1000 Point Drop In The Dow? This Is Just The Beginning…

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By Giordano Bruno

Neithercorp Press – 5/14/2010

Anyone who has been following the fundamental underlying details of the economic downturn since 2007 recognizes that the mainstream financial media have regularly misreported facts in order to quell public concerns over the true magnitude of the collapse we are facing. More often, they choose to simply leave out certain details which might alert people to the greater problem, or underreport vital facts and hope that the truth is eventually buried by the gravity of the great “memory hole”. However, there are instances under which they will lie blatantly and outright about the state of the economy if a piece of information is highly damaging to the establishment. The 1000 point drop of May 6th was one of those instances.

Theories, most of them MSM fabrications, abound in the trading community over this recent event. The shock of such a drop in the market has given many analysts ‘tunnel vision’, and blinded them to the bigger picture. A 1000 point loss in the Dow is certainly a historical event, but in contrast with the whole of what we now face, it is only a symptom, a footnote. It is common for investors and even people with little concern for markets to see what they want to see when it comes to economics. Strong fair trade is the lifeblood of any society. No one wants to believe that they are in the midst of a financial freefall, and some will ignore the obvious until the world comes crashing down around their ears. People fear economic uncertainty more than they fear war, and denial is always pervasive in any culture facing such calamities as depression, or hyperinflation. We WANT to believe economic lies. We want “comfort”, not truth.

In this article, we will ignore comfort. We will set aside what we might wish to see, what we know others want to hear, and examine only the facts, which is something Americans should have been doing years ago, before the collapse ever began. Only by admitting that there is a serious problem, and examining the fundamentals at the heart of that problem, will we ever be able to fix the problem, or at least prepare for its consequences.

One “Fat Finger” Crushed Wall Street?

I know a tall tale when I hear one. “Green Shoots are sprouting”, “The Federal Reserve is necessary”, “Inflation will save us”, “Debt is good” etc. But this one really takes the cake. For those not yet aware, on May 6, 2010 for about 20 minutes the Dow Jones index experienced what some are now calling a “flash crash”, causing it to lose approximately 10% of its entire value. It is considered by many to be comparable to the Black Monday crash of 1987. The market went into a panic, and many traders reported being locked out, unable to process buy and sell orders.

Usually, when the Dow takes a dive like the one on May 6th, there are a whole myriad of factors including instabilities in foreign markets that must be accounted for. We have problems in spades here in the U.S., including a meltdown in long term Treasury bond sales, constant fiat liquidity injections by the private Federal Reserve, continuously frozen credit markets (the problem the bailouts were supposedly going to fix), sustained high unemployment, and a debt to GDP ratio of around 96% (this does not include the debt of unpaid entitlement programs such as Social Security, which if factored in would increase our Debt/GDP ratio by about 800%). Setting the United States aside, Europe is also on the verge of a sovereign debt collapse. Countries such as Greece and Italy have debt to GDP ratios between 150% and 200%.

This kind of debt around the world is absolutely unsustainable regardless of liquidity injections, not even for another few years. The elements for market chaos are everywhere. And yet, when the Dow took a thousand point hit last week, the mainstream media blamed a “fat finger” pressing the wrong key at a trading computer:

http://www.nydailynews.com/money/2010/05/07/2010-05-07_sec_investigating_whether_trader_error_caused_998point_dow_freefall.html

This claim was thrown about by some in the MSM as if it was a verified fact, yet there was absolutely no evidence anywhere to suggest it had any validity. Now, the SEC has reported that it found NO SIGNS that such a trading error ever occurred:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7OLNQchlb7g&pos=5

The bottom line: The “fat finger” story was completely fabricated in order to placate the general public and distract them from the very thin thread our economy hangs by. As if to say to the curious populace “Move along! Move Along! Nothing to see here…”

What the SEC’s findings show is that no one “error” initiated the flash crash, and that the drop was most likely caused by very real and dangerous economic instability! Our markets are indeed so falsely inflated and manipulated that they are capable at any moment of 10% losses in less than twenty minutes time. May 6th was a loud and clear warning to America; pull your money out of stocks while you still can, and get ready for intense volatility in the coming year.

Europe On The Ropes

Last year, we talked about the near sovereign default in Dubai, calling it a stark “canary in the coal mine” alarm to the rest of the world that market chaos was about to commence:

http://neithercorp.us/npress/?p=199

If Dubai was the canary, then Greece is one of the miners…

It was only a matter of time before Europe’s debt problems caught up with them. Greece was already in financial limbo when it was allowed through a bending of rules to join the European Union in 1981. Budgetary actions involved in joining the EU strained Greek markets, and those who take on membership in the Euro are also not able to lower their own interest rates, or inflate their currency in order hide or temporarily delay debt default conditions as we do here in the U.S. This is why even though American external debt is greater than any nation in history, and our budget deficit dwarfs most country’s GDP, Europe was still hit first by prominent signs of sovereign bankruptcy. We are able to delay for a short time our inevitable financial fate by printing money out of thin air. Some mainstream analysts argue that our ability to inflate makes us safe from default. Of course, what they don’t mention is that this strategy monetizes our immense debt, a process which I and many others believe will result in the destruction of the Dollar; the very foundation of our now de-industrialized economy.

European default would be quite a disaster, but one that over a moderate period of time could be rebalanced. May 6th, conversely, signaled a possible change in policy for the EU, which has now suddenly rushed forward with a nearly $1 Trillion bailout package for troubled member nations in the span of a weekend:

http://www.bloomberg.com/apps/news?pid=20601068&sid=alxKmD3w0yqY

This news caused an initial surge in world markets, as did the other half-dozen times that the EU put forward the idea of a bailout for Greece. Investors are still mildly enchanted with the idea of liquidity injections, but certainly not as much as they may have been a year ago. The surge is now beginning to fizzle, and investor sentiment over the supposed recovery is shriveling. Debt in countries such as Italy, Portugal, and the UK are extremely precarious, though the media has focused all of its attentions on Greece for the past several months. The phrase “Greek Debt Contagion” is highly misleading. The Greek crisis is not “spreading” to other countries, its just making the already fragile financial issues of other countries more visible.

The induction of a U.S.-like inflationary program in Europe is less than appealing. Those involved in the markets are now realizing what we have been saying for years; the sovereign debt crisis is global, and no bailout will ever stem the tide. The EU bailout may even serve to exacerbate imbalances, turning a difficult but surmountable disaster into an outright holocaust, due to the suffocating and vicious circle of austerity.

“Austerity” is an eloquent word for a rather brutal policy. The EU’s bailout was facilitated with the help of the IMF (an action which goes against EU law and IMF charter), and when you deal with the devil, there are always strings attached. These strings include the austerity process, which involves the draconian dismantling of most social welfare programs and the disenfranchisement of government employed workers.

In America, many of us see smaller government as a good thing, but from the average European’s point of view, government has been the primary provider for generations, causing many citizens there to become entirely dependent on the system. To cut social welfare in countries that know nothing beyond the socialist constructs they are used to would be a demoralizing proposition. This is a process in which the citizens of Greece are actually penalized for the mistakes of their runaway government officials. That is why riots have exploded in Athens. They know full well the IMF’s track record of subverting nations with highly conditional loans that demand austerity crackdowns on public programs, usually ending in the feudal enslavement of the people while the members of government that accelerated the mess get away scot-free.

Imagine if the U.S. government decided to cut Social Security, and millions of retirees no longer received the money they have grown dependent on for their survival. Imagine that those Americans that receive food stamps (currently 40 million people and climbing), were suddenly cut off because of the establishment’s engineered “blunders”. Imagine the fervent anger that this would cause. It is the kind of mass disillusionment and outrage Europe is facing today, and likely what we will be facing tomorrow.

Citizen unrest is also not the only factor that could throw off the EU bailout or disrupt markets. Because the package is being presented as a fund not just for Greece, but for all EU member states, all these states must adhere to the particulars of the decision as well. This means that all EU countries could eventually be subject to austerity conditions. Many in Germany are extremely unhappy with this arrangement after being outvoted on the initial proposal, and have hinted at the possibility that they will fight against it in the future:

http://www.businessinsider.com/germany-was-out-voted-and-forced-to-bail-out-europe-2010-5

This means that the bailout itself is not even finalized, placing Europe in a Catch-22 scenario (again, just like the U.S.). Pushing forward with the legislation and selling out to the IMF could cause severe division amongst EU nations, disrupt government programs in numerous countries, and foment more riots among the population. Finding (as we have in the U.S.) that the bailouts are not working, they will continue on the path towards over-liquidity and hyperinflation. If they do not push for the bailout, Greece will default, and it will default in short order, followed immediately by Spain and Portugal. This would cause global markets to crumble as well as a cataclysmic devaluation of the Euro.

Interestingly, the only entity that seems to come out ahead in this mess is the IMF, and I believe this is by design. International banks like Goldman Sachs (supporters of globalism and the IMF) triggered the collapse in Greece with fraudulent credit default swaps, just as they helped trigger the collapse here in America with toxic derivatives. Goldman sold these derivatives KNOWING full well that they were toxic, then, bet against them later, making an enormous profit. The fact that Goldman bankers bet against the very derivatives they sold to others shows that they were well aware of the unstable toxic nature of the assets. Here is the boisterous and refreshingly savage Max Keiser to explain the Goldman Sachs involvement in the Greek collapse further:

Goldman’s involvement in the Greek snafu is assuredly not isolated. Goldman deals with many countries and has likely pulled the same scam everywhere. But why would a large international bank deliberately sabotage the economies of the countries it does business with? Would this not ruin the banks as well in the long run? Not if you consider the possibility that Goldman is destabilizing countries deliberately to help the IMF…

Cascading the European economy in the near term will damage all markets, and could even make some markets disappear entirely. However, this is exactly what the IMF is best known for; netting economies as they begin to spoil, while the people are too frightened, distracted, or desperate to do anything about it. The disconnect for many of us is that we seem to think the IMF only hijacks third-world shanty nations. What we need to realize is that the model the Global Banks used to strong arm the third-world is now being used on us. Goldman’s utilization of financial poison on western countries is in fact ‘necessary’ in the process of globalization, and the institution of the IMF’s new “world currency”, the SDR. Europe and the United States have the most prominent currencies in international trade; the Euro and the Dollar. The actions of Goldman Sachs in the Eurozone indicate to me that Global Bankers hope to engineer a simultaneous breakdown of both currencies to make way for the SDR.

Claiming that it is “necessary” to prevent another meltdown, the head of the IMF has already called for his organization to be given unprecedented oversight and control over the economic functions and decisions of member countries, effectively making the IMF global overseer of all finance:

http://www.businessinsider.com/head-of-imf-calls-on-member-states-to-give-him-global-oversight-of-the-financial-system-2010-2

And just hitting the news wire in the past couple days, the IMF’s high level meeting in Switzerland on May 11th has apparently openly produced a strategy to officially make the SDR the new global currency to “assuage fears” of monetary collapse in the Euro and the Dollar. That’s right, they use the words “Global Currency”. This news comes straight from the IMF’s own press release on the meeting, which you can read here:

http://www.imf.org/external/np/speeches/2010/051110.htm

Here is expert on global capital Jim Rickards of consulting firm Omnis Inc. on the implications of this announcement from the IMF. He also believes the institution of the SDR as a world reserve currency may take less than a year-and-a-half:

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/13_Jim_Rickards.html

I have been warning that the IMF and global banks were positioning the world for this move for the past three years, and now it is here.

The May 6th incident proves that EU nations will do anything to prevent a sovereign debt default in any of its members, and to keep markets happy for as long as possible. The speed at which they produced the $1 Trillion package is astounding (unless, of course, they had it ready all along in anticipation). This means that they will continue fiat bailouts just as we have in the U.S., even if eventual hyperinflation results. The difference in Europe’s case is that their bailout is coming directly from the IMF, which means the more they inflate the deeper they go into the IMF’s pocket, and the more viable an option the SDR will seem. The endgame of this is obvious. What we are looking at is the total subjugation of Western finance and infrastructure at the hands of global banks. Both sides of the Atlantic are now, to be quite frank, targeted…

America: Default If We Do, Default If We Don’t

May 6th dashed ideas of “green shoots” in America, at least subconsciously, in most people. If the Dow Jones can lose 1000 points in a matter of minutes, then there is no recovery. A Greek bailout might appease investor sentiment for a short time and boost markets, but only until the fog of disinformation lifts again and we get a new glimpse of reality. If one was to examine the Price to Earnings Ratio (P/E ratio) of the S&P 500, he would find that S&P company earnings are so low that the high value of their stocks is absurd in comparison:

http://moneynews.com/StreetTalk/David-Rosenberg-stocks-Overvalued/2010/04/30/id/357410

Most American companies have sustained low or nonexistent earnings for the past 3 years. The widely publicized earnings revamp in 2009 by some corporations was due in most part to budget cuts. Meaning, the mass layoffs they instituted in 2008 gave the illusion that they were making a profit when they were only scrapping labor. Most companies are making little to no substantial profit through actual sales, yet the value of their shares continues to rise. This has caused stocks to bubble, currently overvalued by 35% or more.

One might ask where the money is coming from to drive the Dow to such unwarranted highs despite the floundering earnings of many companies. A little known decision by the Reagan Administration, Executive Order 12631, may explain a good number of inconsistencies in our economy:

http://www.reagan.utexas.edu/archives/speeches/1988/031888d.htm

Also known by some as the PPT (Plunge Protection Team), the order forms an action group composed of the Secretary of the Treasury, the Chairman of the Board of Governors of the private Federal Reserve, the SEC, and the CFTC. The language of the order was very broad, but the general goal of the PPT was clear; prevent another ‘Black Monday’ stock crash. How? By dumping liquidity into stocks whenever they begin to falter, and snuffing out the last embers of natural free market economy. This kind of manipulation went for the most part unnoticed by the public until our current Recession/Depression began. Some international banks have admitted to the use of the continuous bailouts handed to them by the Fed to snap up stocks instead of reenergizing credit markets as the money was supposedly intended. It is likely that the Fed with the SEC’s blessing has also been pouring fiat into markets directly. This would explain how the May 6th drop could have turned around by 700 points in a matter of minutes.

The establishment is doing everything in its power to keep the illusion of recovery alive.

Hidden Unemployment:

The latest unemployment report from the Labor Department shows a positive job creation of 290,000, yet also reported that unemployment increased to 9.9%. Apparently, the Labor Department still hasn’t been able to get its story straight. In March we talked about the LD’s new ambiguous survey method, which severely narrowed down the number of participants, thus allowing the government to “interpret” the survey in almost any way they choose. Interestingly, some economists are questioning why the government doesn’t report MORE fake job creation, since they now have the option to:

http://www.bloomberg.com/apps/news?pid=20601087&sid=akL7QcsF23dI&pos=2

These economists apparently have no clue as to the subversive changes in the survey method. I suspect that the Labor Department is trying not to overdue its manipulation of employment figures, or risk drawing too much ire from the millions of Americans who know for a fact that there are no jobs, because they are still looking for one.

Real unemployment counting those no longer collecting benefits and those who are underemployed is around 20%. One need only examine the actual availability and quality of jobs in his own city to see that the government is being anything but honest on unemployment.

State Budget Deficits:

Greek debt is nothing compared to the debt of many states here in the U.S. California’s economy is four times as large as Greece, and is experiencing the same sovereign default issues:

http://www.businessinsider.com/why-california-is-the-next-greece-2010-05#california-has-a-20-billion-budget-gap-despite-last-years-ravaging-cutbacks-1

In June of 2009, the state of California sent IOU’s to employees instead of paychecks, and Schwarzenegger is now warning of “terrible cuts” to public programs in order to meet the budget shortfall, meaning, California is suggesting its own “austerity program”:

http://www.businessinsider.com/schwarzenegger-warns-of-terrible-cuts-absolutely-terrible-cuts-coming-in-california-2010-5

California is not alone. Many states are now in the red in terms of budgets:

http://www.nytimes.com/2010/03/30/business/economy/30states.html?th=&emc=th&pagewanted=all

Siphoning Pension Funds:

Another disturbing prospect is the suggested move by some governments (including the U.S.) to begin confiscating employee pension funds in order to cushion the accounts of the banks that caused the crisis in the first place:

http://www.marketoracle.co.uk/Article16809.html

This move may not only be designed to prop up bad banks, but also as a clever way to hide the fact that state pension funds in the U.S. now have a $1 Trillion shortfall or more:

http://www.reuters.com/article/idUSTRE61H13X20100218

The government effectively erases the issue of pension shortfall by simply taking away everyone’s pension!

Ignoring Inflation:

According to Ben Bernanke and the Federal Reserve, fiat money injections have not created inflation, and will probably never create inflation. Of course, ever since the Fed stopped reporting M3, which was the most accurate and definitive measure of our money supply, it is difficult to know what is going on at all. It would seem we are expected to take Ben’s word for it. Despite the lack of transparency, the Fed’s current method of inflation measurement has still revealed a 2.2% hike in consumer prices in the month of March, which is approaching the maximum level the central bank considers “sustainable”:

http://www.breitbart.com/article.php?id=CNG.f4ca4a183df2102e9ad9338f1c9b7c75.171&show_article=1

This measurement does not even include Food and Energy prices. When these are examined, the Fed reports that from March 2009, to March 2010, food and energy prices rose 18.7%! This is an incredible bane to the average consumer’s pocket book!

Some may argue that most of this inflation is due to the steady increase in gas prices, but if they were to look over the price increases in individual food items, instead of the manipulated “mean average” put out by the Fed, they would find considerable price spikes in essential foods over the past year:

http://data.bls.gov/cgi-bin/surveymost?ap

Anyone who does their own grocery shopping knows inflation is ever present. I have noticed in my own area price increases in stock goods of 14% to 20% from a year ago. While Americans might feel like they are being slowly exsanguinated by this trend, it is a cakewalk compared to the inflation we are liable to see in the coming year.

To make matters even worse (which is hard to imagine), the Fed is now creating fiat at the expense of the American taxpayer and sending the money to bailout Europe, doubling our chances of hyperinflation!

http://finance.yahoo.com/news/Federal-Reserve-opens-credit-apf-3150539460.html?x=0&sec=topStories&pos=main&asset=&ccode=

Default Inevitable:

One major difficulty I have come across in trying to explain the circumstances of inflationary breakdown in the U.S. is the debt default issue. Deflationists who argue that inflation is not a concern almost always overlook the problem of our national debt and its effect on the value of the Dollar.

To be as clear as possible; overprinting is NOT the only cause of inflation. Inflation is caused by a fall in the value of our currency. There are many events which can incite the Greenback to devalue, and overprinting is only one of them.

Our unprecedented national debt and our increasing yearly budget deficit can trigger a dollar collapse if foreign investors in our debt decide we are too much of a risk. If BRIC nations, for instance, were to declare that they will no longer use the Dollar as a reserve for trade, the value of our currency would plummet, and we would have inflation despite any physical printing executed by the Fed and the Treasury. If major investors in our Treasuries decided to stop purchasing our bonds (which they have), and begin dumping their existing store (which they are in the process of doing), this would also cause a dollar dive on the world markets, and since we produce very few of our own goods anymore, most manufactured items and some food items would skyrocket in response.

I have said this many times in the past, but I’m going to go over it again for the deflationists out there. Foreign investment in our long term debt has disappeared, and it is waning in our short term debt. This raises a very serious conundrum. If the Fed does not continue monetizing our debt, we will default, the dollar will lose its reserve status, and hyperinflation will commence. A deflationary reaction may occur in stocks, but this is meaningless compared to the increase in prices of goods. If the Fed continues to monetize our debt as the only real investor of Treasuries, the dollar will lose its reserve status, its value will disintegrate, the U.S. will still default, and hyperinflation will commence. Either way, the dollar dies, and we get inflation.

In this scenario, I would not at all be surprised if infusions from the IMF were presented as our only option, with a heavy price tag attached of course…

Another common argument I hear from some financial analysts is that inflation could be a “good thing”, because most debts are denominated in U.S. dollars, and an increase in the supply would make those debts “disappear”. Firstly, these men are assuming that debt will ALWAYS be denominated in U.S. dollars. If we see a major Greenback devaluation, it is very possible that other countries will refuse to take dollars as payment on debts, instead asking for payment in a more stable currency, or even gold. Inflation does not dissolve debt, as I’m sure anyone in Zimbabwe can attest.

Second, even if inflation could somehow be used to wash away deficits, a major dollar depreciation is in no way worth balancing our checkbook. The death of a currency is the death of an economy, and sometimes the death of an entire culture. To hope for hyperinflationary conditions is pure insanity, and any economist who tries to argue otherwise should not be taken seriously.

Prepare For The Worst…

Years ago, the financially conscious in this country saw the precipice ahead and attempted to fight our downhill locomotion towards it. We did this in the hope that through the system, we could affect greater understanding and greater transparency. Our efforts have yielded an astonishing surge in awareness among the public, but very little in the way of diffusing the economic time-bomb we now sit on. There comes a point in any impending disaster when evasion is not an option, and we can only prepare, strengthening ourselves to absorb the trauma. Ron Paul’s Fed Audit Bill was in my view our last chance of working within government to deflect or at least soften the fall we are about to experience. Unfortunately, the Senate has partly derailed Paul’s efforts by passing a toothless proxy supported by CFR member Chris Dodd. The proxy bill allows a one time only audit of the TARP bailouts utilized by the Fed, but not an audit of the Fed’s actual accounts and stockholders. In short, the bill is impotent.

Ron Paul’s bill still has broad based support, and we should continue to fight for it, but do we have the time? I do not believe the Federal Reserve will ever submit to a full audit of its policies and accounts, and is simply dragging out the process until we are in the midst of the final stages of this collapse. Europe’s decline is accelerating faster than most anticipated, threatening to set off a chain of dominos leading straight to the U.S. If anything, this situation proves that the concept of globalism is impractical; through obligatory interdependency, any handful of nations can drag the rest of the world underwater like a cinderblock tied to our feet. Yet, more globalism is being presented as the only solution to our ills!

We and many others have been predicting that the climax of the downturn which began in 2007 will be initially triggered this year. According to the fundamentals, there is no way that we can avoid a currency implosion this late in the game. My suggestions for preparation remain the same as they always have; buy silver, buy gold, buy food, and a means to defend yourself. We might not be able to halt the collapse, but we can survive it, and rebuild in such a way as to ensure such tragedy is never forced upon us again.

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