'Claims Per Deliverable Ounce' Likely Soars to over 200:1 as JPM Pulls Another Large Tranche

JP Morgan, who as I shared last month tends to move large amounts of gold into the registered (deliverable) category on the Comex just in the nick of time, took another huge tranche of gold out of that category last Friday.

Registered (deliverable) gold is now down 202,000 troy ounces or a little over 6 tonnes,  a level which we have not seen there since Nick Laird started keeping track of the Comex warehouses in 2003.

A quick calculation that awaits the updated open interest figure shows that the 'claims per deliverable ounce' has now likely soared to over 200:1.  We have never seen a ratio that high.

I will put up the 'official calculation' from Nick when the official number becomes available.  We might not see the ratio climb if there has been a plunge in open interest, however unlikely that might seem.

Not just considering the Comex, which I consider to be a atavistic pricing mechanism, a conjunction of several things trouble me in the light of Ronan Manly's second article in his current series.

He does a meticulous estimate that indicates that the levels of unencumbered gold in the LBMA, which some of us have come to call 'the float' of physical bullion, are now so low that he calls it 'a game of musical chairs' to cover the unallocated gold accounts.

You may read Ronan's entire article here.

Things being what they are, I am now persuaded that 'the float' is tight enough so that the probability of a 'break' or dislocation in the physical bullion market is high enough to warrant some extra caution. Not panic, but caution, at least until the situation clarifies, particular with an eye to the historically significant month of December.

The other item that greatly concerned me is Jim Rickards assertion that in this type of situation the price of gold is not likely to go up gradually, but may suddenly rise step-wise, almost overnight, by more than a hundred dollars or so per step.  You may watch it here.

I do not claim to have the contacts or pull that some may have or claim to have.  But I have now seen enough to think that in terms of insurance and conservative investments that caution is warranted, now, rather than later.

So, IF you are an investor, not a short term trader, and are holding some percentage of gold in your portfolio as insurance, you may wish to reconsider any arrangements that you may have in which you cannot exercise reasonable control over your possession of bullion which you have purchased.

This is what I believe Kyle Bass referred to as fiduciary caution.

Particularly at risk of a forced cash settlement would be any leveraged or unallocated holdings with an indeterminate counterparty risk, or what some people refer to as 'paper gold.'

I am not saying that there will be a hard default, in terms of outright confiscation in a bankruptcy court, not at all.  Although that may happen.

But I would consider carefully any arrangements that offer guarantees or assurances that could be satisfied with a cash settlement at a price to be determined by someone else without your consent.  As we saw in 1933, they settled at one 'official price' and then allowed the price to resume some 40% higher.

If you are a short term trader, do what you will, but be mindful of your leverage, and take uncovered short positions at your own risk.  And if covered, carefully consider your counterparty risks, because the bigger players will be lawyered up and looking for patsies and victims.  Again, a hard lesson from MFGlobal.

This market may likely turn extremely volatile, even to the extent of a big down move followed by a sizable move higher.  This is how these jokers roll.  When the going gets tough, they tend to keep doubling down and running a bravura bluff.   This was the story of 'the London Whale.'

In the meanwhile, we will have to bear up as best we can with this ridiculous lack of transparency and secrecy and sound regulatory oversight in public markets in the age of crony capitalism.

I have included the latest silver Comex chart as well.   I have to admit that I do not feel I have the same grasp of silver that I hope to achieve in gold.   There seems to be a steady bleed in the inventories, and one huge difference is that with silver there is no great central pool of it to cover short term gaps in the physical markets through leasing as there is with gold.

So, I will keep an eye on silver, because the premiums there are acting more oddly on the retail level than gold is, and its market structure is such that a festering problem can become a big and obtrusive problem rather quickly, and the central banks would be in a poor position to do anything about it.

I would tend to exercise the same caution with silver investments as insurance as I would with gold.  And so I am.

Gold Daily and Silver Weekly Charts - About Those Special Issue Bonds and Full Faith and Credit

I was expecting another 'hit' on the futures contracts around the May-June contract dates I have posted several times.

Perhaps the antics today will be all for now. Let's see what happens.

Someone said something unintentionally funny about the Social Security Trust Fund bonds and the reliability of the US government today that I ordinarily would ignore, but it may serve to illustrate a point.

This fellow seems to think that defaulting on the Social Security Trust would be fine and good, because 'the money is not there, it is spent.'

That can be said about almost ANY bond that is ever issued. The bonds are essentially instruments with certain terms backed by 'the full faith and credit' of the borrower, or some other designee. The money received for them is almost always 'spent' or in the case of a trust invested in some other instruments. That is the purpose of issuing the bond, whether they are for a retirement plan, a school, or a missile defense system!

In the case of Social Security there are two types of bonds that are now held, both 'special issue' meaning that they are not publicly marketed through the primary dealers. This is a bit of a change, in that the Trust formerly held both public and special issue bonds.

The Social Security trust funds are financial accounts in the U.S. Treasury. There are two separate Social Security trust funds, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits.

Social Security taxes and other income are deposited in these accounts, and Social Security benefits are paid from them. The only purposes for which these trust funds can be used are to pay benefits and program administrative costs.

The Social Security trust funds hold money not needed in the current year to pay benefits and administrative costs and, by law, invest it in special Treasury bonds that are guaranteed by the U.S. Government. A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them.

You can see a listing the Treasury bonds held by the Social Security Trust here.

The key point is that the special issue bonds are not subordinate debt, or a secondary obligation, but fully guaranteed by the full faith and credit of the Treasury. I have never actually held or read one of the bonds, but this is my understanding of it, and would accept detailed and specific language that shows that they are susceptible to selective default based on the wording of the bonds or a specific statute and not some interpretation of other documents.

Yes, the Congress can make changes to the Social Security System as they have done in the past, although they generally make those changes gradually, and set future dates for the changes. They have even denied a person in the past from collecting Social Security (Flemming vs. Nestor) because of the transgressions against the state, in this case a non-citizen who was deported for their activities in the Communist party at the height of the Red Scare. It is not a general precedent, and finds no application in general case law with which I am familiar, although I no longer have access to Lexus.  It will stand as a specifically narrow ruling so long as it is not challenged or expanded by some other case(s). That is how law of precedents works.

The government can also revoke your right to vote should you be convicted of a specific class of criminal offense. Does this mean that the government has broad powers to deny the right to vote to anyone it wishes for any reason, or that it can easily do so?

But the key point is that it does not really matter since this does not affect the underlying value and guarantees of the special issue bonds in the Trust fund which is the whole point of this. Not one bit. When it comes to the bonds, they are backed by 'the full faith and credit' of the Treasury, the same as any other bonds it issues.

And as such, they are no different than the bonds issued for public sale by the Treasury which are held by China in exchange for their own inputs for example. And this includes bonds of zero duration, which are Federal Reserve Notes.

What I find a little repugnant about some of the arguments about the Social Security Trust is that they are sometimes put forward by people who would like to see the obligations defaulted upon, in order to provide extra tax cuts to the wealthy for example.  That is a matter of policy and law going forward, and has nothing to do with the status of the special issue Bonds of the Treasury.  If some people wish to take from the old and the poor and give to the rich they will have to find some other justification than the value of the Special Issue Treasury Bonds.

By the way, this argument about the existence of the Trust Fund has its roots in the Bush II Administration.  Who would have guessed that?

"Some in our country think that Social Security is a trust fund – in other words, there's a pile of money being accumulated. That's just simply not true. The money – payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust."

George W. Bush, February 9, 2005

It is not clear to me that Bush II understood what he was saying, understood the legal and economic issues and their implications, or really did not care.  If some politicians would like to say the money taken from the public and held in Trust is not there, that the bonds are a fraud and subject to default, then they ought to be able to say who stole it and when, because theft and betrayal it surely is, and as bad or worse than the theft of customer money from the accounts at MF Global, which similarly vaporized by unknown hands, or so they claim. 

And that hardly lends itself to trust, for who can have confidence in the full faith and credit of a thief and a betrayer of trusts, who goes so far as to rob the elderly and the disabled?   Is this the government of Washington, Jackson, Roosevelt, Jefferson and Lincoln?

How are the mighty fallen, and their oaths of duty and honor perished.

But these are all plays on words in the manner of Washington and the financiers. There is a Trust and it contains special issue bonds guaranteed by the Treasury.  Some confusion arises because they are not marketable bonds, which means that their value does not vary, and the Banks cannot get their mitts on them to take a piece of the action. So technically one might think that they are not assets. But they are liabilities and are included in the calculation of the public debt.

These comments were criticized as laying the groundwork for defaulting on almost two trillion dollars worth of US Treasury bonds, or more likely facilitating the transfer of the obligations of the Trust into private investments such as US equities. At the same time in 2005 Wall Street brokerage firms were lobbying heavily for the suspension of Social Security in favor of privately held retirement accounts, managed by them of course. George W. was most likely just reading the talking points for his constituents.

Fortunately it did not matter because the President has no power to default on the sovereign obligations in the Trust even by Executive Order; only the Congress has that power. And no matter what existential truthiness arguments pundits like George W. Bush would like to make to justify it, the action would be to declare a selective default on over two trillion in US government bond obligations.

But perhaps more important than the arbitrary respect for legality, the principle of the law of the markets is an impediment to be overcome. Creditors become very uneasy when they see an organization or government that starts to default on its sovereign obligations, particularly foreign holders of the debt who are often as disadvantaged in the local power structure as the weak and the old.

But the punchline of the whole thing was this. This person went on to suggest, in colloquial language, that indeed the bonds are obligations, but so are Greek bonds. And if you can't pay you can't pay.

In other words, US bonds backed by the 'full faith and credit' of the US government are no different than Greek bonds.  To that I might add, not yet, but give it some time.  lol

In one of the instances where I might agree with Modern Monetary Theory (MMT), a sovereign issuer of its own currency never really has to default on its bonds, if the terms of payment are in their own currency, and they have the right and ability to create any amount of that currency which they wish. The US has this ability, and unfortunately for Greece they do not.

Where I disagree somewhat with MMT is that this is a bit of sophistry, a technical nicety. Yes, they may avoid a technical default on the longer duration bonds, but a sovereign issuer most certainly can and has defaulted on the value of their currency, or their bonds of zero duration in a fiat currency regime. In most cases it is a protracted erosion of value, and the US has been doing a good job of this for the past 75 years or so to say the least.

The only 'currencies' that do not bear such counterparty risk from the issuer, that do not rely on the full faith and credit of some issuing authority, are gold and silver. And this is why they have been used throughout history as such, because they are natural currencies from their very characteristics of durability and relative scarcity.

Governments can and have interfered with gold and silver, and made it their own, setting the value. They have even seized it in the past on some pretext. But they have also handed tickets to families and sent them to relocation camps as well. There is a chasm of difference between what can happen and what will likely happen, and what the possible responses to arbirary actions and even the oppression of tyranny might be

And there you have it. The case for the direct ownership of gold and silver, the only currencies that do not rely on the promise of a temporal government or entity, but stand by their own value from their very nature.

*Technical Note: When I refer to Federal Reserve Notes as government bonds of zero duration, one can consider that shorthand for 'government zero coupon bonds of unrestricted duration.' Thanks to Knukles for forcing me to the additional precision. lol.

US Policymakers Considering Various Paths for State Bankruptcies

PIIGs on steroids, and selectively applied defaults.

Thank God the Banks will be saved any pain or discomfort.

Washington and New York will rule them all with an iron rod.

NYT
Path Is Sought for States to Escape Debt Burdens
By Mary Williams Walsh
January 20, 2011

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.

Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.

Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers...

Morgan Stanley: Government Defaults Inevitable

In addition to "It's different this time" and "Self sufficiency is an out-moded concept" one of the deadliest assumptions is "That can never happen here."

Morgan Stanley says what we have all known for some time. There will be government defaults of various types on debts which have become unmanageable.

As we see in a UK Telegraph story today, a report claims the Tories are placing the greatest pain in managing their budget gaps on the backs of the less well to do, presumably protecting their more well to do constituency. No surprise to anyone if it is true. And yet this may not be enough unless the economy recovers and the great mass of the public can regain some reasonable level of organic economic activity.

In the States, the uber wealthy will be spending large sums to lobby against new taxes, and even removing tax cuts that were known to be untenable, and based on false economic assumptions, at the time they were passed under Bush. Instead they will point to more broadly public and regressive taxes such as VATs, and seek to curtail public programs like Medicare and Social Security, while leaving their own subsidies and welfare, such as those in the financial sector and corporate and dividend tax breaks, sacrosanct.

In the US the broad mass of consumer have been the economy's golden goose, and after decades of median wage stagnation, neo-liberal economic policies, and overseas military expansions and expeditions, that goose looks cooked.

But at the end of the day this soft class warfare, despite its vicious hypocrisy and pettiness, is all intramurals, as the real defaults and debt reconciliation will most likely be in the form of artificially low bond rates accompanied by devaluations in the Western fiat currencies. I have been trying to figure out a way that a selective default could be accomplished, but have not quite muddled through that yet.

The limit of the Fed's and Treasury's ability to monetize the debt, which is a form of default through a true monetary inflation, is the value of the dollar and the bond. People who have never lived through it will begin to finally understand this in the days to come.

Bloomberg
Morgan Stanley Says Government Defaults Inevitable
By Matthew Brown
Aug 25, 2010 11:44 AM ET

Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.

“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.

Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard & Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks.

Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Conversely, Italy has one of the highest debt- to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said.

Double Dip

“Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view,” the report said. “But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”

Mares once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.

“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”

Investors’ concern that the U.S. may fall back into recession has grown in recent weeks as U.S. economic data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009...

“The conflict that opposes bondholders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well-aligned with those of influential political constituencies,” such as elderly voters and their claims on pensions and health insurance, Mares wrote.

So Why Is the Stock Market Going HIgher?

Q: But Jesse, if things are so bad, why is the stock market going up?

A: There is no doubt that equity markets, when judged in nominal terms, can do amazing things when the Fed spikes the punch bowl with grain liquor. Especially when market regulation has been weakened by decades of mistaken ideology and corruption.

The German stock market during the Weimar Crack Up Boom showed some remarkable gains, and was actually a lifesaver for many investors, for a time.

Bull markets are generally corrosive of the average intellect. That is why statists with something to hide love them so much. No matter what era, people willingly surrender their common sense to the bubble, if only for pragmatic reasons.

Those actively playing the deflation trade, short stocks and commodities, are getting killed for now. They are obviously early. The real deflation in paper asset prices will eventually come as the bust follows boom, but more selectively than most imagine, except temporarily if there is a genuine crash and not a long slow decline. Some assets will soar even higher as the dollar devaluation gains momementum and not retrace significantly as the dollar collapses in slow motion.

As Ludwig von Mises noted:

"This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to their altered money relation

There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.

These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy...

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."

Until then, be aware that the paper chase is on, backed by the full faith and credit, and desperate lies, of some very frightened, but still very powerful and increasingly ruthless, men. There is a good case to be made that the financial sector, led by Wall Street, hijacked the US productive economy and bought off the politicians and has been managing it for their own benefit most notabley since. This is not the first time, and it will most likely not be the last.

Try to stay out of their way as they thrash about, looking for something to fill the hollowness of their being, more fuel for the bonfires of the profane.

China May Lead Coalition of Nations to Topple the US Petrodollar

It does make sense that this would happen, and many including ourselves have been forecasting this outcome as a viable trigger for a significant, but orderly, dollar devaluation.

The US has violated the premise under which the Dollar served as the world's reserve currency. As Alan Greenspan himself said, the US Dollar regime worked because it was managed as though it was still under an external monetary standard, mimicking the rigor of a hard currency while maintaining a flexibility for monetary policy adjustment. We questioned the veracity of that claim when he made it, but it was the appearance, if not the reality, of responsibility and discipline that made things work for the monetary wizards.

Ironically enough, the closet goldbug Mr. Greenspan shattered that discipline with a gearing up of financial engineering in response to economic and trading crises starting with 1987 and reaching higher notes with LTCM and the Asian currency crisis.

China devalued the yuan against the dollar, and was able to promote an aggressive program of industrialization through multinationals like Walmart who desired cheap labor. The Chinese were able to persuade Bill Clinton and then George Bush to grant them favored nation trading status, without the condition of a freely traded currency. This allowed China to import manufacturing jobs, and made the US politicians and financiers happy with their personal donations and profits.

The dogs of war were loosed by the Fed in 2002 with a remarkably reckless expansion of debt through over easy interest rates, with an explosion of fraudulently rated US dollar financial assets from an Anglo-American banking system grown utterly corrupt and in full bloom of a credit bubble.

Bernanke has taken the dollar into its endgame, while insiders grab fistfuls of dollars and quietly sell their financial assets behind the scenes during this recent market rally. Obama and his team are either corrupt or incompetent. The same can be said of his two predecessors, at least.

"The capitalists will sell us the rope with which we will hang them."
Vladimir Ilyich Lenin

However this plays out over the next nine years, it will be history in the making, and interesting to say the least. It will be neither straightforward, nor easy, nor transparent to the public. But it seems inevitable that the days of Empire based on dollars backed by oil and global military reach are over and gone-- until the next time.

The Independent UK
The demise of the dollar
By Robert Fisk
Tuesday, 6 October 2009

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

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.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar." (Look for the NWO to start making a stronger play to control the EU - Jesse)

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Do Ben and Tim = Thelma and Louise?

One cannot help but note that Team Obama is trying to derail serious proposals regarding financial reform for Wall Street at the G20 meeting, as we suggested they would.

The concerns raised by US revelations at the G20 today about new intelligence regarding Iran's secret underground nuclear facility have overshadowed financial reform and economic problems, and Gordon Brown's prescription yesterday that the G20 would become the new governing council for the world. It also stepped rather heavily on the House Hearings on HR 1207 "Audit the Fed" bill sponsored by Ron Paul and a good part of the Congress.

Why waste a crisis indeed. Especially when you can cop a two-fer.

Yesterday we put forward a somewhat lengthy piece on the Fed and reverse repos being considered titled Fed Eyes US Money Market Funds.

There is a key quote in there that we would like to highlight today.

The central bank is now considering dealing with money market funds because it does not think the primary dealers have the balance sheet capacity to provide more than about $100 billion... Money market mutual funds have about $2.5 trillion under management..."

Only 100 billion in available capital for a relatively risk free short term investment in the global banking system including the Primary Dealers, does seem a bit tight for a set of such 'well capitalized' banks, especially since they aren't making many commerical loans, preferring to speculate in the commodity and equity markets for daytrading profits.

BNP Paribas Securities Corp., Banc of America Securities LLC, Barclays Capital Inc., Cantor Fitzgerald & Co., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Daiwa Securities America Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc. , Jefferies & Company, Inc., J. P. Morgan Securities Inc., Mizuho Securities USA, Morgan Stanley & Co. Incorporated, Nomura Securities International, Inc., RBC Capital Markets Corporation, RBS Securities Inc., UBS SecuritiesLLC.

Couple that with the revelation reported some time ago at ZeroHedge and covered here, that the Fed is taking on more than 50 percent of the longer dated Treasuries, and there is only about Ten Billion left on their balance sheet for expansion, and you get the picture of a financial system not cruising into recovery but heading straight at a confrontation with harsh reality.

We have considered the possibility that the Fed is doing this to place exclusively AAA and Treasuries on the balance sheets of the Funds, aka the Shadow Banking System, who are holding some seriously awful garbage. But this does not quite make sense unless those reverse repos are of a very long duration or rolled over automatically for a long period of time. A proper program such as was extended to the banks where the Fed buys the assets outright would be that solution. It made more sense to us that the banking system is still very tight on good capital assets and liquidity.

Here is an update from ZH that is somewhat compelling if one understand the implications. Visualizing the Upcoming Treasury Funding Crisis.

"Summary: foreign purchasers are congregating exclusively around the front end of the Treasury curve, meaning that the primary net purchaser of dated bonds has been the Federal Reserve. As everyone knows by now, the Fed only has $10 billion left out of the $300 billion total allotted for Treasury QE. That should expire next week. ... The time of unravelling may be upon us sooner than most think."

Do Tim and Ben = Thelma and Louise?

As the Eagles sang:

"Take it, to the limit, one more time..."