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Welcome to the "Wolf Creek Pass" School of Monetary Policy

I don’t know if you folks remember that hit ditty: a humorous tune about two truckers attempting to manhandle an out-of-control 1948 Peterbilt down the “other side” of Wolf Creek Pass – a death-taunting section of U.S. Highway 160 where the elevation drops a hefty 5,000 feet in a relatively short distance.

The song’s two characters – a truck driver named Earl and his brother, who’s his partner as well as the song’s narrator – are taking a flatbed load of chickens on a speedy trip down this winding, two-lane Colorado highway. After the narrator gives Earl the above-mentioned warning, the ancient semi’s brakes fail.

From there on down, the narrator tells us that the brothers’ trip “just wasn’t real pretty.” The truck careened around hairpins and switchbacks, and then raced at an uncontrolled 110 mph toward a tunnel with “clearance to the 12-foot line” – with chicken crates sadly “stacked to 13-9.”

The drivers and the runaway Peterbilt “went down and around and around and down ’til we run outta ground at the edge of town… and bashed into the side of the feed store – in downtown Pagosa Springs.”

Believe it or not, I started thinking about this funny old country tune the other night – right after I’d read a piece about QE3 and the U.S. Federal Reserve.

As zany as it first sounds, the parallels are striking.

  • Featured Story

    DON’T BE SO ARROGANT, MR. PRESIDENT

    Empires have come and gone. Some lasted a blink of an eye and some millennia.
    The question is, after 9/11, the rise of China and a great financial crisis, where does the U.S. empire stack up to its predecessors?
    Well, it seems the one commonality they all have is the point when their might was undermined by sloth and greed. And entitlements: free bread and circuses. For some it took years, others centuries.
    Here, in a compelling and unique address, is what Romulus Augustus, the last emperor of the Roman Empire, might say to President Obama now about how to keep America great.
    Read on and share with family and friends...

    Read More...
  • Martin Hutchinson

  • How to Fix the U.S. Housing Market If this week's economic reports showed us anything, it's the fact that two years into what's supposed to be an economic recovery, the U.S. housing market remains on life support.

    But here's what those reports didn't tell you: If the housing market isn't fixed soon, it's going to drag the rest of the economy down into a hellish bottom that will take years, if not decades, to crawl out of.

    The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth.

    It's time we fixed what's broken and implemented new financing and tax strategies to stabilize prices.

    Contrary to the naysayers - and in spite of political pandering and procrastination - we can almost immediately execute a simple two-pronged plan to fix mortgage financing and stabilize U.S. housing prices.

    I call it a not-so-modest proposal.

    The Worst Since the Great Depression

    The facts are frightening: We are in a bad place. The plunge in housing prices we've seen during the current downturn is on par with the horrific freefall the U.S. housing market experienced during the Great Depression.

    And without an effective plan to arrest the double-dip in housing, there's no bottom in sight.

    Hope Now, an alliance of lenders, investors and non-profits formed at the behest of the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development, counts 3.45 million homes being foreclosed from 2007 through 2010. Current estimates of pending and potential foreclosures range from another 4 million to as many as 14 million.

    According to RealtyTrac, a real-estate data provider, the country's biggest banks and mortgage lenders are sitting on 872,000 repossessed homes. If you add in the rest of the nation's banks, lenders and mortgage-servicers, the true number of these REO (real-estate owned) homes is closer to 1.9 million.

    These shocking statistics illustrate just how large the current overhang of bank-owned properties actually is (at current sales levels, REO properties would take three years to unload). And they help us to understand how the staggering number of yet to-be-foreclosed, repossessed, and sold homes will depress U.S. housing market prices for years to come.

    Please read on by clicking here ...

    Read More...
  • Author Chat: Money Morning's Martin Hutchinson Talks About "Alchemists of Loss" The Nobel Prize panel granted its top award to seven leading economists - whose theories went on to cost investors trillions of dollars in losses.

    This story - as well as some of the other top financial fiascos through the ages - is detailed in the new book, "Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System," which was written by Martin Hutchinson, a former merchant banker and Money Morning columnist, and Kevin Dowd, an economist and respected academic.

    Money Morning Executive Editor William Patalon III recently sat down with Hutchinson, to talk about the book. Here are some excerpts from that discussion.

    Read More...
  • Money Morning Mailbag: Tobin Tax the Only Solution to Problems Posed by High Frequency Trading An episode of the television news program "60 Minutes" that aired Oct. 10 highlighted investors' fears over the growing trend of high frequency trading (HFT) run by a world of "supercomputers."

    The "60 Minutes" piece prompted this letter from a reader wondering if the technological shift means it's time to readjust investment strategy.

    Sunday night on "60 Minutes" they had a story about high-speed computers that are out-trading humans. Is it time to refocus on the world stage and find tangible rather than paper investments to put your money in? A partnership in a retail or manufacturing venue surely is more transparent than the stock market.

    --Roman

    Money Morning has been examining the effects of high frequency trading for years. In August 2009 Contributing Editor Martin Hutchinson said high frequency trading systems were front-running the market.

    Read More...
  • The Defeat of the "Shadow Shogun" Means it's Time to Buy Japanese Stocks Japanese Prime Minister Naoto Kan's narrow Tuesday victory over Ichiro Ozawa for the leadership of the Democratic Party of Japan wouldn't normally get investor pulses racing - after all Japan has had five prime ministers in four years.

    However, the Bank of Japan's heavy intervention in the currency markets this week confirmed my view that this political twitch was really very different.

    The upshot: As investors, we should pay attention ... and should look to increase our allocation to Japanese stocks.

    To understand why it may be time to buy Japanese stocks (and to see what stocks to buy), please read on...

    Read More...
  • Investing in Canada: The World's Safest Economy I've said it once, and I'll doubtless say it a few dozen more times before the U.S. economy returns to health: Just because you have to endure recessionary conditions doesn't mean that your money has to.

    That's the argument I make when I urge Americans to search for investments outside U.S. borders. Ironically, your money doesn't have to travel all that far: What's arguably the world's "safest economy" is actually located just north of the border.

    I'm talking, of course, about investing in Canada.

    For the five ways to profit from Canada, please read on...

    Read More...
  • Money Morning Mailbag: There's No Way Around the Dangers of Municipal Bonds Money Morning Contributing Editor Martin Hutchinson last month introduced readers to the dangers of municipal bonds. While many investors assumed munis offered a safe haven in turbulent times, the battered condition of state and local finances has left many munis running the risk of default.

    "Brokers will tell you that particular state and municipal bond issues are 'safe,' meaning that they are rated highly by the rating agencies," said Hutchinson. "However, the rating agencies got it wrong on subprime mortgage instruments, and it seems pretty clear that they are getting it wrong on states and municipalities."

    On the municipal level, local property taxes are the primary revenue source. Declining home prices and increased mortgage delinquencies are creating a housing market that offers little local revenue. Municipalities are then left struggling to make ends meet.

    Hutchinson said the vicious cycle could send municipal-bond defaults soaring past 2009's $6.4 billion.

    Read More...
  • The Tobin Tax: The Deficit-Busting Levy Wall Street Hates After the Nov. 2 midterm elections, the Obama administration and Congress are going to have to scramble to fill a trillion-dollar hole in the U.S budget, and tax increases may be the only option.

    A tax increase won't be good news for an already wheezing economic recovery that seems to get weaker with each new report or indicator that's issued. But the type of tax that's chosen will go a long way in determining just how much damage the U.S. economy will have to endure.

    With a deficit in excess of $1 trillion, there aren't a lot of options. One possibility would be to allow the 2001 and 2003 Bush tax cuts to expire, which would have a depressing effect on the economy and most people's pocketbooks.

    But a better option would be to devise some new taxes that may prove less damaging. Indeed, there's even one possibility that might even do some economic good if it's implemented correctly.

    It's called a "Tobin tax."

    To see how a reasonably set "Tobin tax" could help U.S. leaders to fix the nation's finances, please read on... Read More...
  • How Washington Should Handle the Bush Tax Cuts The big political issue for the remainder of this year will be the so-called "Bush tax cuts" engineered by U.S. President George W. Bush in 2001 and 2003.

    Those tax cuts are scheduled to expire on Dec. 31, with taxes reverting to their 2001 levels.

    It's not at all clear which of the cuts will be extended and which will be repealed.

    But one thing is clear: The outcome of the Bush-tax-cut debate will have major implications for the U.S. economy.

    To understand the economic implications of extending the Bush tax cuts, please read on... Read More...
  • The Headline You Never Expected: Foreign Growth Could Bail Out the U.S. Economy During a period of increasingly worrisome headlines about the U.S. economy, there is one bright spot.

    The rest of the world appears to be doing much better than we are.

    In the long run, that's good news for the United States. Rapid world growth will eventually rekindle the economic fires here, producing a growth that is more balanced than the bubbles of 1995-2008.

    Still, getting to that point will be a challenge, since - economically speaking - the home fires don't appear to be burning all that brightly.

    To see how foreign growth could bail out the U.S. economy, please read on...


    Read More...
  • The Global Double-Dip Recession: Which Markets to Hold… And Which Ones May Fold Last week's stock-market meltdown was a worldwide affair, and was touched off by trader fears of a global "double-dip" recession.

    However, the truth is that the odds of a recessionary reprise are high in just a few countries - primarily those that have experienced excessive fiscal and monetary "stimulus," or that have real inflation problems.

    The rest of the world is recovering just fine.

    To find out which markets to hold - and which ones may fold - please read on...

    Read More...
  • How to Profit From Europe's Stealthy Resurgence European countries - both inside and outside the Eurozone - are slashing their budget deficits.

    Greece, Portugal and Spain - three of the so-called "PIGS" - have to do so, of course. But Germany - generally reckoned to be in excellent shape - is also cutting its deficit, as is France, which hasn't run a budget surplus in 40 years. Britain, too, with no need to protect the euro (it's not a Eurozone member) just introduced a budget that cut the deficit by $140 billion over four years.

    U.S. President Barack Obama and other Keynesians warn that Europe may push its own economy - or even the global economy - back into recession.

    But here's the surprising reality: Europe may gain from its fiscal pain - and its deficit-trimming actions offer the best hope for a lengthy recovery.

    To see which European countries are expected to rebound - and which ones to invest in - please read on...

    Read More...
  • China's Inflation Higher Than Target Rate, Could Be a Sign It's Time to Tame Rapid Growth China's inflation rate rose 3.1% in May from a year earlier, exceeding the government's 3% target rate for 2010 and stirring speculation on whether or not Beijing will attempt to slow the nation's rapid growth pace.

    The consumer price index climb was the fastest in 19 months and was higher than the 2.8% rate in April. The National Bureau of Statistics also posted increases in industrial production, retail sales, and property prices, which contributed to analysts wondering whether or not China will make moves to tame growth to avoid higher inflation.

    "Officials seem confident that price pressures will ease later this year, attributing much of the recent positive trend to base effects, but there are plenty of reasons to think that inflation can keep moving higher," Royal Bank of Canada (NYSE: RY) economist Brian Jackson told The Wall Street Journal.

    Read More...
  • How to Cure Western Bankers of "Bad-Banker" Behavior Masayuki Oku, the new head of the Japan Bankers Association, recently said that Western bankers did not understand self-control the way Asian bankers did, which was a major cause of the 2008 crash and the Great Recession.

    I think he has a point.

    Oku's main purpose in denouncing Western bankers for their lack of self-control was to object to the tougher proposed capital rules from the Basel Committee, the global body that sets banking regulations.

    To understand how to fix the Western banking sector, please read on... Read More...
  • Money Morning Mid-Year Forecast: Oil Prices Down but Not Out While it looked like they were headed towards the $90 a barrel level, oil prices hit a wall in the spring. Rattled investors who worried about the direction of the global economy shunned black gold in favor of real gold as a means of preserving capital.

    But don't be fooled. The spring retreat simply set the stage for a second-half rally.

    After starting the year at about $81 a barrel, prices climbed as high as $86 a barrel before plunging to $64 on May 25.

    Read More...
  • The Case for $5,000 Gold: And How to Profit The gold bug is unstoppable. Prices are up four-fold since 2001... and they're not stopping anytime soon. Could $5,000 per ounce be in our future? Read this report to find out why gold is being pushed through the roof - and four ways to profit from gold's rise. Read More...