A fine piece. News Kontent does not endorse paranoia and denial and asks if its the climate science community or the owners of fossil carbon infrastructure who have the biggest incentive to muddy the debate. We think the later.
CLIMATE CRISIS: CHOOSING
POLICIES FOR A NEW FUTURE
by Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission
December 9, 2009
Basic Complexity of the Issues
On December 7, some 56 leading newspapers in 45 countries took the unprecedented step of publishing a common joint editorial. The reasons for this were described by these papers as due to humanity facing a profound emergency. The editorial said that unless there is worldwide and vigorous common action, climate change will 'ravage our planet and with it our prosperity and security'. The same editorial gave examples of the grave menaces that it says have been building for a generation. It said :'Now the facts have started to speak: 11 of the past 14 years have been the warmest on record, the Arctic ice-cap is melting and last year's inflamed oil and food prices provide a foretaste of future havoc'.
In the same way, and with a little more creative networking of ideas, global warming and climate change can be blamed, or heavily implicated in many other fields. These can include erosion, salination of agricultural lands, high building land prices, global spread of seasonal and other virus diseases including influenza, economic migration from poor countries to rich - but not, for example, low natural gas prices or low interest rates.
Given the intensity of world mining, fishing, agriculture, industry, transportation and urbanization it would be surprising if there was no anthropogenic climate change, or human-intensified natural climate change. As the 'climate sceptics' say, world climate change has always existed: our problem, today, is accelerated climate change joining other long-term processes making a secure and prosperous future less and less likely. Among these, mineral depletion and bioresource loss or species extinction are major long-term features of the 'environmental pessimists' agenda, and a constant challenge to technological optimists.
Single and Multiple Causes
The search for key causes, or even unique causes, is constant but it is constantly frustrated by complexity, which itself has a one-way tendency to increase. This can be explained by the present global crisis issue of climate change. This change is certain, while global warming is not certain. The identification of CO2 as the overwhelmingly most important, or even the nearly unique driver of both global warming and climate change is also uncertain and theoretical, although saying this is not politically correct.
CO2 is at least the driver that we can act on, reducing CO2 emissions by large or massive amounts in a short period - which could or should also stop oil prices from rising, if oil demand is also capped or reduced. If we find that reducing CO2 in the atmosphere (or in fact, slowing its growth) does not slow climate change, but appears to reduce global warming, and helps slow the growth of world oil demand and limits oil price growth, and also helps launch "the green economy", this could be considered a large if partial victory. This might be the situation by let us say 2025.
In turn however this will demand the implementation and pursuit of very large alternate energy spending. This will particularly concern carbon capture and sequestration at coal fired electric power stations, which worldwide supply around 55% of all today's electricity. These already complex, high cost and uncertainly feasible long-term actions focused in the energy sector, we can call 'energy levers for CO2 reduction', but several other sectors are also clearly concerned. These include agriculture, forestry and other land use, where many accompanying measures and actions will be needed, also on a long-term basis, if we want to achieve the first goal of a final cap on global CO2 emissions, perhaps around 2025-2035, before moving on to large and reliable annual reductions in total CO2 emissions.
The dates are of course "fuzzy". Media and political attention is riveted on the renewable energy sources, where bigger and bigger targets are announced. Satisfying even 5% to 7% of world total commercial energy demand from non-hydro renewables like wind farms and solar photovoltaic power plants, by 2030, would however be quite a heroic task. This particular goal is costed by myself in published studies at around US $ 11 trillion in 2006 USD value, over 20 years. Many other spending and investment scenarios exist, and new ones are published almost daily. Amounts proposed are always increasing - but the most effective framework assumption of quickly achieving zero growth in world energy demand, then reducing it, is as yet rarely considered.
The reasons for this careful avoidance of the 'zero option' are so evident we do not have to list them, but can simply take the 'per capita' argument used by Chinese and Indian leaderships for refusing global, immediate and binding CO2 emissions cuts. If or when these two countries achieved even one-haf the present oil or gas intensity (demand per capita in barrels or barrel equivalent) of the OECD in 2009, their combined CO2 emissions from oil and gas burning would make any chance of capping global emissions impossible. The 'zero option' for both OECD and nonOECD countries is therefore latent, and certain in the future, but for the present is not politically correct.
This in turn and however generates further powerful complexities. Some of them are evident and others less so. Missing a certain key target, either national or global for a key date may make the set of options and policies related to attaining or achieving those goals obsolete or inapplicable. This is similar to problems in range finding and targeting of artillery fire, missile fire control, or celestial mechanics - exactly the bases of cybernetic science. Systems theory is needed for planning various 'critical paths' with various levels of redundancy, at various levels of confidence.
Global Warming versus No Global Warming
If there is no global warming (GW) why support actions to prevent or limit human-caused emissions of GW gases and particulates or aerosols ? Unfortunately for the sceptics, both sides in the climate change debate have substantial theoretical credibility and supporting scientific evidence. Modelling and forecasting planetary change of a 'simple thing' like daily weather requires the largest computing power outside the world's military. Weather forecasts are not always right, and usually there are few excuses offered by national and world weather forecasting institutions when they get their daily forecast scenarios wrong. In no way does this mean we lose all faith in computing power, and return to bark strips or tea leaves for weather forecasting, although removal of 'offending' tree ring data by GW researchers and theorists, because its 'performance' in showing constant GW was disappointing, is also too radical.
Exactly the same applies to intervention or non-intervention in global, regional and national energy economies. This can use a business application of systems thinking: the "marginal" concept used in business planning, which starts with a comparison of risks and probabilities for each action, at and for a certain time, and with various degrees of investment spending or intensity of action. If we take actions to reduce greenhouse gases, but find later on that human GW was actually insignificant or less than we feared, our net loss would be the cost of these actions, as well as hypothetical alternate uses for the same resources through the same period.
We however have another and much more certain driver for transiting away from fossil fuels and developing alternate and renewable sources and systems: Peak Oil, qnd the sure and certain depletion of the easiest and largest reserves and sources of oil, coal and gas. As with population control to limit the demographic crisis, this is another politically incorrect, carefully avoided driver for alternate energy, but in no ways prevents it from being real. Large spending to force energy transition away from fossil fuels and other resource conserving features of "the green economy" will also generate the benefit of earlier substitution of non-renewable resources in the economy, causing a situation very similar to that when coal started substituting wood as a major industrial heat source, or petroleum oil started substituting whale oil for street lighting.
If we take no action, the laisser faire path, there will inevitably be higher future monetary costs, and lost options, for correcting or mitigating the higher level of accumulated damage to our planet. Running out of oil will no longer be a theoretical graph curve, but a reality. Comparing the consequences of these two extreme alternatives (no action versus massive action) it is very apparent that the most basic lever for change - depletion of fossil fuels and need for alternate energy - will become more critical and costs will rise radically, if we do not soon act to replace non-renewable fossil fuels. This will probably be joined by action to cap and then reduce world total commercial energy utilization, preceded by this option becoming politically correct and able to be discussed. Not taking action, now, only pushes forward the date when we, or our descendents will have to take action. Calculating the 'opportunity cost' of different policy sets or ensembles will tend to show we have plenty to gain with little to lose by taking action now.
Policy Making for Transition
Current and recent policy making across the wide, interdependent and converging fields of energy-economy-environment and climate has always been sector isolated, often short term, many times ad hoc. This applies not only to public policy, but also corporate private enterprise and other entities and groups, all of which, however, have a common interest in a managed, optimized and predictable future. When results do not match expectations, locating the causes, bottlenecks, conflicts and interference between different policies, or elements of operated policies is usually difficult. Those responsible for setting policy of course seek 'overall best fit' or good 'system performance', but the areas where they should focus their effort are not necessarily clear, nor their actual choices. They are often left with no choice but to rely on ad hoc methods, on intuition, or abandoning current policies without attempting to bridge conflicting goals with various critical path modelling techniques. Doing this, could enable lower cost and effective reforms and modifications to be made, without abandon of the policy implementation structures and any cumulative positive results obtained.
This challenge will be especially strong as energy-economy-environment become more welded together, less easy to dissociate and treat separately. Negative feedback from incompatible and divergent policy mixes will rise quickly in cost, and could threaten overall progress towards the highest levels goals: preventing runaway climate change and substituting first oil, then gas and coal in the global energy mix.
Examples of this are easy to give. The long and hesitant process of generating recovery in OECD economies and elsewhere has included, or still includes government subsidies, cash gifts or soft loans to car buyers. Cars purchased are almost exclusively oil-fuelled, if somewhat higher fuel efficient than the traded in, and often scrapped cars, in some countries often including cars less than 6 years age. Given that car lifetimes in OECD countries are usually above 13 years, this economic recovery policy has at least two negative impacts. Future oil demand for private road transport tends to be maintained, and future subsidies needed to encourage trade in of these 'economic recovery cars' and replacement by electric or hybrid cars will have to be higher, than in the absence of the state aid to buying cars. To be sure other negative impacts can be included, for example subsidies given to private car buying make it difficult to also give subsidies to urban mass transit development, or intercity high speed rail.
Financing Global Energy Transition
One essentially avoided critical issue, at present, is financing what will inevitably be a worldwide transition away from fossil fuels. Although heavily implicated in, and basic to transition away from fossil energy to green energy, the linkage is presently not formal and open. More important for operation of what can only be a massive, long term and global process, no explicit energy transition fund or funding framework exists. Many reasons exist for the absence of decision leading to creation of a 'global energy transition fund'. These range right across the spectrum from scientific and technological, to industrial, economic, monetary and other factors, even political ideology, opposed to multilateral 'big government' or world government action. This type of action we can note is usually reserved for post-catastrophe, postwar situations. Climate crisis plus oil depletion have as yet to achieve that status. If we believe the statements of leading G20 politicians on the climate issue, this is an oversight that is now being corrected.
As noted by myself in previous articles (www.financialsense.com/editorials/mckillop/2009/0930.html)
we already face what will become radical either-or decisions in global energy financing due to spiralling needs for conventional oil and gas capex, versus ever growing estimates of what is needed in alternate and renewable energy spending. Choosing both is likely impossible even today, and will become yet more impossible by as early as 2020, notably because of further capex needs due to oil depletion being joined by gas depletion and global coal infrastructure limits by that date. Action to mitigate climate change by massive investment in renewable and alternate energy, as noted above, only jumpstarts certain inevitable longer term investment and spending decisions, not only in the energy sector.
This is a complex issue, not easily brought into the political arena, but planning ahead is always appreciated when it delivers proven, and provable results. To this end, therefore, financing frameworks will enormously benefit from systems-based design, definition and implementation. Upstream from this, the needed global policy mixes or ensembles for ensuring best possible 'system performance' will necessary include the consideration of energy, economy and environment as fundamentally linked and convergent.
A Few Conclusions
The pace of events in climate change alarm, and G20 government climate-related energy and economic policy (with environment soon to enter), all tend to underline the critical lack of coherent and mutually-reinforcing policy sets or ensembles. In addition, the lack of any real global financing framework or system for green energy transition will likely deliver even lower success or 'bang for the buck', than the complex, speculative, limited and specialized 'semi private', but in fact public-private, financing frameworks typified by emissions cap-and-trade. This could be called a worst case mix of public policy irresponsibility and incompetence, and private sector opacity and greed.
To be sure every possible financing method and process can be suggested. Mass issuance of 'citizen energy credits' is suggested by several NGOs and associations. The other extreme is similar. The two extremes meet in an increasingly possible IMF-managed creation and issuance of a new world money, the "CO2 Bancor", at least nominally restricted to energy-and-climate financing, but also designed to relieve pressure on the US dollar as world reserve money.
Green energy financing by strict market-only mechanisms is unlikely, now, simply because public expectations have risen fast with political grandstanding by G20 leaders, and because oil depletion will not wait another 5 years or more, for trial-and-error to eliminate inefficient and low net energy candidates, such as crop base fuel ethanol. By 2015, loss of world oil export capacity could reach 2.5 Mbd a year, about the present total import need of South Korea or Germany, yet world biofuels production growth is at best a few hundred thousand barrels/day each year. We are forced to conclude that costs and time requirements for free market trial-and-error policy and programme selection are too high. This is due to accumulated impacts of past inaction, notably the long period of cheap oil through 1986-2000, and through market mediated wrong choices, shifting too many resources to poor energy performers, while starving potential high performers of resources needed for their sustained development.
Probably the key factor for ensuring sufficiently rapid and reliable transition away from the fossil fuels and global capping of greenhouse gas and particulate emissions by around 2035 is policy. Present policy making in the energy, economy, and environment plus climate fields remains sector focused, often firewall separated, generating mutual antagonism and weakening of initiatives and programmes implemented. Apart from not attaining initial goals, programme costs are raised by unnecessary duplication of single-sector policies that soon lose credibility. The default solution is often abandon of the policy, major financial and economic loss, and the start of a new cycle of ad hoc 'solutions'.
The real answer is simple to identify but difficult to apply: coherent policy ensembles of convergent or non-antagonistic programmes, implemented only after comprehensive study of all single policy interactions and elimination of unproductive policy sets. Regional and national effort will be prime in setting these ensembles, with regional and national financing and funding mechanisms dovetailed into global frameworks, for example through reinforced versions of currently emerging climate-related aid and assistance to most affected low income countries. In this way, the goal of setting and achieving long term transformation and transition of the economy and society will have a higher chance of being realised.
© 2009 Andrew McKillop
http://www.financialsense.com/editorials/mckillop/2009/1209.html
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12 December 2009
Value and Rules ~ Satyajit Das
Wall Street Revalued: Imperfect Markets and Inept Central Bankers by Andrew Smithers (2009)
The Road to Financial Reformation: Warnings, Consequences, Reforms by Henry Kaufman (2009)
A book review...
In a sense, this crisis is about values (the prices paid for many assets) and the rules (regulations governing financial markets). It is also about rules (rigid model based formulations of price) and values (ethics or the lack thereof). These two books provide different perspectives on the issues.
In Wall Street Revalued, Andrew Smithers, an experienced practitioner (in fund management and now as a consultant), explores the value of stocks. This is a theme that Mr.Smithers has written about before, most notably in his 2000 book Valuing Wall Street which together with the Robert Shiller’s better known Irrational Exuberance presciently highlighted the overvaluation of new economy Internet stocks.
Wall Street Revalued argues that assets can be objectively valued and managing asset prices should be one of the central functions of central bankers. Mr. Smithers’ asserts that denial of these fundamental principles lay at the heart of the global financial crisis. On valuation, Wall Street Revalued favours the “q” ratio (the replacement cost of a company’s assets) and cyclically adjusted price-earnings ratio over the previous ten years (a measure also adopted by Professor Shiller).
Eloquent and persuasive, Mr. Smithers make his case well with the advantages of brevity and an abundance of charts and Tables. But some problems remain.
It is not clear how earnings or accurate replacement values can be forecast. This is particularly so at inflection points in economic history – I am sure horse and buggy makers were “cheap” on replacement cost and PE measures after the advent of non-equine modes of transportation. The ability of obscurantist accountants and derivative professionals to affect company earnings and cash flows has become increasingly important. The effect of leverage (both obvious and disguised) also affects these numbers perhaps more that Mr. Smithers acknowledges. How are these to be dealt with at an acceptable level of certainty?
If precise valuation were possible then surely the entire idea would have enabled computers loaded with Mr. Smithers’ data and insight to generate significant excess returns. Markets may deviate from fair value for varying, sometimes lengthy, periods. Echoing Minsky’s famous formulation – “conditionally coherent”, Mr. Smithers argues that markets are “imperfectly efficient”, fluctuating around their fair value.
The question then is over what time horizon will be the true value be achieved? As Keynes stated: “…this long run is a misleading guide to current affairs. In the long run we are all dead.”
As every sensible trader knows, the price you pay is always wrong. If you sell then by definition you are lowest price in the market. If you buy, then your bid is the highest. They also know price is what you pay while value is what you hope and pray for. The mysteries of value remain.
Before Nouriel Roubini, Marc Faber and the others, there was Henry Kaufman – the original ‘Dr. Doom’. He too saw the crisis coming (this disease is clearly infectious!). The text contains an entire section on his prophetic and neglected early warnings.
Road to Financial Reformation provides a personal (at times) and insightful overview of the global financial crisis and brims with suggestions for reform to avoid a future recurrence. Intended for financiers and regulators involved in the industry, the book is a thoughtful analysis of the main issues.
Dr. Kaufman’s major concern is the blind faith in models and questionable innovations. He is critical of the rapid increase in size and concentration of financial institutions. He identifies how securitisation of bank loans “created the illusion that credit risk could be reduced if the instruments became marketable” and led to a decline in the credit quality of debt. He also shrewdly identifies how the idea of liquidity altered from assets (what you could sell) to one centered on liabilities (what you could borrow).
His solutions are unsurprising. He advocates a single regulator and increased regulation. Amusingly, he urges that “amid the blizzard of quantitative, technical offerings…courses in economic and financial history should be required for all business degrees.” As Marx warned history has a tendency to repeat first as tragedy and then as farce. It is not entirely clear why the simple study of it would prevent this.
The reliance on central bankers, on the part of both Mr. Smithers and Dr. Kaufman, to prick asset bubbles and take responsibility for regulating the financial system is brave.
Recently, Ben Bernanke, President of the Federal Reserve, confessed: “I did not anticipate a crisis of this magnitude.” Mr. Bernanke further acknowledged shortcomings in a more traditional area of central bank expertise – ensuring the adequate capitalisation of banks. It is far from clear that central bankers would be capable of identifying mis-valuation and acting on it. Most tellingly, traders and investors did not prove particularly able at this task. And they were better paid than central bankers.
Regulation and governance generally rely on enforcement and strict compliance. Dr. Kaufman conveniently neglects mention of the fact that he had a seat on Lehman Brothers’ board and a member of its finance and risk committee.
The octogenarian Dr. Kaufman was joined on this committee by a Broadway producer, a former officer of US Navy, founder of Spanish-language TV station and a former chairman of IBM (from some 13 years ago). The 5 directors had been on Lehman's board for a collective 55 years. It appears that there were two meetings of finance and risk committee in 2006 and 2007. The composition of the committee is especially puzzling as there was no inkling that the investment bank was contemplating ownership of warships or producing musicals or programs for Spanish language TV.
Whatever the book’s other considerable insights, Road to Financial Reformation does not make the case for the capabilities of central bankers and other worthies oversighting either the markets or individual institutions. It may ultimately be a case of values rather than rules.
© 2009 Satyajit Das All Rights reserved.
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
The Road to Financial Reformation: Warnings, Consequences, Reforms by Henry Kaufman (2009)
A book review...
In a sense, this crisis is about values (the prices paid for many assets) and the rules (regulations governing financial markets). It is also about rules (rigid model based formulations of price) and values (ethics or the lack thereof). These two books provide different perspectives on the issues.
In Wall Street Revalued, Andrew Smithers, an experienced practitioner (in fund management and now as a consultant), explores the value of stocks. This is a theme that Mr.Smithers has written about before, most notably in his 2000 book Valuing Wall Street which together with the Robert Shiller’s better known Irrational Exuberance presciently highlighted the overvaluation of new economy Internet stocks.
Wall Street Revalued argues that assets can be objectively valued and managing asset prices should be one of the central functions of central bankers. Mr. Smithers’ asserts that denial of these fundamental principles lay at the heart of the global financial crisis. On valuation, Wall Street Revalued favours the “q” ratio (the replacement cost of a company’s assets) and cyclically adjusted price-earnings ratio over the previous ten years (a measure also adopted by Professor Shiller).
Eloquent and persuasive, Mr. Smithers make his case well with the advantages of brevity and an abundance of charts and Tables. But some problems remain.
It is not clear how earnings or accurate replacement values can be forecast. This is particularly so at inflection points in economic history – I am sure horse and buggy makers were “cheap” on replacement cost and PE measures after the advent of non-equine modes of transportation. The ability of obscurantist accountants and derivative professionals to affect company earnings and cash flows has become increasingly important. The effect of leverage (both obvious and disguised) also affects these numbers perhaps more that Mr. Smithers acknowledges. How are these to be dealt with at an acceptable level of certainty?
If precise valuation were possible then surely the entire idea would have enabled computers loaded with Mr. Smithers’ data and insight to generate significant excess returns. Markets may deviate from fair value for varying, sometimes lengthy, periods. Echoing Minsky’s famous formulation – “conditionally coherent”, Mr. Smithers argues that markets are “imperfectly efficient”, fluctuating around their fair value.
The question then is over what time horizon will be the true value be achieved? As Keynes stated: “…this long run is a misleading guide to current affairs. In the long run we are all dead.”
As every sensible trader knows, the price you pay is always wrong. If you sell then by definition you are lowest price in the market. If you buy, then your bid is the highest. They also know price is what you pay while value is what you hope and pray for. The mysteries of value remain.
Before Nouriel Roubini, Marc Faber and the others, there was Henry Kaufman – the original ‘Dr. Doom’. He too saw the crisis coming (this disease is clearly infectious!). The text contains an entire section on his prophetic and neglected early warnings.
Road to Financial Reformation provides a personal (at times) and insightful overview of the global financial crisis and brims with suggestions for reform to avoid a future recurrence. Intended for financiers and regulators involved in the industry, the book is a thoughtful analysis of the main issues.
Dr. Kaufman’s major concern is the blind faith in models and questionable innovations. He is critical of the rapid increase in size and concentration of financial institutions. He identifies how securitisation of bank loans “created the illusion that credit risk could be reduced if the instruments became marketable” and led to a decline in the credit quality of debt. He also shrewdly identifies how the idea of liquidity altered from assets (what you could sell) to one centered on liabilities (what you could borrow).
His solutions are unsurprising. He advocates a single regulator and increased regulation. Amusingly, he urges that “amid the blizzard of quantitative, technical offerings…courses in economic and financial history should be required for all business degrees.” As Marx warned history has a tendency to repeat first as tragedy and then as farce. It is not entirely clear why the simple study of it would prevent this.
The reliance on central bankers, on the part of both Mr. Smithers and Dr. Kaufman, to prick asset bubbles and take responsibility for regulating the financial system is brave.
Recently, Ben Bernanke, President of the Federal Reserve, confessed: “I did not anticipate a crisis of this magnitude.” Mr. Bernanke further acknowledged shortcomings in a more traditional area of central bank expertise – ensuring the adequate capitalisation of banks. It is far from clear that central bankers would be capable of identifying mis-valuation and acting on it. Most tellingly, traders and investors did not prove particularly able at this task. And they were better paid than central bankers.
Regulation and governance generally rely on enforcement and strict compliance. Dr. Kaufman conveniently neglects mention of the fact that he had a seat on Lehman Brothers’ board and a member of its finance and risk committee.
The octogenarian Dr. Kaufman was joined on this committee by a Broadway producer, a former officer of US Navy, founder of Spanish-language TV station and a former chairman of IBM (from some 13 years ago). The 5 directors had been on Lehman's board for a collective 55 years. It appears that there were two meetings of finance and risk committee in 2006 and 2007. The composition of the committee is especially puzzling as there was no inkling that the investment bank was contemplating ownership of warships or producing musicals or programs for Spanish language TV.
Whatever the book’s other considerable insights, Road to Financial Reformation does not make the case for the capabilities of central bankers and other worthies oversighting either the markets or individual institutions. It may ultimately be a case of values rather than rules.
© 2009 Satyajit Das All Rights reserved.
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).
Greece, China, USA and the Euro - All Connected?
Hat tip to Charles Powell for this one.
I spoke with some friends who are Greek and also in the shipping business. They hate the problems that Greece is facing. The 12.7% budget deficit is the highest in the EU and is not sustainable. Efforts to cut government expenses have caused a political backlash against PM Papandreou. The only available solution is to raise taxes and crack down on tax evaders.
The Shippers are largely untaxed on their global operations. Their status is ‘protected’ under the constitution. Taxing the shippers would go a long way toward closing the budget gap. The changes in tax laws will not come easy. There is no certainty of the outcome. The sense that I got from these discussions was that there is a short window open for Greece to come up with a plan to cut its deficit to approximately 9%. I asked for both a ”good” and a “bad” news scenario. Although the responses to the question I asked are speculation, they have interesting implications.
GOOD NEWS:
"If Greece is able to restructure its tax code and install a plan to reduce its deficits to 8% of GDP, then China will invest Euro 25 billion in Greek bonds."
The issue of the Chinese investing in Greece was first raised on November 29 by the WSJ. I think it was one of those well placed rumors. If this were to happen, it would be of significance. It would establish that China is assuming a role as some form of 'lender of last resort'. The bilateral trade conditions that would be attached to a deal of this magnitude would re-raise the issue of China’s trade hegemony and economic muscle. For me, the most significant aspect of this is that it would represent yet another significant diversion of China’s investable funds away from the US.
If this were to happen, the $40 billion under discussion would not impact the supply demand equation for US debt. But the direction of this would be significant. The US desperately needs China to significantly increase their holdings of US IOU’s in the coming years. They are under no obligation to do so. What if they were to take a stance with the US similar to Greece? We would get a headline that looked like:
China to Purchase $200 Billion of US Debt
Terms include: Higher interest rate, a commitment to buy Chinese goods and a promise to reduce the deficit.
Of course we are not going to see a headline like that anytime soon, but the developments in Greece are a possible first step in that direction. If China bails out Greece in 2010 it is a game changer from a number of perspectives.
BAD NEWS:
"If Greece is unable to address its budget deficit the Chinese will not invest and financial conditions for the country will deteriorate quickly. One consequence would be that Greece would be forced to separate from the Euro."
This is not a high probability outcome. However, talk of it would have a very significant impact on the FX markets. The people who I spoke with made an interesting observation, "Switzerland is very much integrated with the EU and the Euro, but they have maintained their own currency. If Greece had its own currency it could adjust it to achieve a trade advantage that would address the fundamental imbalances." (Same argument as "the weak dollar is good for the USA"). These same people point to the fact that the Swiss National Bank has been intervening in the currency market to weaken the Swiss Franc in order to achieve a trade advantage. The thinking is, “If it works for the Swiss, then Greece should do it too!”
Consider where this could go. If there is talk of this happening, it would raise the same issue for Spain and Italy who are suffering from their association with they Euro. This could lead in the direction of a two-tiered Euro. One would be strong. The other weak. The implications for the dollar would be significant in both the short and long term. It could be the source of instability as the process unfolds.
The Greece story has already gotten the money moving. It is a story that could take us in some surprising directions. I got the sense that there was a short fuse on this. The next three months may put some powerful forces into play.
Is there anything behind the Chinese/Greece connection? I think so. I always assume there is something to it when you get statements like the following. Asked whether Greece is negotiating with China to sell bonds, a government spokesman said:
"It may be true, and if it is true, we do not want to comment. But even if it isn't true we wouldn't want to comment.”
http://brucekrasting.blogspot.com/2009/12/greece-china-usa-and-euro-all-connected.html
I spoke with some friends who are Greek and also in the shipping business. They hate the problems that Greece is facing. The 12.7% budget deficit is the highest in the EU and is not sustainable. Efforts to cut government expenses have caused a political backlash against PM Papandreou. The only available solution is to raise taxes and crack down on tax evaders.
The Shippers are largely untaxed on their global operations. Their status is ‘protected’ under the constitution. Taxing the shippers would go a long way toward closing the budget gap. The changes in tax laws will not come easy. There is no certainty of the outcome. The sense that I got from these discussions was that there is a short window open for Greece to come up with a plan to cut its deficit to approximately 9%. I asked for both a ”good” and a “bad” news scenario. Although the responses to the question I asked are speculation, they have interesting implications.
GOOD NEWS:
"If Greece is able to restructure its tax code and install a plan to reduce its deficits to 8% of GDP, then China will invest Euro 25 billion in Greek bonds."
The issue of the Chinese investing in Greece was first raised on November 29 by the WSJ. I think it was one of those well placed rumors. If this were to happen, it would be of significance. It would establish that China is assuming a role as some form of 'lender of last resort'. The bilateral trade conditions that would be attached to a deal of this magnitude would re-raise the issue of China’s trade hegemony and economic muscle. For me, the most significant aspect of this is that it would represent yet another significant diversion of China’s investable funds away from the US.
If this were to happen, the $40 billion under discussion would not impact the supply demand equation for US debt. But the direction of this would be significant. The US desperately needs China to significantly increase their holdings of US IOU’s in the coming years. They are under no obligation to do so. What if they were to take a stance with the US similar to Greece? We would get a headline that looked like:
China to Purchase $200 Billion of US Debt
Terms include: Higher interest rate, a commitment to buy Chinese goods and a promise to reduce the deficit.
Of course we are not going to see a headline like that anytime soon, but the developments in Greece are a possible first step in that direction. If China bails out Greece in 2010 it is a game changer from a number of perspectives.
BAD NEWS:
"If Greece is unable to address its budget deficit the Chinese will not invest and financial conditions for the country will deteriorate quickly. One consequence would be that Greece would be forced to separate from the Euro."
This is not a high probability outcome. However, talk of it would have a very significant impact on the FX markets. The people who I spoke with made an interesting observation, "Switzerland is very much integrated with the EU and the Euro, but they have maintained their own currency. If Greece had its own currency it could adjust it to achieve a trade advantage that would address the fundamental imbalances." (Same argument as "the weak dollar is good for the USA"). These same people point to the fact that the Swiss National Bank has been intervening in the currency market to weaken the Swiss Franc in order to achieve a trade advantage. The thinking is, “If it works for the Swiss, then Greece should do it too!”
Consider where this could go. If there is talk of this happening, it would raise the same issue for Spain and Italy who are suffering from their association with they Euro. This could lead in the direction of a two-tiered Euro. One would be strong. The other weak. The implications for the dollar would be significant in both the short and long term. It could be the source of instability as the process unfolds.
The Greece story has already gotten the money moving. It is a story that could take us in some surprising directions. I got the sense that there was a short fuse on this. The next three months may put some powerful forces into play.
Is there anything behind the Chinese/Greece connection? I think so. I always assume there is something to it when you get statements like the following. Asked whether Greece is negotiating with China to sell bonds, a government spokesman said:
"It may be true, and if it is true, we do not want to comment. But even if it isn't true we wouldn't want to comment.”
http://brucekrasting.blogspot.com/2009/12/greece-china-usa-and-euro-all-connected.html
C H Powell tenders some reading recomendations.
Thanks Charles!
from Oklahoma, historical hotbed of economic doctrine AND debate:
http://anecdotaleconomics.blogspot.com/2009/11/but-this-time-it-is-different.html
the thinking person's commons for debate around appropriately
regulating the finance sector (by way of TED, 'the epicurean
dealmaker'):
http://newdecembrists.blogspot.com/
wonderfully powerful, superbly written narrative of the
events/ructions of the global economy over the last thirty years
Warning: long paper which repays careful reading (SpacewaysChuck read
it in three installments; PDF can be downloaded......
http://www.aboutlawyers.com/?id=73169
and, concise, punchy version of the above by the authors of 'Cheap
Motels and a Hot Plate', my favourite new blog:
http://blog.cheapmotelsandahotplate.org/2009/10/31/the-abcs-of-the-economic-crisis-mike-whitney-interviews-the-authors/
and, mike konzcal, one of the good guys:
http://rortybomb.wordpress.com/2009/12/09/at-the-roosevelt-institute/
SpacewaysChuck-navigating the post Lehman Bros, GFC infected, Mad Max
scorched Earth of the oldest Continent on Earth-since 2007"
(copyright)
from Oklahoma, historical hotbed of economic doctrine AND debate:
http://anecdotaleconomics.blogspot.com/2009/11/but-this-time-it-is-different.html
the thinking person's commons for debate around appropriately
regulating the finance sector (by way of TED, 'the epicurean
dealmaker'):
http://newdecembrists.blogspot.com/
wonderfully powerful, superbly written narrative of the
events/ructions of the global economy over the last thirty years
Warning: long paper which repays careful reading (SpacewaysChuck read
it in three installments; PDF can be downloaded......
http://www.aboutlawyers.com/?id=73169
and, concise, punchy version of the above by the authors of 'Cheap
Motels and a Hot Plate', my favourite new blog:
http://blog.cheapmotelsandahotplate.org/2009/10/31/the-abcs-of-the-economic-crisis-mike-whitney-interviews-the-authors/
and, mike konzcal, one of the good guys:
http://rortybomb.wordpress.com/2009/12/09/at-the-roosevelt-institute/
SpacewaysChuck-navigating the post Lehman Bros, GFC infected, Mad Max
scorched Earth of the oldest Continent on Earth-since 2007"
(copyright)
11 December 2009
Robert Kiyosaki - Silver hedge against inflation
Kiyosaki gives the thumbs up for Silver as the best Investment for the Future. ~ Hat Tip Duncan
9 December 2009
WSJ ~ Requiem for the Dollar
Requiem for the Dollar
By JAMES GRANT
Illustration by WSJ; iStockphoto (3)
Ben S. Bernanke doesn't know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman's head.
I wonder, though, just how far we have really come in the past 200-odd years. To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners.
In ancient times, the solidus circulated far and wide. But it was a tangible thing, a gold coin struck by the Byzantine Empire. Between Waterloo and the Great Depression, the pound sterling ruled the roost. But it was convertible into gold—slip your bank notes through a teller's window and the Bank of England would return the appropriate number of gold sovereigns. The dollar is faith-based. There's nothing behind it but Congress.
But now the world is losing faith, as well it might. It's not that the dollar is overvalued—economists at Deutsche Bank estimate it's 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors.
You get the strong impression that Mr. Bernanke fails to appreciate the tenuousness of the situation—fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century. Before you know it, that bill in your wallet won't buy a pack of gum.
For most of this country's history, the dollar was exchangeable into gold or silver. "Sound" money was the kind that rang when you dropped it on a counter. For a long time, the rate of exchange was an ounce of gold for $20.67. Following the Roosevelt devaluation of 1933, the rate of exchange became an ounce of gold for $35. After 1933, only foreign governments and central banks were privileged to swap unwanted paper for gold, and most of these official institutions refrained from asking (after 1946, it seemed inadvisable to antagonize the very superpower that was standing between them and the Soviet Union). By the late 1960s, however, some of these overseas dollar holders, notably France, began to clamor for gold. They were well-advised to do so, dollars being in demonstrable surplus. President Richard Nixon solved that problem in August 1971 by suspending convertibility altogether. From that day to this, in the words of John Exter, Citibanker and monetary critic, a Federal Reserve "note" has been an "IOU nothing."
To understand the scrape we are in, it may help, a little, to understand the system we left behind. A proper gold standard was a well-oiled machine. The metal actually moved and, so moving, checked what are politely known today as "imbalances." Say a certain baseball-loving North American country were running a persistent trade deficit. Under the monetary system we don't have and which only a few are yet even talking about instituting, the deficit country would remit to its creditors not pieces of easily duplicable paper but scarce gold bars. Gold was money—is, in fact, still money—and the loss would set in train a series of painful but necessary adjustments in the country that had been watching baseball instead of making things to sell. Interest rates would rise in that deficit country. Its prices would fall, its credit would be curtailed, its exports would increase and its imports decrease. At length, the deficit country would be restored to something like competitive trim. The gold would come sailing back to where it started. As it is today, dollars are piled higher and higher in the vaults of America's Asian creditors. There's no adjustment mechanism, only recriminations and the first suggestion that, from the creditors' point of view, enough is enough.
So in 1971, the last remnants of the gold standard were erased. And a good thing, too, some economists maintain. The high starched collar of a gold standard prolonged the Great Depression, they charge; it would likely have deepened our Great Recession, too. Virtue's the thing for prosperity, they say; in times of trouble, give us the Ben S. Bernanke school of money conjuring. There are many troubles with this notion. For one thing, there is no single gold standard. The version in place in the 1920s, known as the gold-exchange standard, was almost as deeply flawed as the post-1971 paper-dollar system. As for the Great Recession, the Bernanke method itself was a leading cause of our troubles. Constrained by the discipline of a convertible currency, the U.S. would have had to undergo the salutary, unpleasant process described above to cure its trade deficit. But that process of correction would—I am going to speculate—have saved us from the near-death financial experience of 2008. Under a properly functioning gold standard, the U.S. would not have been able to borrow itself to the threshold of the poorhouse.
Anyway, starting in the early 1970s, American monetary policy came to resemble a game of tennis without the net. Relieved of the irksome inhibition of gold convertibility, the Fed could stop worrying about the French. To be sure, it still had Congress to answer to, and the financial markets, as well. But no more could foreigners come calling for the collateral behind the dollar, because there was none. The nets came down on Wall Street, too. As the idea took hold that the Fed could meet any serious crisis by carpeting the nation with dollar bills, bankers and brokers took more risks. New forms of business organization encouraged more borrowing. New inflationary vistas opened.
Not that the architects of the post-1971 game set out to lower the nets. They believed they'd put up new ones. In place of such gold discipline as remained under Bretton Woods—in truth, there wasn't much—markets would be the monetary judges and juries. The late Walter Wriston, onetime chairman of Citicorp, said that the world had traded up. In place of a gold standard, it now had an "information standard." Buyers and sellers of the Treasury's notes and bonds, on the one hand, or of dollars, yen, Deutschemarks, Swiss francs, on the other, would ride herd on the Fed. You'd know when the central bank went too far because bond yields would climb or the dollar exchange rate would fall. Gold would trade like any other commodity, but nobody would pay attention to it.
I check myself a little in arraigning the monetary arrangements that have failed us so miserably these past two years. The lifespan of no monetary system since 1880 has been more than 30 or 40 years, including that of my beloved classical gold standard, which perished in 1914. The pure paper dollar regime has been a long time dying. It was no good portent when the tellers' bars started coming down from neighborhood bank branches. The uncaged teller was a sign that Americans had began to conceive an elevated opinion of the human capacity to manage financial risk. There were other evil omens. In 1970, Wall Street partnerships began to convert to limited liability corporations—Donaldson, Lufkin & Jenrette was the first to make the leap, Goldman Sachs, among the last, in 1999. In a partnership, the owners are on the line for everything they have in case of the firm's bankruptcy. No such sword of Damocles hangs over the top executives of a corporation. The bankers and brokers incorporated because they felt they needed more capital, more scale, more technology—and, of course, more leverage.
In no phase of American monetary history was every banker so courageous and farsighted as Isaias W. Hellman, a progenitor of an institution called Farmers & Merchants Bank and of another called Wells Fargo. Operating in southern California in the late 1880s, Hellman arrived at the conclusion that the Los Angeles real-estate market was a bubble. So deciding—the prices of L.A. business lots had climbed to $5,000 from $500 in one short year—he stopped lending. The bubble burst, and his bank prospered. Safety and soundness was Hellman's motto. He and his depositors risked their money side-by-side. The taxpayers didn't subsidize that transaction, not being a party to it.
In this crisis, of course, with latter-day Hellmans all too scarce in the banking population, the taxpayers have born an unconscionable part of the risk. Wells Fargo itself passed the hat for $25 billion. Hellmans are scarce because the federal government has taken away their franchise. There's no business value in financial safety when the government bails out the unsafe. And by bailing out a scandalously large number of unsafe institutions, the government necessarily puts the dollar at risk. In money, too, the knee bone is connected to the thigh bone. Debased banks mean a debased currency (perhaps causation works in the other direction, too).
Many contended for the hubris prize in the years leading up to the sorrows of 2008, but the Fed beat all comers. Under Mr. Bernanke, as under his predecessor, Alan Greenspan, our central bank preached the doctrine of stability. The Fed would iron out the business cycle, promote full employment, pour oil on the waters of any and every major financial crisis and assure stable prices. In particular, under the intellectual leadership of Mr. Bernanke, the Fed would tolerate no sagging of the price level. It would insist on a decent minimum of inflation. It staked out this position in the face of the economic opening of China and India and the spread of digital technology. To the common-sense observation that these hundreds of millions of willing new hands, and gadgets, might bring down prices at Wal-Mart, the Fed turned a deaf ear. It would save us from "deflation" by generating a sweet taste of inflation (not too much, just enough). And it would perform these feats of macroeconomic management by pushing a single interest rate up or down.
It was implausible enough in the telling and has turned out no better in the doing. Nor is there any mystery why. The Fed's M.O. is price control. It fixes the basic money market interest rate, known as the federal funds rate. To arrive at the proper rate, the monetary mandarins conduct their research, prepare their forecast—and take a wild guess, just like the rest of us. Since December 2008, the Fed has imposed a funds rate of 0% to 0.25%. Since March of 2009, it has bought just over $1 trillion of mortgage-backed securities and $300 billion of Treasurys. It has acquired these assets in the customary central-bank manner, i.e., by conjuring into existence the money to pay for them. Yet—a measure of the nation's lingering problems—the broadly defined money supply isn't growing but dwindling.
The Fed's miniature interest rates find favor with debtors, disfavor with savers (that doughty band). All may agree, however, that the bond market has lost such credibility it once had as a monetary-policy voting machine. Whether or not the Fed is cranking too hard on the dollar printing press is, for professional dealers and investors, a moot point. With the cost of borrowing close to zero, they are happy as clams (that is, they can finance their inventories of Treasurys and mortgage-backed securities at virtually no cost). The U.S. government securities market has been conscripted into the economic-stimulus program.
Neither are the currency markets the founts of objective monetary information they perhaps used to be. The euro trades freely, but the Chinese yuan is under the thumb of the People's Republic. It tells you nothing about the respective monetary policies of the People's Bank and the Fed to observe that it takes 6.831 yuan to make a dollar. It's the exchange rate that Beijing wants.
On the matter of comparative monetary policies, the most expressive market is the one that the Fed isn't overtly manipulating. Though Treasury yields might as well be frozen, the gold price is soaring (it lost altitude on Friday). Why has it taken flight? Not on account of an inflation problem. Gold is appreciating in terms of all paper currencies—or, alternatively, paper currencies are depreciating in terms of gold—because the world is losing faith in the tenets of modern central banking. Correctly, the dollar's vast non-American constituency understands that it counts for nothing in the councils of the Fed and the Treasury. If 0% interest rates suit the U.S. economy, 0% will be the rate imposed. Then, too, gold is hard to find and costly to produce. You can materialize dollars with the tap of a computer key.
Let me interrupt myself to say that I am not now making a bullish investment case for gold (I happen to be bullish, but it's only an opinion). The trouble with 0% interest rates is that they instigate speculation in almost every asset that moves (and when such an immense market as that in Treasury securities isn't allowed to move, the suppressed volatility finds different outlets). By practicing price, or interest-rate, control, the Bank of Bernanke fosters a kind of alternative financial reality. Let the buyer beware—of just about everything.
A proper gold standard promotes balance in the financial and commercial affairs of participating nations. The pure paper system promotes and perpetuates imbalances. Not since 1976 has this country consumed less than it produced (as measured by the international trade balance): a deficit of 32 years and counting. Why has the shortfall persisted for so long? Because the U.S., uniquely, is allowed to pay its bills in the currency that only it may lawfully print. We send it west, to the central banks of our Asian creditors. And they, obligingly, turn right around and invest the dollars in America's own securities. It's as if the money never left home. Stop to ask yourself, American reader: Is any other nation on earth so blessed as we?
There is, however, a rub. The Asian central banks do not acquire their dollars with nothing. Rather, they buy them with the currency that they themselves print. Some of this money they manage to sweep under the rug, or "sterilize," but a good bit of it enters the local payment stream, where it finances today's rowdy Asian bull markets.
A monetary economist from Mars could only scratch his pointy head at our 21st century monetary arrangements. What is a dollar? he might ask. No response. The Martian can't find out because the earthlings don't know. The value of a dollar is undefined. Its relationship to other currencies is similarly contingent. Some exchange rates float, others sink, still others are lashed to the dollar (whatever it is). Discouraged, the visitor zooms home.
Neither would the ghosts of earthly finance know what to make of things if they returned for a briefing from wherever they were spending eternity. Someone would have to tell Alexander Hamilton that his system of coins is defunct, as is, incidentally, the federal sinking fund he devised to retire the public debt (it went out of business in 1960). He might have to hear it more than once to understand, but Congress no longer "coins" money and regulates the value thereof. Rather, it delegates the work to Mr. Bernanke, who, a noted student of the Great Depression, believes that the cure for borrowing too much money is printing more money.
Walter Bagehot, the Victorian English financial journalist, would be in for a jolt, too. It would hardly please him to hear that the Fed had invoked the authority of his name to characterize its helter-skelter interventions of the past year. In a crisis, Bagehot wrote in his 1873 study "Lombard Street," a central bank should lend without stint to solvent institutions at a punitive rate of interest against sound collateral. At least, Bagehot's shade might console itself, the Fed was faithful to the text on one point. It did lend without stint.
If Bagehot's ghost would be chagrined, that of Bagehot's sparring partner, Thomson Hankey, would be exultant. Hankey, a onetime governor of the Bank of England, denounced Bagehot in life. No central bank should stand ready to bail out the imprudent, he maintained. "I cannot conceive of anything more likely to encourage rash and imprudent speculation..., " wrote Hankey in response to Bagehot. "I am no advocate for any legislative enactments to try and make the trading community more prudent."
Hankey believed in the price system. It might pain him to discover that his professional descendants have embraced command and control. "We should have required [banks to hold] more capital, more liquidity," Mr. Bernanke rued in a Senate hearing on Thursday. "We should have required more risk management controls." Roll over, Isaias Hellman.
So our Martian would be mystified and our honored dead distressed. And we, the living? We are none too pleased ourselves. At least, however, being alive, we can begin to set things right. The thing to do, I say, is to restore the nets to the tennis courts of money and finance. Collateralize the dollar—make it exchangeable into something of genuine value. Get the Fed out of the price-fixing business. Replace Ben Bernanke with a latter-day Thomson Hankey. Find—cultivate—battalions of latter-day Hellmans and set them to running free-market banks. There's one more thing: Return to the statute books Section 19 of the 1792 Coinage Act, but substitute life behind bars for the death penalty. It's the 21st century, you know.
James Grant, editor of Grant's Interest Rate Observer, is the author, most recently, of "Mr. Market Miscalculates" (Axios Press).
http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html#printMode
By JAMES GRANT
Illustration by WSJ; iStockphoto (3)
Ben S. Bernanke doesn't know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman's head.
I wonder, though, just how far we have really come in the past 200-odd years. To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners.
In ancient times, the solidus circulated far and wide. But it was a tangible thing, a gold coin struck by the Byzantine Empire. Between Waterloo and the Great Depression, the pound sterling ruled the roost. But it was convertible into gold—slip your bank notes through a teller's window and the Bank of England would return the appropriate number of gold sovereigns. The dollar is faith-based. There's nothing behind it but Congress.
But now the world is losing faith, as well it might. It's not that the dollar is overvalued—economists at Deutsche Bank estimate it's 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors.
You get the strong impression that Mr. Bernanke fails to appreciate the tenuousness of the situation—fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century. Before you know it, that bill in your wallet won't buy a pack of gum.
For most of this country's history, the dollar was exchangeable into gold or silver. "Sound" money was the kind that rang when you dropped it on a counter. For a long time, the rate of exchange was an ounce of gold for $20.67. Following the Roosevelt devaluation of 1933, the rate of exchange became an ounce of gold for $35. After 1933, only foreign governments and central banks were privileged to swap unwanted paper for gold, and most of these official institutions refrained from asking (after 1946, it seemed inadvisable to antagonize the very superpower that was standing between them and the Soviet Union). By the late 1960s, however, some of these overseas dollar holders, notably France, began to clamor for gold. They were well-advised to do so, dollars being in demonstrable surplus. President Richard Nixon solved that problem in August 1971 by suspending convertibility altogether. From that day to this, in the words of John Exter, Citibanker and monetary critic, a Federal Reserve "note" has been an "IOU nothing."
To understand the scrape we are in, it may help, a little, to understand the system we left behind. A proper gold standard was a well-oiled machine. The metal actually moved and, so moving, checked what are politely known today as "imbalances." Say a certain baseball-loving North American country were running a persistent trade deficit. Under the monetary system we don't have and which only a few are yet even talking about instituting, the deficit country would remit to its creditors not pieces of easily duplicable paper but scarce gold bars. Gold was money—is, in fact, still money—and the loss would set in train a series of painful but necessary adjustments in the country that had been watching baseball instead of making things to sell. Interest rates would rise in that deficit country. Its prices would fall, its credit would be curtailed, its exports would increase and its imports decrease. At length, the deficit country would be restored to something like competitive trim. The gold would come sailing back to where it started. As it is today, dollars are piled higher and higher in the vaults of America's Asian creditors. There's no adjustment mechanism, only recriminations and the first suggestion that, from the creditors' point of view, enough is enough.
So in 1971, the last remnants of the gold standard were erased. And a good thing, too, some economists maintain. The high starched collar of a gold standard prolonged the Great Depression, they charge; it would likely have deepened our Great Recession, too. Virtue's the thing for prosperity, they say; in times of trouble, give us the Ben S. Bernanke school of money conjuring. There are many troubles with this notion. For one thing, there is no single gold standard. The version in place in the 1920s, known as the gold-exchange standard, was almost as deeply flawed as the post-1971 paper-dollar system. As for the Great Recession, the Bernanke method itself was a leading cause of our troubles. Constrained by the discipline of a convertible currency, the U.S. would have had to undergo the salutary, unpleasant process described above to cure its trade deficit. But that process of correction would—I am going to speculate—have saved us from the near-death financial experience of 2008. Under a properly functioning gold standard, the U.S. would not have been able to borrow itself to the threshold of the poorhouse.
Anyway, starting in the early 1970s, American monetary policy came to resemble a game of tennis without the net. Relieved of the irksome inhibition of gold convertibility, the Fed could stop worrying about the French. To be sure, it still had Congress to answer to, and the financial markets, as well. But no more could foreigners come calling for the collateral behind the dollar, because there was none. The nets came down on Wall Street, too. As the idea took hold that the Fed could meet any serious crisis by carpeting the nation with dollar bills, bankers and brokers took more risks. New forms of business organization encouraged more borrowing. New inflationary vistas opened.
Not that the architects of the post-1971 game set out to lower the nets. They believed they'd put up new ones. In place of such gold discipline as remained under Bretton Woods—in truth, there wasn't much—markets would be the monetary judges and juries. The late Walter Wriston, onetime chairman of Citicorp, said that the world had traded up. In place of a gold standard, it now had an "information standard." Buyers and sellers of the Treasury's notes and bonds, on the one hand, or of dollars, yen, Deutschemarks, Swiss francs, on the other, would ride herd on the Fed. You'd know when the central bank went too far because bond yields would climb or the dollar exchange rate would fall. Gold would trade like any other commodity, but nobody would pay attention to it.
I check myself a little in arraigning the monetary arrangements that have failed us so miserably these past two years. The lifespan of no monetary system since 1880 has been more than 30 or 40 years, including that of my beloved classical gold standard, which perished in 1914. The pure paper dollar regime has been a long time dying. It was no good portent when the tellers' bars started coming down from neighborhood bank branches. The uncaged teller was a sign that Americans had began to conceive an elevated opinion of the human capacity to manage financial risk. There were other evil omens. In 1970, Wall Street partnerships began to convert to limited liability corporations—Donaldson, Lufkin & Jenrette was the first to make the leap, Goldman Sachs, among the last, in 1999. In a partnership, the owners are on the line for everything they have in case of the firm's bankruptcy. No such sword of Damocles hangs over the top executives of a corporation. The bankers and brokers incorporated because they felt they needed more capital, more scale, more technology—and, of course, more leverage.
In no phase of American monetary history was every banker so courageous and farsighted as Isaias W. Hellman, a progenitor of an institution called Farmers & Merchants Bank and of another called Wells Fargo. Operating in southern California in the late 1880s, Hellman arrived at the conclusion that the Los Angeles real-estate market was a bubble. So deciding—the prices of L.A. business lots had climbed to $5,000 from $500 in one short year—he stopped lending. The bubble burst, and his bank prospered. Safety and soundness was Hellman's motto. He and his depositors risked their money side-by-side. The taxpayers didn't subsidize that transaction, not being a party to it.
In this crisis, of course, with latter-day Hellmans all too scarce in the banking population, the taxpayers have born an unconscionable part of the risk. Wells Fargo itself passed the hat for $25 billion. Hellmans are scarce because the federal government has taken away their franchise. There's no business value in financial safety when the government bails out the unsafe. And by bailing out a scandalously large number of unsafe institutions, the government necessarily puts the dollar at risk. In money, too, the knee bone is connected to the thigh bone. Debased banks mean a debased currency (perhaps causation works in the other direction, too).
Many contended for the hubris prize in the years leading up to the sorrows of 2008, but the Fed beat all comers. Under Mr. Bernanke, as under his predecessor, Alan Greenspan, our central bank preached the doctrine of stability. The Fed would iron out the business cycle, promote full employment, pour oil on the waters of any and every major financial crisis and assure stable prices. In particular, under the intellectual leadership of Mr. Bernanke, the Fed would tolerate no sagging of the price level. It would insist on a decent minimum of inflation. It staked out this position in the face of the economic opening of China and India and the spread of digital technology. To the common-sense observation that these hundreds of millions of willing new hands, and gadgets, might bring down prices at Wal-Mart, the Fed turned a deaf ear. It would save us from "deflation" by generating a sweet taste of inflation (not too much, just enough). And it would perform these feats of macroeconomic management by pushing a single interest rate up or down.
It was implausible enough in the telling and has turned out no better in the doing. Nor is there any mystery why. The Fed's M.O. is price control. It fixes the basic money market interest rate, known as the federal funds rate. To arrive at the proper rate, the monetary mandarins conduct their research, prepare their forecast—and take a wild guess, just like the rest of us. Since December 2008, the Fed has imposed a funds rate of 0% to 0.25%. Since March of 2009, it has bought just over $1 trillion of mortgage-backed securities and $300 billion of Treasurys. It has acquired these assets in the customary central-bank manner, i.e., by conjuring into existence the money to pay for them. Yet—a measure of the nation's lingering problems—the broadly defined money supply isn't growing but dwindling.
The Fed's miniature interest rates find favor with debtors, disfavor with savers (that doughty band). All may agree, however, that the bond market has lost such credibility it once had as a monetary-policy voting machine. Whether or not the Fed is cranking too hard on the dollar printing press is, for professional dealers and investors, a moot point. With the cost of borrowing close to zero, they are happy as clams (that is, they can finance their inventories of Treasurys and mortgage-backed securities at virtually no cost). The U.S. government securities market has been conscripted into the economic-stimulus program.
Neither are the currency markets the founts of objective monetary information they perhaps used to be. The euro trades freely, but the Chinese yuan is under the thumb of the People's Republic. It tells you nothing about the respective monetary policies of the People's Bank and the Fed to observe that it takes 6.831 yuan to make a dollar. It's the exchange rate that Beijing wants.
On the matter of comparative monetary policies, the most expressive market is the one that the Fed isn't overtly manipulating. Though Treasury yields might as well be frozen, the gold price is soaring (it lost altitude on Friday). Why has it taken flight? Not on account of an inflation problem. Gold is appreciating in terms of all paper currencies—or, alternatively, paper currencies are depreciating in terms of gold—because the world is losing faith in the tenets of modern central banking. Correctly, the dollar's vast non-American constituency understands that it counts for nothing in the councils of the Fed and the Treasury. If 0% interest rates suit the U.S. economy, 0% will be the rate imposed. Then, too, gold is hard to find and costly to produce. You can materialize dollars with the tap of a computer key.
Let me interrupt myself to say that I am not now making a bullish investment case for gold (I happen to be bullish, but it's only an opinion). The trouble with 0% interest rates is that they instigate speculation in almost every asset that moves (and when such an immense market as that in Treasury securities isn't allowed to move, the suppressed volatility finds different outlets). By practicing price, or interest-rate, control, the Bank of Bernanke fosters a kind of alternative financial reality. Let the buyer beware—of just about everything.
A proper gold standard promotes balance in the financial and commercial affairs of participating nations. The pure paper system promotes and perpetuates imbalances. Not since 1976 has this country consumed less than it produced (as measured by the international trade balance): a deficit of 32 years and counting. Why has the shortfall persisted for so long? Because the U.S., uniquely, is allowed to pay its bills in the currency that only it may lawfully print. We send it west, to the central banks of our Asian creditors. And they, obligingly, turn right around and invest the dollars in America's own securities. It's as if the money never left home. Stop to ask yourself, American reader: Is any other nation on earth so blessed as we?
There is, however, a rub. The Asian central banks do not acquire their dollars with nothing. Rather, they buy them with the currency that they themselves print. Some of this money they manage to sweep under the rug, or "sterilize," but a good bit of it enters the local payment stream, where it finances today's rowdy Asian bull markets.
A monetary economist from Mars could only scratch his pointy head at our 21st century monetary arrangements. What is a dollar? he might ask. No response. The Martian can't find out because the earthlings don't know. The value of a dollar is undefined. Its relationship to other currencies is similarly contingent. Some exchange rates float, others sink, still others are lashed to the dollar (whatever it is). Discouraged, the visitor zooms home.
Neither would the ghosts of earthly finance know what to make of things if they returned for a briefing from wherever they were spending eternity. Someone would have to tell Alexander Hamilton that his system of coins is defunct, as is, incidentally, the federal sinking fund he devised to retire the public debt (it went out of business in 1960). He might have to hear it more than once to understand, but Congress no longer "coins" money and regulates the value thereof. Rather, it delegates the work to Mr. Bernanke, who, a noted student of the Great Depression, believes that the cure for borrowing too much money is printing more money.
Walter Bagehot, the Victorian English financial journalist, would be in for a jolt, too. It would hardly please him to hear that the Fed had invoked the authority of his name to characterize its helter-skelter interventions of the past year. In a crisis, Bagehot wrote in his 1873 study "Lombard Street," a central bank should lend without stint to solvent institutions at a punitive rate of interest against sound collateral. At least, Bagehot's shade might console itself, the Fed was faithful to the text on one point. It did lend without stint.
If Bagehot's ghost would be chagrined, that of Bagehot's sparring partner, Thomson Hankey, would be exultant. Hankey, a onetime governor of the Bank of England, denounced Bagehot in life. No central bank should stand ready to bail out the imprudent, he maintained. "I cannot conceive of anything more likely to encourage rash and imprudent speculation..., " wrote Hankey in response to Bagehot. "I am no advocate for any legislative enactments to try and make the trading community more prudent."
Hankey believed in the price system. It might pain him to discover that his professional descendants have embraced command and control. "We should have required [banks to hold] more capital, more liquidity," Mr. Bernanke rued in a Senate hearing on Thursday. "We should have required more risk management controls." Roll over, Isaias Hellman.
So our Martian would be mystified and our honored dead distressed. And we, the living? We are none too pleased ourselves. At least, however, being alive, we can begin to set things right. The thing to do, I say, is to restore the nets to the tennis courts of money and finance. Collateralize the dollar—make it exchangeable into something of genuine value. Get the Fed out of the price-fixing business. Replace Ben Bernanke with a latter-day Thomson Hankey. Find—cultivate—battalions of latter-day Hellmans and set them to running free-market banks. There's one more thing: Return to the statute books Section 19 of the 1792 Coinage Act, but substitute life behind bars for the death penalty. It's the 21st century, you know.
James Grant, editor of Grant's Interest Rate Observer, is the author, most recently, of "Mr. Market Miscalculates" (Axios Press).
http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html#printMode
7 December 2009
Predictions for 2010...Good News - Bad News
Will 2010 be a 1930 or, comparable to 1937? Is it different this time? When one nation state of a formerly high productive stature destroys itself with inflation, the untouched others can soften the blow and in time bail out the fallen one. This was Germany's fate in the 1920's. In our current instance, most all of the world's economies are on their knees with some hurting worse than others. Who can help with recovery this time? There is no one. It will not be China as some suppose as China shall suffer the same systemic collapse as the U.S, and all of Europe, Russia, and South America. China's neighbors Japan, Taiwan, Korea, India, Indonesia and others will join the fallen.
The interwoven complexities of international trade and finance have caught them in all in a spider's web of systemic collapse. Those who can shall attempt a massive inflationary rescue. While it might appear to work for a few months, eventually all implodes. Please note the following from John Pugsley's "Common Sense Viewpoint" as printed in "Golden Insights" by James U. Blanchard III 1997.
"Inflation will destroy debt. The end answer to all argument (inflation versus deflation) rests in the Federal Reserve and government. Both are absolutely committed to preventing a financial collapse or deflation. As long as they are willing to print dollars to support any failing creditors, the cycle will go on. What most deflationists fail to consider is that inflation destroys debt."
"Creditors win through inflation and lenders lose. The deflationists do not see that if inflation of the money supply continues, which it will, there needs to be a deflation. All the debt in the world can be wiped out just by creating purchasing power…and that's exactly what is happening…the debt problems will be resolved, but they will not be resolved by debt liquidation through bankruptcy and collapse. They will be resolved through debt liquidation via the creation of money. We are in for the greatest wave of inflation in the history of the world. You had better not be on the wrong side of the dollar." -John Pugsley "Common Sense Viewpoint."
We agree with Mr. Pugsley but, this was written years ago. We would suggest that this time with most formerly productive nations becoming victims of both inflation-hyperinflation and systemic collapse; the ending could be much worse than supposed. We forecast inflation first then hyper-inflation some time down the road.
What happens between here and there? While in our view, our forecast episodic adventure takes at least 2-3 years but, no one knows for certain. We forecast 2010 to be one of the very worst years of Greater Depression II; the year 2010being the second cycle of several depressionary phases. The fall of Lehman and a surrounding crash was only Phase One. Before Phase Two terrorizes global markets, we suggest a short recovery arrives first.
Debts both public and private have not been paid down to any great extent. To make matters worse, new debts continue to plague central banks, nation's banks, consumers and commerce. In order to find a basing bottom and enable a recovery, these debts must be paid, repudiated or inflated away. For now all of these solutions are in play but as fast as old problems are resolved even more continue to pile-on aggravating the troubles.
While global governments are busy attempting to inflate away debts through monetization; i.e., printing piles of un-backed dollars, notes and bonds, the load is simply unsustainable on the math. Manipulators have gone past the point of no return. There will be no recovery until after a smashing correction arrives. This smash is the quick and dirty answer to final de-leveraging of all those debts. We think it comes in phases and in fits and spurts.
Japan is in the worst shape with public debt versus GDP now standing at 270%. With an aging population and not nearly enough young workers entering their workplace, deflation arrived again and the Nikkei Stock Market is taking big hits. The U.S. and Europe except for the U.K have 125% of debt versus GDP with the U.K's at 105%. (Source for percentages Societe Generale).
The U. S. Dollar plays a very important role in these problems. With the Dollar being 85% of the entire world's reserve currency; as the dollar goes, so goes the global system. Unfortunately, the dollar has much further to fall and for this month of December, 2009, the dollar can sink to an index low of 70.00-72.50 from today's prices. Look for the dollar's final support as a minimum low sometime during the next three years ranging from 40-46.
Stocks are peaky and will shorter term correct. We think the nearby correction will be mild and new buying can return in January, 2010 continuing through spring, 2010. The Dow could easily find an 8850 base and then return to a new rally. The S&P's might base at 950. Meanwhile, we could experience an 11-12% Dow and S&P haircut.
The blow-off top for primary stock markets could be later May through July, 2010. On this cycle, five extremely negative events hit world economies and markets simultaneously.
These are:
(1) $40-$50 billion in U.S. credit card failures are reported;
(2) Housing sales both new and used for the first half of 2010 fail so badly, this market is literally in free-fall. There will be 7-10 million new mortgage defaults with most of those in the prime paying (not sub-prime) category caused by job losses;
(3) First half auto sales are reported. They will be so poor more car-makers file bankruptcy;
(4) Commercial real estate loans bankrupt many developers and their projects among those existing, under construction, and planned.
(5) Insurance companies are holding so much failing commercial real estate paper, they are in danger of defaulting with some running for government bailouts in TARP II. At one time years ago, the 20 top insurance companies could literally control the United States economy. They are huge asset holders of property and cash investments.
Housing valuations will fall on the average, nationwide in the U.S., another -30%. We figured about one year ago that 1980's prices would be the bottom. Now we potentially see a bottom at 1970's prices. More homes were foreclosed in the last 12 months than in an entire decade in the first Great Depression of the 1930's.
On the Monday morning of 11-23-09, news reported used housing sales were up 10.1%. This is nothing but giveaways prodded by seller financing, government freebie down payment credits, and crash and burn pricing taken by bottom feeders. Housing remains in international collapse. The last great creditor, FHA is hurting badly.
Inflation is now an unreported at 7% and rising. By May, 2010, it begins to bite very hard first on the lower 1/3rd of U.S. wage earners and the jobless. Most of their income is spent on food and energy. They top the inflation pain lists.
Consumers with newer bought and leased autos will do "jingle mail." They will return newer unexpired leased cars and trucks back to dealers' lots, give them the keys and quit paying. We saw this with houses over the past 1-2 years. Auto lots will overflow with new-used cars and trucks. Values will plummet. Many of these "returns" will be from the "Cash for Clunkers" program by those who got stuck with unaffordable car and truck payments.
Auto-maker GM projected total U.S. industry sales for 2010 of 11mm with a new recovery. There will be no recovery and sales could skid for the whole industry group down to 7mm or less in 2010. In 2011 it gets even worse.
Auto layoffs will escalate and unions will scream for help to president Obama. He will financially band-aid a dying industry. Consumers have no buying power, credit or cash to make any difference. Those with cash will save it and hunker down and wait out the troubles. Auto union membership declines rapidly. Most vehicle lending dries-up to a trickle.
The crude oil and energy sector has fundamentals pulling in both directions. Today we see oil price resistance at $80 with a trading range slightly lower in the $70's. Fundamentals show an over-supply on recession-depression lower demands. On the other hand, inflation of prices is rising on a weaker dollar and will escalate. Look for crude oil to visit the $50's and then turn-around on inflation rising to $100. Gasoline will follow as some refineries are closing on operating losses and no new ones are being built. Inflation ultimately wins on price escalation. Eventually, scarcity of product returns.
Depressions normally and historically last ten years. It could take consumers that long to pay down all of their debts before a return to normal conditions. Savings rates are up but with so much debt and few or zero salary raises in the face of new and rabid inflation, consumers will be economically slaughtered.
Credit and banks go through the wringer again. There are few bank ideas left to earn lender income except for trading. While Goldman Sachs makes millions weekly doing this, most banks are not set-up for it and there are only so many good traders available for the work. Since Obama's compensation guy is rankling big traders with income limits this makes things worse as these people leave for unrestricted pay in overseas trading positions.
The bond market is so huge it takes time for it to roll over and slide off a cliff. Asia and the U.S Federal Reserve have been our larger paper buyers. While they still buy some to keep markets glued together they are: (1) exiting the longer term paper for shorter terms and, (2) buying less of it turning to other ideas in the commodity markets.
With the higher Yen, Japan is increasingly engaged in hard asset shopping trips as is South Korea. They are both looking for grain, gold, oil, natural gas and other commodities they lack internally.
Junk bonds could lose 1/3rd of today's value just next year. Treasury bond and note buying continues until "full faith and credit" is repudiated on distrust. Eventually they crash but in slow-motion over years due to the magnitude of these markets. We think no bond is a safe bond. Municipal bonds are viewed as some of the safest. What happens when cities, towns, counties and states are so broke they cannot pay the interest? Their tax revenue is going off a cliff. Some are safer than others for awhile but for how long? Who can finger a top? It can't be done as it's too political.
Various states within the United States have or, will be failing financially. Someone reported 1/3rd of the TARP money spent so far was used to bail-out bankrupt states. This will escalate as federal TARP money cannot help them fast enough and in large enough amounts to keep it all glued together. Watch for fire and police employment to get as thin as too be very dangerous in various communities. Ten states are going financially critical and 47 are on the watch lists.
New York, New Jersey, Connecticut, Michigan, Ohio, Florida, Arizona, Nevada and California are among the financially worst, hurting from falling tax revenue on broken businesses and consumers. Watch California as they could go out of control first within this group. They continue to contrive new taxes and not work on spending reduction. When some states face total collapse it will get very ugly very quickly. Michigan is among the worst of the worst. Most all of the states are spending themselves into the ground. They refuse to cut back as its political suicide. They will spend until there is nothing left to spend and then scream for help to the Federal Government.
China is in very serious trouble as the U.S. consumers have stopped buying their stuff. Their TARP for early this year exceeded that of the United States in both amount and rapidity of spending. It is estimated they spent in four months from January, 2009 to May, roughly $600 Billion with most of it going into projects now at over-capacity. The U.S.' lack of buying cut China's entire year of exports by -25%. Also, note the Chinese economy is 1/4th the size of the United States' economy.
There are hundreds of idle Chinese factories and millions of laid-off workers with no new factory employment and not much work of any kind. Further, millions sold subsistence farms to work in the city. Now that work is gone and so are the farms that would have fed them. Watch for a slow motion or, faster collapse of China with a descent into riots and other social problems in 2010. China need 24mm new jobs each year just to stay even and are remain far behind that job generation power curve; never mind new job growth gains.
If the worry of China not buying our treasury paper suddenly became real, the U.S. government could stop most all Chinese exports into the U.S with crushing tariffs. China would then have skyrocketing joblessness, goods piled-up with no sales and be stuck with a trillion dollars in crappy U. S. bond and currency paper having little or no value and no way to sell it. They would take a $1 U.S. Trillion paper hit and be stuck with mountains of un-saleable merchandise. The social fallout would be catastrophic. China shall continue to buy U.S. Bonds to keep exports moving; albeit at a reduced level.
Should Chinese imports cease, American workers might find some lower paying employment in re-opened U.S. factories with the return of manufacturing to the states from Asia. After all, where would Wal-mart get all their goods to sell in U. S. stores?
We hope for the best and would prefer China keep it all glued together and endure only a mild recession. With global financials and markets so fragile and wrecked we give them a one in five of pulling it off. Rather, in a Chinese communist command economy, forthcoming dislocations could be legendary.
Ambrose-Evan Pritchard, the esteemed writer for The London Telegraph says, "The world economy is still skating on thin ice. The west is sated with debt, the East with (too much) plant. The crisis has been contained (masked) by zero rates and a fiscal (credit) blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough (internal) demand to compensate. It is adding supply." (Editor: organic Chinese demand is barely beginning).
"My view is that the markets are still in denial about structural wreckage of the credit bubble. There are two more boils to lance. China's investment bubble; and Europe's banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle."
We agree with Mr. Pritchard but contend China has other bubbles in autos, real estate, their stock market and major water shortages and pollution as well. If these bubbles pop one at a time, it goes easier. But, we might see multiple bubble-popping instead. In that instance, China might take-down the entire global system. Note the effects of the recent scare from Dubai on their $80mm default.
Education, particularly among colleges and universities, has hit the money wall as students now debate if a $40,000 to $80,000 expenditure is worth it in this economy. Newly graduated kids with good degrees but no experience go to the end of the line for jobs.
Experienced people get what few jobs remain as employers have a wider range of choices and can be super picky. Further, employers have no time or money for training. Many kids are schooling on the internet and with on-the-job training while taking menial work for any kind of a pay check.
Public school teachers with longer years of experience, working in grades K-12 are being thinned out for some cheaper new grads. Foreign language teachers along with those in math and science are still preferred over the others. Watch for an increase in home schooling as laid-off teachers with their own children work at home and take in other peoples' kids for instruction-pay. The big public school systems are in trouble. They can no longer be afforded. Since the U.S. Government layered on piles of bureaurat red tape some years ago, fully 1/3rd of public school budgets must be devoted to stupid, expensive politically correct type work. It's all a big waste as students and teachers must suffer for it.
Watch for more traffic accidents due to postponed road work and repairs. Bridges can fall and broken paving causes more wrecks. Higher tax communities will be abandoned especially by seniors with educated kids out of the house. New York City has lost over $6 Billion in income taxes from those fleeing the city and the state.
This trend goes even faster. We see retired folks selling out as local real estate taxes are unaffordable. They are migrating to lower tax states and smaller communities offering fewer services. Much of the big city service stuff is not required and consumers cannot pay for it. Think of Detroit's city wasteland on steroids.
Gold And Silver Trading Is The Place To Be
Fund managers and traders are not married to markets and move to ideas that produce. Gold and silver shares can top and correct in the near term but then take-off in new 2010 rallies. Bigger funds have invested in long-only commodities baskets including gold, silver, grain, copper, platinum and others. They regularly buy the whole cycle from Labor Day to May, endure the dips and trade on 50 and 200 day averages. With a falling dollar these managers forecast stronger gains in these markets. December gold futures were trading near $1,200 this morning of December 1. We see a near-term mild correction followed by more buying.
Administration's Politics Mostly Fail
The Obama left wing liberal agenda designed to transfer wealth is not working. The president's popularity is sinking along with his agenda. The primary problem is the administrations inability to claw out of the employment depression. Instead, they will continue to keep digging while installing the wrong ideas, creating more and deeper messes. This advances the desirability of precious metals, and other hard assets of all kinds. Joblessness is the primary economic problem.
Dollar is the key to several markets. For December, dollar sinks lower.
Never mind the angled line support. Look at the lower box momentum.
Personally, I can see unbelievable opportunities to trade that we would never see again for many years. Turn these problems into opportunities. Those on the right side of the trade might get rich. Those on the other side are just victims. Stay Alert. –Traderrog.
The interwoven complexities of international trade and finance have caught them in all in a spider's web of systemic collapse. Those who can shall attempt a massive inflationary rescue. While it might appear to work for a few months, eventually all implodes. Please note the following from John Pugsley's "Common Sense Viewpoint" as printed in "Golden Insights" by James U. Blanchard III 1997.
"Inflation will destroy debt. The end answer to all argument (inflation versus deflation) rests in the Federal Reserve and government. Both are absolutely committed to preventing a financial collapse or deflation. As long as they are willing to print dollars to support any failing creditors, the cycle will go on. What most deflationists fail to consider is that inflation destroys debt."
"Creditors win through inflation and lenders lose. The deflationists do not see that if inflation of the money supply continues, which it will, there needs to be a deflation. All the debt in the world can be wiped out just by creating purchasing power…and that's exactly what is happening…the debt problems will be resolved, but they will not be resolved by debt liquidation through bankruptcy and collapse. They will be resolved through debt liquidation via the creation of money. We are in for the greatest wave of inflation in the history of the world. You had better not be on the wrong side of the dollar." -John Pugsley "Common Sense Viewpoint."
We agree with Mr. Pugsley but, this was written years ago. We would suggest that this time with most formerly productive nations becoming victims of both inflation-hyperinflation and systemic collapse; the ending could be much worse than supposed. We forecast inflation first then hyper-inflation some time down the road.
What happens between here and there? While in our view, our forecast episodic adventure takes at least 2-3 years but, no one knows for certain. We forecast 2010 to be one of the very worst years of Greater Depression II; the year 2010being the second cycle of several depressionary phases. The fall of Lehman and a surrounding crash was only Phase One. Before Phase Two terrorizes global markets, we suggest a short recovery arrives first.
Debts both public and private have not been paid down to any great extent. To make matters worse, new debts continue to plague central banks, nation's banks, consumers and commerce. In order to find a basing bottom and enable a recovery, these debts must be paid, repudiated or inflated away. For now all of these solutions are in play but as fast as old problems are resolved even more continue to pile-on aggravating the troubles.
While global governments are busy attempting to inflate away debts through monetization; i.e., printing piles of un-backed dollars, notes and bonds, the load is simply unsustainable on the math. Manipulators have gone past the point of no return. There will be no recovery until after a smashing correction arrives. This smash is the quick and dirty answer to final de-leveraging of all those debts. We think it comes in phases and in fits and spurts.
Japan is in the worst shape with public debt versus GDP now standing at 270%. With an aging population and not nearly enough young workers entering their workplace, deflation arrived again and the Nikkei Stock Market is taking big hits. The U.S. and Europe except for the U.K have 125% of debt versus GDP with the U.K's at 105%. (Source for percentages Societe Generale).
The U. S. Dollar plays a very important role in these problems. With the Dollar being 85% of the entire world's reserve currency; as the dollar goes, so goes the global system. Unfortunately, the dollar has much further to fall and for this month of December, 2009, the dollar can sink to an index low of 70.00-72.50 from today's prices. Look for the dollar's final support as a minimum low sometime during the next three years ranging from 40-46.
Stocks are peaky and will shorter term correct. We think the nearby correction will be mild and new buying can return in January, 2010 continuing through spring, 2010. The Dow could easily find an 8850 base and then return to a new rally. The S&P's might base at 950. Meanwhile, we could experience an 11-12% Dow and S&P haircut.
The blow-off top for primary stock markets could be later May through July, 2010. On this cycle, five extremely negative events hit world economies and markets simultaneously.
These are:
(1) $40-$50 billion in U.S. credit card failures are reported;
(2) Housing sales both new and used for the first half of 2010 fail so badly, this market is literally in free-fall. There will be 7-10 million new mortgage defaults with most of those in the prime paying (not sub-prime) category caused by job losses;
(3) First half auto sales are reported. They will be so poor more car-makers file bankruptcy;
(4) Commercial real estate loans bankrupt many developers and their projects among those existing, under construction, and planned.
(5) Insurance companies are holding so much failing commercial real estate paper, they are in danger of defaulting with some running for government bailouts in TARP II. At one time years ago, the 20 top insurance companies could literally control the United States economy. They are huge asset holders of property and cash investments.
Housing valuations will fall on the average, nationwide in the U.S., another -30%. We figured about one year ago that 1980's prices would be the bottom. Now we potentially see a bottom at 1970's prices. More homes were foreclosed in the last 12 months than in an entire decade in the first Great Depression of the 1930's.
On the Monday morning of 11-23-09, news reported used housing sales were up 10.1%. This is nothing but giveaways prodded by seller financing, government freebie down payment credits, and crash and burn pricing taken by bottom feeders. Housing remains in international collapse. The last great creditor, FHA is hurting badly.
Inflation is now an unreported at 7% and rising. By May, 2010, it begins to bite very hard first on the lower 1/3rd of U.S. wage earners and the jobless. Most of their income is spent on food and energy. They top the inflation pain lists.
Consumers with newer bought and leased autos will do "jingle mail." They will return newer unexpired leased cars and trucks back to dealers' lots, give them the keys and quit paying. We saw this with houses over the past 1-2 years. Auto lots will overflow with new-used cars and trucks. Values will plummet. Many of these "returns" will be from the "Cash for Clunkers" program by those who got stuck with unaffordable car and truck payments.
Auto-maker GM projected total U.S. industry sales for 2010 of 11mm with a new recovery. There will be no recovery and sales could skid for the whole industry group down to 7mm or less in 2010. In 2011 it gets even worse.
Auto layoffs will escalate and unions will scream for help to president Obama. He will financially band-aid a dying industry. Consumers have no buying power, credit or cash to make any difference. Those with cash will save it and hunker down and wait out the troubles. Auto union membership declines rapidly. Most vehicle lending dries-up to a trickle.
The crude oil and energy sector has fundamentals pulling in both directions. Today we see oil price resistance at $80 with a trading range slightly lower in the $70's. Fundamentals show an over-supply on recession-depression lower demands. On the other hand, inflation of prices is rising on a weaker dollar and will escalate. Look for crude oil to visit the $50's and then turn-around on inflation rising to $100. Gasoline will follow as some refineries are closing on operating losses and no new ones are being built. Inflation ultimately wins on price escalation. Eventually, scarcity of product returns.
Depressions normally and historically last ten years. It could take consumers that long to pay down all of their debts before a return to normal conditions. Savings rates are up but with so much debt and few or zero salary raises in the face of new and rabid inflation, consumers will be economically slaughtered.
Credit and banks go through the wringer again. There are few bank ideas left to earn lender income except for trading. While Goldman Sachs makes millions weekly doing this, most banks are not set-up for it and there are only so many good traders available for the work. Since Obama's compensation guy is rankling big traders with income limits this makes things worse as these people leave for unrestricted pay in overseas trading positions.
The bond market is so huge it takes time for it to roll over and slide off a cliff. Asia and the U.S Federal Reserve have been our larger paper buyers. While they still buy some to keep markets glued together they are: (1) exiting the longer term paper for shorter terms and, (2) buying less of it turning to other ideas in the commodity markets.
With the higher Yen, Japan is increasingly engaged in hard asset shopping trips as is South Korea. They are both looking for grain, gold, oil, natural gas and other commodities they lack internally.
Junk bonds could lose 1/3rd of today's value just next year. Treasury bond and note buying continues until "full faith and credit" is repudiated on distrust. Eventually they crash but in slow-motion over years due to the magnitude of these markets. We think no bond is a safe bond. Municipal bonds are viewed as some of the safest. What happens when cities, towns, counties and states are so broke they cannot pay the interest? Their tax revenue is going off a cliff. Some are safer than others for awhile but for how long? Who can finger a top? It can't be done as it's too political.
Various states within the United States have or, will be failing financially. Someone reported 1/3rd of the TARP money spent so far was used to bail-out bankrupt states. This will escalate as federal TARP money cannot help them fast enough and in large enough amounts to keep it all glued together. Watch for fire and police employment to get as thin as too be very dangerous in various communities. Ten states are going financially critical and 47 are on the watch lists.
New York, New Jersey, Connecticut, Michigan, Ohio, Florida, Arizona, Nevada and California are among the financially worst, hurting from falling tax revenue on broken businesses and consumers. Watch California as they could go out of control first within this group. They continue to contrive new taxes and not work on spending reduction. When some states face total collapse it will get very ugly very quickly. Michigan is among the worst of the worst. Most all of the states are spending themselves into the ground. They refuse to cut back as its political suicide. They will spend until there is nothing left to spend and then scream for help to the Federal Government.
China is in very serious trouble as the U.S. consumers have stopped buying their stuff. Their TARP for early this year exceeded that of the United States in both amount and rapidity of spending. It is estimated they spent in four months from January, 2009 to May, roughly $600 Billion with most of it going into projects now at over-capacity. The U.S.' lack of buying cut China's entire year of exports by -25%. Also, note the Chinese economy is 1/4th the size of the United States' economy.
There are hundreds of idle Chinese factories and millions of laid-off workers with no new factory employment and not much work of any kind. Further, millions sold subsistence farms to work in the city. Now that work is gone and so are the farms that would have fed them. Watch for a slow motion or, faster collapse of China with a descent into riots and other social problems in 2010. China need 24mm new jobs each year just to stay even and are remain far behind that job generation power curve; never mind new job growth gains.
If the worry of China not buying our treasury paper suddenly became real, the U.S. government could stop most all Chinese exports into the U.S with crushing tariffs. China would then have skyrocketing joblessness, goods piled-up with no sales and be stuck with a trillion dollars in crappy U. S. bond and currency paper having little or no value and no way to sell it. They would take a $1 U.S. Trillion paper hit and be stuck with mountains of un-saleable merchandise. The social fallout would be catastrophic. China shall continue to buy U.S. Bonds to keep exports moving; albeit at a reduced level.
Should Chinese imports cease, American workers might find some lower paying employment in re-opened U.S. factories with the return of manufacturing to the states from Asia. After all, where would Wal-mart get all their goods to sell in U. S. stores?
We hope for the best and would prefer China keep it all glued together and endure only a mild recession. With global financials and markets so fragile and wrecked we give them a one in five of pulling it off. Rather, in a Chinese communist command economy, forthcoming dislocations could be legendary.
Ambrose-Evan Pritchard, the esteemed writer for The London Telegraph says, "The world economy is still skating on thin ice. The west is sated with debt, the East with (too much) plant. The crisis has been contained (masked) by zero rates and a fiscal (credit) blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough (internal) demand to compensate. It is adding supply." (Editor: organic Chinese demand is barely beginning).
"My view is that the markets are still in denial about structural wreckage of the credit bubble. There are two more boils to lance. China's investment bubble; and Europe's banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle."
We agree with Mr. Pritchard but contend China has other bubbles in autos, real estate, their stock market and major water shortages and pollution as well. If these bubbles pop one at a time, it goes easier. But, we might see multiple bubble-popping instead. In that instance, China might take-down the entire global system. Note the effects of the recent scare from Dubai on their $80mm default.
Education, particularly among colleges and universities, has hit the money wall as students now debate if a $40,000 to $80,000 expenditure is worth it in this economy. Newly graduated kids with good degrees but no experience go to the end of the line for jobs.
Experienced people get what few jobs remain as employers have a wider range of choices and can be super picky. Further, employers have no time or money for training. Many kids are schooling on the internet and with on-the-job training while taking menial work for any kind of a pay check.
Public school teachers with longer years of experience, working in grades K-12 are being thinned out for some cheaper new grads. Foreign language teachers along with those in math and science are still preferred over the others. Watch for an increase in home schooling as laid-off teachers with their own children work at home and take in other peoples' kids for instruction-pay. The big public school systems are in trouble. They can no longer be afforded. Since the U.S. Government layered on piles of bureaurat red tape some years ago, fully 1/3rd of public school budgets must be devoted to stupid, expensive politically correct type work. It's all a big waste as students and teachers must suffer for it.
Watch for more traffic accidents due to postponed road work and repairs. Bridges can fall and broken paving causes more wrecks. Higher tax communities will be abandoned especially by seniors with educated kids out of the house. New York City has lost over $6 Billion in income taxes from those fleeing the city and the state.
This trend goes even faster. We see retired folks selling out as local real estate taxes are unaffordable. They are migrating to lower tax states and smaller communities offering fewer services. Much of the big city service stuff is not required and consumers cannot pay for it. Think of Detroit's city wasteland on steroids.
Gold And Silver Trading Is The Place To Be
Fund managers and traders are not married to markets and move to ideas that produce. Gold and silver shares can top and correct in the near term but then take-off in new 2010 rallies. Bigger funds have invested in long-only commodities baskets including gold, silver, grain, copper, platinum and others. They regularly buy the whole cycle from Labor Day to May, endure the dips and trade on 50 and 200 day averages. With a falling dollar these managers forecast stronger gains in these markets. December gold futures were trading near $1,200 this morning of December 1. We see a near-term mild correction followed by more buying.
Administration's Politics Mostly Fail
The Obama left wing liberal agenda designed to transfer wealth is not working. The president's popularity is sinking along with his agenda. The primary problem is the administrations inability to claw out of the employment depression. Instead, they will continue to keep digging while installing the wrong ideas, creating more and deeper messes. This advances the desirability of precious metals, and other hard assets of all kinds. Joblessness is the primary economic problem.
Dollar is the key to several markets. For December, dollar sinks lower.
Never mind the angled line support. Look at the lower box momentum.
Personally, I can see unbelievable opportunities to trade that we would never see again for many years. Turn these problems into opportunities. Those on the right side of the trade might get rich. Those on the other side are just victims. Stay Alert. –Traderrog.
5 December 2009
China denounces U.S. banks for 'evil intent' with derivatives
Outside vanilla derivative products their sole function is to flog off hidden risk. The western banks mentioned monitised their cred and died, end of story.
BEIJING -- A senior Chinese official who oversees the country's largest state-owned enterprises has publicly slammed Western investment banks for "maliciously" peddling complicated derivative products that caused huge losses for Chinese companies over the last year.
In Beijing's strongest criticism on the matter to date, Li Wei, vice director of the state-owned Assets Supervision and Administration Commission, singled out Goldman Sachs, Morgan Stanley, Merrill Lynch, and Citigroup in a long and highly critical article in the latest issue of an official Communist party newspaper.
The large losses suffered by Chinese state companies were "closely associated with the intentionally complex and highly leveraged products that were fraudulently peddled by international investment banks with evil intentions," Mr Li asserted. "To a certain extent some international investment banks were the chief criminals and the root of ruin for the Chinese enterprises who encountered this financial derivatives Waterloo."
In his article, Mr Li said 68 of the 130-odd state companies controlled directly by Sasac had been buying derivatives to speculate or hedge against rising commodity prices and fluctuating currencies and interest rates, even though some of them were not authorised to do so.
These 68 companies had booked total combined net losses of Rmb11.4 billion on the Rmb125 billion worth of financial derivatives products they had bought by the end of October 2008, Mr Li said.
The government has not previously revealed the full extent of losses suffered by Chinese companies that made ill-fated bets on over-the-counter, mostly offshore derivatives.
In September, Sasac warned that some of the contracts were illegal and might be invalidated, a move that prompted some Western banks to agree quietly to renegotiate contracts behind closed doors.
Air China, China Eastern Airlines, Cosco, China Railway Engineering Corp., China Railway Construction Corp., and Citic Pacific were among the companies that lost the most from buying complex derivatives.
Some of the biggest losses came from the airlines and shipping companies' purchases of options to hedge against rising oil prices between June and August last year, when oil hit a historic peak of more than $140 a barrel.
When prices fell during the financial crisis, these companies were saddled with large losses, partly because they had chosen riskier -- and cheaper -- derivatives products to hedge against rising prices.
Mr Li said the most important reason for the derivatives losses was unnecessary speculation and attempts at arbitrage by these state companies.
He also cited weak risk management procedures, a lack of expertise, and intentional breaking of rules that restrict most kinds of financial derivatives in China.
But he said China should "not give up eating for fear of choking" and that it was imperative for Chinese companies to keep using financial derivatives.
BEIJING -- A senior Chinese official who oversees the country's largest state-owned enterprises has publicly slammed Western investment banks for "maliciously" peddling complicated derivative products that caused huge losses for Chinese companies over the last year.
In Beijing's strongest criticism on the matter to date, Li Wei, vice director of the state-owned Assets Supervision and Administration Commission, singled out Goldman Sachs, Morgan Stanley, Merrill Lynch, and Citigroup in a long and highly critical article in the latest issue of an official Communist party newspaper.
The large losses suffered by Chinese state companies were "closely associated with the intentionally complex and highly leveraged products that were fraudulently peddled by international investment banks with evil intentions," Mr Li asserted. "To a certain extent some international investment banks were the chief criminals and the root of ruin for the Chinese enterprises who encountered this financial derivatives Waterloo."
In his article, Mr Li said 68 of the 130-odd state companies controlled directly by Sasac had been buying derivatives to speculate or hedge against rising commodity prices and fluctuating currencies and interest rates, even though some of them were not authorised to do so.
These 68 companies had booked total combined net losses of Rmb11.4 billion on the Rmb125 billion worth of financial derivatives products they had bought by the end of October 2008, Mr Li said.
The government has not previously revealed the full extent of losses suffered by Chinese companies that made ill-fated bets on over-the-counter, mostly offshore derivatives.
In September, Sasac warned that some of the contracts were illegal and might be invalidated, a move that prompted some Western banks to agree quietly to renegotiate contracts behind closed doors.
Air China, China Eastern Airlines, Cosco, China Railway Engineering Corp., China Railway Construction Corp., and Citic Pacific were among the companies that lost the most from buying complex derivatives.
Some of the biggest losses came from the airlines and shipping companies' purchases of options to hedge against rising oil prices between June and August last year, when oil hit a historic peak of more than $140 a barrel.
When prices fell during the financial crisis, these companies were saddled with large losses, partly because they had chosen riskier -- and cheaper -- derivatives products to hedge against rising prices.
Mr Li said the most important reason for the derivatives losses was unnecessary speculation and attempts at arbitrage by these state companies.
He also cited weak risk management procedures, a lack of expertise, and intentional breaking of rules that restrict most kinds of financial derivatives in China.
But he said China should "not give up eating for fear of choking" and that it was imperative for Chinese companies to keep using financial derivatives.
4 December 2009
Gold Desafio: Global Struggle
by Jim Willie, CB. Editor, Hat Trick Letter
The gold market has become, despite little recognition by the financial press, the battlefield for global control of the financial world. To the winner go the spoils and access to the helm. To the winner goes control of global banking, dominance in commerce, and the advantage in some degree of printing money on a credit card that all nations must finance indirectly. Nevermind the military aspect. In the Untied States, the custodial control of the USDollar as global reserve currency enabled it to spawn numerous syndicates with criminal impunity, since under the USGovt aegis (if not management). The gold market is the site of the most ominous dangerous life changing battle in recent history. My work has frequently mentioned a Paradigm Shift in progress. The shift is of power, influence, dominance, control, privilege, and direction. It also permits the writing of history itself. Since the end of World War II, the Untied States and Great Britain created an empire based primarily upon economic and financial prowess, but certainly reinforced by military strength. With the fall of Wall Street, the ruin of US banks, the insolvency of American households, and the quagmire of US foreign wars, the shift has accelerated. The parallel debacles and ruin into insolvent for Great Britain has ushered in an Anglo removal from the power circuit. The transition will not be smooth. See the endless wars, the attacks on tax havens, and the viruses.
Notice the slow fade of the Japanese, a nation having served as US Lackeys for more than a few decades. They must next join forces with the Chinese, and perhaps bow but not too much since they bring tremendous technological prowess to the table. Thousand year old enmity must yield to cooperative alliance and ventures. Regional unity will become of paramount importance in the next chapter of economic development. The Tokyo mavens are suffering from the shock of the Yen Carry Trade unwinding process. Weeks ago, my articles pointed out how the rise in the Japanese Yen would keep the pressure firmly on their economy, clearly still export driven. The USDollar crisis has its own core troubles. But they are amplified by a stronger yen currency, which is undergoing a handoff to the Dollar Carry Trade. The Yen currency continues to push higher, causing the Japanese Govt to assemble and hammer out emergency policy. Never in history has a carry trade fed off and exploited a decline in the global reserve currency. These are historic times.
GOLD AS CRUX FOR BATTLE
The shift in power is most evident in the rapid rise in accumulated gold by the Chinese Govt. In my view this is the actual crux of the global desafio. In the Spanish language, desafio means a great struggle and battle, much akin to jihad in the Arabic language, but without the warlike military connotation or tendency toward glorified suicide. My first exposure was the Discovery Channel. A show focused upon the Alaskan Desafio as some brave group weathered the wintry storms, traveled with sled dogs, and struggled to eat and sleep. This gold desafio is for global control. Those who control the gold control the global banking with all its trappings. The corrupted COMEX and London Bullion Market Assn are the clear battlegrounds for the gold battle. In an open manner, no longer hidden from view, the COMEX is settling gold long futures contracts with Street Tracks GLD shares. Investors in GLD shares should be horrified at shareholder contamination. Clearly, the COMEX does not have much of any gold bullion, yet it operates formally as an exchange to sell gold, and to create a market for gold price discovery. Some call this new redemption developed appropriately a silent COMEX default, and correctly so. It is the early chapter of a COMEX default, presaged last May.
The two-sided fraud deserves mention once more. In time, the Street Tracks GLD (run by State Street, with JPMorgan as custodian) will be exposed as totally corrupt. They are using GLD shares openly now to cover COMEX short futures contracts. They are likely providing GLD bullion to London to satisfy futures contract delivery demands. Evidence painted a picture after London gold delivery stresses occurred at the same time as vast deletions from the GLD bar list, which suddenly reappeared days later. That is burning the candle at both ends of the GLD itself. Eventually my expectation is for GLD shares to sell at a 40% discount to gold price as the lack of gold inventory is revealed. Then later, after lawsuits, the GLD might easily sell at 80% discount. Finally the climax could be prosecution for fraud and all investors will be given 20 cents per dollar versus gold. Who knows? Maybe it will be 30% and 60% and 40 cents per dollar. The trouble for hapless unsuspecting investors is they did not read the prospectus, which permits such misuse of GLD shares. They just might be lazy and qualified sheeple. The Wall Street crowd did effective planning. One must give a tip of the hat to their brain trust. The GLD is a tool to drain gold demand from the public and to supply it to the syndicate. It is one of the most brilliant open ploys in financial history.
THE ANTICIPATED DUBAI CRUSH
On October 8th, the Jackass gave you a "TOLD YA SO" on the announced previewed end of the Petro-Dollar. The Saudis, with Chinese and Russians on their left and right arms, heralded the end of the sale of crude oil in US$ terms, with French and Japanese in tow. The Germans secretly were in charge of counseling toward the forged deal, but preferred the shadows. The new crude oil transaction settlement system will take time, but surely not to require eight years until 2018 as announced. That stated target date was intended to deflect and distract from US retaliation. The mere announcement should be regarded as a schematic diagram for architects and investors alike to follow. New systems must be constructed. Investors ahead of the curve will be the primary beneficiaries. The changes that result from the announcement itself will assure the completion date to be just 2 or 3 years, not 8 years.
In just two short months, it is time to say "TOLD YA SO" again, this time on the story that came out of the United Arab Emirates. Or should they be also called the Untied Arab Emirates, after their squabbles between city states? The Dubai World debt default and restructure has caused shock waves the world over. IT WAS FORECASTED IN AUGUST BY THE HAT TRICK LETTER. The vast construction bust has caused anticipated ripples. The threat to London banks is acute. Time will tell whether its ripples will cause sufficient damage to London and New York bankers to topple them and to force lost control in other banking functions like gold management, as my forecast indicated. It seems that worsened big London bank solvency from underwritten Dubai losses, rather than Arab USTreasury Bond dumping, will be the principal cause of any imminent breakdown, if it occurs. See the article entitled "US Bank Enemies at the Gates" from late August (CLICK HERE).
For the record, here is what was written over three months ago by the Jackass pen. "The regional construction boom in the Arab world has an epicenter in Dubai. Unfortunately, it has gone bust, and loudly so. If not for the prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai would have embarrassed them in front of the world. Instead, a new threat comes. The Abu Dhabi rescue next must contend with an indigestion problem, as USTreasurys and likely other US$-based bonds are flooding their banking system. They might own a considerable batch of US bank stocks, soon to be dumped. Ambition led to a whiff of hubris, as fantastic architectural design led to large scope, seen in the skyscrapers and bridges. Not shown are the spectacular communities designed as trees with branches and leaf petals, many empty, busted, and without investment income. But they overdid it, and now must deal with corporate failures and liquidation challenges. The Persian Gulf bank failures represent the clear and present threat. The outsized projects have yielded to outsized rescues and next outsized indigestion to handle the funds in ways so as to avoid a string of national bank failures. Vast liquidations come, word comes from contacts.
A bank panic in the Persian Gulf could ensue very soon, a back door threat. It would clearly have origins in the United Arab Emirates, spread to the entire Persian Gulf like to Saudi Arabia, Kuwait, and elsewhere. From this global toehold, the bank panic could then spread to London, New York, and points in Europe. The UAE bankers must manage their situation. They are loaded to the gills with USTreasurys, the main currency used in the liquidations and rescues local to the UAE. They also have pet stock accounts in big US banks. As further liquidations occur, avoidance of bank failures seems a remote prospect. Watch the enemies at the gates, outside looking in, in urgent need of dumping USTreasury Bonds and other US$-denominated securities."
Much can be told about hidden developments, like family squabbles between the UAE emirate rulers, bitterness over shame brought to the region, anger from unheeded counsel, sudden departures of people in key posts, and a desire to punish (even exploit) the decline in fortunes. The biggest question in my book is how much Abu Dhabi bankers wish to permit London bankers to absorb losses, before Abu Dhabi cleans up and grabs liquidated properties in Dubai at deeply distressed prices? Negotiations are underway, heated, and of vital importance in London between all the bankers involved. What can London offer Abu Dhabi? That is the question. The Arab world takes a dim view of debt to begin with. They abhor home and property mortgages generally, and thus never invest in mortgage bonds. To prove the point, hundreds of Dubai Prisoners languish in their hotels and apartments. They are British, American, and European engineers, financial cogs, analysts, and other workers whose employers from the parent Western firms defaulted on very large loans. These people will remain prisoners, and will likely become pawns in the game during negotiations. Conditions grew so desperate that hundreds of cars lie abandoned at airports, from workers who fled the region before trapped in homes.
Expert analysts warn of continued shock waves, as almost nothing has been resolved, very little asset or corporate liquidation has occurred, fallout has not yet been permitted, bank losses have not been declared, and resolution prices have not been posted. The internal battle between UAE city states, one rich in oil and a banking center, the other recovering from a construction bust amidst great hubris and displayed magnificent follies, will play itself out in the coming several months or years. The internal families are locked in a power struggle. In Dubai, 30% of their economy is derived from real estate, construction, and other property development. They have some truly braindead concepts and ideas at work, like indoor snow skiing, like cooled beaches with underground pipes, and golf courses that require much output from the desalinization plants to water the green landscape against sandy backgrounds. These are like plebeian versions of marble palaces in the desert. To be sure, a great awakening comes as a load of debt is dumped on the big bankers, just when they might have thought the worst was over.
One friend calls the Dubai construction array the greatest property folly in a century. Maybe so! Next come shock waves to London banks. The follies must be liquidated, with great losses dumped upon balance sheets. The banks must take much more lumps and losses. The original $10 billion in debt loss is more like $80 billion. Details on the story appear in the upcoming December Hat Trick Letter reports, which are streaming in on a daily basis. European banks have some exposure too, but not as much as London. The Abu Dhabi rulers must complete bargains with London bankers, who have conspired to suppress the gold price for two decades. The UAE leaders hold a huge amount of gold, and have demanded its return from London custodial accounts. Resentment seethes beneath the surface, the basis for Arab vengeance. The fallout will be wreckage of Royal Bank of Scotland, and maybe HSBC too.
In the process, watch power shift to Abu Dhabi as concessions are made by London under extreme pressures. Parts of Dubai are ghost towns, almost totally unoccupied vast projects. The biggest question in my book is whether RBS can go bust and be liquidated while still operating under the British Govt aegis? Lloyds will take large blows as well. The shock waves have not yet fully reverberated. They will continue for months. The Dubai property prices have not yet bottomed, and might settle at 20 cents per dollar on original basis. The legion of Western wonks in the financial sector stupidly expected Abu Dhabi to rescue all Dubai loans, without benefit of much knowledge of resentment, family conflicts, banker ambitions, and ramifications that extend to the new Gulf Dinar currency that shifted planning rooms (Saudi to Russian). My August article implied the Dubai bust would result since Abu Dhabi would not step in and bail out their UAE brethren. The inner conflicts and agendas were well known all along here.
The next shoe for the condemned Caucasian crowd is mortgage losses from Eastern Europe. For several years, the Swiss provided the funds as a result of their 1.5% steady official rate. At the time, it was 3% below the rest of the continent. The combination of home loan default, and sharply lower Eastern Europe currency basis has resulted in near total losses to Swiss banks on such mortgage portfolios. Also, watch Greece, which could be the next Dubai crush zone. It is a construction bust center also, like Spain. The socialist roots in Southern Europe have enabled a denial of property price declines from Spain to Italy to Greece. Instead of vast arrays of homes being sold at distressed lower prices, they sit in inventory at elevated absurd high prices. The bust impact comes soon, as these assets cannot be carried much longer on the books.
GO GOLD GO GOLD
This is just the beginning. We are still in the proverbial second inning of this gold explosion. Gold continues to rise because the system is breaking, because almost zero remedy has been completed, because pressures are brought to bear using the same broken tools to fix the problems, because mountains of new money are wasted and paid to failed bankers, because the crisis is ongoing, because the economies are not responding to stimulus, because home foreclosures and job losses continue unabated. Much more government rescue and stimulus comes, MUCH MORE. The Chinese are firmly in control of the gold price. They inch up the gold price systematically in order to release more supply from both the cash desperate and the investment knuckleheads. A big story has hit the press, that HSBC is backing out of the gold storage business. My gut tells me that HSBC might be clearing major bank vault space to hold Chinese deliveries from metals exchanges. The gold price does not merely rise from a weakening USDollar and major currencies. Nations intentionally try to undercut themselves in order to preserve their export economies. The gold price also rises from the gradual removal of shackles that have falsely suppressed the price, as supply has dwindled, replaced by paper gold, and probably tungsten gold too. In the last couple weeks, extraordinary scrutiny has come to the gold delivery system. The process reveals an unspeakable global shortage of gold bullion. The gold price is attempting to adjust to a proper higher price free from interference, based upon supply matching demand. The gold price will rise further from continued debasement of the major currencies. Even now, with the COMEX and LBMA in London, the gold market cannot clear at the current price. There is an extreme shortage of gold bullion in physical supply, due to years of price intervention and replacement by paper gold. Apart from weak or destroyed currencies, the gold price must be higher from basic intervention relief.
Some argue that gold must rise to match the supply of newly created money, bound in the fiat currencies with pretty designs and colored ink, even watermarks. Gold should rise in parallel with money creation, but not in lockstep. A currency can always be fixed according to a cover clause that dictates 1% of money can be redeemed in gold. Later, a move to 1.5% in the gold cover clause would fortify one currency in much the same way that official national interest rates lift currencies upon changed policy. Personally my wish is for the gold price to continue its powerful bull run without the Euro currency breakout toward 160. That would expose all the currencies together as horribly weak if not invalid. If the Euro rushes toward 160, the gold market in Europe must then adapt to an interruption in the bull roaming on the continent. Stand back! The explosive upward thrust in the gold price is still a threat, much like Mount St Helens. The Powerz have begun to lose control of the gold market.
No search for safe haven in the USDollar took place after the Dubai world shock. Rather it was a retreat from the British Pound and Euro currencies, which bore the risk of loans underwritten. In one short week, the effect has dissipated, as the USDollar is weaker than BEFORE the Dubai incident broke to make news. All currencies are weak relative to the stable powerful reliable gold. The USDollar is showing a steady relentless weakness, unable to snap into any recovery. It is my view that ruining the federal finances is what Obama was hired to do by the syndicate. The high risk of USMilitary coup in the future remains acute in order to avert a USTreasury default, or perhaps coincident with a default. Obama's specific job is to run up deficits and ruin the dollar, which paves the way for the coup. The Cap & Trade game is just another fraud revealed, with credit given to the intrepid internet websites that gave up the ghost. The upcoming coup has a definite purpose, to remove foreign creditors from any receivership tribunal. The Untied States can become a sequestered state, free from foreign interference. Yet isolation would be the fate won.
ENTER THE CLOWNS
Don't bother to pardon the misspelled names, done to disguise the identities of clowns within our midst. The Jackass is fully capable of errors, usually admitted quickly. My biggest arena for errors has been long-term USTreasury Bond yields, due to interventions, interference, and monetizations. Other errors have been made, hoped to be minor in nature. An extraordinary amount of information must be digested, absorbed, and integrated into any editorial analytic work that covers a complex and treacherous financial world. Errors come since we are human. But what follows is not ordinary, and speaks to an arena tilted toward deception delivered with motive. My work has an objective to analyze correctly, to highlight connected factors, to explain complexities, to forewarn with lead time, and to make forecasts. The string of solid forecasts is my carrying card. Other foibles are carried. My body is adorned by moles, one just like my mother's. More than a few wild long hairs grow from my eyebrows, making some wonder if General Elmo Zumwalt was a distant uncle. My eyes are uneven, one lower, but no glasses are needed to correct vision. My head is balding, but hats keep it warm. My right foot is pigeon toed, that results in a hook in the soccer kick. The left kick is more adept. But my work is factual, helped along by wonderful reliable sources and numerous newshound friends. Minor errors are committed along the way. One should care not about a minor typo within articles offered in the public domain, despite my usual final proofread pass. What follows is a list of elements inside the gold community, often doing a notable disservice.
Why are the US financial airwaves polluted by Denis Gartmann and his consistently incorrect and shallow preachings? His fund is down, not down hard, as he maintains his negative opinion of the gold asset story. He hedged a gold position with an offsetting currency position, resulting in a total waste of investment funds. Gold just happens to be the biggest story and one of the best performing assets in the last half decade. One might conclude such strong performance is worthy of disdain, disrespect, and disrepute. NOT! A contact of mine is considering a new Anti-Gartmann Fund, with a double leverage component that takes the opposite position of the Gartmann fool. Given his steadily shallow analysis and lack of comprehension of the gold market, one might conclude that Gartmann has a secondary income source from Wall Street firms. He might indeed be paid to denigrate the Gold Bull market, despite the tarnish to his reputation. An aside on Gartmann, who used to speak as the Cambridge House gold conferences alongside the Jackass. He appeared in 2005, much to my surprise, since he is so incredibly lacking in insight. From the podium, in front of over 1000 people, he delivered probably the stupidest speech ever to penetrate my ears. Gartmann actually claimed, one year before the housing bust struck, that the USEconomy was still grossly under-leveraged. He actually made numerous points about how the assets within the Untied States still had countless additional collateral from which to draw credit. He actually spoke of numerous new avenues to extend credit, and how the extra funds to surge within the channels of the American system would result in much greater economic growth. He concluded that the best days of the USEconomy were well ahead of us. He praised the merits of risk. Then came the bust. One must wonder if the 1000 people remember the idiotic preachings and drivel from the man that day in Vancouver. The Jackass sure does, one of only a handful who emitted laughter during the Gartmann ideological face plant in the snow. What is his latest correct forecast??
The same conference featured Doug Kasey, who went galactic in a mindless harangue. He spoke of the eventual cap on commodity prices from mining asteroids in the solar system. You see, they are rich in iron and other base metals. He ignored the cost of mining in the deep solar recesses, and how the high cost would impose a cost cap, but one perhaps 50 to 100 times the current commodity prices. After all, in order to exploit the vast asteroid metal supply, one must escape the earth's orbit, at a heavy cost, an overlooked factor. The conference management might have done well to give Doug a face to face check before he stepped up to the podium. Man oh man!! That was a memorable conference with two icons displaying their unwaxed cross-eyed viewpoints for all to see. One must give Kasey credit for many speeches that challenge the honesty and integrity of the USGovt and USMilitary enterprises.
Next take Pablo Van Eaton. The man sounds good, looks great, has a great speaker voice, and is a nice fellow. But he carries a distinction above all others. Van Eaton provides the most eloquent and well constructed arguments for consistently wrong forecasts, and has done so for several years. He had one good call a few years ago on mining stocks hitting a peak, but that call has been eclipsed by a long list in a row that seems not to end. It is like he was a champion on his school forensic team, burdened by arguing the merits of a plainly wrong position, but excelled. When gold was meandering in the low to middle 900 level for months earlier this year, he forecasted a move in the gold price down below 800, as the deflation threat would take its toll. However fallible, he is still invited to appear as a panelist on the dinner hour shows for the Canadian Business Channel. The major investment houses must love his steady disdain shown for the gold market. His subscribers are welcome to switch over to the Hat Trick Letter, where correct forecasts are not only important but are regularly given. Pablo attracts crowds at the conferences. Bless them one and all who hang on his every word, as they must have very short memories. What is his latest correct forecast??
A vivid memory is etched in the Jackass mind from the Calgary conference in 2004, offered also by the Cambridge House. Van Eaton shared generously a taxicab with the Jackass to the airport. The conference had ended. During the taxi ride, Van Eaton expounded on why the USDollar would suffer a serious decline from May to the end of the 2004 year, since Asian sovereign funds would diversify away from the USDollar. In direct rebuttal, the Jackass explained in simple terms that the US Federal Reserve had begun to raise the official interest rate, and would continue for several more meetings. The Jackass rebuttal argument was that we live in a bond driven world, and as long as the official US interest rate was rising, the USDollar would continue to rise in a surprisingly counter-trend rally from basic bond speculation. The point was made quietly, tactfully, professionally, since Pablo was paying for the taxi. Furthermore, my extended argument was that the Asians would hold off on a major dumping of US$-based assets, and instead sell after a year or two had passed. Score one more correct call for the Jackass, and one more wrong forecast for Van Eaton, who shared the same fallacious argument before 1000 people at the same Calgary conference. IN THE NEXT FEW MONTHS, THE USDOLLAR ENJOYED A POWERFUL UPWARD RALLY IN PURE COUNTER-TREND FASHION. It ended when the USFed halted the rate hikes, as forewarned. One must wonder where Pablo takes his cues, or who pays his clandestine paychecks. One must not become too enamored of that charming foreign accent, which delivers a flow a words like a melody. The Jackass does not care if a hillbilly accent is worn when the mental acumen comes through in brilliance. Take TBoone Pickens. His homey folksy Texan accent is charming, and sounds nowhere near as intelligent and alluring as Van Eaton. But Pickens is as consistently correct on forecasts as Van Eaton is wrong.
Another lame entry is Richard Burnedstein, the respected economist from Merrill Lynch. This week he said gold has no driving fundamentals that justify its rising price. Clearly Burnedstein loves the paper game, and surely maintains a high derived price on all things paper. His paycheck is also high, derived from a major paper merchant firm. One must excuse Richard since he at least comes forth with the Merrill Lynch name attached to his own, including all appearances. So his preachings are a much more genuine acknowledged compromise of mental processes. He is paid to represent his firm, whereas Gartmann could easily be receiving large funds from the back door, where his allegiance lies and influence of partners is more hidden. Never forget that Wall Street earns almost zero investment banker fees from gold or the mining firms. It is like dogs selling cat food; they don't do it! What mining firms do solicit in funds for stock issuance is largely conducted in Toronto and Vancouver. So the gold fundamentals are lacking in the man's compromised view. What is his latest correct forecast??
One must suppose that skyrocketing gold investment demand and rush to diversify out of a collapsing dollar do not qualify as fundamental. And the absence of metals exchange gold inventory also does not qualify as fundamental. And the Chinese pledge to lift their gold reserves 10-fold to 10 thousand metric tonnes in eight to ten years, that is not fundamental either. And the G-20 pledges to formally move toward an IMF basket of currencies, known as the Special Drawing Rights, and away from the USDollar, that is not fundamental either. And the Saudi announcement of a phase-out of sales for crude oil in US$ terms over the next few years, neither is that a fundamental. And the grossly insolvent banks in the Untied States, England, and Europe, which are simultaneously struggling, unable to extend loans, desperately suckling from government teats, that is not fundamental either. Burnedstein plainly fails to recognize that the entire world is grasping for something tangible within the global monetary system overrun by toxic paper, and that anchor reached for is gold.
The last two figures that complete the clown show are more closely tied to websites and their associated businesses. Bobo Moriarity is the owner and editor of a formerly prominent website. He shows a surplus of his own articles on his website, usually to extol the merits of some stock he owns. Many thrive and do very well. Not many other analyst articles appear. In Spanish, a bobo is an idiot, a dunce, by the way. Big Bobo, who is reportedly wonderful on field trips to visit mine properties, has called the $1190 gold high of last week a top. He did not use the word bubble, but he expects a notable correction and a long period to achieve new highs. The gold price has gone north instead, laying waste to his forecast, which was correct, but only for approximately one day. Maybe when the gold price reaches $1250 per ounce, he will retract his forecast. He has shown a disproportional disrespectful critical insulting tone to the lowly Jackass from an error committed. It is admitted. The pre-1964 dimes were silver coated but with copper core (not zinc), and besides, in earlier years the dimes were only 93% silver anyway (not 100%). Points taken! Beat me with a stick, but not a golden rod! The switch from majority silver to negligible silver in US coinage escapes Moriarity to this day. His criticism includes great departures from the reality of my correct forecasts and command of the English language, even sentence construction. He is way out of bounds! He finds no merit in the entire tungsten story, and urges proof put on the table. Proof comes but not soon, since murder is often an obstacle to arriving at such press conferences. Maybe when the gold price reaches $1300 or $1500 per ounce, he will understand the Global Paradigm Shift and why gold has risen in a powerful manner in the last two months. Maybe he is not aware that the Chinese are major buyers, and even control the price rise step by step. Surely he does. The most basic Head & Shoulders Reversal Pattern dictates a price target of 1300. The Christmas season is traditionally strong, another factor ignored by Bobo. So he thumbs his nose at seasonal strength and aint a chartist either. To the good Captain, let the gold battle cry be "1-2-3 GOLD" !!
Then we have Jon Needler, who must be the son of the website owners where he displays his anti-gold propaganda. To point out Needler's erroneous forecasts and perspectives would require a full article at least 15 pages in length. He seems the most likely to receive a secondary clandestine remuneration for his diligent work in denigrating the gold market. He comprehends precious little about gold or silver. His arguments are so full of holes that a high school economics student could easily challenge him. His forecasts are consistently not just wrong, but wrong in powerful directional thrusts. Yet his work continues to be posted, despite little or no value. Precisely zero rebuttal will be given, since his work is so extraordinarily devoid of substance or quality. In fact, Needler serves as a salesman for paper gold certificate who openly admits his preference for gold coins. What is his latest correct forecast??
Then consider Henry Orlandwini. His work is actually quite good. The one Hat Trick Letter subscriber is still hoping for return of the $28k absconded by him. Occasionally, like today, he said something that struck the Jackass as lacking deeper insight. He said, "I think currencies are devaluing more than gold is rising, and that is why I contend that overbought is a relative term. Gold is rising, but not as fast as the world currencies are falling." The initial reaction here was "wow, really dumb statement." This is a much bigger phenomenon than just currencies falling. We are in the midst of a systemic breakdown and major financial upheaval. We have a broken monetary system, a threatened global reserve currency, discredited central banks, insolvent major banking systems, and an important Paradigm Shift away from the USDollar as power shifts also to the East. Orlandwini is watching too much the branches, leaves, and ferns within the forest, and seems to be missing the bigger picture. When he attempts to forecast the gold price today and the US$ DX index today, identifying resistance and support levels, he might be missing the biggest story of the last few decades. It is the collapse of the US$-based global monetary system and the urgent effort to replace it and to salvage wealth accumulated. Furthermore, and more precisely, the gold price is pushed by not only a weakening USDollar and weakening major global currencies. They are simultaneously being destroyed, debauched, and debased, not just weakened. The additional force that Orlandwini overlooks is that the gold price is attempting to free itself from the Wall Street and London City shackles. The gold price (silver too) is attempting to find its correct price, even besides the continued weakening of currencies.
Lastly, consider US Federal Reserve Chairman Ben Bernanke. He was clearly chosen by the syndicate to continue the Banker Welfare programs, to run the USDollar printing press until it seizes up, and to preach about how deflation will not happen here. He has not uttered one correct forecast in his entire tenure. He missed every single major banking turn of events, every single breakdown, misjudged the size of bank losses every step of the way, and has missed the economic relapse. The battle for the Bernanke re-appointment will reveal the titanic struggle for wresting control of the USDollar, the US banking system, and the disclosure of deeply engrained corruption. If truth be known, the center of the financial syndicate is the USFed, with operations headquartered in Goldman Sachs and JPMorgan. Payoffs from TARP Funds were diverse. Extortion was probably involved amidst reported death threats to Paulson and other Heads of Banking State. Orders were given to use TARP Funds but do not lend. Guidance was given for acquisitions of ailing banks, not loans. The USFed is the center nexus that processes narco syndicate funds. If truth be known, so is Dubai, by way of Baghdad.
Copyright © 2009 Jim Willie, CB
http://www.financialsense.com/fsu/editorials/willie/2009/1202.html
by Jim Willie, CB. Editor, Hat Trick Letter
The gold market has become, despite little recognition by the financial press, the battlefield for global control of the financial world. To the winner go the spoils and access to the helm. To the winner goes control of global banking, dominance in commerce, and the advantage in some degree of printing money on a credit card that all nations must finance indirectly. Nevermind the military aspect. In the Untied States, the custodial control of the USDollar as global reserve currency enabled it to spawn numerous syndicates with criminal impunity, since under the USGovt aegis (if not management). The gold market is the site of the most ominous dangerous life changing battle in recent history. My work has frequently mentioned a Paradigm Shift in progress. The shift is of power, influence, dominance, control, privilege, and direction. It also permits the writing of history itself. Since the end of World War II, the Untied States and Great Britain created an empire based primarily upon economic and financial prowess, but certainly reinforced by military strength. With the fall of Wall Street, the ruin of US banks, the insolvency of American households, and the quagmire of US foreign wars, the shift has accelerated. The parallel debacles and ruin into insolvent for Great Britain has ushered in an Anglo removal from the power circuit. The transition will not be smooth. See the endless wars, the attacks on tax havens, and the viruses.
Notice the slow fade of the Japanese, a nation having served as US Lackeys for more than a few decades. They must next join forces with the Chinese, and perhaps bow but not too much since they bring tremendous technological prowess to the table. Thousand year old enmity must yield to cooperative alliance and ventures. Regional unity will become of paramount importance in the next chapter of economic development. The Tokyo mavens are suffering from the shock of the Yen Carry Trade unwinding process. Weeks ago, my articles pointed out how the rise in the Japanese Yen would keep the pressure firmly on their economy, clearly still export driven. The USDollar crisis has its own core troubles. But they are amplified by a stronger yen currency, which is undergoing a handoff to the Dollar Carry Trade. The Yen currency continues to push higher, causing the Japanese Govt to assemble and hammer out emergency policy. Never in history has a carry trade fed off and exploited a decline in the global reserve currency. These are historic times.
GOLD AS CRUX FOR BATTLE
The shift in power is most evident in the rapid rise in accumulated gold by the Chinese Govt. In my view this is the actual crux of the global desafio. In the Spanish language, desafio means a great struggle and battle, much akin to jihad in the Arabic language, but without the warlike military connotation or tendency toward glorified suicide. My first exposure was the Discovery Channel. A show focused upon the Alaskan Desafio as some brave group weathered the wintry storms, traveled with sled dogs, and struggled to eat and sleep. This gold desafio is for global control. Those who control the gold control the global banking with all its trappings. The corrupted COMEX and London Bullion Market Assn are the clear battlegrounds for the gold battle. In an open manner, no longer hidden from view, the COMEX is settling gold long futures contracts with Street Tracks GLD shares. Investors in GLD shares should be horrified at shareholder contamination. Clearly, the COMEX does not have much of any gold bullion, yet it operates formally as an exchange to sell gold, and to create a market for gold price discovery. Some call this new redemption developed appropriately a silent COMEX default, and correctly so. It is the early chapter of a COMEX default, presaged last May.
The two-sided fraud deserves mention once more. In time, the Street Tracks GLD (run by State Street, with JPMorgan as custodian) will be exposed as totally corrupt. They are using GLD shares openly now to cover COMEX short futures contracts. They are likely providing GLD bullion to London to satisfy futures contract delivery demands. Evidence painted a picture after London gold delivery stresses occurred at the same time as vast deletions from the GLD bar list, which suddenly reappeared days later. That is burning the candle at both ends of the GLD itself. Eventually my expectation is for GLD shares to sell at a 40% discount to gold price as the lack of gold inventory is revealed. Then later, after lawsuits, the GLD might easily sell at 80% discount. Finally the climax could be prosecution for fraud and all investors will be given 20 cents per dollar versus gold. Who knows? Maybe it will be 30% and 60% and 40 cents per dollar. The trouble for hapless unsuspecting investors is they did not read the prospectus, which permits such misuse of GLD shares. They just might be lazy and qualified sheeple. The Wall Street crowd did effective planning. One must give a tip of the hat to their brain trust. The GLD is a tool to drain gold demand from the public and to supply it to the syndicate. It is one of the most brilliant open ploys in financial history.
THE ANTICIPATED DUBAI CRUSH
On October 8th, the Jackass gave you a "TOLD YA SO" on the announced previewed end of the Petro-Dollar. The Saudis, with Chinese and Russians on their left and right arms, heralded the end of the sale of crude oil in US$ terms, with French and Japanese in tow. The Germans secretly were in charge of counseling toward the forged deal, but preferred the shadows. The new crude oil transaction settlement system will take time, but surely not to require eight years until 2018 as announced. That stated target date was intended to deflect and distract from US retaliation. The mere announcement should be regarded as a schematic diagram for architects and investors alike to follow. New systems must be constructed. Investors ahead of the curve will be the primary beneficiaries. The changes that result from the announcement itself will assure the completion date to be just 2 or 3 years, not 8 years.
In just two short months, it is time to say "TOLD YA SO" again, this time on the story that came out of the United Arab Emirates. Or should they be also called the Untied Arab Emirates, after their squabbles between city states? The Dubai World debt default and restructure has caused shock waves the world over. IT WAS FORECASTED IN AUGUST BY THE HAT TRICK LETTER. The vast construction bust has caused anticipated ripples. The threat to London banks is acute. Time will tell whether its ripples will cause sufficient damage to London and New York bankers to topple them and to force lost control in other banking functions like gold management, as my forecast indicated. It seems that worsened big London bank solvency from underwritten Dubai losses, rather than Arab USTreasury Bond dumping, will be the principal cause of any imminent breakdown, if it occurs. See the article entitled "US Bank Enemies at the Gates" from late August (CLICK HERE).
For the record, here is what was written over three months ago by the Jackass pen. "The regional construction boom in the Arab world has an epicenter in Dubai. Unfortunately, it has gone bust, and loudly so. If not for the prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai would have embarrassed them in front of the world. Instead, a new threat comes. The Abu Dhabi rescue next must contend with an indigestion problem, as USTreasurys and likely other US$-based bonds are flooding their banking system. They might own a considerable batch of US bank stocks, soon to be dumped. Ambition led to a whiff of hubris, as fantastic architectural design led to large scope, seen in the skyscrapers and bridges. Not shown are the spectacular communities designed as trees with branches and leaf petals, many empty, busted, and without investment income. But they overdid it, and now must deal with corporate failures and liquidation challenges. The Persian Gulf bank failures represent the clear and present threat. The outsized projects have yielded to outsized rescues and next outsized indigestion to handle the funds in ways so as to avoid a string of national bank failures. Vast liquidations come, word comes from contacts.
A bank panic in the Persian Gulf could ensue very soon, a back door threat. It would clearly have origins in the United Arab Emirates, spread to the entire Persian Gulf like to Saudi Arabia, Kuwait, and elsewhere. From this global toehold, the bank panic could then spread to London, New York, and points in Europe. The UAE bankers must manage their situation. They are loaded to the gills with USTreasurys, the main currency used in the liquidations and rescues local to the UAE. They also have pet stock accounts in big US banks. As further liquidations occur, avoidance of bank failures seems a remote prospect. Watch the enemies at the gates, outside looking in, in urgent need of dumping USTreasury Bonds and other US$-denominated securities."
Much can be told about hidden developments, like family squabbles between the UAE emirate rulers, bitterness over shame brought to the region, anger from unheeded counsel, sudden departures of people in key posts, and a desire to punish (even exploit) the decline in fortunes. The biggest question in my book is how much Abu Dhabi bankers wish to permit London bankers to absorb losses, before Abu Dhabi cleans up and grabs liquidated properties in Dubai at deeply distressed prices? Negotiations are underway, heated, and of vital importance in London between all the bankers involved. What can London offer Abu Dhabi? That is the question. The Arab world takes a dim view of debt to begin with. They abhor home and property mortgages generally, and thus never invest in mortgage bonds. To prove the point, hundreds of Dubai Prisoners languish in their hotels and apartments. They are British, American, and European engineers, financial cogs, analysts, and other workers whose employers from the parent Western firms defaulted on very large loans. These people will remain prisoners, and will likely become pawns in the game during negotiations. Conditions grew so desperate that hundreds of cars lie abandoned at airports, from workers who fled the region before trapped in homes.
Expert analysts warn of continued shock waves, as almost nothing has been resolved, very little asset or corporate liquidation has occurred, fallout has not yet been permitted, bank losses have not been declared, and resolution prices have not been posted. The internal battle between UAE city states, one rich in oil and a banking center, the other recovering from a construction bust amidst great hubris and displayed magnificent follies, will play itself out in the coming several months or years. The internal families are locked in a power struggle. In Dubai, 30% of their economy is derived from real estate, construction, and other property development. They have some truly braindead concepts and ideas at work, like indoor snow skiing, like cooled beaches with underground pipes, and golf courses that require much output from the desalinization plants to water the green landscape against sandy backgrounds. These are like plebeian versions of marble palaces in the desert. To be sure, a great awakening comes as a load of debt is dumped on the big bankers, just when they might have thought the worst was over.
One friend calls the Dubai construction array the greatest property folly in a century. Maybe so! Next come shock waves to London banks. The follies must be liquidated, with great losses dumped upon balance sheets. The banks must take much more lumps and losses. The original $10 billion in debt loss is more like $80 billion. Details on the story appear in the upcoming December Hat Trick Letter reports, which are streaming in on a daily basis. European banks have some exposure too, but not as much as London. The Abu Dhabi rulers must complete bargains with London bankers, who have conspired to suppress the gold price for two decades. The UAE leaders hold a huge amount of gold, and have demanded its return from London custodial accounts. Resentment seethes beneath the surface, the basis for Arab vengeance. The fallout will be wreckage of Royal Bank of Scotland, and maybe HSBC too.
In the process, watch power shift to Abu Dhabi as concessions are made by London under extreme pressures. Parts of Dubai are ghost towns, almost totally unoccupied vast projects. The biggest question in my book is whether RBS can go bust and be liquidated while still operating under the British Govt aegis? Lloyds will take large blows as well. The shock waves have not yet fully reverberated. They will continue for months. The Dubai property prices have not yet bottomed, and might settle at 20 cents per dollar on original basis. The legion of Western wonks in the financial sector stupidly expected Abu Dhabi to rescue all Dubai loans, without benefit of much knowledge of resentment, family conflicts, banker ambitions, and ramifications that extend to the new Gulf Dinar currency that shifted planning rooms (Saudi to Russian). My August article implied the Dubai bust would result since Abu Dhabi would not step in and bail out their UAE brethren. The inner conflicts and agendas were well known all along here.
The next shoe for the condemned Caucasian crowd is mortgage losses from Eastern Europe. For several years, the Swiss provided the funds as a result of their 1.5% steady official rate. At the time, it was 3% below the rest of the continent. The combination of home loan default, and sharply lower Eastern Europe currency basis has resulted in near total losses to Swiss banks on such mortgage portfolios. Also, watch Greece, which could be the next Dubai crush zone. It is a construction bust center also, like Spain. The socialist roots in Southern Europe have enabled a denial of property price declines from Spain to Italy to Greece. Instead of vast arrays of homes being sold at distressed lower prices, they sit in inventory at elevated absurd high prices. The bust impact comes soon, as these assets cannot be carried much longer on the books.
GO GOLD GO GOLD
This is just the beginning. We are still in the proverbial second inning of this gold explosion. Gold continues to rise because the system is breaking, because almost zero remedy has been completed, because pressures are brought to bear using the same broken tools to fix the problems, because mountains of new money are wasted and paid to failed bankers, because the crisis is ongoing, because the economies are not responding to stimulus, because home foreclosures and job losses continue unabated. Much more government rescue and stimulus comes, MUCH MORE. The Chinese are firmly in control of the gold price. They inch up the gold price systematically in order to release more supply from both the cash desperate and the investment knuckleheads. A big story has hit the press, that HSBC is backing out of the gold storage business. My gut tells me that HSBC might be clearing major bank vault space to hold Chinese deliveries from metals exchanges. The gold price does not merely rise from a weakening USDollar and major currencies. Nations intentionally try to undercut themselves in order to preserve their export economies. The gold price also rises from the gradual removal of shackles that have falsely suppressed the price, as supply has dwindled, replaced by paper gold, and probably tungsten gold too. In the last couple weeks, extraordinary scrutiny has come to the gold delivery system. The process reveals an unspeakable global shortage of gold bullion. The gold price is attempting to adjust to a proper higher price free from interference, based upon supply matching demand. The gold price will rise further from continued debasement of the major currencies. Even now, with the COMEX and LBMA in London, the gold market cannot clear at the current price. There is an extreme shortage of gold bullion in physical supply, due to years of price intervention and replacement by paper gold. Apart from weak or destroyed currencies, the gold price must be higher from basic intervention relief.
Some argue that gold must rise to match the supply of newly created money, bound in the fiat currencies with pretty designs and colored ink, even watermarks. Gold should rise in parallel with money creation, but not in lockstep. A currency can always be fixed according to a cover clause that dictates 1% of money can be redeemed in gold. Later, a move to 1.5% in the gold cover clause would fortify one currency in much the same way that official national interest rates lift currencies upon changed policy. Personally my wish is for the gold price to continue its powerful bull run without the Euro currency breakout toward 160. That would expose all the currencies together as horribly weak if not invalid. If the Euro rushes toward 160, the gold market in Europe must then adapt to an interruption in the bull roaming on the continent. Stand back! The explosive upward thrust in the gold price is still a threat, much like Mount St Helens. The Powerz have begun to lose control of the gold market.
No search for safe haven in the USDollar took place after the Dubai world shock. Rather it was a retreat from the British Pound and Euro currencies, which bore the risk of loans underwritten. In one short week, the effect has dissipated, as the USDollar is weaker than BEFORE the Dubai incident broke to make news. All currencies are weak relative to the stable powerful reliable gold. The USDollar is showing a steady relentless weakness, unable to snap into any recovery. It is my view that ruining the federal finances is what Obama was hired to do by the syndicate. The high risk of USMilitary coup in the future remains acute in order to avert a USTreasury default, or perhaps coincident with a default. Obama's specific job is to run up deficits and ruin the dollar, which paves the way for the coup. The Cap & Trade game is just another fraud revealed, with credit given to the intrepid internet websites that gave up the ghost. The upcoming coup has a definite purpose, to remove foreign creditors from any receivership tribunal. The Untied States can become a sequestered state, free from foreign interference. Yet isolation would be the fate won.
ENTER THE CLOWNS
Don't bother to pardon the misspelled names, done to disguise the identities of clowns within our midst. The Jackass is fully capable of errors, usually admitted quickly. My biggest arena for errors has been long-term USTreasury Bond yields, due to interventions, interference, and monetizations. Other errors have been made, hoped to be minor in nature. An extraordinary amount of information must be digested, absorbed, and integrated into any editorial analytic work that covers a complex and treacherous financial world. Errors come since we are human. But what follows is not ordinary, and speaks to an arena tilted toward deception delivered with motive. My work has an objective to analyze correctly, to highlight connected factors, to explain complexities, to forewarn with lead time, and to make forecasts. The string of solid forecasts is my carrying card. Other foibles are carried. My body is adorned by moles, one just like my mother's. More than a few wild long hairs grow from my eyebrows, making some wonder if General Elmo Zumwalt was a distant uncle. My eyes are uneven, one lower, but no glasses are needed to correct vision. My head is balding, but hats keep it warm. My right foot is pigeon toed, that results in a hook in the soccer kick. The left kick is more adept. But my work is factual, helped along by wonderful reliable sources and numerous newshound friends. Minor errors are committed along the way. One should care not about a minor typo within articles offered in the public domain, despite my usual final proofread pass. What follows is a list of elements inside the gold community, often doing a notable disservice.
Why are the US financial airwaves polluted by Denis Gartmann and his consistently incorrect and shallow preachings? His fund is down, not down hard, as he maintains his negative opinion of the gold asset story. He hedged a gold position with an offsetting currency position, resulting in a total waste of investment funds. Gold just happens to be the biggest story and one of the best performing assets in the last half decade. One might conclude such strong performance is worthy of disdain, disrespect, and disrepute. NOT! A contact of mine is considering a new Anti-Gartmann Fund, with a double leverage component that takes the opposite position of the Gartmann fool. Given his steadily shallow analysis and lack of comprehension of the gold market, one might conclude that Gartmann has a secondary income source from Wall Street firms. He might indeed be paid to denigrate the Gold Bull market, despite the tarnish to his reputation. An aside on Gartmann, who used to speak as the Cambridge House gold conferences alongside the Jackass. He appeared in 2005, much to my surprise, since he is so incredibly lacking in insight. From the podium, in front of over 1000 people, he delivered probably the stupidest speech ever to penetrate my ears. Gartmann actually claimed, one year before the housing bust struck, that the USEconomy was still grossly under-leveraged. He actually made numerous points about how the assets within the Untied States still had countless additional collateral from which to draw credit. He actually spoke of numerous new avenues to extend credit, and how the extra funds to surge within the channels of the American system would result in much greater economic growth. He concluded that the best days of the USEconomy were well ahead of us. He praised the merits of risk. Then came the bust. One must wonder if the 1000 people remember the idiotic preachings and drivel from the man that day in Vancouver. The Jackass sure does, one of only a handful who emitted laughter during the Gartmann ideological face plant in the snow. What is his latest correct forecast??
The same conference featured Doug Kasey, who went galactic in a mindless harangue. He spoke of the eventual cap on commodity prices from mining asteroids in the solar system. You see, they are rich in iron and other base metals. He ignored the cost of mining in the deep solar recesses, and how the high cost would impose a cost cap, but one perhaps 50 to 100 times the current commodity prices. After all, in order to exploit the vast asteroid metal supply, one must escape the earth's orbit, at a heavy cost, an overlooked factor. The conference management might have done well to give Doug a face to face check before he stepped up to the podium. Man oh man!! That was a memorable conference with two icons displaying their unwaxed cross-eyed viewpoints for all to see. One must give Kasey credit for many speeches that challenge the honesty and integrity of the USGovt and USMilitary enterprises.
Next take Pablo Van Eaton. The man sounds good, looks great, has a great speaker voice, and is a nice fellow. But he carries a distinction above all others. Van Eaton provides the most eloquent and well constructed arguments for consistently wrong forecasts, and has done so for several years. He had one good call a few years ago on mining stocks hitting a peak, but that call has been eclipsed by a long list in a row that seems not to end. It is like he was a champion on his school forensic team, burdened by arguing the merits of a plainly wrong position, but excelled. When gold was meandering in the low to middle 900 level for months earlier this year, he forecasted a move in the gold price down below 800, as the deflation threat would take its toll. However fallible, he is still invited to appear as a panelist on the dinner hour shows for the Canadian Business Channel. The major investment houses must love his steady disdain shown for the gold market. His subscribers are welcome to switch over to the Hat Trick Letter, where correct forecasts are not only important but are regularly given. Pablo attracts crowds at the conferences. Bless them one and all who hang on his every word, as they must have very short memories. What is his latest correct forecast??
A vivid memory is etched in the Jackass mind from the Calgary conference in 2004, offered also by the Cambridge House. Van Eaton shared generously a taxicab with the Jackass to the airport. The conference had ended. During the taxi ride, Van Eaton expounded on why the USDollar would suffer a serious decline from May to the end of the 2004 year, since Asian sovereign funds would diversify away from the USDollar. In direct rebuttal, the Jackass explained in simple terms that the US Federal Reserve had begun to raise the official interest rate, and would continue for several more meetings. The Jackass rebuttal argument was that we live in a bond driven world, and as long as the official US interest rate was rising, the USDollar would continue to rise in a surprisingly counter-trend rally from basic bond speculation. The point was made quietly, tactfully, professionally, since Pablo was paying for the taxi. Furthermore, my extended argument was that the Asians would hold off on a major dumping of US$-based assets, and instead sell after a year or two had passed. Score one more correct call for the Jackass, and one more wrong forecast for Van Eaton, who shared the same fallacious argument before 1000 people at the same Calgary conference. IN THE NEXT FEW MONTHS, THE USDOLLAR ENJOYED A POWERFUL UPWARD RALLY IN PURE COUNTER-TREND FASHION. It ended when the USFed halted the rate hikes, as forewarned. One must wonder where Pablo takes his cues, or who pays his clandestine paychecks. One must not become too enamored of that charming foreign accent, which delivers a flow a words like a melody. The Jackass does not care if a hillbilly accent is worn when the mental acumen comes through in brilliance. Take TBoone Pickens. His homey folksy Texan accent is charming, and sounds nowhere near as intelligent and alluring as Van Eaton. But Pickens is as consistently correct on forecasts as Van Eaton is wrong.
Another lame entry is Richard Burnedstein, the respected economist from Merrill Lynch. This week he said gold has no driving fundamentals that justify its rising price. Clearly Burnedstein loves the paper game, and surely maintains a high derived price on all things paper. His paycheck is also high, derived from a major paper merchant firm. One must excuse Richard since he at least comes forth with the Merrill Lynch name attached to his own, including all appearances. So his preachings are a much more genuine acknowledged compromise of mental processes. He is paid to represent his firm, whereas Gartmann could easily be receiving large funds from the back door, where his allegiance lies and influence of partners is more hidden. Never forget that Wall Street earns almost zero investment banker fees from gold or the mining firms. It is like dogs selling cat food; they don't do it! What mining firms do solicit in funds for stock issuance is largely conducted in Toronto and Vancouver. So the gold fundamentals are lacking in the man's compromised view. What is his latest correct forecast??
One must suppose that skyrocketing gold investment demand and rush to diversify out of a collapsing dollar do not qualify as fundamental. And the absence of metals exchange gold inventory also does not qualify as fundamental. And the Chinese pledge to lift their gold reserves 10-fold to 10 thousand metric tonnes in eight to ten years, that is not fundamental either. And the G-20 pledges to formally move toward an IMF basket of currencies, known as the Special Drawing Rights, and away from the USDollar, that is not fundamental either. And the Saudi announcement of a phase-out of sales for crude oil in US$ terms over the next few years, neither is that a fundamental. And the grossly insolvent banks in the Untied States, England, and Europe, which are simultaneously struggling, unable to extend loans, desperately suckling from government teats, that is not fundamental either. Burnedstein plainly fails to recognize that the entire world is grasping for something tangible within the global monetary system overrun by toxic paper, and that anchor reached for is gold.
The last two figures that complete the clown show are more closely tied to websites and their associated businesses. Bobo Moriarity is the owner and editor of a formerly prominent website. He shows a surplus of his own articles on his website, usually to extol the merits of some stock he owns. Many thrive and do very well. Not many other analyst articles appear. In Spanish, a bobo is an idiot, a dunce, by the way. Big Bobo, who is reportedly wonderful on field trips to visit mine properties, has called the $1190 gold high of last week a top. He did not use the word bubble, but he expects a notable correction and a long period to achieve new highs. The gold price has gone north instead, laying waste to his forecast, which was correct, but only for approximately one day. Maybe when the gold price reaches $1250 per ounce, he will retract his forecast. He has shown a disproportional disrespectful critical insulting tone to the lowly Jackass from an error committed. It is admitted. The pre-1964 dimes were silver coated but with copper core (not zinc), and besides, in earlier years the dimes were only 93% silver anyway (not 100%). Points taken! Beat me with a stick, but not a golden rod! The switch from majority silver to negligible silver in US coinage escapes Moriarity to this day. His criticism includes great departures from the reality of my correct forecasts and command of the English language, even sentence construction. He is way out of bounds! He finds no merit in the entire tungsten story, and urges proof put on the table. Proof comes but not soon, since murder is often an obstacle to arriving at such press conferences. Maybe when the gold price reaches $1300 or $1500 per ounce, he will understand the Global Paradigm Shift and why gold has risen in a powerful manner in the last two months. Maybe he is not aware that the Chinese are major buyers, and even control the price rise step by step. Surely he does. The most basic Head & Shoulders Reversal Pattern dictates a price target of 1300. The Christmas season is traditionally strong, another factor ignored by Bobo. So he thumbs his nose at seasonal strength and aint a chartist either. To the good Captain, let the gold battle cry be "1-2-3 GOLD" !!
Then we have Jon Needler, who must be the son of the website owners where he displays his anti-gold propaganda. To point out Needler's erroneous forecasts and perspectives would require a full article at least 15 pages in length. He seems the most likely to receive a secondary clandestine remuneration for his diligent work in denigrating the gold market. He comprehends precious little about gold or silver. His arguments are so full of holes that a high school economics student could easily challenge him. His forecasts are consistently not just wrong, but wrong in powerful directional thrusts. Yet his work continues to be posted, despite little or no value. Precisely zero rebuttal will be given, since his work is so extraordinarily devoid of substance or quality. In fact, Needler serves as a salesman for paper gold certificate who openly admits his preference for gold coins. What is his latest correct forecast??
Then consider Henry Orlandwini. His work is actually quite good. The one Hat Trick Letter subscriber is still hoping for return of the $28k absconded by him. Occasionally, like today, he said something that struck the Jackass as lacking deeper insight. He said, "I think currencies are devaluing more than gold is rising, and that is why I contend that overbought is a relative term. Gold is rising, but not as fast as the world currencies are falling." The initial reaction here was "wow, really dumb statement." This is a much bigger phenomenon than just currencies falling. We are in the midst of a systemic breakdown and major financial upheaval. We have a broken monetary system, a threatened global reserve currency, discredited central banks, insolvent major banking systems, and an important Paradigm Shift away from the USDollar as power shifts also to the East. Orlandwini is watching too much the branches, leaves, and ferns within the forest, and seems to be missing the bigger picture. When he attempts to forecast the gold price today and the US$ DX index today, identifying resistance and support levels, he might be missing the biggest story of the last few decades. It is the collapse of the US$-based global monetary system and the urgent effort to replace it and to salvage wealth accumulated. Furthermore, and more precisely, the gold price is pushed by not only a weakening USDollar and weakening major global currencies. They are simultaneously being destroyed, debauched, and debased, not just weakened. The additional force that Orlandwini overlooks is that the gold price is attempting to free itself from the Wall Street and London City shackles. The gold price (silver too) is attempting to find its correct price, even besides the continued weakening of currencies.
Lastly, consider US Federal Reserve Chairman Ben Bernanke. He was clearly chosen by the syndicate to continue the Banker Welfare programs, to run the USDollar printing press until it seizes up, and to preach about how deflation will not happen here. He has not uttered one correct forecast in his entire tenure. He missed every single major banking turn of events, every single breakdown, misjudged the size of bank losses every step of the way, and has missed the economic relapse. The battle for the Bernanke re-appointment will reveal the titanic struggle for wresting control of the USDollar, the US banking system, and the disclosure of deeply engrained corruption. If truth be known, the center of the financial syndicate is the USFed, with operations headquartered in Goldman Sachs and JPMorgan. Payoffs from TARP Funds were diverse. Extortion was probably involved amidst reported death threats to Paulson and other Heads of Banking State. Orders were given to use TARP Funds but do not lend. Guidance was given for acquisitions of ailing banks, not loans. The USFed is the center nexus that processes narco syndicate funds. If truth be known, so is Dubai, by way of Baghdad.
Copyright © 2009 Jim Willie, CB
http://www.financialsense.com/fsu/editorials/willie/2009/1202.html
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