Global bond manager Pacific Investment Management Co. (Pimco) sees a 60% chance of global recession within three to five years.

“The global economy,” says Pimco analyst Saumil Parikh, “experiences a recession every six years or so.” The last certified global recession was four years ago.

Vancouver veteran Dr. Marc Faber went on record last year saying he believed the chance of a global recession in 2013 was “100%.”

Last week, Faber told CNBC that recent Dow highs were “not to be trusted.” Jim Rogers, another Vancouveralum, with whom we just recorded the Zero Hour scenario has also been forecasting a recession. “You should be very worried about 2013-2014” Rogers warns…

In the markets, traders are worried central banks will ease their “support.” Likewise, individual investors face a catch 22: even good economic news may be negative if it causes central banks to tighten.

“Repeated doses of fiscal and monetary stimulus,” cautions The Daily Reckoning’s Dan Amoss, ”are what make the economy even more fragile over time,” he said. “And yet, during the next slump, you can expect more shrill calls for stimulus.”

And so it goes.

Jason Farrell

For The Daily Reckoning

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“Deficits Do Matter”

Sometime after the election — it must have been mid-November — there was a meeting of the Economic Policy Group, including the vice president. As we sat at the table in the Roosevelt Room, we talked about where we were and where we were going. If I remember right, Glenn Hubbard made a presentation that was displayed on the screen at the front of the Roosevelt Room and showed where we were going and what different tracks looked like and GDP growth and the rest, including the effects of the proposed third tax cut.

I made the argument, which I had been making over and over again since maybe June or July, that it was not advisable to have another tax cut because of the need to fix Social Security and Medicare and to have some money to smooth the fundamental redesign of the tax system. We needed to have in effect rainy-day money in the event that we had another 9/11 event — and at that point it looked like maybe we were going to go to Iraq, and it was not going to be cheap to do that.

So I argued that we should not have another tax cut because the economy was going to be in positive territory and doing okay through the next couple of years anyway without another tax cut, and there were all of these other compelling reasons not to risk a deficit and not to risk adding more to the national debt. And the vice president basically said, “When Ronald Reagan was here, he proved that deficits don’t really matter and so it’s not a consideration or a good reason not to have an additional tax cut.”

I was honestly stunned by the idea that anyone believed that Ronald Reagan proved in any fashion, certainly not in conclusive fashion, that deficits don’t matter. I think it is true on a temporary basis that a nation can have a deficit and have a good reason for having a deficit. I think during the Second World War there was no way we could avoid having a deficit. But when we came out of the Second World War we started running budget surpluses again and did that through the ’50s and into 1960. It’s interesting, it’s really only been in the last 40 years or so that we’ve accepted the notion that it’s a bipartisan thing that we don’t have to have fiscal discipline.

A year ago there was this signing ceremony in the Rose Garden for the new Medicare prescription drug entitlement, and it’s going to cost us trillions of dollars. This event was not unlike any of the others in the Rose Garden on a nice sunny day, with the president sitting at the signing table with a bunch of grinning legislators behind him taking credit for this “great gift” they’re giving the American people. But none of their money was going to get given to make this happen, because the federal government doesn’t have any money that it doesn’t first take away from the taxpayers.

There was no mention of the fact that this in effect was a new tax on the American people, and we didn’t know how we were going to pay for it. It was only grinning presidents and legislators taking the credit for a gift, which strikes me as a ridiculous continuing characteristic of how we do political business in our country.

If you can get 51% of the people in the Congress to agree with the President’s leadership initiative to say we ought to do this, that’s all it takes. And I think it’s regrettably true there are a lot of people who don’t understand that when they get a gift from the American people, it’s from the American people and it can only be paid for with taxes over time.

I think the confusion is aided and abetted by the fact that it doesn’t feel like we’re paying for it. It’s a lot like running up credit card debt: As long as you can pay the interest charges on your credit card debt, you can live way beyond your means. In fact, we as a nation are living way beyond our means, and for a period of time, there’s no doubt we’ve demonstrated you can get away with it. But I think we only need to look at the fate of other countries that have lived beyond their means for a long time to see you inevitably get into trouble.

If you look at Germany in 1923, they got to a point where their currency was so worthless that you needed a wheelbarrow to haul the currency that was needed to buy a loaf of bread. You get inflation where people stop investing in your national debt, when they say, “We’re not going to loan you money because you’re not going to be able to pay it back.” It’s the same thing that happens to individuals and families.

When you get extended to the point that you can’t service your debt, you’re finished. So you go through a calamity — you go through a terrible inflation, which is a way of having a national bankruptcy, and you destroy accumulated income and wealth. In fact you take from all the people, because suddenly their financial assets are worth nothing.

Are we going to have that right away? No. But should the people who are in positions of political leadership know that and anticipate it and do something about it for the American people? You bet. And now is the time to begin doing something about it.

One of the difficult aspects of this debt problem is that it’s not very transparent to people who are unschooled in fiscal and monetary policy. In a way, this problem’s a little bit like the famous example of throwing a frog into boiling water. If you throw him into the already boiling water, he jumps out right away. But if you put the frog in the pot of cold water and turn the heat on under it, the frog will let itself be boiled because it doesn’t respond to slow increase in temperature.

Our debt problem is something like that. If we wait until we have a calamity and financial markets shut us off because we’ve exhausted their belief that we can service additional debt, it’s too late. This is a problem that we need to deal with without letting the heat be turned up some more.

I would hope we can demonstrate we’re intelligent people that don’t wait until they create a calamity in their country before they deal with problems that are obvious to anyone who’s ever studied economic policy and fiscal policy and monetary policy. You only need to look around the world to see places like Argentina, Turkey, and Germany after World War II whose governments have effectively achieved a meltdown condition. Knowing this can happen to modern nations, we should not let it happen to ours.

Regards,

Paul O’Neill
for The Daily Reckoning

Ed. Note: This essay was featured prominently in the Daily Reckoning email edition, which offers a detailed, often irreverent view of the markets at large, every day to over 300,000 subscribers. If you’re not receiving theDaily Reckoning by email, you’re missing out on at least 2/3 of our best analysis and commentary. Sign up today, for free, right here.

From the inside of the Federal Reserve’s gold vault (where we are told one quarter of the world’s bullion resides) to NYC’s diamond district and the gold-dealers on the streets, this NatGeo documentary is a fascinating walk through the reality of trust, money, and gold. As the narrator notes, “the Fed’s discretion is so trusted that few depositors have ever asked to see if their gold is still here,” except of course Germany now that is, adding (from the exact opposite perspective to the man that runs the building) that, “for thousands of years people used gold as money… it’s the perfect recyclable money….” The must-watch video then progresses to the reality of our financial world where he explains, the trillions in money that is transacted every day “used to be backed gold, but is now supported by the promise of our government… The fact that it all works based on trust alone is simply taken for granted,” leaving the ominous question of “who is in charge” of that ‘trust’? Cue Ben Bernanke – who answers the question of what the world would look like without a Fed… bank runs, stock market crashes, and financial chaos.

Wall Street’s biggest disaster was largely due to high-risk deals by one 32-year-old, who lived large and bet crazy

In the summer of 2005, hotshot Amaranth Advisors LLC trader Brian Hunter spied a bargain.

Natural gas supplies nationally were plentiful, gas production was unusually high, and by midsummer storage facilities were brimming with the stuff. Prices were low, hovering between $6 and $8 per MMBtu. Since investors didn’t expect any reason for prices to shoot up, nobody was very interested in options that gave them the right to buy natural gas well above that. The options were going for bargain-basement prices. So Hunter swooped in, scooping up millions of dollars of options on the cheap.

Energy was a growing colossus in Amaranth, and by August 2005 energy investments were tying up 36 percent of Amaranth’s money. Hunter was taking a huge gamble when he bought up his millions of dollars of options. He would profit only if natural gas prices rose dramatically. And that didn’t seem likely to happen.

Then Mother Nature came roaring in to Hunter’s rescue.

…..read more HERE

Like a carefully memorized religious incantation, politicians and central bankers continually stress how their stimulus policies are designed to promote the interests and prosperity of the middle class. Cynical observers may note that this brave political stance may have something to do with gaining the support of the vast majority of voters who identify themselves as “middle class.” However, the cumulative effect of their economic programs has achieved the opposite. The middle class is being crushed under increased taxes, negative real interest rates, debased currencies and increasingly intrusive regulations.

A large and healthy middle class is the single most important bastion of democracy and freedom in the modern world. Individuals who identify with the middle class exhibit strong support of their nation and economic system. A small, weak middle class opens the political door to dictatorial control and tyranny. This was the case in the waning days of czarist Russia when, the small Bolshevik party was able to court the discontent of the underclass to seize control over more than one hundred million people.

Many government policy decisions lead Americans to take on debt, such as Clinton’s homeownership push, Bush’s post-911 spending prescription, or the tax code’s mortgage interest deduction. As the largest debtor in the world, it is not a leap in logic to imagine the U.S. Government prefers policies that favor debtors rather than creditors. These efforts can be magnified if central bank monetary debasement destroys the value of any savings the middle class had managed to save. The explicit policy of the Federal Reserve is now to hold interest rates below the rate of inflation, which by definition discourages saving and encourages debt.In exchange for the loss of their savings, the middle class can’t point to any significant gains. Wage rates in America and Europe have been largely flat for several years. In Japan, a similar recession caused a flat economy that has lasted for more than ten years while the broader economy has largely stagnated.

Meanwhile the middle classes are reeling from price increases in many of the areas that are most vital to their lives, such as food and energy. Statistics show that the share of income that Americans must devote to these basics has increased significantly in recent years. In addition, huge new stealth taxes, such as ObamaCare, threaten to dig the hole even deeper. The combination has been a serious reduction in the net disposable income of many consumers in the middle classes. However, even these reduced incomes disqualify many in the middle from government aid programs such as mortgage relief, Medicaid, and food stamps. In short, the middle class is being squeezed between lower net earnings and higher living costs. It’s no wonder that many have turned to debt to get by.

Many of those members of the middle class, who have scraped and saved during their working lives, now face serious unemployment, often long-term in nature as old skills become redundant. In retirement, these people live often on fixed incomes. Many who are fearful of recession and the resulting market vulnerabilities of securitieshave hoarded cash in bank deposits. Today’s interest rates manipulated downwards by central banks offer depositors less than half of one percent a year on most deposits. With even ‘official’ inflation running at just over one percent, bank deposits and short-term financial instruments offer only negative yields. If a more realistic rate of inflation were widely known, almost all fixed instruments, other than those of very high risk, would offer negative real yields.

Finally, the oppressive regulations and aggressive intrusion of today’s government are reducing the incentive and raising the costs of starting and continuing in small businesses. In fact, a recent report detailed the increasing difficulties of starting a small business in America. Despite small but steady increases in the overall employment picture, more small businesses are cutting workers rather than bringing on new hires.  

In short, the policies of central banks, combined with those of overbearing government, are crushing the middle class and with them the single most important bastion of democracy. Students of history recognize this trend as dangerous. People who believe that society offers no hope of improvement are often willing to enlist in open class warfare and subscribe to the views of dangerous demagogues. Perhaps this is the direction that Washington, Brussels, and Tokyo want to go? We should take great efforts in spreading the word that freedom is good for everyone, not just the rich.

John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

Vancouver, Calgary and Toronto Detached Housing Priced in Gold

The chart above shows Vancouver, Calgary and Toronto detached housing priced in ounces of gold valued in CA$. Bullion attracts investment when credit markets contract because of its classic use as a hedge against currency depreciation and its ability to act as money, a store of value. The Millionaire Metric allows you to see what your dollar is worth and the (declining) amount of gold you need to be a millionaire. In May 2013 the spot price of gold continued to plunge driving the cost of real estate up in relation. So far it’s been a year and a half correction. In terms of value it requires 36% less gold to be a millionaire than it did 5 years ago.

…..view 12 more Real Estate Charts HERE