Monday, January 31, 2011
The Egyptian tanks, the delirious protesters sitting atop them, the flags, the 40,000 protesters weeping and crying and cheering in Freedom Square and praying around them, the Muslim Brotherhood official sitting amid the tank passengers. Should this be compared to the liberation of Bucharest? Climbing on to an American-made battle tank myself, I could only remember those wonderful films of the liberation of Paris. A few hundred metres away, Hosni Mubarak's black-uniformed security police were still firing at demonstrators near the interior ministry. It was a wild, historical victory celebration, Mubarak's own tanks freeing his capital from his own dictatorship.
In the pantomime world of Mubarak himself – and of Barack Obama and Hillary Clinton in Washington – the man who still claims to be president of Egypt swore in the most preposterous choice of vice-president in an attempt to soften the fury of the protesters – Omar Suleiman, Egypt's chief negotiator with Israel and his senior intelligence officer, a 75-year-old with years of visits to Tel Aviv and Jerusalem and four heart attacks to his credit. How this elderly apparatchik might be expected to deal with the anger and joy of liberation of 80 million Egyptians is beyond imagination. When I told the demonstrators on the tank around me the news of Suleiman's appointment, they burst into laughter.
Their crews, in battledress and smiling and in some cases clapping their hands, made no attempt to wipe off the graffiti that the crowds had spray-painted on their tanks. "Mubarak Out – Get Out", and "Your regime is over, Mubarak" have now been plastered on almost every Egyptian tank on the streets of Cairo. On one of the tanks circling Freedom Square was a senior member of the Muslim Brotherhood, Mohamed Beltagi. Earlier, I had walked beside a convoy of tanks near the suburb of Garden City as crowds scrambled on to the machines to hand oranges to the crews, applauding them as Egyptian patriots. However crazed Mubarak's choice of vice-president and his gradual appointment of a powerless new government of cronies, the streets of Cairo proved what the United States and EU leaders have simply failed to grasp. It is over........read on
Sunday, January 30, 2011
Charts presented in this report are courtesy Stockcharts.com unless indicated.
This chart courtesy Federal Reserve Bank of St. Louis shows the increase in M2 money supply is speeding up again after a somewhat slower rise during the past year. This represents monetary inflation, which precedes price inflation, which in turn provides energy for gold, silver and many other commodities.
"The central economic problem plaguing this country since 1913, has been the presence of the federal Reserve System. Without the FED's debt-currency scheme having effectively supplanted the constitutional monetary system based upon silver and gold, would have been impossible - not simply improbable, or difficult, but impossible - for politicians in the public sector and speculators in the private sector to have amassed the staggering level of un-payable, unconstitutional, and unconscionable debt that now bear down upon this country." Dr. Edwin Viera, Jr. (from: 'Going to the roots of the Problem').
Featured is the daily gold price chart. The blue arrows point to buying opportunities. The 50DMA is in positive alignment to the 200DMA (green oval), and the latter is rising. This is bullish action. Price is turning up while the supporting indicators are at support levels (green lines). Gold and silver usually suffer a seasonal decline in January or February, and Wednesday most likely mared the end of that decline. The Gold Direction Indicator rose up from 28% on Tuesday to 71% on Wednesday.
CBO's Revised Budget Sees 2011 Deficit Rising By $500 Billion To $1.5 Trillion; $4 Trillion In Deficit Through 2013 Guarantees QE3+
This news item by itself should make you want to buy silver and gold. The strongest foundation beneath the bull market in precious metals is budget deficits. This fact was emphasized in the 1970s by James Blanchard III at his New Orleans hard money conferences.
Budget deficits are never closed by cutting government services ( token cuts are merely symbolic). They are covered by borrowed money and by monetary inflation.
Featured is the index that compares gold to the US dollar. Price is carving out a bullish flag formation. The current pullback appears quite normal within the ongoing bull market. A breakout at the blue arrow will be very bullish for gold. The supporting indicators are at support levels (green lines).
During the 1970 - 1980 inflationary period the 'asset protectors' were: silver, gold, oil, diamonds and farmland. Stocks and bonds did not keep pace.
Featured is the COT gold report courtesy Cotpricecharts.com. The 'net short position' of commercial traders dropped 18,000 contracts, to 207,000 as of Tuesday Jan. 18th. This is the lowest number since August 21 2008! Gold on that date was $952 and over the next 5 months it rose 19% to $1138. If a new COT report were to be released today, it would actually turn out to be lower still, because gold has dropped in price since the release of the latest report. As it is, the 'net short' position (purple bar), and the 'net long' position of large speculators (grey bar), are the most bullish of any week in this chart! The next COT report is due out this Friday Jan 28th and is expected to be even more bullish than this one!
This chart courtesy Kitco.com shows the gold price to be a bargain for buyers in India. They are able to buy gold at the same price as back in November. Indians love bargains!
This chart courtesy Kitco.com shows the gold price in Chinese Yuan. The buyer in China is able to buy gold at the same price as back in October. The Chinese also love a bargain, and this comes just in time for the New Year celebrations that begin on Feb 3rd 2011 AD. The Chinese are well aware of price inflation and the need to protect themselves from this inflation by buying gold.
Featured is the daily silver chart. Price became overbought at the end of December and the Fibonacci target for the pullback is at 26.02. Price turned up on Wednesday while the supporting indicators are oversold (green lines). A close above the blue arrow turns the trend bullish again. The 50 DMA is in positive alignment to the 200 DMA (green oval), and both are rising.
Fundamentals for silver are very bullish. In the 1950s an estimated 10 billion ounces were stockpiled around the world. In 1965 the US government owned a strategic stockpile of over 6 billion ounces. By 1980 the worldwide supply of silver was down to an estimated 3.5 billion ounces. Today estimates range between 500 million and at most 1 billion ounces. Silver is being used up faster than mines can produce silver, and the 'easy to find' silver from Peru and Mexico is 'long gone'. Mines are expensive to build, and rising fuel prices cut deeply into miners profits. Meanwhile the industrial uses for silver continue to rise. Silver is used in cell phones, computers, TVs, refrigerators, electrical applications, medicine, weapons, satellites, water filters just to name some of the applications. Whereas gold gets recycled, the amount of silver used in industry is primarily in small amounts and ends up in landfill. The ratio between gold and silver (currently at 48), could one day end up being even!
This chart courtesy Cotpricecharts.com shows the 'net short' position of commercial silver traders to be the lowest since March 2010. Back then silver was 17.37 and it rose during the following two months to 19.34, an increase of 11%, (66% annualized). The total 'net short' position as of Tuesday Jan. 18th is 45,000, compared to 47,000 the week before, and this does not reflect the action from Thursday Jan 29th, when silver was knocked down to the tune of -1.20. Once that action is added to the data, (as it will be in the report that is issued this Friday), the 'net short' position is very likely to be the most bullish in several years!
Featured is the daily Platinum chart. Platinum is telling investors in gold and silver: "don't worry - be happy - follow me."
Featured is the TIP bond fund that consists of bonds that are indexed to inflation. The people who buy these bonds are trying to protect themselves from price inflation. An uptrend in the fund indicates that those who believe price inflation is occurring, are in the majority.
Featured is the CCI Commodity Index, weekly chart. Price broke out to a new all-time high this past week. The expectation is that the breakout at the green arrow will be tested, and if the test is successful, commodities will have blue sky above. The RSI and MACD are positive and the 50 DMA is in positive alignment to the 200 DMA while both are rising.
A few bullish factors to be considered:
- Newly mined gold is not keep pace with newly printed money.
- As oil prices rise, mining costs increase - especially the cost of building a mine from scratch.
- Food prices are rising in a number of countries. This is one of the results of monetary inflation, as it produces price inflation.
- Chinese New Year begins February 3rd and runs for 15 days. It is a season of gift giving, and this year the number of millionaires has increased again over last year. Chinese people love gold and whereas the government prohibited gold ownership for many years, it now openly encourages its citizens to own gold.
- Central Banks are continuing to buy gold, instead of selling gold into the marketplace - as they did for years.
- Since the last gold rush in the late 1970s, the number of people on the planet has increased by several billion. 40% of these new citizens live in China and Asia.
- "Chinese gold and silver demand has been phenomenal ahead of the New Year holiday," said Adrian Ash, head of research at BullionVault.com, a leading online service for gold bullion trading and ownership, citing comments from dealers among others. Shipments have been "heavy" and they began very early, in mid-December, he said.
- Western governments continue to run deficits. These deficits are covered with borrowed money and with printing press money.
- The US government is destroying the value of its currency and the nations against which the US dollar is compared in the US dollar index, are destroying their currencies in lock-step, in order to remain competitive in the market place. The only way you can measure this ongoing destruction is in the price of gold, silver and other scarce resources.
- Quantitative easing is here to stay, for to stop now guarantees the various economies would dive off a cliff.
- The multi-trillion dollar time-bomb of OTC derivative instruments is still bogging down progress in the world's major banks. Central banks are printing money to shovel into these banks to keep the bottom line from showing too much red ink. Meanwhile some of the banks are using part of this money to reward their employees. This widens the gap between rich and poor and sets the stage for civil unrest.
- When government spending rises while revenues are dropping, the resulting gap begins to widen exponentially instead of arithmetically.
- A pull-quote from the latest article by economist Daniel R. Amerman: "The truly big picture for both the United States and most other major developed nations is that population growth has been shrinking, long term promises to current and future retirees have been extravagant, and for the most fundamental of demographic and economic reasons, the nations simply can't afford to pay for those promises. On a global basis, governments are left with a choice between breaking promises by openly reneging on their legal commitments on a massive scale, possibly having to actually declare bankruptcy in many cases (effectively) - or they can follow the time-honored route that almost every nation which has found itself in the situation and has had the ability do so has done: they can pay their promises in form, but not in substance. They can inflate away the value of their national currency, and pay everything in full, but that currency will only be worth a fraction of what it is right now".
- Since 2005, the January through March period has seen China's private household gold demand average a rise of 22% from the previous nine months, according to a BullionVault analysis, based on GFMS data courtesy of the World Gold Council.
- "Long term, that has meant Chinese households have put an ever-greater proportion of their fast-growing annual savings into gold," said Ash, with that portion growing from 0.8% of retained income in 2001 to a forecast of more than 1.7% in 2010.
- Until a major fiat currency becomes trustworthy, there is no alternative store of value that compares with gold and silver.
- Premiums for gold bars in China jumped to their highest level in two years.
- Precious metals dealers in China report very strong demand for gold from China. Refiners cannot meet the demand.
- The World Gold Council preliminary report shows gold sales into India will be the highest in its history.
- Eric Sprott, chief investment officer of Sprott Asset Management, after having difficulty locating enough bullion for their new silver fund was quoted : "Frankly, we are concerned about the illiquidity in the physical silver market. We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver."
- Sales of silver Eagles set a new record in January, by the 19th of the month. Already, 4.6 million coins have been sold, an all-time monthly high since the coin's release in 1986.
- Gold and gold mining stocks represented 26% of all global assets in 1981 (high inflation), and 20% in 1932 (high deflation). Today, gold and gold mining shares represent about 1% of global assets.
- John Embry of Sprott Investments, in a recent article for Investors Digest expressed doubts that all of the gold in the gold ETFs is physical, (suspecting that some of it consists of COMEX contracts).
- Mr. Embry further observes that gold is re-establishing itself in its historical role as money.
DISCLAIMER: Please do your own due diligence. Investing involves taking risks. I am NOT responsible for your trading decisions.
Peter Degraaf is an online stock trader with over 50 years of investing experience. He publishes a weekly as well as a daily report for his many subscribers. For a sample copy please send him an E-mail at firstname.lastname@example.org or visit his website www.pdegraaf.com
Egypt Closes Banks, Stock Market; Protests Spread to Saudi Arabia, Jordan; Saudi King Backs Mubarak; Reflections on Misguided US Policy
One sure way to get people fired up is to shut down the stock market and all the banks, thereby denying citizens access to their money. Yet, that is exactly the desperate course of action chosen by Egyptian President Hosni Mubarak.
Protests have now spread to Saudi Arabia, and Jordan. So far however, the protests in Saudi Arabia are of a peaceful nature, mostly related to government response to flooding. Recent history suggests that may change at any moment into something far more significant.
In a move that can easily backfire, the Saudi king defended Mubarak and offered support.
Meanwhile, in Jordan, the pace of protests have now picked up as opposition supporters have held rallies in Amman and called for the resignation of Jordan's prime minister......read on
What's the most controversial topic we've ever tackled? You'd think it might be something about exploiting rising food prices. Or bankers' bonuses. Or even vice stocks.
I doubt any of you would have guessed: "the ratio of gold and silver to house prices". Yet that is the subject that holds the record for reader comments – by a long chalk.
And today I'd like to update you on that topic.
The best way to measure house prices
Let's kick off with a stat that I find amazing. Did you know that if you had sold your average British house in late 2004 and bought silver – just regular bars of silver – you could now sell that silver and buy 5.5 average British houses?
As we all know, money seems to buy you less and less each year – the above statistic really brings this home. This is because we operate under a system of 'fiat' (from the Latin, 'let it be done') money and credit. Churchill described it as money 'by government edict'. In other words, it is the law that what we use as money be money. Without that legal backing, modern money would be just a meaningless computer digit or piece of paper..........read on
The news that the rating agency S&P had downgraded Japan's sovereign debt from 'AA' to 'AA-'. This is no small development. The reality is that Japan's finances are in even worse shape than those of the US when its overall indebtedness is compared as a percentage of GDP. Japan is approaching a debt to GDP ratio of nearly 200%! Yes, you read that correctly. The only nation in the entire world that is higher is Zimbabwe. In effect, it would take the sum total of all economic activity generated in Japan over a two year period to eliminate the nation's debt. Think about that!
What this means is that the rating agencies, who are watching these sovereign debt woes which have struck various countries in the EU, are concerned about the same problem beginning to surface in other quarters around the globe. Quite simply they are looking at the huge deficits being run by many nations in the West (and Japan). In other words - TOO MUCH DEBT!
That led to selling in the long end of the US yield curve this morning as bond traders are starting to be more than a bit fearful that the same thing is going to happen to the US's 'AAA' rating at some point in the future if the US does not get its financial house in order. They are watching massive amounts of QE2 and another ballooning of the federal budget deficit and are selling even as the Fed attempts to jam the market higher with its purchases. AT this point, the only thing holding the long end of the curve is the Fed. How long can that last especially without affecting the Dollar?
More and more we see the integrity of sovereign debt being brought into doubt which leads to the question among many investors; "what is a safe haven that is actually safe?" Who wants to take the chance of holding a nation's bonds if overnight they face the real risk of being downgraded?
The real world impact of this is that nations whose debt gets downgraded will have to offer potential investors a higher rate of return to compensate them for the increased risk of holding their debt. For nations already hopelessly in debt, that means borrowing costs begin to rise forcing them to borrow even more money just to keep their heads above water. The whole thing becomes a vicious cycle with rising interest rates compounding the problem.
The US has been able to sneak by and thus far avoid a rating agency's downgrade partly because its borrowing costs are so low. Should these agencies begin to train their sights on the US and give closer scrutiny to its miserable financial condition, there is a chance that a downgrade could follow. Such a development, were it to indeed occur, would force the US to offer higher rates of return on its debt. That of course would raise its borrowing costs at a time when it can least afford it not to mention short circuiting the QE policy which is deliberately designed to lower borrowing costs.
This is why the take down in gold, after yesterday's nice performance, is so remarkable for its perverseness and why long term oriented holders of the metal should not be the least bit concerned as to the antics taking place in the paper market. Sovereign debt woes are not behind us - the problem lies squarely ahead of us and no amount of wishful thinking is going to change that hard reality.
This being said, one of the things we now want to monitor will be the performance of gold when priced in terms of the Yen.
Saturday, January 29, 2011
The United States government has four interrelated motivations for destroying the value of the dollar:
1. Creating money out of thin air on a massive basis is all that stands between the current state of hidden depression, and overt depression with unemployment levels in excess of those seen in the US Great Depression of the 1930s.
2. It is the weapon of choice being used to wage currency war and reboot US economic growth.
3. It is the most effective way to meet not just current crushing debt levels, but to deal with the rapidly approaching massive generational crisis of paying for Boomer retirement promises.
4. Political survival and enhanced power for incumbent politicians.
In this article we will take a holistic approach to how individual short term, medium and long term pressures all come together to leave the government with effectively no choice but to create a high rate of inflation. If you have savings, if you rely on a pension, if you are a retiree or Boomer with retirement accounts - any one of these four fundamental motivations is individually a grave peril to your future standard of living. However, it is only when we put all four together and see how the motivations reinforce each other, that we can understand what the government has been and will be doing, and then begin the search for personal solutions.Reason One: The Political Interests Of Irresponsible Politicians
As further covered below, 9% of the US economy currently consists of "free money" from a politician's perspective. That is $1.4 trillion a year that politicians get to disburse on a political district and favored special interest group basis. In other words, $1,000 per month, per American household that can be used to reward friends and that can be withheld from enemies, with personal credit being taken by the benevolent politicians for this never-ending largess.In ordinary circumstances, politicians would be restricted to spending perhaps $200 or $300 per month per household that the government didn't actually have through "normal" deficit spending, with the difference being borrowed in the bond market. Anything above that would require the unpleasantness of raising taxes, with the potential of the politician actually losing their position and privileged lifestyle if he or she wasn't in a "safe district". However, in the current climate, all limitations are gone, the pork is rolling out on a historically unprecedented basis, and the politicians are wielding unprecedented power.
So why do the limitations usually exist on at least some level, and why are they gone now? The last time the US government had directly created money out of thin air on a massive basis to fund deficit spending was the Civil War, and the only other previous time was the Revolutionary War. There is a very good reason such governmental actions are so rare: the only two times it has been done before, the value of the US dollar was rapidly destroyed. So, this spending without limit would not ordinarily make sense. Unless, from the government's perspective, there were other dangers that were considered greater problems, that could be addressed only through destroying the value of the dollar.Reason Two: To Hide A Depression
I have written numerous articles about various aspects of Reasons Two through Four for some years now, and my long term readers and subscribers have been well aware of the building pressures. While the emphasis of this article is on the interrelationships, we will first set the stage by taking a few paragraphs each to briefly review the individual government motivation, with a link to a full length article that covers the problem in more depth.The second government motivation is to hide a depression, and while you wouldn't know it from government press releases or media headlines, there has been a gaping hole in the US economy since 2008, as illustrated below:
During the first round of the financial crisis, the US private economy nearly collapsed, threatening to send the US economy straight into deep depression. We're talking about a $1.3 trillion private sector collapse that was contained only by the government fantastically increasing the money it spent, even while tax revenues were falling. The creation of huge government deficits has been all that has maintained even a facade of semi-normalcy. Remove the mechanism of the government creating money so that it can spend what it doesn't have, and it is straight to official Great Depression-level unemployment in months, as illustrated in the graph below.
Even as the true gravity of the situation is hidden from the general public, so too is the true cost of the grossly irresponsible short-term "band-aid" that is being used to cover the hole in the US economy. The destruction of the value of savings in general, as well as the impoverishment of Boomers and retirees in particular, is explained in my article linked below, "Hiding A Depression: How The US Government Does It."Reason Three: A Desperate Attempt To Escape Depression By Waging Currency War
The US government went to war in September of 2010, and for the moment at least - it is winning this currency war. Simply put, the US would have great difficulty emerging from the depression described above so long as the US dollar is "strong", because a strong dollar translates to "expensive" US workers who have difficulty competing for market share even in the US economy, let alone abroad. One solution is that when a nation slashes the value of its currency, its workers become relatively cheaper, and they then cannot only better defend their domestic market share, but can begin to take market share in foreign economies as well. However, when a major nation goes on the offensive, many trading partners will counterattack and try to defend their economies, not by making their own currencies stronger, but by making their own currencies weaker, so that their domestic workers remain relatively inexpensive and will be better able to compete for market share.
To successfully go on the currency offensive and negate attempted counterattacks, Federal Reserve Chairman Bernanke chose a radical tool - he publicly announced that the Fed would be directly creating money on a massive scale equal to 9% of the US economy, with the proceeds going to purchase US government debt. In other words the stimulus and other deficit spending are now being funded simply by creating money out of thin air. Ultimately, the only source of value for a symbolic currency (such as the US dollar) are the policies deployed by the central bank to maintain that value, and when the nation's chief central banker directly threatens to use his power to destroy the symbol rather than preserve it - the threat is extraordinarily effective.
This success can be seen by the US dollar recently reaching its lowest level against the Chinese yuan in 17 years. This means US workers are getting a big leg up when it comes to competing with Chinese workers, both in the US and around the world. The effects are global, with a good example being Brazil, which used to export $15 billion more a year to the US than it imported - but is now importing $6 billion more from the US than it exports. That $21 billion shift from being an exporter to importer translates to jobs leaving Brazil, as well as genuine economic growth for the US, and Brazil is furiously threatening countermeasures, including outright trade war if needed.
There is no free lunch, however. While the US government is insisting to the world-at-large that it is not engaged in currency warfare, in order to maintain the plausible deniability that is essential to diplomatic doublespeak, it is also hiding the heavy cost from its own citizens. The US standard of living since the late 1990s has been based on having a "strong" dollar and huge trade deficits - meaning we haven't actually been able to pay for what we consume for a long time. Therefore, even as jobs and the real economy grow, there is a drop in the overall standard of living, that is not evenly weighted - but is disproportionately born by savers, Boomers and retirees.Much more information on how this works and the specific ways that older citizens will be bearing most of the pain can be found in my article linked below, "Bullets In The Back: How Boomers & Retirees Will Become Stimulus, Bailout & Currency War Casualties". These second and third elements of hiding a depression and waging currency war are tightly interwoven, and could even be called "killing two birds with one stone". The money doesn't exist to keep the US from openly plunging into depression, it simply isn't there for a fiscally responsible government. And covering the economic hole by creating money out of thin air at a rate equal to 9% of the total US economy is so fiscally irresponsible that few nations dare a counterattack of such magnitude. For now, massive monetary creation allows the US to not only cover over the current hidden depression, but also to wage all-out currency war to try to emerge from that depression.
However, to fully understand the agenda of the US government, we have to look at the greatest financial problem of all, and how destroying the value of the dollar is the intended solution.
Reason Four: Dodging National Bankruptcy
Sometimes households reach the unfortunate point where when they add up the credit cards, mortgage payments, and 2nd mortgage payments - they realize that they will never be able to pay their bills. They know they are bankrupt and there is no way of dodging that. But instead of reducing their spending - they may even step up the spending, until all the lines of credit are maxed out, and the bills are all in arrears. Because, once you know bankruptcy is inevitable anyway - why slash your standard of living before you absolutely have to? Partying it up now for another few months won't change the destination, so why not?
Fortunately, relatively few ordinary people think that way. There is ample evidence, however, that a good number of politicians hold that mindset when it comes to budget deficits that appear impossible to repay, at least in the conventional manner.
There is a lie that is being frequently repeated, which is that our children and grandchildren will be slaving away for decades to pay back the money that we've been borrowing to fund this reckless deficit spending. The assumption underlying the lie is that if it weren't for the current spending, the nation would be fine, and therefore increased taxes will be needed to pay back the borrowing.
Except that the nation isn't fine. Like most other major developed nations in the world, the United States has been effectively bankrupt for quite some time, with a day of reckoning that is approaching fast with or without the current outrageous level of deficit spending.
The graph below is from my article " Bailout Lies Threaten Your Savings"
As developed step by step in "Bailout Lies", when we add up Medicare promises, Social Security promises, pension promises (backed by the federal government), individual retirement account cash-out expectations, and the cost of the current bailouts, the total comes to over $1,225,000 per non-retired household (over the coming years) that has an above poverty line income. This isn't even the total cost - it is the excess cost over and above current estimated tax receipts, which assumes a healthy and growing economy. When we drop the assumption of an economy growing at the same rates of the last 50 years, then the shortfall goes far higher - perhaps over $200 trillion for Social Security and Medicare alone by some recent estimates. That would raise the total shortfall to over $3 million per non-retired and above-poverty-line household.
Let's return to our bankrupt household example. Over and above any personal debts, every household in America is already bankrupt, because on average - we can't even come remotely close to coming up with the taxes to pay for the $1.2 to $3 million that the government is going to need from each from us.
The US is bankrupt, however, only so long as a dollar is worth a dollar. That is the critical assumption, and also forms the heart of the second lie when it comes to widespread beliefs about the deficits. This is all explained in more detail in the "Bailout Lies" article, but national governments whose borrowings are denominated in their currency (such as the US government promising to repay lenders with US dollars) aren't subject to normal bankruptcy risk. How governments avoid bankruptcy is demonstrated in the illustration below from the "Bailout Lies" article.
Merely make a dollar worth five cents, and impossible government promises become quite payable. The problem is that this "solution" also requires making most people's life savings worth five cents on the dollar.The Convergence Of The Four Overwhelming Governmental Motivations: The Long-Term
Let's add our four powerful motivations together, and see how they interrelate. The truly big picture for both the United States and most other major developed nations is that population growth has been shrinking, long term promises to current and future retirees have been extravagant, and for the most fundamental of demographic and economic reasons, the nations simply can't afford to pay for those promises. On a global basis, governments are left with a choice between breaking promises openly - reneging on their legal commitments on a massive scale, possibly having to actually declare bankruptcy in many cases (effectively) - or they can follow the time-honored route that almost every nation which has found itself in the situation and has had the ability do so has done: they can pay their promises in form, but not in substance. They can inflate away the value of their national currency, and pay everything in full, but that currency will only be worth a fraction of what it is right now.
So the larger the future shortfall, the more overwhelming the motivation to destroy the value of the currency, and the greater the degree of destruction of the currency that is necessary in order to turn impossible promises into possible promises.The Short Term
Let's look at the short term in the United States. As previously discussed, there is currently a gaping hole in the US economy that is equal to 9% of the size of the economy. This hole is being covered over by massive deficit spending, and if this massive deficit spending were to cease abruptly, then for the reasons shown in the article, the US would go straight to an overt Great Depression level of unemployment.
So, if you're in the political establishment and you don't want outright political revolution, then you have enormous incentives to try to keep an appearance of normalcy in the economy, no matter how much damage you need to do to the long-term value of your nation's currency.Combining Long-Term & Short-Term
Now let's tie together long-term and short-term. Short term interests are served by recklessly risking the long-term value of the nation's currency, thereby providing the funding to cover over the hole in the economy. Long term interests in terms of impossible government promises that must be inflated away, are served by the destruction of the value of the nation's currency. The more severe this destruction, the less the cost of repaying impossible promises. Arguably then, the more risk that is taken in "papering" over the hole in the current economy, and the more severe the long term consequences, the better off the government will be in the future when it comes to its ability to cheaply repay debts that are otherwise unpayable.The Medium-Term & The Real Economy
Now, let's go to the medium term and consider the real world factor that bridges the current economic crisis and the long term economic crisis. That bridge is ultimately all that really matters, and that is the real economy. Without a powerful and rapidly growing real economy, there is no way out of the "Hidden Depression" in which the United States currently finds itself. American workers must be competitive if they are to regain both domestic and international market share (a situation many other nations are in as well).Mixing Medium & Long Term
Nobody knows the true extent of the trouble the US economy is in over the next ten, twenty and thirty years as Boomer retirement promises come due in full, but we do know that:
1) It would take a historically unprecedented rate of economic growth to meet the promises in current dollars without bankrupting the nation; and
2) The financial devastation could be far, far worse than most estimates if the US economy does not perform like it has historically, but instead continues the downward spiral of a wounded empire that is losing prominence and economic power on the world stage.
When we strip away the common assumption of endlessly compounded 3% real economic growth, and say that we are either losing economic growth or just breaking even, then the future shortfalls grow even more staggering.Bridging Medium, Long & Short-Term
What the short-term and long-term both have in common is that the only true solution is ultimately to grow the real economy. The real economy has been hampered since the mid-1990s by a short sighted "strong dollar" policy that has enormously benefited major international corporations and major banks, and has led to a debt-driven illusion of personal prosperity for many of the citizens of the United States. It's a standard of living that could never be paid for, but rather was reliant on other nations lending the US the money to fund that lifestyle, so long as we agreed to keep the dollar "strong". The effective terms were that certain other nations lent us the money to live it up without our being able to pay for the goods that delivered our subsidized standard of living, and in exchange we let them take our industries and jobs.
To regain economic competitiveness, the US must re-grow the real economy, which means removing the handcuffs on American workers, which requires driving down the value of the US dollar. This has to be done in a competitive world, where other nations want to defend their own market share by driving down the value of their own currencies. So for the US to be "successful" - as it has been highly successful so far in these first four months of overt currency war - it has chosen a strategy of taking more radical actions to threaten to destroy the value of its currency than other nations dare.
In other words, the other nations aren't as willing to recklessly and rapidly wipe out the value of their citizen's savings as the United States is, which gives the US a temporary "advantage" in currency brinksmanship.
Most conveniently, the otherwise impossible cost of covering over the gaping hole in the US economy can be paid for through open monetization on deliberate, prominent display for the whole world to see. The strategy is to simply manufacture the money out of nothingness, which then lets the rest of the world know that the US dollar is in grave peril of swiftly diving in value. This then drives down the value of the dollar, and reboots the real economy and real American competitiveness, even as the hole in the economy is temporarily covered over. Perhaps most important of all, this begins the rapid destruction of the value of the dollar as necessary to avert formal US bankruptcy when it comes to paying the enormous retirement and health care obligations that are coming due over the next ten, twenty and thirty years.
To understand the true extent of the danger to your savings, you need to see how all three of these levels work together: hiding the depression in the short-term, rebooting the real economy in the medium-term, and the long-term destruction of the value of the dollar so that impossible promises can be paid in form, but not in substance. All three strategies effectively require the destruction of the value of the savings of older Americans and retirees in particular. It is your future lifestyle that must be sacrificed for all of these goals to happen together.Adding In Short-Term Political Benefits
And finally, and not of incidental importance although perhaps not quite as fundamental as the other factors, there are enormous political rewards for those currently in power when it comes to pursuing this approach. As covered in the "Hiding A Depression" article, the government's share of the US economy (with very little commentary) has gone from 35% of the total economy to 43% of the total economy. In the real world of politics, what is most important is that this growth comes in the form of discretionary spending, that (normally) rare commodity that is the currency of pure power. In normal circumstances, between government transfer payments, the military, and the established bureaucracy, there isn't all that much discretionary money for politicians to channel for their partisan desires. That has turned upside down, as discretionary money was created so fast, that Congress and the Administration initially had trouble figuring out how to spend it.
The government has enormously increased its control over the day-to-day economic life of the nation. This control is not being exercised on an altruistic basis, but is being used in the exercise of raw political power. Politicians have the unprecedented ability, almost without limitation, to take the $1000 per month per American household in money that is being created out of the void, and to use it to reward their friends and hurt their enemies. And many are doing so.
These four motivations all exist simultaneously, they all wrap around each other in their numerous interrelationships, and they all reinforce each other. What they all have in common is an overwhelming incentive to make sure that a dollar does not remain worth a dollar.The Personal Implications
The implications of the four powerful motivations all coming together are that we have multiple, overwhelming reasons to believe that the value of the US dollar (and many other currencies) will be mostly or near entirely destroyed in coming years. Now, when paper wealth is wiped out for much of the population, and real wealth (goods and services) for a nation has taken a blow - but is not wiped out - then what we necessarily have is a massive redistribution of wealth. The personal impact interpretation of the connections that we have made in this article, is that there is very good reason to believe that the largest redistribution of wealth that has been seen in modern times is likely to be occurring over the coming years.
Inherently, the older that you are - the more likely that wealth will be redistributed away from you instead of towards you. A giant "Reset Button" will likely be pressed for the dollar, and with it the value of your savings and investments will likely evaporate - that is, if you have been following the conventional wisdom for retirement investing. You may not have that many working years left to recover from the damage, and jobs may be difficult to come by even if you want to work. So you are competing against younger workers not just for jobs, but for goods and services, where they have the current income in inflation-adjusted terms to buy these desirable goods - and you don't. Thus, the older citizens become impoverished relative to the younger citizens. This is a history that has been repeated time and again across nations and across the centuries - it is the pensioners that get nailed when the currency reset button gets pressed.
If you have worked hard and lived a responsible life so that you have savings and investments to protect, let me suggest that the single most valuable investment that you can make to maintain the value your savings and your standard of living over the coming years of turmoil, is education.
You need an education in how to fundamentally change your financial profile.
Your financial profile can't look at all like that of an ordinary older person - or you will share the fate of most older people.
To change that profile in a manner that reduces your overall lifestyle risk rather than raises - means getting the most thorough education that you can. As soon as you can.
Daniel R. Amerman is a futurist and financial consultant with a unique approach to helping individuals and organizations prepare for and profit from an upcoming time of generational change and likely financial turmoil. He is a Chartered Financial Analyst and former investment banker, with MBA and BSBA degrees in finance and over 20 years of financial experience. Do you know how to Turn Inflation Into Wealth? To position yourself so that inflation will redistribute real wealth to you, and the higher the rate of inflation - the more your after-inflation net worth grows? Do you know how to achieve these gains on a long-term and tax-advantaged basis? Do you know how to potentially triple your after-tax and after-inflation returns through Reversing The Inflation Tax? So that instead of paying real taxes on illusionary income, you are paying illusionary taxes on real increases in net worth? These are among the many topics covered in the free â€œTurning Inflation Into Wealthâ€ Mini-Course. Starting simple, this course delivers a series of 10-15 minute readings, with each reading building on the knowledge and information contained in previous readings. More information on the course is available at DanielAmerman.com or InflationIntoWealth.com .
Daniel R. Amerman, CFA
This article contains the ideas and opinions of the author. It is a conceptual exploration of financial and general economic principles. As with any financial discussion of the future, there cannot be any absolute certainty. What this article does not contain is specific investment, legal, tax or any other form of professional advice. If specific advice is needed, it should be sought from an appropriate professional. Any liability, responsibility or warranty for the results of the application of principles contained in the article, website, readings, videos, DVDs, books and related materials, either directly or indirectly, are expressly disclaimed by the author.
It was the third consecutive Friday of protests following Muslim prayers in Jordan, inspired by the unrest in Tunisia and rallies in Egypt demanding the downfall of the country's longtime president.
Arab world unrest has Jordan's king under pressure
Human rights in retreat again in Middle East in 2010
Protesters demand Jordan's government step down
About 3,500 opposition activists from Jordan's main Islamist opposition group, trade unions and leftist organizations gathered in Amman's downtown, waving colorful banners reading: "Send the corrupt guys to court."
The crowd denounced Jordanian Prime Minister Samir Rifai's unpopular policies. Many shouted: "Rifai go away, prices are on fire and so are the Jordanians."
Another 2,500 people also took to the streets in six other cities across the country after the noon prayers. Those protests also called for Rifai's ouster.
King Abdullah II has promised some reforms, particularly on a controversial election law. But many believe it's unlikely he will bow to demands for popular election of the prime minister and Cabinet officials, traditionally appointed by the king.
Rifai also announced a $550 million package of new subsidies in the last two weeks for fuel and staple products like rice, sugar, livestock and liquefied gas used for heating and cooking. It also includes a raise for civil servants and security personnel.
Still, Jordan's economy struggles, weighed down by a record deficit of $2 billion this year. Inflation has also risen by 1.5 percent to 6.1 percent just last month, unemployment and poverty are rampant — estimated at 12 and 25 percent respectively.
Members of the Islamic Action Front, the political wing of the powerful Muslim Brotherhood and Jordan's largest opposition party, swelled the ranks of the demonstrators, massing outside the al-Husseini mosque in Amman and filling the downtown streets with their prayer lines.
As they broke into a procession, the demonstrators chanted, "In the name of God, the government must change" and the Muslim holy book "Koran is our constitution, jihad is our path.".........read on
The Egyptian capital Cairo was the scene of violent chaos on Friday, when tens of thousands of anti-government protesters stoned and confronted police, who fired back with rubber bullets, tear gas and water cannons. It was a major escalation in what was already the biggest challenge to authoritarian President Hosni Mubarak's 30 year-rule. They are demanding Mubarak's ouster and venting their rage at years of government neglect of rampant poverty, unemployment and rising food prices.
Despite more than a year of investigation into the financial crisis, US President Obama's bipartisan "meltdown panel" cast a wide net of blame. All-in they produced a more than 600-page book that may amount to nothing, according to analysts. Gerald Celente, the director of the Trends Research Institute in New York said the report is not new, it's all information that was public knowledge and many analysts warned of for years
Friday, January 28, 2011
Chris Martenson Interview With Jim Rogers: Why Inflation Is Raging Worldwide And He's Shorting US Treasury Bonds
"I see more inflation and more currency turmoil as we go forward. There are huge debt imbalances in the world. U.S. is the largest debtor nation in the world and all the assets are in Asia. The largest creditors in the world are China, Korea, Japan, Taiwan, Hong Kong, Singapore – this is where the assets are and the debts are in the West. Those imbalances have to be resolved. They frequently lead to more currency turmoil. We’ll see more inflation, we’ll see more governments fall. We just saw Tunisia fall – more are coming because the world is going to continue to have these problems, and especially inflation that is going to cause more social unrest."
So said investing legend Jim Rogers when he spoke recently with ChrisMartenson.com about the inflationary pressures rising dramatically around the globe, despite some governments' best efforts to downplay them. Jim shares his "outside in" perspective on US monetary and fiscal policy, and how international players find themselves forced to react. He sees a lot of fundamental imbalances that need to be corrected for, as well as shortages of almost everything developing. In his words, "It's going to be a real mess before it's over."
In this podcast, Jim explains why:
- Inflation is ramping up worldwide, though many governments are trying to downplay the risk. In fact, the Fed is 'throwing gasoline on the fire' with its prodigious money printing.
- Higher interest rates are inevitable, which will lead to a lower standard of living for everyone - except those who have recognized the risks and invested accordingly.
- Dangerous supply drawdowns are occurring across the commodity landscape (including oil). This will increase the upward pressure on prices.
- Given a future of higher rates, as well as massive debt issuance, Jim thinks it's now time to short U.S. Treasuries
- The world economy is more interconnected than ever. All the players need each other, raising the systemic risk posed if countries start defaulting (which Jim notes is a more common occurance than most people realize).
For the first time in human history almost all of humanity is politically activated, politically conscious and politically interactive... The resulting global political activism is generating a surge in the quest for personal dignity, cultural respect and economic opportunity in a world painfully scarred by memories of centuries-long alien colonial or imperial domination... The worldwide yearning for human dignity is the central challenge inherent in the phenomenon of global political awakening... That awakening is socially massive and politically radicalizing... The nearly universal access to radio, television and increasingly the Internet is creating a community of shared perceptions and envy that can be galvanized and channeled by demagogic political or religious passions. These energies transcend sovereign borders and pose a challenge both to existing states as well as to the existing global hierarchy, on top of which America still perches...
The youth of the Third World are particularly restless and resentful. The demographic revolution they embody is thus a political time-bomb, as well... Their potential revolutionary spearhead is likely to emerge from among the scores of millions of students concentrated in the often intellectually dubious "tertiary level" educational institutions of developing countries. Depending on the definition of the tertiary educational level, there are currently worldwide between 80 and 130 million "college" students. Typically originating from the socially insecure lower middle class and inflamed by a sense of social outrage, these millions of students are revolutionaries-in-waiting, already semi-mobilized in large congregations, connected by the Internet and pre-positioned for a replay on a larger scale of what transpired years earlier in Mexico City or in Tiananmen Square. Their physical energy and emotional frustration is just waiting to be triggered by a cause, or a faith, or a hatred...
[The] major world powers, new and old, also face a novel reality: while the lethality of their military might is greater than ever, their capacity to impose control over the politically awakened masses of the world is at a historic low. To put it bluntly: in earlier times, it was easier to control one million people than to physically kill one million people; today, it is infinitely easier to kill one million people than to control one million people.
Former U.S. National Security Advisor
Co-Founder of the Trilateral Commission
Member, Board of Trustees, Center for Strategic and International Studies
An uprising in Tunisia led to the overthrow of the country’s 23-year long dictatorship of President Ben Ali. A new ‘transitional’ government was formed, but the protests continued demanding a totally new government without the relics of the previous tyranny. Protests in Algeria have continued for weeks, as rage mounts against rising food prices, corruption and state oppression. Protests in Jordan forced the King to call on the military to surround cities with tanks and set up checkpoints. Tens of thousands of protesters marched on Cairo demanding an end to the 30-year dictatorship of Hosni Mubarak. Thousands of activists, opposition leaders and students rallied in the capitol of Yemen against the corrupt dictatorship of President Saleh, in power since 1978. Saleh has been, with U.S. military assistance, attempting to crush a rebel movement in the north and a massive secessionist movement growing in the south, called the “Southern Movement.” Protests in Bolivia against rising food prices forced the populist government of Evo Morales to backtrack on plans to cut subsidies. Chile erupted in protests as demonstrators railed against rising fuel prices. Anti-government demonstrations broke out in Albania, resulting in the deaths of several protesters.
It seems as if the world is entering the beginnings of a new revolutionary era: the era of the ‘Global Political Awakening.’ ......read on
Reports are emerging that Internet has gone down in Cairo and throughout Egypt, only hours before the largest planned protests yet.
According to a report from The Arabist, "Egypt has shut off the internet."
Multiple Internet Service Providers are affected according to the report, which states:
I just received a call from a friend in Cairo (I won't say who it is now because he's a prominent activist) telling me neither his DSL nor his USB internet service is working. I've just checked with two other friends in different parts of Cairo and their internet is not working either.
The news of the Internet outage came minutes after the Associated Press published a video of an Egyptian protestor being shot.
CNN reporter Ben Wedeman confirmed Internet is down in Cairo and writes, "No internet, no SMS, what is next? Mobile phones and land lines? So much for stability. #Jan25 #Egypt"
Whether Americans and Westerners in general like it or not, the Chinese have become and will remain the key drivers to many economic and financial market developments, progress, and averted wreckage. The intrepid lapdog US press, loyal to the syndicate, is a critical element to maintain distractions. Of course, China must adapt and react to their own stumbles and accidents, assured since for years they have maintained a tight link in monetary policy. Doing so has linked their asset bubble expansion and bust cycle to the deadly one in the United States, and filled their coffers with US$-denominated toxic debt securities. However, China has three advantages over the US that stand out. They have $2.65 trillion in savings, rainy day money in a war chest. They have a vast industrial base, courtesy of the US, the West, and Japan, which donated the technology for the fabled disastrous low-cost solution. They have an expanding middle class. Neither the US, the UK, nor Western Europe has anything remotely similar to these three benefit allowances. It is slowly becoming clear that the US granted the Most Favored Nation status to China in return for massive gold & silver swaps to the USGovt. The Wall Street fraud kings illicitly sold the leased bullion into the market, to sustain the American fiat paper congame, and thus a betrayal to the Chinese.
The Beijing leaders are highly motivated to unseat the Anglo bankers from their perched throne, emboldened by vengeance. The betrayal was to the American people also, since waves of jobs went to China from US shores, since the US sold not only its own Fort Knox gold inventory, but Western Europe's also, then China's to boot. Those who believe the USGovt has any gold reserves at all should donate their cerebrums to science while still alive, a euthanized suicide. The USGovt in all likelihood is in possession of less than zero gold, owing both Europe and China massive amounts. It is the American ticket to the Third World, paved by lost industry, locked by vast debt, assured by broken economic principles blessed by high priest heresy. The US banking leaders still believe the US can revive itself by the flood of more debt and stronger consumer spending, without a clue of what legitimate income means or where it comes from.
Before delving deeper into this important thesis topic, a comment is in order regarding President Obama's State of the Union address and his plan. As forecasted by the Jackass on repeated past occasions, the entirety of the sacrifice to reduce the USGovt budget will come from the domestic, non-defense, non-security side. Aid to businesses and households and dedication to infrastructure will be removed. The higher priority war machine will be preserved. He called it non-security measures, implying the sacred nature of the security of the nation. Ironically, the security of the nation has been put in peril from unspeakable banker fraud, abandonment of industry, and neglect of infrastructure, not to mention the continued ignorance toward capital formation and dutiful embrace of a consumption mindset. The Obama Admin will remain committed to gutting America, undercutting the middle class, and feeding the deterioration of the USEconomy. He will assure a reduced domestic blood supply and food intake. Expect more empty talk of clean energy and jobs. The greatest potential for spending cuts are from the defense budget, for which the USGovt spends more than the rest of the world combined. A vast array of military bases, embassies place on foreign soil, and weapons projects will be preserved. The maintenance of the foreign threat will be steadfastly maintained. The ethics of drone weapons, regeneration of enemies, destabilization of governments, and the absent economic multiplier effect from defense/offense spending will all conspire to weaken the United States in ways that our leaders seem incapable of understanding. They promote the Fascist Business Model, the very same that has contributed to the wreckage of the nation. The victims are economic growth, rule of contract law, sanctity of private property, and truth. The legitimate threat to the nation comes from its internal situation and the impunity of large scale financial crimes. When reference is made to a Sputnik moment for the United States, try not to laugh. A deeply indebted nation with spiraling deficits latched at the hip to a currency besieged by monetary inflation cannot afford any grand initiative, especially when its highest national priority is war. Survival will soon escalate to a higher priority.
OVERVIEW OF THE CHINA-EUROPE CARD
The Chinese are well along a full court press to secure Gold bullion and dominate in the next phase of the global chess game that will span the next decade or more. With the expansion in the European Dollar Swap Window by the Chinese, the Euro currency has risen impressively. No benefit to Gold has been realized despite the USDollar slide in the last month. One must suspect the Chinese are busy as yellow jacket bees dumping USTreasury Bonds. But also, the Chinese might have suspended some of their Gold & Silver purchases. They might have actually drained for a time the COMEX gold inventory, and await its replenishment. Enter the BIS after midnight from the loading dock. Beijing leaders might be anticipating a high volume Gold bullion purchase flow from the back door in Europe. Refer to EuroBonds bought at discount using the Dollar Swap Window, converted eventually to Gold. My guess is the harlot Intl Monetary Fund will facilitate the Gold conversion, from the EU member nation central banks associated with PIGS nations. If inadequate supply of Gold is a problem with PIGS nations, perhaps some gold swap contracts can be enabled with the help of the Bank For Intl Settlements in Switzerland. But those swaps would seal the PIGS nation fates, since they would hand over industrial, commercial, and other collateral, assuring banker elite ownership of whatever keys to the kingdom are left. Therefore, Gold is vulnerable to hits during the time China takes its foot off the accelerator pedal. China has found a way to purchase high volumes of Gold bullion at a discount. The discount is essentially the EuroBond sovereign debt discount under distress, which might be in the 10% to 20% range. So the PIGS debt will be rescued for a while, but with forfeit of their central bank gold, or borrowed gold.
TRADE AS GEOPOLITICAL LEVER
The last several decades have revealed some sordid bilateral contracts, critical deals like what was made with the Saudis. The USGovt pledged to protect the House of Saud and their kingdom, helped along by massive USMilitary weapon sales. The Saudis in turn would demand payment for crude oil in USDollar terms exclusively. The entire Persian Gulf has toed the line on US$ oil sales ever since, even other OPEC players like Nigeria and Indonesia. A difficult balancing act has been required, and still is required, to keep the peace and minimize the friction between Arab nations and the headquarters of the multi-faceted syndicate helm that has controlled the USGovt with tight reins for nine years and four months. The USGovt prefers to enforce and sustain its global domination with heavy handed banker tactics, financial market rigging games, export of crippling acidic debt, usage of the World Bank and IMF tools, and numerous clever devious nasty methods in the shadows best not described. Lately, a chief US export has been price inflation, most evident in food prices, courtesy of the QE2 program by the USFed. In the last decade, the chief export was toxic debt securities. The Chinese have a different approach, one that might have been more prevalent in the United States half a century ago. They have made 180 trade deals across the world, the exact number exaggerated. They do not place military personnel on foreign soil. They do not lace foreign banking systems with toxic debt. They establish multi-faceted contracts that involve the build-out of port facilities, railroad lines, schools, hospitals, and community living centers. They ignore ugly government facts of life like what exist in West Africa. They operate a sophisticated guerrilla economic warfare in sharp contrast to what the US does. The Chinese build partnerships, not without some friction, while the Americans ignite violent conflicts and demand that allies take sides, while extorting bank ruin, living above their means. The source of the ignition events is kept well under wraps. The ultimate motives of the Chinese is likewise kept rather quiet.
DOLLAR SWAP WINDOW
The most important factor to bear upon the financial markets globally in the last several months, the greatest change agent, in my view, is the creation of the Dollar Swap Windows by China. They are being erected in Europe. Their focus is on the PIGS nation sovereign debt. The debt of Greece, then Portugal, finally Spain very recently, and later inexorably Italy have found and will find a major buyer in China. They will buy PIGS debt at discount. They will win favor across the continent. They will gain advantages not well publicly mentioned. They will cut off geopolitical opposition in extremely subtle manner. They will open up the pathways for greater technology transfer. They will offer a semblance of stability to the currency markets in turmoil. They will spread their global presence, if not dominance. They will work some backdoor deals with motives to secure large volumes of gold bullion at discount. They will solicit more cooperation from previously devoted Anglo tools like the Intl Monetary Fund, and perhaps turn the IMF itself into a Chinese agent. They will possibly pave the way to a mild colonization movement, perhaps having already chosen Southern Spain over Southern California. The Mexican Civil War might have frightened them off any plan to send a million Chinese to North America, equal in intensity to the realization of rising hostility and trade war with the USGovt. Somehow friction with Basque Separatists and detente with Andora versus Spain seems tame compared to roving gangs of Mexican drug lord lieutenants ready to dole out violence on US soil, whose battle lines are drawn by tribal history far more than the US press reports. The systemic failure of Mexico was forecasted in the Hat Trick Letter in the summer 2007, with timing expected for some climax events and recognition in mid-2010, a correct forecast. The USGovt has gone from assisting China in economic and industrial development to blaming them for the depleted US condition. The bigger problem is obviously the deeply entrenched domestic devotion to asset bubbles and colossal bank fraud, run in parallel with the absurd destructive consumption mindset.
HIDDEN EURO IMPACT
So the Dollar Swap Window has been constructed, with expansion a certainty. The Chinese will have an opportunity to dump a big batch of USTreasury Bonds on a regular basis. My full expectation is that the Chinese will sell far more USTBonds than they purchase PIGS nation sovereign debt. In other words, they are building a dumping ground. Key parts of the equation are that the Europeans have been promised a willing buyer (although with ulterior motive) in the Chinese for PIGS sovereign debt. The Germans are sick & tired, fed up to the gills, in supporting the Southern Europe welfare system which identifies the broken element of the faulty European Union. Its foundation had cracks from the start, more than the Jackass recognized admittedly in past years. The Europeans have been promised some important support for the embattled Euro currency. Every time the Greek crisis made the news in past months, the Euro currency sold off with gusto. No more! A strong broad plank of support for the Euro has been provided by China. They are selling their USTBonds and buying EuroBonds with PIGS brand markers. The Euro currency has risen from a January 10th low of 129 all the way to almost 137 in this month alone. The rise has occurred despite the ongoing saga of PIGS debt distress. The Portuguese sovereign debt has been shored up by Chinese promises of purchase. The Irish Govt debt is a totally different animal. They accepted and swallowed the lethal IMF poison pill, cut their budget, and seen enormous deficits spiral out of control as their economy craters. They have resorted to monetary inflation approaching Weimar style as proof of the disastrous error in decisions. Translated to US size difference terms, Ireland has expanded their Euro money supply the equivalent of the US doing so by $12 trillion, all in the space of three months on the Emerald Isle centered in Dublin. They are not keeping Dublin tidy!
The financial news reports fail to mention the China card. They fail to mention that China is exchanging USTBonds for Euros in order to purchase EuroBonds with PIGS skin labels. They fail to mention that large Chinese hands are supporting the Euro currency. My belief is that the news media does not wish to stress the expansion of Chinese influence. For a century, or perhaps three centuries, the cultural and heritage linkage between Europe and the United States has been firm and solid. A grand Chinese wedge has been inserted, not so much between Central Europe and Southern Europe as between Europe and the United States. China will be crucial in casting the Southern nations aside from the European core. They will become wards of China, even for exploit. The Dollar Swap Window constructed by China has actually isolated the USGovt in serious ways. Relief to PIGS EuroBonds is obvious. The numerous other effects are not, and those effects are not in the news. They are main elements of the Hat Trick Gold & Currency Report, and have been for several months. The expansion to Spain was a forecast made in November and December, with confirmation coming by denials in Madrid.
Something unique and unusual has happened in the last three weeks. The Euro currency has risen noticeably from 129 to 137, but the Gold price has fallen from $1385 to $1335 per ounce. For almost a full decade, the correlation between the US$ DX index and the Gold price has been in the minus 70% neighborhood. What has happened in the last month has been a gigantic outlier. It is not just significant with umpteen standard deviations above the norm. It is in the wrong direction. My best guess is that the Chinese have temporarily halted their usage of the COMEX avenue for gold acquisition. They have permitted the corrupted COMEX to push down the gold price, using its fraudulent paper mechanisms. They have given free rein for the Wall Street maestros to lower the gold price for any IMF deal to secure European gold bullion in exchange for EuroBonds. Most gold & silver contracts are settled in cash anyway these days, since the COMEX does not have much precious metal in its possession. Imagine the day coming before too many months when gold & silver can be traded in contracts at the COMEX with no gold or silver metal exchanging hands. That day is coming, along with ruin of the GLD and SLV defaults, ruin, deep discounts in share price versus the metal price, and investor lawsuits. As for the Gold & Silver price, they will rise when the Chinese decide to resume buying. Right now, their attention is diverted to EU gold bought at deep discount, and in volume. As usual, they are thinking at least 20 years ahead. The Gold & Silver price will rise soon enough for the patient minded. The physical market wrests control always, as the mid-term forces take over.
OBTAINING GERMAN TECHNOLOGY
Germany is grateful that a new benefactor has come to Southern Europe. No longer does the German Govt feel burdened by the welfare enforced by the European Union dictum. The Germans are exhausted from $300 billion in annual welfare support of a deadbeat set of children in Portugal, Italy, Greece, and Spain. Over the last ten years, the drain of German wealth has been $3 trillion in total. A German banker has kept me up to date on the details. He frequently mentions that it is not a matter of willingness for the Germans to continue to support the broken nations of Southern Europe, complete with their grand deficits and inefficient economies, and greatly different work ethic, and their preference for song and dance and wine. The Germans are NOT CAPABLE of the continued drain of $300 billion per year, since the cost has turned into a nightmare burden.
In return for the outsized Chinese relief of PIGS debt, the Germans have offered key exports in technology. The main items are machine tools, telecommunications, construction equipment, and cars. Germany is the technology leader in Europe, with no close second competitor. France is a distant second. The German Economy is not a war economy, as they possess world class technology for domestic purposes. In the early part of the last 2000 decade, the technology transfer was significant from Japan to China. It enabled a great leap for Chinese industry. In many instances, the installed Japanese technology, like with machine tools and sophisticated manufacturing floor control systems, the Chinese leapfrogged the US easily. Enter the current phase, where the Germans are working with the Chinese in major deals. My view is that the Eastern Alliance, whose participants are Germany, Russia, China, and the Persian Gulf states, has many components not easily seen. They are working on the New Nordic Euro currency, complete with a gold component, in order to establish a replacement for global banking and commerce. It could become a new global reserve currency, all in time. Expect the alliance to include commitments for vast Russian resources, vast German technology, vast Chinese bank reserves, and guarantees of vast Arab oil supply. The Dollar Swap Window is an important component to the advancement of the Eastern Alliance, in which the US and UK are not players. They are shut out.
ISOLATE USGOVT IN TRADE WAR
A significant hidden effect for the Dollar Swap Window has been the interruption of the trade war alliance encouraged and solicited by the USGovt. Evidence was clear at the most recent G-20 Meeting of finance ministers. The USGovt attempted to find wider support for hostility against China. They all fell of deaf ears. The American delegation was embarrassed, isolated, and stunned. With the Chinese acting as chief debt benefactor in Europe, with the Chinese forging Asian, Arab, South American alliances, nobody joined the adolescent US chatter to confront and combat China. The USGovt is increasingly isolated in its trade war against Beijing. The great trade war will be bilateral, with perhaps no other allies at the side of either nation. Witness the battle for global control and leadership. A great transition is in progress, as the global leader mantle passes from West to East, from the US hands to Chinese hands. The US is expert at creating enemies. As the Islamics fade in perceived threat, enter the Chinese who "stole" the US jobs and "sit on" vast hoard of money from "ill-gotten trade surpluses" in great ongoing accumulation. The ugly truth is that 60% to 65% of Chinese trade surplus from 2004 to 2008 was derived from US and Western corporations having expanded on Chinese soil with factories, fully endorsed by USGovt and Western Govts, often with direct support of ministries. The Europeans are courting the Chinese, and that is big news. China is playing the Europe card at the geopolitical table. Maybe the numerous NATO military bases will eventually fly Chinese flags and be converted to commercial supply transport usage.
The hypocrisy is thick. However, the incessant annoying shallow charges of currency manipulation ring hollow when the US Federal Reserve announced the Quantitative Easing #2. They hypocrisy was extra thick, since the USFed had heralded an end to the 0% monetary policy. The Exit Strategy was followed by monetary inflation, US style, mimicking as best they could the Weimar program 70 years ago. The hypocrisy was doubly thick since the first QE round was promised to be the only round. It was followed by QE2, as forecasted by the Jackass all last year. Expect a QE3 later this year, to rescue states and muni bonds, but only after government pension obligations are abandoned and smashed. In the process, the United States has become isolated. Numerous trade deals exclude the USGovt and USEconomy. The new perverse grand trade partners for the United States are war continuation, war expansion, and a deep embrace of the Printing Pre$$, the monetary inflation machinery. As USTreasury Bond creditors have stepped away, the USFed has entered with powerful demand from printed USDollars, all done electronically, boasted at zero cost. In my view, the cost is infinite, with broad capital destruction and economic disintegration.
BACKDOOR GOLD PURCHASE
Word is gradually leaking out that the Chinese have a powerful ulterior motive to purchase EuroBonds, not so much out of altruism, not even so much out of global expansion of influence. THE CHINESE WISH TO CONVERT DISCOUNTED EUROBONDS TO SECURE HUGE VOLUMES OF EUROPEAN GOLD. The Beijing leaders must for instance have a plan to convert a fixed percentage of EuroBonds to gold bullion, even a cut deal with European leaders and bankers, arranged carefully in advance. They wish to replace the gold bullion possibly swindled by the USGovt. Any USGovt gold leases to European nations from past years might be repaid directly to the Chinese, to close out the lease contracts. The acquisition will NOT be front page news, will NOT be discussed by European leaders, and will NOT be publicly debated. The choice for PIGS nations has been and will continue to be default on sovereign debt or to cut deals with China that buy time. Since Germany has let it be known that their credit line is cut off, China has filled the void. But Beijing leaders are crafty. They have very likely secured deals whereby the IMF harlot will facilitate huge gold bullion sales to China with the EuroBond securities. The IMF has run past cover in lease close-outs from the USGovt, complete with grand deceptions. The key to unmask the lease close-out deals is that the IMF never identified buyers. There were none often. A sale without a buyer is an end to a short trade after the passage of years in time. Without some promised conversion to gold, China would not have cut the deals. It is the quiet underpin. The common denominator in the great majority of Chinese deals forged worldwide in the last decade is the secured supply line of hard assets, like commodities. They also have a preference for port facilities. Energy supplies, mineral wealth, and foodstuffs are the main objective of the numerous Chinese trade deals, which increasingly involve establishment of currency swap facilities and conversion systems. See Brazil and Russia, which do not bother to use the USDollar in trade settlement. In the future, look for commodity deals that supply China with fresh water.
Expect this trend to increase to the point that eventually the Chinese Yuan (renminbi) is a global currency with full convertibility. Later, it might serve as global reserve currency. What gives it the edge in such a role is its rise, compared to the USDollar's decline. The next decade will see the Redback (Yuan) more and the Greenback (US$) less in banks worldwide, and in trade settlement. The extreme wild card in the entire equation is eventually colonization by the Chinese elite. If they aid in government debt purchase, then hold title to property, while providing supply lines to a wide range of consumer products (someday cars too), what would prevent them from sending 100 thousand people per year to occupy abandoned homes and empty apartment buildings held under proper title? Nothing!
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com