For more than three decades, savvy world investors have feared that in any serious deflationary crisis, the U.S. would panic and open the floodgates of printed fiat currency, writes Richard Maybury.

Maybury believes that the deflationary crisis has arrived; dollars are being created by the Federal Reserve at an astounding rate. The steady upward slope of BASE, the St. Louis Adjusted Monetary Base has become vertical.

Since officials don’t know the location of the threshold that would trigger an inflationary crisis, making the U.S. dollar worthless, they are dropping money into the economy in increments instead of one huge infusion.

Americans see each of the smaller injections as a failure. Thus, each one makes them more fearful. The velocity of money falls, nullifying the inflationary effect of the injections, Maybury writes (U.S. and World Early Warning Report, Special Bulletin #3, 10/10/08).

The only silver available for purchase is in 1,000-oz. bars. One explanation, suggested by Arthur Robinson, is that Americans are so frightened that they have bought up all the silver coins.

Nonetheless, “we have the tools to manage the crisis,” writes Paul Volcker reassuringly (Wall St J 10/10/08). Volcker was Federal Reserve chairman from 1979-1987. “Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and restore trust.”

If confidence is restored, the game can proceed. At least for a time.

The international confidence-builders have had an “unprecedented crisis” come up at a most awkward moment: Just after World Bank president Robert Zoellick called for a “radical revamping of multilateral organizations in light of the global economic meltdown,” it was found that the security of the World Bank Group’s computer network has been compromised by cybercriminals. Intruders have had access to the Bank’s most sensitive systems for at least 6 months. Officials have been scrambling to find the cause of the problem, while also trying to keep news from leaking to the public.

Maintaining the Bank’s information infrastructure costs about $280 million per year. One disgruntled staffer complained that it doesn’t even have an internal search engine that works. But investigators found that intruders were “downloading anything and everything.” Among other problems, spyware had been covertly installed on workstations in the Bank’s Washington headquarters (Fox News 10/10/08).

As President Bush told Americans, the crisis is global.

Neither the Federal Reserve nor the World Bank is offering a confidence-inspiring path to financial stability.

Additional information:

• “A Trillion-Dollar ‘Rescue’?” AAPS News, November 2008.
• “Confidence Games,” Civil Defense Perspectives, September 2008.
• “Massive Pork Bill Passed by Unconstitutional Process to ‘Rescue’ Economy,” AAPS News of the Day 10/5/08.
• “About the Power,” AAPS News, September 2008.
• “About the Money,” AAPS News, August 2008.

According to the U.S. Constitution, all revenue bills must originate in the U.S. House of Representatives. How then did the massive bill to make taxpayers buy all kinds of toxic debt originate in the U.S. Senate?

It only appears that way. For purposes of our lawmakers, “it”—that is the shell bill wrapped around the “rescue” package—did come from the House. Apparently, any bill previously passed by the House will serve. This one was a bill requiring “mental health parity,” H.R. 1424, originally sponsored by Rep. Patrick Kennedy (D-RI) and pushed through as the shell bill by Sen. Edward Kennedy (D-MA). That is an insurance mandate that forces employers and insurers who offer mental health benefits to more than 50 workers to provide them on par with medical benefits. There can be no higher deductibles or copayments for mental health benefits, or stricter limits on physician visits (Kevin Freking, LA Times 10/2/08).

Starting out as a 3-page bill, the package rapidly expanded to 442 pages, despite a promise by Sen. Chuck Schumer not to “Christmas-tree” the bill. It got decorated even more after the House rejected it in response to an outpouring of rage from constituents.

In a tape played on talk radio, Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, said his mail was running about 50:50. “Fifty percent no, and 50% hell no.” Incumbents have a lot of explaining to do, especially if they switched their votes from “no” to “yes.”

Possible rationales: The stock market plunge after the “no” vote. Disaster aid to states struck by summer storms. A one-year patch for middle-class families facing a sting from the alternative minimum tax. More students able to finish college if a credit crunch on college loans is forestalled. Increasing FDIC insurance from $100,000 to $250,000. Tax credits for “alternative” energy. A really good speech by Joe Knollenberg (R-MI) about how he was willing to pay the price of getting this important thing done.

The biggest single switch was in the Congressional Black Caucus. Thirteen members of the CBC switched from “no” to “yes”; many had heard from Barack Obama. Both presidential candidates strongly endorsed the bill.

“When I woke up this morning, I had real peace that this was the right thing to do,” said Rep. Mike Conaway (R-TX), a certified public accountant (Patrick O’Connor, Politco.com 10/4/08).

Among the switchers was Rep. John Boehner (R-OH), the hero of conservatives credited with the initial rejection. Apparently because of the addition of $150 billion in “sweeteners” to the $700 billion bailout, he called on Republicans to vote for the modified bill.

Among the least well-known features of the bill is a provision that makes IRS authority to conduct undercover operations permanent. IRS agents can, for example, run an extended sting operation disguised as an accounting firm. The bill also empowers the IRS to share personal tax returns with any federal agency investigating suspected “terrorist” activity.

The most earth-shattering provisions in the bill lay the foundations for an economy-killing carbon tax like the “cap-and-tax” system that is now destroying European industry, observes Matthew Vadum (Capital Research Center 10/2/08). On Oct 2, while Americans were focused on the threat of a credit meltdown, House Democrats released principles for an aggressive plan to cap greenhouse gas emissions, which could cost even more than the failed $6.7 trillion Lieberman-Warner Climate Security Act, writes Marc Morano, communications director for Senate Environment and Public Works Committee Inhofe staff.

The $700 trillion that the Treasury is now authorized to hold in “troubled assets” is piled on top of other recent bailouts. These include: $29 billion for Bear Stearns financing; $200 billion for Fannie Mae and Freddie Mac nationalization; $85 billion for AIG; $300 billion for Federal Housing Administration rescue bill; and much more, for a total of more than $1.8 trillion, or more than $17,000 for every American household, writes Declan McCullagh (Politics and Law 10/3/08).

As Congress and the President celebrate “dealing with” the problem, Treasury Secretary Paulson, with his selected associates, is planning to move quickly to buy distressed assets. What is his experience in valuing assets? Paulson, remember, was formerly head of Goldman Sachs and, simultaneously, the Nature Conservancy. He presided over the donation of 680,000 acres of land in Tierra del Fuego, Chile, to the Wildlife Conservation Society without ever assessing the area’s potential value for timber, oil, or metals, in order that Goldman Sachs shareholders could know the true value of the giveaway (Vadum, op. cit.) (Also see Fred Lucas, “In Goldman Sachs We Trust: How the Left’s Favorite Bank Influences Public Policy, Foundation Watch, October 2008.)

Carbon emissions trading is the biggest potential moneymaker for Goldman Sachs.

Who will be competing to unload assets on the U.S. taxpayer? Gov. Arnold Schwarzenegger already has his hand out for California, which has been shut out of credit markets and could run out of cash by the end of the month. Many foreign banks are also on the verge of the abyss.

The stock market fell further after the bailout, as did the dollar. The focus has now shifted to the fallout and to the question of whether the latest, biggest bailout will succeed in containing the panic.

Additional information:

• Read the bill: http://thomas.loc.gov/home/gpoxmlc110/h1424_eas.xml
• See how they voted: Senate; House
• Competitive Enterprise Institute’s Bailout Watch.