Will the US devalue the Dollar?

Will the US inflate its way out of it’s debt problem or will it devalue the dollar?  Darryl Schoon explains the subtle differences of these two outcomes in this guest article.  We heard Darryl speak very eloquently last year (see our previous take on his lecture: China and the introduction of paper money) and his thoughts are worth following especially given his background as a Chinese American and his study of Chinese history.  Links to his website and Blog are at the end of the article…

The ability to wage war on credit gave the West an insurmountable advantage over the East. The West’s credit, however, has now turned to debt and the West has lost its advantage. But the return to parity will not be easy.

The three hundred year economic expansion fueled by debt-based capital markets is coming to an end and with it, the hegemony of the West over the East. During that period, debt-based paper money propelled first England then the US to world dominion because of the ability to wage war on credit and to print money ad infinitum.

That era is now ending because the critical balance between credit-driven expansion and debt-driven contraction has now shifted significantly in favor of the latter; and in 2010, both East and West now find themselves on the edge of a growing deflationary sinkhole created by the sequential collapse of two large US bubbles, the dot.com and US real estate bubbles.

The US caused the 1930s deflationary depression and is again cause of the current contraction; and although similarities exist between the two, the differences between them insure a far more consequential outcome today than in the 1930s.

Global demand is again falling as credit contracts, a sign that debt-driven deflation is back but, today, there is an additional danger as well. Since 1971, because of the US default on its gold obligations, money no longer possesses intrinsic value and the consequences will soon become apparent. Deflationary depressions and a collapse in the value of fiat money have happened before but never simultaneously. Soon, they will.

We are in what Stephen Roach, Chairman of Morgan Stanley Asia, calls the end-game, the resolution of past monetary excesses and imbalances, excesses and imbalances that reached never-before-seen heights in the last decade. The long awaited day of reckoning has arrived.

THE PROBLEM

Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the US, the world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more, what the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital systems.

The amount of outstanding US debt has now reached levels that can never be paid off:

… the United States government and its agencies have, by far, the largest pile-up of interest-bearing debts ($15.6 trillion), the largest accumulation of unsecured obligations (over $60 trillion), the largest yearly deficit ($1.6 trillion), and the greatest indebtedness to the rest of the world ($4.8 trillion).

Martin D. Weiss, www.moneyandmarkets.com    

The unpayable levels of US debt are not just the problem of the US. Because the US dollar is the lynchpin of today’s fiat money system, US debt is everyone’s problem. The US dollar is the world reserve currency and a default by the US will have far-reaching consequences, especially in China, its largest creditor.

INFLATE, DEVALUE AND TAX

Bill Gross, co-founder of PIMCO, the world’s largest bond fund and an expert in matters of debt, wrote in 2006, the way a reserve currency nation [such as the US] gets out from under the burden of excessive liabilities is to inflate, devalue, and tax.

Inflation destroys the value/cost of liabilities by eroding the value of money. Debts are paid back with inflated currencies, a process which benefits the debtor and injures the creditor. This is why reserve currency nations usually inflate their way out of debt by printing what they owe.

Devaluation is another option afforded reserve currency nations. By devaluing the value of their currency, the value of what they owe falls relative to other currencies. Again, the benefit is to the debtor at the expense of the creditor.

Taxation is another option but is no longer available to the US, as its liabilities are now too high. It would be like forcing the elderly and morbidly obese to engage in strenuous exercise to regain youth. Of the three, inflating away debt is by far the preferred option but it is one the US can no longer choose.

Managing Director and Chief US Economist at Morgan Stanley, Richard Berner, recently discussed the reasons in We Can’t Inflate Our Way Out, February 24, 2010. http://www.morganstanley.com/views/gef/index.html#anchor6647bf63-2073-11df-978b-bbc960980e46

It’s tempting to think that the US can inflate its way out of its fiscal problems.  A faster, sustained increase in prices would erode the real value of past debt, and higher future inflation would - other things equal - reduce the real resources needed to service and pay back the promises we are making today.

However, inflating away US debt won’t work because as Richard Berner points out nearly half of federal outlays are [now] linked to inflation, meaning that increments to debt would [also] rise with inflation.

Inducing monetary inflation would also raise aggregate US debt resulting in a self-defeating cycle of higher prices and higher debt. However, there is also another more fundamental reason why inflating away US debt won’t work, to wit: Inflation is almost impossible to induce during severe deflationary contractions.

Fed Chairman Ben Bernanke understands this difficulty quite well. Bernanke’s late mentor, Milton Friedman, theorized the Great Depression could have been prevented by sufficient monetary stimulus and so in 2008, faced with the possibility of another deflationary depression, Bernanke put Friedman’s theory to the test. It failed.

 

http://jutiagroup.com/2010/01/27/looking-over-into-the-abyss/

 

Unfortunately, when tested, Friedman’s theory didn’t work. Despite Bernanke’s massive monetary expansion, global credit is still contracting and lending is drying up.

The Telegraph UK reported on February 17, 2010:  lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16%.  “Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10% decline,” he [analyst David Rosenberg of Gluskin Sheff] said. The article continues: The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6% over the last three months. http://www.telegraph.co.uk/finance/economics/7259323/US-bank-lending-falls-at-fastest-rate-in-history.html

Inflating away debt is virtually impossible in the presence of deflation, but if US monetary expansion is sufficiently large, it could result in the hyperinflation of the US money supply, which would destroy both US debt and the US economy as well.

DEVALUING THE US DOLLAR

Devaluation is the US’ only remaining option. But, on February 25^th, Comstock Partners’ special report, The Cycle of Deflation, Impediments to Debt Relief, pointed out the major impediment to a US devaluation to reduce debt—China.

…there is a stumbling block to the normal competitive devaluations that typically take place. In the past, a country that incurred too much debt just did what they could to devalue their currency in order to export their way out of the dilemma by exporting their goods and services to their trading partners. ..[But]The Chinese have linked their currency to ours, so as we debase our currency, one of our major trading partner’s currency is also declining and China becomes the major beneficiary of the debasement of our dollar.http://www.comstockfunds.com

 

The China peg to the US dollar thus prevents the US from altering its trade deficit by currency devaluation, but it does not prevent the US from devaluing the dollar for other reasons. If the US does devalue the dollar, it will not be to reduce debt—it will be to maintain its advantage over the world in general and China in particular.

YESTERDAY JAPAN TODAY CHINA

In 1985, when Japan was challenging the US for economic dominance the Japanese economy was in danger of overheating and Japan signaled the US its intent to raise interest rates.

The US responded by threatening Japan with trade sanctions, cutting off Japan from US markets. During the 1980s, the US badly needed Japanese savings to fuel Reagan’s multi-trillion dollar debt-based military buildup; and if Japanese rates were raised, Japanese savings would stay at home.

Threats of US trade sanctions forced Japan to keep interest rates low but at a perhaps fatal cost to Japan. Low interest rates combined with inflows of burgeoning trade profits ignited a speculative frenzy in stocks causing the then largest stock market bubble in history; and when the bubble collapsed in 1990, Japan fell into a deflationary trap from which it has never fully emerged.

Today, US dominance is again being challenged, this time by China. While it is not possible to know what the US will do, it is naïve to believe the US will do nothing; but whatever happens, US debt and the US dollar will be affected.

China has now significantly reduced its buying of US debt leaving the US with growing deficits and a virtual boycott by China of new US IOUs. This will impact future US/China relations.

The tentative but mutual benefits of the past are being replaced by self-interest as US spending and consequent debt is increasingly perceived as being out of control by China. That perception is correct. Since the 1980s, America’s focus has been on borrowing more, not spending less and the implications are clear.

 

U.S. government borrowing, percentage of outstanding U.S. Treasuries owned by China (2002-2009) – Sources: US Treasury, Haver Analytics, New York Times

With China moving away from increasingly risky US debt, the US is now far more likely to treat China as a challenger than as a needed creditor; and, while devaluing the US dollar would have minimal impact on overall US debt, it would have a significant impact on China.

In December 2009, total foreign holdings of US government debt equaled $3.29 trillion. With total US obligations now close to $100 trillion, a 30 % devaluation of the US dollar would impact only that debt held by foreigners—but the losses to China would significant

China currently owns at least $1.7 billion in US dollar denominated securities; and, if the US devalued the dollar by 30 %, China’s losses on its investments would be in excess of $500 million.

As stated earlier, it is not possible to know what the US will do. But since WWII geopolitical considerations have always outweighed economic factors in US policy decisions and there is little reason to expect this to change—even as the end-game approaches.

THE END GAME AND SOVEREIGN DEFAULT

The US is trapped. Caught between rising expenditures and the need to borrow more, outstanding US debt is incapable of ever being repaid and should the credit rating of the US ever reflect its actual state, sovereign default, not devaluation would be the result.

In 2008, Kenneth Rogoff and Carmen Reinhart in This Time Is Different: A Panoramic View of Eight Centuries of Financial Crisis reviewed the history of sovereign defaults concluding the then dearth of defaults was in actuality a warning of more to come. They were right.

Then, Rogoff and Reinhart mistakenly described the US as a “default virgin”, belonging to a small group of nations that had never defaulted. But on February 26^th Rogoff said that the US had, in fact, defaulted during the Great Depression by changing the price of gold from $20 to $35 per ounce.

While technically a default, the US action was actually a currency devaluation. The real default occurred in 1973 when the US officially reneged on its gold obligations under Bretton-Woods, leaving other nations holding US paper dollars that could no longer be converted to gold.

Professor Antal Fekete noted the significance of that default when he wrote in 2008, Thirty-five years ago gold, symbol of permanence, was chased out from the Monetary Garden of Eden, replaced by the floating irredeemable dollar as the pillar of the international monetary system. That’s right: a floating pillar. The gold demonetization exercise was a farce. It was designed as a fig leaf to cover up the ugly default of the U.S. government on its gold-redeemable sight obligations to foreigners. The word ‘default’ itself was put under taboo even though it punctured big holes in the balance sheet of every central bank of the world, as its dollar-denominated assets sank in value in terms of anything but the dollar itself.

As the end-game progresses it is impossible to know what the US will do. It is likely the US doesn’t know itself. What the US does know is that it is now trapped by increasing levels of mounting debt from which there is no easy exit.

NO EXIT

What if – to put it simply – you couldn’t get out of a debt crisis by creating more debt?

Bill Gross, PIMCO, March 2010

 

 

The question, What if you couldn’t get out of a debt crisis by creating more debt? will, in fact, be answered in some way by Mr. Gross himself. As Managing Director of PIMCO, the world’s largest bond fund, Mr. Gross is in the business of buying debt and betting on the outcome, an avocation that increasingly resembles Russian roulette.

Spreads on sovereign debt are rising and credit default swaps reflect the higher premiums being charged to protect against default. Investors such as Mr. Gross compare risk to reward in regards to debt and when the reward is believed to compensate for the risk, the bond is bought and the bet is placed.

As we enter the end-game, the odds, as in Russian roulette, exponentially increase making previous yield curves irrelevant. The trigger event may be Greece, Spain, the UK, the US, Latvia, Japan or some other nation. But, one thing is certain, when someone takes a bullet, all bets will be off. No one can cover what can’t be covered.

THE END GAME AND HUNGARY

Professor Antal E. Fekete grew up in Hungary during the most virulent period of hyperinflation in the world. Perhaps the experience made the good professor more sensitive than most about the possibility of its reoccurrence in America but he is not alone in believing so.

The possibility of a US hyperinflation was raised by Professor Laurance Kotlikoff in the July/August 2006 Review, published by the St. Louis Federal Reserve Bank: …The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century.

Since Professor Kotlikoff wrote those words, US monetary expansion has far exceeded what preceded it; and, what follows may be more predictable than we want to know.

 

 

From March 25-29, in Szombathely, Hungary, Professor Fekete will present a seminar on the unfolding financial crisis. Mr. Sandeep Jaitly, along with Professor Fekete will discuss how the basis can be used to predict movements in the price of gold and silver.

Mr. Jaitly is the publisher of The ‘Gold Basis Service’ a monthly subscription newsletter that describes movements in the basis and co-basis along with predictions for the coming month for gold and silver, proceeds will benefit the Gold Standard Institute. For details, see http://bullionbasis.com/index.php?p=1_3_Gold-Basis-Service.

I will also be in attendance and will speak on capitalism’s journey to the East and its mixed reception. The end-game is in progress and I have found few more knowledgeable about its origins and progress than Professor Fekete.

To enroll, contact GSUL@t-online.hu. Those who attend will receive a complementary 6 month subscription to Moving Through The Maelstrom with my monthly commentary and daily news updates, see http://www.drschoon.com/members/join/view_membership_options.asp.

I have always believed the financial crisis to be part of a far greater shift involving more than money and power, although both will be affected. Yin and yang, the universal polarities, are rebalancing.

The return to parity will not be easy.

Buy gold, buy silver, have faith.

Darryl Robert Schoon

www.survivethecrisis.com

www.drschoon.com

Blog www.posdev.net/pdn/index.php?option=com_myblog&blogger=drs&Itemid=81

America—A Country of Serfs Ruled By Oligarchs

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

 

Some thoughts on China…

Marc Faber – If the Chinese were to develop a taste for coffee, to the extent that, on average, every adult were to drink one cup of coffee per day,  China would consume the entire world’s coffee crop….

The Chinese government has announced that it has plans to build cities at a rate that will house a population the size of Australia’s every year for the next 15 years…. Hmm, doesn’t that have some implications for ongoing demand for raw materials?

Last year, for the first time ever, Chinese bought more vehicles than Americans… More generally, last year the developing world bought more vehicles than the developed world… Doesn’t that imply a continuing increased thirst for oil?? Perhaps also, it’s part of the reason that, in an economic environment of the greatest downturn (in the Western world at least) since the 1930s, the oil price is once again approaching $80 per barrel… See also the article on peak oil below.

Chinese citizens, in total, now own more cellphones than US citizens…

James Dines – Rare earths are obscure elements that just happen to be essential materials for modern technology. Large scale modern windmills, for example, require considerable amounts. China controls over 96% of the world’s production of rare earths… Oh dear, Mr Obama – don’t you think that instead of waging expensive foreign wars and killing over 2 million Afghans since the war began, it might be better to spend the dollars you don’t have but insist on spending anyway on securing supplies of these essential materials?  Oh, I forgot, I suppose you do have the option at any time of declaring war on China…

Last but not least, Chinese citizens are being encouraged by their government to buy gold and silver. And, of course, if you are a Chinese citizen, Government “encouragement” has to be taken seriously…

Here are our subjects this week. 

·         Government debt, private sector non-lending – from “The Automatic Earth” blog

·         Defaults, by Marc Faber

·         Peak Oil reaches mainstream media

·         America—A Country of Serfs Ruled By Oligarchs

Government debt, private sector non-lending – from “The Automatic Earth” blog 

February 19 2010: A thousand miles behind

Ilargi: When on any given morning you see consecutive headlines that read

1. “US bank lending falls at the fastest rate in history”,
2. “Lending to British businesses falls at record pace”,
3. “UK mortgage lending falls to 10-year low “,
4. ”Shock as British deficit equals that of Greece” and
5. “Britain posts first deficit for January since records began”

is your first thought that the economic recovery is nicely on pace? If so, perhaps a Tiger Woods press-op is more your thing.

How about we add this one:

“Fed raises interest rate on emergency loans to banks”

Think perhaps that would switch on the light?

See, what those headlines tell us is that the spigots on the private sector are not just closed, they’re still tightening ever more. While at the same time, government debt keeps rising. There can be only one conclusion. The only thing that lets our economies continue to exude a semblance of normality is the dwindling rests of our own remaining wealth, and we are not only not adding any, we are spending what is left, and fast. Our governments, eager to stay in power and remain wealthy, keep us thinking we’re doing just fine, borrow enormous amounts of money in world markets that is not used for any sort of recovery, but instead to pay for the debts of a small group of people who gained access to our full faith and credit by buying the representatives we elect. And once the Federal Reserve starts raising interest rates, while simultaneously drawing down its purchases of Treasuries and mortgage-backed securities, we will come to understand that we have been living in a soapbubble of our own making, built at the expense of many trillions of dollars and that this bubble is about to pop. That is true in the US as it is in the UK, and all the attention presently squandered on Greece and Ireland is but a trick to make us look the other way for a little bit longer, until everything of value has been stripped from around us and we can wake up one day to find all support and stimulus measures vanished into thin air, a bad moon rising, and a cold wind blowing through the cracks of our unheated MacMansions, with no gas stations able to supply us with the fuel to get out and get away. That’s what these headlines say. With all the money thrown at the issues, everything keeps reaching record lows. And all our governments can think of is to spend more. Until they don’t. One year ago, stock markets had almost reached their then low. The amount of public funds spend since to lift those markets are truly mind-boggling, and their effect now, predictably, turns out to be short-lived. The rich have gotten richer, and the poor have gotten an awful lot poorer in that year. They just don’t know it yet, or at least not the full and true extent, but once the numbers are crunched on government and central bank purchases of lenders’ defunct mortgage loans and their own sovereign debt (how’s that for a Ponzi scheme?), you will know just how destitute you’ve become. And it’ll be too late to do anything about it. You’ll have let yourself be fooled for too long. And, to use an ancient metaphor, find yourself one too many mornings and a thousand miles behind. Or is that a thousand debt payments?  

 

Defaults, by Marc Faber 

 I Think In The Next 10 Years, We Will Have A Lot Of Defaults 

What you find in the world is an unusual situation. International reserves have grown from 1 trillion dollars in 1996 to over 8 trillion dollars at the present time. Most of these reserves are held by emerging economies like China, India, Russia, Brazil and so forth. Over 70% of international reserves are in Asia including Japan.

So, what you have is basically in emerging economies, they have relatively low debt to GDP ratios and in most emerging economies their mortgage market has hardly developed. People buy homes for cash. There is no mortgage market. Whereas in the developed world, what we have is an overleveraged consumer and governments that have liabilities that they cannot meet in the long run. So something will break. And I think in the next 10 years, we will have a lot of defaults. Now before the United States, the UK or Eurozone members default on their debt obligations, they will print money. And then we will get very high inflation rates. Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world. Dr. Doom also trades currencies and commodity futures like Gold and Oil.

  

Peak Oil reaches mainstream media

On our site, we have references to the coming commodity crunch, in particular, we look at the work of Chris Martenson.  To find out in depth about the peak oil crisis, we highly recommend the web site www.theoildrum.com  What is interesting at the present time is that this idea, which has been almost entirely pooh-poohed by the mainstream media, is gradually gaining traction in that same forum. For example, from Ambrose Evans-Pritchard, of the Telegraph, comes this piece. 

 Barclays and Bank of America see looming oil crunch

For oil markets, it as if the Great Recession never happened. Surging demand in China, India and the Middle East is making up for decline in the debt-crippled West, ensuring another global crunch within three or four years.

By Ambrose Evans-Pritchard, International Business Editor Bank of America and Barclays Capital, two leading oil traders, have told clients to brace for crude above $100 (£64) a barrel by next year, before it pushes relentlessly higher over the decade. This is a stark contrast from recessions in the 1980s and 1990s, when it took years to work off excess drilling capacity built in the boom.

“Oil has the potential to flirt with $100 this year. We forecast an average price of $137 by 2015,” said Amrita Sen, an oil expert at BarCap. The price has doubled to $78 in the last year.

Related Articles

Rowena Mason: you don’t have to be a survivalist to believe in peak oil

Garry White: it’s not just oil prices that are going up

Britain faces ‘oil crunch’ within five years

Oil shortages by 2020 due to Western ‘profligacy’

Rowena Mason’s energy blog

Why would climate change chief defect to business?

“The groundwork for the next sustained step up in oil prices is now almost complete. Global spare capacity is likely to be reduced to low levels within a relatively short time. The global economic crisis has postponed, but not cancelled, a crunch which would otherwise be starting to bite now,” said Barclays.

Francisco Blanch, from Bank of America Merrill Lynch, said crude may touch $105 next year, with $150 in sight by 2014. “Approximately 1.7bn consumers in emerging markets with a per capita income of $5,000 to $20,000 are eagerly waiting to buy cars, air-conditioning units, or white goods,” he said.

China has overtaken the US as the world’s top car market. Mr Blanch expects oil demand to rise by a further 2.8m barrels per day (bpd) in China and 2.5m bpd in India by 2015, when two giants will be absorbing the lion’s share of Gulf output. Consumption in the West has already peaked and will fall each year as populations shrink and we waste less, but the West no longer sets the price. Global use will increase by 8.8m bpd to 95m bpd.

Supply is scarce. Sir Richard Branson warned this month that the world faces ‘peak oil’ within five years. “Don’t let the oil crunch catch us out in the way that the credit crunch did,” he said.

Mr Blanch said output from non-OPEC states is falling by 4.9pc each year, despite Russia’s reserves. Saudi Arabia and the Emirates can plug a quarter of the gap, but global spare capacity must soon drop to wafer-thin levels – leaving us vulnerable to the sort of “super-spike” seen in 2008. The wildcard is whether Iraq can quadruple output to Saudi levels this decade, a target dismissed by most analysts as pie-in-the-sky.

Painfully high prices are needed to unlock fresh supplies as reserves are depleted in the North Sea and the Gulf of Mexico. Deep-water rigs off Brazil are costly and require drilling far below the seabed. Canadian oil sands and US biofuels have break-even costs near $70. While the US, UK, and the Far East are turning to nuclear power, it takes a decade to build reactors. “peak uranium” lurks in any case.

The oil spike brought the global economy to a shuddering halt in 2008. This time the crunch may hit before the West has fully recovered. Whatever happens, the US, Europe and Japan will soon transfer a chunk of their wealth to the petro-powers. It is a new world order.  

 

America—A Country of Serfs Ruled By Oligarchs

By Dr Paul Craig Roberts – bio at end.

(We have featured articles by Dr Roberts in these pages before – Ed.) 

The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent (”the recession is over”), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean?

The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.

More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest.

Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains cannot drive the consumer economy.

Housing is still under pressure, and commercial real estate is about to become a big problem.

The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.

The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.

Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes.

Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.

As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one recently arrived:

“Thank you for your continued truthful commentary on the ‘New Economy.’ My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband’s job stagnated. After several years of no pay raises, he finally lost his job a year and a half ago. But he didn’t just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted. We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can’t find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn’t have made it. So, I could tell you just how that ‘New Economy’ has worked for us, but I’d really rather not use that kind of language.”

Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers.

Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.

It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.

To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden.

Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.

Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit.

The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.

If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit.

America is on its way to becoming a country of serfs ruled by oligarchs.

 

Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan’s first term.  He was Associate Editor of the Wall Street Journal.  He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider’s Account of Policymaking in Washington;  Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow’s Forbes Magazine interview with Roberts about the epidemic of prosecutorial misconduct. His latest book, How The Economy Was Lost , has just been published by CounterPunch/AK Press.

Precious metals paper market correction continues

 

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

 

Last week and earlier saw the precious metals paper market correction continue.  Please note that this is the supposed paper market tail wagging the physical market dog. The physical market remains in high demand and short supply.

The banksters kept forcing the paper price of gold and silver lower, started covering their shorts, and rebuying longs as the technical funds coughed up their leveraged positions. Eventually, the price will rise, the banksters will sell into strength, and this round of the dance will end, only for another round to begin. We have seen this particular dance so many times that one might think all gold pundits would report accurately on it – but no. One would be better advised to listen to Jim Sinclair, who has stated many times that this game will continue, with a marked increase in volatility, as the gold price see-saws higher, as it assuredly will, whether we are in for a period of heavy deflation, or massive inflation.

The financial system is now inherently unstable, and one of the other of these outcomes is inevitable. The debt will either collapse, meaning massive defaults at individual, municipal, state and sovereign level, or it will be inflated away.  The powers that be know this – that’s why central banks have become net buyers of gold, and the Chinese government is encouraging its citizens to buy gold and silver.

Meanwhile, western governments are encouraging their citizens to spend any money they have and indeed to go further into debt, to buy widgets to “get the economy moving again”.  It’s also why the SEC has quietly arranged to allow money market funds to suspend redemptions. A brighter flashing pointer to continued expected financial instability, I have yet to see.  Here’s Zero Hedge’s take on the new rule…

 

Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Too bad investors’ hardships considerations ended up being completely irrelevant.

Here’s an interesting question. Is it immoral, or “un-American”,  to walk away from your mortgage debt? Of course if you’re a too big to fail bank, it is apparently quite OK. But corporations have legally become people – they can spend as much as they like endorsing their preferred candidates for Congress or Senate. It’s all very confusing. I would hazard a wager though, that as more and more folks take the “jingle mail” route, we will hear increasing calls from the banks about the dubious nature of the practice….

 

Speaking of debt, Australian economist Steve Keen, who was one of the few to presciently call the upcoming crisis in 2007, has carried out some very interesting work concerning the rate of growth of debt in an economy. What he has found, if I understand him correctly, is that for both the US and Australia, there is a very high correlation between the rate of growth of debt and the rate of growth of the economy.

Now we know that, in the US, it is taking increasingly large increases in debt to produce growth – now the figure is upwards of $5 of debt to produce a $1 increase in GDP. This means that if we go for growth, we have to accept an increasing debt burden – just at a time when the existing debt burden is becoming unconscionably large.

It is also interesting to see President Obama try to harness the groundswell of calls for fiscal responsibility by proposing certain spending freezes. Of course the fact that this is a small drop in a very large ocean seems to escape many folks attention…

 

Lastly, I just want to draw people’s attention to Eric King’s site King World News where each week, Eric posts great interviews with noted figures in both the precious metals and general business communities. The current interview with Jim Rickards is long, but one that I found particularly good for understanding the nature of the gold market.  You can download the full interview here.

UPDATE:  If you’re pushed for time to listen to this interview, we’ve now published this summary article of the main content… Jim Rickards: A tidal wave of demand for gold

 

Prof Fekete: Why is the Chinese Government urging its people to buy gold and silver?

As we mentioned in this previous article (China and the introduction of paper money), in November we attended a conference in Canberra Australia hosted by the Gold Standard Institute.  The main speaker was Professor Antal Fekete.  Professor Fekete is an author, mathematician, monetary scientist and educator.  Below we paraphrase the Professors lecture on the final day of the conference, where he gives his thoughts as to why the Chinese Government is urging its people to buy gold and silver.  He also gives a few ideas as to what else China should do to strengthen their financial position. 

Hopefully we’ve recalled the gist of the Professors argument accurately enough.  We’ve also added a few thoughts of our own in italics.

What should China do?  A 7 point manifesto:

1.  It was far sighted of China to legalise and in fact encourage the purchase of precious metals.  In fact an incredible move for a government.  But he would urge China to make it a constitutional right of the people to save in the form of gold and silver.  [Gold and silver can now be readily bought across China including at many banks.  It was only a few years ago that ownership of precious metals was illegal for the Chinese].
2. What should China do with her 2 Trillion plus of US dollars of fiat currency?  This is far too big an amount to just buy US property.  And if the bonds were sold in significant amounts it would destroy the US bond market and so obviously be very bad for China’s remaining holdings.  So therefore the obvious choice is to simply hedge it with Gold.  Buy gold on weakness and then tell the world you will continue to accumulate gold and set an example to other countries.  Therefore the gold price will keep steadily going up protecting Chinas existing gold holdings.  And when a substantial part of the Chinese treasury hoard is spent on gold it simply won’t matter what happens to the rest.  [We would also add that China would then likely end up with the largest gold reserves on the planet, just as the US did after WWII].
3. Open the Chinese Mint to Gold and Silver.  Create an unconditional right for the people of China to convert bullion into coins free of seigniorage (as the US Constitution says) i.e. There would be no charge to mint bullion into coins.  This would result in tremendous demand as gold in coin form is worth more than in bullion form as it is more readily exchangeable.  So people would actually take their gold to China to effectively get something for nothing.  The cost to China would be made up for by the massive amounts of gold coming into their financial system.
4. Establish the world’s first Gold Bank.  There has been no gold based bank  since the Bank of International Settlement (BIS) abolished having its “books” in gold units in 2002.  The idea being that people will have some trust little by little and release some gold from their hoard that will make it into circulation.  Once the Chinese Mint is open to gold worldwide, more and more gold will be attracted to China as a safe place to save.
5. Establish the worlds first Gold Life Insurance Company.  This would grant Annuities and Life cover to anyone who would pay the premiums in gold.  The policies would also be paid out in gold.  This would give the policy holders a fair return on their premiums paid.  Unlike life cover currently where you pay premiums for many years in today’s dollars to receive a pay out in the future in depreciated dollars.  Whereby the policy holders lose in the long run.  This would also prove very attractive.
6. Start “Real Bill” circulation in the world.  “Real Bills” are commercial paper that matures into gold in 90 days or less.  Basically a short term bond that matures into Gold and is bought at a discount.  London used to be the clearing house centre for Real Bills prior to WWI when Real Bills were still in place.  World trade could effectively be financed by Real Bills.   [For more on Real Bills see this interview with Professor Fekete.  Basically the Professor states that without Real Bills as part of a gold standard it is doomed to failure, as they provide the elasticity in the system during the changing “seasons” when demand for different products alters.  The interview is well worth a read as it covers many other subjects too including China currently being the biggest hoarder of silver.]
7. Proletarians of the world unite in Gold!  “You have nothing to lose but your chains!”  The professors 7 Point Manifesto is a title borrowed with tongue firmly in cheek from Karl Marx’s communist manifesto.  But the Professor did say Marx “wasn’t a complete idiot” as he did say Money is Gold and Gold is money.  The World is waiting for someone to break the ice.  [We would add that China certainly seems to be holding the ice pick!]

At the conclusion of the Professor Fekete’s lecture, there was some discussion about China’s poor human rights record and why would they want to give people even more freedom given it remains a communist nation.  However Darryl Schoon who we featured in the previous article on the Gold Standard Institute Seminar, answered the most adroitly in that “It is far easier to rule a happy and prosperous people”.  Food for thought indeed and we reckon the western rulers may be setting themselves up for even tougher times in the not too distant future.

China and the introduction of paper money

We were recently in Australia attending a conference hosted by the Gold ‎Standard Institute – a body which aims to educate on the need for “sound ‎money”.  Or rather an unadulterated gold standard.  Captain amongst the ‎speakers was Professor Antal Fekete, whose writings we have featured ‎previously.‎

But our award for the “most passionate performance” at the conference went ‎to Darryl Schoon.  Darryl, while being an American is of Chinese descent and ‎majored in East Asian political science, so is well versed in the history of the ‎region.  The following is (hopefully) a simple summary of his lecture which ‎covered the early days of paper money or fiat currency, which began in China, ‎and which quite appropriately may now be in the process of also being ‎terminated by China.  (Keep an eye out for more on this in a future article - ‎Professor Feketes 7 Point Manifesto on “What should China do?”)‎

And so onto our very brief history lesson and what it might teach us today…‎

Paper Money originally started in China as a means of exchange between ‎trading houses.  The trading houses noticed this means of exchange was ‎trusted and eventually its use spread through all of Chinese society.‎ 

However they printed more and more and so eventually (as has been ‎repeated many times since) they crossed the invisible line and inflation started ‎to appear.  This eventually led to the paper money system collapsing.‎

In the 13th century the Polo’s travelled to China and witnessed this paper ‎money in action.‎

On return from his travels, Marco Polo was captured in a war between Genoa ‎and Venice and imprisoned.  It as here he told the tales of his travels to his ‎cell mate who published stories of “burning rocks for heat” (coal) and of the ‎‎“great Kublai Khan” who took bark from trees and converted it to money by ‎writing on it.‎

The Khan was sharp enough to have a simple rule that saw his paper money ‎widely used - if you didn’t accept his “legal tender”, you were executed!‎
Meanwhile Polo noted that the Khans own treasury was full of gold and silver.  ‎‎(hhmmm – notice the interesting parallel to the monetary system of today, ‎where Central Banks hoard the gold and the people are required to use the ‎paper money – although thankfully you just get imprisoned and not beheaded ‎today!).‎

 

Anyway, Marco Polo was well trusted by the Khan who asked he become an ‎ambassador for him and to communicate with the pope.  Polo took this paper ‎money to the Pope who thought it was the work of the devil and burned it – ‎maybe we should do the same now!‎

Jumping forwards a couple of centuries and there were many episodes of ‎paper money before China eventually outlawed it in the 1600’s.‎

Meanwhile in the west in 1694 King William was heavily in debt from fighting ‎various wars (again notice any similarities with the present day???).  The ‎bank of England went to the King and had him agree to give them the ‎authority to issue the “coin of the realm” in exchange for unlimited borrowing ‎from them.  (Not coincidentally this is the same arrangement that central ‎banks have today with their respective governments.)‎

However unlike today, the paper money was issued alongside the gold and ‎silver coins.‎

The bankers had charged interest on lending other peoples coins, but then ‎they had the revelation that they could also do this with the paper which they ‎created out of nothing!  The perfect business model!‎

‎(As a side note, when USA’s President Roosevelt outlawed possession of ‎gold coins in the 1930’s it too was because of an economic crisis and ‎collusion between the powers – the government and the bankers.)‎

Anyway, this system worked so well, because it coincided with the industrial ‎revolution and huge expansion of British society.  ‎

In the 17th Century the British credit based system allowed them to raise an ‎army and conquer many lands.  So the expansion of debt was a success - the ‎British Empire rose on this tide of debt.‎

However they were halted in China and Russia where Marx’s ideas took hold ‎and economic, civil and financial powers were combined to turn back the ‎English.‎

Quite a few centuries have gone by, but there is a very peculiar symmetry in ‎play now.  It is now China and Russia who are embracing the free market and ‎‎“real money” and the west who is steadily turning to Statism and Socialism.‎ 

And while most of us westerners have successfully been brainwashed to steer ‎well clear of gold, the Chinese Government is actually encouraging its citizens ‎to put at least 5% of their savings into gold and silver.‎

So keep an eye on China – they invented paper money, and so therefore ‎know first hand the problems that accompany it only too well.  It could well be ‎China that eventually forces a return to a global gold monetary standard.‎

(For more detail on the monetary history of the last century and it’s implications for you today, get access to our Gold Investing eCourse here.)

How and why China will flood the gold market

Back in August we reported that the Chinese Government was encouraging it’s citizens to purchase gold and silver and why they might be doing it.  Here’s some more on the subject from Casey Research’s Jeff Clark…

 

By Jeff Clark, Editor, Casey’s Gold & Resource Report

As you read this, the Chinese government is doing an extraordinary thing… something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year’s meltdown in the stock market, people believe it. After all, Chinese citizens don’t receive government retirement money… and they don’t have company pension plans like people in many other countries do.

This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it’s cheaper per ounce).

The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don’t recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?

In spite of a few ads on television and satellite radio, buying gold and silver in the U.S. is still largely seen as a fringe-group activity. That’s not the case in China. And in the big picture, there are three distinct trends occurring in China today that many in the Occidental world are not paying attention to.

First, look where China stands as a gold-producing nation.

 

In 2008, China produced 9,070,000 ounces of gold, exceeding all other countries. Further, its production continues to rise, while many of the top-producing countries are in decline.

Second, China had the lowest per-capita gold consumption of any country over the past half-century. This year, it is widely expected that Chinese demand for gold will surpass that of India. In other words, they’ll also become the world’s No. 1 retail buyer.

Third, the Chinese government has been using its foreign exchange reserves to buy gold – a lot of it – and doing so on the sly. This past April, Chinese officials made a surprise announcement that they had been secretly buying gold since 2003, increasing their gold reserves by 76% to 33,886,000 ounces. The Chinese government now owns 30 times the gold it held in 1990. And China is believed to be a leading candidate to buy some or all of the 12.9 million ounces the International Monetary Fund says it will sell.

But all this production and all this buying isn’t enough…

Even though China is the world’s seventh-largest holder of gold, gold comprises but a tiny fraction of its reserves, as shown in the table below.

 

What would happen to the gold price if China increased its gold reserves to just 5%? What about 10%? To overtake the U.S. as king of the gold hill, it would have to buy all the gold held by the governments of France, Italy, and Germany combined. Can China really do any of that?

At $1,000 gold, to push China’s gold holdings to 5% of reserves would take $55.3 billion; to 10% would cost $144.4 billion; to be the world’s top gold dog would run $227.6 billion.

Chinese reserves are approaching $2.3 trillion, of which almost 70%, or $1.6 trillion, are denominated in U.S. dollars. The cost to become the world’s biggest holder of gold would be a pittance compared to the amount of money China has available. In other words, money is not a problem.

Combining the country’s massive holdings of dollars and the very real likelihood those dollars are going to lose much of their value, the motivation to buy tangible assets is urgent.

Further, keep this in mind: China’s reserves continue to grow. Therefore, the country must continue buying gold (or consuming its own production) just to maintain the small gold-to-reserves ratio it has, let alone increase it.

In addition to the government buying precious metals, Chinese citizens will continue gobbling them up, too. Demographics alone tell us why.

Government statistics show the average urban household in China has about US$1,300 in disposable income. Multiply that by the number of urban households in China and you come up with roughly $36 billion in available capital.

According to precious metals consultancy CPM Group, about 9.5 million ounces of gold will be turned into coins this year (including “rounds” and medallions). At $1,000 gold, that’s $9.5 billion, or only about one-third of the capital available in China.

The number is more striking for silver: Total coin production this year is expected to hit 35 million ounces, equaling $615 million or just 1.7% of the available capital in China. Of course, a lot of Chinese people want cars and refrigerators, etc., but it won’t take much of a shift of this capital into gold and silver to have a major impact on the global retail precious metals market. It may already be under way.

And long-term projections show the demographic trend won’t slow down: The middle class in China is expected to increase by 70% by 2020. So over these next 10 years, more Chinese and more money will be coming into the precious-metals markets, all at a time when inflation is almost certain to be high, adding to gold and silver’s appeal. Couple this with China’s long-standing cultural affinity for gold and you have the makings for a potentially life-changing gold rush.

If I were a crime detective, I’d say China has the motive, means, and opportunity to push gold and gold stocks much higher.

If you’re interested in taking a stake in China’s booming silver market, make sure to read the latest edition of Casey’s Gold & Resource Report. Jeff has turned up a small company poised to become one of the dominant mining companies in China. This company is sitting on an incredibly rich silver property… it’s heavily owned by its blue-chip management. It’s the one stock to own if China goes “silver crazy.” You can learn about this and all other stocks recommended in Casey’s Gold & Resource Report for just $39 per year. Try it risk-free for 3 months here.

Carry Trades, the New Zealand Dollar and Gold

Weekly Wanderings 21 October 2009

This week the US dollar carry trade, gold and scary charts!… 

Each week over at MaxKeiser.com, Max and Stacy present a radio show entitled “The Truth about Markets”. There are at least two variants of the show, with one slanted towards Christchurch (New Zealand) listeners. In this WW, I summarize the points discussed this week in the show.  (The full audio can also be downloaded here.)

(1) Carry Trades. The idea of a carry trade is to fund one asset by selling short or borrowing one currency or asset that is hopefully decreasing in value, and to use the proceeds to ‎buy another asset that is hopefully increasing in value. New Zealand has been strongly affected by the Yen carry trade, in which large amounts of yen were borrowed at essentially zero percent interest and used to buy the kiwi (NZ dollar), which yielded a high rate of return because of our high interest rates here.

(2) There used to be a Gold Carry Trade, in which gold was borrowed from Central Banks, again at very low interest rates, then sold, and the proceeds used to buy other higher yielding assets, such as US Treasury bonds. When Barrick Gold announced recently that it was dehedging or closing its hedge book, this was seen by many observers as a signal that this version of the gold carry trade was essentially finished.  (See this previous article for more on the Barrick dehedging: Professor Fekete: Why Barrick Gold has ended Gold hedging)

(3) One powerful effect of the gold carry trade was to artificially suppress the market gold price, thus creating downward pressure on it. Possibly the announcement by Barrick also contained a subtle signal from the powers that be that the price of gold would henceforth be allowed to move more freely.

(4) The US dollar is now, and has been for the last 12 months, available to borrow at essentially zero cost, indicating the beginning of a new US Dollar carry trade, and is now being used to buy other perceived higher yielding assets (like the resource currencies - the Australian, New Zealand and Canadian dollars). There is evidence that gold is a beneficiary of this new carry trade, and certainly there is now upward pressure on the gold price, and concomitant downward pressure on the value of the US dollar.

(5) Other upward pressures on the gold price include the existence of the exchange traded funds, GLD for gold and SLV for silver, which, although they are problematic to some extent, provide an easy way for the general public to invest in precious metals.

(6) Central banks around the world, most notably the Chinese, are buying gold in increasing quantities.  Chinese officials have announced that every time the gold price sinks below a certain level, they will be a buyer, thus giving rise to the notion of the Beijing put, analogous to the so-called Greenspan put. The effect of this is to create a floor under the gold price.

(7) This new dollar carry trade could be derailed, if the US authorities were to raise interest ‎rates substantially. However one powerful reason that this is unlikely to happen over the next couple of years at least, is because of the large number of ARMs (adjustable rate mortgages) in existence, whose rates would then have to be reset, dealing another crippling blow to the housing market.

(8) Speaking of interest rates, the RBA (Reserve Bank of Australia), has just chosen to raise ‎interest rates. Well known Australian economist Steve Keen suggests that this is a ‎serious error, because there is a housing price collapse yet to occur. We observe that one ‎thing is certain: if Aussie housing prices were to collapse, NZ house prices would definitely ‎echo that trend.‎

(9) Once the US dollar has assumed this role as a funding currency for carry trades, there is ‎consequently tremendous pressure on its legitimacy as the world’s reserve currency, ‎since its value is continually being forced down by the carry trade. This is one reason that monetary authorities around the world are calling for a new reserve currency. In ‎fact, gold is now unofficially assuming that role.‎

(10) Monetizing the debt. Another thing that has worried foreign holders of US ‎dollars is that the US would start to monetize its debt, meaning that yet more dollars ‎would be created, thus further weakening the dollar. Bernanke promised he would not do this; however Zero Hedge has alleged that at the Treasury and Agency Bond auctions ‎this week, within 30 minutes of the issue and purchasing of Fannie Mae bonds, they were ‎sold on to the Fed…. If this is in fact the case, then foreign holders of large amounts of US ‎dollars (e.g. China) have every reason to be agitated.‎

(11) Over the past few years, whenever the dollar has weakened to a significant ‎extent, there has been co-ordinated action by central banks to force its value back up ‎again. This does not appear to be happening this time around….

(12) We are very likely to be at the beginning of a period of sharply increasing ‎volatility in the values of currencies, including gold.‎

Thank you, Max Keiser and Stacy Herbert

 

Now we would like to draw your attention to some alarming information, courtesy of Weiss Research.  (You can sign up for a free eletter on their Money and Markets homepage.)

The charts speak for themselves….

 

Hear the word I-N-F-L-A-T-I-O-N anyone?

This insatiable demand for commodities from a rapidly growing China is only ‎going to continue to increase…….

GOT GOLD?

INVESTING IN NATURAL RESOURCES?

DIVESTING YOURSELF OF US DOLLARS?
  

Russia also ready to abandon the dollar

Russian Prime Minister Vladimir Putin annouced this week they are ready to consider using the Chinese and Russian national currencies when doing oil and gas deals with China, instead of the US dollar.  They will join Brazil who recently agreed to trade with China in yuan (chinese currency) instead of dollars.  Along with the annoucement last month from Iran that they are dumping the dollar to use the euro in their Oil Stabilisation Fund, to “protect itself from the fragilityof the US economy and the weak dollar” according to Iranian state radio.

While we think the US dollar is toast in the long run, there is so much negative news on the dollar coming out all at once that it makes us just a tiny bit suspicious.  Regardless, the dollar continues to fall while just about everything else rises.  In particular gold, silver and resource based currencies like the Canadian, Australian and New Zealand dollars.

Chinese being encouraged to buy gold and silver

16 August 2009:  Up until this year it’s been illegal for the average chinese citizen to buy and hold gold and silver.  Also this year the government made it illegal to export silver and investing in precious metals is now also being reported about in the Chinese government controlled media.  See the video below. 

We think this looks to be a very bullish signal long term for precious metals.  You can also read a full expose from a local chinese source here.  This is definitely worth a read and be sure to also read the third comment down by Kevin T.

Update:  7 October 2009:  Here’s a video we’ve just come across with one mans very interesting and well reasoned theory as to why the Chinese government may be encouraging it’s citizens to buy precious metals…

GATA, China and Gold Price Suppression

Weekly Wanderings 29 September 2009

As usual in these weekly wanderings we present you with topical and interesting items we’ve come across during the week…  

 

This week, over at King  World News ,  Eric hosts a fantastic audio interview with Bill Murphy and Chris Powell, of the Gold Anti-Trust Action committee (GATA). We consider this to be an important and revealing piece, and make no apology for making the contents the centerpiece of our column for this week. You can listen to the audio here, and we summarise the main points alleged in the interview below…

 

1. The Federal Reserve has admitted in correspondence with GATA that is has gold swap arrangements in place with other central banks. This admission is of major importance because it openly confirms that the Fed has the power to actively intervene in the gold market, if this be deemed necessary.
    
2. GATA has been trying to gain information relating to the operation of the gold market for more than 10 years – to be fobbed off at every turn, despite the so-called Freedom of Information act. This admission marks a major breakthrough.
    
3. The Fed intervenes surreptitiously in many markets, in particular it suppresses the price of gold to make the US dollar appear stronger.
    
4. The “audit the Fed” proposal before Congress is gaining momentum. The Fed, whose operations are cloaked in secrecy, itself seems to have the view that if its operations became public knowledge, then the world would collapse. Alan Blinder, a former Fed official stated on US public TV, that “the last duty of a central banker is to tell the public the truth”.
    
5. If the claims made by GATA that half or more of the US gold reserves are gone are shown to be correct – and they have been very carefully researched – then this may spell serious trouble for the dollar.
    
6. Gold price suppression, if it indeed has been, and is, taking place, is the foundation of the manipulation of all markets, leading to reckless over-consumption in the US itself, and impoverishment of the rest of the world, particularly the developing world, due to artificial dollar strength.
    
7. With regard to the gold price at present, the central banks are taking on China. Jim Sinclair of jsmineset.com has pointed out that when central banks go up against countries, they are faced with opponents that are as powerful as they themselves…in terms of the depth of their pockets.
    
8. GATA is, and has been, in discussions with senior economic advisors in both Russia and China – with Chinese officials over the last 18 months.  Chris Powell remarked that he had been present last year at a dinner of the Committee for Monetary Research and Education in NY, at which Professor Robert Mundell  stated that he had advised the Chinese government to buy any and all gold that might be sold by the IMF.  The Chinese are concerned not to initiate a drastic plunge in the value of the dollar, but they have to hedge against their massive dollar position, and one way to do this is to continue buying gold.
    
9. The battle is now joined between the financiers – the central bankers – and the producers – the productive sector of the economy. It is not an exaggeration to say that the proposal to audit the Fed, if it is allowed to be passed, could significantly influence the destiny of everyone in the US and the rest of the world, by causing a seismic change in the relative values of worldwide capital and labour markets.

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