The Day The Earth Stood Still
by Howard Ruff
Some years ago when we
lived in Washington, D.C., we went to see a new
science-fiction movie, The Day the Earth Stood
Still, at the RKO Keith Theater, located across
the street from the White House. As the movie
opens, a huge flying saucer is landing on the
ellipse, south of the White House.
Ironically at that moment in the real world,
some police cars or fire trucks were going right
past the theater with their sirens blaring, at
the same time we were watching this flying
saucer land on the screen. It felt like there
was actually something serious going on.
As the movie progressed, the actor, Michael
Renney, came out of the flying saucer with a
huge robot and announced that he was an
ambassador from a Federation of Planets who were
worried about the war-like tendencies of this
planet and were there to impose peace on us,
which he later did by stopping all electronic
and mechanical devices – airplanes, trains,
When we left the theater, I had to reassure
myself that everything was still working – that
we could still get on a real world bus or
streetcar and go home and it would all work
I’ve never forgotten that dramatic day. What we
have seen in the last few weeks equals what
happened – the earth has stood still.
Wall Street, as we have known it all my life, no
longer exists. Merrill Lynch has been bought
out, as well as Washington Mutual. Fannie Mae
and Freddie Mac, Bear Stearns and AIG are gone,
and Lehman Brothers is bankrupt and has
collapsed. But the major issue before us is that
this Democrat-controlled government has taken
over everything we used to call “Wall Street.”
With the aid, assistance and encouragement of
President Bush, Uncle Sam is trying to buy $700
billion worth of rotten assets so they can
control Wall Street.
What rotten assets would they buy? It seems that
one of the issues behind the collapse of the
mortgage industry has been the Democrats forcing
mortgage lenders and brokers over the years to
issue mortgages that can never be repaid as part
of their social policies to create “affordable
mortgages” to create “an ownership society.”
So Congress rushed in to create unenforceable
mortgages which are unlikely to be paid –
mortgages where you could start with a low
teaser rate and kick the ball three or four
years down the road to where the stated interest
rate would rise so they couldn’t be paid. Also,
no documented income required, no down payment!
I have warned you repeatedly against falling for
this scam. I told you to only accept a
fully-funded, fixed-rate mortgage. If you took
my advice, you are watching with bemused silence
the soap opera in Washington.
Today Wall Street and the securities industry
have been socialized by Congress and the
Democrats are firmly in control. $700 billion
will buy up the bad mortgages that people can’t
pay and alter the terms to stop foreclosures so
everyone, no matter how unworthy, can own a
house they can’t lose, whether they can make the
payments or not.
So how do I feel about this?
I can’t tell big-government politicians what to
do and what will work. I’m not that smart, and
they wouldn’t listen anyway. My job is to figure
out what will really happen and then help you
middle-class Americans deal with the world as it
is and profit from it.
The irony is that they may have created a
problem beyond the ingenuity of human
leadership; so big and perverse that there is no
real solution short of spending billions to buy
up bad assets.
So who is to blame for this mortgage disaster?
Blame congress, including compliant Republicans,
for the “ownership society.”
Blame the Federal Reserve for keeping interest
rates so low for years that anyone could get a
mortgage under the relaxed terms – buy a home
with a mortgage that could never be repaid –
creating a real-estate bubble.
Blame perverse laws passed by Congress divorced
from any reason to buy votes.
Blame individuals who signed up for mortgages
that they could never repay.
And blame those who want to bail them out by
buying their mortgages and readjusting the terms
so they don’t get thrown out of the home they
can’t afford and should not have bought!
This is supposed to fix the problem.
It may kick Wall Street and the banker’s problem
down the road, but it won’t fix America’s
problem. Everything you have been reading in
newspapers and seeing on TV is aimed at saving a
few favored executives on Wall Street and the
tattered reputations of the politicians who
created this problem.
Throwing Money at Problems
The end result? How does Congress usually fix a
big problem? The only way they know is to throw
money at it. They create the money out of
nothing. They vastly expand the money supply.
One of the immutable laws of the financial
universe is that when you expand the supply of a
paper currency, you create monetary inflation.
I don’t know how to fix Wall Street’s problem,
nor do the politicians with all their posturing.
But I do know how to take advantage of what is
happening! I’ll say it again; when the
government throws money at a problem, they
create monetary inflation. The vast expansions
of the money supply that we are seeing dwarfs
anything we have seen in our lifetimes.
With that as the reality, whether or not you
think you know how to solve Wall Street’s
problem is irrelevant. The reality is you can
now profit from the sure thing – monetary
Monetary inflation means we will wake up one day
in the grip of a huge price inflation. As Will
Rogers said, “Invest in inflation, it’s the only
thing that’s going up.”
In this artificial environment, you can easily
turn small amounts of money into big fortunes if
you know a few simple things to do. Let them
play their crazy Washington games.
How did all these giant institutions fail so
One of the causes of Wall Street’s problems is
the answer to the question: What happened all of
a sudden to their balance sheets? The villain is
Generally Accepted Accounting Principles(GAAP).
In recent years, changes in GAAP required banks
and brokers to “mark to market” the investments
on their balance sheet. When the diminished
value of real-estate assets which had been
packaged and securitized so that banks and
brokers could invest in them became obvious, no
one knew how to value them. Under GAAP they had
to “mark to market,” which means they had to
mark them down to zero. There was no market
price, because there were no buyers or sellers.
In the real world we know that most mortgages
will be paid. But rather than ascertaining value
based on normal cash flow, because there was no
market they had to mark these assets down to
zero and trillions disappeared from balance
When a bank or brokerage house balance sheet is
deeply impaired, they have to raise additional
capital. When that is happening to everyone, who
will loan you money? Consequently, the balance
sheets just plain disappeared.
What to Do
You are lucky to have an old hand like me
around. I have lived through the inflation of
the ‘70s when we made fortunes on inflation
hedges. Most financial advisors are too young to
have even been around then, and you are adrift
without a rudder.
When I wrote How to Prosper During the Coming
Bad Years in the 21st Century, I had concluded
that the world was coming back around to where
it used to be in the ‘70s for the same reasons,
only more so. So rather than writing a whole new
book (I write books for part of my income), I
would simply update the big best-seller that I
wrote back in 1978 (2.6 million copies) because
the principles were again the same. I only had
to update it for the 21st century.
This is the book that we give every new
subscriber and every renewed subscriber who
doesn’t already have it.
Will the principles that worked back then work
again? Yes, they will work again because the
principles that are close to eternal as
financial principles can be.
Here is the advice I am updating now.
Prices will rise sharply due to monetary
inflation, which eventually results in price
Today I received an email from Money News.
"The earthquake will come via a collapse in the
market for U.S. government bonds as domestic and
foreign investors realize that the only way
Uncle Sam can meet his future spending
obligations is to print massive quantities of
money," warns Boston University economist
Laurence J. Kotlikoff.
"The result will be sky-high inflation and
interest rates and, most surely, a prolonged
reduction in output and employment."
"This could happen today. It could happen
tomorrow. But it will happen here just as it has
happened in every other country that tried to
spend far beyond its ability to pay," he writes.
Nevertheless, Kotlikoff figures the real total
debt of the government right now is $70
trillion. Never mind the personal debts – credit
cards, mortgages, cars, and other loans –
Americans would face as our economy heads,
potentially, into a deep recession.
Compare that figure to the entire U.S. economy,
which amounted to $13.8 trillion in total
economic output in 2007.
And don’t forget the automakers and airlines who
want us to give them a few billion dollars. “If
we keep our promises to the retiring baby
boomers, we'll be paying out $4 trillion a year
that we don't have for decades,” says Kotlikoff.
Normal commerce is crippled by inflation. The
commodities you ordinarily will be able to buy
whenever you want, at the price you want, may
not always be there, as inflation has driven up
the cost of fuel so the trucks will find it
harder to pull up to the back door of your local
store and restock the shelves.
You must turn a liability into an asset. Prices
will rise higher and higher. How do you turn
this into an asset? By buying things now while
they are still relatively cheap, storing them
away and then consuming them later when prices
This includes every commodity you would buy at
your local store, ranging from food, to diapers,
to soap, to auto parts, to everything else.
Some people call this “hoarding.” So be it! I
don’t want to be politically correct by not
“hoarding” if I will be hungry and my family
will not be able to eat. In the real world, so
few people will take my advice I will have
little impact on the rest of the world.
(By the way, Karen Varner is still very helpful
with planning food storage or 24-hour kits. You
can call her at (801) 225-0948 or email her at
firstname.lastname@example.org. You’re welcome!)
How do you take Will Roger’s advice and invest
in inflation because it’s going up? Several
investments will benefit.
Gold and Silver
The stars of the show are gold and silver, with
the emphasis on silver. Why will they boom?
Historically, the world is littered with dead
paper currencies. Major currencies disappear
about every 70 years, and historically at these
times, people have instinctively turned to
precious metals because gold and silver coins
have a long history as money.
We have been using them as money since before
Roman times, and metal coins protect you against
inflation because they boom. They do not
increase in price; the currency diminishes in
value in relation to them and precious metals
reflect this phenomenon.
Gold gets all the headlines, but the real star
will be silver. Gold is not as much of a
monetary commodity except in the theoretical
sense as backing for paper currency.
Silver has been actual money. When the Romans
conquered Spain, they took over the Spanish
silver deposits lying relatively close to the
surface. Silver coins were the basic currency of
Rome, and for centuries it was valuable because
that was the only kind of money there was. But
then the Roman Senate decided they had to gain
the support of the populace. They were beginning
to sleep under bridges and needed to be
entertained housed and fed.
So they built the coliseum and began to show
bouts between lions and Christians (lions 200,
Christians zero). “Bread and circuses” were the
watchwords of the day, and as soon as the Roman
Senate made the decision to cater to the mob,
they had to figure out how to stretch the money
when the silver mines began to run out.
They started out by making silver coins thinner
and smaller, and then clipping the corners, then
mixing them with base metals. People caught on
real fast, and they wanted more coins in return
for their goods and services (“rising prices?”).
This monetary inflation turned serious when the
far-flung Roman legions began to distrust the
value of the currency in which they were paid.
So the Roman legions began to desert. Monetary
inflation brought down the Roman Empire and made
it impossible for them to defend themselves
when, centuries later, the barbarians were at
Then we invented the printing press.
Paper to Money
How did paper currency first begin? It started
out as warehouse receipts for gold and silver in
the warehouse (bank). If a duke or noble wanted
to conduct a war, he would simply go to the
warehouse and take out some of his gold and
silver and use it to pay the troops and buy
They soon discovered that rather than going to
the bank and getting the metal, it was easier
just to pass the receipts around so the other
guy could go get the metals.
In other words, the warehouse receipts began to
be accepted as currency representing the coins.
It seemed like a good idea at the time.
Paper started turning into money when the
warehouse owners (bankers) realized that nobody
knew how many receipts there were, and they
began to create more receipts than there was
money and passing them around as if they were
backed by real metals. After all, who would
Soon, and it didn’t take long, people began to
look upon the paper receipts as though they were
real money. It was convenient. It was a lot
easier than going to the bank and getting the
Eventually, as paper lost its relationship to
actual stored metals, governments began to
ignore the fiction that it was a warehouse
In the U.S., the receipts backed the gold in the
warehouse, and individual countries could bring
their receipts to the Federal Reserve gold
window and exchange them for gold.
However, soon we had created so many receipts
that we began to lose too much gold at Fort
Knox. So President Nixon yielded to reality and
closed the gold window. He gambled that nations
would look upon the currency as money and that
decision would be accepted. He was right.
Since Nixon closed the gold window, there is no
gold backing for the paper. The paper is
considered money all by itself. The race was on.
The restraints were gone.
Congress found that they could buy votes by the
simple act of creating paper currency. The paper
currency has undergone lots of evolution since
then. With the birth of the computer, they don’t
even have to print anything. Only about five
percent of the so-called Money Supply is
actually minted, printed or coined. The rest of
it is on the computers of banks.
Politicians found they could buy votes by simply
creating more receipts through modern means.
That’s where we are now.
Congress is engaging in an orgy of vote-buying,
driven by socialist dogma. That’s what is at
stake with this crazy attempt to create $700
billion to buy up defunct mortgages.
The capper on this deal was when mortgage
lenders discovered they could package thousands
of mortgages into bonds and sell them for
investment then re-loan the money again, and
The fed cooperated by keeping interest rates at
one percent per year to prevent an economic
collapse. American suckers bought in and got
easy mortgages to buy property in areas like Las
Vegas, Arizona, Florida, and Southern
California, and real-estate prices soared.
Eventually, of course, this could not be
sustained, and the real-estate bubble has burst.
Many mortgages under the teaser-starter rates
have now found they can’t make their payments
and began to default. This has resulted in the
biggest burst bubble in the history of bubbles.
I saw a picture of the Democratic leaders of
Congress: Harry Reid, Barney Frank, and Nancy
Pelosi (aided by George Bush) doing their best
to look like they were heroes on a horse in the
public square, bragging about how they would
solve Wall Street’s problem by getting banks to
buy up these rotten assets, establishing a
market value for them.
In a rare display of common sense, Congress has
chosen not to fall for the scam. As this is
written, we (and they) don’t know what the heck
they are going to do. But we do know the Federal
Reserve has issued billions of dollars to
favored firms so that some chosen bankers can
buy up other institutions, buying the rotten
assets so the old world can continue.
They are trying to maintain a sick society by
eliminating the voter’s consequences for
stupidity. This is why I have placed the biggest
blame on the suckers who fell for the deal and
bought homes they really could not afford.
Congress wants to buy up these securitized
mortgages, change the terms, and ensure that
people don’t get thrown out of their homes. If
they succeed, it might work for a while, but
America has so far said no.
What will be the result? I don’t know, but no
solution is being proposed that doesn’t involve
the creation of money and an inflationary
When you combine this with the fact that other
socially acceptable entitlement programs, like
Social Security, Medicare and Medicaid, are
unsustainable and can only be maintained by
creating money, we have a lead-pipe cinch
guarantee of more inflation in the future.
It has already started. Look at the recent
prices in the super market. Look at the recent
price of oil and gas.
Prices will not go straight up. Take oil for
example, the price has recently plummeted. Of
course, it jumped again once the so-called
bail-out failed. But it is possible that oil may
fall to as low as $60 per barrel temporarily,
but that doesn’t matter. If inflationary prices
retreat temporarily from time to time, you can
buy now at low prices to later consume at higher
Gold and silver will do extremely well. Silver
has several things going for it:
It has always been a real monetary metal, which
naturally responds to inflationary pressures.
It is a critical industrial metal, with over
2,000 industrial uses.
There is no stockpile of silver sitting around
to be dumped. It’s all gone; used up by
industry. So it is immensely price sensitive.
There are those like Ted Butler who have alleged
that the price of silver has been manipulated
and kept artificially low, and they are probably
right. I don’t completely understand Ted’s
reasoning, but I won’t argue with him. The point
is that it is artificially cheap and should be
The Stock Market
Stay away from the stock market generally. Avoid
blue chips and most mutual funds, as they are an
endangered species. This week’s decline of 777
points in the Dow is a harbinger of the future.
The stock market is not a single entity. It has
many independent pieces, and some aspects of the
stock market should prosper.
Uranium mining stocks. In the quest for cheaper
energy, we will build nuclear plants. If they
proceed with the nuclear plants that are on the
drawing board or under construction today, there
is only half enough uranium above ground to
provide their needs. So buy the mining stocks, I
added one more to the list this week. The
Investment Menu should boom for years.
Oil service companies such as Schlumberger and
Halliburton. We will drill for oil off shore,
and the companies that build and service the oil
rigs will do very well indeed. In the long run,
they are an excellent bet.
We will be exploiting oil sands in Idaho, Utah,
Wyoming and Colorado. I haven’t identified yet
the best stock buys in that area, but stay
tuned. By the next issue, I should have a list
There is a lot of controversy over oil sands.
They could be disasters environmentally, so I’m
holding off a bit, but we will drill for oil off
In the meantime, we will watch with interest
what dumb thing Congress finally decides to do.
It will be done by throwing money at the problem
and creating runaway inflation.
I repeat again what Will Rogers said, “Invest in
inflation; it’s the only thing that’s going up.”