Ron Paul On Bernanke and the Fed

Going the Way of AIG with Dollar Holders as Patsies

The Guidotti-Greenspan rule states that a nation's reserves should equal short-term (one-year or less maturity) external (foreign) debt, implying a ratio of reserves-to-short term debt of 1. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital.

The rule is named after Pablo Guidotti – Argentine former deputy minister of finance – and Alan Greenspan –former chairman of the Federal Reserve Board of the United States. Guidotti first stated the rule in a G-33 seminar in 1999, while Greenspan widely publicized it in a speech at the World Bank (Greenspan, 1999).

Guzman Calafell and Padilla del Bosque (2002) found that the ratio of reserves to external debt is a relevant predictor of an external crisis.

This is an interesting application of the Greenspan-Guidotti Rule by Porter Stansberry below because it includes the value of the gold at market prices, as well as the oil in the Strategic Petroleum Reserve, and all the foreign reserves on the books of the US against the total foreign debt owed in using the Greenspan-Guidotti rule for its default assessment.

Those who argue for a stronger dollar because of deflation due to domestic credit destruction overlook the reality of the yawning imablance of US debt to external creditors, and the need to deal with it without writing it off like a home mortage.

Yes, the US has lots of buildings, and minerals in the ground, and forests and proprietary software, and overpriced financial assets, and tranches of dodgy mortgages to sell. We are discussing AAA liquid assets here, without significant counterparty risk. Those peddling US debt instruments to Asia these days are getting a very cold reception.

What Porter Stansberry says is valid, with the important exception that the US still owns the world's reserve currency. Otherwise it would be well on its way to a hyperinflationary climax.

This is why we do not expect the default to be like the Lehman Brothers over-weekend implosion, nor as dramatic as the crisis in Dubai, or more historically the failure of the post-Soviet Russia. The US is too big to fail.

The dollar will devalue to unexpected lows, not with a bang but a whimper.

More AIG than Lehman, with high profile big-talking executives, self-serving accounting, bonuses to the perpetrators, de facto bailout and subsidies from frightened central bankers, and all that until the rest of the world can adjust. The US will most likely wallow in stagflation until it can get itself together again, barring a global conflict.

There are structural issues for sure. The US is still the consumer of the world's export products, especially manufactured goods. The problem is that they are paying for it with paper that is increasingly worthless. And it is militarily the only remaining superpower.

Do not expect this to be a straightfoward default. The US money center banks are wielding weapons of financial mass destruction, and are not afraid of gooning it up in the markets for real products, as they still exercise significant pricing power.

It may be our currency, but it's your problem.'' John Connolly, Treasury Secretary, in response to European anger at the 1971 US gold default

So, it will take time for the exporting nations to grow their domestic markets, and to find new customers at home and abroad. It will take time for the nations to agree on a new currency regime, as the US has now pulled the rug out from under them once again with the quantitative easing of the dollar. But that adjustment effort is now well underway. With regard to change, "It is not necessary to change. Your survival is not mandatory." - W. Edwards Deming

The downside of structural change after a long decline is that once it occurs, it is difficult to obtain one's prior reputation and position.

"When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger."

Porter Stansberry, The bankruptcy of the United States is now certain

The US Dollar Is In a Secular Bear Market and Will Remain in One Until...

Contrarians might take some cheer from dollar bearishness, but one needs to be aware that not everything that is fundamental and recognizable is overdone and wrong.

Markets do overrun their trends, especially on the short term and by amateur speculators, setting up very nice opportunities for the professional market makers. The attractiveness of being a 'contrarian' is that when you are right you can set yourself up as superior to those who were wrong, distinguishing yourself from the mere mortals, and feel the euphoria of God's favored hand.

But being a contrarian requires a superior sense of what is real, and what is out of synch with reality. In general few amateurs possess this level of judgement and perspective, and end up just looking silly and eccentric after a few correct calls, taking the opposite position because it is the opposite, proclaiming night to be day, and the moon to be cheese.

Oh they deny it, and keep changing their forecasts, and burying their mistakes, fooling no one really but themselves, constructing ever more intricate theories about why they are right and will be ultimately vindicated in their 'beliefs.' But on the whole they lose money and take a terrific financial beating for being obstinately. Every seasoned trader learns this lesson, at least once, and bears its scars. They become superior traders when they are able to take a position again and hold it, despite the market head fakes, because they are right and they know it.

Markets do fluctuate. This is why it is so important to determine whether a move in a market is a purely 'technical move,' ie a bounce or dip to skin the overleveraged speculators who have piled on to a momentum move, and a genuine and sustainable change in direction underpinned by some fundamental reason.

And this news piece provides an important clue as to when a change in the dollar bear market may begin to occur.

“History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates.”

The rise in rates will be relative to other currencies and commodities in valuation, but the forecast here is substantially correct. The dollar is in a bear market and will remain there for the foreseeable future. Again, with bounces and dips to tempt the punters in to be fleeced and skinned.


Dollar Slump Persisting as Top Analysts See No Bottom
By Bo Nielsen

Nov. 23 (Bloomberg) -- The most accurate dollar forecasters predict the world’s reserve currency will continue sliding even when the Federal Reserve begins to raise interest rates, which policy makers say is an “extended period” away.

Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc and Scotia Capital Inc. say the dollar will depreciate as much as 6.4 percent versus the euro. About $12 trillion of fiscal and monetary stimulus, the world’s lowest borrowing costs and a record $4 trillion of government bond sales between 2009 and 2010 will weigh on the currency, they said. So will the nation’s 10.2 percent unemployment rate and signs that the economic recovery may falter, they said.

“History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,” said Callum Henderson, the Singapore-based global head of foreign-exchange strategy for Standard Chartered.

The best forecaster of the dollar against the euro in the six quarters ended June 30 in Bloomberg’s ranking of 46 firms last month predicts the greenback will weaken 5.3 percent to $1.58 per euro in 2010, from $1.4970 today.

“It’ll take time to drain the oversupply of dollars from the market,” Henderson said. “The dollar will remain weak until the Fed’s rates rise above the competitors’....”

Foreign Holdings of US Dollar Assets

Roughly analagous to Eurodollars, although it is not clear how much if any of the central bank reserves are actually captured here in these reports by BIS reporting commercial banks, especially in China and the non-European countries. Certainly the NY Fed Custodial Accounts for Foreign Central Banks show no decline whatsoever from the long term trend of accumulation to support their mercantilism and currency pegs.



But the takeway from this chart is that a long term trend of dollar accumulation was broken, and rather painfully, in the deflating of the Wall Street financial assets fraud.

One might not expect the Europeans and Asians to accept new financial instruments in dollars quite so readily. The US seems intent on maintaining a few mega-banks to serve as "competitive" instruments of national policy on the world financial stage.

They may find that maintaining the banks and their particular weapons of financial mass destruction may be just as costly as 700 military bases in diverse locations. Such are the burdens of empire.

Ladies and Gentlemen, the United States of America Is Insolvent

"In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our readers this month: the United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations. This isn’t official yet, and we don’t know when the market will react to it, but there is no longer any doubt about the extent of their trajectory. There simply isn’t enough taxing power, value creation or outside capital willing to support its egregious spending...

The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars. How on earth does anyone expect them to raise this capital? As we stated in a previous article, in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28% from September 2008 to July 2009 - far short of what the US government required. The US taxpayer can’t cover the difference either. According to recent estimates, tax revenue from all sources would have to increase by 61% in order to balance the 2010 fiscal budget. Given that State government income tax revenues were down 27.5% in the second quarter, the US government will be lucky just to maintain its current level of tax revenue, let alone increase it.

The bottom line is that there is serious cause for concern here – and don’t be fooled into thinking this crisis will fix itself when (and if) the economy recovers. Just how bad is it?..." Sprott Asset Management

Just a reminder, in case you had forgotten in all the excitement of a bull market rally in US equities and a reasonably good baseball World Series.

Ladies and Gentlemen, the United States Is Insolvent, 29 May 2009

The States racked up some serious debt in keeping the world safe for democracy in the Second World War. On a percentage basis, it has recently spent a significant amount keeping its financial sector safe from productive effort and honest labour. They will raid the Treasury, take their fill, and then compel the government to confiscate the savings of a generation by defaulting on its obligations, its sovereign debt.

Obama's Economic Policy Has Doomed the US to Stagnation - Or Worse

This was the very moment of Obama's failure, when he allowed Summers, Geithner and Bernanke to establish the principle of "Too Big To Fail" and set up a financial oligarchy at the expense of taxpayers. We would have expected this out of the Treasury under Hank Paulson, but to see this kind of policy error favoring Wall Street over the US taxpayers from a government elected on the promise of reform is inexcusable, a disgrace.

Be Prepared For the Worst - Ron Paul

Bloomberg
Stiglitz Says U.S. Is Paying for Failure to Nationalize Banks

Nov. 2 (Bloomberg) -- Nobel Prize-winning economist Joseph Stiglitz said the world’s biggest economy is suffering because of the U.S. government’s failure to nationalize banks during the financial crisis.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”

Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks’ share prices climbed this year.

U.S. Treasury Secretary Timothy Geithner, appearing yesterday on NBC’s “Meet the Press” program, said the country’s economic recovery hinges in part on banks taking more risk and restoring the flow of credit to businesses.

“The big risk we face now is that banks are going to overcorrect and not take enough risk,” Geithner said. “We need them to take a chance again on the American economy. That’s going to be important to recovery.”

President Barack Obama said on Oct. 24 that the nation’s lenders, supported by taxpayers in the crisis, need to “fulfill their responsibility” by lending to small businesses still struggling to get credit.

Companies such as Citigroup Inc. and Bank of America Corp. benefited from a $700 billion taxpayer-funded bailout package last year. In contrast, Obama said that too many small businesses are still short of money, adding that his administration will “take every appropriate step” to encourage banks to lend.

Bank Lending

“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse,” Stiglitz said. “What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.”

While the U.S. economy grew at a 3.5 percent annual rate in the third quarter, the first expansion in more than a year, the Columbia University economist said the recession is “nowhere near” its end, citing rising unemployment and weak demand.

The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system. (And it is an inherently unfair plan that creates even additional moral hazard by penalizing sound banking by forcing it to pay for reckless bank management. - Jesse)

Citigroup and Bank of America shares have quadrupled from this year’s lows in March.

Trend Change: Official Purchases from Central Banks Supporting Gold Price

Starting in 1989, the world's Central Banks became steady net sellers of their gold reserves which had been accumulated over the years.

In addition to official gold sales, the banks also began to engage in gold leasing contract with bullion banks such as J. P. Morgan, Goldman Sachs, et al. The gold was leased, and the bullion bank sells it in the market, paying the lease difference in a sort of gold carry trade.

And now for something completely different, it appears that the world's central banks may once again become net buyers of gold, after a twenty year campaign of selling gold from their vaults into the public markets, creating a steady downward pressure on the price of gold, that contributed to its long bear market.

There is some thought that the central bank gold sales had been designed to support the strong dollar as the reserve currency of the central banks. Gold had been viewed as a threat. Documents which have been disclosed and quotations from the transcripts of central bank meetings do support a concern that the price of gold could rise, destabilizing the fiat regime which had been in place since the US went off the international gold standard in 1971.

Starting in 2001, gold began a bull market based in part by the decline of the US dollar as the undisputed reserve currency of the world. And now the banks are reconsidering their position, and in some cases nervous central bankers seeking to recover their leased bullion, even adding to their reserves by new purchases.

This is not to imply that gold will replace the dollar. Rather, if the intended target is indeed the SDR, which comes up for rebalancing in 2010, banks may need to have gold on hand since it is thought to be favored as a component of the basket of currencies of which the new SDR will be created.

With regard to the proposed IMF sale of 403 tons of gold, there is speculation that this amount may be spoken for already by a few central banks who wish to convert some of their existing US dollar reserves to gold. At a market price of $1,050 per ounce, that would be a total sale of about $13.7 billion. That would barely make a dent in China's dollar reserves should be they so inclined to cut a check.

And of course there are the usual rumours of bullion banks who are heavily 'naked short' gold, having sold the leased product, and are unable to buy physical bullion in size with which to deliver it. There is also some talk of bullion banks having engaged in 'fractional gold' sales to customers holding unallocated bullion. This is cited as one reason why the COMEX in the US has a rule that allows deliver in the futures markets to be made in paper,

Whatever the truth may actually turn out to be, there can be no disputing that an end to twenty years of steady selling of gold, a relatively small and tight market compared to most others, in which central gold reserves represent a significant source of supply, is significant news indeed.

"In its just released Gold Survey 2009 GFMS suggested that the official sector in aggregate became a net buyer in the second quarter of 2009 and forecast that the second half of the year would see further net purchases. This represents a remarkable change of direction for a market that has been used to absorbing substantial volumes of gold sold by central banks over the last decade."

"Over the next year or two this new trend may be obscured somewhat by the planned sales of 403 tonnes of IMF gold, assuming, of course, that there is no off-market transfer of some or all of this bullion to an official sector buyer, something we think improbable but by no means impossible. Once the IMF sales programme is completed, however, we would expect the official sector as a whole to have a broadly neutral impact on the market. This would represent a return to the situation prevailing in the 1970s and 1980s when the official sector was a net buyer in some years and a net seller in others. Besides the obvious supply/demand implications for gold, such a change from net sales to something close to ‘neutrality’ would be highly positive for gold prices, as it ought to provide a major boost to sentiment and confidence in the yellow metal."

GFMS Report

“Central banks stand ready to lease gold in increasing quantities should the price rise.” Alan Greenspan, July 24, 1998

A 'fractional reserve' bullion bank would be unnerved by this trend, with visions of potential insolvency if it continues and they are not able to cover their obligations. Talking their book would require them to be quite negative, in the hopes of creating supply in the form of a decent pullback, allowing them to cover their 'short positions' and failed to hedge them adequately.

The biggest forward hedger in the sector, Barrick Gold, was recently forced to capitulate and announce the need to raise billions to buy out of their forward obligations. This still does not help those who are in need of the physical product.

The situation in the silver market is even more potentially explosive, since the CFTC has allowed two or three banks to assume enormous short positions, unprecedented for any other commodity market, amounting to a massive naked short without any conceivable hope of being supplied at today's market prices. But as long as they can keep a few steps ahead of the need to deliver the goods, the game can go on.

A truly remarkable financial system, which can only serve to puzzle future generations. "What were they thinking?"

ALBA Gives Nod for Regional Currency SUCRE in Central and South America

This is not the first time ALBA has discussed plans for a regional currency, and the proposal does not yet seem to be concrete to us. The countries have agreed in principle to proceed, with the details to be worked out over the next year.

Nevertheless, it does start to chip away at Wall Street's usual answer to any dollar challenge, "Where else will they put their reserves, what else will they use for trade if not the US Dollar?" This has always seemed to be among the most arrogant, self-centered observations of an empire in recorded history. "Without us, who will tell them what to do, who will lead them, who will manage their money?" Were even the British at the turn of the 19th century that self-deluded, so blineded by the rationale of the white man's burden to manage other people's affairs?

Ecuador’s currency was called the sucre before it shifted to the US dollar nearly a decade ago. Jose Antonio de Sucre was an early 19th century South American Independence leader who fought alongside Simon Bolivar. Sucre is also the capital of Bolivia.

In this proposal, it is known as the Sistema Único de Compensación Regional (SUCRE), a new currency for intra-regional trade, to replace the US dollar in trade among several countries: Venezuela, Bolivia, Cuba, Ecuador, Nicaragua, Honduras, Dominica, Saint Vincent and Antigua and Barbuda.

Most of these countries have already withdrawn their participation with the World Bank, and it's Center for International Trade disputes, which had sought to arbitrate disagreements among the countries and several western energy firms.

This may be important because Venezuela is a major source of oil imports to the US market. Will Chavez start demanding payment for his oil in the SUCRE? Will the US begin to discover the nuclear threat from Venezuela? Or merely encourage its neighbors and internal groups to challenge its sovereignty?

The exact composition of the SUCRE has not yet been disclosed, if it has been decided. Until that happens, and a firm timeline is disclosed, this is merely a proposal that has been discussed before.

The proposed sucre does not affect any discussions (if any are still continuing) with regard to the amero, which as we understand it is a potential North American regional currency amongst Mexico, the US, and Canada. If we were Canadian, we would resist that proposal with all the resources at our disposal.

But make no mistake, there are alternatives to the dollar and they are being discussed around the world. A broader based alternative that would include China and Russia among others would have more 'teeth.' Some composition including gold and silver backing of some sort, if it is sufficiently revalued higher, would give any regional currency a greater international acceptibility.

It made an impression, by the way, that this news story was first picked up here out of China, and not from any US mainstream news outlets.

And speaking of strategic moves, the US recently sought to obtain seven military bases in Colombia, strategically located in the midst of the ALBA countries.

CCTV China
ALBA member states plan new currency
2009-10-18 11:44 BJT

A meeting of the Bolivarian Alternative for the Americas, or ALBA, has announced plans to create a new single currency to replace the US dollar. The organization's 7th Summit has concluded with an aim to stop using the greenback for trade between member states next year.

ALBA groups Bolivia, Cuba, Ecuador, Nicaragua, Venezuela and other regional governments. A Russian delegation also attended the two-day meeting. Leaders announced a plan to eventually create a single regional currency, the SUCRE.

They also decided to explore creating state-sponsored food and mining multinationals.

The summit also touch the Honduras issue. The ousted Honduran Foreign Minister called on the Organization of American States to implement new measures to increase pressure on the de facto government of Honduras to end the political crisis.

Sumitomo Forecasts Dollar to 50 Yen, End of Dollar as Reserve Currency

"We can no longer stop the big wave of dollar weakness," said Daisuke Uno at Sumitomo.

Nothing goes straight up or straight down. Look for corrections in the precious metals and the dollar, and the strengthening currencies such as the Aussie dollar, which seems headed to US dollar parity. However, the macro trend is apparent.

We get a chuckle over this dollar weakness when free market people like Steve Forbes come out and look for market intervention to stop it. The market is taking the dollar where it should be, where it needs to go. If only countries with obvious pegs and ongoing manipulation to support export mercantilism were also to allow their currencies to float more freely. It is going to kill off global trade. It is the great failure of the WTO and US trade policy to have allowed pegs and overt currency manipulation policies which are de facto tariffs and subsidies on trade.

A 'crash' in the US stock market, should one occur, will temporarily jar nearly everything. More likely is a long slow slide as in the second phase of the Great Depression, from 1931 to 1933.

Monetary inflation can make the nominal charts more palatable as it is doing today. The problem is that all Ponzi schemes come to bad ends.

The only way out, the only viable path, is for the US to embrace a serious reform of its markets and its financial system, and to change system that encourages the debilitating corruption of decision-making in Washington, which is under the influence of an army of well-heeled lobbyists.

To that extent, the "straight talking" pre-Palin version of John McCain had it right. Little serious reform can be done until campaign finance and influence peddling in Washington is addressed. McCain saw the danger of this conflict of interest in his own career as part of the Keating Five, and his own party and the rise of the neo-con statism and its assault on republican ideals.

The Democrats have shown themselves to be no better, having gone down the slippery slope of Clinton capitalism, the partnership of special interests and government. Obama failed when he embraced it. And now both parties are deep in the mire of corruption.

The banks must be restrained, and the financial system reformed, and balance restored to the economy, before there can be any sustainable recovery.


Bloomberg
Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says
By Shigeki Nozawa

Oct. 15 (Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”

The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to as low as 75.211 today, the lowest since August 2008.

The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen.

“We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency. Hossein Ghazavi, Iran’s deputy central bank chief, said on Sept. 13 the euro has overtaken the dollar as the main currency of Iran’s foreign reserves....

Central Banks More Aggressively Reducing US Dollar Exposure In Their Reserve Portfolios

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

If The Independent and Robert Fisk can be dismissed as the tabloid fringe by the mainstream media and those desperately clinging to status quo, here is a piece on the diminishing dollar from the radical paparazzi known as Bloomberg news.

Currencies can have significant volatility even within long term trends, due to short squeezes and official intervention. Forex trading is for professionals only, as most amateurs become fooled by the leverage and the opacity of the market's positional dynamics, ie. they don't know who the patsy is at the table.

That being said, there is an interesting aspect to the currant position of the dollar as the long time, but fading,world's reserve currency known as The Prisoner's Dilemma.

In a situation such as this, the country which quietly sheds dollars first takes a lesser loss on their reserves than those who hold, but also risks punishment by the US and the G7 for deviating from the consensus of central banks and their financial engineers.

This is further complicated by the entanglement of some exporting countries in their own mercantilist support for large dollar surpluses. This requires a replacement for the dollar to be phased in slowly, and to gain support amongst non-US trading partners of the major exporting countries. The matter of the petrodollar is also an important aspect, but can probably wait until the move out of the dollar is well underway.

Is there anyone buying US dollar Agency Debt these days besides the Fed? It used to be a favorite among the Central Banks, but was dumped them in an amazingly short period of time once the perception of risk changed around the world. Almost overnight in Central Bank time.

As we pointed out several times previously, the SDR, which is a basket of currencies, is a logical replacement for the US dollar reserve. It is rebalanced in its composition every five years, and the next remix is going to occur in 2010.

If the equity market breaks and the US dollar carry trade reverses, the dollar may catch a sharp rally, which will bring the strong dollar crowd, especially deflationists, out of their funk and kicking their heels in "mission accomplished" mode. The celebration is most likely to be, once again, a kind of a 'false Spring' that merely serves to draw them deeper into losses, and ultimately over a cliff.

This sort of historic change always starts slowly, first a trickle, then a trend, but thereafter can quickly become a torrent.

Bloomberg
Dollar Reaches Breaking Point as Banks Shift Reserves
By Ye Xie and Anchalee Worrachate
October 12, 2009 00:40 EDT

Oct. 12 (Bloomberg) -- Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

Sliding Share

The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Englander concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification.

America’s currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totaled $1.4 trillion in fiscal 2009 ended Sept. 30.

Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell to 75.77 last week, the lowest level since August 2008 and down from the high this year of 89.624 on March 4. The index, trading at 76.489 today, is within six points of its record low reached in March 2008.

Foreign companies and officials are starting to say their economies are getting hurt because of the dollar’s weakness...

Dollar’s Weighting

Developing countries have likely sold about $30 billion for euros, yen and other currencies each month since March, according to strategists at Bank of America-Merrill Lynch.

That helped reduce the dollar’s weight at central banks that report currency holdings to 62.8 percent as of June 30, the lowest on record, the latest International Monetary Fund data show. The quarter’s 2.2 percentage point decline was the biggest since falling 2.5 percentage points to 69.1 percent in the period ended June 30, 2002.

“The diversification out of the dollar will accelerate,” said Fabrizio Fiorini, a money manager who helps oversee $12 billion at Aletti Gestielle SGR SpA in Milan. “People are buying the euro not because they want that currency, but because they want to get rid of the dollar. In the long run, the U.S. will not be the same powerful country that it once was.”

Central banks’ moves away from the dollar are a temporary trend that will reverse once the Fed starts raising interest rates from near zero, according to Christoph Kind, who helps manage $20 billion as head of asset allocation at Frankfurt Trust in Germany.

‘Flush’ With Dollars

“The world is currently flush with the U.S. dollar, which is available at no cost,” Kind said. “If there’s a turnaround in U.S. monetary policy, there will be a change of perception about the dollar as a reserve currency. The diversification has more to do with reduction of concentration risks rather than a dim view of the U.S. or its currency...”


Dollar Forecasts

The median estimate of more than 40 economists and strategists is for the dollar to end the year little changed at $1.47 per euro, and appreciate to 92 yen from 90.13 today.

Englander at London-based Barclays, the world’s third- largest foreign-exchange trader, predicts the U.S. currency will weaken 3.3 percent against the euro to $1.52 in three months. He advised in March, when the dollar peaked this year, to sell the currency. Standard Chartered, the most accurate dollar-euro forecaster in Bloomberg surveys for the six quarters that ended June 30, sees the greenback declining to $1.55 by year-end.

The dollar’s reduced share of new reserves is also a reflection of U.S. assets’ lagging performance as the country struggles to recover from the worst recession since World War II...

“The world is changing, and the dollar is losing its status,” said Aletti Gestielle’s Fiorini. “If you have a 5- year or 10-year view about the dollar, it should be for a weaker currency.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

The Plan to De-dollarise the Oil Markets: Its Roots and Implications

The breakdown of US dollar reserves being held overseas in the attached article of news is interesting, even though estimated.

I am curious to see when Kevin Phillips and Chalmers Johnson start speaking to this as this sort of historic change is in their respective ballparks.

Of course, there is always the option to listen to those in the American financial media who dismiss the internationally respected and well-connected Robert Fisk as a commie crank, a liberal web spinner, and a tinfoil conspiracty theorist.

Not all opinions are created equal, but all must be substantiated by data and sustained by confirming evidence. On the other hand, willful ignorance, prejudice, and groupthink, also known as the herd mentality, may work in the day to day amongst a select group of chums and the like-minded, but their consequences can render a thoroughly discouraging experience in the markets, where no one really cares what you think and why.

Don't blindly feed your arms and legs to the sharks, especially out of a misplaced allegiance to a favorite theory or betting system, as it just encourages them and mucks up the water.

But do not rush out and react to this news story, because these types of adjustments take several years to occur. They are longer term macro-trends. But they do matter because they also occur slowly, not all at once at the end of a period of time.

These are lessons that every trader still standing must ultimately learn.

Here is some additional detail on this story in a video interview with Robert Fisk, in addition to the news story below.

The Independent
A financial revolution with profound political implications
By Robert Fisk
Wednesday, 7 October 2009

The plan to de-dollarise the oil market, discussed both in public and in secret for at least two years and widely denied yesterday by the usual suspects – Saudi Arabia being, as expected, the first among them – reflects a growing resentment in the Middle East, Europe and in China at America's decades-long political as well as economic world dominance.

Nowhere has this more symbolic importance than in the Middle East, where the United Arab Emirates alone holds $900bn (£566bn) of dollar reserves and where Saudi Arabia has been quietly co-ordinating its defence, armaments and oil policies with the Russians since 2007.

This does not indicate a trade war with America – not yet – but Arab Gulf regimes have been growing increasingly restive at their economic as well as political dependence on Washington for many years. Of the $7.2 trillion in international reserves, $2.1trn is held by Arab countries – China holds about $2.3trn – and the nations interested in moving away from dollar-trading in oil are believed to hold over 80 per cent of international dollar reserves....

Read the rest here.

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.

The Utility of Gold and Silver Over the Past 200 Years

A bit of an oversimplification as one might expect for a short video, but rather effective in making its several of its points. Some interesting data as well.

Warren Buffett has asked "What utility does gold have?"

Since his views are respected and he is unusually successful, it is important to consider this question.

The utility of gold is that it resists the manipulation of the statists, which is why they hate it. It provides a store of wealth that is difficult for the state to confiscate through debasement. Gold and silver have represented the instruments of freedom and safety, a secure store of wealth, for individuals faced with adversity and uncertainty over thousands of years.

For quite some time the various pieces of evidence with regard to the Central Banks and gold have been becoming public. It seems to this reader, based on a careful search and consideration of the facts, that the attempt to control the price of gold and to a lesser extent silver by some of the Banks, led by the Brits and the Yanks, is almost certain as an adjunct in their efforts at financial engineering.

But the Banks are failing. They are failing in particular since the market break of 2000 when the first of the post Asian financial crisis bubbles collapsed. They are being broken, once again, by the physical buying coming in particular from Asia and Europe, where currency risk is a familiar concept. Most American go through their lives never having handled another currency except the dollar, and their education in finance, and even their own history, is sadly lacking. For them, the US dollar is the monetary alpha and the omega, and its decline is incomprehensible.

We are now in the midst of a new financial bubble in world equity markets, and it too will collapse.

This is not to say the future will be straightforward and simple. It will not.

People sometmes worry about government confiscation. Since gold no longer has any official status in the US except as private property, this is a bit of a red herring. True, government can try to seize any of your private property not just gold. It can try to force you to wear a number, or imbed a chip in your head, to buy and sell, it can even try to pack you on a freight train for resettlement in New Mexico. The question is not what the state can try to do, but rather, what you will let them do and how you will respond to it.

At the moment the US dollar remains the linchpin of the Anglo-American financial oligarchy. That is it failing is probably one of the great issues facing world stability today.

Right now the Dollar is the subject of an aggressive carry trade, with traders selling it short to buy other assets. This obviously sets up the potential for another short term dollar squeeze such as we saw last year when the Eurobanks were devastated by the failure of the toxic dollar assets on their balance sheets which had to be paid in full in dollars to their depositors.

A reversal in the dollar and the collapse of carry trade would shake world equity markets to their core as the gamblers are forced to unwind positions. The vampire squid and associates would probably benefit, but many would suffer. In today's environment, that makes the possibility of this happening even more likely in our book.

But then again, sometimes things do go down into a long spiral, and finally are priced at 30 on a Friday, and open up on Monday at 2, or 'no bids.' It happens. But usually it happens in slow motion at first with national currencies. It is much easier to boil a batch of frogs slowly than to wade in and start chopping heads.

Likelihood is a dollar rally at some point if stocks start unwinding. And then things get interesting, and ugly. Not with a bounce, but a 'splat,' with interest rates running to levels that would make your jaw drop.

For a longer view and a warning likely to fall on deaf ears, the more the oligarchs and elitists take the world's people through these cycles, the greater they need to pay attention to one lesson that ripples throughout history: the trick is not only how to make a great fortune through theft and trickery, but how to hold on to it, and very likely your life, when the tide turns and the people have finally had enough.



Gold and Silver Video

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..."

Shanghai Exhange to List Foreign Shares in the Yuan

This article highlights the growing move internationally away from the dollar dominance in finance.

But it does also illustrate the 'closed capital account" which restricts the exchange of domestic and foreign currency even today in China.

No country should be allowed full WTO status with a managed and closed currency. There is no way to conduct 'fair trade' in such a regime. And certainly the actions by both Clinton and Bush to advance China as a trading partner while pegging the dollar at a steep devaluation remains a scandal of major proportion.

What would the world say if the US decided to move to a two tier currency system, devaluing the iternational dollar by 40% and then pegging it to a basket of currencies including the Euro, AUS$, Pound and Yen?

Caijing
Shares at Shanghai's International Board to be Denominated in Renminbi
By Fan Junli
09-18 19:59

(Caijing) Shares on Shanghai's too-be-launched international board will be denominated in renminbi rather than U.S. dollars, sources close to regulators told Caijing.

But critics say the decision could doom the board to the same fate of Japan's yen-deonomiated international board, which closed in 2004.

China has been preparing for months to launch an international board on the Shanghai Stock Exchange. Fan Xinghai, director-general of Shanghai' Financial Services Office, said September 14 that one or two foreign companies will be listed on the board in early 2010.

One of the key difficulties in preparing the board has been the question of whether the shares listed there should be denominated in renminbi or U.S. dollar, a source said.

U.S. dollar denominated listings would pose several problems. Overseas' companies' listings would be subject to the approval of more than one government department if their shares were denominated in U.S. dollars. Also, China's closed capital account, which restricts the exchange of local and foreign currency, would pose an obstacle to U.S. dollar listings, the source said.

"Now a consensus has been reached that it is not necessary to denominate foreign companies' shares listed on the domestic market in U.S. dollars," the source said.

His comments were confirmed by a several other sources close to regulators.

Critics argue that denominating shares in renminbi will make it difficult for international investors to trade on the international board.

"We may risk repeating the failure of Japan's international board," one securities industry source said.

Japan's international board, where shares were denominated in yen, had 131 listed overseas companies in 1991. But Japanese investors' enthusiasm towards shares on the international board withered and foreign companies began to delist their shares. Only 32 companies remained listed on Tokyo's international board by 2003 and the board eventually closed in 2004.

Nevertheless, supporters of the renminbi denomination arrangement for Shanghai's international board said the failure of Tokyo's international board could not be attributed to yen denomination. They claim it was caused by the slump in the Japanese economy, the yen's appreciation and the high cost of trading cost on the board.

US Dollar Long Term Chart and a Scenario for Dollar Devaluation

Here is a long term chart of the US Dollar Index.

The recent rally in the US dollar completed at an almost perfect 38.2% fibonacci retracement from the 70.70 bottom. In part this rally was part of the short squeeze in eurodollars created by the collapse of US dollar financial CDO deposits held by customers at European banks.

The Dollar Rally and the Deflationary Imbalances in the US Dollar Holdings of Overseas Banks

The target for the active H&S top from 121 is still 65. The Key Pivot remains 81, the high end of band which had been the support level held by the dollar for almost 20 years. While the dollar is below 81 the H&S top is active and working.

We have been trying to calculate a new lower bound for the dollar decline from the charts. Reason tells us that at some point the dollar decline and economic imbalances may lead to a devaluation of the dollar.

People have asked, "How can the dollar be devalued? After all, there is no fixed standard."

Well, the dollar can decline considerably in purchasing power of real goods, as it has been doing for many years. However, the dollar can be devalued against its only true measure as a fiat currency: itself.

A formal devaluation of the dollar would be the discontinuance and reissue of the US dollar as a 'new dollar' with some preset exchange rate.

A likely figure would be 100:1, that is, 100 old dollars for 1 new dollar, possibly to be called 'the amero' as some have suggested or simply the 'dollar' as the US dollars currently in use will be withdrawn from circulation. If this does not provide sufficient relief it might have to be repeated.

This is what happened to the Russian rouble on January 1, 1998 after a debt default. Since it is unlikely that the US default will be preceded by a hyperinflation and protracted period of instability, we think the 1000:1 ratio of reissuance used by Russia might be too severe for the dollar, most especially because of its position as the reserve currency.

However, if the new dollar is to be at least partially backed by gold at the insistence of its international trading partners, then 1000:1 seems to 'work' more effectively given the US gold reserves and projected new money supply. This might be accomplished in phases, or with a dual currency regime.

It should also be noted that devaluation alone does not fix economic problems. It is a form of debt default, more severe than mere inflation. After its reissuance in 1998, for example, the new Russian rouble quickly lost approximately 70% of its value against the dollar because the devaluation had not been accompanied by significant economic reform. It has since recovered through painful adjustment.

You should not believe that this scenario is possible for the US dollar, yet. After all, if it was generally accepted and believed that it would happen, a severe value decline would already be underway.

Fiat currencies traffic in confidence. This things tend to play out over months and years, not days, unless there is a precipitating event usually caused by exterior events. Even though there had been a Russian debt default in the 1990's, the rouble had been troubled by serious inflation for many years before that.

But the warning signs are here if you have the eyes to see them, as unlikely as it might seem. It will appear to be a 'no-brainer' to a future generation. "What were they thinking? How could they have been so blind? What made them think that it could go on like that forever?"

However, we are approaching levels of economic imbalance and unserviceable debt levels that should bring at least a bit of a chill in the dollar bulls, as a warning that all things of the earth pass away, as they have done, and will always do. Some things, however, endure longer than others because they are universal, and not particular to a time or place.

In an upcoming blog, we will attempt to explain why the debt destruction in the US, with a moderating of the growth of some of the money supply measures, is not and will not result in a strengthening dollar. We do not expect any one who 'believes' in deflation as espoused by some of the dollar bulls to accept this. After all, they ignore the dollar devaluation that occurred in the depths of the Great Depression, when a devaluation really meant something radical as it was done against a gold standard.

H&S Top and "Iron Cross" on Weekly Dollar Chart Targets 66

The weekly chart on the US Dollar Index has rather awful technicals, as it has dropped to a recent low, and set the 'iron cross' in the moving averages that is generally the hallmark of a sustained decline.

There is a massive Head & Shoulders formation that *should* preclude a rally over 81 if it is working, limiting any gains to a further 'right shoulder.'

The ultimate objective of this formation remains 66 for this leg of the large formation.

It is difficult to square this with a technical outlook that includes a major decline in the US equity indices, since the pairs have been running inversely, that is, dollar down, and stocks up.

Anything is possible, especially when the governments are actively and aggressively 'tinkering' with the markets. It is possible that the Fed monetizes sufficiently to reinflate an equity bubble, essentially whoring out the Dollar and the real economy for the sake of the financial or FIRE sector.

Signs of an Approaching Decline in US Equities That Could Be Quite Impressive

There is a strong correlation between this US equity rally and the Fed monetization of debt, which indicates a 'hot money' flow into US stocks but with thin volumes from a significant market bottom. This points to 'technical price trading' by the financial sector, also known was price manipulation, or trading stocks like commodities.

Continued heavy insider selling from those with the best forward view of the real economy is a clear sign of a top. No one can trust what the Fed or the Administration are saying about an economic recovery, as much now as ever. Obama's administration is no reform government.

This surprisingly robust rally in US Treasuries is remarkable given the decline in the US dollar, based in part on a strong yen and carry trades. The short end is obviously quantitative easing, with strong buying from Asian central banks dumping Agency debt but continuing to manipulate their currencies. 'Free trade' is an illusion.

The long end rally in Treasury suspect is likely interest rate manipulation by the US Fed and its central bank cronies. It has been a huge mistake to allow the Fed to perform the non-traditional printing that young Ben touted so proudly in his famous essay. Clever in the short term is too often tragic overall.

Gold and silver are surging as investors largely outside the US seek safety in harder assets.

There is also a community of small speculators outside the US which has been buying stocks on dollar weakness, to play an arbitrage with their own currencies. There is a hot money crowd in eastern Europe for example, and in Asia. And so far this year it has been working. At some point that door will close, quite hard, and many will be caught offsides and out of luck.

A dollar devaluation? Technically one cannot officially devalue the dollar per se because it has no official peg. The more appropriate term is debasement perhaps, and de facto default, but the effect is the same; a decline in purchasing power by the dollar vis a vis other monetary instruments. But for now we are in a monetary matrix, and the central banks and their minions can continue to play their game.

Besides being the hallmark of markets made sick by central bank and other official manipulation, these are signs that indicate that the 'smart money' is battening down the hatches for a very rough September and October in US equities as the pros hand off their latest Ponzi scheme to the public.

We will not be surprised if there is a significant decline, first to a pullback of about 7 to 10 percent. Then we will see if the market can rally on renewed dollar devaluation and if not, then another major slide to test lower levels.

If there is an 'event' the pros will dump the market bids quite hard, perhaps precipitously. It is always easier to complete a market wash and rinse when a scapegoat is available.

Obviously no one can predict the future with certainty, and even within clearer trends the actual timeframes are always most difficult if barely possible when the markets are dominated by computer manipulation. But the auspices are ominous indeed, and we are proceeding with caution.

Until the banks are restrained, and the financial system is reformed, and the economy is brought back into balance, there can be no sustained US recovery.

CNN Money
Insiders sell like there's no tomorrow
By Colin Barr, senior writer
September 11, 2009: 7:27 AM ET

Corporate officers and directors were buying stock when the market hit bottom. What does it say that they're selling now?

NEW YORK (Fortune) -- Can hundreds of stock-selling insiders be wrong?

The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized.

But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

While a wave of insider selling doesn't necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don't believe current stock prices are justified by economic fundamentals.

"It's not a very complicated story," said Charles Biderman, who runs market research firm Trim Tabs. "Insiders know better than you and me. If prices are too high, they sell."

Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn't the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007.

Silverman said the "orgy of selling" is noteworthy because corporate insiders were aggressive buyers of the market's spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.

"That was a great call," Silverman said. "They were buying when prices were low, so it makes sense to look at what they're doing now that prices are higher..."

US Dollar Seasonality

Rough seas ahead for Uncle Buck.



Chart Courtesy of ContraryInvestor.com

China Admonishes US Monetization, Sees a Hard Fall for the Dollar Over Time

China is saying many things which are true.

They are also omitting many things that are key to the cause of our financial problems. They bought the silence of a succession of US political administrations over their blatant currency manipulation in support of trade subsidies, including the outright contributions to Clinton and Gore, and the cronyism with Bush.

China is a significant part of the problem, and like so many dogs that Wall Street helps to set up to further their gains, this one refuses to wag its tail on command.

The blowback on the US dollar will be significant.

Telegraph UK
China alarmed by US money printing
By Ambrose Evans-Pritchard
Cernobbio, Italy
9:06PM BST 06 Sep 2009

The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said. (China is already a strong buyer in the precious metals markets, and is encouraging its citizens to buy gold and silver as well - Jesse)

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added. (The short interest being held by three or four US banks is grown remarkably large. As Barrick gold claimed in their lawsuit with JP Morgan by Blanchard, they are being backstopped by the US government. Larry Summers has been a long time proponent of controlling the price of gold to influence longer term interest rates. See his paper on Gibson's Paradox. Greenspan understood the same relationship all too well, as does Bernanke. - Jesse)

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction. (The other central banks of the world have put a significant halt to their own selling, now realizing that the US Federal Reserve and Treasury are fighting a losing battle. - Jesse)

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise. (How about releasing the peg to the US dollar and allowing the yuan to appreciate, dampening your exports, Uncle Cheng? Along with encouraging domestic consumption and higher wages. - Jesse)

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down." (Apparently the Chinese do not lie to their people yet about the true state of their economy. Greenspan and Geithner have much to teach them. - Jesse)

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity." (He didn't go wrong. He did not care. He was willfully blind. He was brought in to the banking ponzi scheme in 1996 - Jesse)

Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery. (We should have NO illusion about China doing anything to promote imports and growth for anyone but themselves, ever. It is not a free market, it is a command economy with a strong mercantilist bent. - Jesse)

China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult". (No it is not. It is hard because the Chinese elites are afraid to lose control of the country to a growing merchant and middle class. - Jesse)

Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China. (One of the root causes was the devaluation of the Chinese yuan in the mid-1990's, and the allowance thereafter of China into most favored nation trading status with the US after making considerable contributions to Bill Clinton and Al Gore, through the Chinese military. Remember that scandal? - Jesse)

"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis...."

(Perhaps it is more correct to say that we have this crisis because statist governments and crony capitalists continually interfere with market mechanisms, creating unintended consequences and downtream crises that are growing increasingly severe and systemically threatening. - Jesse)