Deep Economic and Debt Frictions Triggering Competing Currency Wars
Currencies / Fiat Currency Sep 29, 2010 - 03:57 AM GMTBy: Jim_Willie_CB
Some prefatory stories are highly revealing. Bank of America is badly on the ropes. On the same weekend at the end of July, when the Bank For Intl Settlements executed a 340 ton gold swap contract, two other events happened. The London metals exchange apparently suffered coordinated delivery raids, all legal, but painful nonetheless, stripping the embattled exchange of much gold bullion. My source from the German banking fortress shared that the BIS might have rescued the London Bullion Market Assn, and thereby prevented a near default at the exchange. Spurious stories about aiding commercial banks, even the Portuguese central bank, were floated to distract the masses.
The second event was that on the same weekend, Bank of America suffered a failure. But the USFed pulled it out of the fire by Monday morning with fresh huge infusions of funny money. This week, another $13 billion infusion came to BOA by way of much darker corners of USGovt agencies, from nether recesses. It is getting that bad! So BOA had been propped by the USFed and the USCongress in the past, but by the syndicate now. In time, they will remove the valued assets and exit the burning building. Unexpected consequences are sure to come, a fact of nature. The BOA story came after a prompted inquiry as to which banks might next succumb to the rising gold & silver prices. BOA was at the top of the list of banks mentioned, but others were mentioned too. They appear in the September Hat Trick Letter, the usual suspects.
QE2: A JUSTIFIED CANCER
My best description of QE2, the Quantitative Round #2 Launch, is simply stated a monetary cancer, an admission of failure, and the trigger for the next breakdown in the global monetary system. The QE2 Launch is a US flag flying upside down at the central bank command center. Imagine trying to justify printing money to cover debts, and retaining credibility. The belief stated by USFed Chairman Bernanke, that zero cost comes from printing money, is pure heresy with dire consequences. The cost is lost confidence in the monetary system, in the currencies, and in the central bank franchise system. The QE initiatives kill the requisite confidence. Thus the rise in the Gold price in response. The financial news anchors struggle to hide their growing awareness that gold is the safe harbor from a destroyed monetary system, wrecked currencies, discredited central banks, and insolvent banks. They are awakening, as are those in the investment community.
Three additional sides are revealed on the Quantitative Easing desperation. The Bank of England has a US plant residing within. Adam Posen is an American who sits on the Monetary Policy Committee at the bank. He inflamed concerns about monetary instability with a speech to the Chamber of Commerce in Hull on Tuesday. He urged the major central banks to pursue more aggressive bond buying in order to rescue the world economy from stagnation that persists. He spoke of the fear of looking ineffective from inaction, mitigated by usage of extreme tools. He actually said, "Thus, policymakers should not settle for weak growth out of misplaced fear of inflation." So there you have it, inflation full speed ahead. A clarion call to inflate. The risk is hyper-inflation. Their policies in the last cycle produced unforeseen problems. In fact, the central banks, in particular the USFed, fight the last war only to create the most monster, on a consistent basis, in a pattern of serial events. Their colossal monetary inflation is breaking all historical records. It is given political cover by virtue of doctored price inflation statistics to hide its chronic 5% to 7% range. Posen pushed for further monetary easing undertaken in the United Kingdom, even to the extent of corporate debt purchases. Of course, to keep the order, they should begin with simple UKGilt (bond) purchases. He acknowledged that a QE program will not be able to create sustained recovery on its own. He fears a 1990s Japan style scenario, when a collapse of the Western monetary system is the more possible ugly outcome. He advises more effective coordination of large scale asset purchases by the central banks working together. This is a trumpet call to the Competing Currency War, where peace is declared at first, but which will vanish in the din of a threatening crisis.
A second warning came from Bill Gross of PIMCO, the newest target of informal inside trader accusations. His bond funds seem to have been benefiting handsomely from advanced notice of many special USGovt programs to purchase bonds. The PIMCO funds might front-run the USGovt policy, certainly doing very well for their investors. They could be the newest invited player in the fascist business model privileged group. Gross is on record this week as warning that the Quantitative Easing programs, those that involve vast bond purchases with newly printed USDollars, backed by nothing, fully diluting the national currency and undermining the central bank integrity, will lead to a worsening strain on the USDollar and a decline in the American standard of living. That is a slick backdoor way of saying significant price inflation. Nobody on stage wishes to warn of price inflation as a consequence to the current policy. Nobody on stage wishes to contradict the low price inflation environment portrayed falsely by bank officials, which justifies the magnificent monetary inflation being ordered.
The third warning came from Yu Yongding, a former adviser to the Chinese central bank. He called the USDollar as being one step nearer to a crisis while debt levels in the US rise to frightening levels. Yu also called a devaluation of the USDollar inevitable while the USGovt debt rises. He stressed that USTreasurys fail to provide safety or liquidity. Yu openly expressed concern over the safety of its FOREX reserves, including those invested in USTreasurys. China is the largest foreign investor in this sanctioned asset bubble, falsely deemed a safe haven. Its pursuit globally has transformed it to an asset bubble. China is trying to shed USGovt bonds, as they have cut holdings by 10% to $847 billion in the twelve months ended July, according to the USDept Treasury data. The invitation given to Fannie Mae to reside under the same USGovt roof as the USTreasurys has greatly increased the risk to the USDollar. The guarantee has been declared as explicit.
EUROPE'S HAND BID TO DANCE
Any new QE2 chapter will probably have minimal positive effect, but much negative effect. The beneficiary will be gold & silver, but no specific currency, since tied to the same papyrus raft. No cure will come from a prescribed Quantitative Easing Round #2. The first round accomplished nothing. Curiously, the central bankers exhibit a strange sense of caution, as though they realize the great risk of much deeper capital destruction, and heightened risk of triggering price inflation. A selloff of the USDollar might soon motivate a similar QE2 by Europe. Except this time around, the Europeans must admit their Bank Stress Tests were a total fraud and sham staged event. The QE2 will ultimately serve as the catalyst that speeds up the processes riddled in crisis that are already underway. Tremendous destruction of wealth comes next, from the USGovt creditors and US citizens alike.
In order to mitigate the severe damage to the USEconomy and US financial structure, the US will induce Europe to join in the destruction. The cause celebre will be to avoid a fast rising Euro currency. My forecast is that the high risk of a significant USDollar decline will induce European leaders to join in the currency debasement. They will announce a nearly simultaneous rescue soon, a similar EU bank bond redemption initiative, but without much time delay like last time. It will coincide nicely with the USFed QE2 Launch in order to minimize the currency impact and isolated USDollar swoon effect. European leaders will push for a matching QE Launch, since their export trade lies in the line of fire with a higher Euro currency. In joining the deadly tango on the currency dance floor, Europe and the United States will define the primary forces in the Competing Currency War, best described as a race to the bottom. In my view, the hesitation to execute a renewed QE2 program is foreknowledge of its extreme risks and admission of central bank failure at a certain level. It will deplete the central banks of weapons in their toolbag. They will be failure standing naked on the monetary stage in full view.
The advent of the QE2 Launch might have served as the final straw for former USFed Chairman Volcker. The man of extreme stature, perhaps the last effective central banker of US vintage, delivered a scathing tirade to a gathering of bankers and economists, harshly criticizing them in impromptu fashion. He left no financial stone without a stain or dent, in the most ringing, acerbic, rattling harangue qualifying as internal indictment in US history!! That is not an exaggeration, not in the least. Such a shrill speech has never been witnessed in US history. Volcker particularly expressed disappointment that the Financial Regulation Bill actually granted the USFed even more powers, when the original intention was to limit it. That was my stated forecast in the summer Hat Trick Letter reports, since bankers control the USCongress and the reform process. My personal belief is that the QE2 Launch is understood by Volcker as a green light toward a full speed careening downhill ride down into the chasm for the US Economic Ship of State. He must in his mind's eye realize that the Third World awaits. Isn't it interesting how the concept of Third World has gained traction in the US alternative press, after the Jackass forecasted it in October 2008? It is mentioned with greater frequency lately.
THE CURRENCY WAR HEATS UP
The competing currency war is ramping up, with gross interventions, open disputes, notable desperation, friction among trade partners, and urgent need to take action. Nations are taking positions against each other increasingly. In defending their economies, they are pitting themselves against allies and foes alike. The number of bilateral squabbles has never been greater. The winner will be Gold, as all paper currencys will circle the toilet and lose. The Gold price acts as a meter; it will rise in spectacular fashion. It rises due to the profound debasement in a death process of the currency system. The undermine is being sanctioned by the major nations. This process follows inevitably after the grotesque insolvency of the US banking system, the UK banking system, and much of the European banking system. Their economies are dying on the vine as a result of the dysfunctional credit systems.
The Competing Currency War has numerous sides in flourishing development, many stories, involving many nations, much conflict, collectively of huge importance. The longstanding battle between China and the United States is at a flashpoint every couple months. Japan is angry that the Chinese central bank has pushed up the value of the Yen. A return to investor flight away from the Euro might resume on renewed concerns over the sovereign risk. The Australian Dollar has been pushed higher by the strength of Australian resource wealth and further official interest rate hikes. Numerous international meetings over the next six weeks will elevate concerns from the broken financial arenas into the fractious political domain. The US and China are headed for a serious clash, with little sign of compromise. Each Quantitative Easing initiative acts like a stick poked in the Chinese eye, since claims of currency manipulation ring hollow when the USGovt is doing precisely that, undercutting the USDollar loudly.
The upcoming midterm elections in the United States could easily flip control to the other inept party, as perceptions grow of systemic failure while political inaction persists. Anticipated gridlock would ensure inaction and accelerate the slide. President Obama hastily sent the lead economic adviser Larry Summers to Beijing to haggle with Chinese leaders over their currency policy. Summers promptly resigned afterwards. Team Obama is losing its members, never perceived as any all-star cast, but rather retreads. The political insects in the USCongress harp on China, an easy target. They buzz but make no honey. Further details on events related to other nations in the widening Competing Currency War are provided in the September Hat Trick Letter. Refer to China versus Japan, but also unilateral actions taken by Australia and Switzerland. Some juicy updates are provided regarding the New Nordic Euro currency scheduled for June 2011. A reversion to the D-Mark currency might be the more likely route. Great disruption comes, but with a de-centralization theme. Several months ago the Jackass forecasted a broad movement toward domestic currencies in Europe. The Globalists appear to be blocked from their conceived plans, good news for people who care about the people.
THE GOLD REACTION
The next chapter will not unfold like the last chapter. Past efforts to remedy in response to crisis were extraordinarily shallow and ineffective. The next round will feature a zooming gold & silver price, already hitting record high levels. GOLD & SILVER will be the beneficiary to currency strife, the global tremor in the monetary system. The paper currencies and their attached sovereign shackles of debt have ruined the approved legal tender format. Money is actually denominated debt!! In the forecasting arena, applying yesterday's effect to a different world makes for gross errors. What comes will not be a repeat of the USDollar rise after the September and October 2008 events. In fact, what comes next will be the opposite. My forecast is for all currencies, including the USDollar, to suffer great damage in their purchase power and the all important confidence aspect, but to rotate in focused stories. The Competing Currency War has heated up in a huge way. The broken sovereign debt arena has done untold damage to the monetary system, a story not fully told. Gold & Silver will rise, but the currencies (USDollar, Euro, Pound Sterling, Yen) will experience eerie calm !!! Sure, the USDollar will fall, but only until the Euro is intentionally undermined and damaged by its own custodians on the continent. The falling USDollar is your tipoff that every major currency will be under assault. Gold will react favorably.
Numerous factors have conspired to lift the Gold price, which has broken the $1300 target level. It has much more to run, since nothing is fixed, much money has been squandered, and great volumes of additional debt will be monetized in a cancer stroke. Silver has also breached the important $21.5 level of resistance. Rather than show a chart of the Gold price or Silver price, check the Gold-Silver Ratio. Great strides are soon to come in the Silver price, breath taking moves toward $30. The Powerz are losing control of silver, as the shortage is acute. Endemic Big Bank behavior has changed radically in the silver price suppression. They are losing control. Lack of physical metal does that!! One should always remember that central banks own no silver, thus silver wins on the supply side. Also, industry makes almost no demands of gold, thus silver wins on the demand side. Its volatile price should not deter the investor in times of crisis and grotesque shortage, but rather give courage.
THE USDOLLAR SHUN & SHAME
The USDollar is being increasingly avoided in global commerce. China & Russia have set up currency trading facilities. While a positive move, neither nation has a convertible currency. Behold the Chinese Yuan convertibility to Malaysian Ringgit, just the start of global Yuan usage, a small but important step. Usage in Brazil is in the works. Chinese Yuan trading against the Russian Ruble is expected to begin within weeks in Shanghai. Bank Rossii in Russia has targeted the Ruble currency against a Dollar-Euro basket, which the bank claims is a fully convertible currency. China overtook Germany as Russia's second largest trading partner in the first six months of 2010. Trade between China and Russia rose 50% to $30.7 billion in the first seven months of 2010, compared with the same period in 2009, according to the Chinese Ministry of Commerce. More details are provided in the widening maturing developing relationship between Russia and China in the proprietary reports. Both nations have called vigorously for the USDollar role in the financial system to be reduced. Neither nation has anything remotely to call a major financial center, but they are evolving slowly in steps. Both Putin and Medvedeve has expressed aspirations. The USDollar is in deep trouble internationally, obviously in financial centers, but also in global commerce. The USDollar is even discounted by 20% in some cases in West Africa, like with older vintage bills, the ultimate insult. The issue is heavy counterfeiting. Thanks to Jim Sinclair for that story.
The great bond fraud on Wall Street, the great USGovt deficits, the great USTreasury Bond bubble, the great risk faced by foreign creditors in possession of bloated reserves, these factors are causing lost integrity for the USDollar. In countless transactions conducted at high levels of commerce, the two sides of deals increasingly avoid the USDollar. Dariusz Kowalczyk is a senior economist at Credit Agricole CIB in Hong Kong. He said, "Gradually the dollar is being eliminated from the foreign trade settlement flows. People are beginning to trade Asian currencies without intermediation via the dollar."
THE RUINED VEGETABLE GARDEN
Lastly, an illustrative example is given about a vegetable garden that continues to suffer damage, wherein no remedy is sought, which produces lousy inadequate output for survival. The garden is the USEconomy and the water comes from the US financial system. The key to the garden's success is plowing under the soil and proper water management. To see how the USEconomy does not and cannot respond to the current policy, consider a vegetable garden. It fails to produce much crop output, a fine analogy of the current landscape. The reasons why it cannot be revived must be closely examined. They are not even remotely understood in the United States by either the economists, leaders, or population. The analogy is not perfect, but it sure hits a realistic and sensitive chord. It makes sense.
The view is better elaborated by means of a vegetable garden analogy, such as one acre of land, or 4/10-th hectare. Imagine this derelict garden is the de-industrialized USEconomy racked by asset bubbles. The analogy is in no way complete, but some aspects are one-to-one almost perfectly. To begin with, this acre suffered from two gardener custodians mainly having money to devote to the garden from the housing mortgage bubble. It broke and thus starved the garden of money for most upkeep, as the water flow has been systematically constricted. The garden must be plowed under and turned over, but it is not. See the banks which are not liquidated, nor their toxic assets liquidated, as the process would bring them ruin and thus loss of all power. So the soil is not conducive to growth of much. The garden must have its weeds removed, but they are not. See the regulatory burden which is the norm, the constant. The USFed applied a big hose to irrigate the garden, but since the soil is not prepared, it cannot absorb water. Businesses cannot grow, since credit is scarce, and capital is wasting away. The vast irrigation programs resulted in vast pools of collected water, with some runoff that actually stripped the land of its nutrients and seeds. See the huge bank reserves, and the interrupted capital formation step. The landlord did step in and force the planting of a queer beast of a crop, which actually caused more problems. See the Clunker Car program, the GM Volt electric car, and the home buying tax credit. The primary problem is the soil. It is not turned over properly to release new nitrogen juices. The soil is not soft and conducive to new growth, free of weedy roots like dandelions. The soil cannot absorb the hose of water effectively. Thus the crop is poor.
The landlords need to be eliminated, even permitted a dangled fate from the nearby oak tree. They are too well entrenched in the farm county political structure though. The landlords are untouchable and can never be given justice, despite their horrible theft of water, despite their frequent purchase of crops with phony lord coupons. See the confiscation of savings from baseless printed money. The landlords are invisible and know no nation as home, as they operate a monopoly on the lake water source. They control from the shadows and have gardeners eliminated who cause a ruckus. The misery and hunger caused has been horrific, and the theft of water has been staggering. New landlords should take over. Their advisors, the arrogant lot who watch from their luxurious porches, who never have accomplished anything in their lives on a farm, should be eliminated also, their high priests even shown the same tree. See the Goldman Sachs syndicate officers, Wall Street included, the cast of economic advisors, the regulatory scarecrows that rotate in field roles, even the US Federal Reserve.
The secondary problem is the irrigation, as the hose goes through the landlord's property, and he steals much of it before creating the damaging floods in the garden. The gardeners must pay for the landlord's stolen water, part of the deal from this imperfect arrangement. The irrigation system must be redesigned so that a network of channels is created to more evenly distribute the water in smaller volumes, with much less skimming, and with less likelihood of large pools collected without theft. The channels must bypass the landlord's property altogether. Let him build his own well, and work for a change. Let him experience calloused hands and dirt under his fingernails, even an aching back from labor under the sun. This garden is a wreck, and cannot grow vegetables in any conceivable volume that would sustain life, not with the current landlords serving in their current roles, as the people endure heavy work with sweaty brows, only to find meager crop output for their family dinner tables.
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by Jim Willie CB
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