The financial danger facing us.

There are two basic and very great dangers facing the financial system of America:

The first one is the continued default of real estate, now commercial real estate. Fully 7.1% of real estate loans are now in default and default rates will skyrocket. The reason is that real estate loan recepients usually pay interest only and almost half of the outstanding loans will become due later this year and next year. With the economy in the pits, commercial real estate loans that cover shopping centers, offices and other such items are simply beyond the means of businesses to pay. It is estimated that nearly 1,000 regional banks are in danger of going under.

The second danger arises from the "carry trade" in the dollar. This is the way it works: the FED makes loans to banks and hedge funds at 0.25% interest. Banks and hedge funds then use this money to buy Treasuries on which they earn 2.0-3.5% interest risk free. Naturally, banks and hedge funds would rather buy Treasuries than make loans to businesses. A good way you say to recapitalize banks? OH NO, NOT BY A LONG SHOT!! The banks are allowed to become leveraged and buy 10 to 30 times the amount they borrowed from the FED. Since, the banks can not buy all the Treasuries, the FED buys a hitherto secret amount. But, as the manufacturing of currency picks up, the value of Treasuries decreases and the FED has to increase the interest rate it pays on Treasuries, so there are buyers. But, as the interest rates on Treasuries increase, the government has to pay more interest on the debt. In addition, the rate of loss of value of Treasuries is faster than the rate of gain in interest paid to the banks and hedge funds and these in turn must raise capital to satisfy reserve requirements. This makes it even harder for business to borrow. The carry trade in Japan ushered in the lost decade of very small gain in their economy.

So, as the banks go belly up, the FED has to print money even faster to pay for the deficit and for financing the national debt. This will fuel very rapid inflation.

Certain pundits tell us to sell gold because it will drop in price. Even George Soros got into the act. But, he just bougth $75M worth of stock in NovaGold Resources, while Paulson got $100M worth of stock. Both got a 25% discount btw.