16 October 2009

End of US$ Global Reserve Currency

The heralded end to the Petro-Dollar defacto standard completes the loop, the vicious cycle that will work to destroy the USDollar. In a sense, the US$ had to face an end, its sunset guaranteed when Nixon defaulted on its redemption value. The United States served as custodian for the global reserve currency. Naturally, the most damage will be to the US as a consequence of its twilight, especially after the recent era of fraud & counterfeit. Few look back to that date in 1971 as prophetic for declaring the USDollar’s days as limited and finite. The world will continue to trade the US$ in future years, but it must stand on its own value, based upon its own merit, the result of balancing its supply & demand, from the integrity of its fundamentals. Some climax events have come, or at least are previewed on an unfortunate path. Never in my memory has USGovt leadership been so disrespected. Never has Wall Street been so culpable for financial ruin, yet still in power running the USGovt finance ministries. The global revolt against the United States has many sides, but the financial aspect is most profound. It is hardly even covered in the US press. The US citizens have little comprehension of the enormity of a lost global reserve currency, with all its privileges, abused for constructing financial engineering towers and funding foreign wars. The direct effects will be felt in higher costs and assured supply, including credit.

No need to enter details, but the nation with each passing year resembles even more a very large Third World nation. Empty foreclosed homes, empty shopping malls, millions of jobless, discouraged business formation, nationalized failed firms, vanishing Middle Class, trillion$ federal deficits, monetized debt, reduced liberties, selective elite law enforcement, syndicate stronghold, huge prison population, controlled press networks, distrust of leaders, aggressive military, these are the characteristics that most people agree are unsavory. But when one takes them as a cornucopeia table display, they are described as Third World. This article will be shorter than most, since the more complete analysis is provided for Hat Trick Letter members. We are not fooled by the banter, the propaganda. We have been preparing for the surge in gold & silver, the powerful erosion in the USDollar, the ruin of the banks, the universal bust in bonds, the insolvency of the homeowners, and the army of jobless. Personal fortunes have by and large not been ruined. Some have thrived.


The swirling motion of the above loop is powerful. With the crude oil sales no longer taking US$ payments, the loop is completed. The financial engine in the Dollar Carry Trade now will have a commercial engine to further its momentum, to add power to the cycle, and force powerful lethal feedback reactions. Only when the financial and commercial sides fit like two giant interlocking pieces does the power take hold, much like a toilet assembled. The Fisk report on a 2018 timeframe for the phase out of US$ petro sales is more politically massaged information. The timetable will be just a couple years, doubtful more. The reactions from systems will force the timing to be much sooner, out of desire, out of necessity, due to broken systems that accelerate the breakdown process due to the announcement itself in feedback loops. By the way, the swirling motion in the vicious loop should remind people of a toilet being flushed. In the Northern Hemisphere, the motion is clockwise. Thus my representation, since my entire life has been spent roaming the north. To people reading from the Southern Hemisphere, imagine the elements of the graph in mirror image format. Thanks for the cooperation.


Entire foreign banking systems have been constructed with USTreasury Bonds serving as important assets in their foundations. The requirement was clear by virtue of payment for crude oil for Saudi and other OPEC nation crude oil. The Petro-Dollar standard required nations to prepare for payment in US$ terms, and thus build systems to make those payments. The banks act like giant ATM machines to dispense USDollars for oil payments. Many did so reluctantly. The purchase of crude oil is without doubt the largest and most important economic commodity purchased, next to food supply. The demand for USDollars will be sharply reduced in the future. Payment for crude oil in IMF basket terms will reduce the need for holding all those USTreasurys. Banking systems will change their structural makeup. They will adapt to other non-US$ swap facilities that aid in trade. One should be on the lookout for outright refusal to accept USDollars, the next step. The toxic bonds could easily lead to perception of USTBonds being toxic as well.


Nations have been struggling to diversify their FOREX reserves for the last few years. They react to the fundamental problems of the USEconomy, the USGovt deficits, the US Bank insolvency, the US Home insolvency, the dismissal of US Industry, and the trend toward nationalization. The foreign managers of finance suddenly awakened in 2005 to find they had accumulated a surfeit of bonds in the form of USTBonds, USAgency Mortgage Bonds, and US Bank Corporate Bonds, with no semblance of balance in their portfolios. Add to their reserves the Sovereign Wealth Funds, and the magnitude of the problem was deemed unreasonable, unwise, and unacceptable, in need of change. So foreign finance accounts have been buying more EuroBonds, even Chinese Govt Bonds, more Gold, more commodity stockpiles, and more foreign assets that assure commodity supply. China leads the way in setting the standard in diversification practices.


The USFed does the most talking about an end to its free money, also known as monetary easing. But the United States will be the last to raise interest rates, stuck without an Exit Strategy. Australia did not talk about it at all, but recently raised its rates by 25 basis points. Generally speaking, those who do too much speaking do too little doing. The crippled nature of the conditions in the United States dictate continued 0% easy money. The powerful players in the Dollar Carry Trade will ensure that the free money parade does not stop. It is self-sustaining. They will even influence the USFed not to hike rates. Furthermore, the next round of bank losses from commercial mortgages and prime Option ARMortgages will deliver big blows. Some astute analysts are already estimating the magnitude of the next round of bank losses. Any hike in interest rates would not only add costs to borrowers across the USEconomy, but add costs to the USGovt. They are, by the way, producing trillion$ deficits.


The endless series of stimulus for a moribund USEconomy, reduced payroll taxes collected as federal revenue, nationalized Black Hole costs (Fannie Mae, AIG, GM), current health care costs (Medicare), hidden banker welfare (TARP funds one pearl on a string), sacred military budget (contractor largesse & syndicate benefit), and stupid pork projects will continue to churn out gigantic mind-numbing federal deficits. The only reduction seen is in forecasts by official agencies, which bear little reflection to reality. The permanence of trillion$ deficits will be clear in another year. Removed stimulus, removed props, removed monthly special programs, these steps will cause a return to deteriorated conditions. The Clunker Bank and Clunker Home programs are well along.


The USTreasury auctions are the biggest congame since the Wall Street mortgage bond sales, whose monetization eclipses the Weimar machine. The primary bond dealers are required to bid on USTreasurys that come to auction. They are reimbursed in Permanent Open Market Operations by the USFed within a week or so. The US press does not notice or does not report or is told to look the other way. The foreign central banks turn in their USAgency Mortgage Bond to the USFed, which with newly printed money buys the USTreasurys offered. These central banks use the sale proceeds and additional funds drawn from the Dollar Swap Facility to bid on USTreasurys that come to auction. The US press does not notice or does not report or is told to look the other way. The USGovt continually promises the foreign creditors that no monetization of debt will take place. They lie. The true victims are confidence and trust, essential to any fiat currency.


Confidence is lost, never to return. It takes years to build confidence and trust, but only a few moments or days to lose it. Actions and developments in the last several years have contributed to a powerful and deep loss of confidence. In my view the mortgage bond fraud export combined with the Iraq & Afghan Wars to shatter respect, trust, and confidence. Nowadays, monetization worsens the lost faith as a crowning blow. Bully tactics by the US & UK for years added constant strain, producing resentment. The result is less support for the USDollar, and almost no cooperation for US$ and USTBond support programs outside the central bank franchise system.


As the Yen Carry Trade enters its final phase in wind-down, the Dollar Carry Trade will accelerate. Imagine, the global reserve currency in the US$ is used to fund a carry trade, from a Japanese handoff !!! The world has been turned upside down in its financial axis. No doubt about it. We live in a bond-driven world. National finances matter little compared to the interest rate yield offered to financial speculators, whose efforts are amplified by leverage. Take the Japanese, for example. Their trade surplus endured for 30 years. In the last year it vanished. Yet the Japanese Yen is rising versus the USDollar. The carry trade is seeing a grand handoff. The Dollar Carry Trade is a bond-driven phenomenon once again. Its power might be best seen in the Yen currency valuation, in its surprising rise. The Yen is analyzed in the October Hat Trick Letter report. The invitation for the USMilitary to depart Okinawa has some effect. The bond arbitrage has much more. The Japanese finance firms receive little attention. They are experts at running and exploiting the carry trades. They are switching programs.

If you believe all is well in Japan and Tokyo support will continue, then you miss the ‘Lost Lackey Effect’ from the last year. The Saudis will not carry the US bags any longer. The Arab squires will carry bags with Kremlin markings. The Japanese will not carry the US bags any longer. The Toyko squires will carry bags with Beijing markings. The chief strategist at a major Japanese bank Sumitomo today warned that the US$ might fall to 50 yen this year. That would be a 45% decline. Daisuke Uno at Sumitomo expects the USEconomy to suffer a second sudden recession. He said, “The US economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger. The dollar’s fall will not stop until there is change to the global currency system.” The strong warnings reflect the growing rift between Japan and the USA. The outcome of recent elections in Japan changed the entire bilateral landscape. The pro-American LDP party was ousted, a major new piece to the ongoing Paradigm Shift.


Gold reached 1060 this week, and silver touched 18. This is just the beginning. The pullbacks like today should be exploited to purchase more at discount. Purchases of gold at the London exchanges are being interfered with, due to basic problems of not having sufficient gold bullion to satisfy delivery demand, otherwise known as DEFAULT. Reports arrived privately cite the LBMA officials offering 25% more than contract value if high volume gold futures contracts are settled in cash. Two different central banks are scrambling to locate gold for the contracts, but much of it is substandard bullion with under 90% purity. Sounds like a default is right around the corner, and some members have their nether stones caught in a vise. CLEAR EVIDENCE SCREAMS OF GOLD HAVING A $1300 CURRENT PRICE.
The next target for gold is 1130, with a midterm target of 1300.
The next target for silver is 19 with a midterm target of 26.

The Bank of England news today was comical. The central bank is the most disrespected on the planet, for inconsistency, wavering, desperation, and cluelessness. Their table pounding in desperate confusion caused a big 200-pt rally in the Pound Sterling versus the Euro. The chief loser currencies in the current phase will be the USDollar and British Pound Sterling. They are both used toilet paper, long spent in wiping an empire’s dirt.

Copyright © 2009 Jim Willie, CB
Editorial Archive

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. 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.

Jim Willie CB is the editor of the “HAT TRICK LETTER” Use the below link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.


1 comment:

Patrick said...

He talks a lot of sense, but there's something in Jim Willie's writing style that makes me want to fade him.