Stiglitz: The Banks Must Be Restrained, The Financial System Must Be Reformed

"We will have another armed robbery unless we prevent the banks, the banks that are too big to fail. We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.” Joe Stiglitz

If a Nobel Prize winnter in economics says the obvious, besides a few diligent bloggers, perhaps other economists will obtain 'air cover' in speaking about the economic and regulatory absurdity taking place today in the US and the UK. Winning the Nobel is even better than tenure.

Here is a video of his speech in Brussels, because this Bloomberg article leaves out some of the more 'pithy' remarks on the Wall Street bank bonuses, the errors efficient market theory, political and ideological capture, lies (his wording) told by central bankers including Alan Greenspan, unproductive "taxes" by banks on the real economy, 'criminal' management of beta, and the social costs of this financial crisis from Joe Stiglitz from the Brussels banking conference.

Stiglitz characterizes the reforms being put forward by the US Congress as completely wrong, and harmful. Watch the video, and compare what Joe Stiglitz is saying with the ponderous mendacity of Larry Summers, and you may better understand why Obama's policies are doomed to failure.

It does not take much imagine to see how things might be quite different if Joltin' Joe was the Chief Economic Advisor or Fed Chairman, rather than 'Last War' Larry or Zimbabwe Ben.

Again, here is a link to this 'must see' video which can be a bit slow to start because of Bloomberg's video platform.

Bloomberg
Stiglitz Says Banks Should Be Banned From CDS Trading
By Ben Moshinsky
October 12, 2009 06:28 EDT

Oct. 12 (Bloomberg) -- Large banks should be banned from trading derivatives including credit default swaps, said Joseph Stiglitz, the Nobel prize-winning economist.

The CDS positions held by the five largest banks posed “significant risk” to the financial system, Stiglitz said at a press conference in Brussels. Big banks should have extra restrictions placed on them, including a ban on derivative trading, because of the risk that they would need government money if they fail, he said in a speech today.

“We will have another armed robbery unless we prevent the banks, the banks that are too big to fail,” Stiglitz said. “We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.”

Derivative trading and excessive risk-taking are blamed for helping to spark the worst financial crisis since World War II. American International Group Inc., once the world’s largest insurer, needed about $180 billion of government money after its derivative trades faltered and pushed the company toward bankruptcy.

Financial markets should be subject to taxes that will discourage “dysfunctional” trading and help pay for the effects that the global crisis had on poorer nations, Stiglitz said last week.

U.S. and European regulators have pushed for tighter regulation of the $592 trillion over-the-counter derivatives market, amid concerns that it could create systemic failures in the financial system. Lawmakers have called for global rules covering derivatives to prevent financial institutions from exploiting jurisdictional differences in regulation.

Stricter Standards

Former German finance minister Hans Eichel said in an interview today that global regulation would ultimately be needed. The European Union should enforce tougher legislation, even if the U.K. is reluctant to adopt stricter standards, he said.

“The Eurozone is strong enough economically to go it alone,” Eichel said. European legislation could then become the blueprint for global rules, said Eichel.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sliding Share

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

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

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

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

Dollar’s Weighting

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

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

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

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

‘Flush’ With Dollars

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


Dollar Forecasts

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

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

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

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

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

Crash 0f 2007 and Retracement From the Top

The US Equity Market Decline from the October 2007 Top on a Percentage Basis with Fibonacci Retracements.



The SP 500 Decline from the October 2007 Top Deflated by Gold in $US, with Fibonacci Retracements from the Point of Secondary Breakdown.

The Speculative Bubble in Equities and the Case for Deflation, Stagflation and Implosion

As part of their program of 'quantitative easing' which is another name for currency devaluation through extraordinary expansion of the monetary base, the Fed has very obviously created an inflationary bubble in the US equity market.



Why has this happened? Because with a monetary expansion intended to help cure an credit bubble crisis that is not accompanied by significant financial market reform, systemic rebalancing, and government programs to cure and correct past abuses of the productive economy through financial engineering, the hot money given by the Fed and Treasury to the banking system will NOT flow into the real economy, but instead will seek high beta returns in financial assets.



Why lend to the real economy when one can achieve guaranteed returns from the Fed, and much greater returns in the speculative markets if one has the right 'connections?'



The monetary stimulus of the Fed and the Treasury to help the economy is similar to relief aid sent to a suffering Third World country. It is intercepted and seized by a despotic regime and allocated to its local warlords, with very little going to help the people.



Deflation

By far this presents the most compelling case for a deflationary episode. As the money that is created flows into financial assets, it is 'taxed' by Wall Street which takes a disproportionately large share in the form of fees and bonuses, and what are likely to be extra-legal trading profits.

If the monetary stimulus is subsequently dissipated as the asset bubble collapses, except that which remains in the hands of the few, it leaves the real economy in a relatively poorer condition to produce real savings and wealth than it had been before. This is because the outsized financial sector continues to sap the vitality from the productive economy, to drag it down, to drain it of needed attention and policy focus.

At the heart of it, quantitative easing that is not part of an overall program to reform, regulate, and renew the system to change and correct the elements that caused the crisis in the first place, is nothing more than a Ponzi scheme. The optimal time to reform the system was with the collapse of LTCM, and prior to the final repeal of Glass-Steagall, and the raging FIRE sector creating serial bubbles.

Stagflation

These injections of monetary stimulus to maintain a false equilibrium is in reality creating an increasingly unsustainable and unstable monetary disequilibrium within the productive economy. As the real economy contracts, the amount of money supply that the economy can sustain without triggering a monetary inflation decreases, and in a nonlinear manner. This is because the money multiplier does not 'work' the same in reverse, owing to the ability of private individuals and corporations to default on debt.

Ironically, with each iteration of this stimulus and seizure of wealth, the dollar becomes progressively weaker because there is a smaller productive economy to support it, even if there are less dollars, despite the nominal gains in GDP which are an accounting illusion. This has been further enabled by the dollar's status as reserve currency backed by nothing since 1971, which has created an enormous overhang of dollars in the hands of other nations.

One cannot have a sustained economy recovery in which the real median wage and domestic employment are stagnant or declining, and Personal Income is declining, as wealth is being increasingly concentrated in corporations and the upper 2% of the population.



This is why stagflation, rather than hyperinflation or a sustained monetary deflation with a stronger dollar, is most likely. There will be a mix of falling and rising prices, depending on the elasticity and source (imported content) of the products, with a wildly staggering dollar that could destabilize other parts of the world, and pernicious underemployment and growing civil unrest domestically.

Those who have taken a huge share of the last three bubbles would like to stop the bubble now, keep their gains, and return to a system of fiscal restraint with light taxation on their windfall of assets.



So why does this not just simply happen? Because the political risks become enormous. It is difficult to reduce a population of free men into debt slaves, without risking a significant reaction. Therefore, it seems most likely that the government and the Fed will try to 'muddle through' for the time being, and look for an exogenous event to break the stalemate.



The traditional solution has been a military conflict, which stifles dissent against the government while generating artificial demand sufficient to energize the productive economy. It is a means of exporting your social misery, official corruption, and fiscal irresponsibility to another, weaker people.

Implosion

One only has to look at the "German miracle" of the 1930's to see this progression from artificial stimulus, to domestic seizure of assets, to scapegoating and aggressive wars of acquisition, as described above. But this progress out of economic depression had made Hitler and Mussolini the darlings of Wall Street and the international financiers. Indeed, Time Magazine had even named Hitler their "Man of the Year" for this economic miracle, even though it was a fraudulent house of cards.



If the Fed continues to apply monetary stimulus and subsidy into this system, without a significant reform, the dollar will eventually "break" and the real economy will temporarily collapse. This will result in the mother of all stagflation, with a hyperinflationary edge to it, and a breakdown in the electoral process, the rise of demagogues, and soaring interest rates.

At this point the cure will not be a monetary stimulus, but more like a surgery to remove a life-threatening cancer, fraught with risk and a significant challenge to the continuing governance of the US not seen since the 1860's.

Conclusion

As you know, our own judgement on this is that we will go through a cycle of demand deflation, which we are in now, and then most likely a pernicious stagflation which may see some episodes that will be remniscent of the inflation of the 1970's. A persistent deflation with a stronger dollar, as well as hyperinflation, seem to be outliers that are dependent on exogenous factors.

If the world dumped its dollars tomorrow, we would see a US hyperinflation. If the Fed raised short term rates to 20 percent tomorrow under duress we would see a ture monetary deflation. As a reminder, in a purely fiat currency regime with an absence of external standards, the question of iflation and deflation is a policy decision. The limiting factor is the latitude with which that policy decision can be made.

The most probable path is a lingering death for the dollar over the next ten years, with a produtive economy that continues to stagger forward under the rule of the financial oligarchs.

See Money Supply: A Primer and Price Demand and Money Supply As They Relate to Inflation and Deflation. You might also take a look at Some Common Fallacies About Inflation and Deflation and Gold: Until the Banks Are Restrained and Balance Is Restored. And finally, if you intend to trade and invest in these markets, you really ought to take a look at A Priori Vs. Empirical Reasoning and Practical Decision-Making.

Reading for the Weekend

Surely, there is at this day a confederacy of evil, marshalling its hosts from all parts of the world, organizing itself, taking its measures, enclosing the Church of Christ as in a net, and preparing the way for a general apostasy from it...

Far be it from any of us to be of those simple ones, who are taken in that snare which is circling around us! Far be it from us to be seduced with the fair promises in which Satan is sure to hide his poison!

Do you think he is so unskillful in his craft, as to ask you openly and plainly to join him in his warfare against the Truth?

No; he offers you baits to tempt you. He promises you civil liberty; he promises you equality; he promises you trade and wealth; he promises you a remission of taxes; he promises you reform. He promises you illumination, he offers you knowledge, science, philosophy, enlargement of mind.

He scoffs at times gone by; he scoffs at every institution which reveres them. He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods.

Then he laughs and jokes with you, and gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."

John Henry Newman

Beta Monster: The Most Dangerous Banks In the World

The most leveraged bank by far is the-investment-bank-which-must-not-be-named. It is followed by J.P. Morgan on a percentage basis, but JPM is far larger nominally than these charts indicate because of its much larger capital base. Its in the nature of the difference between a cardshark (GS) and a pawnshop (JPM). Or perhaps just the capital requirements of the short versus the long con.

Luckily for the US financial system the big banks are incapable of making errors in risk management, and always seem to get by with a little helpful information from their friends, and a lot of money from the public.

We would ask Timmy for an explanation on how this could happen so soon after a crisis in which the Treasury had to ask Congress to stop financial armageddon overnight because of the perils of excessive leverage on dodgy capital, but he is taking dictation from Lloyd on line 1, and Jamie is on hold on line 2.

Mutual Funds Are at Cash Levels Not Seen Since the 2007 Market Top

Trend following beta monkeys (TFBM) using Other People's Money (OPM).

They'll never learn.

Because they don't care after they have collected their fees and bonuses.

Herd behaviour does not begin to describe this phenomenon.

The US financial system is designed to maximize financial management returns and encourage the mispricing of risk, and ultimately the distribution of wealth from the many to the few through fraud, fiduciary recklessness, and Ponzi schemes.

The root cause of the US's problems are with the distorted monetary policies of the Federal Reserve, and the regulatory failure of a government corrupted by its financial sector.

Obama Wins the Nobel Peace Prize

Is the award taxable?

Not if his Treasury Secretary does his tax returns.

Its not the most undeserved award ever granted. After all, Henry Kissinger also received the Nobel Peace Prize. And Schicklgruber was Time's Man of the Year in 1939.

What has he done? What has Obama actually done?

What has Obama actually done to merit the Nobel Peace Prize this early in his administration? Besides talking.

Well he did pay the US' tab at the UN. But other than that, he has done nothing to merit this award, except for talking a good game. And so, he cheapens it.

Why the Federal Government Seized the Monetary Gold in 1933

The question of confication reappears every time gold rallies, from those with enough history to be able to throw out a few facts and sound plausible, but not enough grounding in history and the law to actually place them in any sort of reasonable context.

Below is a 'reprise' of a blog entry we posted early this year on the topic.

The Feds acted on gold because at the time it WAS the currency of the country, and the government had some proper claims on it. When the US left the gold standard it relinquished all such claims, as gold became purely private property. Except perhaps if you are holding gold American eagles, which bear the patina of 'currency.'

It should also be noted that the sole action of the government was to ask for the gold, to withdraw convertibility of gold notes from the domestic public, and to monitor the activity of safe deposit boxes taking certain categories of gold, and essentially nothing else. There were no investigations, searches, or even active prosecutions for non-compliance.

The purpose of the confiscation was to prepare the way for a formal devaluation of the dollar while it was still on the gold standard.

Could the government try to confiscate the gold from private citizens again? Certainly. Although unless it is part of a return to the gold standard with adequate recompense, it would be little more than the theft of private property.

The government can also ask you to place an RFID chip in your head before you can buy anything or drive a car, ask for your children and place them in youth camps, bind you over to your creditors in indentured servitude, ask you to house homeland security troops in your home with no payment, and request your presence on a freight train for relocation to New Mexico.

There is a wide difference between what *could* be done, what is likely to be done, and what people might consider to be unreasonable enough to resist.

Talk of confiscation invariably occurs when gold rallies because it is a way for those who rode the rally to climb the wall of worry and those who missed the rally to feel better about their lost opportunity.


The Last Time the Feds Devalued the Dollar to Save the Banks
14 January 2009

We dipped once again into the Federal Reserve Bulletin Publication from June, 1934 to take a closer look at the growth of the monetary base, and found an interesting graphic that shows the accounting for the January 1934 devaluation of the dollar and the subsequent result on Bank Reserves in the Federal Reserve System.

As you will recall, the Gold Act, or more properly Executive Order 6102 of April 5, 1933, required Americans to surrender their gold coinage and certificates to the Federal Reserve Banks by May 1, 1933. There were no prosecutions for non-compliance except one benchmark case which was brought voluntarily by a person who wished to challenge the act in court.

After a substantial portion of the gold was turned in by US citizens and taken from their bank based safe deposit boxes, the government officially devalued the dollar from 20.67 to 35.00 per ounce in the Gold Reserve Act of January 31, 1934.

The proceeds from this devaluation were used to provide a significant boost to the Federal Reserve member bank positions as shown in the first chart below.

The inflation visited on the American people because of this action helped to take the CPI as it was then measured up 1200 basis points from about -8% to +4% by the end of 1933. To somewhat offset the monetary inflation the Fed also contracted the Monetary Base which served the nascent recovery in the real economy rather poorly and is viewed widely as one of a series of policy errors.

Considering that the actions did little for the employment situation this was painful medicine indeed to those who were dependent on wages.



Fortunately at the same time FDR was initiating the New Deal programs which, despite continual opposition from a Republican minority in Congress, managed to provide a small measure of relief for the 20+% public that was suffering from unemployment and wage stagnation.

People ask frequently "Will the government seize gold again?"

While there is no certainty involved in anything if a government begins to overturn the law and seize private property, one has to ask for the context and details first to understand what happened and why, to understand the precedent.

Technically, the government did not engage in a pure seize of private property, since at that time the US was on the gold standard, and much of the gold holdings of US citizens were in the form of gold coinage and certificates.

Governments always make the case that the currency is their property and that the user is merely holding it as a medium of exchange. The foundation of the argument was that the government required to recall its gold to strengthen the backing of the US dollar against the net outflows of gold for international trade. The devaluation helped with this as well, since dollars brought less gold for trade balances.

People also ask, "Why didn't the government just revalue the dollar without trying to recall all the gold from the American public?"

The answer would seem to be that this would have been more just, more equitable recompense for the public. The Treasury could have purchased gold from the public to support its foreign trade needs.

But it would have left much less liquidity for the banks.

One can make a better case that the recall of the gold, with the subsequent revaluation to benefit a small segment of the population in the Banks, was a form of seizure of wealth without due compensation. Hence the lack of active prosecutions.

So, will the government take back gold again to save the banks by devaluing the dollar?

Highly unlikely, because they not only do not need to this, since the dollar is no longer backed by gold, and is a form of secular property except perhaps for gold eagles, but they do not have to, because they are devaluing the dollar already to save the banks.

This time the confiscation of wealth to save the banks is called TARP.

If one thinks about it, US Dollars are being created and provided directly to the banks to boost their free reserves significantly, at a scale comparable and beyond to 1933-34.

The confiscation of wealth is being spread among all holders of US dollars and dollar assets, foreign and domestic, in the more subtle form of monetary inflation.

Granted, the government must be more opaque to mask their actions in order to sustain confidence in the dollar while the devaluation occurs, but this is exactly what is happening, and all that is required to happen in a fiat regime.

There is no need to seize widely held exogenous commodities like gold and oil, but merely dampen any bellwether signals that a significant devaluation of the dollar is once gain being perpetrated on the American people in order to save the banks.

Its fascinating to look carefully at this next chart below.



First, notice the big drop in gold in circulation of 9.8 million ounces, or roughly 36% of the measured inventory at the end of 1932. Think someone was front-running the dollar devaluation? We suspect that the order went out to start pulling in the gold stock to the banks.

The reduction in gold in circulation AFTER the announcement of the Gold Act in April would be about 3.9 million ounces, or roughly 22% of the gold remaining in circulation in March 1933.

Considering that all gold coinage held by banks in the vaults was automatically seized, the voluntary compliance rate is not all that impressive. We are not sure how much of this was being held in overseas hands by non-US entities.

But beyond a doubt, there was a unjust, if not illegal, seizure of wealth by requiring citizen to turn in their gold to the banks, which was then revalued at the beginning of 1934 by 69% from 20.67 to 35 dollars.

It would have been much more equitable to devalue the dollar and to change the basis for dollar/gold first, before requiring private citizens to surrender their holdings. But of course, this would have lessened the liquidity available for direct infusion into the Federal Reserve banks.

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

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

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

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

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

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

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

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

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

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

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

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

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

Read the rest here.

Gold: Until the Banks Are Restrained and Balance Is Restored

Gold has apparently broken out of a big inverse Head and Shoulder formation, possibly an ascending triangle if you prefer that for reliability. In combination, as they often are, this is a powerful sign of buying pressure, accumulation and a sharp rise in price.

The targets we saw on the Gold Long Term chart posted here on September 15 call out a range of targets for this leg in the bull market from 1310 to 1350 level.



Here is a closer look at an updated chart showing the successful breakout from the Inverse H&S pattern. The target of 1310 now seems more confident for this leg of the gold bull market.

The formation will be in play as long as the 'secondary neckline' is not violated on a weekly close.



It is always more difficult to move from the charts to a more fundamental macro analysis and ask, "What does this mean? What is the market telling us with these sharp moves higher in gold and silver?"

And of course there is the most common question of all, "How far can it go?"

This is where the controversy begins, because gold is stepping on the toes of those who misunderstand the existing forces of demand deflation and monetary inflation in the United States, who fundamentally do not understand money and wealth, and their differences.

It is also bothering the financial commentators and analysts who, in addition to mouthing the words and sentiments that other people provide for them, sometimes have a thought of their own and must wonder, "Is what I am saying true? And if it is, why is gold doing this? Should I be fearful of my position if the markets fail?"

We have tried to portray some potential causes for the sweeping move in gold. One must first remember that this is nothing new. Gold is in an obvious and sustained bull market, that has it roots when the Federal Reserve under Alan Greenspan decided to print its way out of a series of crises beginning in the mid 1990's, and started rising in earnest with the Fed's monetary and regulatory errors in 2002.

Gold, despite the obvious efforts of the monied interests to disparage it publicly while accumulating it privately, is rising because the US dollar is being used badly, is being weakened by the failing schemes of a corrupt combination of the government and financial interests.

This is why there has been no serious reform, no meaningful investigations or indictments in what will surely be remembered in history as a financial fraud of a magnitude with the South Sea Bubble in England and the Mississippi Bubble in France.

There are going to be more crises, more dislocations associated with this, despite the best efforts of the financial engineers to paper it over, and the captive media to cover it up, dismiss it, and move along to the next asset bubble, this time in stocks.

This is what gold is telling us. It is saying that the era of the US Dollar as the world's reserve currency is over, with all that this implies in the balance of power in the world as it has existed since the end of the Second World War. And it is occurring for some very good reasons which the US media and the Congress seem to prefer to ignore.

Gold is where people put their wealth when they are confronted with uncertainty, with asymmetric information, when they are afraid; when the statists and the crony capitalists are preying on the savings of the people. Gold is a refuge, a safe haven, when there is good reason to be concerned about your currency, your wealth, and your future; when lies are in the ascendancy and truth and justice are scarce commodities.

This is because gold is one of the few stores of value that is compact, universal, portable, and contingent upon the full faith and credit of nothing but itself.

And so the rally in gold will likely continue until the banks are restrained, the financial system is reformed, and balance is restored to the economy. When the media once again speaks freely and truthfully and openly, when justice is done and the guilty are judged, and when the people can more reasonably place their confidence in the words and actions of those who hold the stewardship of their nation under the Constitution which they have sworn to uphold.

Or, when the Constitution is tossed, and freedom is extinguished, because it is no longer convenient to a people given over to self-deception, egoism, greed, mere anarchy, and nothingness.

"In Egypt's sandy silence, all alone,
Stands a gigantic leg, which far off throws
The only shadow that the Desert knows:
I am great Ozymandias, saith the stone,
The King of Kings; this mighty city shows
The wonders of my hand. The City's gone,
Nought but the leg remaining to disclose
The site of this forgotten Babylon.

We wonder, and some hunter may express
Wonder like ours, when thro' the wilderness
Where London stood, holding the wolf in chase,
He meets some fragments huge, and stops to guess
What powerful but unrecorded race
Once dwelt in that annihilated place."

Horace Smith, 1 February 1818

Latvia Goes "No Bid"

This bears watching. It may be nothing on the grander stage, but then again, there is a precedent for small events to trigger larger actions and reactions.

Latvia on the brink
By MarketWatch
Oct. 7, 2009, 10:04 a.m.

LONDON (MarketWatch) -- It's never good news when a government bond auction fails. It's particularly bad news when an auction fails for a note maturing in just six months. And it's really bad news when there isn't any bid at all.

Yet that's what happened Wednesday when Latvia tried to sell close to $17 million of paper. It's not hard to figure out why.

The Baltic country is squabbling with Western -- mostly Swedish -- leaders over spending cuts, and it's a very real possibility that the country may be forced to devalue its euro-pegged currency if emergency global funds don't arrive.

Were Latvia to devalue, that would hit economies in neighboring countries like Lithuania, and Swedish banks would rack up additional losses on the loans they have made throughout the region.

The real nightmare scenario would be the Swedish banks then pulling down other European banks, and then triggering Credit Crunch: Part 2.

There is, of course, a long way before that unwieldy scenario comes to pass. Latvia hasn't devalued -- yet - and, even if it does, that doesn't mean it would drag the Swedish banks under.

Lenders like Swedbank which has more branches in the Baltic countries and Ukraine than in Sweden -- have endured plenty of losses, and Swedbank, for one, just raised more than $2 billion to weather stormier times. See earlier story.

Still, investors might recall a minor matter involving teaser loans that only took down the entire world economy.

Not every domino falls. But there's one that's looking shaky.

Guest Post: Tavakoli On the Reserve Currency Discussions

Here is a commentary from Janet Tavakoli on the Robert Fisk article in yesterday's Independent.

It is remarkably well grounded and thoughtful in its analysis and is well worth reading.

This is a guest post at Le Café Américain, but links to her site and other important essays are contained herein.

Her insights are a welcome palliative to some of the astonishingly shallow commentary we have seen and heard from the financial media.

Of course we would agree that this discussion has been ongoing for many years, as such a discussion fills the void in the evolution of global finance after the breakdown of the original Bretton Woods Agreement, and the closing of the gold window by Richard Nixon.

The point which we have made, perhaps no nearly so well, is that the actions of the Fed and the Treasury over the last ten years have brought the world to what appears to be a tipping point, something that will finally precipitate a change in what has long been a de facto equilibrium; a sea change if you will.

A major precipitant to the current action appears to be the quinquennial rebalancing of the SDR, which will be occurring in 2010. That, and the widespread financial fraud which Wall Street perpetrated on foreign investors, which has been seriously underplayed by the American media.

This is the scenario which was forecast here in 2005, when it became apparent that Greenspan and his governors, together with the Treasury, were not going to act in a manner that would promote a sustainable environment for the status quo.

And further, that the serial sociopaths on Wall Street would keep pushing their luck to the limit, face-ripping their way around the world with our trading partners and creditors until they hit the wall in the form of a break in confidence and an irreparable loss of trust, triggering a significant financial blowback.

Although there was some hope that Obama and his economic team might be able to turn the tide, that hope is fading quickly. And so here we are today.


China Defaults, Currency Basket Threatens Dollar
TSF – October 6, 2009
By Janet Tavakoli

Robert Fisk exposed revived discussions by the Gulf States, China, France, Japan, Brazil, and Russia to replace the dollar as the benchmark oil trading currency with a basket of currencies including gold within 10 years.

This proposal is not new and discussions have been ongoing for decades. But other extraordinary moves in the capital markets suggest we should take this threat to the dollar’s position very seriously. For example, China has $2.3 trillion in currency reserves (about 70% in dollars), and China knows how to get its way.

In November 2008, Chinese banks said they would no longer play by our rules. Top tier banks (Bank of China and Industrial and Commercial Bank of China) reneged on derivatives contracts. They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation. This should have been headline news in every financial newspaper, but it wasn’t. Chinese banks defaulted.

They may have been partially motivated by U.S. malfeasance in the capital markets that caused losses in Asia. The U.S. squandered its credibility and our cover-ups have done nothing to restore it.

Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties. Everyone was forced to renegotiate contracts with the Chinese banks.

From the perspective of the derivatives markets, this is earth shattering. What would have happened if AIG had done the same thing? (Hey, Goldman, UBS, and others…you want your collateral? Well…Stuff It!)

At the end of August 2009, China signaled that state owned oil consumers: Air China, COSCO, and China Eastern could default on money-losing commodities derivatives contracts.

If we had been paying attention, the U.S. should have done everything in its power to correct our mistakes, clean up the mess in our financial system—instead of sweeping it under the carpet—and turned our efforts to maintaining the credibility of the capital markets and the credibility of the dollar.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides
consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008).

Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

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

The Unreasoning Antipathy for the Bull Market in Gold Deconstructed as Cognitive Dissonance

"Foolishness is my theme, let satire be my song." George Gordon, Lord Byron

The comments in the news today following the suggestion that the US Dollar is not eternal, and that gold might be rising in price because of increased demand and changing economic climate and taste, might be humorous, if not uproariously comical, if the underlying subject was not of such potentially serious consequence to the savings of many.

For example, a major gold bullion site, that seems to be permanently bearish on gold through its house commentator, has even added a new chart to its main site that purports to show that the rising price of gold is just a dollar doppelganger, not real, and not a bull market. Given that said analyst has been bearish on gold for the last several hundreds of dollars, one has to ask, "Is he talking someone's book, or just feeling sheepish?"

But, trying to accept that these things as genuine and sincere expressions of thoughtful analysis, in the face of overwhelming evidence to the contrary, here is some speculation on why the concept that the dollar might no longer be the focus of Creation, and could be replaced by something that includes gold, proves to be so disturbing to the point of mania in some noted and otherwise presumably public figures in the face of four years of steady price increases and an unmistakable upward trend.

We do not have an issue with someone who thinks that some future outcome might diverge from what we think might happen, since it is all about probabilites. But it is odd when people choose to continually deny what IS happening, and keep rationalizing that it is not happening, cannot be happening, and is merely some illusion because it does not fit in with their firmly held belief. That denial seems a bit irrational, coming from those we suppose are ordinarily rational and otherwise grounded in reality.

Prechter, Shilling, and the Ideologically Predisposed Deflationists

Those who have decided what *should* be happening, and are not pleased that reality is not cooperating with their ideological predispostions. "I reject your reality, and substitute my own." See 'Flat Earth Society'

"An early version of cognitive dissonance theory appeared in Leon Festinger's 1956 book, When Prophecy Fails.

This book gave an inside account of belief persistence in members of a UFO doomsday cult, and documented the increased proselytization they exhibited after the leader's "end of the world" prophecy failed to come true.

The prediction of the Earth's destruction, supposedly sent by aliens to the leader of the group, became a disconfirmed expectancy that caused dissonance between the cognitions, "the world is going to end" and "the world did not end."

Although some members abandoned the group when the prophecy failed, most of the members lessened their dissonance by accepting a new belief, that the planet was spared because of the faith of the group." Wikipedia

Market Analysts and Financial Newspeople Syndrome

Sometimes people who have chosen a particular path, profession, or investment strategy will strenuously reject anything that suggests that their choice might have been incorrect, or threatens their status quo, with sometimes humourous results. Similar to 'pampered child being denied their candy and rejecting that possibility' syndrome.

"In a different type of experiment conducted by Jack Brehm, 225 female students rated a series of common appliances and were then allowed to choose one of two appliances to take home as a gift.

A second round of ratings showed that the participants increased their ratings of the item they chose, and lowered their ratings of the rejected item. This can be explained in terms of cognitive dissonance. When making a difficult decision, there are always aspects of the rejected choice that one finds appealing and these features are dissonant with choosing something else.

In other words, the cognition, "I chose X" is dissonant with the cognition, "There are some things better about Y." More recent research has found similar results in four-year-old children (Bloomberg and CNBC news anchors and commentators) and capuchin monkeys (Several prominent metals analysts and chief market strategists)." Wikipedia

But we would have to admit that at the end of the day:

"No man really becomes a fool until he stops asking questions." Charles Steinmetz

Peak Employment

The Labor Participation Rate is the total number of people employed expressed as a percentage of the total non-institutionalized working force over the age of 16.

It is a good number to watch, because it is harder to play games with it, as the government tends to do with the unemployment rate, making people disappear when their benefits expire.

Granted, it is not perfect, because it does not account for those who are underemployed, working part time or at a minimum wage job far below their aspirations and capabilities.

Nevertheless, we are seeing a flatness in the employment figures that is pronounced.



This might not necessarily be a bad thing, if the average real wage was rising sufficiently so that one might put forward the hypothesis that people are not working because they do not need to work, and their disposable income is sufficient for their needs.

But this is not the case in the USA.

A painful adjustment to free trade and globalization? Sending your working class against nations that are executing aggressive industrial policies is like sending troops marching upright in ordered ranks into heavily entrenched machine gun fire.

Most would feel better if that pain were more equally and equitably distributed. The wealthy elite often like to use a crisis to send a nation to war at times such as these, to create work and control the population. In WWI there was also a vigorous pandemic to help cull the herd as the eugenicists used to say. Good for employment, perception control, and of course profits.

And so it is, that the generals, besotted with the favors of industrialists, and the institutionalized thinking of craven staff, are fighting the last war once again, and losing badly.

So Why Is the Stock Market Going HIgher?

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

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

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

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

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

As Ludwig von Mises noted:

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

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

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

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

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

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

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

Bloodbath Coming in the US Banking Sector

The stock market rallied today because of a slightly better than expected ISM Services number. Considering how much 'stimulus' the government has given to the FIRE sector it should be doing slightly better than the real economy.

Another reason the market rallied in New York today was a bullish call on the banking sector by a Goldman Sachs analyst.

Here is a somewhat different analysis of the situation by Chris Whalen of Institutional Risk Analytics. Chris believes that he sees strong evidence that "the fourth quarter in the banking industry is going to be a bloodbath."

Astounded by Goldman's Upgrade Banks Heading Into Storm Says Whalen

Even if Goldman is wrong, and lots of investors take their advice and get hurt buying into banking stocks before an approaching "bloodbath," they seem to have it covered, at least for themselves, with plenty of derivatives delivering hefty profits into their own pockets should those banks fail.

And they could be right. The government might be preparing fresh tranches of bailout money and there could be more toxic assets coming from off the banks' off-balance-sheets to yours, via the Fed.

Place your bets. Or better yet, save your money, and don't.

Yahoo Finance
The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says
by Aaron Task
Oct 05, 2009 01:49pm EDT

Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.

But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally.

"Why is liquidity going into the financial sector? It's because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign."

The banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. "The real economy is shrinking because of a lack of credit."

The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn't yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)

"Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath," says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.

"When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring," Whalen says.

In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other "prophets of the apocalypse" who've once again been raising red flags in recent days.

China May Lead Coalition of Nations to Topple the US Petrodollar

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

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

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

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

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

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

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

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

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

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

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

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

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

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

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

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

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

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

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

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

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

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

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

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

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