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Faith and confidence in the
USDollar, in management of the US
banking system, in the viability of the USEconomic structure,
in the image of Wall Street honesty, and in the integrity of USGovt federal finances are all at historic lows. Repair
seems close to impossible. The US Congress, the current presidential
Administration, the USFederal Reserve, and the US
Dept of Treasury together appear to be in the center
of a grotesque policy failure morass. On the financial economic aggregate
front, bring attention to the “Impossible Trinity” as it is
called for a brief dissection exercise in diagnostics. Without a gold standard
to enforce discipline and balanced accounting across national finances and
trade, the simultaneous balance of three factors is rendered an impossibility. The failure of attempts is hidden by
means of pure propaganda in its face, falsified economic statistics as a
front, which is a specialty well developed by the US
managers.
Economic and financial
stewardship requires the simultaneous balance act, well analyzed by economic
theory experts. Three challenges exist for the intractable mission, doomed
from the start without a gold anchor. A) maintain
a stable currency exchange rate for the USDollar on
the FOREX market, B) maintain an independent monetary policy for setting
interest rates and guiding the USDollar money
supply, C) maintain a stable open current capital account comprised of the
trade gap and that of financial assets. So the US$
exchange rate, the USTreasury credit market yield,
and the total balance of trade cannot be tightly managed at the same time.
Something must give. Economists unanimously agree that at most, a nation can
succeed in two of the three objectives, but never three. The US
maestro custodians manage to fail on all three. Like financial laws of
physics, offsetting forces are powerfully at work. However, when all three
fronts are marred badly by failure, one must conclude vast perverse chronic
ineptitude (if not corruption) is involved. The task is impossible from the
start without a gold tether on the buck. Add incompetence and perhaps an
initiative to fleece the middle class, and performance
can fail miserably, as we see.
The fascist merger of
state, the penultimate banking sector out of New York City,
and certain corporate groups (see oil industry, military defense)
stands as the most glaring threat to free market capitalism in the modern
history of the nation. Yet it receives no challenge. The retrenchment from
globalization forces, manifested ironically as active participation
(corporate outsourcing of operations and jobs), has made public opposition
muted. The recoil from the security firestorm, regardless of origin for
actual threats, has confused the public perhaps as much as frightened it. As
we learned seventy years ago in Central
Europe, fear is a powerful tool when used in a
controlled fashion. The current custodians seem to brandish aggression and
arrogance, while dragged down by dishonesty and ineptitude at the same time.
The world notices, and makes votes against the USDollar,
which serves as a ballot. The more hidden vote is with the embrace of gold.
MY CONTENTION IS THAT ALL
MENTIONED INSTITUTIONS HAVE FAILED, THE CONGRESS, THE ADMINISTRATION, THE
USFED, AND THE US
DEPT OF TREASURY. A FAILED FINANCIAL STATE HAS OCCURRED. AS PROOF, THE LITMUS
TESTS REGISTER FAILURES FOR THE USDOLLAR, FOR BOND PURCHASES, AND FOR THE
BALANCE OF TRADE. THE MONETARY CRISIS WILL CONTINUE, ECHOED BY AN ECONOMIC
CRISIS EXTENDED FROM STRUCTURAL FRACTURE. THE RELEASE VALVE WILL BE THE
RISING GOLD PRICE, REGARDLESS OF THE DEPTHS REACHED BY THE USDOLLAR.
WE ARE WITNESSING A FAILURE IN CONFIDENCE FOR THE USDOLLAR, THE MOST CRUCIAL
ASPECT OF ANY FIAT CURRENCY. A WIDER WAR IS THE WILD CARD.
By the way, keep in mind
the latest nonsensical and utterly false mantras circulating in the markets
these days. “The USDollar is declining in
an orderly fashion” and “Price inflation is under
control” have hit the lighted billboards with such regularity as to
cause laughter to the well informed. A 15% decline in the DX dollar index in
24 months is not orderly. A 4% decline since the USFed
rate cut two weeks ago in veiled desperation is not orderly. As for price
inflation, it is running at 10% on an annual basis, if one bothers to count
the price increases on the cross section of items within the broad economy. Remember
that every economic mythology requires mantras as glue to hold their chapters
together, as a practiced fallacious ideology. Last autumn they were “The
subprime mortgage problems will be contained” and “The
housing market will stabilize in the spring” and “No
spillover from the banking problems to the real economy” all
spouted about broadly and prominently. Two years ago it was “Global
trade surplus recycle provides a stable reliable source of capital for the United States”
when now that USTBond support relies upon a printing press increasingly. All
heretical economist foundations urgently require mythology of beliefs,
mantras for incantations, all profoundly untrue, to
serve as false pillars upon which temporary support is gained.
THE
IMPOSSIBLE TRINITY
Manage the USDollar: The USDollar
has not maintained a stable value in its exchange rate in the FOREX markets
versus the major and secondary currrencys, not at all. Since early 2001, when
the DX dollar index hit a 121 high, the US$
has fallen over 35%. The major offset has been the euro currency, which has risen
from 84 to 141, an amazing 67% leap upward. The primary defense against the
ongoing plummet in the last seven years has been the USFed tightening cycle
off the long-held 1.0% rate in 2005, which engineered a US$ bounce. The
effect to dampen the gold price in 2005 was fully forecasted here in the Hat
Trick Letter. Another serious decline in the USDollar will cause another
painful round of cost inflation, the increase in prices of almost everything
resident to the USEconomy.
Few technical chart
patterns are extremely reliable. My reliable favorites are the simple
momentum swing pattern, the flat triangles, and the head & shoulders
pattern. The DX dollar chart displayed the most horribly dire bearish, a huge
head & shoulders bearish pattern. If full potential is realized on
the breakdown, the DX could face a further 50% loss from the critical
long-term support level of 80. If that occurs, the entire face of the
United States
will be transformed into a very ugly place. In 1995, the DX index bounced off
the 80 level. In very early 2005, the DX bounced off the 80 level again,
rising all the way to 92 by the end of that year. With the end of all
prospects for a higher short-term USTreasury yield to attract foreign money
into USTreasurys, the stage is set for a spectacular decline in the USDollar.
The amusing part of the story is the nonsense about how the decline will be
good for the USEconomy. How will uniformly higher prices be good? How will
discouragement of foreign investors be good? How will erosion of foreign
central bank assets be good? Favorable conditions for US
exporters is indeed actual and good, provided one can identify big
export industries. Multi-national operations to be
translated on favorable translations is actual and good, provided
investing abroad is the priority, not at home. A new wave of job outsourcing
is possible.
The USDollar is clearly
being permitted to fall, first because it must in order to resolve
imbalances, but also because many key powerful global institutions are losing
faith in it. The Asians are investing less in USTreasurys, and have shown a
flat account since summer 2005, over two years. In fact, China
is using their vast sovereign investment funds as a weapon to fight against
the USGovt, in response to trade sanction legislation marching down the pike.
The Arab nations must deal with powerful consequences from pegging their
currencys to the USDollar. Price inflation, vastly growing money supply,
construction booms gone slightly out of control, these are the consequences. The
Arab oil producers will soon deliver a fracture blow to the PetroDollar in
the coming months, or else permit forces to rip apart their economies and
banking systems. A removal of a tight US$ peg by Persian Gulf oil
producers means the end of the vastly important PetroDollar itself, the
commercial foundation of the world reserve currency enforcement!!! The
world over, revolt against the USDollar is underway, in bloom, even
accelerating. A monetary crisis is underway which fails to receive proper
publicity. Regardless of monetary policy or the trade imbalance, the USDollar
is heading for a crisis decline.
Manage
monetary policy: The US Federal Reserve has a “Sophie’s
Choice” to contend with. Do they attempt to rescue the USEconomy,
dragging horribly down by the housing market? Or do they attempt to rescue
the USDollar, under siege globally, indefensible on numerous fronts? Sadly,
the USTreasury Bond has been transformed into a War Bond, since the USGovt
current leaders are engaged on an unproductive war, whose
only certain outcome is the strain toward national bankruptcy. The USFed cast
its vote two weeks ago, to defend the USEconomy and to permit the USDollar
exchange rate to fall. Ben let go on the rope on his left hand (right side to
viewers). The custodians will in all likelihood attempt
to manage the decline in an orderly fashion. However, another official rate
cut, or a string of them in a fresh new easing cycle, will remove the
favorable bond yield differential, which has supported the USDollar for two
years.
The amazing overtone to the
rate cut on September 18th, is that the USFed has actually reduced interest
rates amidst unchecked money supply growth. That is opposite to normal
conditions. The international vote of little confidence, possibly to turn
ugly into no confidence, has been the rise in long-term USTBond yields since
that fateful day of the rate cut. Another rate cut of 50 basis points in late
October could result in a push upward with more force in long-term bond
yields, like to the 5.0% level. The housing market would not fare well on
fixed mortgage rates in reaction. An argument can be made that long-term
bond yields have reversed and are now in an uptrend. The steeper
USTreasury Yield Curve is evidence of that reversal. We are in a dangerous transition
at a time when confidence in both the USDollar and USTreasury Bond is fast
vanishing.
My longstanding accusation is that the USFed
has acted as a quasi cabinet ministry, who together with the Dept of Treasury
deserve the tagteam title of Dept of Inflation. The USFed chairman deserves
the shameful title of Secretary of Inflation. They talk about fighting price
inflation, but they manage the growth of money and credit. Actually they
mismanage it, since they turn a blind eye to grotesque money growth and
credit growth. See the exploding credit derivatives and subprime mortgage
bonds, for instance. The US$
money supply is growing at around 14% on an annual basis, which is actually
regarded as a positive development. This unbridled growth is not solely a
treatment to subprime bonds wrecking havoc in the banking system. The below
chart is compliments of the Shadow Government Statistics folks, who do
outstanding work to remove gimmicks and lies. The USGovt can hide the
official M3 Money Supply statistic, but it can be reconstructed. Notice how
the M1 Money Supply series is running negative. That can be interpreted to
mean that the real tangible economy is in recession, as money shrinks, in the
technical sense. By that is meant the monetary aggregate, the total amount of
money sloshing about in the actual economy apart from the financial games, is
in decline, thus monetary deflation. In the arenas where people lose jobs,
mortgages are foreclosed, businesses fail, and bankruptcies find resolution, money is being destroyed. Tell that to the S&P500 and
Dow stock indexes!!!
Maintain an open capital
account: The current account deficit remains a veritable hemorrhage. In
2Q2007 the C/A deficit registered at $190.79 billion. The foreign capital
inflow at $150.9 billion was insufficient in the quarter to fund the deficit.
Where and how was the gap filled? The printing press!!! The USFed and Dept of
Treasury were forced to authorize money off the electronic printing press to
cover the gap! The story received no press coverage. What was covered was the
lifting of the USGovt permitted debt limit, from $8.965 trillion to $9.82
trillion. All is well, they can borrow more money now on the national credit
card, largely squandered on a war, but handled off the official balance
sheet. One can make the argument that a large pocket of key financial
institutions engages in grandiose false double book accounting methods. See
Wall Street firms and their ACA Capital, a garbage can of under-water credit
derivatives, and their hedge books themselves, which are rarely marked to
market. ACA is shared in ownership by several WS firms.
In some of my initial
public articles written four years ago, a strong economic forecast was made.
My claim was that the USDollar would be devalued in a big way, but the trade
gap would actually worsen. That came to pass in spades, despite some hate
email accusing me of gross incompetence! The trade gap remains in the $57 to
$63 billion monthly range, having almost doubled. Anyone who claims that a $6
billion improvement accomplishes much of anything should tell his gambling
addicted son that a $6300 per week gambling problem has made progress, now
that it is only $5700 per week. Only in the last several months, has the US export trade grown at a faster pace than
the US
import trade. Since January 2002, exports have grown by 71.5% versus
growth at 78.3% for imports. During those 5-1/2 years though, import volume
grew by $85.6 billion versus growth of $56.1 billion for exports. Thus
the trade gap worsened markedly. More recently, however, exports have grown
since January 2007 by 6.15% versus growth at 3.71% for imports, but export
volume caught up by only $1 billion. Exports are catching up, but had a much
lower starting point.
The nasty curve ball in the
last several months has been the decline in foreign central bank willingness
to hold USTreasury Bonds. Consecutive monthly declines are being registered.
This puts added pressure on the USFed/DeptTrez to print more money and buy
more USTBonds, in a process called monetization. The whole world is watching
in horror! They are losing confidence in the world reserve currency, the
mismanaged USDollar. Its legal tender in the financial markets is the
mismanaged USTreasury Bond, whose legitimacy is undermined by the printing
press. In private circles any such practice is called counterfeit.
CONCLUSION
We are witnessing a failure
of economic and banking stewardship, management, and performance. The entire
world is held hostage. Their banking systems are reinforced by gargantuan
sums of US$-based securities. To call them ‘secure’ at all is a
bad joke and a misnomer in every sense. The backlash from the subprime bond
export, complete with fraud, mispricing, mislabeling, and premeditation, has
in no way been fully played out. With the European, British, and Japanese
central banks frozen on policy, urged to hold on interest rates at the point
of a gun, the gold price will serve as a relief valve. These major
central banks are expanding the money supply in magnificent fashion, over 14%
together. With the US Federal Reserve certain to cut rates further, and with
far less likelihood of foreign major central banks to follow suit, the
USDollar is in great jeopardy. With the Arab states which form the Gulf Coop
Council contemplating a removal of the US$ peg, a fracture in the
PetroDollar defacto standard is near. Implications to the USDollar
negatively, and to gold positively, are profound. The Asians and Arabs are
hedging against US$-based bond losses by purchasing increasing amounts of
gold. The transactions are not being hidden. Gold is heading for $1000 in the
coming several months. The USDollar is heading for DX=70 in the coming several
months. The euro is heading for 150 in the next several months. The Canadian
Dollar is heading for 110
in the next several months. The precious metal mining
stocks are poised for a substantial runup in the next several months. The
season will work favorably until the spring.
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By : Jim Willie CB
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Jim Willie CB is the editor of the
“HAT TRICK LETTER”
Jim Willie CB is a
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