The
prospect of the United States defaulting on its debt is not just likely. Its
inevitable, and imminent.
The regulatory black
holes into which sanity and reason disappear on a daily basis are soon to
collapse under the mass of their sheer size. The circle jerk going on among
G7 governments has to end – the steady advance of gold, even in the
face of a managed price, exposes the real value of the U.S. dollar, as
opposed to its apparent value expressed in the dollar index.
Is 2009 the year
that the United States formally defaults? And with that, will the dollar
collapse an be rolled back ten for one or more?
There are a lot of
reasons to support that theory. To Wall Street economists, such an event is
heresy and therefore unthinkable. Yet Wall Street is the very La-la-land that
bred the idea of a perpetually indebted nation in the first place.
Number one among the
indicators favoring this scenario is what is happening in the U.S. Treasuries
auction market.
Last Thursday, an
$30 billion auction in five-year notes failed to stir the interest of
traditional primary dealers. The auction itself was saved by an anonymous
“indirect” bid.
Buyers are
discouraged by the prospect of what is expected to amount to $2 trillion
total issuance for the full year of 2009. The further out the maturities on
notes, the more bearish the sentiment towards them. The only way to entice
buyers is through the increase in yields.
But with yields at
1.82 per cent, five-year notes were met with a demand for 1.98 times the
amount offered - the lowest bid-to-cover ratio since September. A sell-off in
treasuries began in earnest upon the conclusion of that auction.
The U.S. Federal
Reserve suggested last week that it was going to step up its treasury-buying
activity, and the mainstream media interprets this as a form of market
support. What it actually is evidence of growing anxiety and desperation on
the part of the Fed as the realization dawns that demand for treasuries is
progressively evaporating.
The increased demand
for gold as an investment witnessed throughout the last two weeks that has
pushed gold to a 4 month high is further evidence that investors across the
board are gravitating more towards gold and away from U.S. debt.
So what is the
catalyzing event that will precipitate outright capitulation?
I think the
spin-controlled version of events will make the collapse of the derivatives
market the red herring that facilitates the aw-shucks-we-have-no-choice
shoe-gazing moment possible, and that’s exactly the parachute the
government needs to retain a veneer of credibility - at least in its own
delusional mirror.
The announcement
that the CFTC was about to become the target of a regulatory overhaul
supports this theory. Consistent with his unfortunate proclivity to hiring
foxes to guard chickens, Barack Obama’s choice for CFTC commissioner
Gary Gensler was the undersecretary of the U.S. Treasury when the Commodity
Futures Modernization Act of 2000 was passed, and is one of its architects. This
was the piece of legislation that was put forth to appease the opposition to
“dark market” trading in certain OTC derivatives first noisily
derided by CFTC commissioner Brooksley Born in 1998.
Ignoring
Born’s admonishments with this act, it exempted credit default swaps
(CDO’s) from regulation, resulting in the somewhere between 58 and 300
trillion dollars in value presently under threat if the positions were to be
unwound. Because of their unregulated status, counterparties in the largest
transactions can simply “roll forward” contracts, instead of the
losing party in the transaction covering their loss with a transfer of money.
It is this massive “nominal” value that could be the Achilles
heel of what’s left of the U.S. banking system, and by extension, the
U.S. dollar.
I don’t arrive
at this conclusion because I like making catastrophic outlandish predictions.
Its merely the result of following certain logical paths to their most likely
outcome based on what has happened in the past.
In discussions on
this topic with editors of top tier financial publications, such speculation
is dismissed out of hand, and the argument to refute the likelihood of such
outcomes is never brought forward.
Gold exchange traded
funds (ETF’s) are now the largest holders of physical gold, and as a
proxy for investors who don’t want to be encumbered with taking
delivery of the physical, provide a simple way to participate in the gold
market.
United States citizens
should bear in mind, however, that should the banking system be brought down
completely by the collapse of the futures market, proxies for gold such as
ETF’s and bullion funds could theoretically be targeted by a government
desperate for possession of value. The risk from security in holding physical
bullion is matched by the risk of confiscation by government in these
volatile times. Don’t forget, the government confiscated and outlawed
private ownership of gold in 1933 in support of an ill-conceived gold
standard, which to some extent, was that era’s spin to halt the flight
of gold (and real value) from U.S. soil.
Don’t think
for a minute such drastic events are outside the realm of possibility. If
somebody had told you in 1998 that a bunch of angry crazy
pseudo-Muslims were going to fly jetliners into the World Trade Center, what would you have said?
James West
www.midasletter.com
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