16 Dec 2013

Faber, Celente, Dent, Maloney, Rogers – What Do They Say Is Coming In 2014?

Some of the most respected prognosticators in the financial world are warning that what is coming in 2014 and beyond is going to shake America to the core.  Many of the quotes that you are about to read are from individuals that actually predicted the subprime mortgage meltdown and the financial crisis of 2008 ahead of time.  So they have a track record of being right.  Does that guarantee that they will be right about what is coming in 2014?  Of course not.  In fact, as you will see below, not all of them agree about exactly what is coming next.  But without a doubt, all of their forecasts are quite ominous.  The following are quotes from Harry Dent, Marc Faber, Gerald Celente, Mike Maloney, Jim Rogers and nine other respected economic experts about what they believe is coming in 2014 and beyond...
-Harry Dent, author of The Great Depression Ahead: "Our best long-term and intermediate cycles suggest another slowdown and stock crash accelerating between very early 2014 and early 2015, and possibly lasting well into 2015 or even 2016. The worst economic trends due to demographics will hit between 2014 and 2019. The U.S. economy is likely to suffer a minor or major crash by early 2015 and another between late 2017 and late 2019 or early 2020 at the latest."
-Marc Faber, editor and publisher of the Gloom, Boom & Doom Report: "You have to say that we are again in a massive financial bubble in bonds, in equities, in [other] asset prices that have gone up dramatically."
-Gerald Celente: "Any self-respecting adult that hears McConnell, Reid, Boehner, Ryan, one after another, and buys this baloney… they deserve what they get.
And as for the international scene… the whole thing is collapsing.
That’s our forecast.
We are saying that by the second quarter of 2014, we expect the bottom to fall out… or something to divert our attention as it falls out."
-Mike Maloney, host of Hidden Secrets of Money: "I think the crash of 2008 was just a speed bump on the way to the main event… the consequences are gonna be horrific… the rest of the decade will bring us the greatest financial calamity in history."
-Jim Rogers: "You saw what happened in 2008-2009, which was worse than the previous economic setback because the debt was so much higher. Well now the debt is staggeringly much higher, and so the next economic problem, whenever it happens and whatever causes it, is going to be worse than in the past, because we have these unbelievable levels of debt, and unbelievable levels of money printing all over the world. Be worried and get prepared. Now it [a collapse] may not happen until 2016 or something, I have no idea when it’s going to happen, but when it comes, be careful."
-Lindsey Williams: "There is going to be a global currency reset."
-CLSA's Russell Napier: "We are on the eve of a deflationary shock which will likely reduce equity valuations from very high to very low levels."
-Oaktree Capital's Howard Marks: "Certainly risk tolerance has been increasing of late; high returns on risky assets have encouraged more of the same; and the markets are becoming more heated. The bottom line varies from sector to sector, but I have no doubt that markets are riskier than at any other time since the depths of the crisis in late 2008 (for credit) or early 2009 (for equities), and they are becoming more so."
-Financial editor Jeff Berwick: "If they allow interest rates to rise, it will effectively make the U.S. government bankrupt and insolvent, and it would make the U.S. government collapse. . . . They are preparing for a major societal collapse.  It is obvious and it will happen, and it will be very scary and very dangerous."
-Michael Pento, founder of Pento Portfolio Strategies: "Disappointingly, it is much more probable that the government has brought us out of the Great Recession, only to set us up for the Greater Depression, which lies just on the other side of interest rate normalization."
-Boston University Economics Professor Laurence Kotlikoff:"Eventually somebody recognizes this and starts dumping the bonds, and interest rates go up, and inflation takes off, and were off to the races."
-Mexican Billionaire Hugo Salinas Price: "I think we are going to see a series of bankruptcies.  I think the rise in interest rates is the fatal sign which is going to ignite a derivatives crisis.   This is going to bring down the derivatives system (and the financial system).
There are (over) one quadrillion dollars of derivatives and most of them are related to interest rates.  The spiking of interest rates in the United States may set that off.  What is going to happen in the world is eventually we are going to come to a moment where there is going to be massive bankruptcies around the globe."
-Robert Shiller, one of the winners of the 2013 Nobel prize for economics: "I'm not sounding the alarm yet.  But in many countries the stock price levels are high, and in many real estate markets prices have risen sharply...that could end badly."
-David Stockman, former Director of the Office of Management and Budget under President Ronald Reagan: "We have a massive bubble everywhere, from Japan, to China, Europe, to the UK.  As a result of this, I think world financial markets are extremely dangerous, unstable, and subject to serious trouble and dislocation in the future."
And certainly there are already signs that the U.S. economy is slowing down as we head into the final weeks of 2013.  For example, on Thursday we learned that the number of initial claims for unemployment benefits increased by 68,000 last week to a disturbingly high total of368,000.  That was the largest increase that we have seen in more than a year.
In addition, as I wrote about the other day, rail traffic is way down right now.  In fact, for the week ending November 30th, U.S. rail traffic was down 16.3 percent from the same week one year earlier.  That is a very important indicator that economic activity is getting slower.
And we continue to get more evidence that the middle class is being steadily eroded and that poverty in America is rapidly growing.  For example, a survey that was just released found that requests for food assistance and the level of homelessness have both risen significantly in major U.S. cities over the past year...
A survey of 25 American cities, including many of the nation's largest, showed yearly increases in food aid and homelessness.
The cities, located throughout 18 states, saw requests for emergency food aid rise by an average of seven percent compared with the previous period a year earlier, according to the US Conference of Mayors study, published Wednesday.
All but four cities reported an increase in demand for assistance between the period of September 2012 through August 2013.
Unfortunately, if the economic experts quoted above are correct, this is just the beginning of our problems.
The next wave of the economic collapse is rapidly approaching, and things are going to get much worse than this.
So what do you think?
Which of the individuals quoted above do you think are right on the money and which ones do you think are way off base?
Please feel free to share what you think by posting a comment below...


25 Nov 2013

The Money Bubble Gets Its Grand Rationalization

Late in the life of every financial bubble, when things have gotten so out of hand that the old ways of judging value or ethics or whatever can no longer be honestly applied, a new idea emerges that, if true, would let the bubble keep inflating forever. During the tech bubble of the late 1990s it was the “infinite Internet.” Soon, we were told, China and India’s billions would enter cyberspace. And after they were happily on-line, the Internet would morph into versions 2.0 and 3.0 and so on, growing and evolving without end. So don’t worry about earnings; this is a land rush and “eyeballs” are the way to measure virtual real estate. Earnings will come later, when the dot-com visionaries cash out and hand the reins to boring professional managers.
During the housing bubble the rationalization for the soaring value of inert lumps of wood and Formica was a model of circular logic: Home prices would keep going up because “home prices always go up.”
Now the current bubble – call it the Money Bubble or the sovereign debt bubble or the fiat currency bubble, they all fit – has finally reached the point where no one operating within a historical or commonsensical framework can accept its validity, and so for it to continue a new lens is needed. And right on schedule, here it comes: Governments with printing presses can create as much currency as they want and use it to hold down interest rates for as long as they want. So financial crises are now voluntary. They only happen if a country decides to stop depressing interest rates – and why would they ever do that? Here’s an article out of the UK that expresses this belief perfectly:

Our debt is no Greek tragedy

“The threat of rising interest rates is a Greek tragedy we must avoid.” This was the title of a 2009 Daily Telegraph piece by George Osborne, pushing massive spending cuts as the only solution to a coming debt crisis. It’s tempting to believe anyone who still makes it is either deliberately disingenuous, or hasn’t been paying attention.
The line of reasoning goes as follows: Britain’s high and rising public debt causes investors to take fright and sell government bonds because the UK might default on those bonds.
Interest rates then spike up because as less people want to hold UK debt, the government has to pay them more for the privilege, so that the cost of borrowing becomes more expensive and things become very, very bad for everyone.
This argument didn’t make sense back in 2009, and certainly doesn’t make sense now. Ultimately this whole Britain-as-Greece argument is disturbing because it makes the austerity project of the last three years look deeply duplicitous.
If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.
Why? Because the Bank directly controls the interest rate on short-term government debt, so it can vary it at will in line with any given objective. Interest rates on long-term government debt are governed by what markets expect to happen to short term rates, and so are subject to essentially the same considerations.
It doesn’t matter if investors get scared and dump government bonds because this has no implication for interest rates – it is what the Bank of England wants to happen that counts.
If investors do suddenly decide to flee en masse, the Bank can simply use its various tools to bring interest rates back into line.
The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.
Greece and the other troubled Eurozone countries are in a totally different situation. They don’t have their own currency, and have a single central bank, the ECB, which tries to juggle the needs of 17 different member states. This is a central bank dominated by Germany, which apparently isn’t bothered by letting the interest rates of other nations spiral out of control. Investors, knowing this, made it happen during the financial crisis.
On these grounds, the case of Britain and those of the Eurozone countries are not remotely comparable – and basic intuition suggests steep interest rate rises are only possible in the latter.
Britain was never going to enter a sovereign debt crisis. It has everything to do with an independent central bank, and nothing to do with the size of government debt. How well does this explanation stand up given the events of the last few years? Almost perfectly. The US, Japan and the UK are the three major economies with supposed debt troubles not in the Eurozone.
The UK released a plan in 2010 to cut back a lot of spending and raise a little bit of tax money. The US did nothing meaningful about its debt until 2012, and has spent much of the time before and since pretending to be about to default on its bonds. Japan’s debt patterns are, to put it bluntly, screwed – Japan’s debt passed 200 per cent of GDP earlier this year and is rising fast.
But the data shows that none of this matters for interest rates whatsoever. Rates have been low, stable and near-identical in all three countries regardless of whatever their political leaders’ actions.These countries have had vastly different responses to their debt, and markets don’t care at all.
By the same token, the problems of spiking interest rates inside the Eurozone have nothing to do with the prudence or spending of the governments in charge.
Spain and Ireland both had debt of less than 50 per cent of GDP before the crisis and were still punished by markets. France and the holier-than-thou Germany had far higher debt in 2007, and are fine.
The takeaway is that problems with spiking interest rates amongst advanced countries are entirely restricted to the Eurozone, where there is a single central bank, and have no obvious relation to the state of public finances.
So what we have, then, is a disturbingly mendacious line of reasoning . Back in 2010 the Conservative party made a perhaps superficially plausible argument about national debt that was wrong then and is doubly wrong now. They then – sort of – won a mandate to govern based on this, and used it to radically alter the size of the state. The likelihood that somehow this was all done in good faith beggars belief.
Britain has had a far higher proportion of austerity in the form of spending cuts than tax rises relative to any comparator nation. On this basis austerity is a way of reshaping the state in the Conservative image, flying under the false flag of debt crisis-prevention.
If the British public had knowingly and willingly voted for the major changes made under the coalition in how the government taxes, spends and borrows, this wouldn’t be such a great problem.
Instead, they were essentially conned into it by the ridiculous story of Britain as the next Greece.
Some thoughts
What’s great about the above article is that it doesn’t beat around the bush. Without the slightest hint of irony or historical sense, it lays out the bubble rationale, which is that central banks are all-powerful: “If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.”
So this is the end of history. Interest rates will stay low and stock prices high and governments will keep on piling up debt with impunity – because they control the financial markets and get to decide which things trade at what price. Breathtaking! Why didn’t humanity discover this financial perpetual motion machine earlier? It would have saved thousands of years of turmoil.
At the risk of looking like a bully, let’s consider another peak-bubble gem:
“The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.”
The writer is saying, in effect, that the value of the British pound – and by extension any other fiat currency – can fall without consequence, and that the people who might want to use those currencies in trade or for savings will continue to do so no matter how much the issuer of those pieces of paper owes to others in the market. If holders of pounds decide to switch to dollars or euros or gold, that’s no problem for Britain because it can just buy all the paper thus freed up with new pieces of paper.
This illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy. Governments couldn’t stop tech stocks from imploding or home prices from crashing, and when the time comes, the Bank of England, the US Fed, and the Bank of Japan won’t be able to stop the markets from dumping their currencies. Nor will they be able to stop the price of energy, food, and most of life’s other necessities from soaring when the global markets lose faith in their promises.

24 Nov 2013

China Announces That It Is Going To Stop Stockpiling U.S. Dollars

China just dropped an absolute bombshell, but it was almost entirely ignored by the mainstream media in the United States.  The central bank of China has decided that it is "no longer in China’s favor to accumulate foreign-exchange reserves".  During the third quarter of 2013, China's foreign-exchange reserves were valued at approximately $3.66 trillion.  And of course the biggest chunk of that was made up of U.S. dollars.  For years, China has been accumulating dollars and working hard to keep the value of the dollar up and the value of the yuan down.  One of the goals has been to make Chinese products less expensive in the international marketplace.  But now China has announced that the time has come for it to stop stockpiling U.S. dollars.  And if that does indeed turn out to be the case, than many U.S. analysts are suggesting that China could also soon stop buying any more U.S. debt.  Needless to say, all of this would be very bad for the United States.
For years, China has been systematically propping up the value of the U.S. dollar and keeping the value of the yuan artificially low.  This has resulted in a massive flood of super cheap products from across the Pacific that U.S. consumers have been eagerly gobbling up.
For example, have you ever gone into a dollar store and wondered how anyone could possibly make a profit by making those products and selling them for just one dollar?
Well, the truth is that when you flip those products over you will find that almost all of them have been made outside of the United States.  In fact, the words "made in China" are probably the most common words in your entire household if you are anything like the typical American.
Thanks to the massively unbalanced trade that we have had with China, tens of thousands of our businesses, millions of our jobs and trillions of our dollars have left this country and gone over to China.
And now China has apparently decided that there is not much gutting of our economy left to do and that it is time to let the dollar collapse.  As I mentioned above, China has announced that it is going to stop stockpiling foreign-exchange reserves...
The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.
“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.
It isn't going to happen overnight, but the value of the U.S. dollar is going to start to go down, and all of that cheap stuff that you are used to buying at Wal-Mart and the dollar store is going to become a lot more expensive.
But of even more importance is what this latest move by China could mean for U.S. government debt.  As most Americans have heard, we are heavily dependent on foreign nations such as China lending us money.  Right now, China owns nearly 1.3 trillion dollars of our debt.  Unfortunately, as CNBC is noting, if China is going to quit stockpiling our dollars than it is likely that they will stop stockpiling our debt as well...
Analysts see this as the PBoC hinting that it will let its currency fluctuate, without intervention, thus negating the need for holding large reserves of the dollar. And if the dollar is no longer needed, then it could look to curb its purchases of dollar-denominated assets like U.S. Treasurys.
"If they are looking to reduce these purchases going forward then, yes, you'd have to look at who the marginal buyer would be," Richard McGuire, a senior rate strategist at Rabobank told CNBC in an interview.
"Together, with the Federal Reserve tapering its bond purchases, it has the potential to add to the bearish long-term outlook on U.S. Treasurys."
So who is going to buy all of our debt?
That is a very good question.
If the Federal Reserve starts tapering bond purchases and China quits buying our debt, who is going to fill the void?
If there is significantly less demand for government bonds, that will cause interest rates to rise dramatically.  And if interest rates rise dramatically from where they are now, that will set off the kind of nightmare scenario that I keep talking about.
In a previous article entitled "How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System", I described how China could single-handedly cause immense devastation to the U.S. economy.
China accounts for more global trade that anyone else does, and they also own more of our debt than any other nation does.  If China starts dumping our dollars and our debt, much of the rest of the planet would likely follow suit and we would be in for a world of hurt.
And just this week there was another major announcement which indicates that China is getting ready to make a major move against the U.S. dollar.  According to Reuters, crude oil futures may soon be pricedin yuan on the Shanghai Futures Exchange...
The Shanghai Futures Exchange (SHFE) may price its crude oil futures contract in yuan and use medium sour crude as its benchmark, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.
China, which overtook the United States as the world's top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.
If that actually happens, that will be absolutely huge.
China is the number one importer of oil in the world, and it was only a matter of time before they started to openly challenge the petrodollar.
But even I didn't think that we would see anything like this so quickly.
The world is changing, and most Americans have absolutely no idea what this is going to mean for them.  As demand for the U.S. dollar and U.S. debt goes down, the things that we buy at the store will cost a lot more, our standard of living will go down and it will become a lot more expensive for everyone (including the U.S. government) to borrow money.
Unfortunately, there isn't much that can be done about any of this at this point.  When it comes to economics, China has been playing chess while the United States has been playing checkers.  And now decades of very, very foolish decisions are starting to catch up with us.
The false prosperity that most Americans are enjoying today will soon start disappearing, and most of them will have no idea why it is happening.
The years ahead are going to be very challenging, and so I hope that you are getting ready for them.


19 Nov 2013

Hyperinflation – Are We There Yet?

Among the alternative financial press (the so-called bloggers of finance) there is a renewed buzz regarding a slowly unfolding crisis. Many believe we are near an inflection point.
The fear is certainly justified. Money or credit creation is now exponential. The US Federal Reserve is on a path toward monetizing anything and everything, while the European Central Bank is about to unleash its own bond buying program.
Japan is equally a basket case. Paving the way for long-discussed direct monetization of equities is becoming evermore a reality. The US central bank, together with its Japanese counterpart, is monetizing an unprecedented $125 billion in direct bond buying.
Despite shrinking deficits, there is no way either central bank can taper these purchases without pricking the latest in yet another series of asset bubbles. Both central banks have morphed into politically controlled arms of their respective Treasuries.

Getting the Inflation Wish

Meanwhile, equities are trading at all time highs. We are back to dot-com IPO's by which well-meaning companies ultimately take all the risk, helping Wall Street make money for nothing without risk of failure.
Home prices have soared back from the lows experienced 5 years ago. At the same time, nearly fifty percent of all home purchases made with cash in the 3rd quarter of 2013 in the US are acquired by private equity and hedge funds.
All the while, inflation is considered tame by mainstream consensus. Basically every major economic data point or indicator is so completely manipulated that there is no wonder that most investors cannot see the true state of risk.
Gold and silver continue to suffer from "painted-tape syndrome". This is a situation in which overnight sell orders have routinely broken the CME trading platform on at least three occasions in the previous 6 months. These moves occur surrounding zero economic or financial developments.
Recently, the US Census Bureau has become embroiled with scandal. Among such scandal is that, as long suspected, the data collected for the all important unemployment rate was found to be grossly manipulated around the last presidential election.
We are at the critical juncture where the population is split mainly between the unknowing and those whose paycheck depends on not knowing. The rest shake their heads and prepare for the worst.

We Have Been Here Before

History repeats in large cycles. The relatively short interval of these cheap credit drive super cycles is evidence that the system is now spinning out of control.
While the alternative media has long pointed out the unsustainability of the current world financial system, we are now witnessing the likes of very carefully orchestrated, albeit political, posturing. Such posturing takes the form of warnings coming from some of the larger investment firms and institutions.
The fact that the larger voices document their positions in this way could be an early sign of the end of confidence.

The Inflection Point

We are going to hit the monetization inflection point at some point soon - if we haven't already. The likely trigger could be indirect; it could even be something small. A bank failure or crisis in China (happening now) or a smaller conflict will be enough to push confidence over the edge.
The conduit for money velocity will be the Treasury, via the Federal Reserve. Government spending on its own will bid up prices for its own economic and political survival.
It is harrowing that modern systems, hopelessly lacking in redundancy and yet working on the surface, are treading on so much fragility.

History Rhymes

All hyperinflations hinged on the budget deficit point of no return, where more than 50% of annual deficits are monetized directly or half spending more than half of what was collected. The Obama administration's recent budget requests contain $2.902 trillion in receipts and $3.803 trillion in outlays for a deficit of $901 billion, or around 24% of government spending.
The closer we get, the more important it is to hold various assets as insurance - precious metals being an obvious choice - high on the list.

13 Nov 2013

What A Confidential 1974 Memo To Paul Volcker Reveals About America's True Views On Gold, Reserve Currency And "PetroGold"

Just over four years ago, we highlighted a recently declassified top secret 1968 telegram to the Secretary of State from the American Embassy in Paris, in which the big picture thinking behind the creation of the IMF's Special Drawing Right (rolled out shortly thereafter in 1969), or SDRs, was laid out. In that memo it was revealed that despite what some may think, the fundamental driver behind the promotion of a supranational reserve paper currency had one goal in mind: allowing the US to "remain masters of gold."
Specifically, this is among the top secret paragraphs said on a cold night in March 1968:
If we want to have a chance to remain the masters of gold an international agreement on the rules of the game as outlined above seems to be a matter of urgency. We would fool ourselves in thinking that we have time enough to wait and see how the S.D.R.'s will develop. In fact, the challenge really seems to be to achieve by international agreement within a very short period of time what otherwise could only have been the outcome of a gradual development of many years.
This then puts into question just what the true purpose of the IMF is. Because while its stated role of preserving the stability in developing, and increasingly more so, developed, countries is a noble one, what appears to have been the real motive behind the monetary fund's creation, was to promote and encourage the development of a substitute reserve currency, the SDR, and to ultimately use it as the de facto buffer and intermediary, for conversion of all the outstanding "barbarous relic" hard currency, namely gold, into the fiat of the future: the soon to be newly created SDR. All the while, and increasingly more so as more countries converted their gold into SDR, such remaining hard currency would be almost exclusively under the control of the United States.
Well, in the intervening 44 years, the SDR never managed to take off, the reason being that the dollar's reserve currency status was exponentially cemented courtesy of both the great moderation of the 1980s and the derivative explosion of the 1990s and post Glass Steagall repeal 2000s, when the world was literally flooded with roughly $1 quadrillion in USD-denominated derivatives, inextricably tying the fate of the world to that of the dollar.
However, back in 1974, shortly after Nixon ended the Bretton Woods system, and cemented the dollar's fate as a fiat currency, no longer convertible into gold, the future of the SDR was still bright, especially at a time when the US seemed set to suffer a very unpleasant date with inflationary reality following the 1973 oil crisis, leading to a potential loss of faith in the US dollar.
Which brings us to the topic of today's article: the international monetary system, reserve currency status, SDRs, and, of course, gold... again.
Below is a memo written in 1974 by Sidney Weintraub, Deputy Assistant Secretary of State for International Finance and Development, to Paul Volcker, when he was still just Under Secretary of the Treasury for Monetary Affairs and not yet head of the Federal Reserve. The source of the memo was found in the National Archives, RG 56, Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker, 1969–1974, Accession 56–79–15, Box 1, Gold—8/15/71–2/9/72. No classification marking. A stamped notation on the note reads: "Noted by Mr. Volcker." Another notation, dated March 8, indicates that copies were sent to Bennett and Cross. It currently resides in declassified form in Document 61, Foreign Relations Of The United States, 1973–1976, Volume XXXI Foreign Economic Policy, and is found at the Office of the Historian website.
The memo is a continuation of the US thinking on the issue of the then brand new SDR, the fate of paper currencies, and the preservation of US control over reserve currency status. Most importantly, it addresses several approaches to dominating gold as well as the US' interest of banning gold from monetary system and capping the free market price, contrasted by the opposing demands of various European deficit countries (sound familiar?) on what the fate of gold should be at a time when the common European currency did not exist, and some European countries were willing to fund their deficits with gold: something the US naturally was not happy about.
While we urge readers to read the full memo on their own, here the two punchlines.
First, here is what the S intentions vis-a-vis gold truly are when stripped away of all rhetoric:
U.S. objectives for world monetary system—a durable, stable system, with the SDR [ZH: or USD] as a strong reserve asset at its center — are incompatible with a continued important role for gold as a reserve asset.... It is the U.S. concern that any substantial increase now in the price at which official gold transactions are made would strengthen the position of gold in the system, and cripple the SDR [ZH: or USD].
In other words: gold can not be allowed to dominated a "durable, stable system", and a rising gold price would cripple the reserve currency du jour: well known by most, but always better to see it admitted in official Top Secret correspondence.
We continue:
To encourage and facilitate the eventual demonetization of gold, our position is to keep the present gold price, maintain the present Bretton Woods agreement ban against official gold purchases at above the official price and encourage the gradual disposition of monetary gold through sales in the private market. An alternative route to demonetization could involve a substitution of SDRs for gold with the IMF, with the latter selling the gold gradually on the private market, and allocating the profits on such sales either to the original gold holders, or by other agreement.... Any redefinition of the role of gold must be based on the principle stated above: that SDR must become the center of the system and that there can be no question of introducing a new form of gold– paper and gold–metal bimetallism, in which the SDR and gold would be in competition.
And there, in three sentences, you have all the deep thinking behind the IMF's SDR: simply to use it as a vehicle through which a select few can accumulate gold (namely those who can create fiat SDRs d novo), while handing out paper "profits" to the happy sellers.
And just in case it was not quite clear, here it is again, point blank:
Option 3: Complete short-term demonetization of gold through an IMF substitution facility. Countries could give up their gold holdings to the IMF in exchange for SDRs. The gold could then be sold gradually, over time, by the IMF to the private market. Profits from the gold sales could be distributed in part to the original holders of the gold, allowing them to realize at least part of the capital gains, while part of the profits could be utilized for other purposes, such as aid to LDCs. AdvantagesThis would achieve our goal of demonetization and relieve the problem of gold immobility, since the SDRs received in exchange could be used for settlement with no fear of foregoing capital gains.Disadvantages: This might be a more rapid demonetization than several countries would accept. There would be no benefit from the viewpoint of financing oil imports with gold sales to Arabs (although it is not necessarily incompatible with such an arrangement).
One wonders just who in the "private market" would be stupid enough to convert their invaluable paper money into worthless, barbaric relics?
And finally, was there the tiniest hint of a proposed alternative system to the PetroDollar. Namely, PetroGold?
There is a belief among certain Europeans that a higher price of gold for settlement purposes would facilitate financing of oil imports... Although mobilization of gold for intra-EC settlement would help in the financing of imbalances among EC countries, it would not, of itself,provide resources for the financing of the anticipated deficit with the oil producers. For this purpose, it would be useful if the oil producers would invest some of their excess revenues in gold purchases from deficit EC countries at close to a market price. This would be an attractive proposal for European countries, and for the U.S., in that it would not involve future interest burdens and would avoid immediate problems arising from increased Arab ownership of European and American industry. (The Arabs could both sell the gold and use the proceeds for direct investment, so that the industry ownership problem would not be completely solved.) From the Arab point of view such an asset would have the advantages of being protected from exchange-rate changes and inflation, and subject to absolute national control
One wonders if the price of gold is "high enough" now for Arab purposes, and just where the Arabs are now in their thinking of converting oil into gold... or alternatively into a gold-backed renminbi. And if not now, soon, once the pent up inflation in the Fed's $4 trillion, and rising, balance sheet inevitably start to leak out?
The full Volcker memo can be found here.


12 Nov 2013

The Death of the USD

The death of the dollar is coming, and it will probably be China that pulls the trigger.  What you are about to read is understood by only a very small fraction of all Americans.  Right now, the U.S. dollar is the de facto reserve currency of the planet.  Most global trade is conducted in U.S. dollars, and almost all oil is sold for U.S. dollars.  More than 60 percent of all global foreign exchange reserves are held in U.S. dollars, and far more U.S. dollars are actually used outside of the United States than inside of it.  As will be described below, this has given the United States some tremendous economic advantages, and most Americans have no idea how much their current standard of living depends on the dollar remaining the reserve currency of the world.  Unfortunately, thanks to reckless money printing by the Federal Reserve and the reckless accumulation of debt by the federal government, the status of the dollar as the reserve currency of the world is now in great jeopardy.
As I mentioned above, nations all over the globe use U.S. dollars to trade with one another.  This has created tremendous demand for U.S. dollars and has kept the value of the dollar up.  It also means that Americans can import things that they need much more inexpensively than they otherwise would be able to.
The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars...
Are You Ready For The Death Of The Petrodollar - Photo By Revisorweb
Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary.  For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this.  This has created tremendous demand for U.S. government debt and has helped keep interest rates super low.  So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates...
United States Treasury Building - Photo by Rchuon24
And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system.  For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.
Our entire way of life in the United States depends upon this game continuing.  We must have the rest of the world use our currency and loan it back to us at ultra low interest rates.  At this point we have painted ourselves into a corner by accumulating so much debt.  We simply cannot afford to have rates rise significantly.
For example, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has been much higher than that at various times in the past), we would be paying more than a trillion dollars a year just in interest on the national debt.
But it wouldn't be just the federal government that would suffer.  Just consider what higher rates would do to the real estate market.
About a year ago, the rate on 30 year mortgages was sitting at 3.31 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate is $1315.52.
If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage would be $2201.29.
Does 8 percent sound crazy to you?
It shouldn't.  8 percent was considered to be normal back in the year 2000.
Are you starting to get the picture?
We need other countries to use our dollars and buy our debt so that we can have super low interest rates and so that we can afford to buy lots of cheap stuff from them.
Unfortunately, the truly bizarre behavior of the Federal Reserve and the U.S. government over the past several years is causing the rest of the world to lose faith in our currency.  In particular, China is leading the call for a "de-Americanized" world.  The following is from a recent article posted on the website of France 24...
For decades the US has benefited to the tune of trillions of dollars-worth of free credit from the greenback's role as the default global reserve unit.
But as the global economy trembled before the prospect of a US default last month, only averted when Washington reached a deal to raise its debt ceiling, China's official Xinhua news agency called for a "de-Americanised" world.
It also urged the creation of a "new international reserve currency... to replace the dominant US dollar".
So why should the rest of the planet listen to China?
Well, China now accounts for more global trade than anyone else does, including the United States.
China is also now the number one importer of oil in the world.
At this point, China is even importing more oil from Saudi Arabia than the United States is.
China now has an enormous amount of economic power globally, and the Chinese want the rest of the planet to start using less U.S. dollars and to start using more of their own currency.  The following is from a recent article in the Vancouver Sun...
Three years after China allowed the yuan to start trading in Hong Kong’s offshore market, banks and investors around the world are positioning themselves to get involved in what Nomura Holdings Inc. calls the biggest revolution in the $5.3 trillion currency market since the creation of the euro in 1999.
And over the past few years we have seen the global use of the yuanrise dramatically...
International use of the yuan is increasing as the world’s second-largest economy opens up its capital markets. In the first nine months of this year, about 17 percent of China’s global trade was settled in the currency, compared with less than one percent in 2009, according to Deutsche Bank AG.
Of course the U.S. dollar is still king for now, but thanks to a whole host of recent international currency agreements this status is slipping.  For example, China just recently signed a major currency agreement with the European Central Bank...
The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.
"It's a way of promoting European and Chinese trade, but not doing it with the U.S. dollar," said Brooks. "It's a bit like cutting out the middleman, all of a sudden there's potentially no U.S. dollar risk."
And as I have written about previously, we have seen a bunch of other similar agreements being signed all over the planet in recent years...
1. China and Germany (See Here)
2. China and Russia (See Here)
3. China and Brazil (See Here)
4. China and Australia (See Here)
5. China and Japan (See Here)
6. India and Japan (See Here)
7. Iran and Russia (See Here)
8. China and Chile (See Here)
9. China and the United Arab Emirates (See Here)
10. China, Brazil, Russia, India and South Africa (See Here)
But do you hear about any of this on the mainstream news?
Of course not.
They would rather focus on the latest celebrity scandal.
Right now, the global move away from the U.S. dollar is slow but steady.
At some point, some trigger event will likely cause it to become a stampede.
When that happens, demand for U.S. dollars and U.S. debt will disintegrate and interest rates will absolutely skyrocket.
And if interest rates skyrocket that will throw the entire U.S. financial system into chaos.  At the moment, there are about 441 trillion dollars worth of interest rate derivatives sitting out there.  It is a financial time bomb unlike anything the world has ever seen before.
There are four "too big to fail" banks in the United States that each have more than 40 trillion dollars worth of total exposure to derivatives.   The largest chunk of those derivatives is made up of interest rate derivatives.  In case you were wondering , those four banks are JPMorgan Chase, Citibank, Bank of America and Goldman Sachs.
A huge upward surge in interest rates would absolutely devastate those banks and cause a financial crisis that would make 2008 look like a Sunday picnic.
Right now, the leader in global trade seems content to use U.S. dollars for most of their international transactions.  China also seems content to hold more than a trillion dollars of U.S. government debt.
If that suddenly changes someday, the consequences for the U.S. economy will be absolutely catastrophic and every single American will feel the pain.
The standard of living that all of us are enjoying today depends largely upon China.  They can bring down the hammer at any moment and they know it.


12 Oct 2013

China’s Hunger for Gold Triggers Speculation About Reserves

China is on pace to consume a record amount of gold this year, which may be partly due to the central bank diversifying its foreign-exchange reserves, analysts say.
China imported around 861.40 metric tons of gold via Hong Kong in the first eight months of the year, more than double the 361.02 tons during the same period last year, new data from Hong Kong Census and Statistics Department showed. Imports from Hong Kong fell in August from the previous month but remained elevated, the data showed.
Gold prices hit a three-year low in June but have since rebounded.
Strong demand in China is driven largely by consumers, and jewelers are restocking following a spike in buying in April, when prices began tumbling. However, analysts say the People’s Bank might also be taking advantage of the lower prices to bulk up its reserves.
“My suspicion is that they [Chinese government] are increasing their gold holdings as part of their foreign reserves,” said Joyce Liu, an investment analyst with Phillip Futures in Singapore.
The Chinese government rarely releases comprehensive data on gold imports or its holdings, but Hong Kong’s data is considered a pretty accurate indicator of demand. The People’s Bank of China, the central bank, last stated its gold holdings in April 2009, when they stood at 1,054 tons.
China has the world’s biggest stockpile of foreign-exchange reserves, at roughly $3.5 trillion, including around $1.3 trillion in U.S. Treasury bonds. Beijing is thought to be keen to diversify its exposure, and the current legislative gridlock in the U.S. and a possible debt default have only deepened concerns about the outlook for the U.S. dollar and Treasurys, analysts said.
The World Gold Council has estimated that Chinese imports this year will top 1,000 tons–believed to be a record amount. China became the world’s biggest gold consumer in the first half of this year, just topping India, which had held the top spot for years, the WGC said in August. Chinese demand totaled 570 tons during the first six months of the year, while India’s was 568 tons, it said.
In India, retailers are now paying as much as $50 a troy ounce more than international prices ahead of the upcoming festive season, a time of strong gold demand. Demand is outpacing supply following government efforts to curb imports

25 Sep 2013

Global bail-ins are now an acceptable standard practice.

Now that "bail-ins" have become accepted practice all over the planet, no bank account and no pension fund will ever be 100% safe again.  In fact, Cyprus-style wealth confiscation is already starting to happen all around the world.  As you will read about below, private pension funds were just raided by the government in Poland, and a "bail-in" is being organized for one of the largest banks in Italy.  Unfortunately, this is just the beginning.  The precedent that was set in Cyprus is being used as a template for establishing bail-in procedures in New-Zealand, Canada and all over Europe.  It is only a matter of time before we see this exact same type of thing happen in the United States as well.  From now on, anyone that keeps a large amount of money in any single bank account or retirement fund is being incredibly foolish.
Let's take a look at a few of the examples of how Cyprus-style wealth confiscation is now moving forward all over the globe...
For years, there have been rumors that someday the U.S. government would raid private pension funds.
Well, in Poland it just happened.
According to Reuters, private pension funds were raided in order to reduce the size of the government debt...
Poland said on Wednesday it will transfer to the state many of the assets held by private pension funds, slashing public debt but putting in doubt the future of the multi-billion-euro funds, many of them foreign-owned.
The Polish government is doing the best that it can to make this sound like some sort of complicated legal maneuver, but the truth is that what they have done is stolen private assets without giving any compensation in return...
The Polish pension funds' organisation said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation.
Announcing the long-awaited overhaul of state-guaranteed pensions, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.
He said that what remained in citizens' pension pots in the private funds will be gradually transferred into the state vehicle over the last 10 years before savers hit retirement age.
For years, Iceland has been applauded for how they handled the last financial crisis.  But now it is being proposed that the "blanket guarantee" that currently applies to all bank accounts should be reduced to 100,000 euros.  Will this open the door for "haircuts" to be applied to bank account balances above that amount?...
Following the crisis in October 2008, Iceland's government declared all deposits in domestic financial institutions were 'blanket' guaranteed - an Emergency Act that was reafrmed twice since. However, according to RUV, the finance minister is proposing torestrict this guarantee to only deposits less-than-EUR100,000. While some might see the removal of an 'emergency' measure as a positive, it is of course sadly reminiscent of the European Union "template" to haircut large depositors. This is coincidental (threatening) timing given the current stagnation of talks between Iceland bank creditors and the government over haircuts and lifting capital controls - which have restricted the outflows of around $8 billion.
European finance ministers have agreed to a plan that would make "bail-ins" the standard procedure for rescuing "too big to fail" banks in the future.  The following is how CNN described this plan...
European Union finance ministers approved a plan Thursday for dealing with future bank bailouts, forcing bondholders and shareholders to take the hit for bank rescues ahead of taxpayers.
The new framework requires bondholders, shareholders and large depositors with over 100,000 euros to be first to suffer losses when banks fail. Depositors with less than 100,000 euros will be protected. Taxpayer funds would be used only as a last resort.
What this means is that if you have over 100,000 euros in a bank account in Europe, you could lose every single bit of the unprotected amount if your bank collapses.
As Zero Hedge reported on Tuesday, a "bail-in" is now being organized for the oldest bank in Italy...
Recall that three weeks ago we warned that "Monti Paschi Faces Bail-In As Capital Needs Point To Nationalization" although we left open the question of "who will get the haircut including senior bondholders and depositors.... given the small size of sub-debt in the capital structures." Today, as many expected on the day following the German elections, the dominos are finally starting to wobble, and as we predicted, Monte Paschi, Italy's oldest and according to many, most insolvent bank, quietly commenced a bondholder "bail in" after it said that it suspended interest payments on three hybrid notes following demands by European authorities that bondholders contribute to the restructuring of the bailed out Italian lender. Remember what Diesel-BOOM said about Cyprus - that it is a template? He wasn't joking.
As Bloomberg reports, Monte Paschi "said in a statement that it won’t pay interest on about 481 million euros ($650 million) of outstanding hybrid notes issued through MPS Capital Trust II and Antonveneta Capital Trusts I and II." Why these notes? Because hybrid bondholders have zero protections and zero recourse. "Under the terms of the undated notes, the Siena, Italy-based lender is allowed to suspend interest without defaulting and doesn’t have to make up the missed coupons when payments resume." Then again hybrids, to quote the Dutchman, are just the template for the balance of the bank's balance sheet.
Why is this happening now? Simple: the Merkel reelection is in the bag, and the EURUSD is too high (recall Adidas' laments from last week). Furthermore, if the ECB proceeds with another LTRO as many believe it will, it will force the EURUSD even higher, surging from even more unwanted liquidity. So what to do? Why stage a small, contained crisis of course. Such as a bail in by a major Italian bank. The good news for now is that depositors are untouched. Unfortunately, with depositor cash on the wrong end of the (un)secured liability continuum it is only a matter of time before those with uninsured deposits share some of the Cypriot pain. After all, in the brave New Normal insolvent world, "it is only fair."
Fortunately, it does not appear that this particular bail-in will hit private bank accounts (at least for now), but it does show that European officials are very serious about applying bail-in procedures when a major bank fails.
New Zealand
The New Zealand government has been discussing implementing a "bail-in" system to deal with any future major bank failures.  The following comes from a New Zealand news source...
The National Government are pushing a Cyprus-style solution to bank failure in New Zealand which will seesmall depositors lose some of their savings to fund big bank bailouts, the Green Party said today.
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
"Bill English is proposing a Cyprus-style solutionfor managing bank failure here in New Zealand - a solution that will see small depositors lose some of their savings to fund big bank bailouts," said Green Party Co-leader Dr Russel Norman.
"The Reserve Bank is in the final stages of implementing a system of managing bank failure called Open Bank Resolution. The scheme will put all bank depositors on the hook for bailing out their bank.
"Depositors will overnight have their savings shaved by the amount needed to keep the bank afloat."
Incredibly, even Canada is moving toward adopting these "bank bail-ins".  In a previous article, I explained that "bail-ins" were even part of the new Canadian government budget...
Cyprus-style "bail-ins" are actually proposed in the new Canadian government budget.  When I first heard about this I was quite skeptical, so I went and looked it up for myself.  And guess what?  It is right there in black and white on pages 144 and 145 of "Economic Action Plan 2013" which the Harper government has already submitted to the House of Commons.  This new budget actually proposes "to implement a 'bail-in' regime for systemically important banks" in Canada.  "Economic Action Plan 2013" was submitted on March 21st, which means that this "bail-in regime" was likely being planned long before the crisis in Cyprus ever erupted.
So what does all of this mean for us?
It means that the governments of the world are eyeing our money as part of the solution to any future failures of major banks.
As a result, there is no longer any truly "safe" place to put your money.
One of the best ways to protect yourself is to spread your money around.  In other words, don't put all of your eggs in one basket.
If you have your money a bunch of different places, it is going to be much harder for the government to grab it all.
But if you don't listen to the warnings and you continue to keep all of your wealth in one giant pile somewhere, don't be surprised when you get wiped out in a single moment someday.