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Plaza Accord 2.0: Is It Coming? Is It Here?

Tyler Durden's picture





 

Submitted by Michael Krieger of Kam LP

If we desire respect for the law, we must first make the law respectable.
The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.

Experience teaches us to be most on our guard to protect liberty when the government's purposes are beneficent.

Fear of serious injury alone cannot justify oppression of free speech and assembly.  Men feared witches and burnt women.  It is the function of speech to free men from the bondage of irrational fears.

- Quotes by former Supreme Court Justice Louis Brandeis

Is Plaza Accord 2.0 Coming?

On the fringes of the typical daily news blitz in which I fully immerse myself, I have noticed heightened chatter about this concept that we may be on the cusp of some sort of “Plaza Accord 2.0” type agreement between governments and central banks globally.  I feel the need to address this because I do indeed think that some sort of informal or unspoken agreement of this nature may already have been agreed upon behind the scenes.  First, just a quick recap on the first Plaza Accord. 

The Plaza Accord was signed on September 22, 1985 and it consisted of an agreement between the major Western economic powers at the time  (including Japan) to devalue the U.S. dollar relative to the Japanese yen and the German Deutsche Mark.  The trade backdrop was similar in many ways to today.  According to Bloomberg the current account deficit as a percentage of GDP in September 1985 was -2.59% and today it is -2.96%.  While many have pointed out the similarities, I want to make it very clear that I believe the structural, social and political environment in the United States right now is multiples worse of what it was back then.  One statistic that I think is worth mentioning is the budget deficit as a percentage of GDP.  The latest available data here is for June 2010 when it stood at a banana republic -9.1%.  In September 1985 it was -5.0%. 

So what would a modern version of the Plaza Accord look like.  I have been writing for several years now and since before the economic crisis that a major dollar devaluation, while not a good thing for the country, had become inevitable.  The debt and spending that has been piled on since the crisis to “avoid another Great Depression” (give me a break we are in it) has only compounded the situation and makes an even larger devaluation a certainty.  The reason why I think the chatter of a Plaza 2.0 is so compelling right now is because we have only two choices left.  We can devalue in a disorderly and completely chaotic fashion, or we can agree to do it in a more measured and sane manner.  A massive QE2 program would be the chaotic choice and would lead to total and complete monetary and economic destruction throughout the world.  This is what people have been referring to as the currency wars.  I actually think that Bernanke’s threat to QE2 to infinity has scared some of the emerging market leaders and central bankers straight; as it should.  At this point it is in everyone’s best interest to come together and say ok, the dollar needs to be devalued but it needs to be devalued versus all major currencies more or less simultaneously.  The truth of the matter is this.  With commodities surging and the CRB RIND Index (the spot price for 22 sensitive basic commodities) at an all time high, the booming economies in Asia and elsewhere in the emerging world are experiencing horrific inflation that is much worse than the official statistics demonstrate and this creates an environment where currency appreciation is a necessary tool to keep prices under control.  The BIG problem here is that they are wary to allow significant strengthening as long as the yuan remains static.  No one wants to devalue while China sits there and does nothing.  On the other hand, I believe they would all be very willing and content to allow a major appreciation versus the dollar if China comes along for the ride. 

This is where a new Plaza-type agreement comes in.  If all countries can decide it is in their best interest to collectively allow market appreciation for their currencies versus the dollar then everyone can probably live with that.  It is certainly better than an all out currency war where each Central Banker yells my printing press is bigger than your printing press.  Listen, no one’s printing press is bigger than Banana Ben Bernanke’s and I think the world is starting to figure that out.  This brings me to an even more interesting point.  Has the G20 already agreed to such an arrangement informally?  While the financial press was abuzz with articles that nothing came of recent meetings, can we believe this at face value?  Look at various currencies versus the dollar.  In the OECD, look at the yen, the Swiss franc, and even the euro for crying out loud.  In Asia, look at the Thai bhat, the Indian rupee, the Korean won.  Look a the Singapore dollar last night!!!  Even the yuan is moving and appreciated by 0.20% versus the dollar overnight.  See the yuan/dollar chart below.

One Year Yuan Chart

So What Does this Mean?

I am about to do something that I never myself expected to do.  I am going to give Bernanke the benefit of the doubt on the recent QE2 chatter.  What if it was all just a threat to other nations to act on their currencies?  What if he was merely bluffing to blast the dollar into oblivion in an attempt to get other central banks around the world to give in to the concept of dollar devaluation?  At the end of the day, this was probably not his intent because all the evidence shows that the Federal Reserve have no comprehension of how markets really work and how their participants really think.  Nevertheless, whether it was his intention or not is irrelevant.  The endless chatter of QE2 did indeed send a shiver down the spines of the rest of the world and their currencies have been appreciating consistently as of late.  This brings me to two important points that I think the market has failed to appreciate.

The first is that the Fed may be likely to do LESS not more at its November 3rd meeting.  An announcement of $500 billion let’s say in QE2 at this stage in my opinion is the equivalent of no QE2.  Furthermore, I have noticed that my general fears on Zimbabwe, fiat money, hyperinflation which I have been harping on for the last two years has gone mainstream.  The conclusions do not seem to be particularly thoughtful however.  The markets are rallying as if the dollar will be totally destroyed in the near-term and I don’t believe this will happen because the world has too much to lose.  Rather there may be a somewhat orderly but significant broad-based dollar devaluation.  There is this notion in the markets that this is good for equities in general.  I disagree completely.  Take a step back and think of the U.S. economy for a second.  The economy is still dominated by consumer spending and a financial system that survives on creating ponzi schemes that investors buy in search for “yield.”  This then takes me to the two sectors I think have the most to lose in the scenario we are entering.  Financial services (especially the bailed out TBTF guys) and retail.  As the dollar is devalued and imported goods become prohibitively expensive due to the direct currency effect as well as the costs to ship things (fuel anyone?) we will source more of our consumption locally as well as the input costs.  Capital will allocate in a more efficient manner to manufacturing and away from ponzi finance creations.  Financial services has had a great run in dominating the U.S. and this was unfortunately extended thanks to cronies like Hank Paulson but the gig is up.  Then there is retail.  You have got to be kidding me on this sector.  Again, retail has benefited from a business model where they outsource cheaply from abroad and sell to a consumer that spent beyond its means.  None of this works in a dollar devaluation scenario.  People are buying into this sector because of some LBOs and a vocal hedge fund manager taking stakes in companies.  Give me a break.

So this brings me to the conclusion of this piece.  I believe the equity markets are pricing in near-term QE to infinity and I do not think this will necessarily happen.  Even if it did, I am not convinced stocks broadly would go up on this.  My major advice to anyone managing money is to dump the loser sectors like financials and retail and move into sectors where the secular growth will be in a dollar devaluation scenario.  For me, that is primarily in companies that produce globally traded commodities.  I continue to think increased relative exposure to oil, agriculture and precious metals are the most attractive areas.  Later on, manufacturing will join this list.  I believe the best way to play any potential market sell-off is to bet against the financial and retail sectors specifically.  While many will call the world we are entering de-coupling again, it’s really more like de-valuation. 

All the best,
Mike

 


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Thu, 10/14/2010 - 12:11 | Link to Comment SheepDog-One
SheepDog-One's picture

Too much economics-only concentration and macro economics textbook consulting, look beyond to whats actually taking place. Planned 1 world govt 1 world currency. Anyone actually believes theyre trying to pull back the stick out of this dive is crazy. Its exactly what TPTB planned.

Thu, 10/14/2010 - 12:39 | Link to Comment tahoebumsmith
tahoebumsmith's picture

Exactly..this is why deficits don't matter....Planned 1 world govt 1 world currency...Don't forget that the USD is still considered the world's reserve currency...And once they have collapsed it to nothing it will be time to bring in the new... just like that..POOF... the world's debt will be reset equally across the board.

Thu, 10/14/2010 - 14:39 | Link to Comment SheepDog-One
SheepDog-One's picture

Only 1 thing they need to do before the 1 world currency though, bump off world population by 50% minimum. 

Thu, 10/14/2010 - 12:52 | Link to Comment fearsomepirate
fearsomepirate's picture

What they're *really* talking about is trashing the savings of those of us that actually didn't run up the Mastercard in order to keep funneling goodies to the parasites that keep voting for these politicians again and again.  Whether devaluation is orderly or disorderly, it sends the message that if you're frugal, thrifty, and save your money, the government will make pillage your savings for the sake of the profligate.

When no one saves anything, who pays for it all?

Thu, 10/14/2010 - 13:42 | Link to Comment hbjork1
hbjork1's picture

fearsome...:

You can retain your buying power with Gold and Silver or land holdings.  Dollar looses value price of hard goods goes up .  Then, for necessities you sell the hard goods and uh, uh, uh, pay your taxes on the gain.

 

 

Thu, 10/14/2010 - 19:47 | Link to Comment pamriallc
pamriallc's picture

Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. … The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as US Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.

Capitalism, Socialism, and Democracy, Joseph Schumpeter (1942)

Shawn A. Mesaros, Pamria, LLC

Thu, 10/14/2010 - 12:14 | Link to Comment Andrew G
Andrew G's picture

To help you visualize what Plaza Accord 2.0 would look like - http://www.flickr.com/photos/airojo/3492821441

Thu, 10/14/2010 - 12:16 | Link to Comment Turd Ferguson
Turd Ferguson's picture

You know, I would be inclined to go along with Mike on this. However, his conclusion is based upon the premise that CBs can still "control" exchange rates. The CBs have lost that ability as the forward-thinking global flow of trillions of dollars frontruns every Fed move.

Lets say a "Plaza Accord" is announced. Does anyone seriously think that the new fx targets wouldn't be completely priced in within 24-48 hours? Then what? Plaza Accord 3.0?

No, our delusional, Keynesian masters still don't get it. All fiat are dying. The only question is how quickly.

Thu, 10/14/2010 - 12:24 | Link to Comment Yikes
Yikes's picture

But thats just it. The CB's are trying to fight what the market wants to do naturally: devalue the dollar.  China is the fly in the ointment.

Thu, 10/14/2010 - 12:23 | Link to Comment Yikes
Yikes's picture

delete double post.

Thu, 10/14/2010 - 12:16 | Link to Comment bob_dabolina
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Is Bob Pisani reporting inflows into the financial sector yet?

Thu, 10/14/2010 - 12:19 | Link to Comment TheJudge2012
TheJudge2012's picture

"In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen
and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar."

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar...

Thu, 10/14/2010 - 12:34 | Link to Comment trav7777
trav7777's picture

this would never work.  Nations would be too likely to print into the basket to get oil.

China can't let its currency appreciate or else there goes its export ponzi economy

Thu, 10/14/2010 - 12:40 | Link to Comment CPL
CPL's picture

It more than likely they will enter into the next agreement that that oil turns into food.  As long as deserts and overpopulated regions of the world continue to ignore food > oil then we'll see something that the world has seen only a handful of times in history, usually barely understanding what the impact really means.  We'll more than likely have a human population collapse right as the ink dries for oil bread basket economies.

 

Basically we're going back to 1880 for a while and staying there.

 

Steampunk is the future.

Thu, 10/14/2010 - 13:02 | Link to Comment rapacious rachel wants to know (not verified)
Thu, 10/14/2010 - 12:27 | Link to Comment B9K9
B9K9's picture

Please, I beg of you, stop with the QE shit. Until someone can demonstrate that a weaker $USD and/or global basket of currencies measured against critical commodities (hmm, "oil" anyone?) help in any way, shape or form towards supporting the MIC's objectives in controlling ME oil supplies, then it's all just so many electrons blowing in the wind.

The bottom line is that the USA is a global empire geared towards exploiting others so that we, the American citizen, can enjoy a life-style far in excess of what we "deserve". (And ain't it awesome, bitch!) But we need a functioning economy, bubble or otherwise, in which to fund these far-flung operations.

Ben ain't the man in charge; Petraeus is. Clue in or keep wasting bandwidth.

Thu, 10/14/2010 - 12:37 | Link to Comment Shameful
Shameful's picture

So no QE.  Who will buy our debt?  I remember China pointing out that the trade deficit does not make enough dollars worldwide to buy the debt.  So where will the dollars for the debt come from, and at these rates?  Now if the plan is a radical increase in rates sure that might work.  Though the fireworks of a massive rate hike in treasury yields would blow a lot of people out of the water and make the deficits ridiculously unpayable.

I'm just not seeing the scenario where there is no monetizing and the framework holds together for any length of time.  I have to ask what keeps the wheels on the cart the longest?

Thu, 10/14/2010 - 13:43 | Link to Comment chet
chet's picture

That's what people seem to be ignoring in my view.  The other reason for QE (the main reason?) is for the Fed to keep monetizing the debt, and keep interest rates down.

Also, we want to inflate away our huge debt levels, for expediency sake.

The fact that QE will "do nothing" is almost beside the point.  They have to keep being the buyer of last resort for treasuries.

Thu, 10/14/2010 - 15:08 | Link to Comment Assetman
Assetman's picture

Oh man... this is turning into a big mess.

Central bankers of the world are looking at the Fed, and most likely concluding that they don't give a rats ass anymore.  If the Fed wants to implement QE on a massive scale, local central banks sell the dollar and put in their own capital controls-- and let the US inflate away into oblivion.  Most central bankers see QE for what it is.... it's a way for the Fed to stem the hemorraging of the U.S. banking system.  Problem is, it's like putting a band-aid on a mangled artery-- the patient still dies, but you just wasted a perfectly good band-aid that could have better put to use elsewhere.

What keeps the wheels on the cart the longest?  A concerted effort on two fronts: (a) cut fiscal spending and commit to making progress on that ballooning Federal budget deficit; and (b) cut the crap with the QE talk and start the process of liquidating the bad parts of the banking system, at least providing some support for the $USD.  That's the only way to get foreign participation in the US Treasury market (apart from Fed monetization) and keep those wheels on... and nobody in Washington seems to get it.   And-- just as unfortunate-- everybody assumes that QE-whatever is part the ultimate solution.  It's not.

Like B9K9 said, if Obama doesn't start this process, General Patraeus will-- and Uncle Ben will get a big kick in the @ss before he is thrown out to the wolves.  While some sympathy goes the Fed's way-- because fiscal restraint has been totally absent for the past several years, leaving the Fed to fend for itself-- the FOMC is running off this cliff at full speed with monetary policy.  Ultimately, they may well not be able to control what they THINK they can control (inflation) going forward.  And that's when poeple hit the streets.

And sure... you may well get a Plaza Accord 2.0 out of this-- but this time the bully to the civilized world has rotting teeth-- and everyone knows it.  The Fed better get the most mileage it can out of its QE-Lite program (low coupons, extended duration), because QE2 in whatever form isn't going to be received very well.  Don't think for a minute that "less QE than expected" is going to fly for very long.  And don't assume that the US can pull another Plaza Accord agreement out of its hat.

Thu, 10/14/2010 - 12:28 | Link to Comment doolittlegeorge
doolittlegeorge's picture

GLD young man.  GLD.

Thu, 10/14/2010 - 12:30 | Link to Comment Dagny Taggart
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The first is that the Fed may be likely to do LESS not more at its November 3rd meeting.

Um...POMO 1.3 begins tomorrow through November 8. http://www.newyorkfed.org/markets/tot_operation_schedule.html

In addition, I have seen more promotional Fed speak in the past two weeks than ever before. I think the Fed Govs have had more time in front of the cameras than Obama. Almost like they got a hotshot new PR team. It does not appear the Fed is doing less at all.

 

Thu, 10/14/2010 - 12:31 | Link to Comment Shameful
Shameful's picture

Would a Plaza 2 even work? How orderly would it be, after all anyone who wants to can start trading on the 4x. Hell what about Treasuries? How will the appetite be for them while there is an official ongoing devaluation? Or would Bennie and the Ink Jets just keep buying any and all offerings? Also should point out that historically the Plaza accord was to much of a success.  What are the odds they will pull off a Louve Accord 2.0?

Also what about China? Plaza seems like it put the sting on Japan, is Chian worried about that?

Thu, 10/14/2010 - 12:32 | Link to Comment DosZap
DosZap's picture

What would this do to PM's, if instituted?.

Bottom drop out, or more, faster upside?.

I am confused.

Thu, 10/14/2010 - 12:48 | Link to Comment Abigail Adams
Abigail Adams's picture

It is still fiat. Just because they play the shell game with other fiats, PMs have the same purpose.

http://www.garynorth.com/goldwars.pdf

Thu, 10/14/2010 - 12:35 | Link to Comment stormsailor
stormsailor's picture

i belive we are in the final phase now.  parabolic blow-off of commodities.

i've prepared for the worst, but i don't know how much good it will do,  i don't think i, nor anyone else can forsee what is rapidly approaching.

 

Thu, 10/14/2010 - 12:36 | Link to Comment chinaguy
chinaguy's picture

On the other hand, I believe they would all be very willing and content to allow a major appreciation versus the dollar if China comes along for the ride.

 

China ain't gonna play (or play by "the rules") & you can bank on that.

Thu, 10/14/2010 - 12:44 | Link to Comment Yikes
Yikes's picture

No they won't play along. 

I keep thinking: Why not kick them out of the WTO?  Oh yea, WWIII, that's why.

Thu, 10/14/2010 - 12:50 | Link to Comment CPL
CPL's picture

How can China play by the rules of fiat currency, by their very definition it's based on faiths.

 

I think people are misunderstanding how little China is contributing overall next to being a dumping ground for US treasuries.  If fiat goes tits up, China has around three seconds before it takes a financial dirt nap.

Thu, 10/14/2010 - 12:44 | Link to Comment bronzie
bronzie's picture

all the currencies will be revalued relative to gold whether it happens in an orderly or chaotic fashion

Thu, 10/14/2010 - 12:53 | Link to Comment Bearster
Bearster's picture

"If we desire respect for the law, we must first make the law respectable.  The greatest dangers to liberty lurk in insidious encroachment by men of zeal..."

"OK, the dollar needs to be devalued..."

Dude, you are not part of the solution.  You are part of the problem.  Destroying savings does not "need" to be done.  What needs to be done is to cut about 99% out of the government, and leave the basic laws against, you know, murder, robbery, rape, pillage, etc.  And a basic defense.  So you cut spending, you cut the government's power to interfere with production and trade.

You don't attack savers, or destroy savings.  That's INSANE!

Thu, 10/14/2010 - 13:13 | Link to Comment WSP
WSP's picture

Bearster, you picked up the interesting irony there----out of one side of the mouth the author starts with that quote, but then out of the other justifies the destruction of millions of responsible American citizens.   If the government performed their duties as chartered in the constitution, we would not have a problem to begin with.

With that out of the way, sadly, what the author is suggesting is exactly what will happen.  One way or another the corrupt oligarch will destroy responsible people to bailout the irresponsible, so as far as I am concerned, NOBODY should have any respect for the law or the country.   In the end, government has no respect for its responsible citizens, nor does it respect the law,so why should we?

The only sad commentary here is that the average American does not understand what most that frequent ZH and other economics sites (not MSM) understand----the real problem is a corrupt, out of control government.  Yes, I know the tea party wants smaller government, and they have many good reasons and justifications; however, even most tea partiers don't realize just how much they are being screwed over by their own government via fiat currency, debasement, corrupt foreign dealings, etc.  And no matter what, most people never will understand, and that is what the corrupt banking oligarch is banking on (pun intended).   They are stealing our savings, and thus, our labor, and there really is nothing we can do to stop it.

Thu, 10/14/2010 - 12:53 | Link to Comment buzzsaw99
buzzsaw99's picture

At this point it is in everyone’s best interest to come together and say ok, the dollar needs to be devalued but it needs to be devalued versus all major currencies more or less simultaneously...

 

That's the moist dorked up thing I've ever read here. Who wrote it, turbo timmy?

Thu, 10/14/2010 - 12:57 | Link to Comment rapacious rachel wants to know (not verified)
Thu, 10/14/2010 - 13:09 | Link to Comment john_connor
john_connor's picture

Dollar, Stocks, AND treasuries down.  Ugliness is a foot.

Thu, 10/14/2010 - 13:10 | Link to Comment Shiznit Diggity
Shiznit Diggity's picture

So QE2 is a Nixonian "madman" ploy? I might be inclined to agree if I could shake my impression of Chopper Pilot Ben as a full-blown sociopath.

Thu, 10/14/2010 - 13:13 | Link to Comment michael.suede
michael.suede's picture

This:

" The reason why I think the chatter of a Plaza 2.0 is so compelling right now is because we have only two choices left.  We can devalue in a disorderly and completely chaotic fashion, or we can agree to do it in a more measured and sane manner.  "

Is utterly ridiculous.

How about option 3:

We discharge the bad debt and stop trying to print our way to prosperity.

The fraud needs to stop.  The debt needs to be liquidated.  The banks need to be put out of business.  The Fed needs to be destroyed.

Thu, 10/14/2010 - 13:20 | Link to Comment WSP
WSP's picture

But Michael, that would require that the irresponsible suffer, and economic social justice dicates that the irresponsible get bailed out at the expense of the responsible who get punished for being responsible.   It would also require politicians to not use our money to buy votes and special favors for themselves and their friends.   Come on, short of another revolution, that will never happen. 

No, the government will continue to screw over the responsible, BUT, they do risk that at some point the responsible may just say the hell with it and no longer respect the law or the country, and if they happens, who will bail out the irresponsible?

And yes, the Fed does need to be destroyed, but who do you propose does it?  Every  politician that is not completely corrupt has tried and miserably failed to audit the fed.  Either they were politically destroyed or they were privvy to information that demonstrated to them that an audit or abolishment of a corrupt fed would lead to a complete meltdown.  No, in the end nothing will change---the irresponsible and corrupt will continue to be rewarded for their irresponsibility while the responsible, law abiding citizens will be punished.  

Thu, 10/14/2010 - 13:20 | Link to Comment rapacious rachel wants to know (not verified)
Thu, 10/14/2010 - 13:18 | Link to Comment Dagny Taggart
Dagny Taggart's picture

What is to prevent Ben from doing both? Make the agreements and continue debasing the currency? Unless there is someone sensible at the BIS that can make Bernanke pee in his pants, he's King of the World. Did you ever read "Yurtle the Turtle" (Dr. Seuss) to your kids? It didn't end well for Yurtle the Turtle either.

Thu, 10/14/2010 - 13:32 | Link to Comment Yardfarmer
Yardfarmer's picture

A quaint and charming student exercise although based on many mistaken assumptions especially

 I am going to give Bernanke the benefit of the doubt on the recent QE2 chatter.  What if it was all just a threat to other nations to act on their currencies?  What if he was merely bluffing to blast the dollar into oblivion in an attempt to get other central banks around the world to give in to the concept of dollar devaluation?  At the end of the day, this was probably not his intent because all the evidence shows that the Federal Reserve have no comprehension of how markets really work and how their participants really think.    

 

This is based upon the popular view that the Federal Reserve is composed of well meaning and mostly amiable, well meaning bunglers who, after all, have the best interests of the nation and its citizens in mind. They just happen to be possessed by a preternatural incompetence which if they were shown the light by the likes of Mr. Krieger and so many other enlightened commentators, they would immediately see the error of their ways, adopt more reasonable fiscal and monetary policies and presently usher us all into the land of plenty.

Such incredible naiveté goes a long way in explaining the obvious muddlement, second guessing and general confusion which characterizes this article from beginning to end. What we are witnessing today is not a theoretical exercise in Econ. 201 whose salient features can be modified and tweaked to create a pleasing working economic model. The members of the Federal Reserve know all to well how "markets really work and how their participants really think". Otherwise they and their willing cohorts and enablers in the legislative, judicial and executive branches would have been unable to design, engineer and effect the greatest debacle in economic history. There will be no Plaza 2. There will be QE2 into infinity as Bernanke and the rest of the infernal cabal proceed apace with their blueprint for subversion, dismemberment and destruction of the United States.

 

 

Thu, 10/14/2010 - 14:23 | Link to Comment JR
JR's picture

Well done, Yardfarmer. You articulate a powerful opposing summation to Krieger’s argument; it is an indictment against the abuses of an economic system that has created perhaps the gravest financial crisis in American and world history.

Krieger’s point is let’s go ahead with dollar debasement and break the promise to Americans again and then everything will be okay. 

There’s no better demonstation of the rupture in the contract society than the phrase “too big to fail.” It essentailly means that everyone small is allowed to fail.

That’s why “Wall Street is all giddy about the recent stock market government induced rally” but most Americans aren’t buying into it.” Alan Kauth at interorealestate.com says it’s reflected in "the multiple polls showing negative attitudes towards the economy and Wall Street.”

In terms of wealth distribution by type of asset, the bottom 90% on America’s economic wealth ladder own only 18.8 percent of all the Street’s stocks and mutual funds.

The main principle that destruction of the money hurts is the foundation of honesty.  It begs the question, will the parties to an agreement stick to the rules and the promises of the agreement or is one party allowed to cheat or disregard the agreement? 

When the financial system fails to enforce its agreements then there is no system.  This is the deterioration of a contract society. When banks, who not only write their own laws but even break those laws, are not only excused but are rewarded for breaking the law,  it discriminates against ethical law and inevitably destroys the civilization.  It is no different from the discrimination by teachers who will not fail students who don't perform the work against those students who do perform the prescribed work.

The bottom line is that citizens lose confidence in all their agreements.  It cannot be avoided: the currency is a promise—to savers storing their past labor in dollars, to widows living on fixed insurance premiums, to young parents saving dollars in good faith for their children’s education, to wage earners depositing their pennies in banks for retirement and into Social Security for their old age…

Americans believed U.S. legal tender was to represent a storage of their labor to be earned and used when needed.  The government is a liar.

Reference to statistics: http://aforeclosurealternative.com/?p=520

Thu, 10/14/2010 - 13:32 | Link to Comment treemagnet
treemagnet's picture

Personally, I think the above makes alot of sense.  The threat and corresponding silent treatment are to give others pause.  Once they (other central bankers) marinate in that thought, it'll get action.  Just like Roosevelt said, "Speak softly and carry a big stick".

Thu, 10/14/2010 - 15:02 | Link to Comment The_Euro_Sucks
The_Euro_Sucks's picture

The world is not stupid, plaza 2.0 wont happen. First closing of the goldwindow, then plaza then the Louvre accords (2 years after plaza). You expect that the world is gonna allow to get raped again by the US after these 3 working overs? Nah, this time it will be the US who will take it (no lubricant will be applied). If you pay attention you see that gold is going to replace the dollar on the balance sheets of the world. The world will gain a whole lot and the US and Japan will lose a whole lot. Go do something usefull instead of all the bombing and killing to maintain that pathetic empire. That the US will learn.

Thu, 10/14/2010 - 15:06 | Link to Comment 99er
99er's picture

Mish:

Somehow, some way, if you listen to Geithner and Krugman, all of these problems are supposed to go away if only China would float the Yuan.

Well Geithner's head is up his ass because none of this will go away as long as the US looks for scapegoats instead of admitting reality. That reality is we are on the road to bankruptcy and neither Keynesian nor Monetarist stimulus will help.

Our problems are structural in nature and everyone needs to admit there will be no quick solutions and we cannot spend our way out of this mess. The only thing that can put the US back on track is fiscal prudence and sound monetary policy. Unfortunately, no one wants to hear the truth.

Thu, 10/14/2010 - 18:17 | Link to Comment Stuck on Zero
Stuck on Zero's picture

Plaza accords will not change the trade deficit problem.  If the dollar went to zero the mercantilists would never accept our products.  Plaza accords would have the amusing side-effect of creating vast amounts of black market trades, street corner currency traders, customs battles, and shopping tourism.  I've seen it before and it's loads of fun.

Fri, 10/15/2010 - 05:48 | Link to Comment Baguita
Baguita's picture

It would be a good idea to take a break from expressing personal preferences and solutions for global salvation and to consider pragmatically the consequences of a possible Plaza 2.

It is more than plausible, it is entirely rational to think that the progressively intense posturing on both sides (eg China saying 'we cannot revalue upwards by 20%, this would be disastrous for the world') is diplomatic jostling for position before the forthcoming G20. I think that it is possible that some deal will be cooked and served to us.

It is also very likely that both sides will, certainly after a while, if not straight away, engage in subversing any agreement reached. Such is the way of history and to think otherwide is unrealistic. Besides, no agreements last for ever.

 

So, let's be practical and think: what would the short-term consequences be of a currency accord of sorts reached at the G20, with $ devalued somewhat and the yuan and other emerging countries' currencies revalued upwards somewhat?

I am particularly interested in what the consequences will be for gold. Any thoughts?

Fri, 10/15/2010 - 13:13 | Link to Comment Assetman
Assetman's picture

It is also very likely that both sides will, certainly after a while, if not straight away, engage in subversing any agreement reached. Such is the way of history and to think otherwide is unrealistic. Besides, no agreements last for ever.

 

So, let's be practical and think: what would the short-term consequences be of a currency accord of sorts reached at the G20, with $ devalued somewhat and the yuan and other emerging countries' currencies revalued upwards somewhat?

 

I am particularly interested in what the consequences will be for gold. Any thoughts?

Gold will see though any BS well before anything else on the subversion issue.

There may be some agreement to resetting FX expectations, but it isn't going to stop Benny from monetizing UST debt.  The bigger the Fed balance sheet gets, the more gold will rise in $USD terms.  That's really all you need to know at this point in the game.

Tue, 11/16/2010 - 10:35 | Link to Comment daniel
daniel's picture

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