O.U.S.A.

As such, we took the liberty of grabbing screenshots of two charts featured in the doc.

One depicts the rising income disparity in the United States since 1970.

The second shows the amount of U.S. dollars in circulation since 1910. Note the Everest like increase beginning with the bank bailouts in 2009.

A crackup boom, we explained yesterday, is a financial boom that inspires euphoria on Wall Street… but shares little with the middle or working class. Nor does it inspire much confidence in the 1% of Occupy Wall Street ire.

”Inflation,” the economist Friedrich Hayek adds, “is probably the most important single factor in that vicious circle wherein one kind of government action makes more and more government control necessary.”

Despite having been invited to speak on the subject on our local NPR program repeatedly, we’ve never really been interested in the rising inequality inherent in boom times. But Hayek makes a good point.

“For this reason,” the Austrian continues “all those who wish to stop the drift toward increasing government control should concentrate their effort on monetary policy.”

The makers of Breaking Inequality claim they will present a petition with 10 or 20 million signatures to Congress in September of 2013 and force them by sheer will of the populace to restore the classical gold standard, thereby creating a level playing field for entrepreneurs, small business owners, bankers and politicians alike.

As we write, it has a little over 24,000 views on YouTube. Take a look and sign it if you like.

Or… take out an insurance policy.

We were a bit surprised by what came next…“[but] all good things must come to an end” he said, “this winning streak is no different.” As a chartist and market timer, Greg has always donned rosier glasses than us… except, of course, when it comes to gold.

It is true. The end of April marked six straight months of higher and higher monthly closes, something not seen since the market bottomed out in 2009. Since that bounce back three years ago, the S&P has risen 131%… It looks like we have nowhere to go but up.

In fact, the stock market seems to be one of the very few rays of bright light amongst other stagnant or dismal economic news… That is if you listen to pundits and luminaries on CNBC and beyond.

Alas, the stock market is not the economy. Neither does the “wealth effect” lift all boats as it turns out.

You may recall back in 2009 the bottom and bounce back coincided with the Fed’s first round of so-called quantitative easing (QE). Investors cheered… hit the bid… and the S&P regained almost half of its losses.

Fast forward almost 8 months, and the same thing happened. Mr. Bernanke swooped in with “QE2” and propped up the S&P’s upward momentum.

And what happened when the Fed spigot twisted shut? The market tumbled.

Today… same “solution”, different magnitude.

The affectionately titled “QE Infinity” began anew in September, 2012. Since then, the central bank has added more than half a trillion in assets to its balance sheet — $360 billion in treasuries and $320 billion in mortgage backed securities

The result: The S&P increased 30% in 8 months and perhaps introduced a false sense of prosperity.

We alluded yesterday to the present day absence of the once discontented Tea Party and Occupy protests. For now it seems that the Fed has pulled one over on them. Funny how a little more Everclear in the punch bowl encourages the partiers to linger…

(Here’s the part in the story where we get to play the role of the bad boy in the corner, mocking, even if only to disguise our own flaws.)

“Whom does an absolutely unrestrained Federal Reserve System with a limitless credit card benefit?” Lewis Lehrman asked last week during our candid interview on film.

“First,” Lehrman answers with a follow up question, “it benefits the big spenders in Congress, because when Congress spends 40 percent more than they take in with tax revenues, who finances the difference?”

Lehrman continues:

In the last year, 60 to 75 percent of the budget deficit was financed by the Federal Reserve System. How does the Federal Reserve System do this? The Federal Reserve System buys U.S. government bonds out of the market, and it issues cash balances to the deposits of all those… primarily bankers… who sell those treasuries to them, with which they then repurchase additional U.S. Treasury bonds, continuing to finance and refinance the U.S. Treasury.

Now, if the new money issued by the Federal Reserve System against the purchase of U.S. Treasury debt goes into the market, whom does it go to first? It goes to the bankers and the bankers’ clients, and who is that? Generally the speculator class on Wall Street, who can then borrow at these subsidized interest rates, closer to 0 or 1 percent, unlike the common man in the street who has to pay 12, 15 and 20 percent, and as a result, it leads to what is called the carry trade.

The speculators — or, if you wish, the investors — on Wall Street or on Lombard Street in London, they borrow money at 1%, and they believe that the policies of the central banks are going to lead to a rise in commodity prices. It’s going to lead to a rise in the prices of bonds, so they front run the Fed. If the Fed’s buying bonds, I’m going to get out there in front, borrow the money from them and buy the bonds that they’re going to repurchase, and I’m going to make a very quick, easy, speculative profit, and that is what’s been going on since 2009.

It’s not a new thing. It’s been going on since the Federal Reserve was established, and more so after 1971 after the suspension of convertibility, but it is more intensified, by an order of magnitude, than it was in the early, money creating days of the Federal Reserve.

As we observed yesterday, ultimately it’s the middle class who pays the price. Or what they can afford of it any longer.

The bear market cycles identified by Napier don’t line up in lock step with our “fearsome foursome” chart, but after the crash of 1929, they line up almost perfectly. The inflection points Napier describes — when bear turns to bull — are in 1921, 1932, 1949 and 1982. And based on those previous market cycles, Napier’s book projected the next turn would come in 2014 — next year. (Which lines up with the 14½-year average for secular bear markets.)

But oh, what a wild ride we’d be in for between now and then. In a November 2012 presentation, Napier did not project a date… but he did say for the market to reach valuation levels equal to those earlier turning points, the S&P 500 index — currently above 1,500 — would crash to 450.

Ouch. That implies a Dow in the neighborhood of 5,000 — in line with David Rosenberg’s forecast.

We beg to differ. Aside from the recurring pattern of lows smack in the middle of a secular bear — i.e., 1974 — we’ll cite Napier’s most compelling evidence. It’s the q ratio, or “Tobin’s q.”

This number is the brainchild of Nobel laureate James Tobin: Take the total market value of a company, then divide it by the replacement value of its assets (in other words, how much you’d pay to build the company from scratch).

You can apply the q ratio to a company or the entire stock market. Here’s our 2011 chart, updated to the present courtesy of Doug Short at Advisor Perspectives:

In every previous bear market cycle, the q ratio hit roughly 0.30 at each of Napier’s bear market turning points. Napier is convinced the next turning point will coincide with a similar reading.

We’re struck by the stratospheric reading the q ratio reached at the end of the 1982-2000 bull market — far, far higher than previous tops during the 20th century. We think it’s no accident. We think it’s the consequence of Alan Greenspan’s tenure at the Fed and his habit of loosening the monetary spigots at even the faintest hint of a crisis…

• The 1987 crash & Saddam Hussein’s invasion of Kuwait in 1990
• The 1991 recession & The 1994 “Tequila crisis,” when Mexico devalued the peso
• The 1997 Asian crisis & Russia’s default in 1998
• The Y2K scare in 1999

Couple that with all the money printing Greenspan and Ben Bernanke have done since 2000… and we suggest the q ratio might be moving up in a new long-term channel.

So what does that mean for the Dow, and gold and the ratio?

As we’ve written, we think the bottom is in. The level of 6,547 set four years ago this month will never be revisited. Beyond that, it becomes much harder to say. And once again, the Fed is to blame: Mr. Ritholtz says the Fed’s policies since the Panic of 2008 are a “wild card.”

Zero interest rate policy and quantitative easing “make it difficult to think of most gains as completely organic,” he says. “It also has made any comparisons to prior secular bull markets more challenging, as it introduces another variable.

“Under ordinary end-of-secular-bear market conditions,” he goes on, “I would like to see P/E ratios even lower and stocks even more hated/ignored. The Fed has disrupted those metrics, and that makes seeing the end of the secular bear all the more challenging.

“If you want a more specific forecast date for when I think it will end, my best guess is sometime between next Tuesday and 2017.”

We’ll stick our necks out a bit more in light of the Dow’s performance during previous secular bears, even as we acknowledge Barry’s caveat that we have “a decidedly small sample set” from the past century.

We reprise a chart of the bears and the bulls we published yesterday. In each of the last two secular bears, the Dow has a ceiling. We’re bumping up against the ceiling right now.

Look for a 20-25% downdraft sometime between next Tuesday and 2017. We have every expectation that the boomers who got sucked into stocks in the late ’90s… and again around 2004-05… only to get kicked in the teeth both times… and who are only now re-entering the market… will get kicked one last time.

That will knock the Dow to below 11,000… which at a 2:1 Dow-gold ratio, means gold jumps to $5,500.

That’s our forecast. We’ll keep you updated from now through 2017.

Regards,

Addison Wiggin
for The Daily Reckoning