Reserve Currency

Right now, we are at a stage where Treasury bonds are as weakened as a termite-riddled house. They look fine: But they are well on their way to a complete collapse. Why? Because of the way they have been mishandled and mistreated by the Federal Reserve Board, and the U.S. Treasury. Whether by incompetence or by design, U.S. Treasury bonds have become the New & Improved Toxic Asset. The question is no longer if they will collapse—it’s when. Here's why. —Gonzalo Lira

Since early April, the yield on 10-year Treasury notes has dwindled from 4.0% to below 2.5% on August 24th. Meanwhile, the 12-month change in the Cleveland Fed's median CPI has hovered feebly between 0.5% and 0.6% since March. These abnormally low interest and inflation rates are fanning fears of renewed GDP contraction, a plunge into price deflation, or both. Boardrooms and blogs are humming with rumors of a 'QE II' (Quantitative Easing II) program to counter a chilly deflationary dip. One reason fears are so acute is that the Federal Reserve's main policy tool, the overnight interest rate on Fed Funds, is flatlined at zero. Moreover, via 'extraordinary measures' beginning in September 2008, the Federal Reserve added some $1.4 trillion of securities, including $1.1 trillion of MBS (mortgage-backed securities), to its balance sheet in a stimulus bid. Yet despite these heroic efforts, economic leading indicators have turned weak this summer, as sinking Treasury yields add to the disquiet. In its August meeting, the Federal Reserve downgraded its economic outlook, and backed away from plans to let its enlarged securities holdings run off as MBS mature. Instead, it committed to buying about $18 billion of Treasuries from mid-August through mid-September, mostly in the 2- to 10-year range, by reinvesting MBS principal payments. It also set a $2.05 trillion floor for its securities holdings -- thus freezing 'QE I' in place (perhaps forever) and hinting that a larger 'QE II' could follow. But if QE I isn't working, what hope would QE II have of achieving its purpose in a fresh emergency? This paper discusses a faster-acting alternative, which is feasible within the existing statutory and institutional structure -- namely, targeted purchases of international reserve assets instead of Treasury notes.

While no one can say when the big spike in gold will occur, one can say accurately that, given the systematic frailty, it could literally happen on any given day. That’s what happens when scams are unveiled. Remember Bernie Madoff? How many people do you think tried to give him money the day after he was arrested, versus desperately scrambled to get their money out of his sticky web? The answers are “No one” and “Everyone” – that’s what happens when people lose faith in a currency.

Anyone else find this interesting?

I usually don’t do follow-up pieces to any of my posts. But my recent longish piece, describing how hyperinflation might happen in the United States, clearly struck a nerve. There were two issues that many readers had a hard time wrapping their minds around, with regards to a hyperinflationary event: The first was, Where does all the money come from, for hyperinflation to happen? The second question was, Why will commodities rise, while equities, real estate and other assets fall? In other words, if there is an old fashioned run on a currency—in this case, the dollar, the world’s reserve currency—why would people get out of the dollar into commodities only, rather than into equities and real estate and other assets? In this post, I’m going to address both of these issues — Gonzalo Lira

Quietly and with little fanfare, Gold has made a MAJOR change in its status. The precious metal is largely viewed as THE anti-paper money play by investors. This all changed in November 2009. What happened then? The Sovereign Debt Crisis began in earnest with Dubai asking for a six-month extension on $60 billion worth of debt.

At this point, Gold broke away from its traditional relationship to the US Dollar. Indeed, since then Gold has actually moved in tandem with the US Dollar. The correlation between the two is not perfect, but generally Gold and the Dollar have moved together both to the upside as well as the downside.

"American consumers are trying their best to deleverage. In terms of the story, the patient is actually trying to lose weight. But the government is blocking deleveraging and trying to boost consumption. They are forcing food down the patient's throat. According to the Flow of Funds Report, households reduced debt at a 2.4% annualized rate ($330 billion) during Q1 of 2010. Meanwhile, the federal government was piling on debt at an 18.5% annual rate ($1.44 trillion). Since every dollar of government debt is a promise to tax the private sector in the future with interest, this public spending spree effectively negated the Herculean efforts of the private sector to return to a sustainable path. That's where the arrogance of Washington is really apparent. Scores of millions of American consumers have made the decision that reducing their debt burden is in their best interests right now. But a few hundred individuals in government believe they know better than the collective wisdom of the entire free market. By leveraging up the public sector, they have used their power to confiscate our savings. In short, they are forbidding us from following the common sense path to fiscal health." - Michael Pento

Two years ago when I told everyone I knew that the United States was bankrupt and would ultimately default of its debt one way or the other (by inflation or restructuring) I was called crazy and dismissed by 95%+ of the people I met. These days many of the same people still think I am crazy when I say that a political, financial and intelligence elite which has now teamed up with large corporations is attempting to create a global currency and world government (with them at the helm of course), but the notion that the U.S. is bankrupt is now more or less mainstream. Even the corporatist/socialists in power are now unable to merely dismiss questions about the deficit. The public has woken up from its slumber of consciousness and is now starting to see things as they are. This is an extremely positive development and is why as I have said before I think the elite are in their last days as the freight train of consciousness runs them and their twisted illusions of grandeur into the sea. The weakest link in this sick and corrupt financial system that was forced upon many of us before we were even born with its mechanics purposely hidden in the shadows so that we remained ignorant of its preposterousness, is the commodity market. However, within the commodity market the weakest link is gold. - Mike Krieger

In light of the entrenched way of perceiving things, especially in the U.S., it is difficult enough to convince some people that the economy is in fact not providing the security they desire, but is actually destroying their future completely. To explain to them that this is deliberate, that the economy is designed to self-destruct, that is another prospect altogether. Many people hit a proverbial wall on this issue because they simply cannot fathom that certain groups of men (globalists and central bankers) view money and economy in completely different terms than they do. The average American lives within a tiny box when it comes to the mechanics and motivations of finance. They think that their monetary desires and drives are exactly the same as a globalist’s. But, what they don’t realize is that the box they think in was BUILT by globalists. This is why the actions of big banks and the decisions of our mostly corporate establishment run government seem so insane in the face of common sense. We try to rationalize their behavior as “idiocy”, but the reality is that their goals are highly deliberate and so far outside what we have been taught to expect that some of us lack a point of reference. If you cannot see the endgame, you will not understand the steps taken to reach it until it is too late. - "Giordano Bruno"

The United States is running out of time to get its budget and trade deficits under control. Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery. As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times column, “Welcome to the Recovery.” As John Williams (shadowstats.com) has made clear on many occasions, an appearance of recovery was created by over-counting employment and undercounting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echoes from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big-spending Democrats. It is encouraging to see some realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore. However, the solutions offered by those who are beginning to recognize that there is a problem are discouraging...The United States and the welfare of its 300 million people cannot be restored unless the neocons, Wall Street, the corporations, and their servile slaves in Congress and the White House can be defeated. Without a revolution, Americans are history. - Dr. Paul Craig Roberts

No, there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced. But his will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer. - Egon von Greyerz, Matterhorn Asset Management

Inflation continues to ebb away. In Japan core CPI deflation, at -1.5% is the worst on record. While in the US, the corporate sector is seeing its weakest pricing power on record ? even worse than that seen in the deflationary maelstrom during the Asian crisis (see chart below). We have consistently articulated the view that the severity of the current situation will only be appreciated when this current cycle ends in failure ? and that is not too far away. That will be the time that equities will plunge to new lows. And that, not March 2009, will provide the buying opportunity of a generation to hedge against the coming Great Inflation. - Albert Edwards

"When I refer to it as The Deficit (it is too majestic for the lowercase), I am not referring to a mere fiscal shortfall—I am referring to a policy mentality. This policy mentality—shared by both “saltwater” and “freshwater” economists—effectively amounts to a suspension of the notion of opportunity cost. In the realm of The Deficit, the macroeconomic policy questions cease to be “either/or”—they become “both/and”. All policy options can be achieved because—according to the macroeconomic policy known as The Deficit—the American fiscal shortfall can never bring the United States to bankruptcy. As Dick Cheney so memorably phrased it, deficits don’t matter—so The Deficit as a macroeconomic policy can continue indefinitely." - Gonzalo Lira

Stay tuned, we might not need QE 2.0 after all...

Here's the scary part ...