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Welcome back to FMU :-))

Oct 26, 2003

***We begin with an interesting item from www.truthout.org

The Consumer, First Source of Dynamism, Piles on Debt to Sustain World Growth

By Eric Leser
Le Monde (October 20, 2003)

"For three years, while companies and Wall Street recovered from the Internet bubble's explosion and the many excesses of the nineteen nineties, the American consumer has kept his country's economy going by main might. The consumer has allowed that economy to withstand the most violent shocks in half a century. The September 11 attacks, repeated financial scandals, the stock market collapse, and the war in Iraq provide no justification for American households' faith in the future. And it is their intact appetite today that in large part explains the recovery.

"American consumption is so significant; all the world's economies can congratulate themselves on it. It represents a little less than 70 % of United States' Gross National Product and 20% of world economic activity.

"Above all, it has been the main source of economic dynamism for several years. Europe in general and France in particular count on American recovery alone to resume their growth. The great Asian exporters, Japan, South Korea, and especially China, have not stopped devaluing their currencies against the dollar for years in order to continue their massive exports to the United States. China's trade surplus of over 100 billion dollars finances its development into "the factory of the planet" and Japan sees US exports as the only way out of depression.

NECESSARY DROP IN THE DOLLAR

"Today no one can allow the American consumer to falter. The Federal Reserve gives him the means to continue to pile on debt cheaply by bringing the cost of money back to its lowest level in forty-two years and the White House has increased his purchasing power (especially for the wealthier) with massive tax reductions. As for international investors, they allow the machine to continue to function by bringing their capital to the United States to balance the ever growing trade deficit and the great weakness in domestic savings. The successive interest rate reductions of the last three years have not provided an opportunity for Americans to reduce their debt, but to spend more. They've been incited to do so by, among others, car manufacturers which offer loans at zero interest. Financial establishments multiply tricks and montages to reduce debt burdens or shamelessly propose credit cards secured by a principal residence, to, as one ad emphasizes, "secure daily expenses painlessly." There are now more cars registered in the United States than there are drivers' licensees.

"This situation cannot last. The world economy depends on an American consumer whose debt never stops mounting. This perverse system feeds United States' deficits and outsize needs for foreign capital. American households can't simultaneously spend more than they earn and save. On average debt represents 115 % of their disposable income, compared to 55 %, for example, in France. Debt service equals 14 % of income, a level that hasn't taken off, thanks to low interest rates and continual mortgage renegotiation. It's difficult to imagine that household debt could increase still more and "yet, the only way for the consumer to continue to dope the economy consists of accumulating new debts," underlines Merrill Lynch economist Dave Rosenberg. "If a new bubble exists today, it has a name: debt," he adds.

Another danger, runaway American external deficits.

"The balance of payments deficit (foreign trade and capital) should greatly exceed its record 2002 level of 480 billion dollars. Some experts consider that it could approach 600 billion dollars. That means that every day the United States have to "import" 1.6 billion dollars of foreign capital. Aware of the problem, industrial countries timidly search for a remedy. They gave tacit agreement in September during the G7 in Dubai to pursuit of dollar devaluation, the only way to begin to rebalance American external trade accounts by favoring local businesses.

"The world economy cannot succeed if everyone concentrates on exports only. There's a growing understanding today among big economies that they need to concentrate on demand and put reforms in place that allow their domestic markets to drive growth," specifies John Snow, US Treasury Secretary. The only weapon to compel Europe and Asia to pep up their internal demand is to let the greenback slide. However, a rapid dollar drop could interrupt investment by Japanese and Chinese- the principal buyers of US Treasury obligations. If they were to turn away from these securities, that would mean much higher long term interest rates in the United States and a serious threat to American consumption and world economic growth.

"The rebalancing of the world economy must therefore be progressive, but is nonetheless an absolute necessity. Asia, and, even more, Europe must breathe some life into their consumption, i.e., above all, make their social elevators work." End quote.

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***From the Taipei Times:

HSBC to slash 4,000 more British jobs in favor of Asia

Full story can be viewed at:
http://www.taipeitimes.com/News/worldbiz/archives/2003/10/18/2003072428

"HSBC Holdings Plc, the world's second-biggest bank by market value, faces trade union opposition to plans to eliminate 4,000 more jobs in the UK as it shifts work to lower-cost sites in Asia. HSBC joins JP Morgan Chase & Co, Morgan Stanley and other financial companies in moving some operations to Asia and India to avoid paying London or New York wages and office rents. The lender is cutting costs after more than US$45 billion in purchases in the past five years.

"Salaries in India are between one-tenth and one-quarter of what would be paid in London, New York or Hong Kong, according to the Indian Institute of Management in Bangalore. The world's top 100 financial companies will move 1 million back-office and technology-related jobs to India by 2008, Deloitte Research forecast in an April report. That's half the 2 million positions, or about 15 percent of financial jobs worldwide, that will probably be moved offshore by then, the report said." End quote.

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***Extract from a posting at www.mises.org:

The End of Dollar Supremacy?
By Antony P. Mueller

"The major buyers of U.S. debt among the central banks are now located in Asia, and here particularly in China, Hong Kong and Taiwan (see table below). This trend-that central banks substitute private investors and thus stabilize the dollar-will hardly be sustainable.
Table 3
Annual changes in official exchange reserves. Selected areas (a)

(a) in billions US dollars at current exchange rates
(b) mainly China, Hong Kong SAR, and Taiwan
Source: Bank for International Settlements, 73rd Annual Report, Basel 2003, table V.1

"A situation like this which has emerged over the past few years implies an increasing financial vulnerability of the United States. If the buying spree by foreign central banks should stop or even reverse, the impact would affect the dollar exchange rate, the treasury market and the domestic price level with the consequences of a sinking dollar, a sharp rise of domestic interest rates and an increased inflation rate. It is highly unlikely that the American economy would prove resilient enough to withstand such a triple blow.

"The coming of a dollar crisis would expose the internal fragilities of the U.S. economy which currently are largely hidden. Along with the end of the favors for consumers to indulge in spending and for private and public debtors to have their investment and budget deficits financed by foreigners, a decline of the dollar would expose the lack of a balanced industrial structure in the United States. More than twenty years of persistently high trade deficits have led to an industrial structure which has made the United States highly dependent on foreign imports with a lack of domestic suppliers that could readily substitute dearer imports.

"What would happen if the dollar should surpass the threshold and a crisis of confidence emerges? The consequences would not be confined to the United States itself. The dollar crisis would affect the rest of the world and it would put the current international monetary system at stake with the potential of bringing it down. While the pillars on which the dollar stands may still seem to be intact today-the statue itself may come down. But when the dollar should fall, the pillars on which it has stood, will crumble too.

"Given the trend that the U.S. foreign debt position will continue to deteriorate, a severe dollar crisis seems almost inevitable. But this is only half of the story. The dramatic part of the enfolding scenario is that there is no ready substitute for the dollar as a global currency and that the dollar crisis will put the overall economic and political position of the United States at risk. With the loss of the privileged position of the dollar the economy would weaken and this in turn would undermine the political role that the United States plays presently as the world's hegemon.

"International finance is closely intertwined with international politics. While a predominant role in international finance does not come without the basis provided by politics, it is sound finance on which the continuation of the dominant global role will depend later on. Both of these, however, have a more profound basis: it is basically the ethical attitude to the matters of money and finance, the deeply rooted sense for prudence and rectitude, which is required to be maintained in order to keep the privileged position." End quote & pow!

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***www.timesonline.com

If the EU buys most of Russia's oil, why must we trade in dollars?
By Carl Mortishead
October 22, 2003

Full article:
http://www.timesonline.co.uk/article/0,,630-862941,00.html

"WELCOME to the petro-euro. The idea of pricing barrels of oil in a currency other than the greenback was floated at a recent summit meeting between the Russian President, Vladimir Putin, and Gerhard Schröder, the German Chancellor. Eurocrude got another airing at a round table pow-wow between EU and Russian civil servants. It was acknowledged that currency was, in the end, a matter for buyers and sellers but "denominating Russia's oil and gas exports in euros" would be a clear signal of deepening relations between the EU and Russia in energy. Usurping the dollar's grip on the oil market is not even a dream for the most ardent europhile. But if the Russian President is prepared to entertain the idea of petro-euros, it cannot be dismissed just as an attempt to snub Washington.

"The EU buys more than half of Russia's oil and 62 per cent of its gas exports. Contracts over the latter fuel are already commonly denominated in euros and a fifth of the natural gas consumed in the EU is Russian. It is also easy to see why both sides to an oil contract might benefit from billing and payment in euros. Europe is Russia's natural trading partner and the eurozone will eventually extend to the Russian border with the addition of Poland, Slovakia and Hungary. The EU wants Russia to recycle its petro-euros, buying capital goods from European manufacturers and removing for both sides an extraneous risk (the dollar).

"Billing in euros is one thing but supplanting the dollar is another. Oil has been a dollar business as long as anyone can remember for the good reason that it is convenient. America is the biggest buyer of crude and a huge derivatives market balloons over the two benchmark crude blends, Brent and West Texas Intermediate. Diverse crudes from Nigeria's Bonny Light to Iraq's Kirkuk are priced daily against dollar Brent.

"Previous attempts to ditch the dollar have been politically inspired or just opportunism. In periods of dollar weakness,Opec resurrects a scheme to price its crude against a basket of currencies and Saddam Hussein occasionally demanded payment in euros. Mahathir Mohammed, the retiring Malaysian leader, dreamt of an islamic petrocurrency, the gold dirham.

"But the petro-euro is more than hubris. The market for Russian oil is the eurozone and talk of tankers to America is gesture politics. A vast and expanding Eurasian economy fuelled by Siberian oil and gas does not need dollars to trade barrels. If the shoe fits, eurocrude will happen."
End quote.

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***More top class analysis from Stephen Roach (www.morganstanley.com)

Imported Productivity

"America's fabled productivity miracle continues to be a key underpinning for much that is special about the US economy. With productivity in the nonfarm business sector up an astonishing 6.8% sequentially (annual rate) in 2Q03 and 4.1% on a year-over-year basis, it's hard to deny that something quite extraordinary is going on. As I see it, what's special is an increasingly powerful global labor arbitrage between domestic and foreign labor input that has given rise to a surge in offshore outsourcing. The result is a jobless recovery built on an increasingly tenuous foundation of "imported productivity." The real issue is whether this new strain of productivity enhancement is sustainable. I have my doubts.

"On the surface, there's no denying the unique character of this productivity-led recovery. In the first six quarters after the US economy officially bottomed in 4Q01, nonfarm business productivity has recorded a 6.7% cumulative increase. That's the fastest six-quarter post-recession rebound since that which occurred after the recession ending in 4Q70. Equally impressive, however, is the extraordinary shortfall in job creation that has occurred since the end of the last recession in November 2001. Private nonfarm payrolls have contracted about 1% (or 1.1 million workers) in the ensuing 22 months since that cyclical trough. That stands in sharp contrast to gains of about 5% recorded, on average, over comparable periods of the preceding six business cycle upturns. In fact, had the current cycle conformed to the prior-cycle norm, today's job count would be fully 4.3 million workers higher.

"This same cyclical comparison allows us to calculate some hypothetical productivity scenarios on the basis of alternative employment paths for the US economy. If, for example, private nonfarm payrolls had traced the path suggested by the earlier six-cycle norm, our calculations suggest that productivity would have risen only 2.0% over the six quarters ending 2Q03 -- less than one-third the pace actually recorded. Alternatively, if hiring had closed only half the gap between the current cycle and the six-quarter norm, our calculations would place the productivity increase at 4.3% over the six quarters ending 2Q03 -- slightly more than one-third slower than published figures currently indicate.

"These are tricky and admittedly controversial calculations. In particular, they assume that work schedules -- as approximated by the length of the average hourly work week -- remain fixed at the actual levels for the two alternative employment scenarios. In other words, we estimated labor input -- the denominator of the productivity ratio -- as the product of employment levels and weekly work schedules. The only thing we modified in this calculation was headcount -- not the work week. This enabled us to isolate the productivity response to alternative hiring trajectories.

"Of the two scenarios, the one I find most intellectually appealing is what I would call the "middle-ground alternative" -- the productivity result predicated on a hiring path that falls midway between the current outcome and the norm that would have been suggested by previous cycles. This alternative is broadly consistent with the subpar character of the current recovery of real GDP -- 2.7% average gains in the first six quarters of this upturn versus 5.7% average annualized increases in comparable periods of earlier upturns. In other words, for a GDP recovery that has run at half its cyclical norm, it makes sense to consider the productivity implications of an alternative hiring trajectory that would have closed about half the gap between the current cycle and those of the past. On that basis, we can better assess the impacts of this jobless recovery on America's productivity -- results that stem from a shift in the fundamental relationship between aggregate demand and labor input.

"If that presumption is correct, then as much as a third of the so-called productivity bonanza of this recovery can be attributed to a shortfall in domestic hiring. Absent that windfall, productivity growth over the first six quarters of this expansion actually would have fallen well short of its typical recovery profile. Obviously, that has not been the case in this jobless recovery. But that doesn't mean aggregate demand is necessarily being sourced by more efficient modes of global production that require reduced labor content. Instead, courtesy of a cross-border labor arbitrage, it may simply mean that there has been a substitution of foreign labor input for domestic labor input. For America, that has the effect of biasing domestic productivity growth to the upside. That's because conventional measures undercount the total labor input -- foreign as well as domestic -- required to generate a given product flow. Conversely, for foreign outsourcers, productivity growth may well be biased to the downside, as low-wage employment encourages more labor-intensive production schemes.

"This has profound implications for the character of economic recovery in the United States and the broader global economy. For starters, it has given rise to a major leakage of domestic income generation. Wage and salary disbursements -- by far the dominant component of personal income -- are basically unchanged in real terms fully 21 months into this recovery; by contrast, at this juncture in the past six upturns, real wage income has been up, on average, by about 9%. The gap between the current cycle and the norm of earlier cycles works out to a shortfall of about $320 billion in real terms, or 4.4% of the current level of real disposable personal income. In other words, the foreign sourcing of domestic demand via imported productivity has given rise to a significant income leakage that already has had a material impact on household purchasing power. Absent other sources of support -- tax cuts, home mortgage refinancing, or a renewal of vigorous hiring -- this shortfall of internally driven income generation could end up spelling serious trouble for the overly indebted, saving-short American consumer. In short, there's good reason to doubt the sustainability of a recovery built on a foundation of imported productivity.

"The flip side of this saga is, of course, quite beneficial to Corporate America. Sourcing demand through low-cost, offshore labor input has become an increasingly important tactic to enhance the operating efficiency of US businesses. The IT-enabled global labor arbitrage has become central to this process, giving rise to the imported-productivity paradigm. While this has resulted in a significant improvement in corporate earnings, the American workforce is not sharing the benefits. The resulting clash between the owners of capital and the providers of labor has resulted in profound tensions in the US body politic. Imported productivity, together with the jobless recovery and income leakage it implies, is the stuff of heightened trade frictions, mounting protectionist risks, and a populist assault on Corporate America. The US Congress has already thrown down the gauntlet in this regard, unleashing a bipartisan barrage of China bashing. Absent a political counterweight, there is no telling how treacherous the endgame becomes -- especially as America now enters its presidential election season.

"Which takes us to the bottom line: In my view, the income leakages of imported productivity raise serious questions about the sustainability of this recovery from an economic point of view. At the same time, the political reaction to the resulting jobless recovery raises equally profound questions about sustainability from a political standpoint."
End quote.

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***From MercuryNews.com:

Insider selling of stock rings warning bells
SOME EXPERTS FEAR 4-MONTH TREND PORTENDS DROP IN MARKET INDEXES
By David A. Sylvester
Posted on Mon, Oct. 20, 2003

"Even as investors bought tech stocks and drove their prices higher this summer, many Silicon Valley corporate insiders did the opposite -- they sold their companies' stock.

"By one measure, Silicon Valley insiders -- the executives and directors who run local companies -- sold $170 worth of stock for every $1 they bought from June 1 to Sept. 30, according to the latest figures from research firm Thomson Financial and Mercury News business research.

"Insider transactions are closely watched because many analysts believe that corporate officers know their company's prospects better than outside investors. In the past, waves of insider selling have preceded declines in stock prices, these analysts say.

"The same wave of insider transactions has hit tech companies across the country. Nationally, tech insiders reached a peak of selling in September when they sold $155.37 worth of company stock for every $1 they bought.

"This amounts to four times more than insiders sold in the overall U.S. stock market and exceeds the selling by tech insiders in early 2000, just before the Nasdaq composite index began its three-year decline.

"Sales are high, but insiders have almost stopped buying stock, too. ``There's a hesitancy among insiders to buy,'' said Lon Gerber, director of insider research at Thomson.

"Nearly every investment adviser who tracks the insiders is warning clients to protect themselves.

``I would not be surprised at a market decline of 20 percent or more,'' said David Coleman, editor of the Weekly Insider Report that has tracked insider trades for Vickers Stock Research since 1971.

"Nine insiders at eBay have sold $50.5 million worth at an average price of $53.94 a share from June 1 to Sept. 30, according to Thomson Financial and Mercury News research. This includes board member Scott Cook, who sold 200,000 split-adjusted shares valued at $11 million; Chief Operating Officer Maynard Webb, who also sold 200,000 valued at $11 million; and CEO Meg Whitman, who sold 45,810 shares valued at $2.5 million.

"Ten insiders at Yahoo, whose stock is near its 52-week high of $43.72, sold 1.3 million shares of stock valued at $41.4 million, at an average price of $31.76 a share. For example, CEO Terry Semel sold 500,000 shares valued at $16.1 million. (He later sold 500,000 shares in October for $14.6 million)." End quote.

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***Japan: Optimism not Realism
by Andrew Smithers; Smithers & Co.
October 13, 2003

"Nikkei Kinyu "Market Eye" Column., 26th September 2003
Japan is experiencing a cyclical upturn, which the optimists hope will turn into a sustained recovery. The IMF, however, has recently commented that this is unlikely, while deflation remains entrenched. This probably represents the majority view among economists and, sadly enough, such caution seems to be justified.

"The Japanese economy suffers from two fundamental problems. First it has a structural savings surplus, arising from its unusual demography, and second it has an over-indebted corporate sector. To cure the first problem, the balance of the economy must change radically in three ways. Investment, which is excessive, must be cut back so that companies can become truly profitable. In addition, the budget deficit must be cut and finally there must be a major expansion of Japans trade surplus.

"It is this need for a large increase in net exports that creates international problems. Without a marked rise in Japan's current account surplus, there will not be enough demand to sustain the economy. This is true today, despite the boost to demand given by the huge budget deficit and excess investment. As these are trimmed, demand will fall and an even greater rise in net exports will be needed to prevent the economy slipping back into recession.

"It is therefore unsurprising that the current upturn should be driven by hopes of rising exports, which depend in turn on the Ministry of Finance's success in preventing a further strengthening of the yen. This success is, however, the cause of rising complaints from the US, as has been underlined by the comments of the US Treasury Secretary John Snow, during his recent tour of the Far East. Happily, it seems that US pressure is greater on China than Japan.

"For Japan to increase its trade surplus it needs a steady improvement in its competitive position. This is why a continuation of the MoF's exchange rate intervention is so important. So long as this continues to keep the yen/dollar exchange rate stable in nominal terms, Japan's competitive position is improving in real terms.

"This is because Japan's prices, measured in total terms by its GDP deflator, are falling at over 2% p.a., while US prices, on the same basis, are currently rising at 1.5% p.a. Thus, if the nominal exchange rate is unchanged, Japan's competitive position is improving at around 3.5% p.a. This is extremely helpful and is all the better for not being dramatic. In combination with a pick-up in the world economy, this should be sufficient to keep Japan's net exports growing.

"In the meantime, however, the twin problems of over-investment and excess debt remain unaffected. Japan already has a falling number of people of working age and as the baby boomers' generation moves towards retirement, the decline will accelerate. This means that Japan cannot, in the absence of a productivity miracle, expand as fast as countries like the US, where the working population is still growing.

"If the US and Japan improve their labour productivity at similar rates, then the US will grow roughly twice as fast as Japan. Naturally enough, this faster growth provides a lot more scope for profitable investment. Despite this, Japan invests much more of its GDP than the US. The result is, inevitably, that Japanese investment is woefully unprofitable.

"Despite poor profitability, Japan's companies are currently planning to increase their investments to an even more excessive level. This is helpful in the short run, but the financing of these investments prevents companies from repaying debt.

"Japan's excessive debts can be illustrated by looking at the balance sheet of Japanese households. Compared with any other major economy, the Japanese people seem, at first sight, to be very rich. According to the OECD, Japanese households have net wealth which is 200% greater, relative to their income, than their opposite numbers in America.

"This apparent wealth is mainly in the form of deposits with the banks and Post Office and, unfortunately, is largely an illusion. These assets of the household sector represent the liabilities of companies and the government. A country is not rich because one half owes huge debts to the other half which it can never repay.

"So long as Japan suffers from deflation, the value of these debts rises in real terms and their burden grows. Sadly enough, it is unlikely that this burden can be alleviated other than by a bout of inflation.

"For inflation to pick up in Japan, there needs to be either a marked increase in the speed at which prices rise worldwide, or a significant weakening of the yen's exchange rate. At the moment, neither of these outcomes looks at all probable. (Uncle Harry disagrees re inflation, which he thinks will increase notably).

"The current improvement in Japan's economic position is therefore unlikely to be the beginning of a sustained recovery. The most likely outlook is for the economy to continue to improve while the US and world demand pick up, but unless this generates inflation, the next cyclical downturn will find Japan's companies with even worse balance sheets than they have today and bankruptcies will rise sharply again."
End quote.

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***Extracts from a MUST READ speech by friend & Congressman Ron Paul of Texas. We apologize for the length of this copy by RP but it is so powerful, we could not resist it. Even then, we did delete parts. But this is a "print out & save" article & send on. And re read. In a time when monetary nonsense is paraded as wisdom by govts & economic lightweights, the words of friend Ron are a beacon to guide truth seekers.

House of Representatives
September 5, 2003

Paper Money and Tyranny

"The Founders of this country, and a large majority of the American people up until the 1930s, disdained paper money, respected commodity money, and disapproved of a central bank's monopoly control of money creation and interest rates. Ironically, it was the abuse of the gold standard, the Fed's credit-creating habits of the 1920s, and its subsequent mischief in the 1930s, that not only gave us the Great Depression, but also prolonged it. Yet sound money was blamed for all the suffering. That's why people hardly objected when Roosevelt and his statist friends confiscated gold and radically debased the currency, ushering in the age of worldwide fiat currencies with which the international economy struggles today.

"If honest money and freedom are inseparable, and paper money leads to tyranny, one must wonder why it's so popular with economists, the business community, bankers, and our government officials. The simplest explanation is that it's a human trait to always seek the comforts of wealth with the least amount of effort. This desire is quite positive when it inspires hard work and innovation in a capitalist society. Productivity is improved and the standard of living goes up for everyone. This process has permitted the poorest in today's capitalist countries to enjoy luxuries never available to the royalty of old.

"But this human trait of seeking wealth and comfort with the least amount of effort is often abused. It leads some to believe that by certain monetary manipulations, wealth can be made more available to everyone. Those who believe in fiat money often believe wealth can be increased without a commensurate amount of hard work and innovation. They also come to believe that savings and market control of interest rates are not only unnecessary, but actually hinder a productive growing economy. Concern for liberty is replaced by the illusion that material benefits can be more easily obtained with fiat money than through hard work and ingenuity. The perceived benefits soon become of greater concern for society than the preservation of liberty. This does not mean proponents of fiat money embark on a crusade to promote tyranny, though that is what it leads to, but rather they hope they have found the philosopher's stone and a modern alternative to the challenge of turning lead into gold.

"Our Founders thoroughly understood this issue, and warned us against the temptation to seek wealth and fortune without the work and savings that real prosperity requires. James Madison warned of "The pestilent effects of paper money," as the Founders had vivid memories of the destructiveness of the Continental dollar. George Mason of Virginia said that he had a "Mortal hatred to paper money." Constitutional Convention delegate Oliver Ellsworth from Connecticut thought the convention "A favorable moment to shut and bar the door against paper money." This view of the evils of paper money was shared by almost all the delegates to the convention, and was the reason the Constitution limited congressional authority to deal with the issue and mandated that only gold and silver could be legal tender. Paper money was prohibited and no central bank was authorized. Over and above the economic reasons for honest money, however, Madison argued the moral case for such. Paper money, he explained, destroyed "The necessary confidence between man and man, on necessary confidence in public councils, on the industry and morals of people and on the character of republican government."

"The Founders were well aware of the biblical admonitions against dishonest weights and measures, debased silver, and watered-down wine. The issue of sound money throughout history has been as much a moral issue as an economic or political issue.

"Even with this history and great concern expressed by the Founders, the barriers to paper money have been torn asunder. The Constitution has not been changed, but is no longer applied to the issue of money. It was once explained to me, during the debate over going to war in Iraq, that a declaration of war was not needed because to ask for such a declaration was "frivolous" and that the portion of the Constitution dealing with congressional war power was "anachronistic." So too, it seems that the power over money given to Congress alone and limited to coinage and honest weights, is now also "anachronistic."

"If indeed our generation can make the case for paper money, issued by an unauthorized central bank, it behooves us to at least have enough respect for the Constitution to amend it in a proper fashion. Ignoring the Constitution in order to perform a pernicious act is detrimental in two ways. First, debasing the currency as a deliberate policy is economically destructive beyond measure. Second, doing it without consideration for the rule of law undermines the entire fabric of our Constitutional republic.

"Though the need for sound money is currently not a pressing issue for Congress, it's something that cannot be ignored because serious economic problems resulting from our paper money system are being forced upon us. As a matter of fact, we deal with the consequences on a daily basis, yet fail to see the connection between our economic problems and the mischief orchestrated by the Federal Reserve.

"All the great religions teach honesty in money, and the economic shortcomings of paper money were well known when the Constitution was written, so we must try to understand why an entire generation of Americans have come to accept paper money without hesitation, without question. Most Americans are oblivious to the entire issue of the nature and importance of money. Many in authority, however, have either been misled by false notions or see that the power to create money is indeed a power they enjoy, as they promote their agenda of welfarism at home and empire abroad.

"Money is a moral, economic, and political issue. Since the monetary unit measures every economic transaction, from wages to prices, taxes, and interest rates, it is vitally important that its value is honestly established in the marketplace without bankers, government, politicians, or the Federal Reserve manipulating its value to serve special interests.

Money As a Moral Issue

"When the government can replicate the monetary unit at will without regard to cost, whether it's paper currency or a computer entry, it's morally identical to the counterfeiter who illegally prints currency. Both ways, it's fraud.

"A fiat monetary system allows power and influence to fall into the hands of those who control the creation of new money, and to those who get to use the money or credit early in its circulation. The insidious and eventual cost falls on unidentified victims who are usually oblivious to the cause of their plight. This system of legalized plunder (though not constitutional) allows one group to benefit at the expense of another. An actual transfer of wealth goes from the poor and the middle class to those in privileged financial positions.

"In many societies the middle class has actually been wiped out by monetary inflation, which always accompanies fiat money. The high cost of living and loss of jobs hits one segment of society, while in the early stages of inflation, the business class actually benefits from the easy credit. An astute stock investor or home builder can make millions in the boom phase of the business cycle, while the poor and those dependent on fixed incomes can't keep up with the rising cost of living.

"Fiat money is also immoral because it allows government to finance special interest legislation that otherwise would have to be paid for by direct taxation or by productive enterprise. This transfer of wealth occurs without directly taking the money out of someone's pocket. Every dollar created dilutes the value of existing dollars in circulation. Those individuals who worked hard, paid their taxes, and saved some money for a rainy day are hit the hardest, with their dollars being depreciated in value while earning interest that is kept artificially low by the Federal Reserve easy-credit policy. The easy credit helps investors and consumers who have no qualms about going into debt and even declaring bankruptcy.

Money As a Political Issue

"A central bank and fiat money enable government to maintain an easy war policy that under strict monetary rules would not be achievable. In other words, countries with sound monetary policies would rarely go to war because they could not afford to, especially if they were not attacked. The people could not be taxed enough to support wars without destroying the economy. But by printing money, the cost can be delayed and hidden, sometimes for years if not decades. To be truly opposed to preemptive and unnecessary wars one must advocate sound money to prevent the promoters of war from financing their imperialism.

"Look at how the military budget is exploding, deficits are exploding, and tax revenues are going down. No problem; the Fed is there and will print whatever is needed to meet our military commitments, whether it's wise to do so or not.

"The money issue should indeed be a gigantic political issue. Fiat money hurts the economy, finances wars, and allows for excessive welfarism. When these connections are realized and understood, it will once again become a major political issue, since paper money never lasts. Ultimately politicians will not have a choice of whether to address or take a position on the money issue. The people and circumstances will demand it.

"We do hear some talk about monetary policy and criticism directed toward the Federal Reserve, but it falls far short of what I'm talking about. Big-spending welfarists constantly complain about Fed policy, usually demanding lower interest rates even when rates are at historic lows. Big-government conservatives promoting grand worldwide military operations, while arguing that "deficits don't matter" as long as marginal tax rates are lowered, also constantly criticize the Fed for high interest rates and lack of liquidity. Coming from both the left and the right, these demands would not occur if money could not be created out of thin air at will. Both sides are asking for the same thing from the Fed for different reasons. They want the printing presses to run faster and create more credit, so that the economy will be healed like magic- or so they believe.

Money as an Economic Issue

"Though the economic consequences of paper money in the early stage affect lower-income and middle-class citizens, history shows that when the destruction of monetary value becomes rampant, nearly everyone suffers and the economic and political structure becomes unstable. There's good reason for all of us to be concerned about our monetary system and the future of the dollar.

"Nations that live beyond their means must always pay for their extravagance. It's easy to understand why future generations inherit a burden when the national debt piles up. This requires others to pay the interest and debts when they come due. The victims are never the recipients of the borrowed funds. But this is not exactly what happens when a country pays off its debt. The debt, in nominal terms, always goes up, and since it is still accepted by mainstream economists that just borrowing endlessly is not the road to permanent prosperity, real debt must be reduced. Depreciating the value of the dollar does that. If the dollar loses 10% of its value, the national debt of $6.5 trillion is reduced in real terms by $650 billion dollars. That's a pretty neat trick and quite helpful- to the government.

That's why the Fed screams about a coming deflation, so it can continue the devaluation of the dollar unabated. The politicians don't mind, the bankers welcome the business activity, and the recipients of the funds passed out by Congress never complain. The greater the debt, the greater the need to inflate the currency, since debt cannot be the source of long-term wealth. Individuals and corporations who borrow too much eventually must cut back and pay off debt and start anew, but governments rarely do.

But where's the hitch? This process, which seems to be a creative way of paying off debt, eventually undermines the capitalist structure of the economy, thus making it difficult to produce wealth, and that's when the whole process comes to an end. This system causes many economic problems, but most of them stem from the Fed's interference with the market rate of interest that it achieves through credit creation and printing money.

"Nearly 100 years ago, Austrian economist Ludwig von Mises explained and predicted the failure of socialism. Without a pricing mechanism, the delicate balance between consumers and producers would be destroyed. Freely fluctuating prices provide vital information to the entrepreneur who is making key decisions on production. Without this information, major mistakes are made. A central planning bureaucrat cannot be a substitute for the law of supply and demand.

"Though generally accepted by most modern economists and politicians, there is little hesitancy in accepting the omnipotent wisdom of the Federal Reserve to know the "price" of money- the interest rate- and its proper supply. For decades, and especially during the 1990s- when Chairman Greenspan was held in such high esteem, and no one dared question his judgment or the wisdom of the system- this process was allowed to run unimpeded by political or market restraints. Just as we must eventually pay for our perpetual deficits, continuous manipulation of interest and credit will also extract a payment.

"Artificially low interest rates deceive investors into believing that rates are low because savings are high and represent funds not spent on consumption. When the Fed creates bank deposits out of thin air making loans available at below-market rates, mal-investment and overcapacity results, setting the stage for the next recession or depression. The easy credit policy is welcomed by many: stock-market investors, home builders, home buyers, congressional spendthrifts, bankers, and many other consumers who enjoy borrowing at low rates and not worrying about repayment. However, perpetual good times cannot come from a printing press or easy credit created by a Federal Reserve computer. The piper will demand payment, and the downturn in the business cycle will see to it. The downturn is locked into place by the artificial boom that everyone enjoys, despite the dreams that we have ushered in a "new economic era." Let there be no doubt: the business cycle, the stagflation, the recessions, the depressions, and the inflations are not a result of capitalism and sound money, but rather are a direct result of paper money and a central bank that is incapable of managing it.

"Our current monetary system makes it tempting for all parties, individuals, corporations, and government to go into debt. It encourages consumption over investment and production. Incentives to save are diminished by the Fed's making new credit available to everyone and keeping interest rates on saving so low that few find it advisable to save for a rainy day. This is made worse by taxing interest earned on savings. It plays havoc with those who do save and want to live off their interest. The artificial rates may be 4, 5, or even 6% below the market rate, and the savers- many who are elderly and on fixed incomes- suffer unfairly at the hands of Alan Greenspan, who believes that resorting to money creation will solve our problems and give us perpetual prosperity.

Today's Conditions

"Today's economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 30 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement- the gold exchange standard- on August 15, 1971. Since then we've been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.

"A paper monetary standard means there are no restraints on the printing press or on federal deficits. In 1971, M3 was $776 billion; today it stands at $8.9 trillion, an 1100% increase. Our national debt in 1971 was $408 billion; today it stands at $6.8 trillion, a 1600% increase. Since that time, our dollar has lost almost 80% of its purchasing power. Common sense tells us that this process is not sustainable and something has to give. So far, no one in Washington seems interested.

"Although dollar creation is ultimately the key to its value, many other factors play a part in its perceived value, such as: the strength of our economy, our political stability, our military power, the benefit of the dollar being the key reserve currency of the world, and the relative weakness of other nation's economies and their currencies. For these reasons, the dollar has enjoyed a special place in the world economy. Increases in productivity have also helped to bestow undeserved trust in our economy with consumer prices, to some degree, being held in check and fooling the people, at the urging of the Fed, that "inflation" is not a problem. Trust is an important factor in how the dollar is perceived. Sound money encourages trust, but trust can come from these other sources as well. But when this trust is lost, which always occurs with paper money, the delayed adjustments can hit with a vengeance.

"Following the breakdown of the Bretton Woods agreement, the world essentially accepted the dollar as a replacement for gold, to be held in reserve upon which even more monetary expansion could occur. It was a great arrangement that up until now seemed to make everyone happy.

"We own the printing press and create as many dollars as we please. These dollars are used to buy federal debt. This allows our debt to be monetized and the spendthrift Congress, of course, finds this a delightful convenience and never complains. As the dollars circulate through our fractional reserve banking system, they expand many times over. With our excess dollars at home, our trading partners are only too happy to accept these dollars in order to sell us their products. Because our dollar is relatively strong compared to other currencies, we can buy foreign products at a discounted price. In other words, we get to create the world's reserve currency at no cost, spend it overseas, and receive manufactured goods in return. Our excess dollars go abroad and other countries-especially Japan and China- are only too happy to loan them right back to us by buying our government and GSE debt. Up until now both sides have been happy with this arrangement.

"But all good things must come to an end and this arrangement is ending. The process put us into a position of being a huge debtor nation, with our current account deficit of more than $600 billion per year now exceeding 5% of our GDP. We now owe foreigners more than any other nation ever owed in all of history, over $3 trillion.

"A debt of this sort always ends by the currency of the debtor nation decreasing in value. And that's what has started to happen with the dollar, although it still has a long way to go. Our free lunch cannot last. Printing money, buying foreign products, and selling foreign holders of dollars our debt ends when the foreign holders of this debt become concerned with the dollar's future value.

"Once this process starts, interest rates will rise. And in recent weeks, despite the frenetic effort of the Fed to keep interest rates low, they are actually rising instead. The official explanation is that this is due to an economic rebound with an increase in demand for loans. Yet a decrease in demand for our debt and reluctance to hold our dollars is a more likely cause. Only time will tell whether the economy rebounds to any significant degree, but one must be aware that rising interest rates and serious price inflation can also reflect a weak dollar and a weak economy. The stagflation of the 1970s baffled many conventional economists, but not the Austrian economists. Many other countries have in the past suffered from the extremes of inflation in an inflationary depression, and we are not immune from that happening here. Our monetary and fiscal policies are actually conducive to such a scenario.

"In the short run, the current system gives us a free ride, our paper buys cheap goods from overseas, and foreigners risk all by financing our extravagance. But in the long run, we will surely pay for living beyond our means. Debt will be paid for one way or another. An inflated currency always comes back to haunt those who enjoyed the "benefits" of inflation. Although this process is extremely dangerous, many economists and politicians do not see it as a currency problem and are only too willing to find a villain to attack. Surprisingly the villain is often the foreigner who foolishly takes our paper for useful goods and accommodates us by loaning the proceeds back to us. It's true that the system encourages exportation of jobs as we buy more and more foreign goods. But nobody understands the Fed role in this, so the cries go out to punish the competition with tariffs. Protectionism is a predictable consequence of paper- money inflation, just as is the impoverishment of an entire middle class. It should surprise no one that even in the boom phase of the 1990s, there were still many people who became poorer. Yet all we hear are calls for more government mischief to correct the problems with tariffs, increased welfare for the poor, increased unemployment benefits, deficit spending, and special interest tax reduction, none of which can solve the problems ingrained in a system that operates with paper money and a central bank.

"If inflation were equitable and treated all classes the same, it would be less socially divisive. But while some see their incomes going up above the rate of inflation (movie stars, CEOs, stock brokers, speculators, professional athletes,) others see their incomes stagnate like lower-middle-income workers, retired people, and farmers. Likewise, the rise in the cost of living hurts the poor and middle class more than the wealthy. Because inflation treats certain groups unfairly, anger and envy are directed toward those who have benefited.

"The long-term philosophic problem with this is that the central bank and the fiat monetary system are not blamed; instead free market capitalism is. This is what happened in the 1930s. The Keynesians, who grew to dominate economic thinking at the time, erroneously blamed the gold standard, balanced budgets, and capitalism instead of tax increases, tariffs, and Fed policy. This country cannot afford another attack on economic liberty similar to what followed the 1929 crash that ushered in the economic interventionism and inflationism which we have been saddled with ever since. These policies have brought us to the brink of another colossal economic downturn and we need to be prepared.

"Paper money encourages speculation, excessive debt, and misdirected investments. The market, however, always moves in the direction of eliminating bad investments, liquidating debt, and reducing speculative excesses. What we have seen, especially since the stock market peak of early 2000, is a knock-down, drag-out battle between the Fed's effort to avoid a recession, limit the recession, and stimulate growth with its only tool, money creation, while the market demands the elimination of bad investments and excess debt. The Fed was also motivated to save the stock market from collapsing, which in some ways they have been able to do. The market, in contrast, will insist on liquidation of unsustainable debt, removal of investment mistakes made over several decades, and a dramatic revaluation of the stock market. In this go-around, the Fed has pulled out all the stops and is more determined than ever, yet the market is saying that new and healthy growth cannot occur until a major cleansing of the system occurs. Does anyone think that tariffs and interest rates of 1% will encourage the rebuilding of our steel and textile industries anytime soon? Obviously, something more is needed.

"The world central bankers are concerned with the lack of response to low interest rates and they have joined in a concerted effort to rescue the world economy through a policy of protecting the dollar's role in the world economy, denying that inflation exists, and justifying unlimited expansion of the dollar money supply. To maintain confidence in the dollar, gold prices must be held in check. In the 1960s our government didn't want a vote of no confidence in the dollar, and for a couple of decades, the price of gold was artificially held at $35 per ounce. That, of course, did not last.

"In recent years, there has been a coordinated effort by the world central bankers to keep the gold price in check by dumping part of their large horde of gold into the market. This has worked to a degree, but just as it could not be sustained in the 1960s, until Nixon declared the Bretton Woods agreement dead in 1971, this effort will fail as well.

"The market price of gold is important because it reflects the ultimate confidence in the dollar. An artificially low price for gold contributes to false confidence and when this is lost, more chaos ensues as the market adjusts for the delay.

"The set of circumstances we face today are unique and quite different from all the other recessions the Federal Reserve has had to deal with. Generally, interest rates are raised to slow the economy and dampen price inflation. At the bottom of the cycle interest rates are lowered to stimulate the economy. But this time around, the recession came in spite of huge and significant interest rate reductions by the Fed. This aggressive policy did not prevent the recession as was hoped; so far it has not produced the desired recovery. Now we're at the bottom of the cycle and interest rates not only can't be lowered, they are rising. This is a unique and dangerous combination of events. This set of circumstances can only occur with fiat money and indicates that further manipulation of the money supply and interest rates by the Fed will have little if any effect.

"The odds aren't very good that the Fed will adopt a policy of not inflating the money supply because of some very painful consequences that would result. Also there would be a need to remove the pressure on the Fed to accommodate the big spenders in Congress. Since there are essentially only two groups that have any influence on spending levels, big-government liberals and big- government conservatives, that's not about to happen. Poverty is going to worsen due to our monetary and fiscal policies, so spending on the war on poverty will accelerate. Our obsession with policing the world, nation building, and pre-emptive war are not likely to soon go away, since both Republican and Democratic leaders endorse them. Instead, the cost of defending the American empire is going to accelerate. A country that is getting poorer cannot pay these bills with higher taxation nor can they find enough excess funds for the people to loan to the government. The only recourse is for the Federal Reserve to accommodate and monetize the federal debt, and that, of course, is inflation.

Conclusion

"It's no coincidence that during the period following the establishment of the Federal Reserve and the elimination of the gold standard, a huge growth in the size of the federal government and its debt occurred. Believers in big government, whether on the left or right, vociferously reject the constraints on government growth that gold demands. Liberty is virtually impossible to protect when the people allow their government to print money at will. Inevitably, the left will demand more economic interventionism, the right more militarism and empire building. Both sides, either inadvertently or deliberately, will foster corporatism. Those whose greatest interest is in liberty and self-reliance are lost in the shuffle. Though left and right have different goals and serve different special-interest groups, they are only too willing to compromise and support each other's programs.

"If unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny- a consequence of which the Founders were well aware. For 90 years we have lived with a central bank, with the last 32 years absent of any restraint on money creation. The longer the process lasts, the faster the printing presses have to run in an effort to maintain stability. They are currently running at record rate. It was predictable and is understandable that our national debt is now expanding at a record rate.

"The panicky effort of the Fed to stimulate economic growth does produce what it considers favorable economic reports, recently citing second quarter growth this year at 3.1%. But in the footnotes, we find that military spending-almost all of which is overseas- was up an astounding 46%. This, of course, represents deficit spending financed by the Federal Reserve's printing press. In the same quarter, after-tax corporate profits fell 3.4%. This is hardly a reassuring report on the health of our economy and merely reflects the bankruptcy of current economic policy.

"Real economic growth won't return until confidence in the entire system is restored. And that is impossible as long as it depends on the politicians not spending too much money and the Federal Reserve limiting its propensity to inflate our way to prosperity. Only sound money and limited government can do that." End quote.

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*** Economic Statistics
October 16, 2003

From www.comstock.com; Comstock Partners, Inc.

"It is amazing how brilliant the economists become after the end of the period they are forecasting. Do you remember how excited they got (in unison) at the beginning of 2000 about the robust economy when real GDP grew at 7.1% in the fourth quarter of 1999? The "forecasts" of that quarter were also revised up throughout the fourth quarter and beginning of 2000. Their excitement stimulated speculators into the market during the first quarter of 2000 just as the market peaked. We will put the latest economic indicators in perspective by including long-term charts of the statistics and we would like you to be the judge as to the significance of the releases after looking over the charts.

"We may not be correct in our assessment of the economy continuing to struggle (after all we are not economists). However, looking at the numbers over a longer period is convincing evidence to us that the post bubble economic environment is still not in a strong recovery. Comments by CEOs at the business meeting at Greenbriar, and after earnings releases, also confirm our scenario and do not support the strong economic recovery view of almost everybody else. The CEO of International Paper, John Dillon, stated that he did not expect a strong upturn in the economy based on the orders he sees at IP. If anyone should be able to predict a strong recovery it would be the CEO of a company that dominates corrugated boxes in which most manufactured goods are shipped. The best Sam Palmisano, CEO of IBM, could come up with was "we are beginning to see signs that the economy has stabilized". Given these views, it is not surprising that insider selling is outnumbering buying in record proportions.

"Industrial production rose by 0.4% in September and the previous month was revised down to a 0.1% decline vs. an earlier reported positive 0.1%. The latest number came in at about the same level as consensus forecasts. Increased auto production was a major factor in this month's gain, and most major market segments expanded for the month, with only non-industrial supplies experiencing a decline. Most of the commentary about the increase was very positive and most economists believe that the economy is now moving into full recovery mode.

"Capacity utilization also edged higher to 74.7% in September, but looking at the chart on a longer-term basis puts things in perspective. The only time it registered lowered numbers with more excess capacity than now (since 1967) was in the worst post-war recession in the early 1980s. The numbers were surprisingly strong in the regional manufacturing surveys, but most of these numbers don't have much relevance to us since there is not a long enough history (or in the case of the Philly Index is too volatile)." End quote.

To view the long-term charts mentioned above, go to:
www.comstockfunds.com & view the 10/16 article titled 'Economic Statistics'

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*** The Pension Guaranty Corp. may need bailout to avoid crisis
By Kathy Kristof

Posted at www.dernews.com (Oct 23, 2003)

Full story:
http://www.detnews.com/2003/business/0310/23/b01-305315.htm

"The troubled US government agency that stands behind the nation's corporate pension plans is suffering mounting losses and could be forced to seek a taxpayer bailout, the agency's director said this month.

"Likening the situation to the savings and loan crisis of the 1980s, the director of the Pension Benefit Guaranty Corp. told Congress that without structural changes the system would collapse. The agency, which insures retirement plans for 44 million American workers and retirees, is running a record deficit of $8.8 billion -- a dramatic jump from the shortfall of $5.7 billion that the agency forecast earlier this year.

"The prime culprit: a series of major bankruptcies, mainly involving airlines and steel companies, that required the agency to step in and assume the costs of funding the companies' pensions.

"Pension claims against the PBGC for 2002 alone were greater than the total claims for all previous years combined," Steven A. Kandarian, executive director of the agency, told the Senate Special Committee on Aging. "At current premium levels, it would take about 12 years of premiums to cover just the claims from 2002."

"The testimony chronicled the problems that have beset the nation's defined-benefit pension system, including company-funded pension plans that promise workers a set level of benefits during retirement. Three years of stock market losses have devastated corporate pension plans' investment portfolios as falling interest rates and rising life expectancies have played havoc with efforts to match shrinking pension assets to expected benefit payouts.

"Those factors have pushed pension funding to a crisis point, experts say, with the pension agency estimating that corporate America's pension liabilities exceed its assets by about $350 billion.

"The agency is funded through premiums paid by employers with healthy defined-benefit pensions. If business failures continue at their recent pace, Kandarian said, the premiums charged to those plans could prove prohibitive and drive them out of the system. At that point, the only answer would be for Congress to call on taxpayers to make up the shortfall, just as they did when the savings and loan industry couldn't cover the losses of failing thrifts." End quote.

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***Posted at www.monefiles.com:

FANNIE MAE, FREDDIE MAC & THE LOOMING U.S HOUSING CRASH

U.S. Said to Be Open to Ending Credit Lines of Loan Giants
By STEPHEN LABATON -- Oct. 22 - NYTIMES

Full story can be viewed at:
http://www.moneyfiles.org/housingcrash10.html

"A senior Treasury official said on Wednesday that the Treasury Department was willing to consider the elimination of the credit line it extends to Fannie Mae and Freddie Mac, the two largest players in the mortgage lending industry, as part of the effort in Congress to overhaul regulation of the two companies. The announcement, made by an assistant Treasury secretary, Wayne Abernathy, in response to a reporter's question after a speech (on Oct 22), briefly shook the stock prices and bond yields of the two companies. It also prompted other officials to emphasize that the administration was not making the proposal but was willing to consider it if proposed by a lawmaker. The incident illustrated the deep political and financial sensitivities involved in overhauling the regulation of Fannie Mae and Freddie Mac, which are big buyers of home loans. The two companies, known as government-sponsored enterprises, have historically had enormous influence on Capitol Hill and, according to their critics, run circles around regulators. The companies have come under increasing political pressure after corporate missteps this year. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. After a speech in Washington, Mr. Abernathy was asked whether the administration would support the elimination of the $2.25 billion in credit lines that each company has with the Treasury, and by extension, the implicit government guarantees of its debt. The guarantees are a vital implicit pledge that enable the companies to issue billions of dollars in debt each year at substantially lower yields than competitors. He replied that if "Congress wants to take on that issue, we're open to having that discussion," according to Reuters and Bloomberg."
End quote.

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--Attention mining investors: OntZinc chairman Mr. Cliff Frame is the two-time winner of Canada's mining man of the year award. He is the chairman of Ontzinc. You are invited to read his company's most recent press release carefully. This appears to be a major undertaking, and the stock chart looks interesting.

-------------------------------------------advertisement-------------------------------------------

OntZinc ADDS THIRD ZINC PROJECT

Concentrates to Ship in April 2004

ONTZINC Corporation (TSX-V-OTZ) reports that its subsidiary St. Lawrence Zinc Company LLC has completed the purchase of the Balmat zinc mine in St. Lawrence County, New York. The mine has been on care-and-maintenance since 2001 due to depressed zinc markets. With base metal prices hitting multi-year highs and project financing being secured, management intends to resume output at a projected initial annual rate of 400,000 tons of ore (45,000 tons of zinc metal), rising to 550,000 tons (74,000 tons zinc) by the third year. The Company expects to ship its first concentrates in April 2004, when the winter's ice leaves the St. Lawrence River. The Company also expects to expand current reserves thus enabling production to increase to 1.2 million tons/year.

The Balmat purchase brings to three ONTZINC's zinc holdings. Through its ScoZinc subsidiary, the Company has a 100% interest in the Scotia Mine near Halifax, Nova Scotia, that may be re-opened during an
improving zinc market. The Company also holds 6,800 hectares of mineral leases in Southwestern Ontario, whereon exploration work has geophysically and geochemically defined 24 zinc anomalies targeted for further exploration this year.

Once the third largest zinc mine in the U.S., Balmat has an estimated surface and underground replacement value of approximately US$300
million. The current mine plan calls for mining approximately 5,000,000 tons of ore over a projected 10-year mine life. Later this year, ONTZINC expects to commence an aggressive surface exploration and drilling program to test for larger resource targets on the property's 56,000 acres of mineral leases. Milling capacity is 5,000 tons per day in a modern, highly automated facility.

Purchase Funded by Operation Cash Flow

The Balmat purchase price of US$20 million is payable out of 30%
of net cash flow from operations after reasonable capital and exploration
expenditures. A five million dollar bonus payment will also result if the
price of zinc hits US $.70/lb. over a two-year period.

Start-Up Capital Being Secured

ONTZINC forecasts the capital costs to restart operations at Balmat at US$20 million. Discussions are advancing to source financing from
municipal and state bonds. An additional US$18.25 million over 10 years is to be made available for Balmat through the New York state "Empire Zone Development Capital Program". And a US$10.0 million working capital loan, secured by mine concentrate inventory, has been arranged through an ONTZINC trading partner.

ONTZINC recently closed three non-brokered private placements
for gross proceeds of US$5.6 million and is currently involved in one
additional private placement for US$4-6 million.

For additional information:

ONTZINC CORPORATION
6 Adelaide Street East, Suite 300
Toronto, Ontario M5C 1H6, Canada

Tel: (416) 913-7601
Fax: (416) 360-5882

Contact: Mr. Keith Spurr
www.ontzinc.ca

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S&P500 Index

S&P500 Dec futures closed Friday Oct 24 at 1029.90 ie, down 7.90 pts on the week.

The Commitment of Traders report shows S&P500 commercial hedgers added 2,204 longs, bringing total longs to 394,176, whilst shorts added 947 contracts, bringing total shorts to 411,246. Large speculators are holding 47,793 longs against 79,076 shorts. And, small traders are holding 136,236 longs against 88,290 shorts.

S&P 500 continuation Cx weekly chart - line on close:

Rise above pivotal 930 neckline temporarily reversed pressure of massive 4½ year head & shoulder top (move above shoulder highs is required to challenge validity of H&S). Spinner in bull mode via tentative cross above zero. Heavy overhead supply/resistance between 1100 & 1200. Chart shorterm bullish to neutral.

S&P 500 Dec futures daily chart - line & bar:

Upside break from June-Aug consolidation offers theoretical 1068 measured target. Volatile action from Sept 8 high forming possible megaphone or broadening top formation (3 peaks at successively higher levels and, between them, 2 bottoms with the second bottom lower than the first). No measuring formula available for broadening tops, but they are not to be taken lightly, as normally associated with major mkt turning points. Spinner easing from crosscurrent bull mode to neutral. Technical deterioration points to shorterm weakness, but length & depth of possible consolidation not yet clear. Protective action recommended. Chart neutral to shorterm bearish.

FMU Traders Guidelines:

Per HSL635: Traders bought a bit at 1044.40. Chart action too negative to justify holding full longs. Lighten up/exit on bounce that fails below 1050 &/or on 1-day close below 1012.

Poss broadening top offers gamblers entry point for shorts (on weakness) at mkt &/or on bounce that fails below 1050 resistance. Close stops advised, ie, no higher than 2-dc over 1050.

Others wait for break below Mar 12 uptrend & nearby closing support. IE, sell short 1-day close below 1012. Stops basis your dollar pain levels, but no higher than 1-dc over 1040. Sell again below 992. Take full/partial profits at 956 & re-short a break below the same level.

Bulls buy spec longs on 3-day close over 1050; stops basis your dollar pain levels, but no lower than 1-day close below 1025. Apply tight trailing stops to lock in shorterm profits.

Traders are advised to use mini S&P's to enter/exit trades incrementally. 1 mini Cx = $50/point, compared with $250 for full size Cx (5 minis = 1 full size).

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Nasdaq

Nasdaq (mini) Dec futures closed Friday Oct 24 at 1376.00 ie, down 17.50 pts on the week.

Nasdaq Composite weekly breadth figures show new highs crushed new lows (489-31), while declines beat advances (2234-1225) & declining volume outpaced advancing volume by a ratio of 1.4 to 1. Mixed bag. Schizo!

Nasdaq Composite (mini) weekly (continuation) chart - line on close:

Price maintaining a positive albeit weak uptrend from Oct 2002 lows.
Absence of technical base activity reduces odds for sustainable upside. Spinner in toppy bull mode as plot lines no longer confirming higher highs in price. Major resistance 1690-2000; major support: 1125. Chart bullish to shorterm neutral.

HSLP-Nasdaq chart (HSLP = our in-house mkt predictor) line & bar:

Price in unrelenting uptrend from Apr lows. No signs of major technical weakness, but corrective throwback towards lower boundary of Apr uptrend probable. Possibility of shorterm weakness confirmed by corrective stance in Spinner lines. Consolidation likely to hold on/above 2155 if higher highs to follow shorterm. Chart bullish to neutral.

Nasdaq (mini) Dec futures daily chart - line & bar:

Price holding firmly within Apr uptrend, but threat of possible broadening top doesn't augur well for shorterm strength. Spinner easing from crosscurrent bull mode to neutral (red timing line in dip below zero). Major support: 1300. Chart bullish to neutral.

FMU Traders Guidelines:

Per HSL 635: Traders bought a bit at 1444. Chart action too negative to justify holding full longs due to threat of poss broadening top. Lighten up or exit on bounce that fails below 1430 or on 1-day close below 1362. Final exit no lower than 1-day close below 1338 (close below Apr uptrend).

Gamblers sell short (on weakness) at mkt &/or short a bounce that fails below 1430. Stops basis your dollar pain levels, but no higher than 2-day close over 1430. Short more below 1338 for 1300 downside profit target.

All sell 1-day close below 1300 for 1220 downside profit target. Stops no higher than 1-day close over 1362.

Bulls buy spec longs on 3-day close over 1430. Stop: 1-day close below 1362. Use close trailing stops to lock in shorterm profits.

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Market Sentiment

Investor sentiment levels remain at extreme levels. Two weeks ago, for the first time ever, all four investment surveys announced more than 57% bulls in the same week. Last week percentage levels remained high with Investors Intelligence reporting 56.6% bulls & Consensus 66%. Persistently extreme levels in investor sentiment surveys have greatly reduced their usefulness as timing tools, but the longer the mkt stays from the mean, the more painful the regression is expected to be.

Best & Worst Dow Jones US industries over 3-months:

10 Best Performing Industries

Consumer Electronics Index +46.58%
Mining Index +44.45%
Home Construction Index +27.88%
Nonferrous Metals Index +26.07%
Semiconductors Index +21.32%
Internet Services Index +19.57%
Home Construction & Furnishings Index +17.20%
Footwear Index +16.40%
Airlines Index +16.15%
Communications Technology Index +15.50%

10 Worst Performing Industries

Pharmaceuticals Index -6.07%
Biotechnology Index -5.44%
Insurance, Full-Line Index -5.37%
Chemicals, Commodity Index -4.15%
Fixed-Line Communications Index -3.79%
Advertising Index -3.65%
Distillers & Brewers Index -3.45%
Healthcare Index -3.42%
Telecommunications Index -3.18%
Chemicals Index -2.16%

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10-Year T-Note

10-Year T-Note Dec futures closed Friday Oct 24 at 112^31, ie up 1^22 on the week.

The Commitment of Traders Report shows T-Bond commercial hedgers added 8,015 longs, bringing total longs to 307,586, whilst shorts added 6,381 contracts, bringing total shorts to 268,740. Large speculators are holding 49,194 longs against 77,254 shorts. Small traders are holding 65,716 longs against 76,502 shorts.

10-Year T-Note Dec yield chart - line on close:

Yield on 10-Yr T-Note hovering below top boundary of May 2000 downtrend. Spinner in crosscurrent bull mode with slight bullish bias (plot lines positioned to confirm sustained upside). Rise over May 2000 downtrend & nearby 4.75 resistance will, in our view, terminate secondary reactions in global equity markets!

10-Year T-Note Dec futures chart - line & bar:

Erratic/volatile action raising risk/reward ratio to uncomfortable levels. Reduce exposure until new medium term trend defined. Spinner in crosscurrent bear mode with slight bullish bias (but dip below zero by (blue) confirming line normally associated with extended negative cycles). Resistance: between 113^27 & 114^22; support: 110^24. Chart neutral with slight bullish bias.

FMU Traders Guidelines:

Per HSL635, traders are short from 111^21. Last Friday's close near session highs & the growing probability of deeper corrective declines in major equity mkts warns against holding shorts. Cover at mkt.

Other mkts offer more favorable trading conditions, as action too mixed to make solid case for either direction. However, strength that fails below 113^27-114^22 resistance would offer spec entry point for bears as close stop could be applied (ie, no higher than 2-day close over 114^22).

Bulls look to buy strength after dip that holds on/above Sept 2 uptrend & key 110^24 support. Stop: 1-day close below 110^24. Or, buy 2-day close over 114^22. Tight trailing stops advised on all positions.

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Economically sensitive commodities

CRB Futures Price Index closed Oct 24 at 249.34, ie up 6.03 pts on the week.

CRB Futures Price Index weekly chart - line on close:

Price re-testing crucial 250 resistance after textbook throwback to Nov 2002 breakout point. Close near last week's highs & positive stance in Spinner lines increases odds for successful breach of 250 resistance. First sign of technical weakness would come on sustained close below Feb 2002 uptrend (eg, below 243); confirmed below 230. Chart bullish.

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DJ World Index

DJ World Index closed Friday Oct 24 at 171.05, ie down 2.29 on the week.

DJ World Index monthly chart - basis line on close:

Firm rise above 165 intermediate resistance highlighting strength of Mar rally-leg. Price action shorterm bullish, but massive 5½-year head & shoulder top doesn't bode well for longterm outlook. Despite positive cross in Spinner plot lines, bearish divergence growing via lower high in (red) timing line when compared to higher highs in price. Resistance: 180 & 200; support: 152. Chart S/T bullish to neutral.

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Gold

Gold Dec futures closed Friday Oct 24 at 389.20 ie, up 17.00 on the week.

***Reuters: COMEX Gold Narrowly Misses New High
Friday October 24, 3:07 pm ET

"NEW YORK, Oct 24 (Reuters) - COMEX gold steamrolled to within $2 of last month's seven-year peak Friday, shining brightly against a tumbling dollar, while trade houses backed up their bullishness with heavy buying of options, dealers said.

"As it has all year, the dollar's fall against the euro encouraged funds to shift into gold. The near $23 rally this week (low to high) gathered steam Friday as an investment bank bought out-of-the-money December $400 call options on the COMEX, which dealers said could pave the way for underlying futures to test that psychological level.

"The December contract topped at $393.00 an ounce, a whisker from the bull market high at $394.80 on Sept 25. Some traders sold too much last week as the key contract fell to $366.50, completing a pullback from the 2003 highs. The shakeout flushed many of the speculative longs out of the market, opening the door to this week's rebound.

"Call options are bets that prices will rise, conferring the right to buy gold at a preset strike price. The sellers of these derivatives protect themselves by purchasing futures in case they have to deliver the metal when the option expires.

"The euro rose to a 15-day high at $1.1857. Low U.S. interest rates, rising deficits and government efforts to orchestrate more favorable exchange rates for American exporters weakened the dollar against foreign currencies this year, making gold look more attractive as an alternative.

"An unstable and nervous dollar and equity markets continue to provide the catalyst for support in the gold market," wrote analyst James Moore at TheBullionDesk.com. "Support is still very strong for gold at the moment, with any weakness quickly absorbed by the physical community as we enter one of the areas of peak demand through the year."

"Buying of physical gold from India and the Middle East has prevented prices from moving down too far in the run up to Diwali celebrations and the Muslim holiday Ramadan.

"Gold mining stocks were also on fire. The XAU Index of gold and silver mining share rose to its highest since October 1997 Friday and the HUI "gold bugs" index of unhedged gold companies reached its highest level since it opened for trading in 1996. (Schultz Gold Index also made new high).

"Producer hedging to protect unmined reserves from falling prices was once a major impediment to gold going higher. But many miners have bought back forward sales this year, because shareholders want more exposure to the rising price of gold." End quote.

Gold Dec weekly continuation chart - line on close:

Upside momentum accelerating with Mar 2001 uptrend. Price rising to new closing highs following breakout from bullish (Feb-Aug) ascending triangle; 414 theoretical upside target. Spinner lines in full bull mode (plot lines in positive cross above zero). Chart bullish.

Gold Dec daily futures chart - line on close:

Threat of shorterm (Sept-Oct) head & shoulder top voided by powerful reversal to Sept closing peak. Price rising to new closing highs after breakout from bullish (Feb-Aug) symmetrical triangle. Spinner neutral to bullish, but quick break over 390 needed if sustained up cycle to develop in (blue) confirming line. Chart bullish.

FMU Trader's Guidelines:

Per HSL635, traders took full profits at 380 after buying spec longs at 367. Traders re-bought on 2-day close over 384 (ie, 386.80, or better).
If U R out, buy spec longs (on strength) at mkt &/or buy a dip that holds on/above 378.50. Take partial profits at 400 & use tight trailing stops on remainder.

Next major bear cue: 2-day close below 360.

*** To increase profits in gold shares, we recommend trading them, not just holding. Our weekly 'Gold Charts R Us' service (GCRU) is available via Net, fax or mail. Via Internet at rate of: 3-mos $300, 6-mos $585, 9-mos $855 & 12-mos $1,110. By fax add $120 per 3-months. By mail only $250 per 3-mos. GCRU offers many gold mine charts with specific buy&sell & stops levels for each pick. U can sign up online at: www.hsletter.com (click on 'Gold Charts R Us').

Note: Special GCRU '2-Week Taster' offer available at $45 via:
http://www.hsletter.com/GCRUpromo_Special.html
oNew Subscribers only.

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US$ vs. Norwegian Krone (NOK)

US$ vs. NOK closed Friday Oct 24 at 7.0179 ie, down 0.0612 on the week.

US$ vs. NOK weekly chart - line on close:

Major resistance 7.50-7.70; major support: 6.64-6.82. Chart action neutral with slight bullish bias due to rise above Feb 2002 downtrend & possible head & shoulder base development. Per last FMU: traders reduced exposure to US$ (bought NOK) on weakness below pivotal 7.50-7.70 resistance (ie, on break below S/T May 2003 uptrend). Buy NOK (aggressively) on continuing US$ weakness below key 6.64 support. Spinner line action confirms shorterm bounce possible on/above 6.64-6.82 support range, but validity of poss H&S base too early to define. Major bull cue (for US$): 2-day close over 7.70; major bear cue (for US$): 2-day close below 6.64.

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Euro vs. US$

Euro Dec futures contract closed Friday Oct 24 at 1.180 ie, up 0.017 on the week.

Euro futures weekly continuation chart - line on close:

Price in healthy uptrend from Mar 2002 low (dip to Aug 2003 low redefined angle of uptrend). Shorterm consolidation possible before attempt to breach key 1.180 resistance. Crosscurrent mode in Spinner lines confirming possibility of S/T weakness. Chart bullish to shorterm neutral. But double top poses risk.

Euro Dec futures daily chart - basis line on close:

Possible inverted head & shoulders continuation pattern has been constructed below key 1.180 resistance (sustained rise above 1.180 neckline needed to confirm). Spinner poised to make positive cross above zero (ie, positioned to confirm sustained upside). Poss consolidation dip below 1.180 resistance expected to be limited if higher highs to follow shorterm. Chart bullish, but double top must be overcome to remain bullish.

FMU Trader's Guidelines:

Per HSL635, traders bought strength after throwback towards 1.132-1.142 support range. Take partial profits at mkt &/or use tight trailing stops to lock in shorterm gains.

Gamblers: if U R out buy spec longs (on strength) at mkt in anticipation of break over 1.180. Increase longs if/when breakout confirmed by 2-day close over 1.180. Stops no lower than 1-day close below 1.158. Take partial profits at 1.2190 & use trailing stops on remainder.

Bear cues: 2-day close below 1.132; again below 1.114.

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Yen vs. US$

Yen Dec futures contract closed Friday Oct 24 at .9159 ie, up .0004 on the week.

Yen futures weekly continuation Cx - line on close:

Patience finally rewarded by upside break from 2½ year inverted head & shoulders base. Consolidation throwback of towards breakout level possible. Possibility of corrective dip hinted by slight loss of upside momentum in Spinner (red) timing line. Chart bullish to shorterm neutral.

Yen Dec futures daily chart - line & bar:

Loss of upside pressure in Sept rally leg creating possible bullish symmetrical triangle continuation pattern. If price breaks below lower boundary of symmetrical triangle shorterm support betwn 0.8950 & 0.9000 may contain corrective action, but throwback towards the 0.8750 level cannot be excluded. Spinner in corrective bull mode (but quick break to new closing highs needed to halt persistent downtrend in (blue) confirming line). Chart bullish to shorterm neutral.

FMU Trader's Guidelines:

Per HSL635, gamblers bought a bit at mkt (ie, at 0.9028). Take ½ of those profits at mkt & use tight trailing profit stops to lock in shorterm gains on other ½ or at 0.9050.

If U R out, buy a bit at 0.9222-stop (gamblers buy a bit at mkt). Stops no lower than 1-day close below 0.9100. Or, look to buy strength after dip that holds on/above 0.8950 & 0.9000. Stop: 1-day close below 0.8950. Take partial profits at 0.9200 & use trailing profits stop on remainder.

Bears temporarily to sidelines.

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New Stock Recommendations

Prudent Bear Fund (BEARX) buy 2-day close over 6.90; stop: 6.20.

Cooper Cameron (NYSE: CAM) sell short at 44.50 (gamblers at mkt); stop: 48.95.

Csx Corp (NYSE: CSX) sell short at 28.70-stop; stop: 31.55.

Petroleum Dev (Nasdaq: PETD) buy at 13.20-stop; stop: 11.60.

Westar Energy Inc (Nasdaq: WR) buy spec longs at mkt &/or buy a dip that holds on/above 18.85; stop: 17.68.

Note: traders are strongly advised to limit total equity exposure in their portfolios to percentages outlined in the HSL Investment Box (p.9 in HSL635).

Traders must adapt recommendations to shorterm mkt direction. If strength/weakness kicks in before pullbacks to buy/sell levels are reached, enter small foothold positions at mkt. Likewise if general mkt direction moves against open positions, exit at mkt rather than waiting for stoploss levels to be hit. Your interpretation & modification based on conditions of our recommendations often makes the difference betwn profits or losses.

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Stop & Sell Recommendations

Take partial profits on:
Alliance Bankshares & raise stop to 14.40.
Coach Inc & raise stop to 27.25.
Crown Resources.
Eresearchtechnology & raise stop to 36.75 S/C/O.
Goldcorp (NYSE)
Goldcorp (Toronto) & raise stop to 17.20 S/C/O.
Newcrest Mining & raise stop to 9.10 S/C/O.
Newmont Mng.
Rio Narcea.
SAP & raise stop to 105.00.
Ultra Pete & raise stop to 14.00.
US Global Gold Shs Fund.
XTO Energy & raise stop to 20.30.

Raise stop on:
Alliance & Leicester to 810.
Candian Nat'l Ry Co to 68.65.
Casino to 70.95.
Huaneng Power (long at 57.00) to 50.30.
Iamgold to 6.75 S/C/O.
Int'l Mineral to 2.80 S/C/O.
Man Grp to 1264.
Marvell Tech to 38.40.
Morgan Stan India to 14.65.
Orange to 8.50.
Petrochina to 0.30.
Royal Bk of Canada to 58.20.
Symantec Corp to 62.00.
Teva Pharm to 54.00 S/C/O (cancel M/T stop).

Sell at mkt:
Cray Inc.
Deutsche Telekom.
High River Gold.
Huaneng Power (long from 37.00).
Sgs Holdings.
Univ. Phoenix Online.
Zurich Fin'l Services.

Cancel order to buy:
Netease.com (insufficient volume).
Petrochina on dip to 0.325.
Wheaton River on dip to 2.25.

Note: Iamgold (Toronto: IMG) was purchased at 7.95 per our recommendation in HSL634, but omitted in HSL635 'Open Positions' copy. Many thanks to Hslm R.M. for bringing this to our attention.

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"The greatest mistake a man can make is to sacrifice health for any other advantage."
Arthur Schopenhauer.

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***A man goes into his son's room to wish him goodnight. His son is having a nightmare - the man wakes him and asks his son if he is OK? The son replies he is scared because he dreamt that Auntie Susie had died. The father assures the son that Auntie Susie is fine and sends him to bed. The next day, Auntie Susie dies.

One week later, the man again goes into his son's room to wish him goodnight. His son is having another nightmare - the man again wakes his son. The son this time says that he had dreamt that granddaddy had died. The father assures the son that granddaddy is fine and sends him to bed. The next day, granddaddy dies.

One week later, the man again goes into his son's room to wish him goodnight. His son is having another nightmare - the man again wakes his son. The son this time says that he had dreamt that daddy had died. The father assures the son that he is OK and sends the boy to bed. The man goes to bed but cannot sleep because he is so terrified.

The next day, the man is scared for his life- he is sure is going to die. After dressing he drives very cautiously to work fearful of a collision. He doesn't eat lunch because he is scared of food poisoning. He avoids everyone for he is sure he will somehow be killed. He jumps at every noise, starts at every movement and hides under his desk.

Upon walking in his front door at the end of the day, he finds his wife. "Good God, Dear," he proclaims, "I've just had the worst day of my entire life!" She responds, "You think your day was bad, the milkman dropped dead on the doorstep this morning."

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***Next HSL will be mailed on Nov 17. Next GCRU on Oct 29.

Subscriber input is WELCOME on FMU service, trading recom's, jokes, or any other ideas/info that may be of interest to FMU family members.

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HSL contact details:

E-mail: info@hsletter.com

Our customer service phone & fax numbers as follows:

PHONE number:
011 506 271 2293 (if you are calling from U.S. or Canada)
00 506 271 2293 (if you are calling from any other country)

FAX number:
011 506 272 6261 (if you are calling from U.S. or Canada)
00 506 272 6261 (if you are calling from any other country)

NOTE: If you experience trouble faxing our office in Costa Rica
please fax our Swiss office on:

011 41 21 652 0525 (if you are calling from U.S. or Canada)
00 41 21 652 0525 (if you are calling from any other country)

Our MAIL address is:

HSL
PO Box 622, CH-1001
Lausanne, Switzerland.

The HSL Team

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