TED Spread, the US Dollar, and the Independent Functioning of the European Capital Markets

An earlier essay The Dollar Rally and Deflationary Imbalances in the US Dollar Holdings of Overseas Banks demonstrates that a significant dollar demand has been created overseas by the deterioration of dodgy, if not fraudulent, US debt assets and dollar deposits.

There is something ironic if not pathetic in the EU coming hat in hand to the Federal Reserve to beg for additional supplies of dollars at higher prices after taking heavy losses from US debt instruments that were founded on deception and false premises.

One obvious solution is for Europe to "go off the dollar standard" as Roosevelt went off the gold standard in 1933 within the US.

For example, for those covenants that are payable in dollars only, the EU can declare that the obligations may be settled in euros at prevailing exchange rates.
As it says on the US dollar, "This note is legal tender for all debts, public and private."

Dollars ought not to be required to settle primarily domestic accounts, as gold was no longer required to settle debts within the US after 1933. Dollar transactions should be treated as forex transactions.

The gold standard was superior to the dollar standard as gold could not be created or destroyed at will by private US banking manipulation.

The US will object strenuously, as will US private companies. After all, there should be little doubt that the bankers are using the current dollar hegemony to their advantage. If Europe is content to subsidize American extravagance then they should continue to do nothing about it. But they need to be prepared for a descent into a kind of debt peonage.

It should be almost embarrassingly obvious to everyone that the Dollar no longer deserves to be treated as the singular reserve currency and as a universal monetary standard, especially not for primarily domestic transactions.

Charts in the Babson Style for Miércoles Matado 8 October 2008

Gulf State Central Banks to Increase Gold Reserves

Gulf News
Gulf central banks look to gold as uncertainty rises
By Cleofe Maceda, Staff Reporter
October 07, 2008, 23:26

Dubai: Central banks in the Gulf and elsewhere in the world will likely turn to gold as the global banking crisis boosts the metal's appeal as a buffer against dire economic conditions, industry sources said on Tuesday.

With bank shares across the world plunging and the US dollar still unstable, central banks have no better option but to diversify their reserves into gold, considered the only alternative to the US dollar and euro.

Analysts said demand from banks will likely affect gold prices, and retail consumers will resort to investing in bullion as well, particularly in exchange traded funds (ETFs), coins and small bars.

"Gold will definitely see a revival as a reserve asset for central banks. The main purpose for the central banks when investing is not to generate the highest possible returns, but to provide a safe and sound financial basis for the currency and the economy built on it," Rolf Schneebeli, former head of the World Gold Council, told Gulf News.

Schneebeli said suitable central bank assets must be universally recognised and must provide a liquid market that is deep enough to absorb major transactions. However, he noted, there are not many currencies that can be used as possible assets.

Earlier this year, the US dollar plummeted against the euro. Although it has started to strengthen recently, doubts remain over its outlook.

"The only alternative to the US dollar is the euro. The pound sterling is probably not strong enough anymore. The yen and the Swiss franc, both strong currencies, do not have enough depth ... Hence, gold is really the only alternative to the dollar and euro," Schneebeli added.

Another advantage of investing in gold, Schneebeli said, is that the precious metal is "nobody's liability."

"This means one is not at the mercy of other governments. After all, governments might use the financial system to exercise pressure on other governments. In the case of gold, this is quite difficult," he said.

K.P. Baiju, managing dir-ector and chief executive officer of Buz Consulting, said gold demand from banks "will impact the prices and will help sustain the current levels for the time being".

Baiju noted that demand from consumers will continue to increase as well, because "gold is considered a good means of small-time savings."

"Gold prices are currently ranging around $825 to $850 an ounce, which was last year's fourth quarter level and the consumers know that this is a good time to buy," Baiju told Gulf News.

Among UAE consumers, Schneebeli sees an increase in demand for ETFs, coins and gold stocks.

Shhhhhh! Here is a Secret Worth Remembering.

The Treasury is going to devalue the US dollar by 30 to 40 percent, or more, from here.

Why?

Because they have no choice. Its what you must do when you cannot selectively default by creditor and you can't pay your debt service with additional debt.

The devaluation will be coated with a minty flavored shell of verbage and G7 misdirection and government programs with lots of letters in the names.

But isn't everyone else is in the same boat?

Actually they aren't. Take a look at the current account deficits and debt service payments growth. That will tell you who is in what boat.

Remember, its a secret. Don't tell the Chinese, foreign holders of US debt, and especially the US middle class whose life savings are going to be wiped out.

Isn't monetary deflation the natural outcome of a country's failure to maintain their credit and grow their debts?

Tell it to Iceland. Want to buy some krona?

But what about Japan? I think we are going to be in a deflation where our money is worth more as we print more of it, while producing less goods in return, and our financial paper is increasingly discredited and worth less.

Excellent. Someone has to hold the bag. Welcome to the team. Have a koolaid and a cookie and take a seat over there while you wait for further processing and creative destruction.

You may also be interviewed for an upcoming documentary to be titled "Cargo Cult Economics."

P.S. Have a nice day