NAVs of Certain Precious Metal Funds and ETFs

SP Futures Hourly Chart at 3 PM

Market volumes are still thin, and driven heavily by momentum traders and Wall Street wiseguys setting up the small specs, looking into what they holding, and then raising them out of their seats on short term spikes and drops.

Today was likely a bit of a letdown on the Fed news, that is, profit-taking, but the dips *should* continue to get bought once the funds sell off dogs into the monthly and quarter close and start window dressing which will likely begin Friday or Monday.

If any exogenous event occurs this market could drop hard and fast because it is all froth, and little conviction. Third quarter earnings *could* look good by comparison, but we have it in the back of our minds that October may be bloody.

Bernanke is disgraceful in his stewardship of the financial system, although it could be argued that he is doing his part, raising liquidity, but Obama and his crew are failing in their task of reforming the system and helping to direct that liquidity into fruitful efforts, rather than bonuses to their patrons on Wall Street.

Confessions of a 'Flationary Agnostic

I have no particular allegiance to either the hyperinflation or the deflationary camps. Both outcomes are possible, but not yet probable. Rather than being a benefit, occupying the middle ground too often just puts one in the middle, being able to see the merits in both arguments and possibilities, and being unwilling to ignore the flaws in each argument. But this is where reason takes me.

In a purely fiat regime, where a monetary authority has the ability and the willingness to monetize debt, there is NO mandated, no predetermined outcome for hyperinflation or deflation in the event of a credit crisis, unless that money is pegged to an external standard, which is ruled out by definition in a purely fiat regime.

In a credit crisis there is often a 'credit crunch' which is what was seen in the financial system when short term credit transactions seized up out of fear. This is not the same as a true monetary deflation which is a real contraction in the money supply, at the least. So far we have not seen this. And we may never.

Also, I would have to agree that the eventual fate of all fiat currency is failure and reissuance of a 'new' currency, due to the sustained erosion of a seemingly incessant, if gradual, inflation. This does not HAVE to be, but it is, as an outcome of human nature. Men will always and everywhere eventually succumb to the temptation of currency debasement, a free lunch, and so they cannot be trusted to manage a nation's affairs with the unrestrained keys to the Treasury.

And at the end of a currency's lifespan, there is quite often a bout of serious inflation that precipitates the reissuance and restructuring. How long this period of time can be no one can say.
That is the simple fact of it. The only limitation on the Fed's ability to inflate is the value of the dollar and the bonds; that is, their acceptability to 'creditors' who are willing to exchange goods and services with real value for paper.

And it should be perfectly clear that to choose a monetary deflation as a fiat policy decision for a country that is a net debtor would be bizarre to say the least.

Everything else is noise and generally ad hominem attacks. And the louder the noise, the less likely the person speaking knows anything about monetary systems.

I read that the Fed has taken on (a euphemism for 'monetized') roughly half of the Treasury debt issued in the second quarter of 2009. And it is quite likely that this is only a part of it, that a good portion of the rest of the debt was arranged for with other central banks, including those who are engaged in large scale currency manipulation of their own which is a de facto monetization on the road to default as China will be finding out most likely some day.

There is quite a bit of misunderstanding on the issue of deflation. As we have discussed before, deflation driven by slack demand is not uniform across product and service classes as it would be during a true monetary deflation. That is because goods and services vary in the elasticity of their demand.

Yes some prices will decrease, as one would expect, especially in those assets whose value has been inflated during a preceding bubble and discretionary items with a significant elasticity of demand.

But other items will remain stable or even increase in price, particularly essential items, and those provided from a sector with an oligopolistic framework.

Why? Because those who control access to essentials will seek to increase prices and 'rents' even during severe recessions to make up for lost revenue streams and profits in other areas of their business. Barring government intervention, every crisis has its profiteers.

So we have the phenomenon of banks being bailed out by the government, with public funds, not lending as they had promised, and greatly increasing fees and cutting services whenever and wherever they can on certain instruments such as credit cards, for example. Or other financial firms taking advantage systemic flaws and leverage and loopholes to game the markets, extracting what amounts to increased rents, a tax, on the nation's transactions, further dragging down the real economy.

Credit is not money. Debt is not money per se. These are things that are instrumental to the process of money creation and destruction.

If I 'owe you' ten dollars, are you ten dollars richer? Not unless you hold some sort of legally enforceable piece of paper to back it up, and even then there is a discount on the value of that paper which is repayment risk, the possibility that I might default on that arrangement.

Money is the sanction of the monetary authority on a particular debt arrangement. It is limited to only that which has been sanctioned, that which passes through the hands of the creditor "into" the money system. This may occur at the point of origin, the central bank, or one of its officially designated representatives, sanctioned by executive order or under the law created by the Congress.

One does not count a private debt obligation held by the creditor as money, in addition to the actual currency that was delivered to the debtor. That would be double counting, a misunderstanding of the accounting system. The debt held by the creditor is an asset, of varying liquidity and risk.

If you have an unused credit card with a $1000 credit limit, do you have $1000 dollars? Does that $1000 dollars exist anywhere? No, clearly not. You may act differently in having it, it may influence your behaviour, but it is not money.

Once you use that card, and 'borrow' $1000 on that credit line, then it does exist as money, and a corresponding liability of $1000 is created and is held by the bank as an asset.

Is that $1000 debt obligation being held by the bank the same as the $1000 in money that was created when you borrowed it and spent it, putting it into motion within the real economy? No. If anything we might have learned from this credit crisis should sink in, the value of collateralized debt obligations, a collection of assets on a variety of instruments, is deeply affected by risk.

This is why a private debt obligation cannot be money, because it is not significantly riskless and is more an asset. Anything that bears a significant risk of default that is not tied to the full faith and credit of the central monetary authority is not money. It is a product, some proxy for money.

Is the savings deposit in excess of FDIC at my local bank 'money?' Yes, but not of the same quality as cash in my pocket. That is why there are a variety of money supply figures.

Is the reduction of debt directly correlated to the levels of money in the nation's monetary supply? It depends on how it is accounted. The debt can be written off, and no 'money' is destroyed per se but the bank will take a writedown on assets. We are seeing this in action today, as vast amounts of CDS and MBS are devalued on the books of the banks.

We make a distinction obviously between the existence of the money itself, and the means or ability to create money through a particular process, which can itself be impaired, without a reduction in the aggregate supply of 'money' depending on how you account for it.

Here is an interesting chart. It clearly shows the precipitous dropoff in commercial lending, and the actions of the monetary authority and the government to step in and support lending, primarily in the programs of the Fed.



This lack of productive economic vigor is impairing the ability of the Fed to maintain an organic growth in the money supply. But it does not stop it. They have some limitation or impairment in their ability to manage the money supply, because of the slack demand in the economy and the loss of the aid of the 'money multiplier' and the moribund velocity of money. The money that is created by the Fed without a corresponding increase in economic activity is 'hot money' that is particularly dangerous from an inflationary perspective.

Here is an interesting paradox. At a time of slower growth rate of money supply, many might think that this is 'good' for the dollar, because less dollars means more value for each dollar, right? In essence, this is one of the major tenets of those called 'deflationists.'

First, there are not less dollars. The growth rate of dollars is slowing but as one can see, this is a relative thing historically.









But here is the key point.

The growth rate of dollars is slowing at the same time that the 'demand' for dollars, the velocity of money and the creation of new commercial credit, is slowing. GDP is negative, and the growth rate of money supply is still positive, and rather healthy. This is not a monetary deflation, but rather the signs of an emerging stagflation fueled by slow real economic activity and monetization, or hot money, from the Fed. The monetary authority is trying to lead the economic recovery through unusual monetary growth. All they are doing is creating more malinvestment, risk addiction, and asset bubbles.

Money supply and the rate of money supply growth is a confusing topic, primarily because lots of commentators twist it and split hairs about it to make points, without really caring to explain what is actually happening to those who are not specialists. 'Experts' hide behind terminology to obfuscate the situation to support particular policy initiatives under a cloud of fear, uncertainty and doubt. Despicable.

We have not written it out and worked the details yet, and the lags and expectations are always a significant issue, but generally the growth in the broad money supply should bear a positive relationship to the growth rate of real economic activity, with the appropriate lags. It ought not to lead it or lag it artificially except in extreme circumstances. Using money as a 'tool' to stimulate or retard economic activity is a dangerous game indeed, fraught with unintended consequences and unexpected bubbles and imbalances, with a spiral of increasingly destabilizing crises and busts. The Obama Administration bears a heavy responsibility for this because of their failure to reform the system and restore balance to the economy in any meaningful way. Whether it is cowardice, ignorance, or corruption is difficult to judge, but it is a failure without regard to motives.

What makes matters worse is that given the cumulative years of government 'tinkering' some of the key economic measures are hopelessly spoiled. The Consumer Price Index is probably the best example as is shown at Shadowstats. Consumer inflation is a key problem because it is used, as the chain deflator, in calculating real GDP, the basic measure of economic activity in a nation.

And so after the cumulative years of financial engineering by the government and the Federal Reserve, here we are today, caught in an ugly cycle of boom and bust, with an outsized financial sector, a government controlled by the money interests, and a productive economy in a systemic decline.

And this is why we say:

The banks must be restrained, and the financial system reformed, and the economy brought back into a balance between the productive and administrative sectors, before there can be any sustained recovery.

Ding, Ding, Ding, Ding.... For the Market and the Democrats

Sometimes they do ring a bell.

Hard to believe that after one of the greatest credit crises in history, Wall Street and the punters went back to their old ways of chasing beta with hot (taxpayer) money.

As ZeroHedge so insightfully observed:

"Sentiment Trader demonstrates how bullish speculative mania as measured by option activity is now at a decade, if not all time, high. With moral hazard having become the only game in town, everyone believes their investments are implicitly guaranteed by the government..."

Paul Krugman, stalwart Democratic liberal economist, took Obama to task recently for his lack of stomach to change and reform the financial system in his column Reform or Bust

"What’s wrong with financial-industry compensation? In a nutshell, bank executives are lavishly rewarded if they deliver big short-term profits — but aren’t correspondingly punished if they later suffer even bigger losses. This encourages excessive risk-taking: some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years, even though the high-risk strategies that led to those bonuses eventually decimated their companies, taking down a large part of the financial system in the process...

I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case — and the president is surely smart enough to know that."

Paul has not yet been able to express the growing concern that many of Obama's top advisors and key staff managers are hopelessly conflicted, if not corrupted, in dealing with Wall Street.; The question can be asked, "if Obama is that smart, why is he acting so slowly, clumsily, ineffectively, timidly?"

The answer gets to the heart of the proposition put forward by Richard Nixon, "People have got to know whether or not their president is a crook."

So which is it to be: ineffective blowhard or corrupt politician? The jury is still out, and there is time for change. But the window is closing.

Obama to Tell the G20 to Fix the US By Changing the World

When you can't run a state, run for President. When you can't run your country, attempt to run the world.

This directive to the G20 is probably going to make the Organizer-in-Chief's recent pathetic sermonette on altruism and self-denial to Wall Street seem effective by comparison.

Unless he is as prime an example of boobus Americanus as he appears to be by his actions, we suspect that this proposal is intended merely to be a blue sky diversion to a broadly unachievable goal from a genuine agenda for reform and action on the table including regulating bankers' pay, which might be an annoying hindrance to Obama's constituents on Wall Street. It has been estimated that the reforms on the table from Europe, for example, might cut the trading revenues at Goldman Sachs by a third.

What Obama does not say, and perhaps does not realize, is that the majority of the problems that exist in the US's imbalanced trade relationships is the position of the US dollar as the world's reserve currency.

Owning the reserve currency is a significant benefit for your government and financial sectors, but it makes your manufacturing and productive economy the target of every mercantilist command economy around the globe that is by definition hungry for dollars.

Reuters
Obama wants G20 to rethink global economy
By Jeff Mason and Dave Graham
Mon Sep 21, 2009 12:29am EDT

WASHINGTON/BERLIN (Reuters) - U.S. President Barack Obama said on Sunday he would push world leaders this week for a reshaping of the global economy in response to the deepest financial crisis in decades.

In Europe, officials kept up pressure for a deal to curb bankers' pay and bonuses at a two-day summit of leaders from the Group of 20 countries, which begins on Thursday.

The summit will be held in the former steelmaking center of Pittsburgh, Pennsylvania, marking the third time in less than a year that leaders of countries accounting for about 85 percent of the world economy will have met to coordinate their responses to the crisis.

The United States is proposing a broad new economic framework that it hopes the G20 will adopt, according to a letter by a top White House adviser.

Obama said the U.S. economy was recovering, even if unemployment remained high, and now was the time to rebalance the global economy after decades of U.S. over-consumption. (The recovery is as tenuous as Mr. Obama's prospects for a second term - Jesse)

"We can't go back to the era where the Chinese or the Germans or other countries just are selling everything to us, we're taking out a bunch of credit card debt or home equity loans, but we're not selling anything to them," Obama said in an interview with CNN television. (How about a system where Wall Street thinks it can defraud the world, and take usurious rents on every financial transaction in every market? - Jesse)

For years before the financial crisis erupted in 2007, economists had warned of the dangers of imbalances in the global economy -- namely huge trade surpluses and currency reserves built up by exporters like China, and similarly big deficits in the United States and other economies. (Greenspan dismissed every growing problem with an unswerving prevarication, and the corportocracy provided air support. - Jesse)

With U.S. consumers now holding back on spending after house prices plunged and as unemployment climbs, Washington wants other countries to become engines of growth. (Most of the world would like to cure its problems by net exporting to other countries in unbalanced trade relationships. The Asian preoccupation with mercantilism is in some ways the natural outcome of the US dollar reserve hegemony. There is a bit of a standoff here. - Jesse)

"That's part of what the G20 meeting in Pittsburgh is going to be about, making sure that there's a more balanced economy," Obama told CNN.

China has long been the target of calls from the West to get its massive population to spend more. It may be reluctant to offer a significant change in economic policy when Chinese President Hu Jintao meets Obama this week. (The only way they can spend more is if they get higher real wages, a neat trick when your national policy is based on exploiting the exploitation of your laboring class - Jesse)

The U.S. proposal, sketched out in a letter by Obama's top G20 adviser, Michael Froman, calls for a new "framework" to reflect the balancing process that the White House wants.

"The Framework would be a pledge on the part of G-20 leaders to individually and collectively pursue a set of policies which would lead to stronger, better-balanced growth," said the letter, which was obtained by Reuters. (Kumbaya, my lord, kumbaya... Jesse)

Without naming specific countries, the proposal indicates the United States should save more and cut its budget deficit, China should rely less on exports and Europe should make structural changes -- possibly in areas such as labor law -- to make itself more attractive to investment.

To head off reluctance from China, Froman's letter also supported Beijing's call for developing countries to have more say at the International Monetary Fund. (Say = talk, but it does not imply that anyone will listen and take any action. The US owns the IMF. - Jesse)

The IMF would be at the center of a peer review process that would assess member nations' policies and how they affect economic growth...(Most statists are by nature Ponzi politicians who really cannot run anything complex, and have to keep expanding their power and span of control or collapse and be exposed as frauds. Its been a perennial source of mischief throughout history. - Jesse)

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.

The Dollar Carry Trade

A video from Warren Pollock regarding carry trades

Stock Market Rally: Shenanigans Abounding

This is just an opinion, and it could be wrong, as all opinions may be.

To be long US equities at this point seems risky, bordering on reckless, for anything but a daytrade. And there is plenty of that going on.

The US markets in general have every mark of a maturing Ponzi scheme in the steady run ups on weakness, and the ramps into the close with the selling after hours on weak volumes.

But why?

Thursday is option expiration, a quadruple witch as we recall. September is one of the big ones, often setting up declines in the month of October. Further, we have Rosh Hoshanah beginning at sundown on Friday September 18. As the saying goes, Sell Rosh HaShana and Buy Yom Kippur.

The government is anxious to encourage 'confidence' to the extent of skewing the statistics to create hope in the public, the consumers. The banks are flush with liquidity, but really have no place to put it but for a minimal return at Treasury, or in some hot money trades. They certainly are not interested in making new loans, but the credit card business is reaping some nicely usurious returns between fees and 26% interest at the drop of a hat.

Where is Goldman Sachs business revenue and profit coming from now? How much real investment banking is being done? How much M&A activity and IPOs are there to sustain it at this size, unscathed by the recent market downturns?

Obama and his team have NO credibility for reform on Wall Street after their handling of Goldman Sachs and the AIG payouts. We hear that Goldman had shopped the idea of those derivatives to the London office of AIG which was up for a quick quid, became their biggest customer, and then when the music stopped they managed to obtain the 100 cents on the dollar payouts from the government even as AIG became hopelessly insolvent.

Bonds, stocks, metals, sugar, cocoa, and oil are all moving higher, while the dollar sinks. Is the dollar funding a new carry trade?

The markets are increasingly the flavor of choice, and if the markets do not show a way, they will make one. Volatility is a screaming buy. Put vertical spreads are remarkably cheap.

Be careful. October looks to be the stormiest of months, if we hold out until then. The market is overdue for a correction, which can be up to 20%. Given the distance we have come on thin volume, what may make this correction shocking is the speed with which it will come.

Watch the VIX.

We remain guardedly 'optimistic' on the markets for next year ONLY because of the Fed's and Treasury's willingness to continue to debase the dollar to cover the massive unrealized losses in the banks' portfolios, even as they return to manipulating markets in business as usual.

Inflation is good for financial assets, and we think another bubble is in the cards, at least for now given Obama's unwillingness to reform, unless some exogenous event or actor intervenes. The other troubling thing is the lack of vigor in the real economy. The stagnation in median real wages is strangling the middle class. There can be no resurgent economy without them.

As much of an outlier it might seem, it is possible that Bernanke and the Treasury might lead the US into a stagnation similar to Japan, but with stagflation, because of their policy errors driven by the distorting demands of an outsized and corrupting financial sector.

Wall Street is throwing buckets of money at Washington to fight even a moderate reform such as a financial 'consumer protection agency.' These fellows will never quit, until they are stopped. And it does not appear that Obama and his cronies have the traction or the fortitude to get the job done.

Until the banks are restrained, and the financial system is reformed, and balance is restored to the economy, there will be no sustained recovery.

Long Term Gold Chart Targets 1325

Someone asked for a long term chart in gold.

Projecting this leg in the gold bull market has been of keen interest to us on one dimension, since we do have some trading activity in our own account. However, on the long term for our core positions it is of no more interest now than it was when gold was trading at 550, 450, or even 250. Gold is in a bull market, and you never give up your core positions in a bull market. You can trade around them if you are an aggressive trader.

As an aside, to anyone who can read a chart and as you can plainly see for youself, gold is in an obvious bull market. If you are dealing with someone who says it is not then they can only a) be incapable of reading a chart, b) be blinded by a mistaken belief, or c) be talking their or someone else's book. There seem to be a few analysts, never bullish on gold in a spectacular bull market, working for major gold trading houses, that fit into this last category.

So, gold appears to be targeting somewhere just north of 1300 for this leg of its bull market. As it says on the chart, this is a LONG term projection, and it should therefore be expected to play out over the LONG term.

The lower bound on gold on these formations is higher than 925 so we would not expect gold to trade lower than that while these formations are 'working.'

Every bull market has its 'wall of worry.' Gold certainly has its own. Its price increases are being met with fierce opposition by four or five US Wall Street banks who are increasing their paper shorts against it to record numbers.

The game of Wall Street is misdirection and mischief using paper and the control of information. Yesterday's US retail sales data was a nice example of the partnership in deception between Wall Street and Washington to deceive the people for a variety of motives, some well-intentioned and some merely venal.

For this reason the Bankers and the statists hate gold, because it defies their control, and that of the money manipulators, those who would control nations and the many by controlling their money.

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.

Robert Reich on Moral Hazard and Obama's Failure

Robert Reich is a top Democrat, former Secretary of Labor under Bill Clinton, and a member of the Obama transition team.

In his recent blog he excoriates the Obama financial team's actions. And in doing so he echoes the things that have been said here, which we will take as some measure of validation from an intelligent public figure and top representative of the party in power.

Surely Obama must see that his Administration is a failure, beginning with his failure to maintain the promise of change, and address the need to reform the financial system.

Do something, Barack. Get a backbone, and do something for the country, and let the special interests, and the cronies of your cronies, be damned.

Start telling it like it is. Make this historic moment memorable, and not a shame.


The Continuing Disaster of Wall Street, One Year Later
Robert Reich
September 13, 2009

As he attempted to do with health care reform last week, the President is trying to breathe new life into financial reform. He's using the anniversary of the death of Lehman Brothers and the near-death experience of the rest of the Street, culminating with a $600 billion taxpayer financed bailout, to summon the political will for change. Yet the prospects seem dubious. As with health care reform, he has stood on the sidelines for months and allowed vested interests to frame the debate. Nor has he come up with a sufficiently bold or coherent set of reforms likely to change the way the Street does business, even if enacted.

Let's be clear: The Street today is up to the same tricks it was playing before its near-death experience. Derivatives, derivatives of derivatives, fancy-dance trading schemes, high-risk bets. “Our model really never changed, we’ve said very consistently that our business model remained the same,” says Goldman Sach's chief financial officer.

The only difference now is that the Street's biggest banks know for sure they'll be bailed out by the federal government if their bets turn sour -- which means even bigger bets and bigger bucks.

Meanwhile, the banks' gigantic pile of non-performing loans is also growing bigger, as more and more jobless Americans can't pay their mortgages, credit card bills, and car loans. So forget any new lending to Main Street. Small businesses still can't get loans. Even credit-worthy borrowers are having a hard time getting new mortgages.

The mega-bailout of Wall Street accomplished little. The only big winners have been top bank executives and traders, whose pay packages are once again in the stratosphere. Banks have been so eager to lure and keep top deal makers and traders they've even revived the practice of offering ironclad, multimillion-dollar payments – guaranteed no matter how the employee performs. Goldman Sachs is on course to hand out bonuses that could rival its record pre-meltdown paydays. In the second quarter this year it posted its fattest quarterly profit in its 140-year history, and earmarked $11.4 billion to compensate its happy campers. Which translates into about $770,000 per Goldman employee on average, just about what they earned at height of boom. Of course, top executives and traders will pocket much more.

Every other big bank feels it has to match Goldman's pay packages if it wants to hold on to its "talent." Citigroup, still on life-support courtesy of $45 billion from American taxpayers, has told the White House it needs to pay its twenty-five top executives an average of $10 million each this year, and award its best trader $100 million.

A few banks like Goldman have officially repaid their TARP money but look more closely and you'll find that every one of them is still on the public dole. Goldman won't repay taxpayers the $13 billion it never would have collected from AIG had we not kept AIG alive. (In one of the most blatant conflicts of interest in all of American history, Goldman CEO Lloyd Blankfein attended the closed-door meeting last fall where then Treasury Secretary Hank Paulson, who was formerly Goldman's CEO, and Tim Geithner, then at the New York Fed, made the decision to bail out AIG.) Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman's high-risk operations.

So will the President succeed on financial reform? I wish I could be optimistic. His milktoast list of proposed reforms is inadequate to the task, even if adopted. The Street's behavior since its bailout should be proof enough that halfway measures won't do. The basic function of commercial banking in our economic system -- linking savers to borrowers -- should never have been confused with the casino-like function of investment banking. Securitization, whereby loans are turned into securities traded around the world, has made lenders unaccountable for the risks they take on. The Glass-Steagall Act should be resurrected. Pension and 401 (k) plans, meanwhile, should never have been allowed to subject their beneficiaries to the risks that Wall Street gamblers routinely run. Put simply, the Street has been given too many opportunities to play too many games with other peoples' money.

But, like the health care industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. And with the Dow Jones Industrial Average trending upward again -- and the public's and the media's attention focused elsewhere, especially on health care -- it will be difficult to summon the same sense of urgency financial reform commanded six months ago.

Yet without substantial reform, the nation and the world will almost certainly be plunged into the same crisis or worse at some point in the not-too-distant future. Wall Street's major banks are already en route to their old, dangerous ways -- now made more dangerous by their sure knowledge that they are too big to fail.