Protecting Yourself from the Inexorable Decline of the US Dollar

04/01/11 Los Angeles, California – Free Baron von NotHaus!

Free our money!

Poor Mr. NotHaus. He thought he was doing something good…something that needed to be done. His idea was to mint silver coins, which he called Liberty Dollars, or simply Liberties.

These were real coins, with real value. In fact, their value has been going up. Silver has been the big star of the latest hard money drama; compared to gold – which has also gone up nicely – silver is at its highest level since 1984. And compared to itself, it is as high as it has been in 30 years.

Silver has now gone mainstream. Even Jim Cramer advises listeners to buy the physical metal. They would be glad if they had. Almost nothing has outperformed it.

Compare Mr. von NotHaus’s money to the money issued by the US Treasury Department. The Treasury’s dollars have no precious metal content – none. At best, their content comes from trees and cotton plants, with a scrap value that is probably negative. Meaning, if it loses its value as money, you’ll have to pay someone to haul it away.

The record on that point is clear. Go back to when the Fed was set up to protect the value of the dollar in 1913. If you want to buy the same things, you’ll need 50 times as many dollars today as you have back then. Since 1971, when the last traces of gold were removed from the dollar-based monetary system, the feds’ money has lost value even faster.

The past is prelude. The feds are working hard to make the dollar worth even less in the future. Given the Fed’s current enthusiasm for debasing it, in a few years, the dollar may have no value left.

Even state governments – hardly visionaries – are looking for ways to protect their citizens from the feds’ fast-disappearing cash. A dozen are considering measures to coin their own money. Smart families are setting up their own reserves of real money – gold. Nobody trusts the dollar over the long term.

So, who do the authorities haul to the hoosegow? The guy who mints honest money in tiny quantities…or the guy who puts out $2.2 trillion in “paper” money that is sure to lose its value quickly?

Go ahead…take a guess.

Poor Mr. von NotHaus got taken to court…and may be taken to prison…for competing with the feds’ monopoly on issuing money. The Constitution – Article 1, Section 8, Clause 5 – gives Congress the power to issue money. Apparently, it makes it a federal offense to compete.

According to the Wall Street Journal report, that provision was cited in paragraph 33 of the indictment against Mr. von NotHaus and then later removed from the charges against him. What was left to convict the man on, we don’t know. But the court did so. And now he must appeal…or face penalties, possibly time in jail…and possibly a long time.

But what about the rest of us? Are we sentenced too? Will we be forced to pay the price for the feds’ goofy monetary policies?

Your editor is now flying back from California. He has no Internet connection, but he has a copy of Barron’s and The Wall Street Journal with him. Alas, he will have to read them.

Among the ideas we found in Barron’s was an article on gold. As background information, throughout the entire 11-year bull market, as far as we know, Barron’s never counseled its readers to buy gold. On the contrary, it generally discouraged them. Whenever it mentions gold, it talks about it as though it were some sort of crank market phenomenon…a marginal investment for the marginally insane.

As Michael Santoli put it in this week’s issue – gold is “not terribly useful.” He quotes a fellow named Jeffrey Christian who believes gold buyers are in for a “gut check” – a drop in the price of 15% to 20%.

He may be right about that. Every bull market has its countertrends and back-stepping. We’d be delighted to see the price 20% lower. “Buy the dip,” we’d tell you.

But as to the usefulness of gold, Mr. Santoli is dead wrong. Yes, gold is useless – most of the time. And, as anything but money and jewelry (a form of money in many countries), it is useless all the time.

But sometimes it is almost essential. When the other money – the feds’ money – goes bad, you need some good money to protect yourself. That’s the role gold has always played; it is natural, uncompromised money.

It does nothing – but it hides no mistakes.

It holds no press conferences – but it tells no lies.

It makes no promises – and never delivers less.

And anyone who bothers to mint coins of gold or silver is doing the world a favor.

Free Baron von NotHaus!

Bill Bonner
for The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning . 

View articles by Bill Bonner

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

Protecting Yourself from the Inexorable Decline of the US Dollar

04/01/11 Los Angeles, California – Free Baron von NotHaus!

Free our money!

Poor Mr. NotHaus. He thought he was doing something good…something that needed to be done. His idea was to mint silver coins, which he called Liberty Dollars, or simply Liberties.

These were real coins, with real value. In fact, their value has been going up. Silver has been the big star of the latest hard money drama; compared to gold – which has also gone up nicely – silver is at its highest level since 1984. And compared to itself, it is as high as it has been in 30 years.

Silver has now gone mainstream. Even Jim Cramer advises listeners to buy the physical metal. They would be glad if they had. Almost nothing has outperformed it.

Compare Mr. von NotHaus’s money to the money issued by the US Treasury Department. The Treasury’s dollars have no precious metal content – none. At best, their content comes from trees and cotton plants, with a scrap value that is probably negative. Meaning, if it loses its value as money, you’ll have to pay someone to haul it away.

The record on that point is clear. Go back to when the Fed was set up to protect the value of the dollar in 1913. If you want to buy the same things, you’ll need 50 times as many dollars today as you have back then. Since 1971, when the last traces of gold were removed from the dollar-based monetary system, the feds’ money has lost value even faster.

The past is prelude. The feds are working hard to make the dollar worth even less in the future. Given the Fed’s current enthusiasm for debasing it, in a few years, the dollar may have no value left.

Even state governments – hardly visionaries – are looking for ways to protect their citizens from the feds’ fast-disappearing cash. A dozen are considering measures to coin their own money. Smart families are setting up their own reserves of real money – gold. Nobody trusts the dollar over the long term.

So, who do the authorities haul to the hoosegow? The guy who mints honest money in tiny quantities…or the guy who puts out $2.2 trillion in “paper” money that is sure to lose its value quickly?

Go ahead…take a guess.

Poor Mr. von NotHaus got taken to court…and may be taken to prison…for competing with the feds’ monopoly on issuing money. The Constitution – Article 1, Section 8, Clause 5 – gives Congress the power to issue money. Apparently, it makes it a federal offense to compete.

According to the Wall Street Journal report, that provision was cited in paragraph 33 of the indictment against Mr. von NotHaus and then later removed from the charges against him. What was left to convict the man on, we don’t know. But the court did so. And now he must appeal…or face penalties, possibly time in jail…and possibly a long time.

But what about the rest of us? Are we sentenced too? Will we be forced to pay the price for the feds’ goofy monetary policies?

Your editor is now flying back from California. He has no Internet connection, but he has a copy of Barron’s and The Wall Street Journal with him. Alas, he will have to read them.

Among the ideas we found in Barron’s was an article on gold. As background information, throughout the entire 11-year bull market, as far as we know, Barron’s never counseled its readers to buy gold. On the contrary, it generally discouraged them. Whenever it mentions gold, it talks about it as though it were some sort of crank market phenomenon…a marginal investment for the marginally insane.

As Michael Santoli put it in this week’s issue – gold is “not terribly useful.” He quotes a fellow named Jeffrey Christian who believes gold buyers are in for a “gut check” – a drop in the price of 15% to 20%.

He may be right about that. Every bull market has its countertrends and back-stepping. We’d be delighted to see the price 20% lower. “Buy the dip,” we’d tell you.

But as to the usefulness of gold, Mr. Santoli is dead wrong. Yes, gold is useless – most of the time. And, as anything but money and jewelry (a form of money in many countries), it is useless all the time.

But sometimes it is almost essential. When the other money – the feds’ money – goes bad, you need some good money to protect yourself. That’s the role gold has always played; it is natural, uncompromised money.

It does nothing – but it hides no mistakes.

It holds no press conferences – but it tells no lies.

It makes no promises – and never delivers less.

And anyone who bothers to mint coins of gold or silver is doing the world a favor.

Free Baron von NotHaus!

Bill Bonner
for The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning . 

View articles by Bill Bonner

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

Protecting Yourself from the Inexorable Decline of the US Dollar

04/01/11 Los Angeles, California – Free Baron von NotHaus!

Free our money!

Poor Mr. NotHaus. He thought he was doing something good…something that needed to be done. His idea was to mint silver coins, which he called Liberty Dollars, or simply Liberties.

These were real coins, with real value. In fact, their value has been going up. Silver has been the big star of the latest hard money drama; compared to gold – which has also gone up nicely – silver is at its highest level since 1984. And compared to itself, it is as high as it has been in 30 years.

Silver has now gone mainstream. Even Jim Cramer advises listeners to buy the physical metal. They would be glad if they had. Almost nothing has outperformed it.

Compare Mr. von NotHaus’s money to the money issued by the US Treasury Department. The Treasury’s dollars have no precious metal content – none. At best, their content comes from trees and cotton plants, with a scrap value that is probably negative. Meaning, if it loses its value as money, you’ll have to pay someone to haul it away.

The record on that point is clear. Go back to when the Fed was set up to protect the value of the dollar in 1913. If you want to buy the same things, you’ll need 50 times as many dollars today as you have back then. Since 1971, when the last traces of gold were removed from the dollar-based monetary system, the feds’ money has lost value even faster.

The past is prelude. The feds are working hard to make the dollar worth even less in the future. Given the Fed’s current enthusiasm for debasing it, in a few years, the dollar may have no value left.

Even state governments – hardly visionaries – are looking for ways to protect their citizens from the feds’ fast-disappearing cash. A dozen are considering measures to coin their own money. Smart families are setting up their own reserves of real money – gold. Nobody trusts the dollar over the long term.

So, who do the authorities haul to the hoosegow? The guy who mints honest money in tiny quantities…or the guy who puts out $2.2 trillion in “paper” money that is sure to lose its value quickly?

Go ahead…take a guess.

Poor Mr. von NotHaus got taken to court…and may be taken to prison…for competing with the feds’ monopoly on issuing money. The Constitution – Article 1, Section 8, Clause 5 – gives Congress the power to issue money. Apparently, it makes it a federal offense to compete.

According to the Wall Street Journal report, that provision was cited in paragraph 33 of the indictment against Mr. von NotHaus and then later removed from the charges against him. What was left to convict the man on, we don’t know. But the court did so. And now he must appeal…or face penalties, possibly time in jail…and possibly a long time.

But what about the rest of us? Are we sentenced too? Will we be forced to pay the price for the feds’ goofy monetary policies?

Your editor is now flying back from California. He has no Internet connection, but he has a copy of Barron’s and The Wall Street Journal with him. Alas, he will have to read them.

Among the ideas we found in Barron’s was an article on gold. As background information, throughout the entire 11-year bull market, as far as we know, Barron’s never counseled its readers to buy gold. On the contrary, it generally discouraged them. Whenever it mentions gold, it talks about it as though it were some sort of crank market phenomenon…a marginal investment for the marginally insane.

As Michael Santoli put it in this week’s issue – gold is “not terribly useful.” He quotes a fellow named Jeffrey Christian who believes gold buyers are in for a “gut check” – a drop in the price of 15% to 20%.

He may be right about that. Every bull market has its countertrends and back-stepping. We’d be delighted to see the price 20% lower. “Buy the dip,” we’d tell you.

But as to the usefulness of gold, Mr. Santoli is dead wrong. Yes, gold is useless – most of the time. And, as anything but money and jewelry (a form of money in many countries), it is useless all the time.

But sometimes it is almost essential. When the other money – the feds’ money – goes bad, you need some good money to protect yourself. That’s the role gold has always played; it is natural, uncompromised money.

It does nothing – but it hides no mistakes.

It holds no press conferences – but it tells no lies.

It makes no promises – and never delivers less.

And anyone who bothers to mint coins of gold or silver is doing the world a favor.

Free Baron von NotHaus!

Bill Bonner
for The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning . 

View articles by Bill Bonner

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

Could a Japanese U.S. Debt Selloff Trigger a Dollar Meltdown?

With the disaster in Japan being far from over, the question of how Japan will finance their reconstruction efforts has, for the most part, stayed out of focus. According to reports, the damage is estimated in excess of $300 billion, nearly four times higher than hurricane Katrina. This number will likely rise the longer the nuclear crisis remains unresolved. Karl Denninger of Market Ticker says there are several problems facing the Japanese:

(Video interview of Denninger on Fox Business follows excerpts and commentary)

The Tsunami did a tremendous amount of damage to the landscape and once they get that cleaned up they’re going to have to rebuild. And then you’ve got about 8 gigawatts of electrical generation that’s been taken offline and there’s no hope of restoring that anytime in the near future.

So, the capital flows that have gone into Japan from exports are going to turn into capital flows going the other direction because Japan has to buy the materials that it needs in order to rebuild its society.

The main issue in terms of rebuilding is one of funding. While the US may send foreign aid to help get Japan back on its feet, such measures are not very popular due to our already troubled debt levels and spending problems, so any support we provide will be limited. Japan can’t depend on international aid of any significance either, because, well, no one else gives like the US. Private donations may help people on the ground with food, clothing and shelter, but those are a drop in the bucket compared to what is necessary.

Considering that Japan is the third largest economy in the world, they will be left to come up with the money themselves.

Karl Denninger says that how Japan will come up with the money is “an open question.”

How they’re going to manage to do that without either printing more money, which at some point will cause problems over there, or selling some of their Treasuries is an open question.

Japan owns about 20% of all US debt. It’s safe to say that Japan’s regular purchases of US Treasuries are about to come to a screeching halt, or at least, be reduced significantly. This fact alone means someone is going to need to step in to buy up that excess debt. We can all guess, fairly accurately, who will end up with those new issues.

But even if the Federal Reserve were to buy up the new debt that Japan won’t, there is the question of how Japan is going to fund the $300 billion plus in recovery efforts. And given that there is no end in sight, we may be talking about double that amount – no one really knows.

So, the question is, will Japan need to sell off some of its US debt in order to pay for recovery and reconstruction efforts? And if so, could that be the black swan that could trigger the domino effect that will lead to a US debt sell off, and ultimately, a currency collapse? Until a month ago this was nowhere on the radar. Now, we have every reason to be concerned about this possible black swan event. Karl Denninger weighs in:

The obvious thing to do is to sell some of those holdings. The danger for the United States is not tomorrow, it’s a few months out. Right now, they’re still trying to clean up the mess. But once they actually start actively rebuilding they’re going to have to have a way to finance this.

And that’s where the danger comes from, because if Japan was to start unloading Treasuries, it would be reasonable to assume that the Chinese, who hold an even larger amount, would look at that activity and say ‘well, if we don’t sell now we lose even more. Maybe we want to be selling some ourselves.’ And, that puts quite an interesting squeeze into our budget picture for the United States.

In January, Treasury Secretary Tim Geithner confirmed that we are literally on the brink of a catastrophic debt collapse resulting from a need for money and raising of our debt ceiling. So, it is clear that we’re already in serious trouble as it is. If Japan were to stop buying our treasuries and actually start selling their existing US debt holdings, it could potentially accelerate the already destructive path on which we find ourselves.

As we’ve suggested previously, all it will take is for buyers and holders of US debt to say ‘no more’ and the jig is up. Mainly, we’re talking about China, and if they pull the plug on all of the credit they have thus far extended, then we could literally be talking ‘lights out’.

This may be a low probability event, but so was an earthquake driven Tsunami wiping out the generators that powered the fuel rod cooling stations in Fukuskima.

Watch Karl Denninger and Neil Cavuto:

View the original article here

Possible End to QE2 Pushes the US Dollar Higher

03/28/11 St. Louis, Missouri – Good Day… Mike did a great job last week, didn’t he? I read over all of the Pfennigs yesterday to try and get caught up on things, and it sure sounded like an exciting week. A cooling of the reactors at the damaged nuclear plant in Japan and NATO military success in Libya have calmed the markets, and currency traders have begun to move back into the “risk” trades. This will be positive for the high-yielding commodity-based currencies, and should be negative for those currencies that were purchased as “safe havens.”

St. Louis Federal Reserve President James Bullard dominated this weekend’s news with a suggestion that the Fed should consider exiting QE2 prior to spending the full $600 billion that was approved for the purchase of US Treasury securities. Apparently Bullard feels that the 3% GDP reported for the fourth quarter on Friday is strong enough to prompt an early exit from round two of the quantitative easing program. “The economy is looking pretty good,” Bullard said to reporters in France on Saturday. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short,” he said. QE2 is scheduled to continue through June, and many (including myself) still think there is a good chance we see a third round of easing before the end of the year. Chairman Bernanke has not shown any desire to end the program early, and continues to be worried about the “jobless” recovery here in the US.

But the dollar bulls liked what they heard from Bullard, and the dollar is up slightly in European trading. The reason for the dollar strength goes back to supply and demand. The Fed has been pumping dollars into the markets with their purchase of US Treasuries. So the currency markets have already priced in the additional $600 billion of supply, but if the Fed stops the program before placing all of these funds into the markets, there would be less US currency flooding the markets and therefore the value of each dollar should rise. An early exit by the Fed from the bond purchases would also move rates higher, decreasing the interest rate differential, which has been widening recently. The dollar also got some help from predictions that this morning’s Personal Spending data will show that US consumers are increasing their purchases. Personal spending is expected to have increased 0.5% in February, and Personal income is expected to have increased slightly less at 0.4%. We will also see pending home sales numbers for February, which will probably be disappointing.

The rest of the week will be pretty slow as far as economic data is concerned, with just the consumer confidence and CaseShiller home price index tomorrow and Challenger jobs data on Wednesday. Thursday will bring our usual weekly jobs numbers along with Factory orders for February. Friday will be the big data day, with the release of the employment data for March along with the ISM Manufacturing and Vehicle sales numbers. With no real data released until Friday here in the US, markets will continue to look for direction from Europe and the Middle East.

The euro (EUR) is trading off a bit in early trading after German Chancellor Angela Merkel’s Christian Democrats were defeated in a regional election. Merkel has been a strong force in the EU’s navigation through the treacherous waters of the sovereign debt crisis, and any indication that she could be losing her grip on power in Germany is bad news for the euro. Mike wrote about Portugal’s problems last week, and the ratings agencies are “piling on” as usual. S&P followed Fitch in cutting Portugal’s credit rating late last week and warned that further downgrades are possible as early as this week. Portugal’s President still hasn’t asked for help from the EU, and is convinced he will be able to get the country’s three biggest political parties to agree on budget cuts in order to meet the government’s deficit targets. The Portuguese government has set a target for a budget deficit of 4.6% of GDP in 2011 and aims to reach the EU limit of 3% in 2012. As Mike pointed out, Portugal is just a small piece of the European picture, but it shows that this sovereign debt problem has some real legs, and will continue to cast a shadow on the euro.

We will get a clear picture of how the markets feel about the EU debt crisis this week, as Italy plans to sell 21.5 billion euros of debt. Italy is Europe’s most indebted country in nominal terms with 1.8 trillion euros of debt. But Italy didn’t have a housing and borrowing fueled boom, so the Italian banks are in better shape than their competitors in Ireland and Greece. The debt auction is expected to go well, and should put a floor on any euro fallout from the Portugal downgrades.

The pound (GBP) continued to decline on Friday, and is off further in this morning’s European trading. The pound fell after a report showed that UK business confidence is the weakest in two years. As Mike reported last week, minutes from the last BOE meeting suggests that rates will remain low. Data to be released tomorrow may further weaken the pound, as it is expected to confirm that the UK economy shrank more than initially estimated in the fourth quarter. Government austerity measures and rising fuel prices are to blame for the negative confidence.

The commodity currencies of Canada (CAD), Australia (AUD), and New Zealand (NZD) were among the best performers over the weekend as investors felt more confidence in the global economic recovery. The Canadian dollar gained the most in three weeks versus the US dollar as crude oil held above $104 per barrel. But the loonie’s rally will probably be capped by political uncertainty, after Prime Minister Stephen Harper’s government was toppled by opposition lawmakers.

The commodity rally and a return to “risk” trades has helped push the Australian dollar to the highest level versus the US dollar since 1983. The Aussie dollar traded above $1.03 for the first time since it began trading freely, surpassing the previous record which it hit on Thursday of last week. The combination of rising commodity prices, and positive interest rate differentials has encouraged investors to flock back into the Aussie dollar.

Both the gold price and silver price are off their highs of last week, but are still trading at fairly strong levels. The precious metals declined on Friday on signs that the US economy is improving, decreasing the need to hold them as a hedge. Bullard’s talk of ending QE2 early eased inflationary concerns, pushing the metals lower. NATO success against Libyan military forces have also helped ease the “need” for the relative safety of the precious metals. Global events over the past few months confirm our belief that all investors should hold a diversified portfolio including metals and currencies. Diversification is an investor’s best protection against the unknown!

Recap: St. Louis Fed Head suggested the FOMC should look for an early exit to QE2, which pushed the dollar higher. Portugal had a ratings decrease, but the President is confident that he will be able to get his government to accept austerity measures. The euro will be tested by Italy’s bond auction this week, but is looking like it will hold up above $1.40. The pound sold off as UK business confidence is at the lowest point in two years. Commodity currencies continued to rally as “risk” trades were put back on, and gold and silver sold off their highs, but continue to protect investors.

Chris Gaffney
for The Daily Reckoning

Chris Gaffney is vice president of EverBank World Markets and the alternate author of the popular Daily Pfenning newsletter. Mr. Gaffney has been involved in the global marketplace since 1987, and is director of sales for EverBank World Markets. The Daily Pfennig is delivered via e-mail to tens of thousands of market watchers globally, providing commentary that allows them to stay on top of economic, currency, and market happenings. He is a Chartered Financial Analyst and holds degrees in accounting and finance from Washington University in St. Louis.

View articles by Chris Gaffney

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

US Dollar Under Acute Pressure: The World seeks an Alternative Reserve Currency

by Bob Chapman

The US dollar continues under acute pressure, as the world seeks an alternative reserve currency.

The days and years of manipulation, fraud and criminal behavior are fast coming to an end. New alliances are evolving, as are outspoken advocates of a new world reserve currency. As a result more and more foreigners are bypassing Treasury and Agency bonds, as well as other US dollar denominated investments. We watch as other major nations accumulate gold and cannot help but think that the new world reserve currency will be gold backed.

Over the past 11 years the Fed and other central banks have increased money and credit by several devices and in the last three years more aggressively by purchasing bonds and via using swaps. QE1’s monetary creation has now begun to affect costs and the entire price structure. As wages lay stagnant the resultant inflation will eventually destroy the middle class, the structure that holds American society together. As the taxpayer saves the financial institutions the middle class is being destroyed. They are funding their own demise.

We believe inflation is currently 8% and should be 14% by yearend. That is the result of QE1 and stimulus 1. Next year the US economy will be impacted by QE2 and stimulus 2. If we get QE3 and stimulus 3, 2013 will be impacted. Inflation could range from 25% to 50%, or more, dependent upon what the elitists have in store for us. While this transpires unemployment will rise and government revenues will fall increasing the already colossal debt. That means consumption will fall as a percentage of GDP from 70% to perhaps 64.5%, the long term mean, by the end of 2013 if we get QE3 and stimulus 3. People will only be able to spend on basics. That also means corporate profits will fall, as well as share prices. That, of course, will depend on whether the “Working Group on Financial Markets” is able to hold the markets up and keep them from falling. Deficits will spiral completely out of control, as will personal and corporate insolvencies. That means education will be cut to the bare bones. Instead of 18 to 21 children in a class you will see 36 to 42. Social services and welfare will be cut in half.

[more...]

View the original article here

Urgent Market Update on Gold, Silver, Oil, Dollar!

Today was a landmark day in market history. Before late-session corrections …

Gold futures surged to the highest level in world history — $1,449 an ounce.

Silver hit $38.18, the most since the Hunt Brothers cornered the silver market in 1980.

Crude oil touched $106.69, a few nickels short of the highest level since September 2008 … corn jumped more than 3% a bushel … and cattle futures jumped to $1.16 a pound, just shy of the highest level on record.

Meanwhile the dollar continues to plunge, losing ground again against the euro … the Swiss franc … plus the Australian, New Zealand, and Canadian dollars. The broad Dollar Index is now within a whisker of a fresh 15-month low.

What’s going on?

Exactly what we’ve warned you would happen: The mad monetary scientists at the Federal Reserve are trashing the value of your dollars, driving up the price of commodities, and completely ignoring the rampant inflationary pressures each and every one of us can see in our daily lives!

I hope and pray …

That Washington will finally wake up to the urgency of our budgetary lunacy …

That Ben Bernanke will stop destroying the value of your hard-earned savings …

That America can somehow avoid a financial Armageddon.

But hopes and prayers alone are not enough. We also must heed the FACTS, and those facts point to a financial disaster of biblical proportions.

For precisely how to protect yourself — and profit — I urge you to see Martin Weiss’ amazing video, American Apocalypse.

The place is here and the time is now. That’s what today’s markets are telling you. And they’re right.

Click here, and it will begin playing on your screen without further ado.

Best wishes,

Mike

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money, Interest Rates Profits and LEAPS Options Alert. He is often quoted by the New York Sun, Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

View the original article here

Still Think the Dollar is Safe?

Even the president of the Federal Reserve Bank of Dallas, Richard Fisher, said today that the U.S. is on a path towards insolvency. “I look at this as a tipping point”, “…its’ going to be very painful”, he said after a speech at the University of Frankfurt.

ZeroHedge.com reports that Bank of America’s chief chartist Mary Ann Bartels, said there is a possibility for another 10% drop in the broader market index, while also reporting that incredibly, the dollar has lost 7.5% of its value in less than 3 months (since January 7th 2011) and more than 17% in just 8 months since August 2010.

Oil is spiking with all of the Middle East conflict, while OPEC expects $120 oil soon.
Gold and Silver are setting new highs once again.

The world continues to lose the credibility of the dollar

The U.S. government continues to overspend (more than it takes in revenue) by nearly $80,000.00 per second of each day. The monthly deficit is equivalent to giving every single person in Shreveport Louisiana a Million Dollars, or lets say Fayetteville North Carolina, or how about Yonkers New York or Spokane Washington. Gee I bet it wouldn’t take long to just simply give every working person in the U.S. a million dollars at this rate… I wonder who’s getting all this money…

While the political machine begins to ramp up for the 2012 elections, chances are that the politicians will not have the will power to do anything significant about the current federal spending, or state spending for that matter.

The point is, the dollar is in increasing danger of a potential severe drop in value, a situation that could come on very quickly and avalanche. Some say that this will very likely occur especially if the dollar index drops below 75 – or worse yet, 71.

What can the regular person do about any of this? The best thing is to simply be aware of the possibility and prepare or ‘hedge your bets’ accordingly. Now, more than ever, is probably a good time to be sure that your ‘ducks are in a row’, and your preparedness plans are nearly complete. The world is in uncharted territory and we should not assume that the world’s economic systems will somehow remain solvent and credible. Things do change, and not always for the better.

Look at the bright side, if you believe that there is real risk, then you will likely take action, whatever that may be. That is a good thing.

If you enjoyed this, or topics of preparedness or current events risk awareness, consider our survival blog RSS feed, new posts by E-mail, or bookmark us at Modern Survival Blog

us dollar index chart vs gold chart

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Sentiment, the Dollar and the Market

Sentiment, the Dollar and the Market
March 21,2011  Analysis from Chris Kimble 

Last week technical analyst Chris Kimble shared his technical look at market volatility, which included an inset on the rise in bearish sentiment (first chart below). Today he expands on the topic with an added perspective on the market and the Dollar (second and third charts).

Chris comments: Last week we ran the 500/Sentiment chart, showing that a ton of investors had become bearish in a hurry.

At the close of last week the second chart reflects that the 500 index closed above support and created another "downside bullish" wick along key support.

With the Dollar breaking key support, the ingredients are in place for a surprise to the upside. For the most up-to-date Kimble analysis, check out Chris's blog: Kimble Charting Solutions.

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As Gold Surges By $30 In Two Days, Dollar 3 Ticks Away From 2010 Lows

The good old old green 75% cotton/25% linen combination formerly known as the reserve currency continues shocking everybody with just how worthless it is, because even as the dollar jumped against the Yen, it plunged against the euro, and in the DXY basket the Euro weighting is about 4 times greater than the Yen. Meaning today the dollar will likely take out 2010 lows, and after that 2009, 2008 and so forth. Furthermore, the DXY has plunged in the past two days, just in time to completely neutralize any nominal increase in stocks values. In the meantime, that other hated metal, gold has risen by $30 in the past two days, reminding once again that until the Fed build an alchemist annex it will continue to be the only true store of wealth (and, yes, only true currency).

Today's DXY chart with the blue line showing the 2010 lows:

A two day chart, for those who enjoy pointing out the stock market "relief rally"

A longer-term chart showing what happens next:

And here is why there is no more trendline supprot in the DXY:

And lastly, gold:

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U.S. Dollar Crisis: Only Way to Protect Yourself

The big news story this morning is the intervention in the foreign exchange markets by the Group of Seven (G7) industrialized countries to push down the price of the Japanese yen…something smart currency traders were expecting.

The European Central Bank, Bank of England, Bank of France, Germany’s Bundesbank, and the central Bank of Italy started selling yen this morning. The Bank of Canada and the U.S. Fed are reported to be doing the same sometime today. This is the first time the G7 have intervened in the foreign exchange markets in a decade.

How convenient for the U.S.

Let’s face the facts here: the U.S. is awash in debt. Our politicians are not decreasing the amount the government spends; they are increasing our debt daily. The U.S. cannot manufacture goods at the cheap rate China can. We cannot compete against China.

So how does a country deal with a national debt crisis while trying to revitalize its economy at the same time? It devalues its currency.

Back in the early 2000s, I started writing about the government’s “secret plan” to devalue the greenback so that we are paying back our creditors with ever cheaper dollars. The U.S. has done a masterful job at “quietly” devaluing the U.S. dollar.

Corporate America loves a cheaper greenback, because their overseas profits translate into more American dollars. The more U.S. companies earn, the higher their stock prices go. Hence, the stock market loves a cheap greenback.

But there is a fine line. If the greenback goes too low, as I have written before, foreigners will be less receptive to buying the U.S. Treasuries we so desperately need to sell to finance our ever increasing debt. The situation can best be referred to as “too much of a good thing killing you.”

The chart below shows the uncharted territory we are about to enter with the U.S. dollar. In the next few weeks, the U.S. dollar will fall to a record low against other world currencies. Get ready for the fireworks—could get really interesting here—and the only way to protect yourself from it: make sure you own gold-related investments.

                                                   Chart courtesy of StockCharts.com

Michael’s Personal Notes:

The more time goes by, the more I’m convinced that inflation will be a huge problem for the U.S. over the next few years.

On Wednesday of this week, the U.S. Labor Department reported that the Producer Price Index (a measure of wholesale costs) jump 1.9% in February from the previous month—the highest level since June 2009.

The government tends to focus on inflation without food and energy costs (what they call “core inflation”). I do not take out food and energy costs when I look at the inflation rate, because: (1) eating is an everyday part of life (we all have to eat); and (2) driving is an everyday part of life—we all have to drive to/from work, take the kids here and there, etc.

As the National Inflation Association recently pointed out, the cost to print one U.S. dollar bill has increased 50% since 2008. Inflation is right under the government’s nose.

Years ago, people were saying that there was no relation between inflation and the price of gold. Back then, I said that was rubbish, and I still say that today. There is a direct link between inflation and gold bullion. And, as a leading indicator, gold is warning of serious inflationary times ahead.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 1.7% for 2011. The selling in the markets, at least temporarily, has subsided. The Dow Jones was up a big 161 points yesterday and this morning Dow Jones futures are up another 80 points. Hence, you can see why I kept my cool through the week and stuck fast to my belief that the bear market rally in stocks is not over.

As I wrote earlier this week, my view is that the markets overreacted to the crisis in Japan…and I was a buyer in the market this past Tuesday.

Bear market rally in stocks…born on March 9, 2009…and alive and well today.

What He Said:

“The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of reducing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would create havoc with the banking system.

Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter

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Why is the Dollar Finding a Safe Haven Bid?

By Marc Chandler

The jasmine revolutions in MENA and euro-era high yields on the peripheral of Europe failed to give the US dollar a safe haven bid. And yet today, it is difficult to deny the greenback is benefitting from the broader risk aversion.

Previously we explained the lack of dollar safe haven bid by noting that it was precisely because US Treasuries were a safe haven, that the dollar was not, in the sense that 1)the market was particular sensitive to the divergence of monetary policy and 2)the interest rate spread between the US and Germany widened. Now while US Treasuries have rallied, German bunds have rallied more so. The 2-year interest rate differential has moved 7 bp in the US favor today and now stands at 97 bp the lowest since before the March 3 ECB meeting in which signalled a near-term rate hike.

Separately, but related to this, the Japan’s earthquake, tsunami and the nuclear accident is a negative shock to the world economy. It is too early to know the extent. Those countries that were engaged in tightening or about to, may have to reconsider. This may also encourage selling of the euro, the Swedish krona, sterling and the Australian and Canadian dollars.

Previously we noted that the rally in oil prices sparked more talk of the recycling of petrodollars as producers maintained the currency allocation of their reserves. Oil prices have come off and there is less talk about petrodollar recycling.

Lastly, we note market positioning. Judging from the IMM data and proprietary information, it appears the market had amassed a large short dollar position. The shock that has swept over the markets is encouraging a movement to the sidelines–selling what one had bought and buying back what one had sold.

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Dollar Turning Point?

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A Financial Armageddon subscriber recently asked me (in a nice way) if I was too negative in my economic outlook, and if I "was capable of a semi-bullish statement of any sort."

I responded that there is always the risk I am wrong in my views. Indeed, I added, when I first began to contemplate the prospect of an economic meltdown (when most economists were expecting the "Goldilocks economy" to continue for the foreseeable future), I underestimated the degree to which authorities would pull out all fiscal and monetary stops to try and keep the leaking ship afloat.

But in the end, I said, nothing has changed. The factors and circumstances that led me to write Financial Armageddon in the first place (e.g., extraordinarily high debt levels) are still there, and in some cases things are much worse than they were four years ago.

But as to my correspondent's second point, I have been known to be bullish on occasion. Those who have been following my work since the crisis began will recall that I was predicting a stock market rebound in March 2009 (I am on the record in several places). Admittedly, I did not anticipate a two-year, 100% rise. Nevertheless, I've learned the hard way that when most investors are on the same side, even if it makes sense longer term, Mr. Market usually finds a way of proving them wrong, at least temporarily.

With that in mind, I wrote a post last week, "Now Is Not the Time," in which I argued that it was risky to be betting on further dollar weakness right now because sentiment towards the currency had become so lopsidedly bearish. As proof, I cited nine recent articles from a variety of business news outlets that made it clear the bulls were few and far between. Other reports since then have noted that speculators have been shorting the greenback with relative abandon.

Today, however, I came across what may well be the best evidence yet that a moment of contrarian reckoning -- that is, a dollar rally -- is at hand. I refer you to the cover story, "The Money Whirl," in this week's Barron's.

 

As was the (in)famous August 1979 BusinessWeek issue proclaiming "The Death of Equities," which preceded the greatest bull market in history, or the June 2005 Time magazine cover story, "Home $weet Home," which marked the peak of history's biggest housing bubble, when mainstream publications feature boldly assertive reports about popular and long-running investment themes that is often a bell-ringing moment, signaling that circumstances are set to change -- perhaps dramatically.

Is history about to repeat itself?

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The dollar, the RMB and the euro?

By Michael Pettis

Barry Eichengreen had a very interesting piece in last week’s Wall Street Journal. In it he argues that we are approaching the end of the period in which the US dollar is the world’s dominant reserve currency, and suggests what that might mean for the world. Here is what he says:

The single most astonishing fact about foreign exchange is not the high volume of transactions, as incredible as that growth has been. Nor is it the volatility of currency rates, as wild as the markets are these days. Instead, it’s the extent to which the market remains dollar-centric.

…The greenback, in other words, is not just America’s currency. It’s the world’s. But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end. I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

I wish Eichengreen were right, but I don’t think he is. Eichengreen argues that one of the main reasons for the current dominance of the dollar was simply the lack of plausible alternatives. This is changing, he suggests, because of the rise of the euro and the RMB.

I am a huge fan of Eichengreen’s and read nearly everything he writes. In fact in January when The Economist asked a number of pundits to suggest who were the two most important economists to rise post GFC, I nominated Hyman Minsky and Barry Eichengreen. I think however on the subject of China he has pretty consistently underestimated the problems the country faces and overestimated Beijing’s accomplishments.

The RMB is unlikely to become a serious reserve currency in the foreseeable future. There are a number of reasons for this. First and most obviously, there are few realistic mechanisms by which the world can acquire RMB. Either China needs to run a large current account deficits, or it needs totally open domestic financial markets in which foreigners can easily acquire domestic RMB-denominated bonds to the tune of several percentage points of China’s GDP annually. I discussed why in a blog entry five months ago.

We are unlikely to see either for many, many decades. Although China will struggle to bring its current account surplus down, there are only two ways it can do so (remember that the current account surplus is equal to savings less investment).

One way is for a further surge in investment. At current levels, however, investment is already so value-destroyingly high (to coin a new adverb), and it is pretty clear that Beijing is desperate to reduce the economy’s dependence on further investment growth, so we can pretty much dismiss investment acceleration as something that is likely to be maintained over the next decade.

The other way is to reduce savings by raising the consumption share of GDP. As I have written before, however, this is going to be excruciatingly difficult, and will likely come about only with a sharp reduction in Chinese GDP growth (in which case one of the main reasons for predicting the rise of the RMB will be undermined).

And how long will it take to bring down savings? The household consumption share of GDP was an astonishingly low 35.1% in 2009, while the total consumption share of GDP, including government and business, was 48%. On Wednesday there were reports that Beijing wants to raise the rate by 2-3 percentage points during 12th Five year Plan.

Only 2-3 percent?

While most people took that as a good thing, to me it was an indication almost of how hopelessly difficult the whole thing is going to be. If the government is successful in increasing consumption by 3 full percentage points, and if we make the generous assumption that this increase occurs fully as an increase in the household consumption share (an increase in government consumption doesn’t count unless it is funded out of privatization proceeds, which is very unlikely), this will bring household consumption up to 38% or so of GDP.

Success? Not at all. Five years ago household consumption was at 40% of GDP, which back then already seemed astonishingly low (and was probably unprecedented in history). It was widely understood back then that such a depressingly low consumption share condemned China to an excessive reliance on investment and a trade surplus for growth. With such low consumption, in other words, it is going to take an awful long time before China can consume all it produces.

I discuss this in a lot more detail in my current newsletter, and especially in light of what has clearly been a very contentious debate in the run-up to the National People’s congress, but I think we can pretty much forget about China’s running a large current account deficit in the next decade, let alone one large enough to feed the world’s need for RMB if the RMB is indeed going to be a dominant reserve currency. That leaves the only other way for the world to accumulate large amounts of RMB bonds: China must open up its capital markets to portfolio inflows representing several percentage points of GDP.

Is that going to happen? For the reasons discussed in my blog entry of five months ago this will require a much greater reform of corporate governance and the financial sector than I think is reasonable to expect and it will probably also mean that reserve growth will actually accelerate – something no one wants to see.

That leads to the second reason why I think Eichengreen’s expectations for the rise of the RMB as a reserve currency are unrealistic. The amount of financial sector reforms required before the RMB can even achieve the yen’s level of acceptance is massive, and in my opinion there has been no significant reform, and in fact a lot of retrogression, in the past decade. Beijing simply cannot permit the necessary amount of capital inflow and outflow until the banks are reformed, liberalized, and made creditworthy.

I will write a lot more about this in the next month or so, but for now it is worth pointing out that the Chinese banking system is one of the least efficient in the world when it comes to assessing risk and allocating capital, and would be bankrupt without repressed interest rates and the implicit (and sometimes explicit) socialization of credit risk. Beijing accepts this because of the tradeoff that gives it banking stability.

Beijing greatly values this stability, even at the expense of capital misallocation, and is in no hurry to give it up by opening up the financial markets and, what’s more, for political reasons I think local governments will resist ferociously any further corporate governance reform. Remember that the phrase “corporate governance reform” in the banking context is just another way of saying that credit decisions will be made on the basis of economic considerations, and not on the basis of government preference. That particular reform will be politically contentious.

A long way to go

The third thing that will limit the rise of the RMB as a dominant reserve currency is, I think, that the geopolitical conditions in this region are pretty bad. The most obvious major countries in the region that can help the process of RMB internationalization – Japan, Russia, India, Korea and to a lesser extent Vietnam and at least one or two others – have a deep mistrust of China and are unlikely to assist the process beyond some minimum level. Remember that one of the reasons sterling never achieved the dominance that the dollar has today is that the French and the Germans, not to mention some other European powers, actively undermined its role in favor of their own currencies. I don’t see why this won’t happen again.

Finally I would also point out that many of the RMB “successes” that everyone touts as evidence of the inevitability of the RMB are really not successes. The fact that Chinese companies are now more likely to bill their transactions with their foreign affiliates in RMB rather than dollars makes it seem like its use in trade is soaring (from a very low base), but it changes almost nothing meaningful, and the widely-reported swaps between the PBoC and other central banks consist for the most part either in disguised loans to countries that will take loans from almost anybody, or indirect ways of preserving dollars (as a member of the board of one such foreign central bank told my central banking seminar).

The belief in the rise of the RMB, in my opinion, is just a replay of the equally fervent belief twenty years ago in the rise of the yen, and the RMB has many of the same constraints that the yen had, but only more so. The RMB still has a long way to go before it will even match the yen.

Perhaps paradoxically, in spite of my belief that several countries will leave the euro (or “adjust” their relationships), I am more sympathetic to Eichengreen’s arguments about the euro. I think once the European crisis has stabilized in the next five to six years the euro will be on a sounder footing – perhaps that should read “on a less absurd footing” – and the euro will become increasingly important as a reserve currency. I agree with Eichengreen that the current dominance of the dollar is extraordinary, completely unprecedented historically, and simply cannot be maintained.

Nor should it. This may be a long shot prediction, but it seems to me there is a growing sense in some US circles that maintaining the dollar as the reserve currency is a public good whose cost was manageable during most of the post-War period but, perhaps since the 1980s, has become increasingly heavy for the US. If we can divorce talk of the dollar from talk of the rise or decline of the US, I think an increasing number of US policy-makers will start to see that the US would be better off if the world were forced to accumulate SDRs or other currencies rather than dollars. This, of course, would be terrible for export-led growth strategies in Asia, but given fears first of a rising Japan and now a rising China, the fact that disengaging from the dollar is bad for Asia will not be a strong argument against it in the US.

The US should take the lead

In fact it is ironic to me that it is considered pro-American to want the dollar to maintain its role as the world’s dominant reserve currency and anti-American to call for a change. I have a very different take. As I see it the dominant role of the dollar is as a public good provided by the US that, because a number of countries have taken to gaming the system, is proving too costly for the US.

In other words I think the use of the dollar as the dominant reserve currency may mean slower economic growth and higher debt for the US. A lot of strange conspiracy theories center on the role of the dollar as the linchpin to American power. In a debate on a well-known current affairs program on Chinese television two years ago, a Chinese professor from a famous Beijing university assured me that American economic dominance occurred because the dollar was the world’s primary reserve currency.

Leave aside that the US was the largest economy in the world, with the most advanced technology and the highest per capita income, by the late 19th Century, at least six or seven decades before Bretton-Woods, this is the sort of claim that can only be made by someone who has a very weak grasp of monetary economics. The strongest argument in favor of the importance to the US of the dollar’s reserve status is that it permits the US government to fund itself cheaply, and in its own currency, with the savings of the rest of the world. But this argument may get it exactly backwards.

Any country with credibility and an actively traded currency can fund itself in its own currency. So why do foreigners own such a large share of US government debt? Isn’t it because they have to buy US Government bonds to hold as reserves, and aren’t foreign purchases needed to make up the shortfall in US demand for government bonds?

No. US investors can easily fund US government debt. Foreigners own US dollar assets, of which US government bonds are the safest and most liquid, because they run current account surpluses. This is true almost by definition. Countries with current account surpluses have no choice but to acquire foreign assets, and the country whose assets are thus acquired has no choice but to run the corresponding current account deficit.

Countries whose domestic policies require large trade surpluses, in other words, must buy the assets of those countries with liquid and open asset markets that are able to run large current account deficits. In practice the US is the only economy large enough, flexible enough, and open enough to act as the counterpart to the net current account surpluses accumulated by the rest of the world.

If countries that have accumulated massive reserves, like Japan, Germany and China, chose to diversify their holdings, or were forced to, away from the dollar, this would be tantamount to saying that the US current account deficit would have to contract and other countries would be forced into absorbing those surpluses. The US would also borrow less because a lower trade deficit would require less fiscal or household borrowing to maintain any given level of growth and employment.

But very few other countries can absorb the US trade deficit. In that case countries that rely on large current account surpluses to absorb their excess capacity would be forced into reducing their surpluses and reducing their capacity. Their growth, in other words, would be lower.

The US, on the other hand, would be “forced” into either higher growth or lower debt levels. This does not seem either like a good thing for surplus countries or a bad thing for the US.

This is an abbreviated version of the newsletter that went out Tuesday. Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me at chinfinpettis@yahoo.com, stating your affiliation, please. Investors who are clients of Shenyin Wanguo Securities will already receive the newsletter. Investors who are not clients but who want to buy a subscription should write to me. also at that address.

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In the Least Ugly Contest, the Dollar Is Ready to Rally!

Fundamentally, the U.S. has major problems. The government’s budget deficit is projected to hit a record $1.6 trillion this year — nearly 11 percent of the gross domestic product, making it the biggest gap between spending and revenues since World War II. And it is facing annual deficits of more than $1 trillion as far as the eye can see.

Even the Bank for International Settlement (BIS), often called the central banks’ central bank, has admitted that the current debt policy in the U.S. is unsustainable. Sooner or later it will lead to a funding crisis, which will then force major economic and political adjustments.

But Europe isn’t doing any better …

For example, credit default swap spreads on Greek government bonds recently widened by 24 basis points when Moody’s slashed the country’s credit rating three notches to B1. It has become increasingly obvious that Greece’s debt problem has not been solved and cannot be solved without debt restructuring — the politicians’ way of saying “debt default.”

Ireland and Portugal are in the same boat. And Spain isn’t far behind. Since Spanish real estate is still massively overvalued — some economists say by as much as 40 percent — Spain looks like an accident waiting to happen.

And what are Europe’s politicians doing about all of this?

Well, they are pretending that everything is A-OK and the European rescue package was the final solution to this major problem. Of course it is not …

You can’t wipe out mountains of debt by simply issuing more debt! The rescue package was nothing more than kicking the can down the road. It bought them some time. But it didn’t get them one iota closer to a solution.

And for an idea of what’s in store …

Look at Ireland for a Clue

Ireland just voted for a new government. I interpret that as a clear vote against the severe austerity program the European Union (EU) has urged Ireland to implement. Yet the Irish population has no incentive to bear that policy’s painful burden. Why should they?

After all, most Irish government bonds are held by foreign financial institutions and the European Central Bank (ECB). Why not let them share some of the burden; let them take some losses?

Didn’t Iceland do relatively well after it simply repudiated its debt? Why not follow this easier path, the Irish are understandingly starting to ask, even if the cost of doing so is to get rid of the euro.

And Greece, Portugal, Spain, and others might come to the same conclusion.

So as far as the dollar and the euro are concerned, it all comes down to a contest of ugliness … and you have to pick which is the least ugly!

But before you pick, you must understand that …

The Euro Has an Additional Problem …

The EU has a major disadvantage compared to the U.S. in dealing with over-indebtedness: Singular national interests. Therefore it is much more difficult for European politicians to go along with the unavoidable and accept the tough choices that must be made.

Agreement over necessary major spending cuts and potential defaults, which will undeniably bring hardship in the short- to- medium-term, is very hard to come by.

That’s because national interests vary widely …

For example, what’s in the best interest of Greece, Ireland, Portugal, or Spain is definitely not what Germany and the other relatively healthy countries want.

The dollar has problems, but the euro’s dilemma is a whole lot worse!

The likely outcome of this explosive mix, a euro crisis, is becoming increasingly probable. What’s more, the chances of the euro not surviving in the coming years climb with each passing day.

There is no easy way out of the European government debt trap. Sooner or later someone will opt for a severe hair cut. Then all hell will break loose with the euro.

Of course there is widespread unwillingness to accept the unavoidable in the U.S. as well. But compared to Europe, chances are much greater that a national agreement to make these hard choices will finally be accomplished.

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So to me it seems that there are fewer obstacles to overcome in the U.S. than there are in the EU.

Plus there is a lot more at stake for the U.S. than just another recession, even a very severe one.

You see …

The U.S. Has a Reserve
Currency to Lose

The U.S. has a huge privilege its economic and political elite are well aware of: The dollar is the world’s reserve currency. Losing this privilege would be a major long-term loss not only for the economic well being of the nation but also in terms of global dominance.

Ben Bernanke and his predecessor, Alan Greenspan, fell short of the responsibility that comes along with this privilege. Their easy money policy played — and still plays — a prominent role in digging the hole the U.S. is in. And Bernanke doesn’t seem to get it! But this, too, will change. Or there will be a change in Fed chairmanship.

To me it’s more like a question of time until the U.S. accepts the truth and starts doing the right thing. If not, the nation will face a crisis of major proportions.

It is not clear, though, when the time for a return to sound fiscal and monetary policy will come. That’s why I am a long-term dollar bear and a long-term euro bear. This of course means that I am a long-term gold bull.

The same fundamentals that strongly impede fiat currencies support the long-term gold bull market. Therefore I suggest investors consider taking a long-term strategic gold position in a gold exchange traded fund (ETF), like GLD, until a major policy change comes about.

But that doesn’t mean there aren’t any …

Opportunities in Paper Currencies

Currently, the dollar’s decline in terms of other currencies seems somewhat overdone. And technically the dollar looks appealing. As you can see in the chart below, the Dollar Index, which measures the dollar against a basket of currencies, is sitting at a major uptrend line.

At the same time sentiment indicators towards the dollar are as bearish as they get. In fact, they’re back to levels last seen at the important lows of October 2009 and November 2010.

Look at the following chart for the positioning of what the Chicago Mercantile Exchange (CME) calls large speculators. Their cumulative position against the dollar is larger now than at the low of March 2008 and November 2009 — when the dollar was much lower.

So it’s very probable that the dollar will soon shoot to the upside — at least for a few months. If you’re inclined to get in on that action, now might be a good time to buy an ETF like PowerShares DB U.S. Dollar Bullish ETF (UUP).

And for clear, concise instructions on how to use currency ETFs and options for the biggest possible payoff, you should check out my colleague, global currency expert Bryan Rich’s latest presentation.

Best wishes,

Claus

Claus Vogt is the editor of the German edition of Safe Money. He is the co-author of the German bestseller, Das Greenspan Dossier, where he predicted, well ahead of time, the sequence of events that have unfolded since, including the U.S. housing bust, the U.S. recession, the demise of Fannie Mae and Freddie Mac, as well as the financial system crisis. Claus is currently the editor of Million-Dollar Contrarian Portfolio and has just completed his book The Global Debt Trap.

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Record US 223 Billion Dollar Monthly Deficit

this image is a fraction of an actual 223 Billion Dollars

Two Hundred Twenty Three Billion Dollars.

$223,000,000,000.00, a deficit analogy

Just 28 days of the United States government deficit spending during February, 2011, that is – just the part of February spending that they put on the government credit card (on top of the cash money they spent during the month), is the equivalent of a line of dollar bills stretching from the earth to the moon, not just once but 346 times!

Here’s another one. If your sole function in life from the age of 1 to the age of 85 was to count dollar bills, say, 3 per second, without any breaks or sleep, it would take 28 lifetimes to count 223 Billion dollars!

Okay, one more, I can’t resist… If the dollar was only worth as much as a sheet of toilet paper, the February record budget deficit would be equivalent to about 2.2 Billion rolls of toilet paper. Good for a lot of flushes.

The big picture
You get the picture, yes?

Now, bear that in mind while looking at the big picture of what the Democrats and Republicans have been proposing and battling for just one year’s worth of budget cuts…

I believe the D’s are talking about 6 Billion and the R’s are talking about 60 Billion, or thereabouts. So let me get this straight… they are talking about ‘cuts’ the equivalent of less than one day of deficit spending (Democans) while the other ‘they’ are talking about the equivalent of only about 8 days (Republicrats)!

Do not most people see the idiocy and lunacy of their squabbling and their play acting?

Their talk of 60 Billion is a drop in the bucket compared with the staggering hemorrhaging amount of money of just one year’s deficit spending, currently 1.3 Trillion.

It’s all ‘a show’
They are merely putting on a little show for the mind-numbed worker-bees who are either too busy with their nose to the grindstone to notice, or who cannot fathom the enormity of the sums in question or know the difference between Billions and Trillions, and who keep on voting them back in office while Rome burns around them.

Neither the D’s or the R’s are in any way serious about cutting spending. They are entirely insulated from the negative results of their actions. They are feathering their nests, they are robbing the treasury, they are not required to abide by the laws that they pass, they are set for life once serving their term or they move on to make millions afterward as corporate lobbyists, they are opted out of the upcoming national health-care and have their own cushy plans, the list goes on and on…

The collapse
The Ponzi scheme of quantitative easing may likely collapse one day, and when it does, the elite will not be touched. It will be the middle class who will have been stripped of their wealth and will suffer through many years, if not decades, of payback for having voted themselves the government that they deserve.

Prepare
Prepare for a dollar crisis. I feel it is coming some day, if not slowly, it could come surprisingly fast. The looters are trying their best to raise the temperature of the frying pan just slow enough so the majority won’t know what hit them and won’t jump out until it’s too late. The problem is, in today’s global system, it’s not just the U.S. with their hands on the temperature control…

If you enjoyed this, or topics of preparedness, geophysical / current events risks, consider our survival blog RSS feed, new posts by E-mail, or bookmark us at Modern Survival Blog

223 billion deficit223 billion dollars february223 billion in deficit spendingdollar collapse food shortagehow long does it take to spend $223 billionsafe life during U S dollar crisisUS Deficit spending recordus dollar collapse mar 7 2011

View the original article here

Record US 223 Billion Dollar Monthly Deficit

this image is a fraction of an actual 223 Billion Dollars

Two Hundred Twenty Three Billion Dollars.

$223,000,000,000.00, a deficit analogy

Just 28 days of the United States government deficit spending during February, 2011, that is – just the part of February spending that they put on the government credit card (on top of the cash money they spent during the month), is the equivalent of a line of dollar bills stretching from the earth to the moon, not just once but 346 times!

Here’s another one. If your sole function in life from the age of 1 to the age of 85 was to count dollar bills, say, 3 per second, without any breaks or sleep, it would take 28 lifetimes to count 223 Billion dollars!

Okay, one more, I can’t resist… If the dollar was only worth as much as a sheet of toilet paper, the February record budget deficit would be equivalent to about 2.2 Billion rolls of toilet paper. Good for a lot of flushes.

The big picture
You get the picture, yes?

Now, bear that in mind while looking at the big picture of what the Democrats and Republicans have been proposing and battling for just one year’s worth of budget cuts…

I believe the D’s are talking about 6 Billion and the R’s are talking about 60 Billion, or thereabouts. So let me get this straight… they are talking about ‘cuts’ the equivalent of less than one day of deficit spending (Democans) while the other ‘they’ are talking about the equivalent of only about 8 days (Republicrats)!

Do not most people see the idiocy and lunacy of their squabbling and their play acting?

Their talk of 60 Billion is a drop in the bucket compared with the staggering hemorrhaging amount of money of just one year’s deficit spending, currently 1.3 Trillion.

It’s all ‘a show’
They are merely putting on a little show for the mind-numbed worker-bees who are either too busy with their nose to the grindstone to notice, or who cannot fathom the enormity of the sums in question or know the difference between Billions and Trillions, and who keep on voting them back in office while Rome burns around them.

Neither the D’s or the R’s are in any way serious about cutting spending. They are entirely insulated from the negative results of their actions. They are feathering their nests, they are robbing the treasury, they are not required to abide by the laws that they pass, they are set for life once serving their term or they move on to make millions afterward as corporate lobbyists, they are opted out of the upcoming national health-care and have their own cushy plans, the list goes on and on…

The collapse
The Ponzi scheme of quantitative easing may likely collapse one day, and when it does, the elite will not be touched. It will be the middle class who will have been stripped of their wealth and will suffer through many years, if not decades, of payback for having voted themselves the government that they deserve.

Prepare
Prepare for a dollar crisis. I feel it is coming some day, if not slowly, it could come surprisingly fast. The looters are trying their best to raise the temperature of the frying pan just slow enough so the majority won’t know what hit them and won’t jump out until it’s too late. The problem is, in today’s global system, it’s not just the U.S. with their hands on the temperature control…

If you enjoyed this, or topics of preparedness, geophysical / current events risks, consider our survival blog RSS feed, new posts by E-mail, or bookmark us at Modern Survival Blog

223 billion deficit223 billion dollars february223 billion in deficit spendingdollar collapse food shortagehow long does it take to spend $223 billionsafe life during U S dollar crisisUS Deficit spending recordus dollar collapse mar 7 2011

View the original article here