John Ralson Saul: Re-evaluating the Current Approach To Trade and Globalisation

Does globalization actually deliver what we thought it would?

There are a range of choices between free trade and protectionism.  Ideological commitments and purity may prevent a meaningful discussion of the situation.

Is there really a surplus of goods, or is trade organized around a plutocratic economic model that is providing a scarcity of wages for labour?

When local laws are leveled by the economic realities of globalization, can nations retain their own character and choice of government and guiding principles?

Can there be genuine 'free trade' in a world in which only the US is a major military and monetary superpower, owner the world's reserve currency, with Russia and China alone presenting some effective counterbalance, while many other nations, among them much of Europe and Japan, have become essentially incapable of exercising enough military power to defend themselves and preserve order in their own regions except for minor police actions?    Are the assumptions about the benefits of free trade founded on assumptions as unrealistic as those that drove domestic free market policies?

Is global free trade 'lifting all boats,' or merely spawning a proliferation of oligarchs because of its inherently lawless and borderless character?

Although the title of the video is in German, the presentation by JRS is in English.

Where We Are At In the Global Precious Metals Markets - A Framework

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.

Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."

Edward 'Steady Eddie' George, Governor Bank of England 1993-2003

The general hypothesis I have put forward over a period of time at this café is that with the spike in the price of gold up to $1900, the central banks of the West became greatly concerned, and opted for a lower price, and a more orderly rise.  And so the price of gold was smacked down into a trading range between $1540 and $1780 through the various price and market operations of some central and bullion banks in what we can think of as a gold pool.

As you may recall, the great sea change was that central banks turned from being net sellers to net buyers of gold, slowly over a ten year period from 2000-2010 approximately.  This change of policy was not uniform, but driven largely from the emerging and re-emerging nations. It ought not to surprise us. No fiat currency has survived for long in historical terms, and even fewer as the world's reserve currency, unless backed by an unassailable empire. They will fall to Triffin's Dilemma, and the decay of power to self-serving and short-sighted corruption. 

Forces similar to those that are working against the EU monetary union, without a comprehensive political union, are working against the dollar global reserve currency, on a much larger and slower paced scale.  This is why a global currency issued and controlled by one central entity tends to presume a one world governance, or at least a cohesive governance of a rather large piece of it.  It is not incidental to their financial goals.

In late 2012 the Deutsche Bundesbank requested, albeit under some domestic political duress and after a polite request to audit the gold was deferred, to have the return of some portion of their nation's gold from its wartime home in New York and Paris.

The NY Fed responded with a rather surprising timeline of seven years for the return of what ought otherwise be a fairly doable amount of gold, despite what the Lord Haw Haw's of the Western gold pool might otherwise have you believe.  The gold pool is a consortium of central banks, bullion banks, and purveyors of paper gold in various unallocated forms who are beholden to a vested interest in a very powerful status quo.

In their desire to control the price of gold, the gold pool has leased out a fair amount of their national bullion holdings to the bullion banks, who in turn sold it into the markets to hold down the price.  A rising price was risky for the confidence of their paper money, and rising demand placed a strain on their ability to supply additional gold to supplement what the miners could produce.   And so it appears that Germany's gold was unavailable.

With the unfortunate circumstance of the gold of the German people threatening their deal to maintain confidence in their currency arrangements,  the central/bullion banks of the West were once again 'staring into the abyss.'   

How could anyone even imagine that government sources, who traffic in public confidence, could allow such a thing to happen, to blatantly abuse their powers, and prevaricate to the public?  It would be a tremendous loss of face, and personal career risk.  And so absent a whistleblower, the goal is to keep the game going at all costs.

So starting in late 2012, a major push began to manage physical gold away from the West's ETFs,  to relieve the short term supply constraints, which involved driving the price lower, and once again mobilizing the troops to talk the metal down.  Please notice the difference in the inventory of silver and gold, both of which had comparable price declines.

This gambit worked to some extent in the West, but overall it failed, miserably.  Demand for physical bullion skyrocketed in the East, as Asia took advantage of the lower bullion prices to increase their official/private offtake of bullion.  The West rehypothecates, but Asia takes.  And that taking presents a heavy toll to a highly leveraged trade.

Apparently the people of Asia for the most part did not agree with the Western economists and brokers that gold was undesirable, for whatever reasons they hold, with a strong basis in human history I should add.  Let's call it a difference of opinion amongst 'peers.'

In a very real sense we should remember that gold is gold, and the price of gold is more like a currency exchange rate than the price of a commodity.  And so one can think of this entire scenario as a major defense of the dollar at some ideal exchange rate to gold, in much the same manner that the Bank of England sought to defend a particular valuation of the pound.

So here we are today, with gold at a level somewhat below $1250 and silver at $20.  And the Comex deliverable gold is at record lows, and indications, albeit somewhat difficult to obtain, of continuing strains for producers (e.g. miners) to continue adding to supply, in the face of a shrinking discretionary market for physical gold (scrap, ETFs, exchanges).  And those who are managing the floats in the market, the unallocated, forward sold, and rehypothecated, are fundamentally shitting their pants, and seek to sit in it with smiling faces lest they give their vulnerable positions away.

The gold pool can rehypothecate and leverage physical gold by multiples into paper, and outright create it with naked short selling.  And they can sell this paper in bulk at whatever they wish in the markets which they control. And they can use positional advantage and their media to bully boy anyone who dares to question this into silence.  But they cannot print gold bullion and deliver it to Asia, which quite frankly does not care what they say. 

In general this is what is referred to at the divergence between the paper and physical gold markets.  It is what happens when 'semi-official' forces endeavor to set an artificially low price in a market that involves some physical commodity which is in a somewhat limited supply.  It tends to become more limited as a result. 

But the supply of paper gold is not limited, especially where things like position limits and leverage are given the wink and a nod behind a wall of opaque obfuscation. And like the reckless fools that they are, they decided late in 2012 to press their advantage hard, with shock and awe, and they are failing.

So this is why I think things will unravel in a manner similar to the London Gold Pool's operation which sought to set an artificially low price.  How exactly this will unravel is a matter of much conjecture.  I doubt it will break at the source of the paper gold, given the power the insiders have over the rules and information there.  Rather, there is more likely to be a strain at some physical delivery source that will cause the current pool to back up the price higher to some more sustainable level.  What that will be I cannot say.

What is driving this current dynamic is what is called the 'currency war,' which is shorthand for a difference of opinion amongst the world powers over the existing global currency trade regime, and the trustworthiness of the financial system that supports it.

China, Russia, Brazil, Venezuela et al. have lined up their interests against the Anglo-American banking cartel which rides the wave of dollar hegemony.  

If you think about this a bit, how would you feel if China's yuan was the world's currency, in which your country held its savings, and with which it paid for important and useful things like oil.  And what if China decided it could print as many yuan as it liked for its own purposes, thank you very much, and distributed them as they wished to its favorite banks and friends.  You would not like it one bit, it would make you rather uneasy, especially if the Chinese mouthpieces in academia started talking about trillion yuan platinum coins to resolve their own internal political corruption.

So, the most likely outcome is a compromise, in which a basket of currencies and a commodity or two like gold, are bundled together into an artificial currency for world trade.  This way no one country, or group of countries, held the 'exorbitant privilege' of owning the world's currency. 

Quite to the point, I think much of what we are seeing now is the 'negotiation stage' of this process.  It is not so much a question of outcome, but rather, of price.  What is to be included and at what valuation to the various world currencies.  I would be stunned if there was a return to an actual gold standard.  I would prefer to see the price of gold float freely without an official government valuation or the thinly disguised monkey shines of the Comex.  But such antics seem to be de rigueur in most financial markets as we have recently learned.

As you might imagine, the existing power structure might choose to continue to fight this rather aggressively, since there are no such enjoyable privileges as exorbitant ones.  Especially if there is a partnership between the political and financial class to maintain their privilege for themselves and their favorite one percent of their constituents.  But they must also contend with their waning power, and significantly low approval and discontent at home.  Pushing questions of one's authority are ill-advised when you cannot be sure of the answer.

And perhaps the biggest unspoken risk-that-must-not-be-named is the credibility trap.  What will the people say if they discover that the Bankers have taken their gold in order to give it to their banking cronies for short term profits?  Yes they will wrap it in rationalizations, excuses, jingoism, and personal immunities, but when the cards fall on the table, the thefts will be uncovered.

So here we are.  Those who think they know what will happen next probably have not given it sufficient thought.  I have a range of ten scenarios, in four major groupings, that are all fairly plausible.  There are some very large exogenous variables involved that no one can predict with much accuracy.

Perhaps some day I will categorize them more cleanly and attempt to lay them out. But for now it is enough work to know what to look for. Watch the UK as I have said, as it may be a bellwether for various reasons of size and composition, and continental Europe, to see if they will accept the role of a 'patsy' for the Gold Pool.   And of course watch China and Russia, and the areas of tensions around them.

What happens next is that one way or the other change will come. Of that I am sure.

Inflation and Deflation: US Money Supply Figures - We're Not In Kansas Anymore Toto

Here are the latest Money Supply Figures from the St. Louis Fed.

I start with the narrowest measure, the Monetary Base and widen out to M2 which is the broadest measure of US money supply currently available, with MZM serving a similar function for the short term.

Previously I have commented on the 'shadow M3' figures done by a few enterprising fellows. As you may recall the Fed stopped publishing M3 a few years back. M3 itself was not the issue but rather the Fed chose to stop reporting a key component of M3 called 'eurodollars' or US dollars held offshore in Europe or anywhere else.  The rationale was that it was too expensive to obtain this data. There are those who found this to be a bit disingenuous for a non profit seeking organization that operates on a cost plus budget.

Those who are attempting to estimate M3 gather what actual remaining data  they can, and estimate eurodollars by  'modeling' them based on trends and correlations as they were in place when the Fed stopped reporting.

As I cautioned before from my own work in the BIS currency reports, there were huge flows of dollars into Europe during what I called the eurodollar short squeezes. The problem with BIS however is that their reporting lags by almost nine months, so the figures are never really current.

I suspect that as these figures unfold we will see that the Fed has created and made available large amounts of dollars that were presented to European institutions, and that this money is not being captured in any of the existing money supply figures, except perhaps the Monetary Base, and that estimates of M3 are likely to the low side because of this change in trend of eurodollars.

So what does all this mean, what is the important 'takeaway?'  It means that deflation is not occurring at the moment because the Fed has taken those actions which it said it would do, plain and simple.  On the other hand there is some inflation appearing but nothing notable with the exception of health care, service fees particularly financial, and a few hard assets. This could start changing even in the face of slack aggregate demand, but not in the face of another significant economic collapse such as in Europe or China. 

And unfortunately recent evidence suggests strongly that the Fed has been misrepresenting what it has done in the financial crisis.  This is unfortunate because it suggests that not only other things were misrepresented, but that there is an ongoing coverup of what has been done, and likely what is being done today.    Coverups tend to feed on themselves, and provoke other new abuses of the public trust.  Also it calls into question all that a private and guarded institution has said in the past based on their reputation.  I do not think people fully realize the implications of this yet. 

In this stage of the Currency War we seem to be in something like the phase of WW II called the 'Phoney War' that occurred between September 1939 and May 1940.   But it does seem to be heating up.

Those who wish deflation to occur badly enough will find it where they will, whether it be in M3 estimates or credit figures. I find it highly ironic that when estimated M3 recently seemed to be showing deflation it was embraced by a particular chatboard site who previously had forbidden its mention when it had showed inflation some years ago. Further, credit is not money. Credit is a source of money creation as is the Fed's balance sheet. The Fed's Balance Sheet is not 'money' per se. It is a source of money creation.

It should also be remembered at this point that a fiat currency is backed by the economy of a country and its official cashflows (primarily taxes) as well as its reserves. As a country's GDP and cashflow deteriorates the soundness of its currency can deteriorate even if the nominal levels of money remain unchanged. I think we are seeing quite a bit of this today.  This deterioration in the backing of a currency is no different from a devaluation in its effect.

Can deflation occur? Absolutely. Give me control of the Fed and I will give you a rip snorting deflation by raising the overnight rate to 20 percent and calling in the reserves so to speak.

But one cannot deal in possibilities when investing, merely safeguard or hedge against them based on the estimates of probability. Well, you can deal in possibilities, but this is largely a means of self-deception, a means of continuing to embrace a theory or investment strategy that has been proven incorrect when it is too difficult to give it up and admit your error.  That difficultly may arise from practical matters, but it is my experience that it is normally attributable to stubbornness, or pride, and sometimes even corruption.

"Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof." John Kenneth Galbraith

Obviously gold and silver and some other things have been rallying smartly for the past ten years in response to the decisions made by the Fed and the US government of both political parties, whether they will admit it or not. When this changes, when the dilution of the currency stops and begins to recover to strength, then I would think it appropriate to change my own particular investment strategy, which is hedged against the unexpected even now. But not until then.  I do not expect inflation to obtain serious traction until foreign governments start rejecting the dollar in size, or the velocity of money begins to obtain some traction in the real economy.   The Fed assures us that they will act to control the spread of inflation when the time comes. But for now the banks appear overstuffed with cheap liquidity, something I like to call hot money.

This type of abundantly cheap, hot money tends to seek higher beta or risk, often in the form of equities and dodgy financial schemes and investments, rather than productive lending.  As the CEO of a Fortune 500 was heard to observe in private, having paid an absolutely eyebrow raising sum for another company in the heady time of the tech bubble, "Yes I paid a high price, but my currency (company stock) is cheap."  He was willing to take an outsized risk because he believed that his overvalued currency was going to become worth a lot less.  He just did not realize at the time that it would eventually become nearly worthless. It did and he was sacked.  I think the analogy to Ben and his Fed, and the way in which they are throwing dollars around, to private and especially to foreign banks,  is quite analogous.  The looting will continue until the value of the overpriced stock is depleted.  That Wall Street will be taking about 8 percent of the total short money supply as its bonuses this year speaks volumes about the value of the dollar and its future.

I saw this coming in 2001 but have to admit I was terribly wrong on timing in 2004, having underestimated the Fed's willingness to obtain international banking cooperation, primarily from Japan the UK and Europe, to generate a massive housing bubble. I will not make that mistake again I hope.

And if you have been wrong in your assumptions or assessment, it is never a shameful thing to admit it, gather yourself together, and go forward from there, because all this indicates is that you have received new information and that you accept it, which is the high mark of intellect and objective science.

Even the mighty Nobel laureate Paul Krugman has recently expressed his disillusionment with Mr. Obama's Hooverism, Freezing Out Hope.

"What’s even more puzzling is the apparent indifference of the Obama team to the effect of such gestures on their supporters. ... Mr. Obama almost seems as if he’s trying, systematically,... to convince the people who put him where he is that they made an embarrassing mistake."

Contrast this with his earlier chastisement of those who were already recognizing that Barry the reformer was either an ineffective nincompoop or an establishment shill.

"Look, Obama didn’t pose as a Nation-type progressive, then turn on his allies after the race was won. Throughout the campaign he was slightly less progressive than Hillary Clinton on domestic issues — and more than slightly on health care. If people like Ms. [Naomi] Klein are shocked, shocked that he isn’t the candidate of their fantasies, they have nobody but themselves to blame." Paul Krugman, NYT June 16, 2008

I am not going to get into the relative merits of one course of public policy decision or another here. My point rather is to demonstrate once again that with a fiat currency the matter of inflation or deflation, within a range of exogenous constraints, is a public policy decision tied intimately into the form of government that one holds as its objective and the nature of the society that you wish to encourage.

I do not wish to single out Krugman with the tautological indictment of being human. He almost appears as a Diogenes, a beacon of objectivity, compared to his ideological counterparts. Too often economists cloak themselves in the robes of a quantitative and objective science, with such canards as the efficient markets hypothesis, supply side economics, the inefficiency of regulation versus unregulated markets, and bailoutism as hard facts, when they are nothing more than arguments in favor of one set of government policies or another.

And far too often they are doing it for pay it appears, which is intellectual dishonesty, malpractice if you will, that is inexcusable and contemptible, one of the reasons why economics is considered by some a disgraced, although not irredeemable, profession these days.  But since these fellows are generally associated with the 'greed is good' school, which elevates the ends above all else, once ought to expect to hide the silverware, whiskey and women when they come to town.

Many things are possible, but not all things are equally probable. As Walter Bagehot famously observed, 'Life is a school of probability.'

For a nation that is a net debtor, deflation is tantamount to suicide. But other nations, most recently Germany in the past century, committed a form of national suicide in service to hubris, and an elite few, and a mistaken understanding of what constitutes a civil society and what it means to be human. They are certainly not the only society to have done this, and I would not presume that they are the only people who will have fallen prey to this self-destruction in the future.

So there is some precedent for disaster. Germany was certainly not the only society to have done this, given the examples of China, Russia, Japan, and Italy, and I would not presume that they are the only people who will fall prey to this self-destruction as well. Having high ideals or having previously suffered oppression is no guarantee of future goodness. Rather it is the attitude of yourself in relation to the 'other.' That is the whole of the law.

Indeed, such a temptation to dehumanisation is tailor made for a generation raised on the notion of their natural goodness, accepting themselves as they are, rejecting and tearing down any external standards of goodness and worth in other people. They see no need to change and work together, but rather to give in, to wallow, in their basest and most selfish impulses, self-centeredness, the greed-is-good meme of the me generation, in a time of general apostasy to all but the lowest form of our self. Class War and the Decline of the West

The madness of crowds seems to have been all the rage in the twentieth century, and what I see now are people who are more technically proficient, more cunning, more skilled in the ways of mass deception and intrigue, but alas, perhaps not more compassionate and wise, and understanding of what it means to be human, truly content with themselves, and simply happy.

So bear these things in mind and protect yourselves as best you can despite the temptations and deceptions of our all too human frailties. It will not be easy, but it was not easy for our parents or grandparents, and theirs and those before them, because it never is. That is the nature of this world.  And even the once triumphant West at some point must learn to pull together again, or founder in a new season of infamy.

"For we wrestle not against flesh and blood, but against principalities and powers, against the rulers of the darkness of this world, against spiritual wickedness in high places." Eph 6:12

On the Edge of History: Will Europe Join in Promoting the SDR as the Global Reserve Currency?

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.

Julius Caesar: Act 4, scene 3, 218–224

China and Russia and some of the other developing nations have been proposing a reformulated SDR, with less US dollar content, a broader representation of currencies, and the inclusion of gold and silver, as a suitable replacement for the US dollar as the global reserve currency.

The US and UK are opposing the SDR as replacement to the US dollar as the new global reserve currency. They prefer to delay and postpone the discussions, and to maintain the status quo for as long as is possible to support their primacy in the financial markets. Control of the money supply is a huge hand on the levers of financial and political power.

It will be most interesting to see where the European Union comes out on this issue, especially in light of the recent drubbing that their banks have taken via dodgy dollar assets and a vicious dollar short squeeze, alleviated by a rescue from the Federal Reserve. It could have gone otherwise, and that provides things to think about. No one wishes to be at the mercy of a small group of unelected financial engineers who are closely aligned with an equally small set of Anglo-American banks operating with a somewhat opaque discretion. Or the goodwill of totalitarian governments who are acting aggressively from their own mercantilist self-interest for that matter.

One hears things. A deal being offered to Germany by the financial interests, for example, as a counterbalance to sentiment for greater latitude and independence in the EU. The lines of discussion move, and sometimes blur. Currency wars are the continuation of diplomacy, and possibly a revival of the cold war, by other means, to paraphrase Clausewitz. And a chilling fog is rolling over the landscape. This is what the timeless metal has been telling us, as it sounds an historic warning.

This is just the latest episode in a long unfolding macro change I have been calling Currency Wars after the Chinese best seller authored by Song Hongbing in 2007. I viewed it as the definitive spike in the theory of The End of History by Fukuyama.

It will continue to proceed slowly, at least for now, but such events tend to accelerate and sometimes dramatically as they progress. However the longer term implications for a change to the de facto Bretton Woods arrangement in place since Nixon closed the gold window in 1971, are enormous and yet little remarked yet by conventional economists, who too often prefer to glare at photons, gaping in the light. It has all the hallmarks of a classic conflict yet unfolding.

Rather than standing fast on an unsustainable status quo, as noted in Triffin's Dilemma, that serves the special interests of a wealthy few, the US might be well served to reform its banks, and balance its economy between service and industry, and stand once again for independent freedom and the common good, rather than narrow power and greed of the monied interests, and their willing tools and frivolous assistants. That is to trust in the wisdom and altruism of a people and their leaders who have of late shown a greater propensity to greed, deceit, and self-destruction. And so I say we must be in God's hands, because I recoil from Caesar's deathly grasp.

Some worry about deflation and inflation. Those outcomes are both hedged easily enough. I am more concerned about the next global holocaust of human destruction, and the bonfire of the vanities yet to come. That is history.

Financial Times
Germany asks US to give up its IMF veto
By Alan Beattie in Washington
September 14 2010 22:31

The US should give up its veto over important decisions in the International Monetary Fund in return for Europe accepting a smaller say, Germany has proposed.

The suggestion, which experts say will be strongly opposed by the US, addresses a politically highly symbolic dispute about voting power and seats on the fund’s executive board. Shifting power towards emerging market countries is one of the central elements in the Group of 20 nations’ drive to make the fund and other international institutions more representative...

Read the rest here.

Reuters
Lagarde says French G20 to discuss wider use of SDR
2010-09-01 18:06 (UTC)

JOUY-EN-JOSAS, France, Sept 1 (Reuters) - France will use its presidency of the G20 next year to discuss proposals for the wider use of IMF special drawing rights (SDRs) as a reserve currency as proposed by China, Economy Minister Christine said...

Read the rest here.

Currency Wars: Jim Rickards on Financial Warfare

This is likely to be the spin:

The problem is not that an irresponsible Fed and a corrupt Congress ruined the US dollar through a failure in stewardship, crony capitalism, and a series of control frauds culminating in a financial collapse that caused great harm to other countries, particularly in Europe. The dollar is a 'victim' of the evil empire that is jealous of our success and who hates freedom. (Let me have some 'freedom dressing' on my sandwich, please.) Markets are only useful when they do what we wish them to do, when they support our agenda and serve our will to power. The rest of the world is required to obey our enlightened rule, and serve their proper roles in the New World Order."

I am not quite sure where Rickards is coming from on this, but read the entire paper and judge for yourselves. What seems ironic is that the US has been the dominant user of economic warfare, economic hitmen if you will, since WW II. For example, US Banks Financing Mexican Drug Cartels. This is in part the natural outcome of its being the clear financial superpower, supplanting the City of London and the British Empire of private corporations against which the US had itself rebelled successfully, an event which it will commemorate in a few days on 4 July. But it has also gotten much worse in the past twenty years because of the erosion of regulation and the capture and corruption of key political processes.

You should also be aware that one of the financials bestsellers in mainland China is a book, with a recently published sequel, titled 'Currency Wars.' The author is said to fall into the old memes of scheming international bankers, which has been used by some to issue a blanket condemnation and discredit his premise in the West. I confess I have not read it, since it is not available in translation. What is most important is that the book has a wide readership and influence in the Chinese intelligentsia.

"Worse even than the long, slow grind along the bottom described in the foregoing section is a sudden catastrophic collapse. In that context, the greatest threat to U.S. national security is the destruction of the U.S. dollar as an international medium of exchange. By destruction we do not mean total elimination but rather a devaluation of 50 percent or more versus broad-based indices of purchasing power for goods, services, and commodities and the dollar’s displacement globally by a more widely accepted medium.

The intention of Central Bank of Russia would be to cause a 50 percent overnight devaluation of the U.S. dollar and displace the U.S. dollar as the leading global reserve currency. The expected market value of gold resulting from this exchange offer is $4,000 per ounce, i.e., the market clearing price for gold as money on a one-for-one basis. Russia could begin buying gold “at the market” (i.e., perhaps $1,000 per ounce initially); however, over time its persistent buying would push gold-as-money to the clearing price of $4,000 per ounce. However, gold selling would stop long before Russia was out of cash as market participants came to realize that they preferred holding gold at the new higher dollar-denominated level. Gold will actually be constant, e.g., at one ounce = 25 barrels of oil; it is the dollar that depreciates.

Another important concept is the idea of setting the global price by using the marginal price. Russia does not have to buy all the gold in the world. It just has to buy the marginal ounce and credibly stand ready to buy more. At that point, all of the gold in the world will reprice automatically to the level offered by the highest bidder, i.e., Russia.

Basically, the mechanism is to switch the numeraire from dollars to gold; then things start to look different and the dollar looks like just another repudiated currency as happened in Weimar and Zimbabwe. Russia's paper losses on its dollar securities are more than compensated for by (a) getting paid in gold for its oil, (b) the increase in the value of its gold holdings (in dollars), and (c) watching the dollar collapse worldwide."

Jim Rickards, Economics and Financial Attacks

Jim Rickards: Gold, Silver, and a May 11 Meeting to Discuss Global Currency Issues

Gold is showing a potential inverse H&S pattern.



Silver is in a well-defined uptrend.



As are the miners.

But all bets are off for the miners and silver most likely if US equities head south.



Jim Rickards on CNBC discusses the May 11th IMF meeting in Switzerland
to discuss the dollar alternatives, the SDR and gold.

And it is worth watching the reactions of the CNBC anchors to what their guests
have to say, and the elegantly polite way that Rickards deals with Joe Kernen.



It's kind of sad that after all these years Joe Kernen is Becky Quick's assistant.

Doesn't he have seniority or something? Can't Immelt throw him a bone?

Gold Holdings And the Evolution of Global Trade and Wealth

What fascinated me about this information is that countries that have much less of the official gold, that is gold held by the governments, are leading the effort to recast the SDR with some gold content in the changes scheduled to take place later this year. And they tend to be the high growth nations with the greatest commitments to exports. And it was a bit of a surprise to see that the Eurozone exceeds the US in total assets by volume. I did not know that. Of course, one may argue about the qualitative unity of the Eurozone. But the big holders of gold there are clearly the core of the union. This chart does not address the issue of gold holdings which may be leased out and sold to the private sector but still listed as an asset, but held as hedges, derivatives, and deep storage, that is, claims on ores yet to be extracted and in some cases even discovered. What is also fascinating, as shown below, is that if one looks at the gross levels of official gold holdings the total was steadily decreasing up until last year. Since there is an annual increase in total gold from mining activity, and very little loss through industrial use that is not subject to later salvage, it appears that there was a steady transfer from the public to the private sector. Essentially the private sector has been taking all the new gold production and official sales for an extended period of time. We have to wonder what sparked the spectacular bull run in gold starting around 2001 from about $250 to $1000+ per ounce? I can assure you, the bankers of the world think about this, and frequently. Since we are denominating gold here in US Dollars, there is an obvious negative correlation of sorts as the dollar moves higher and lower in perceived value by the world. But that does not explain the fact that gold is in a bull market in most of the world currencies except for a few of the commodity exporters and safe havens. Is gold a bubble? As someone who has been a close observer of bubbles for the past ten years the data does not recommend that conclusion. And what makes me even more curious about this point of view is that the very people who for the most part denied the existence of the obvious bubbles in tech, housing, risk, banking and credit, even to the point of absurdity, who could not or would not see a bubble if it perched on the end of their nose, who are card carrying members of the international monied fraternity, are the most vocal in calling gold a bubble with emotional arguments lacking any fundamental data. What's up with that? Some people, like Willem Buiter, have recently made silly and distracting arguments regarding their very subjective opinion about gold. That opinion does not bear all that much weight given gold's long history and broad use as a store of value, more enduring than anything else in recorded history. In other words, an opinion is like a vote, and you are casting your one vote in the face of countless votes of millions of people over the span of ages -- so your opinion is worth what it is worth, to you. It is the supply and demand that interests me. And it surely interests the monied powers, who seem to come out strongly in disfavor of gold and silver at certain intervals when they start getting nervous about the grip they have on the reins of the world's financial markets in paper. The sillier and more baseless their comments, the more my interest. So you will forgive me for seeming rude, but I do not care about your opinion, whoever you may be. I do not even care for my own opinion. I only care for what can be known. A good part of me is on the hunt for knowledge here, and whether you believe it yet or not is of little consequence to the outcome. You may as well spin opinions about the likely path of a truck as it bears down upon you where you stand. Only the trajectory and the mass of the truck matters, and the ability to step out of its way in a lively manner. Given the price action, it is hard to find a more 'popular' commodity as expressed in the action of buying by private individuals with disposable wealth, that at the same time is so seemingly 'unpopular' with public officials, and a genuine antipathy by the world bankers, and so little noted by the general public. The 'gold parties' that people were pointing to as a sign of a top were for companies to BUY gold in the form of old jewelry from the public, not for SELLING it to them and often at preadatory prices, despite the misleading spin from the mainstream media. I like data anomalies. They are so interesting. As Holmes observed in the story Silver Blaze, "Why didn't the dog bark?"

Gregory of Scotland Yard: "Is there any other point to which you would wish to draw my attention?" Holmes: "To the curious incident of the dog in the night-time." Gregory: "The dog did nothing in the night-time." Holmes: "That was the curious incident."

I cannot think of any single economic phenomenon that is more interesting in recent time, say the past 100 years, than the evolution of global trade, the basis for its exchange, and of course the official reserve holdings that are a natural outcome of this. For if one understands that the power to set and control the currency essentially trumps all local fiscal policy issues, there is almost nothing more important than the path which this evolution takes. Valuation and the ownership of the 'standard' of monetary valuation is key, and yet so little remarked, so little discussed in public. I try to resist the temptation to suspicion that statists are driving towards a unified command and control economy. I do not think that this agenda is the basis for formal discussions, except perhaps tangentially in the hallways of Davos. There is an impetus to power, and more power, that can create the same effect in groups of men without the need for formal discussions. Financial engineers and bankers will alway seek more control and more power, because they are seeking to master something that is a portion of human nature, that does not lend itself easily to linear manipulation. As their plans fail, they need to keep expanding to prevent a collapse and their personal humilitation. This is inherent in what they do. This is how dictatorships are created; they seem to be the easier path to inability, if not incompetency. But it is obvious that the theme since the 1980's at least has been the will to power, the knocking down of laws and regulations, to allow the most powerful to do what they will, to take an even greater share of the riches of the world, to the disadvantage of the many. And my hypothesis is that the global reserve currency is a key plank in this agenda. Perhaps this is such a perennial theme that is almost a tautology to remark about it, like a boy who first discovers the wonders of love, and thinks himself a Balboa discovering new oceans. Perhaps this boy is just discovering in a more profound way the deep roots of the darker side of human nature, the basis of evil: pride, greed, and deceit. But there is an ebb and flow in the tides of men, and the rise and fall of nations, ideas, and fundamental values like freedom, justice, honour, duty, mercy, equality, and hope. And we are certainly at the cusp of a trend change, a trend in place since the second Great War, and the dog is not barking. The game is afoot.

What Will the World Reserve Currency System Become? The Stakes Are Enormous

The deterioration of the dollar reserve currency regime is obvious.

If we have forecasted correctly, the world will look to some variation of the IMF's Special Drawing Rights as an eventual replacement for the US dollar. Therefore, the recomposition of the SDR next year will become a lightning rod for the global stresses created by an increasingly unstable and impractical system of global trade.

As you may recall, Russia and China have called for the inclusion of more currencies such as the rouble, the yuan, the Aussie and Canadian dollars, and gold and possibly silver into the mix. The BRIC's seem determined to break the western dominance of global monetary policy.

This may also explain some of the highly emotional,and we would say nonsensical, arguments attacking gold and silver by some of the house economists for the western Banks, and their camp followers and hand puppets in the universities, of late.

The bankers are appalled at the prospect of the new SDR including gold or silver in its new composition to be set in 2010. And so they are jawboning ahead of it. Any country can build its gold and silver reserves in the open market, and the big central bankers find it difficult to manipulate their supplies to their own advantage, despite years of desperate efforts to substitute paper for metal.

Bad enough that the basket may include currencies of non-G7 countries. As you will recall, the G7 was formed when Canada joined the Group of Six: US, Great Britain, France, Germany, Japan, and Italy. The power balances of the post World War II era are changing, and the shifts in trade and financial power reflect this.

In the interim, there will be regional currency arrangements and trading blocs as in the past. The strength and suitability of the new SDR regime will help to determine the disposition of these regional arrangements.

'Free trade' without a floating monetary exchange system is not possible. Otherwise there will be artificial subsidies and penalties among nations, as in all systems of price control. These lead inevitably to imbalances, bubbles, and crises.

The adjustments that are overdue for the dollar and renminbi in particular will make political progress difficult. But the greatest impediment to progress will be the Anglo-American banking cartel, which seeks to control the issue of money as a means of implementing policy and distributing wealth, especially with regard to the natural resources and labor of the developing nations.

Emirates Business Dubai
Do We Need a New Reserve Currency?
By Martin Wolf
Sunday, December 27, 2009

A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America's economy and the greenback is fuelling a "currency-regime crisis," says Martin Wolf, associate editor and chief economics commentator of the Financial Times.

Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar's role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.

Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. "You can't have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.

"So I agree with this. And I'm absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that's not sold by just adding another couple (of currencies). It actually means having a global money."

Indeed, Wolf said he's in complete agreement with China Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency "most credibly and convincingly."

"On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it," said Wolf. "Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession -- the dollar is not adequately supported."

The US currently has a national debt in excess of $12 trillion or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108 billion. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.

Apart from the economic risks posed by the decline of the US dollar, China's devaluation of its currency is causing "a real problem" for Europe. The "very perverse currency adjustment" is highly destabilising for the euro zone economy and could create a crisis, said Wolf.

"There is nothing to prevent this, unless the Europeans decide they are going to intervene in the foreign currency market to buy dollars, and that would be over (European Central Bank president) Jean-Claude Trichet's dead body."

As there is "no chance" of European governments intervening in the foreign exchange markets to improve the competitiveness of the euro, it will result in major currencies such as the euro and Japan's yen becoming "very vulnerable."

"This is simply the American way of shifting the recession from them to their trading partners," said Wolf.

"What we need are global currency adjustments and it has to include the renminbi and global macro adjustments in those countries which make this less painful."

"In terms of the impact of this on the role of the US dollar as the currency of denomination for international transactions, basically I think it's become very unreasonable."

"Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value," said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China, and India, Wolf argues, adding that the greenback's loss of credibility as the dominant global reserve currency is part of this messy transition.

The Americans no longer have the means to save themselves, this is what I think people don't understand. There is no credible American policy," said Wolf. (The American policy has been to maintain the status quo and to confiscate wealth by exporting fraud in amounts that are beyond all reason. This is hardly acceptable to the rest of the world. It is remarkable how few US economists understand this for what it is. Are they so abysmally ignorant by choice or by training? Sometimes it is hard to tell. What can one expect from a group that could not acknowledge the enormous bubbles that have rocked their economy in the past ten years until the damage was done. They are as reprehensible as the doctors who helped to promulgate the psychiatric abuses in the gulag of the former Soviet Union. - Jesse)

"We need to discuss this globally in a harmonious way. It's not happening, so at the moment the euro zone is a prime victim and it will continue to be, and that will create very big problems for European-based manufacturers, and quite particularly those that are relatively vulnerable to global price effects.

"And it's a tremendous mess, a horrifying mess, and that's where we are. I'm sorry. And we've got to get through this transition as quickly as possible to a more stable global monetary system with a lesser reliance on the dollar. We're going to get there over the next 10 years; I'm sure of it. We're going to get there. The only question we have to decide is how we're going to get there."

Meanwhile, a trade skirmish between the US and China could ensue, if Beijing continues to devalue its currency to bolster export-driven economic growth at the expense of economic recovery in the US, said Wolf. (Not just the US, the rest of the world as well - Jesse)

He says China is working hard to defend the artificially low value of the renminbi in the hope that exports will pick up when external demand recovers. According to China's customs authorities, exports from January to November plunged by 18.8 per cent to $1.07 trillion from a year ago. However, according to the Royal Bank of Canada, export growth should pick up in the coming months and reach double-digits in early 2010.

China's efforts, Wolf said, will spark a "very vigorous, even vicious" reaction from the US as it's destabilising US efforts to engender an economic recovery.

SDRs and the Endgame for the US Dollar Reserve

Our take on this is that there is NO question that the US dollar will lose its reserve currency status, and the Treasury and the Fed are aware of this.

The game being played now on the international stage, largely behind the scenes until recently, is with regard to what will take its place and how it will be implemented.

The talking heads on US financial television are largely talking their books even today, taking the position that nothing can replace the US dollar for the next fifteen years at least (Robert Altman-Bloomberg).

Most of the anchors and house commentators are just shallow, nervous in a giggly sort of way, and astoundingly naive which may be attributed to their relative youth and lack of relevant experience in anything beyond looking good and being often wrong but never in doubt.

The US and UK are pushing for Special Drawing Rights (SDRs) from the IMF as the replacement, with very minor rebalancing. There are those who prefer something that they feel is less neo-colonial, or at least more neutral, and reflective of a changing economic reality.

Much of what is hitting the news now is political jawboning ahead of the next realignment of the SDRs in 2010 after the recent summit in Istanbul to discuss this very topic that the news people in the US are denying ever even occurred.

"The basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems.

In the most recent review (in November 2005), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which were held by other members of the IMF.

These changes became effective on January 1, 2006. The next review will take place in late 2010"

The current composition of the SDR, as calculated in 2005, is:

"The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar."

"With effect from January 1, 2006, the IMF has determined that the four currencies that meet both selection criteria for inclusion in the SDR valuation basket will be assigned the following weights based on their roles in international trade and finance: U.S. dollar (44 percent), euro (34 percent), Japanese yen (11 percent), and pound sterling (11 percent)".

Here is a commentary from Max Keiser, an ex-patriate based in Paris. His analysis will seem harsh at times to American ears, more conditioned to the evening news. But this represents what a significant portion of the world now thinks, and it is worthwhile to at least listen to it.

Why would the US resist this? Because there is a huge overhang of dollars in the world, far beyond what can be sustained at current valuation if the dollar was NOT the reserve currency., artificially incenting countries to hold dollars, and to use them for some essential purchases such as oil.

The strong dollar is a huge benefit to the US financial sector and the government. It is a significant drawback to US industry and the non-military productive economy. This is why the Europeans are opposed to the Euro becoming the world's sole reserve currency. Their financial sector has not obtained a dominant influence over the government, and their predisposition to military adventurism is still tempered by their experiences with war in the 20th century. That could change, but not yet.

People talk about an artificial short in the dollar because of debt. That concept only works if the Fed does not exercise its printing press, which it said it would do, and is now doing. But the dollar overhang exists, and has become precariously unstable, and unsustainable.

Max Keiser is hearing that the target composition will be weighted to 50 percent gold, in a return to a system more in keeping with the original Bretton Woods agreement. This is most likely the position being taken by France, China and Russia. The US and UK are adamantly opposed and will fight a delaying game with 2020 as a target for a phased in approach that continues to favor the dollar.

He starts going 'off the rails' for my taste about four minutes into this interview, but it is a viewpoint that is becoming more widely held in parts of the world that are starting to matter to the US economy, blowback-wise, and Americans need to be more aware of this perhaps for practical considerations.



See Also: The Decline of the Dollar as the World's Reserve Currency