Full Circle of Govt Debt Default
by Jim Willie, CB. Editor, Hat Trick Letter | December 15, 2009


The continuation of the bank dominoes took 14 months, but it occurred. The initial destructive impact craters were carved in the United States and England. To be sure, major damage was done to assets in Spain and Greece and other smaller nations in the last year, but their banks had remained insulated. The discredit and death of the central bank franchise system showed first clear evidence in September 2008 on Wall Street. The unique mysterious aspect of banking systems is how they cannot be rebuilt once they turn insolvent. They rot in place, a process accelerated by rotten ethical values, euphemistically called moral hazard. To be sure, much so-called money flows through the dead rotten parts, but nothing becomes resuscitated except balance sheets. And besides, those balance sheets only look better due to accounting rules changes that deviate from mark to market (reality). The distortions magnify and turn cancerous. See the outsized mortgage bonds with no value at all. See the foreclosed homes withheld from the market for sale in bloated bank inventory. See the big bank balance sheets with large entries of idle money sitting in the US Federal Reserve. The dirtiest American secret in the banking world is not monetization of bonds. It is that US banks are deeply insolvent and would have suffered a worse fate in the last year if not for extortion from TARP funds as well as rescue funds coming from syndicate contraband accounts. See the Raw Story article and reference to the United Nations Office on Drugs & Crime (CLICK HERE).

INITIAL BANG

Focus on the bank impact craters, not the assets within those bank portfolios tied to bonds and properties. The US housing market turned down, and the mortgage finance bubble burst. The primary victims were Lehman Brothers, Fannie Mae, and AIG, which all died. Fannie and AIG remain in the Intensive Care located south of the Black Hole down yonder under the USGovt tent. To say they have not died is pure denial at best and stupidity at worst, since they continue to generate grandiose losses, as most rotting dead bodies do. The process is called advanced cadaver decomposition, accelerated by the wondrous financial engineering acid reflux. The tales of destruction in dead banks from the initial bang extended to the AngloSphere as Northern Rock, Royal Bank of Scotland, and HBOS effectively died. It remains to be seen if the venerable Lloyds is an empty shell prone and a cave-in also. Nevermind the details of the many death spirals. Focus on the dominoes and their sequential steps in magnificent wreckage. Marvel at the total lack of recognition by the official spokesmen for financial reality at the USDept Treasury, Wall Street analysts, London analysts, and European analysts. They never comment on sovereign debt insurance or default. Both are covered in the December Hat Trick Letter.

One must inquire why the blindness. The main reasons are many, but two stick out from the aerial view. The bank leaders and their supporting cast are attempting to accomplish the impossible. They strive to revive a dead entity, drained of structural integrity, lacking in motivation to function in capital formation, devoid of vibrant liquidity flow, and directly attached to the syndicate strongholds where the drain continues. They live and operate within their Dome of Fiat Perception, whose major layer is the Dome of American Perception. Unfortunately, those working within the American fence posts suffer the greatest blindness, the tragic effect of engrained arrogance after years of incredibly broad bully tactics and criminal abuse. For those sleepy brain-dead in denial of criminal abuse, a challenge. Just identify where the prosecutions are for multi-trillion dollar bond fraud in global export of toxic mortgage bonds and their derivative brethren, perpetrated by protected Wall Street firms! If one cannot identify, please sit down and be quiet, since clearly integrity was perhaps checked in at the corporate gate in exchange for a paycheck. Wall Street prefers to call the fraud mere errors of judgment. And a murder spree at a shopping mall is an firearms accident! A closer examination can detect continuity in the Treasury Secy post, and in the Securities & Exchange Commission, both still showing Wall Street pedigree. They strive to keep the lid on Wall Street legal matters, and do a great job.



DELAYED SECONG BANG

Finally, the harsh reality from the weight of gravity and the passage of time resulted in a second bang. One can always question the motivation of the Dubai World default, and the fact that it occurred when the USDollar was badly oversold. One can question the wisdom to attempt to force Abu Dhabi to cover the bad debts or assumptions that it would cover the bad debts. One can point to a hidden motive to ruin Iranian assets and trade routes, since they own 30% of Dubai properties and benefit from restricted product shipment through Dubai corporations. Regardless, the aerial view is most important. The biggest victims are the London and European banks heavily exposed to Dubai debt. The Powerz prefer to call it a rally on the USDollar from seeking the safety and security. But to the rotten ramparts of the US financial core? HARDLY!! Instead what happened was that the British Pound and Euro currency fell during an expected retreat after a realization of upcoming declared losses. The US has fortified a false front from accounting marked to fantasy that produced a stock rally and recent culmination in the most fraudulent Non-Farm Payroll report in modern history.

The November Jobs Report was dismantled in several pages of the Hat Trick Letter Macro Economic Report just posted, a grand convenient fiction. The easy dismissal has escaped the mainstream lapdog US press. It included Birth-Death Model fictional adjustments (gigantic for past revisions), constant unstable seasonal adjustments, to begin with. Dismissal included weak TrimTabs data, flagging USGovt tax revenue data, a surprise downturn in ISM service sector data, and still prevalent Challenger Gray & Christmas large site job cuts to make a mockery of the ballyhooed report. So the USDollar rally occurred, give them credit, since they needed it to avoid major losses upon the US$ DX futures option expiration. The Powerz got their onions squeezed in a vise and short hairs clipped on the gold futures options expiration three weeks ago, but they avoided a second massacre on the DX expiration last week. Now the US$ has stalled at the downtrend line.

The second bang was not so important in providing a lift in the Dead Man Walking Dollar, as it was in signaling a resumption in the dominoes. The central bank system has its next shock in store. The downgrades to government debt for Greece, Spain, and Portugal given last week by ratings agencies signal upcoming debt related earthquakes. In the United States, the game is known innocuously as Extend & Pretend. The Europeans are gifted in the same chicanery. The entire banking system in Spain has kept housing inventory, whether from foreclosures or ruined projects, at still elevated prices, stubbornly refusing to mark them down the necessary 30% or 50%. As a result, Spain has a wide gap between bid and offer, and a huge inventory sitting idle, a stalemate that leads to sinkholes.

THE NEXT BIG BANG

The second bang from Dubai is the most important destabilizing debt event in 14 months, but minimized in the United States. The US press hardly even mentions the downgrades across European on sovereign debt. The US press actually boasts that the financial markets are handling the Dubai situation very well, and might be past it already. What incredible denial, but much expected. The second bang signals the beginning of sovereign debt defaults, several of them, and the reshaping of Europe, both with the European Union and the Euro currency. The movement toward a Parliamentary European Union might soon be dead on arrival. The split of the Euro currency is soon to become a reality, a forecast made months before the Persian Gulf debt default forecast. The prudent action is to put the Lisbon Treaty on hold while member nations default on sovereign debt.

Spain's Govt default will soon default. The reality of proper accounting for property writedowns and the corresponding bank debt losses will have a calamitous effect. Over 20% unemployment and the powerful recession in progress will ensure a Spanish Govt debt default. But the immediate fireworks are seen in Greece, where the Premier Papandreou has shown defiance. He will not permit the nation to undergo the mindless reckless coerced IMF restrictions and guidelines, with the workers of Greece suffering. The past record of such IMF strictures results in permanent crippling of nations, with too many precedents to fill a single page. Something very unusual comes to Greece in response to official defiance, something unprecedented yet powerful and unpleasant. Riots will return to Athens, with much greater force and intensity, and spread across Europe. But the spillover of emotions will lead to much bigger events. The momentum of Spanish and Greek defaults will kill the European Monetary Union, and thus the EU itself. The re-emergence of the Deutsche Mark is assured, except it will be called a variant of the Euro. The codenames to date are the Core Euro or the Nordic Euro. It will become the official currency of Germany and certain stronger Central Europe nations with a trade surplus. If France manages to be included in the Core, it will be a miracle and pure gift. The Germans will need squires to carry their bags, an expedient perhaps. Effects from the currency on trade export will leave France reeling but Germany struggling.

AFTERSHOCK BANGS

Once the cracks in Europe are broken wide open, the minor European nations will fall like flies trapped in a hot summer window. The Baltic States are weak and will no longer be carried. But the bigger and more visible tragedies will be seen in Eastern Europe. A curious malformation was constructed in recent years. The Eastern European nations attempted a reconstruction, with new industrial development. However, they went too far on the mortgage side, emulating Europe, England, and the United States. In doing so, they mixed in a deadly potion on the mortgage finance formula. The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and will probably all default on sovereign debt. The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts. The aftershock bangs to the Baltic States and Eastern Europe will set up a powerful additional event that will be seen as a climax.

CLIMAX TO EUROPEAN BANGS

At least one major European nation will suffer the ignominy of a sovereign default. By this time, Spain and Greece will have been wrecked, along with Portugal, possibly Italy also, and maybe even Ireland. The prime victims to close the process of sovereign debt default will include France and the United Kingdom. Considered untouchable, these nations will succumb to the wretched financial foundations that befall them. France unfortunately has too many similarities to Spain, which debtors cannot overlook any longer. The United Kingdom unfortunately has too many similarities to the United States, which debtors cannot overlook since the UK cannot print money like the Americans to buy more time, or draw upon clandestine sources of funds. The UK will run out of time. With the French and British defaults, the game goes ballistic and enters the TWILIGHT ZONE.

RUN ON THE USDOLLAR

Some might look at a dangerous run on the USDollar and a severe decline being the primary requirement for a rise in the gold price. It is true that for a long time the most heavily correlated factor for gold rising has been the US$ falling. A negative correlation has been vividly clear. More importantly though, a transition has begun in the last few months. The most important factor for gold has become, and will continue to be the falling value of the major currencies, all the major currencies, not only the USDollar. One must exclude the Japanese Yen in such an argument, since its 0% interest rate has rendered the Bank of Japan a neutered central bank. Watch the BOJ now, as it actually defends against profound damage from a rising Yen currency in the unprecedented process of an unwind to the grandest carry trade ever connected to financial engineering machinery. In fact, a handoff from the Yen Carry Trade to the Dollar Carry Trade is exactly what the USFed and USDept Treasury wish to interrupt. Never in history has a carry trade been installed to drain the vitality of the global reserve currency, to force and retain a near 0% interest rate, and to enable a continued falling value in the US$.

The most important factor for Gold, worth repeating, has become, and will continue to be the falling value of the major currencies. The entire gaggle of currencies is in deep trouble from government sponsored debasement. The entire gaggle of central banks is in deep trouble from discredit to their franchise system. Gold will rise in a powerful manner from the debasement of the major currencies, in particular the USDollar, the Euro, and the British Pound. The process of currency destruction will involve rotations. The events of the last month have shown that severe losses by London and European banks, from Dubai debt default, bring about an indirect lift in the USDollar. It occurred from a selloff of the British Pound and Euro currency, whose banks are lined up for new profound losses. The Powerz portrayed the Dubai events as a flight to security in the USDollar. If so, why is the long-term USTreasury Bond yield rising? The concept of retreating to a currency, the US$, with trillion$ federal deficits, an insolvent banking system, and an economy struggling under the weight of 25% homeowners insolvent on their home loans, IS TOTALLY LUDICROUS. Soon the counter concept of retreating from a currency into Gold will be better understood.

The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed. When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner. Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon. Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months.

THE MAIN EVENT IS USTREASURY DEFAULT

No forecast invites more private anger, insults, dismissive comments, and generally negative email than my forecast made in autumn 2008 of a USTreasury Default. The climax of the string of global sovereign defaults will be the government debt default for the USGovt, in the USTreasurys. Events in the last year support the forecast. Federal deficits are rising dangerously, over a trillion$ annually. The Greenspan-Guidotti criterion for debt default has long ago been triggered, even assuming the USGovt OWNS ANY GOLD. It does not. Rather it owns clear ledger items called 'Deep Storage Gold' that is not deep in underground vaults, but deep in mountain ore deposits, not yet mined, kept very secretive. The short-term USGovt debt is over $2 trillion, closer to $3.5 trillion if immediate debt finance is counted, as in the next 12 months. The Stimulus Bill was a travesty, more wasted funds and opportunities. The TARP Fund was an $800 billion slush fund, clouded still in secrecy. The foreign wars are a sacred big money loser, with more deficits associated. The competent economists like former USFed Chairman Volcker warn that structural reform is non-existent in the USEconomy and financial sector. Volcker further warns that derivatives have done great harm, and contain no value, only a shift of financial rents. The Global Paradigm Shift is in full force since the spring months, led by the twin concepts of diversification out of US$-based reserves, and of the movement to establish an IMF basket currency as an alternative for international commerce and transaction settlement. The end of the US$ for crude oil sales has been written on the walls. The end to the US$ credit card with unlimited balance is soon to end.

Those people who act as naysayers, even to offer private criticism for the USTreasury Default forecast, seem never to grasp the above arguments, all of which have absolutely zero precedent. They did not foresee many important events, each of which were important Hat Trick Letter forecasts come true. 1) They did not foresee the insolvency of the US banking system. 2) They did not foresee the broader breakdown and wreckage in the mortgage finance industry beyond subprime. 3) They did not foresee the severe whacking to the British Pound. 4) They did not foresee the nationalization and insolvency of fraud ridden Fannie Mae. 5) They did not foresee the downturn and endless US housing bear market decline. 6) They did not foresee the heralded end of the Petro-Dollar, as in exclusive US$ usage for crude oil sales. 7) They did not foresee the Persian Gulf debt shock wave. In fact, they do not foresee anything except the sound of their own voices. THEY WILL NOT RECOGNIZE THE USTREASURY DEFAULT, MOST LIKELY TO COME AS A FORCED DEBT WRITEDOWN WITH DEEP CREDITOR LOSSES. We are in historically unprecedented times. Look for a new USDollar to be used inside the United States fence posts, since the USGovt does not control contracts conducted globally. The devaluation of the US$ will come full circle, and lead to an implosion internally.

TRIGGER EVENT, INSOLVENT USFED !!

The US Federal Reserve is under fire. Many in the USCongress wish to force audits of its balance sheet. Many in the USCongress wish to determine what it does with hundreds of billion$ in USGovt funds. Many citizens in the United States wish to understand its everyday operations and where its loyalty lies, let alone how it manages to fail at both its primary functions. Its defenders cannot come to grips with how the US$ has fallen over 98% in value since its inception. Its defenders cannot come to grips with how the USEconomy is stifled by near 20% unemployment (when those without work are counted). Its defenders cannot justify, or even permit true statistics, regarding the powerful monetization of US$-based official bonds. We are witnessing the Weimar-ization of the USFed and the USTreasury Bond and the USDollar. Once again, American economists ignore history, choose to rewrite it, and ignore the path leading to increasingly damaging cycles. This cycle is systemic, not a business cycle, not a credit cycle, and it contains a cliff much bigger and deeper. The train wreck in progress will culminate in a USTreasury Default.

Put aside the growing debt of the USGovt for a moment. Put aside the growing balance sheet of the USFed for a moment. Put aside the dogmatic belief that the USFed can print money to alleviate financial problems for a moment. Put aside the shifting sands notion that the USDollar will remain the safe haven for a moment. Instead, consider two important notions, monetization and balance sheet. The USFed has been monetizing USAgency Mortgage Bonds in the US credit market, in fact a colossal amount held by foreign central banks. The USFed has been monetizing USTreasury Bonds both by the domestic primary bond dealers, taking their unsold inventory merely one week after auctions. The cash value from foreign mortgage bonds serves as a monetization tool for foreign USTreasury bidding at the same auctions.

Lastly, just look at the USFed balance sheet and its ratio makeup. The USFed is bond buyer of last resort. In expanding its balance sheet, newly acquired assets have terrible quality. The USFed might actually be insolvent here & now due to rising mortgage bond purchases. Half their balance sheet is mortgage bonds. If they are worth just 6% less in true value, the USFed is broke. My conclusion is that the USFed is $100's of billions in the red. Nobody seems to care, believing they can just print money and eliminate their insolvency. It aint that simple.

The US Federal Reserve is killing itself by massive purchases of badly impaired assets, often the toxic assets almost no banks or investors want. Sure, it is also debasing the USDollar in doing so. The most dangerous assets under heavy accumulation are the mortgage backed securities issued by Fannie Mae and Freddie Mac. Demand for them is nonexistent. In the process the USFed has ruined its balance sheet. The ruin has occurred in just the last 12 months. Instead of acting in its historical role as the 'lender of last resort', the USFed has on its own expanded its mandate to become the 'buyer of last resort.' The end result is powerful, as they are a Substandard Junk Bond Warehouse. The destruction of the USFed balance sheet is apparent from the following chart with data, prepared by BusinessInsider.com. See the light blue Fed Agency Debt in the upper right, the cancer that grew upon their balance sheet. Their true value is an order of magnitude lower than book value maintained by the august body. This central bank is walking dead.



Two major billboards must be written and read. 1) The USFed is insolvent. 2) The USFed is dangerously over-leveraged. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. Actually the number was 0.6%, to make a 76-fold increase in toxic mortgage bond assets on the USFed balance sheet. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. Just like other major banks such as the Wall Street firms, the USFed is very highly leveraged. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!

Here is where the insolvency risk screams out in obvious manner. Its listed mortgage bonds are 19 times greater than its capital, equal to 5.3% in inverse. So therefore, if the true value of these toxic assets is actually 6% lower than their recorded book value, the US Federal Reserve capital is depleted, effectively rendering it insolvent. It stands to reason that if Fannie Mae is insolvent, if Freddie Mac is insolvent, and if monetization supports their bonds, while the market shuns them, then the true value of the mortgage backed securities with their brand is less than 94.7% of their book value. Therefore one might safely conclude that on a strict accounting basis, the USFed is effectively insolvent. My simple guess is that the USAgency Mortgage Bonds on the official USFed balance sheet are worth perhap 30% to 50% less than cited on their books. That would leave the USFed insolvent by 15% to 25%.

One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!

THE LEGITIMATE & TRUE SAFE HAVEN

That valid haven has been gold & silver for thousands of years. It will continue to be the safe haven. The major global currencies are being horribly debased as major governments fight off insolvent banking systems. In doing so, they have set up conditions for a string of sovereign debt default incidents. They will occur like a string of dominoes arranged in a global circle. The process was begun in the US and UK with broken banking systems and extraordinary measures to deal with it, like bank aid packages, stimulus packages, and liquidity facilities out the ying yang. The naive crowd thought the process ended when the US, UK, and Europe responded with official government rescues and aid, complete with certain nationalizations of key banks and financial institutions. Dubai defaults demonstrate the process continues for credit market crises. No climax has come, but the future holds plenty.

During the rotational lifts and fades of the major currencies, the one constant has been and will continue to be gold & silver. Notice today Tuesday December 15th, the Euro currency is down 130 basis points to the 145.3 area, but gold is flat on the day and silver is flat on the day, almost no change in each. Other warning signs remain, as the crude oil is back over the $70 mark and the 10-year USTNote yield has reached 3.6% in a recent rise. The so-called USDollar rebound has occurred with a rising long-term USTreasury yield, a contradiction for any claim of a flight to safe haven. The only lift for any US$ counter-trend rally come from walking atop the broken structures of other major currencies. The grand rotation during defaults will lift the Gold & Silver prices tremendously. Watch the back door vulnerability. As central banks and sovereign debt securities undergo a powerful unprecedented siege, their defense of the Gold-Dollar balance beam will vanish. British and European weakness does not translate to USDollar strength, not with destroyed finances for the USGovt and an insolvent balance sheet for the USFed. It instead translates to strength in the Gold & Silver bastions for monetary integrity.

Copyright © 2009 Jim Willie, CB

http://www.financialsense.com/fsu/editorials/willie/2009/1215.html

Timing withdrawals is always tricky....

Zero Hedge looks at the "monitisation debate", the key question who is actually buying the treasuries? You can be sure that the US government is..thats what QE is all about. The question is this; can Ben keep pumping the stimulus until it works and yet still "pull out" before hyperinflation and a reserve currency credibility crisis is well and truly conceived.

As a strategy it has all the same failings of the contraception technique: skewed incentives and an "agency problem" of deep discontinuities in the costs and benefits.

Hmmm.....

A bigger question is the degree to which the US stimulus is working, it looks like it probably; its enabling massive credit creation in China.....


The startling conclusion: $32 billion of Treasury Bonds spread across 7 CUSIPs, were purchased by the FED within 10 days of their initial auction and allocation to primary dealers. The amount purchased by OMOs represents an average of 32.4% of the total allocated to primary dealers in the respective auctions. Furthermore, almost two third of total OMO Operations for bonds issued in 2009, or $62 billion, affects Bonds issued within 30 days of the OMO purchase. These purchases account for a total average of 29% of the total amount allocated to primary dealers. While one may make the argument that on the run bonds are preferred on average by the Fed for purchasing and by the primary dealer community for selling, the data presents a marked skew in the Fed's desire to monetize very recently issued Treasuries.

The key questions remain: allocations to primary dealers in 2009 Bond auctions is an undisputed majority (55%) of all auctions - this is troubling due to the the recent change in the definition of indirect purchasers as well as the markedly reduced interest of foreign buyers such as China and other indirects, for US Treasuries. Could a reason for the Chinese lack of appetite be due to the fact that while primary dealers represent not just a majority of all Treasury purchases, that these dealers may also have an implicit understanding that come hell or high water for auctions that lack indirect interest, the Fed could potentially make any dealers whole on purchases and subsequent sales at a loss such as the highlighted CUSIP 91282LD0 example (explicitly, at a loss for taxpayers who have to fund the primary dealers shortfall, in this case the difference between 99-26 and 99-07)? Would the Chinese be interested in playing in a rigged playing field when indirects are potentially impaired vis-a-vis direct purchasers? Furthermore, is Bernanke pulling a Clinton and while claiming under oath the he is not monetizing debt, he is effectively doing just that on well over $30 billion in Treasuries, which the Fed acquires within 10 days of issuance? And lastly, is the rapid uptake by the Fed a means to goose up auctions which have a potential likelihood of failure: the 7 Year in question came hot on the heels of a 5 Year that for all intents and purposes was quite close to a failed auction? Absent an implicit backstop, which everyone knows the Fed is very keen on making these days: as the SigTarp demonstrated, to the tune of tens of trillions of dollars, what is the likelihood the 7 Year would have fared as well as it did, had not the primary dealers really stepped up, for reasons known and unknown.

Zero Hedge is not making any claims, but merely asking questions. And while we appreciate the opinions of self-professed experts such as John Jansen, these answers should really come from the proper authorities - the US Treasury and the Federal Reserve of the US.

As time allows, Zero Hedge will next conduct a comparable study on Agency and MBS debt repurchases by the Federeal Reserve.

http://www.zerohedge.com/article/open-market-operations-and-statistics

Tame the big four before they suck us dry

The big four are on government life support and highly dependant on imported capital also guaranteed. Basically, with an economy thats income driven and not asset price driven we can't afford the big four. As for private banks, they privatise the profits of the good times and go bludging in the bad and for a whole bunch of reasons are done as profit centers. Commmunity banks, credit unions and State banks are the future. Australian economists have doen good work on the economic rationale for public ownership. The bottom line is that if irresponsible lending, rising household debt, and unaffordable house prices have caused a financial crisis in the USA we’re in for a bigger one here.

Since the financial crisis began the Big Four have increased their share of the mortgage market from 80 per cent to 92 per cent and taken over non-bank lenders such as RAMS and second-order banks including St George and BankWest.

The open letter expresses concern at how the banks are using their privileged access to government guarantees, saying they are "rushing offshore" to expand even though Australians are "repeatedly told that our banks were lucky not to have had substantial overseas exposures".

The banks have been under fire for failing to pass on to mortgage holders the full cuts made by the Reserve Bank. Yesterday the Reserve left its official cash rate unchanged at 3 per cent.

The open letter is signed by economists who have advised both sides of politics, including Christopher Joye, chairman of the former prime minister John Howard's 2003 Home Ownership Task Force, and Nicholas Gruen, chairman of the Government 2.0 Task Force for the Finance Minister, Lindsay Tanner.

The letter was delivered to the office of the Treasurer, Wayne Swan, late yesterday, and gained support from the ACTU president, Sharan Burrow, and the shadow treasurer, Joe Hockey.

But a spokesman for Mr Swan appeared to reject it, saying Australia's financial system had performed "very well" during the crisis compared with others and the Government was "not contemplating" a systemic review.

Dr Joye, who runs the research and investment firm Rismark, said Mr Swan's response was an example of the complacency the open letter warned against.

"Everybody knows that providence has played a part in Australia's ability to skate through this crisis. When a coalition of top academic economists calls for a review to evaluate improvements to Australia's decades-old regulatory system, politicians should listen," he said.

The letter says Australia would "do well not to discount the possibility that a roll of the dice left us without more significant system failures" and adds that "in future, we may not be so lucky".

It was also signed by Joshua Gans, a professor at Melbourne Business School, Stephen King, a Monash University professor and former ACCC commissioner, John Quiggin, a professor at Queensland University, and Sam Wylie, a management consultant.

The letter refers to two inquiries into Australia's financial system - the Wallis inquiry of 1997 and the Campbell inquiry of 1981 - and says much of what they brought in is now out of date. It says a new inquiry would examine whether the banks should pay a "systemic capital charge" to account for risks in their business and whether they should have to accumulate capital in good times.

http://business.theage.com.au/business/peoples-bank-to-break-the-big-four-20090707-dbtx.html

No early end to QE ~ Yet more "old maid's cards" to get loaned out

Bond dealers are in trouble once the secular trend ends....

NEW YORK, July 7 (Reuters) - The Federal Reserve will start on Thursday to lend the debt issued by government-sponsored mortgage agencies in a move to expand the central bank's program to help bond dealers raise short-term cash, the New York Fed announced on Tuesday.

The Fed's daily lending program, in which primary dealers may use borrowed Treasuries to raise short-term cash will be expanded to include debt issued by Fannie Mae (FNM.N) (FNM.P), Freddie Mac (FRE.N) (FRE.P) and the Federal Home Loan Bank System.

The U.S. central bank has been tweaking the programs created to combat the financial crisis and to end the current recession.

The latest move offers another option for dealers to raise short-term cash. It also signals that investors might be willing to accept slightly riskier collateral in exchange for cash, given the improvement in credit conditions since the peak of the credit crisis.

One analyst said this suggests the Fed is in no rush to unwind its quantitive easing programs to stimulate lending and overall growth. There have been concerns the Fed's massive purchase of securities and near-zero percent rate policy will cause a resurgence in inflation once the economy recovers.

"This is another blow for the early bum-rush-the-exit-strategy advocates," said George Goncalves, head of fixed income rates strategy at Cantor Fitzgerald in New York.

The Fed's securities portfolio, the System Open Market Account (SOMA), has swollen as the U.S. central bank has been buying Treasuries and mortgage-related securities in a bid to hold down mortgage and other long-term borrowing costs.

The Fed's combined holding of Treasuries, debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system and mortgage-backed securities guaranteed by these agencies was $1.223 trillion on July 1, up more than $700 billion from a year earlier.

The New York Fed conducts an auction at noon each business day where primary dealers -- firms that deal directly with the Fed -- can borrow U.S. Treasuries overnight from the U.S. central bank's holdings.

These borrowed Treasuries are considered the safest and most liquid securities.

Beginning Thursday, dealers can also borrow agency securities as well as Treasuries from the Fed for a small fee, according to the New York Fed. (Reporting by Richard Leong; Editing by Leslie Adler)


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Willie ~Watch the primary US bond dealers ~ Dresdner Kleinwort exit

My rebuttal reflects what China clearly manifests as a strategy. The rest of the large creditor nations are certain to either follow the Chinese path or set out on a parallel course. Past work has called the Chinese initiatives the spearhead against the USDollar. They realize they must smother (but not kill) the USDollar slowly, eventually suffocating it only at a time their many initiatives are fully deployed in place, much like a neck noose built into a straightjacket. The strategy has two important sides. First, they are protecting their outsized core of US$-based bonds of several stripes. They choose not to embark on any aggressive strategy that would seriously undermine their core holdings in reserves. However, they are not stupid. They see the unprecedented and colossal debauchery of the USDollar via trillion$ in new debt, with seemingly little or no concern over foreign reserve holdings, demands, or priorities. The USGovt believes it can deflate its debts one more time, delivering foreigners weak coffee at the lunch counter, and get away with it. They cannot time, not this time, especially since the USEconomy is stuck in a deteriorating spiral, the US banks are insolvent (despite phony accounting), US households are insolvent, and US industry is either absent or depleted. Foreigners are far too aware of the USGovt attempts to inflate debt away, actually an impossible task as those debts multiply like bacteria, or better described as CANCER. The US leaders want to reduce both the value of the debt burden and assure that its ongoing service costs are kept low. Foreigners are in revolt, threatening to pull the plug.

So foreigners have embarked on a broad response. Second, they are diversifying away from the US$ at the margin in bold moves. They are devoting NEW trade surplus funds to hard assets, like stockpiles, like grand production contracts, like large acquisitions and partnerships. They are regularly urging wider acceptance of the I.M.F. bonds as an alternative to storing surplus funds outside the US$ sphere. In fact, the Chinese lead the global initiative to end international contract settlement in US$ terms, after several decades. They do so with yuan currency swap facilities scattered across the globe like so many automatic teller machines. They do so with historically unprecedented bilateral barter accords, whose systems are being assembled and put into place. See Russia with China. See Russia with Germany also. The stockpile movement is not strictly a Chinese phenomenon. The Shanghai Coop Organization (SCO) recently completed a global meeting, with several key invited guest nations like Brazil. Their unstated purpose was to make concrete steps in contract settlements for a variety of commodities (from crude oil to natural gas to industrial metals), and do so without USDollar involvement. The June SCO meeting in Yekaterinburg Russia was hardly covered by the US financial press. Where it was covered, it was downplayed. Also, despite its many problems within the European Union, like economic recession and wounded banks, foreigners are flocking to the Euro currency, now over 141 and pushing toward 142.

NO, the major theme of 2009 on the Psychology Billboard is REVOLT AGAINST THE USDOLLAR AT THE MARGIN, NOT THE CORE. The foreign creditors and suppliers to the Untied States are in a coordinated global revolt position, being fortified with each passing month. That is the major theme of 2009. Notice the shutdown in Chinese purchase of USTreasury Bonds, down to a mere trickle since October. In fact, the objective of those in revolt is to play down their revolt, to talk nice to the USGovt (which controls an aggressive military), to utter empty words about support for the USDollar, but to work behind the scenes to undermine it AT THE MARGIN. Their exercise is akin to soothing and singing to a large wounded beast, as it is being surrounded, tied up, and muzzled. Their objective includes a pace of undermine intended to be gradual.



Foreign creditors wish to use their USTBond reserves in constructive intelligent manner. The Chinese recently announced a dedication to hedge funds from their vast sovereign wealth fund holdings, a likely avenue for USTBonds used as collateral in accounts. If properly deployed, with sufficient volume, additional USGovt debt can be used to fortify the commodity prices and prevent a perverse unjustified USDollar rebound, built upon failure and liquidation. Slowly but surely, the credit supply for the USGovt and USEconomy will be reduced to the point that later, unclear how much later, it will be cut off.

FOREIGN VULNERABILITY

Reading economic reports from foreign lands serves as a distraction to this entire ill-footed deflation versus inflation debate. Some like my outspoken acquaintance believe that foreign economic distress assures continued decline in US asset prices. They miss the main point. Foreign economic distress assures less trade surplus recycle into USTreasury Bonds, and further isolates the USDept Treasury into monetizing their debt. A DEEP ISOLATION COMES TO THE UNTIED STATES AS FOREIGN CREDITORS BOTH REFUSE TO FUND AND CANNOT FUND THE PROFOUND CRIPPLING US DEBT. Hidden within the bowels of the funding process is the gradual destruction in the official bond primary dealers. Last week, Dresdner Kleinwort decided to exit in its role as a primary bond dealer. The US-based dealers are sitting on a mountain of inventory, acting like a huge collection of boulders on a medium sized vessel at sea. Primary dealers now have a record $368 billion in Corporate, Agency (mortgage), mainstream mortgage bonds, and USTreasury inventory. And the vast bulk of their holdings of USAgency debt has less than a 3-year maturity. Just like the private equity groups and Wall Street firms, they are heading toward a day when they choke on their own feces.

The USEconomy is most vulnerable to price inflation, due to US$ weakness and revolt globally against it, as commodity prices are inversely linked. The USEconomy is perversely the most protected from price deflation. The deflationist argument might possibly hold some water with foreign economies, as their currencies rise enough to harm export trade, as their strong currencies keep commodity costs down. The Deflationist Knuckleheads at best have it backwards, and at worst continue to be lost.

http://www.financialsense.com/fsu/editorials/willie/2009/0701.html

Wandering from a dead past toward an unknown future

I beleive real change is afoot. The debt bubble in the final analysis is the endpoint of a money system which mispriced capital too cheap and therefore pumped up asset prices, then monitised to pay for lots of fossil fuels and consumption. With the illusions on which it was based shattered this credit creation system is completely busted. The centrality of Wall Street and the City has hit the brick wall of investor sentiment, physics (obsolete production paradigms) and politics and in the medium term will be disintermediated by a long credit winter. The baton has been passed to almost invisible organisms with snug burrows and good prospects that are out of sight to most.

The bankers who created a new alliance between private bankers and public government, the government bond enabled state ambition, used firstly to finance mercenary armies to pillage the competitors of Italian City States. Those bankers would have no difficulty recognising that a nation with the power to make its bonds the universal measure of value would ride its advantages to vast wealth, geopolitical clout and military power.

In the same way that we dimly recognise that much of what passed for financial modernity was the last gasps of that medieval order, they knew that secret interventions in the public market for such state debt can maintain the facade of solvency that covers the flight of insiders..

The architects of the old order of giant financial reptiles were also fully invested, naturally enough, in political power. Hence the bailouts to date, but the enormous cost has only bought a little time and in the end no tree grows to the sky and politics always follows the money. Money, barring a final hyperinflationary death rattle will be seen to now flow from first movers in a new technological, economic and social order.

The real deal ahead, imo, is all about conservation and efficiency and new production technologies. Its about a return to the classic human virtues and a recovery from a mania that was "all quickness but no movement" fueled by cheap fossil fuel energy. Only after rest and rehab will the West finally muster the sacrifice and effort required to build a cleaner, greener and clearly sustainable for the long haul future.

Popular culture will track the declining prestige of bankers and bondholders relative to innovators in manufacturing and technology and a new respect for greenies, farmers, scientists, teachers and librarians will slowly emerge.


So what we are in is that difficult period when those who will benefit from the great changes ahead lack power while those who will lose by them are well established with the means to defend the status quo.

We wander a no-mans land where reality is only slowly dawning where unless your absolutely sure about what your doing a burrow is the best bet.


The consensus view, far from grappling with the technical and political difficulties of implementing the required policy response, has failed even to admit the extent of the problem. Yet such an admission is a prerequisite, the first step in fact, of doing what needs to be done.

For almost two years now, our leaders have been in denial, burying the details and delaying the really tough decisions. In recent weeks, though, something has changed.


For the first time since the credit crunch hit the headlines in August 2007, reality is punching through. Powerful people are breaking ranks and saying what needs to be said. Pretty soon we may even begin tackling the root causes of this debacle by facing down the vested interests and making the changes necessary to rescue the Western world from years of economic stagnation.

Earlier this month, Angela Merkel, the redoubtable German Chancellor, took a stand and appealed for "a return to policies of reason" – calling time on "quantitative easing", the deeply misguided policy that has seen Western central banks double the size of their balance sheets to buy government debt.

QE was always a ruse to recapitalise insolvent banks by the back door, so their powerful executives could avoid admitting previous mistakes. Yet it has shattered the world's faith in the West's policy-making competence. It has destroyed any authority we had to tell economies elsewhere what to do.

QE will result in high inflation – in turn, destroying investment and jobs. And it will mean that, for years to come, Western taxpayers pay higher interest charges to service our government's debts.

Almost alone among the ranks of the seriously powerful speaking sense, Merkel was last week joined by Mervyn King. At the annual Mansion House dinner, the Bank of England Governor called for Gordon's Brown's disastrous "tripartite" reforms to be scrapped, returning banking supervision to Threadneedle Street.

That has to be right. UK banks have been able to act so irresponsibly because the authority to monitor them was split between the Bank and the FSA. In fact, Brown was so addicted to the political feel-good factor resulting from ever higher leverage that his system was explicitly designed to allow responsibility for reining in the banks to fall between two stools.

King also stated "it is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee".

These words echoed around the world. The Governor is calling for a re-instatement of the "Glass-Steagall" firewall – the removal of which allowed investment banks to merge with commercial banks. That meant taxpayer-backed deposits could be used by bonus-fuelled traders to make high-risk bets – in the knowledge the state would have to fund a bail-out given that ordinary voters deposits were involved.

By calling for a new "Glass-Steagall", King is taking on Wall Street and the City – among the world's most powerful vested interests.

Yet, politicians need to realise it's precisely because this safeguard was removed, and the "universal banks" became so big, that what started as a banking crisis has become a fiscal crisis – a crisis so severe that some of the world's leading nations could default and, at the very least, several generations of Western taxpayers will be saddled with the bill.

Other harsh realities are now also coming to the fore. New figures confirmed UK government debt is rising quicker than at any time in history – not least due to the bank bail-outs. As the recession hits tax revenues, May saw the biggest surge in monthly public sector borrowing since records began.

In this context, the Tories are now finally allowing themselves to face down Brown and his economically-literate allies – by admitting spending cuts are necessary. How ridiculous does Brown sound when he contrasts "Labour investment with Tory cuts"?

Then there is "deflation" – in my view, the "biggest lie" of all. In May, CPI inflation remained at 2.2pc – above the Bank of England's target. Were it not for the government's temporary VAT cut, the CPI would be 3.4pc – with the Bank have to write yet another public letter explaining why it's so high. We're a million miles from deflation.

As I've often said, the "danger of deflation" was always a myth – conjured up to give Western governments an alibi to pursue wildly expansionary fiscal and monetary policy and perpetuated by the vested interests benefiting from such largesse.

If we're to emerge from this crisis, and avoid similar future disasters, powerful figures now need to recognise and expose such inconvenient truths.

Alarm bells on public sector pensions

Some state employees work hard – and we're lucky to have them. But, in general, public-sector workers enjoy shorter hours, longer holidays, better job security and higher wages than their private-sector counterparts.

Yet 90pc of public-sector workers also have gold-plated final-salary pensions, compared to only 10pc in the private sector. They retire earlier too.

Our ageing society means most of us will reach for our slippers later and on lower pensions than previously thought. But state workers remain immune to economic reality – at everyone else's expense.

The costs of this injustice are vast. Between 2001 and 2008, our public sector pension liability officially grew 110pc to £794bn. A new Policy Exchange report by Neil Record puts the true figure at a staggering £1,104bn.

This massive debt doesn't appear on the Government's balance sheet. Yet each year taxpayers spend more on public sector pensions than defence. By 2040, the annual bill will approach what we spend on the NHS.

A former Bank of England economist, Record has a deserved reputation as an astute, non-partisan fiscal expert. His report's advisory committee includes some of the UK's top actuaries and the former chairman of the Inland Revenue.

The Tory front-bench needs to act on this study. Spin is not enough. The ratings agencies are watching – and public-sector pensions are high on their list of concerns.

BRICs at the top table

Last week, leaders of four of the world's largest economies – Brazil, Russia, India and China – met in Yekaterinburg, Russia. Known as the BRICs, these vibrant nations now account for almost 20pc of global GDP – the same as the United States.

Even this startling figure understates the importance of the BRICs, and the emerging markets (EMs) more generally. Together, they now drive 42pc of global GDP – and rising. That outstrips the US and EU combined.

Over the next few years, as the Western world stagnates, the EMs – with their low debts and highly productive workforces – will keep growing. Global investors largely agree. That's one reason the world's top 10 performing share indices so far in 2009 are all EMs.

Crucially, EMs now boast two-thirds of the world's foreign exchange reserves. The BRICs control the lion's share of that haul.

For the most part, the Western media has dismissed this first BRIC summit as "unimportant". That's partly because the G7 nations weren't invited. The reality is the BRICs' emergence on the world stage is transforming global commerce – and politics too.

These countries are crucial Western creditors. Insolvency looms, unless they keep funding our spiralling government debts. Western leaders need to grow up and realise the world has changed. If we don't accept the emerging giants at the top table, they'll create their own – resulting in a less prosperous, more dangerous world.

It's refreshing to see that you are one of the few writers in the mainstream press who is constantly reminding us of the forthcoming oil crises that the government doesn't want to talk about probably because they think that we're depressed enough as it is.

You may also wish to look into what the Chinese are doing to monopolise RARE EARTH materials e.g. Neodymium is essential for producing the super-magnets inside wind turbines and hybrid cars. RARE EARTH elements are also vital for producing batteries and other such requirements in our so-called "green future". Transitioning into this future is by no means going to be as seamless and painless as our short-sighted politicians make out. The Chinese are already planning their green and fossil fuel energy requirements into the 22nd century. They have already got their teeth into Brazil and the deep offshore Petrobras project. They are also starting to monopolise on RARE EARTHS. It doesn't look like there will sufficient resources left over for the economies of the western hemisphere to carry-on-business-as usual. Check out RARE EARTHS.
Mark Pearce
on June 22, 2009
at 06:01 PM
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We're currently in a paradigm red shift. Deflation and inflation are two black holes that are consuming each other. The "negative feedback loop" is still running full steam and still requires inflation as a component. The only way deflation "wins in the end" is by getting pushed over the cliff by inflation disguised in some form or another (debt, commodities and equities). Debt is the worst. The offspring of all the bubbles have come home to roost. Until the high cost of debt disappears to the tune of tens of trillions of dollars, it remains highly inflationary in its current state. Furthermore, debt begets debt because the marginal productivity of debt turned negative throughout the creation of all the fiat driven bubbles, so the debt will only become more expensive - THAT is inflationary and will continue to eat away at the operating margins of individuals, businesses, and governments.

If only Ambrose Evans Pritchard and Edmund Conway in the DT had your sense Liam.
Deflation was a lie sold to the masses with a concerted media campaign using amongst others Conway and Pritchard Evans in the DT. Its prime purpose being to prop up inflated assets (houses) and prevent the necessary correction from taking place. The 'elite' who run the western banking system have no intention of allowing a needed correction to take place. They would rather debase the currency and prop up assets and eventually return to business as usual even at the risk of hyperinflation and anarchy.

Can more Debt solve a debt crisis....I doubt it somehow..

The head of the European Union and Czech prime minister Mirek Topolanek has publicly said that the plan to spend nearly $2 trillion to push the U.S. economy out of recession is "road to hell". There is no reason to castigate Mr. Topolanek for his characterization of the Obama plan. True, it would have been more polite and diplomatic if he had couched his comments in words to the effect that "the Obama plan was made in blissful ignorance of the marginal productivity of debt which was now negative and falling further. In consequence more spending on stimulus packages would only stimulate deflation and economic contraction."

President Obama, like president Nixon before him, missed an historic opportunity in not ordering a complete change of guards at the Treasury and at the Fed. Now the same gentlemen who have landed the country and the world in this unprecedented débâcle are in charge of the rescue effort. The QTM, the corner stone of Milton Friedman's monetarism, is the wrong prognosticating tool. The marginal productivity of debt is superior as it focuses on deflation rather than inflation.

The financial and economic collapse of the past two years must be seen as part of the progressive disintegration of Western civilization that started with the sabotaging of the gold standard by governments exactly one hundred years ago when in France and in Germany paper money was made legal tender. The measure was introduced in preparation to the coming war, so that the government could stop paying the military and the civil service in gold coins, starting in 1909.

http://www.safehaven.com/article-13063.htm

Some commentary on this article my supkis..

http://emsnews.wordpress.com/2009/06/20/dr-fekete-talks-about-bond-markets/

No capital flight from China, more so the US

Bonds are all about war and empire finance.




Graph #1 is the Japanese carry trade year. Graph #2 is the collapse of global finances year. Note that London funneled massive amounts of foreign money into the US. Now, it is flowing the other way. And Japan funneled most of its international funny money which was denominated in dollars, to Europe in 2006-2007 while a year later, the flow switches suddenly from Europe straight to the US.


China is the ball at the top and the US flow to China was big in 2006 and then, this money flowed to the pirate islands in the Caribbean which is the ball near the bottom. OPEC is the ball at the very bottom of the graph. Notice that the Chinese money flowed from the pirate coves back into the US. Now, the OPEC nations are using euros so money is flowing from Europe to OPEC while money is flowing OUT of the US to the PIRATES [thanks to Bernanke and Geithner bailing out all these criminals!] and this money is flowing to…CHINA!!!


Now, isn’t that funny as hell? Money is NOT flowing out of China at all.

http://emsnews.wordpress.com/2009/06/14/g8-cant-stop-future-inflation/

Top Chinese banker Guo Shuqing calls for wider use of yuan

Guo Shuqing, the chairman of state-controlled China Construction Bank (CCB), also said he is exploring the possibility of issuing loans to trading companies in yuan, allowing Chinese and foreign companies to settle their bills in yuan rather than in dollars.

Mr Guo said the issuing of yuan bonds in Hong Kong and Shanghai would help to develop the debt markets in China and promote the yuan as a major international currency.

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It was the first time the head of a major Chinese bank has called for the wider use of the yuan, although a chorus of senior government officials have already voiced their concerns about the stability of the dollar and have said the yuan should be used more widely.

"I think the US government and the World Bank can consider the issuing of renminbi bonds," he said, asking for a "mutual cooperation" between the US and China to promote Chinese financial services. He said bond issuance could be relatively small, at between 1bn and 3bn yuan (£100m to £300m).

HSBC and Standard Chartered have both said they are preparing to issue bonds denominated in yuan.

Mr Guo is a former head of China's foreign-exchange administration, which manages the country's $1.9 trillion foreign exchange reserves. He said he was confident the yuan would become a major currency in the medium-to-long term.

Two months ago, before the G20 meeting in London, Zhou Xiaochuan, the head of the People's Bank of China, the central bank, published a personal paper proposing to replace the dollar as the international reserve currency. His call came after Wen Jiabao, the Chinese premier, asked the US to guarantee the safety of China's huge pile of US debt.

In April, the Chinese government said traders in Shanghai, Shenzhen, Guangzhou, Zhuhai, Dongguan, Hong Kong, Macau, Yunan and Guangxi could start to settle their bills in yuan, rather than dollars, paving the way for the currency to become more fully convertible.

The Big Collapse Could Be Very Near

A US bond collapse and capital controls are baked in the cake. The question is when and how. Hat tip to Duncan here.....


The Federal Reserve appears to be increasingly nervous about the long term bond market. This is serious. How panicked are they? After leaking a story on Friday, they are back at it on Sunday.

The Federal Reserve leaked to CNBC's Steve Liesman on Friday that they weren't targeting long rates. Why such a leak? Probably because the Fed did not want to appear impotent in controlling the long rate. So they put out the word through Liesman that they weren't targetting the long rate. Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?

The Fed can of course print money to buy up every Treasury bond in existence, but the inflationary ramifications would be Zimbabwe like, and crush the dollar on international currency markets. Are we near the phase where all hell breaks loose? I have never even answered, maybe, to this question before. It's always been, "no." Now it's maybe.

What really has me spooked is another article out this afternoon (on a Sunday) that Drudge has even picked up. It's a Reuters story by Alister Bull. The headline: Federal Reserve puzzled by yield curve steepening.

Translation, the Fed doesn't know what is going on, but they are really scared.

Here's more from Bull:

The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities...

An obvious culprit for the move in bond yields is the country's record fiscal deficit, which will generate a massive amount of new government issuance.

The U.S. Treasury must sell a record net $2 trillion in new debt in 2009 to fund a $1.8 trillion projected fiscal deficit, resulting from falling tax revenues, an economic stimulus package and sundry bank bailouts.

It's the Chinese, and any other Treasury bond buyer who follows the markets, that have pulled away, to varying degrees from buying Treasury long securities. No one wants to be the last one holding bonds, where the new debt about to be issued is in the trillions.

Bull continues with the part of the message the Fed really wanted to get out: With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

"I'm in wait-and-see mode," said one Fed official who spoke on the condition of anonymity. "We laid out the asset purchase plan and we're following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don't think we should be chasing a long-term interest rate," the official said. It's the same message as Friday. The Fed does not want to spook the world into thinking that it can't push long term rates down, so it says it is not trying. But if rates continue to climb, a panic out of Treasury securities is a very likely scenario. And Bernanke has only one play to force long rates back down, buy every long bond in sight, which of course is highly inflationary and puts upward pressure on rates. How's that for a dilemma?

The end of the current financial system, as we know it, may be imminent. If you would have asked me even two weeks ago if collapse was imminent, I would have said it was highly unlikely, now I am saying it is possible. Bernanke may be able to patch things up short-term, if he is lucky, but in the long term the U.S. financial structure is in serious trouble. There is just too much Treasury debt that needs to be raised. An international panic out of Treasury securities, even a slow controlled panic, means the Fed will be the major buyer. This will ultimately mean record inflation.

And keep this in mind, we have never seen a collapse of a currency like the dollar. Even the hyperinflation during Germany's Wiemar Period can not serve as an example. Since the dollar is the reserve currency of most of the world, a panic out of the dollar means more dollars will return to the U.S. shores than any country has ever experienced.

Other countries have had collapsed currencies, but never in the history of world of finance has so much currency been held outside a country of issue that could come flying back, almost on a moments notice. If the panic out of the dollar starts, even if Bernanke stops printing money (unlikely), all the dollars flying back into the U.S. could cause a huge price inflation all on its own.

http://www.globalresearch.ca/index.php?context=va&aid=13826

Endless monetisation of US debt ahead ~ Jim Willie

Behind the bushes, a powerful billboard message can be seen by the trained eye, accompanied by loud signals audible to the trained ear. The US Federal Reserve will be forced to continue the gargantuan monetization scheme. The first round was announced in mid-March, for $300 billion in USTreasurys and $750 billion in USAgency Mortgage Bonds. Most did not give a second thought, that it was a one-time event. WRONG! The monetization news dealt a powerful blow to global confidence in the US financial system generally and the USDollar specifically. The $1 trillion monetization will be repeated, and even become a quarterly event, much like a constant sub-surface flow of water to remove a foundation built upon sand.

The trip to China by USDept Treasury Secy Geithner should be viewed as a key reassurance to these important creditors, later to be viewed as a betrayal. The Chinese audience responded with loud laughter when Geithner assured them that their $2 trillion in savings was safe and secure. This was a national humiliation event, as Geithner has been muzzled. If only the USCongress had such broad wisdom and deep courage to laugh when Goldman Sachs henchmen ‘(Made Men’) from the syndicate gave regular speeches laden with deception and rationalizations for their continued fraud. Then again, the Chinese audience is not on the receiving end of graft and bribery, nor the object of revolving doors.

PLIGHT OF PRIMARY DEALER PARTNERS

The group of 20 to 22 bond dealers with contracts to sell USGovt debt securities are under siege, suffering a grand new plight. This is perhaps the best kept secret in the entire credit market right now. The USFed primary bond dealers are being squeezed. They actually have some power to respond. They are at risk, and face a possible rapid extinction. Despite the rising long-term USTBond yield, money going into USTBond purchases in general is growing like a powerful torrent. Demand for USTBonds is growing fast, very fast. Bond supply is rising faster than demand though!! The role of primary bond dealers is to hold inventory as intermediaries, a prospect that makes those dealers LOSERS right away. Auction sizes one or two years ago used to be $5 billion, $10 billion, even $15 billion on a given month. Just last week the official auction was for $110 billion, a 10-fold increase. The pushback comes from these primary bond dealers, who collectively possess the power to tell the issuer (USDept Treasury) and the agent (USFed) that buyers just do not exist in sufficient volume to absorb such huge regular supply. Fear has entered the hearts and minds of the dealers. They will soon tell their bosses at Treasury and the USFed that more monetization must come in order to lighten the supply load, or else face a renewed crisis, at least horrendous negative publicity. The credit market trucks are breaking down from the weight. The $300 billion monetization sounded like a big amount, but it is not. That amounts to two or three months in supply, if the $1800 billion in USGovt deficits is to be financed. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in failed auctions, crushing losses by the primary dealers, and their possible disappearance. Remember what happened to private equity firms stuck with their own stock and bond inventory? They went bust. That is precisely the risk to these bond dealers.

FORCED MONETIZATION COMMITMENT

The trend is clear for those with open eyes. The official bond auctions will continue relentlessly, probably well over $100 billion per month, for perhaps twenty months at least. Worse, the USGovt federal deficits will be much bigger than estimated. Here is a sobering fact. The USGovt tax revenues are down 35% year over year. For the first time in US history, the tax collection month of April 2009 was a net negative month. Expect the USTBond supply pressures to build, not reduce. My conclusion is clear. PURE MONETIZATION WILL SOON BE A REGULAR QUARTERLY PROMISE. IF NOT, THEN A USTBOND DEFAULT THREAT LOOMS NEAR ON THE HORIZON, OR A POWERFUL SUDDEN STOCK MARKET COLLAPSE WILL ENSUE. A monetization commitment forestalls a USTBond default at a later date.

Meanwhile, the economic impact of this unremedied crisis will slowly be recognized. Watch the job losses, which continue in huge numbers. Watch the home foreclosures, which continue in accelerating numbers. Watch the national home prices, which continue in steady declines. Recall that the USEconomic recovery that began in 2001-2002 was built upon a housing bubble as a foundation. The burst of that bubble is absolutely not a completed process. The national insolvency will take its toll on USTreasurys as a certain reflection. The debt downgrade (imminent, scheduled, expected, who cares its label?) of the UKGilts two weeks ago should have awakened the world to the perception of the USGovt debt as Third World debt paper. The government finances of the United Kingdom are no better and no worse than those of the United States. The global reserve status of the USDollar and USTreasury, the greater size of the USEconomy, these only guarantee that the impact of the US fiasco have broader shock waves. The fiasco is tied to the USGovt committed debt being transformed into debt securities, the USTreasury Bonds. It is a gigantic hairball. It is like a rattle snake swallowing a goat.

SPOTTING THE USTREASURY BLACK HOLE

The USTreasury Bond supply (skyrocketing) is growing much faster than the rising demand. The untold story is that demand is rising in stride to take the rising bond supply, FOR NOW. A rising USTBond long bond yield does not mean necessarily that money exits. Price is determined as demand meeting supply. The rising bond supply will be continuing, not just for a month or two, but for a year or two or three, maybe four. Projected USGovt federal deficits are due to occur for as far as the eye can see. Bond analysts knew that big problems would result. They have begun. Huge USGovt debt commitments ensure a skyrocket of continued USTBond supply. It is sucking in funds all over the financial markets, like a Black Hole. The stock market is at growing risk for its available funds. The primary dealers have the ability to put pressure on fund managers of a wide variety. Those managers will be urged to purchase more bonds, to alter their allocation ratios, and to respond to government pressures. Some will be lured to earn future favors. The Dow Jones Industrial stock index and the S&P500 stock index have begun to stall, after quite a run powered by short covering, relaxation of accounting rules, and widespread talk of early sightings of recovery evidence. The gargantuan outsized USTreasury Bond auctions must find funds to feed the beast, and the stock market is a nearby target. The great Black Hole of USTBond issuance and sale has the potential to draw the entire stock market into its vortex. The conclusion is simple, and the USFed must respond. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in painful stock market declines, the effects from which the public observes and understands well. Their pain usually results in hue & cry, and if not addressed, panic.

http://www.financialsense.com/fsu/editorials/willie/2009/0602.html

Rising U.S. bond yields may spark Credit Crisis II

NEW YORK (Reuters) - The global financial crisis may morph into a second, equally virulent phase where borrowing costs rise again, hobbling an embryonic economic recovery, debilitating cash-strapped banks, and punishing investors all over again.

Early warnings signs of this scenario include surging government bond yields, a slumping U.S. dollar, and the fading of the bear market rally in U.S. stocks.

Optimists hope that a fragile two-month rally in world stock markets, a rise in U.S. Treasury yields from record lows during the depths of the crisis in late 2008, and some less scary economic data all signal that a recovery is around the corner.

But gloomy analysts insist that thinking is delusional.

Once Credit Crisis Version 2.0 ramps up, foreign investors may punish the U.S. government for borrowing trillions of dollars too much by refusing to buy its debt until bond prices plunge to much cheaper levels.

The telling harbinger is benchmark Treasury note yields' surge to six-month highs around 3.75 percent this week, as investors began to balk at the record U.S. government borrowing requirement this year.

The U.S. Treasury plans to sell about $2 trillion in new debt this year to fund a $1.8 trillion fiscal deficit.

Heavy selling of U.S. dollar-denominated assets could trigger a full-blown currency crisis and usher in surging inflation, forcing mortgage rates and corporate bond yields up, undermining any rebound in economic activity.

"The financial crisis is a downward spiral with two twists," said George Feiger, chief executive of Contango Capital Advisors in Berkeley, California.

First came the banking crisis and a huge contraction of credit, starting in mid-2007 which resulted in the stock market panic of 2008 which triggered the deepest U.S. recession in at least two decades.

"Once you have got a recession you have good old-fashioned credit losses," Feiger said. "The second leg is now the consequences of the massive recession and it is just now working its way out," he said.

Investors, many of them foreigners who own a large chunk of the U.S. Treasury market, are steadily demanding higher yields.

The price of the historic rescues of banks, insurers, manufacturers, and securities markets, to prevent a complete collapse during the worst financial crisis since the Great Depression, has meant a record U.S. government borrowing requirement.

But by issuing so much debt, the United States risks repulsing a critical buyer: foreign central banks, who own more than a quarter of marketable U.S. Treasuries. China recently overtook Japan as the biggest such buyer.

"We are getting into that stage which I call 'the markets revenge'", said Martin Weiss, president of Weiss Research Inc. in Jupiter, Florida.

Weiss, known for his especially pessimistic views on the banking system and economy, recently published a book entitled: "The Ultimate Depression Survival Guide".

"The market attacked anyone who had the toxic assets," he said.

Now, foreign investors' primary target is the U.S. government because it has bought many of the tarnished securities from banks and some of the failing institutions itself, but the selloff will soon spread to all U.S. dollar-denominated assets, Weiss expects.

Selling could push up the 10-year Treasury note's yield to about 6.0 percent Weiss warns. For now, he urges investors to stash much of their savings in short term Treasury bills, which carry minimal interest rate risk.

Foreign investors are running out of patience with the U.S. government's debt issuance, he argued.

"What happened at the end of this month is the beginning of the end of that goodwill period," Weiss said. "There could be a major near-term selloff in the dollar."

This month, the euro has gained nearly 7.0 percent against the U.S. dollar. Meanwhile, the benchmark ten-year U.S. Treasury note's yield has surged to six-month highs around 3.75 percent, nearly doubling from its lowest level in 50 years of 2.04 percent seen last December.

Ultimately, corporate bond yields, although still at very wide yield spreads of more than four percentage points above Treasuries according to Merrill Lynch data, will also spike again, Weiss warned. The S&P 500 stock index may fall to 500 points in this next phase of the crisis he added, down from 911 points early on Friday, he said.

On the other hand, many economists reckon the U.S. government and Federal Reserve have averted a rerun of the Great Depression by swiftly orchestrating financial rescues and monetary and fiscal stimulus to offset sagging consumer spending.

Yet even as the U.S. economy and banking system struggle to recover from two years of turmoil, Europe's banks are even more debilitated, raising the threat of a second global systemic crisis spreading back across the Atlantic to the United States, some analysts fear.

"I think the most likely origins for a major crisis would be beyond our borders," said David Levy, chairman of the Jerome Levy Forecasting Center in Mount Kisco, New York.

China selling US denominated Bonds and liberalises financial system further

This is an interesting development but it has been reported from one of Weiss's pony's so seperating fact and pitch is impossible. But still.

By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets. The move hasn’t made much of a splash here in the United States. But I was in China, heading my annual investment tour of that country, when the announcement was made. And believe me when I tell you that China’s company executives, investors and government officials fully understand the implications of what’s just been done.

The move is very shrewd, for it brings about the confluence of highly complimentary trends.
For China-based companies that want to invest abroad, or that want to buy foreign companies, product lines, or other assets, these new dollar-denominated bonds will make it possible to do these deals more easily, and at a much lower cost.
Beijing had already launched an official campaign that urges “Corporate China” to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China’s government eased rules governing its foreign-exchange systems.
These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
And that comes at a perfect time for - up until now - the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these dollar-denominated bonds will be created inside China, effectively short-circuiting that worry.

Given what we know about China’s global natural-resource-acquisition ambitions, the first entrants into this new market will likely be one or more of China’s huge natural-resource concerns that are presently scouring the globe, creating captive supplies of the very commodities that will be necessary to ensure China’s future growth. My experience here suggests that high-tech and infrastructure companies will follow almost immediately. Many of those firms may head straight for Taiwan, thanks to newly inked agreements that make it easier for Mainland China companies to invest across the Taiwan Straits for the first time in decades. After that, these firms will direct their appetites for acquisitions elsewhere around the world.

Just how big could this new dollar-denominated financing market turn out to be?

At a time when Western debt markets remain mired in muck, it’s too soon to tell for certain. But Bank of China Ltd. analyst Shi Lei estimates that non-financial Chinese firms may issue as much as $30 billion during the next two quarters alone

QE, China and the Bond market

Interesting insights from W Joseph Stroupe, editor of Global Events Magazine www.globaleventsmagazine.com

The buying of longer-dated Treasuries by the Fed and potentially by domestic US investors would have the desirable effect of lengthening (flattening) the presently steep yield curve on sovereign US debt, making it both easier and cheaper for the Treasury to roll over the huge sums of maturing short-dated debt into longer-dated debt. That would also work to buy some time for the East to convert longer-dated assets into short-dated assets as its two de facto proxies (the Fed and US investors) carry the load of flattening out the yield curve and keeping longer-dated yields low.

The ultimate victor in the Fed/bond-market clash of wills will be the clever players in the East who see their holdings protected, at little cost and relatively low risk to themselves, while they work at an accelerated rate and in a multipronged strategy to divest of the riskier assets, accomplishing a sufficient measure of reduction of their exposure to dollar risk before the currency takes the awful brunt of the exceedingly dollar-debasing policies enacted in Washington during this crisis.

http://www.atimes.com/atimes/Global_Economy/KE16Dj02.html

US awash in a sea of read ink going fwd

A U.S. government auction of 30-year bonds met a dismal reception on Thursday, driving down bond and stock prices and raising fears the United States may face difficulty financing spending to stimulate the economy.

The $14 billion auction met below-average demand from investors, who forced the government to pay a higher yield. An extended trend of rising yields could force up longer-term interest rates throughout the economy.

It was the first 30-year auction since the government said last week it would move to monthly sales of long bonds, which some analysts say are harder to sell than other maturities.

"It was a horrible auction," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.

"It just does not bode well for interest rates. It's ugly, it's very, very ugly," Hurley added.

Willie ~ Gold's goin' up, the dollars in trouble and treasuries are missing

The battle for survival continues, as banks resorted to basic revisionist accounting (aka fraud) in order to claim improved health. Their reward was a financial sector stock rally of the most queer kind. The rally depended on all manner of contrived demand from the most sordid of chambers opposed to free markets, using tactics that are typically abhorrent. Next this beleaguered sector must withstand valuation checks and fair value scrutiny. Unless analyst dissent is declared illegal, the sector should fall in value. The new facade of Stress Tests has filled the void left by Financial Accounting Standards Board (FASB) concessions that led to phony balance sheets. These Stress Tests are neither a test nor a reflection of stress. They are rigged excuses for continued funds, and worse, might be used to coerce healthier regional banks into merging with dead Wall Street banks laced with insolvency and fraud. These ridiculously hollow institutions continue to engage in sales of USTreasurys with rampant failures to deliver funds in order to maintain cash flow, not mentioned in quarterly earnings reports. ''' This is called naked shorting, counterfeit, and not even complicated fraud. Imagine selling lemonade at a stand and handing over empty glasses. Regulators remain quiet on the subject, a continuation of permitted fraud from lack of oversight that continues from the last administration to the new. Nothing changed except claims of change. The US financial sector is reminiscent of an army of zombies that usurp the vitality of any firm they come in contact with, aided by a guiding government hand that directs living firms into their snares (and shares).

The USGovt should not take control of any bank or corporation unless it plans to fix it, carve off the rubbish, send the acid assets into the drain, discontinue lunatic contracts, and sell the remnant core in the open market. The cynical view, which is wholly embraced here, is that the USGovt is doing precisely that, except a long pause is designed to take place where Wall Street firms under the direction of Goldman Sachs (aka USDept Treasury) engage in profound fraud from TARP and other funds, until the system is sufficiently exploited, and then the big banks collapse from within before any resolution or sale can take place. Watch General Motors fail before it can walk (or drive) even a few months down the road. The primary purpose of government takeovers is to enrich Wall Street firms, and to conceal the past fraud on a gigantic unprecedented scale. Fannie Mae and AIG were nationalized to hide bond counterfeit in the former and credit derivative losses in the latter. One should be aware, certainly not a broadcasted fact, that the special inspector general for TARP funds Neil Barofsky working on behalf of the USCongress has already recommended 40 criminal investigations for fraud from the total over $1000 billion in its funds disbursement during his ongoing audit. The primary focus is AIG payouts, for which Goldman Sachs has steered some very suspicious redemptions at 100% parity. Wall Street would call the program a success. Administrators would call it a great thrust of desperately needed liquidity into banks. The public should know that the program is run by the same bankster criminals and is laced with the same disease that produced the original bank crisis: fraud. The absence of broad disclosure remains the cloak to conceal the massive abuse of public funds.

The US Federal Reserve is trapped. Not only does the 0% monetary policy put them in a corner without options, but ownership of a couple trillion$ worth of heavily impaired bonds has given the august overseer of failure and fraud and money laundering a bad case of constipation on a dead end street. Any change in either situation pushes USTreasury interest rates up, pushes up USAgency Mortgage rates, and renders great harm to the credit markets. The dirty secret is that the USFed is stuck in mud with a bad diet of offal on a road to certain ruin. The dirtiest secret of all might be that the USFed is engineering an orderly collapse of the USEconomy from starvation of Main Street of economic bread, namely credit.

GOLD STRUGGLES HIGHER

The gold consolidation has been like a crock pot slowly cooking a beef stew over a long stretch, as hungry observers whet their appetite with hors d’oeuvres with the promise of bountiful meals. The gold chart presented in the last articles took a more long-term view, as it described the formation of the Right Side Handle in a clear bullish reversal pattern. That consolidation continues. Since February when gold touched the 1000 mark, the selloff and profitaking have taken place amidst a sequence of extraordinary USGovt and US Federal Reserve policy decisions. Gold actually fell following the announcement of $1050 billion in monetized USTBonds and USAgency Bonds, if you can believe that! The reason was an avalanche of (probably illegal) short COMEX futures contracts timed simultaneously, much like calculated denial of oxygen to a runner at the start of a race. The propaganda was that investors were worried about continued deflation, without benefit of knowing what deflation is. Monetary inflation has been historically off the chart, which should include credit derivatives and futures contract commitments.

The incident at the end of March involving Deutsche Bank and the COMEX pointed out serious exchange violations in all likelihood, as D-Bank surely did not hold 90% of its short gold positions in collateral. The German flagship bank almost defaulted. None of the big four banks hold proper gold collateral, routinely, and regulators look the other way. That is just another form of naked shorting, without prosecution. D-Bank in a panicky fashion came up with 850 thousand ounces of gold so as to satisfy a delivery, precisely at a time when the Euro Central Bank just happened to sell 1.141 million ounces of gold. The EuroCB event was anything but ordinary, but was treated as an asterisked event, with no explanation.


USDOLLAR BREAKING DOWN

The USDollar has enjoyed an extremely queer paradoxical rally since last August, when the US financial system exhibited clear signs of insolvency, destruction, and failure. Many observers wonder expect the USDollar will weaken again without additional large scale financial firms going under in failure. Financial failures are most opportune to lift the US$ exchange rates. Must the USDollar be sustained by a steady stream of failing firms, emergency measures, and floods globally of USTreasury Bonds? Perhaps! Since the autumn, a double top failure is plainly evident in the dollar DX index. In April, yet another rollover occurred, but this third turn is not definitive enough to declare a triple failure. A break to 84 would give such a claim credence. The 200-day moving average (in green) has twice provided last ditch support necessary to rekindle another run after each breakdown. Notice the rounded top nature of the series of breakdowns, sufficient to be on the lookout for a retest of the 200dMA at 83, and a clear fall below that level. Such an event would serve as a confirmation of the end to this queer counter-trend USDollar rally.



USTREASURYS, THE LAST PAPER BUBBLE

The long-term USTreasurys remain the arch-enemy of gold. Since the historic failure of the US financial sector last autumn, and is inability to be revived, the USTreasurys have benefited mightily. The flow has hardly been a Flight to Quality, since foreigners are almost uniformly shunning the US$-based bonds. Anyone who bothers to examine the Treasury Investment Capital (TIC) reports can see this plainly. Yet the US financial networks continue to trumpet their falsehoods. See the excellent article entitled “The Big Lie” by Rob Kirby on the topic (CLICK HERE). He describes the key facades corruptly managed and maintained to sell the phony story. Forced hedge fund liquidation by Wall Street perpetrators in an engineered credit contraction, the resulting decline in commodity prices, the compensating USFed actions to monetize the debt securities sold by foreigners, all worked to create the impression of a USTBond rally accompanied by a perverse USDollar rise. Now time seems to be running out, as the tide might be turning.



The 10-year USTreasury Note principal value is exiting the pennant pattern that has bounded its price since January. It is early to declare, but this might be the beginning of a meaningful breakdown in long-term USTreasurys. They have been kept aloft almost by pure monetization, a policy finally admitted in mid-March, long after the policy was put into effect. The 50-day and the 100-day moving averages have each been breached (in blue and red), and next is a challenge of the 200-day MA (in green). The corresponding bond yield battle is being waged at the 3.0% level. The message is being painted on the Treasury Billboard, that the main bidder for long-term USTreasurys is the USGovt via the USFed. They are isolated, which puts risk to both the USTBond and the USDollar from lack of integrity and confidence. Something has to give and it will. My guess is the USDollar will take a bad tumble and fall, rather than long-term rates to rise. The mountain of credit derivatives stand like a lattice work of financial nuclear bombs, with fuses hidden and crisscrossed in the dark. Defense of this mountain of mass destruction potential will be to the end, even if the entire US banking system and USEconomy enter a downward spiral.

THE BEST PART OF ANY USTREASURY SELLOFF WOULD BE THE BENEFICIAL EFFECT ON GOLD, DUE TO THE POWERFUL FEEDER SYSTEM. If the USDollar is sacrificed instead of USTBonds, in order to preserve the USTreasurys, then gold will also benefit, but not as strongly.

RAMPANT USTREASURY FRAUD

Outright counterfeit of USTBonds is the likely province of JPMorgan. Its evidence probably vanished with that of Enron fraud when a certain building was demolished in the Big Apple on an important date known by two numbers that bracket the number 10. Naked shorting is more crafty and devious, but no less counterfeit. The details of naked shorting of USTreasury Bonds are very ugly, and surprisingly broad based. This is supposedly the most liquid and transparent market in the world. NOT SO!!! Market Skeptics (cited with links above) provides some excellent insight on the totally illegal practice and its clear consequences. They wrote,

“Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion. Broker/dealers have stopped delivering bonds. Holders of US treasuries are now scared to lend into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worst might go under… If investors turn their back on treasuries, the US government will find it increasingly difficult and expensive to raise money and roll over its maturing debts. Upward pressure on interest rates will occur at a time when the government needs to be loosening monetary policy in order to jump-start a domestic economy that is heading towards a depression. As a result of fails to deliver, the most transparently priced instrument available now has investors scratching their heads. The natural balance of supply and demand has been altered and the true price of treasuries has become obscured… Fails to deliver in the treasury markets are not a new phenomenon. There is data for fails for treasuries, agencies and mortgage backed securities as far back as 1990, says Susanne Trimbath, an economist, and former employee of the Depository Trust Co, a subsidiary of Depository Trust and Clearing Corp. Back then, though, there would be $50 billion of fails in a whole year, she says. That figure has grown enormously. Failures in US treasuries were 8.6% of all treasuries outstanding in the first five months of this year, compared with 1.2% in the first five months of 2007. That has ballooned further over the past three months, hitting more than $2 trillion for almost the entire month of October, more than 20% of the daily treasuries trading volume.”

Corruption has permeated the entire USTreasury market, which is the great alternative to real money in gold. Some alternative! One can safely claim that almost every single important market in the United States is corrupt. GOLD REPRESENTS AN ALTERNATIVE, BUT AVOID ALL EXCHANGE TRADED FUNDS. They just use your money to short gold, again in naked short sales. It will be physical gold that brings ruin to the Powerz in their corrupt paper chase charade, where price discovery has become a laughing stock.

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