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Last Gasp of a Doomed Currency

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Last Gasp of a Doomed Currency
by Peter Schiff, Euro Pacific Capital | September 12, 2008

In the latest example of financial market madness, the recent government “bailout” of Freddie Mac and Fannie Mae has perversely resulted in a sharp rise in the value of the U.S. dollar. If the markets were functioning rationally, the transference of staggering new liabilities to the U.S. Treasury would have been immediately seen as catastrophic for the dollar. Instead the markets have ignored the obviously negative long-term implications and have remained fixated on the more immediate effects. However, rather than solving the problems, the government’s actions merely confirm my worst fears, and increase the chances for a hyper-inflationary outcome.

By transforming $5.5 trillion of suspect mortgage-backed securities into seemingly bullet-proof Treasury bonds, the move has sparked a relief rally in the dollar as foreign investors no longer have to worry about defaults or markdowns. In fact, to holders of Fannie and Freddie debt, it no longer matters what happens to the housing market. Home prices can drop another 50%, every single homeowner can default on their mortgage, and bond holders will not lose one dime. This has emboldened foreign investors, and temporarily increased demand for both dollars and Freddie and Fannie debt.

Had the government done the right thing and not guaranteed Freddie and Fannie debt, I believe we would now be experiencing an outright financial crisis. The dollar would be falling sharply along with real estate prices, gold would be soaring and the recession would be deepening. However, by nationalizing Freddie and Fannie, the government has merely delayed the crisis. The borrowed time will cost us dearly, as the day of reckoning will now likely involve much steeper losses for our currency.

The Freddie and Fannie takeover does nothing to address the underlying problems that forced the companies into bankruptcy in the first place. All of the bad mortgage debt still exists. In fact, based on this bailout, there will be trillions more in bad mortgages insured over the next few years. The only thing that has changed is how the losses will be distributed. Instead of falling solely on bond holders, who had chosen to invest in mortgage debt, they will now be dispersed among U.S. taxpayers and all holders of U.S. dollars, who made no such choices.

Over the next year or two, my prediction is that several trillion dollars of existing mortgages, not currently insured by Freddie or Fannie, will be transferred to the pile. Going forward the vast majority of new mortgages made to Americans will be bought by Fannie or Freddie. Therefore in a few short years the $5.5 trillion of initially transferred liabilities could grow to more than $10 trillion of new obligations for the U.S. Treasury.

The defenders of the bailout claim that Fannie and Freddie debt does not represent true obligations because they are fully collateralized by homes. But anyone with a casual interest in the current real estate market knows that homes are now only worth a fraction of outstanding mortgage debt. And that fraction gets smaller every day. My guess is that $10 trillion of federally insured mortgages could result in $2 trillion of losses, which amounts to more than $25,000 per American family.

Also, there is no reason to believe that the bailout merry-go-round will end with Fannie and Freddie. Faltering investment bank Lehman Bros. is now positioned to receive the kind of Federal backstop that smoothed the purchase of Bear Stearns back in March. Bailouts of automotive and airline companies can’t be long in coming. Once the market perceives a Federal magic wand, it becomes politically impossible to stop waving it.
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read the rest here http://www.financialsense.com/fsu/editorials/schiff/2008/091...




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Peter tells it like it is.

I've noticed that the media don't have him on whenever the markets are shaky. If you look at his video interview archive at www.europac.net he hasn't had an interview since 8/27/08.

Here is a good five part talk he gave in 2006.

February 2006 Peter Schiff U.S. Bubble Economy Part 1 of 5
http://www.youtube.com/watch?v=sDh3FNuwrTc

Peter Schiff

is the man.
he was the economic advisor to Ron Paul's 2008 presidential run, and he's known about the coming collapse for years. when it comes, he'll have gold a plenty.

another guy to listen to is Jim Rogers. freaken genius too.

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this should make you VERY ANGRY

The only thing that has changed is how the losses will be distributed. Instead of falling solely on bond holders, who had chosen to invest in mortgage debt, they will now be dispersed among U.S. taxpayers and all holders of U.S. dollars, who made no such choices.

If you think about that rather casual statement, it is truly outrageous. Our forefathers would be marching on DC with tar and feathers in hand.

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What is begun in anger, ends in shame.

no actually they would be doing money bombs to make contracts

with other nations to by bigger guns not peeshooters. You think there wasn't a law that said they couldn't borrow money for war against england. lol think again they broke the law for freedom. Why because they got a taste of both and they wasn't going back where they had come from. They would have rather lost everything even their lives.