America's hidden depression...

America's hidden depression... Why our standard of living is plummeting... How paper money turns losers into winners... More on the Social Security snafu... In the mailbag: 'The arrogance of youth'...

It's a short Digest today... but an important one...

I'm preparing to travel tomorrow to Santa Barbara, California. I'm hosting a few dozen of my top employees and my greatest business contacts at the Bacara Resort. We will be meeting with several hundred of my best clients, our S&A Alliance members. The meeting will focus on the monumental changes occurring right now, around the world, in the energy complex.

The keynote speaker is Philip K. Verleger, Jr., whose energy research is normally only available to high-powered institutional investors (who pay enormous sums of money for access to it). We will also hear directly from the CEO of a small (for now) gold mining firm that I believe is shaping up to be the next Arizona Star – a situation that worked out well for many of our subscribers.

I'll give you a review of the meeting in next week's Digest.

But today... I'd like to simply point out one very unpleasant fact. I'd like to give you some insight into why it's so important and what it really means.

Here's the fact: America's standard of living is falling at a faster pace today than at any time since the Great Depression. Specifically, the real median income is down 9.8% since the fall of 2008. Additionally, Americans have lost roughly $5.5 trillion in asset value, or about 8.6% of their wealth.

When you talk about a depression, what you're really talking about is a collapse in the standard of living. That's what's happening today, right now, in our country. But people continue to go about their lives as though nothing is happening. Certainly, our politicians don't want to draw attention to the problem. Instead, they are behind the campaign to "paper over" these losses with schemes like "quantitative easing."

These schemes do nothing to make our economy more productive. They're designed instead to make prices rise so people (hopefully) won't notice how poor they're becoming.

If you've been reading my newsletters since 2008, none of this is a surprise to you. I've been warning month after month, year after year, that the government's efforts to paper over our bad debts won't work. And they won't work for two primary reasons…

First, soaring levels of high-powered money (like the Federal Reserve's asset base) will eventually cause prices to rise. That means the savings of millions of Americans – and the value of their wages – will fall in real terms. That's exactly what's happening. That's why our standard of living is falling so precipitously.

Second, the impact of this inflation and the uncertainty about its impact on the economy will cause entrepreneurs and corporations to delay or cancel major capital investments. That's the primary reason we have yet to see any rebound in employment.

The best way to see what's really happening in our economy and to our standard of living is to look at the value of the stock market through a sound-money lens. You can pick whatever sound money you like. Of course, most people won't ever do this... It would never even occur to them that the dollar is not sound and that it's distorting the value of everything in our economy.

Here's the real situation in America:

That's what the S&P 500 looks like when you price stocks in ounces of gold instead of in U.S. dollars. You'll see we are now below the lows we saw in 2009. Unfortunately, few people understand this... They've never thought about it this way before. And as a result, they're simply not doing enough to protect themselves.

They don't know this is what's really happening, because Washington keeps papering over these problems with more borrowing and more printing. But you can't solve a debt crisis by going deeper into debt. You can't reverse inflation by printing more money.

If I could magically wave a wand and change just one thing about my fellow citizens... I'd make them realize paper money is a crime.

It allows politicians to rob creditors to bail out debtors. It's a tool that's used to take value away from savers and give it to reckless borrowers. It's how both political power and economic power remain vested in Washington D.C.

Now… the politicians and their backers on Wall Street will swear up and down that their policies and the actions of the central bank (which has more than doubled its assets via nearly $3 trillion of asset purchases) aren't causing the inflation. It's as if, in their minds, printing trillions of dollars in new money has no impact on our economy.

It's simply a lie.

But that's not the worst part. The worst part is all that new money will end up in the hands of the people who caused this crisis in the first place.

Let me give you one example. Below, you'll find a chart of Genworth Financial. It's a mortgage-insurance/life-insurance company. It was spun out of GE Capital during the midst of the 2000s financial boom.

Without the bailout of the financial system, via $700 billion in TARP money and more than $2 trillion in quantitative easing, there's no doubt in my mind that Genworth would have gone bust because of losses in its mortgage-insurance unit. But that's not what happened. Instead, Genworth Financial became the No. 1-performing stock in the U.S. from the spring of 2009 until the spring of 2010.

It held on to those gains as long as the Central Bank continued its quantitative easing policies. And when QE finally ended in the summer of 2011... guess what happened to Genworth? I bet you can guess without even looking at the chart.

Paper money took the biggest loser, the company that had made the worst bets with the most leverage... and turned it into the biggest winner… at least, temporarily. For this, we all paid a massive, invisible tax: the largest decrease in real wages since the Great Depression.

This isn't how America should work. The rich and the powerful in New York and Washington D.C. shouldn't have the right to impoverish the rest of us simply to bail out their backers and their cronies.

My guess is... sooner or later... our creditors and the American people will wake up to what's happening to our money. And as I've been warning, they will be furious. What's scariest to me is to see how this anger is manifesting itself in the Occupy Wall Street movement. These folks are blaming capitalism for these kinds of problems. But this has nothing to do with capitalism. Paper money was Marx's idea. But try explaining that to any of those folks...

What's happening to our country is a crime. The ramifications of these kinds of manipulations will be decades of mistrust and social unrest. Unfortunately, this is a long way from being over. The price inflation that will inevitably result from the Fed's actions of 2009, 2010, and 2011 are only now beginning to manifest. The worst is yet to come. And it's going to be a lot worse.

New 52-week highs (as of 10/20/11): Abbott Laboratories (ABT), Activision Blizzard (ATVI), Utilities Select Sector Fund (XLU).

In the mailbag... Boy, have we done it this time. Our readers might expect us to tell the truth about stocks – even when the news is bad. They might even like it, a little, when we point out the idiocy of our political parties or the folly of mob rule (democracy). But... the moment we point out the real problems of the Social Security System... look out.

That's it. We've lost all credibility. In the words of one subscriber, we're nothing more than arrogant youth. Take us down a notch here: feedback@stansberryresearch.com.

"Let me add my voice to William Sutherland's taking offense to your characterization of Soc. Sec. recipients being 'on the dole.' Your flippant answer about being 'willing participants' in a Ponzi scheme made me see a whole lot of red also. Nowhere I read does it give a worker in this country an 'opt out' alternative to contributing to the system. I know you are around 40 yrs. old. I remember full well thinking Soc. Sec. wouldn't be around for me when I was 40, and making plans for at least a 3 legged stool of retirement benefits centered around real estate holdings, IRA/401k contributions, and Soc.Sec. should it be there at that time. Guess what, I'm now there, and I don't feel one bit bad about taking back from a system that gave me no alternative. And I don't consider it 'on the dole' to use your own words. You are the perfect example of the 'arrogance of youth' IMHO. Had I been able to contribute that 13% 'tax' (employee/employer contribution) to an IRA or 401k for the number of yrs. I was robbed of that right, I full well believe I could have turned it into a nest egg that would have supported me for the rest of my life at a far greater level than the paltry amount I receive on the 'Government dole'. Pull your head out of your a--, apologize to the many Seniors who feel the same way as I, and, if you have an alternative to the present state of affairs, print THAT rather than a flippant insult to the many who have gone on before you." – Paid-up subscriber George Earhart

Porter comment: George, I believe you're probably speaking for a large number of our subscribers. And as bad as this will probably be for my business, I'm not going to apologize for anything, nor retract a word of what I said.

(Note: I didn't write that Social Security was the "dole," that was Goldsmith. Instead, I've been saying that Social Security is a crime.)

The fact is, George, if you're a willing participant in Social Security (that is, not someone who pays because they must, but someone who receives benefits because they can), you're taking part in an enormous crime. You can ignore these facts if you want to, but that doesn't make you any less guilty of willingly participating in a crime. Let me explain these facts to you.

According to the Social Security Administration, the average one-earner family retiring in 2010 contributed $352,000 to Social Security and Medicare via taxes and payroll contributions. They are expected to receive $798,000 in benefits, or roughly 126% more than they contributed.

Obviously, Social Security wouldn't be so popular with the voters if they weren't expecting to get a heck of a lot more out of it than they put in. That's common sense. These numbers just prove it. (And if you'd like to see all the numbers yourself, be my guest.)

I wish Social Security's assets had actually been invested during the life of the fund. If they had been, there's a reasonable possibility these benefits would be legally available for distribution. But the fact is, they were not. The fact is, Social Security was, is, and will always be nothing more than a government-mandated Ponzi scheme. The money isn't there, George. And it never was. It's that simple.

We have hundreds of years of common law and several decades of statutory laws and judgments on the books in the United States to deal with the legality of such schemes and the proper way to handle their unwinding.

The principle of the law is simple: The remaining assets of the fund are to be distributed to the contributors of the fund based on the size of their net contributions. That is, if you've been receiving benefits for years and, now getting in excess of what you contributed, you are not entitled to anything, legally. On the other hand, if you haven't gotten back what you've put in, you're entitled to your pro-rata share of whatever is in the fund. And that's it.

What's happening instead is current contributions are being used to pay for current distributions. That's the very definition of a Ponzi scheme. Ponzi schemes are illegal because they benefit early participants at the expense of later participants. You might not recognize that you're taking part in a crime, but that doesn't change the fact that you are. There's no other proper way to describe what's happening.

By the way, not only are current contributions providing current disbursements, but the current contributions are falling short of the required distributions. As a result, tax dollars are being used from current budgets to shore up the short falls. Thus, our characterization of Social Security as "dole" is entirely accurate.

Our subscribers can get mad at us for pointing these facts out, but that doesn't make them any less true.

We are at the beginning of a very, very big problem. Millions of Americans have come to depend on the lies and schemes of a bankrupt government that's been conducting an enormous fraud on the American people. We have no chance at solving these problems if we're not even allowed to speak about them accurately.

The Social Security Administration is actively engaged in a Ponzi scheme. It is a fraud in every respect. It's a crime to willingly participate in a Ponzi scheme, because you're taking assets that have not been earned by the fund and will never be repaid to the current contributors.

Those are the simple, plain facts. You might not like them. And you might hate me for pointing them out, but that won't change a thing.

I realize how important Social Security is to millions of retired Americans. Something like two-thirds of all retirees are completely dependent on Social Security. It's horrendous that this has occurred... and that all of these people are now dependent on a crime. I don't mean to suggest that these people should be cut off. Obviously, our government has made promises to these people and many others nearing retirement. Those promises should be honored.

But they shouldn't be honored through a Ponzi scheme. They shouldn't be honored by allowing one generation to rob another. They shouldn't be honored through a system that, were it conducted by any other institution in our society, would have been shut down decades ago with its leaders put in prison.

We deserve much better from our government. But we'll never get it if we're afraid to talk about what's really happening in our country.

Regards,

Porter Stansberry

Baltimore, Maryland

October 21, 2011