Archive for October, 2010
Entrepreneur and Philanthropist
Posted: October 23, 2010 03:48 PM
Charles Ferguson’s latest documentary, Inside Job, does a masterful job in telling the story of how the financial crisis happened. Ferguson details how the financial institutions got greedy and how they convinced our lawmakers to drop regulations that keep your money safe (basically arguing that over-regulation is a bad thing). The financial institutions gambled with your money and lost. But since they were too big to fail, the feds bailed them out. A “no lose” scenario for the financial institutions.
The movie also explains why President Obama isn’t putting in place regulations to prevent it from happening again. Basically, many of the same people who caused the problem in the first place are still in charge. So they have not rolled back the regulatory policies to what they were before, and they haven’t beefed up enforcement either. No criminal charges have been filed. The rich got richer, everyone else paid the price.
I have previously pointed out that the process used for developing Obama’s economic policies would be significantly improved if it were done by an independent team of experts and made available publicly so that other independent experts can comment on them. After seeing this movie, it’s clear what would happen if they did as I suggested: independent reviewers would point out that Obama’s policies don’t solve the problem because they don’t restore the financial regulations and oversight that we had in the past, nor do they deal with the new problems that surfaced (e.g., the credit rating agencies are not punished in any way if they give safe ratings to unsafe assets). Obama’s policies only deal with the symptoms of the disease, not its cause.
Obama portrayed himself as an agent of change, but this movie makes it clear that it is still business as usual and we are doomed to repeat this disaster.
If you can only see one film this year, this is the movie to see. I cannot recommend this movie highly enough.
Read the entire article HERE.
By MICHAEL HUDSON
What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1 per cent interest cost? This is the game that is being played today.
Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy’s banking system can create the most credit, using an army of computer keyboards to appropriate the world’s resources. The key is to persuade foreign central banks to accept this electronic credit.
U.S. officials demonize foreign countries as aggressive “currency manipulators” keeping their currencies weak. But they simply are trying to protect their currencies from being pushed up against the dollar by arbitrageurs and speculators flooding their financial markets with dollars. Foreign central banks find them obliged to choose between passively letting dollar inflows push up their exchange rates – thereby pricing their exports out of global markets – or recycling these dollar inflows into U.S. Treasury bills yielding only 1% and whose exchange value is declining. (Longer-term bonds risk a domestic dollar-price decline if U.S interest rates should rise.)
“Quantitative easing” is a euphemism for flooding economies with credit, that is, debt on the other side of the balance sheet. The Fed is pumping liquidity and reserves into the domestic financial system to reduce interest rates, ostensibly to enable banks to “earn their way” out of negative equity resulting from the bad loans made during the real estate bubble. But why would banks lend more under conditions where a third of U.S. homes already are in negative equity and the economy is shrinking as a result of debt deflation?
The problem is that U.S. quantitative easing is driving the dollar downward and other currencies up, much to the applause of currency speculators enjoying a quick and easy free lunch. Yet it is to defend this system that U.S. diplomats are threatening to plunge the world economy into financial anarchy if other countries do not agree to a replay of the 1985 Plaza Accord “as a possible framework for engineering an orderly decline in the dollar and avoiding potentially destabilizing trade fights.” The run-up to this weekend’s IMF meetings saw the United States threaten to derail the international financial system, bringing monetary chaos if it does not get its way. This threat has succeeded for the past few generations.
The world is seeing a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. This financial grab is occurring without an army to seize the land or take over the government. Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. Indeed, this “currency war” so far has been voluntary among individual buyers and the sellers who receive surplus dollars for their assets. It is foreign economies that lose, as their central banks recycle this tidal wave of dollar “keyboard credit” back into low-yielding U.S. Treasury securities of declining international value.
For thousands of years tribute was extracted by conquering land and looting silver and gold, as in the sacking of Constantinople in 1204, or Incan Peru and Aztec Mexico three centuries later. But who needs a military war when the same objective can be won financially? Today’s preferred mode of warfare is financial. Victory in today’s monetary warfare promises to go to whatever economy’s banking system can create the most credit. Computer keyboards are today’s army appropriating the world’s resources.
The key to victory is to persuade foreign central banks to accept this electronic credit, bringing pressure to bear via the International Monetary Fund, meeting this last weekend. The aim is nothing as blatant as extracting overt tribute by military occupation. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets.
But the world has seen the Plaza Accord derail Japan’s economy by obliging its currency to appreciate while lowering interest rates by flooding its economy with enough credit to inflate a real estate bubble. The alternative to a new currency war “getting completely out of control,” the bank lobbyist suggested, is “to try and reach some broad understandings about where currencies should move.” However, IMF managing director Dominique Strauss-Kahn, was more realistic. “I’m not sure the mood is to have a new Plaza or Louvre accord,” he said at a press briefing. “We are in a different time today.” On the eve of the Washington IMF meetings he added: “The idea that there is an absolute need in a globalised world to work together may lose some steam.” (Alan Beattie Chris Giles and Michiyo Nakamoto, “Currency war fears dominate IMF talks,” Financial Times, October 9, 2010, and Alex Frangos, “Easy Money Churns Emerging Markets,” Wall Street Journal, October 8, 2010.)
Quite the contrary, he added: “We can understand that some element of capital controls [need to] be put in place.”
The great question in global finance today is thus how long other nations will continue to succumb as the cumulative costs rise into the financial stratosphere? The world is being forced to choose between financial anarchy and subordination to a new U.S. economic nationalism. This is what is prompting nations to create an alternative financial system altogether.
The global financial system already has seen one long and unsuccessful experiment in quantitative easing in Japan’s carry trade that sprouted in the wake of Japan’s financial bubble bursting after 1990. Bank of Japan liquidity enabled the banks to lend yen credit to arbitrageurs at a low interest rate to buy higher-yielding securities. Iceland, for example, was paying 15 per cent. So Japanese yen were converted into foreign currencies, pushing down its exchange rate.
It was Japan that refined the “carry trade” in its present-day form. After its financial and property bubble burst in 1990, the Bank of Japan sought to enable its banks to “earn their way out of negative equity” by supplying them with low-interest credit for them to lend out. Japan’s recession left little demand at home, so its banks developed the carry trade: lending at a low interest rate to arbitrageurs at home and abroad, to lend to countries offering the highest returns. Yen were borrowed to convert into dollars, euros, Icelandic kroner and Chinese renminbi to buy government bonds, private-sector bonds, stocks, currency options and other financial intermediation. This “carry trade” was capped by foreign arbitrage in bonds of countries such as Iceland, paying 15 per cent. Not much of this funding was used to finance new capital formation. It was purely financial in character – extractive, not productive.
By 2006 the United States and Europe were experiencing a Japan-style financial and real estate bubble. After it burst in 2008, they did what Japan’s banks did after 1990. Seeking to help U.S. banks work their way out of negative equity, the Federal Reserve flooded the economy with credit. The aim was to provide banks with more liquidity, in the hope that they would lend more to domestic borrowers. The economy would “borrow its way out of debt,” re-inflating asset prices real estate, stocks and bonds so as to deter home foreclosures and the ensuing wipeout of the collateral on bank balance sheets.
This is occurring today as U.S. liquidity spills over to foreign economies, increasing their exchange rates. Joseph Stiglitz recently explained that instead of helping the global recovery, the “flood of liquidity” from the Federal Reserve and the European Central Bank is causing “chaos” in foreign exchange markets. “The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy. … It’s doing nothing for the American economy, but it’s causing chaos over the rest of the world.” (Walter Brandimarte, “Fed, ECB throwing world into chaos: Stiglitz,” Reuters, Oct. 5, 2010, reporting on a talk by Prof. Stiglitz at Colombia University. )
Dirk Bezemer and Geoffrey Gardiner, in their paper “Quantitative Easing is Pushing on a String” , prepared for the Boeckler Conference, Berlin, October 29-30, 2010, make clear that “QE provides bank customers, not banks, with loanable funds. Central Banks can supply commercial banks with liquidity that facilitates interbank payments and payments by customers and banks to the government, but what banks lend is their own debt, not that of the central bank. Whether the funds are lent for useful purposes will depend, not on the adequacy of the supply of fund, but on whether the environment is encouraging to real investment.”
Quantitative easing subsidizes U.S. capital flight, pushing up non-dollar currency exchange rates
Federal Reserve Chairman Ben Bernanke’s quantitative easing may not have set out to disrupt the global trade and financial system or start a round of currency speculation that is forcing other countries to defend their economies by rejecting the dollar as a pariah currency. But that is the result of the Fed’s decision in 2008 to keep unpayably high debts from defaulting by re-inflating U.S. real estate and financial markets. The aim is to pull home ownership out of negative equity, rescuing the banking system’s balance sheets and thus saving the government from having to indulge in a Tarp II, which looks politically impossible given the mood of most Americans.
The announced objective is not materializing. The Fed’s new credit creation is not increasing bank loans to real estate, consumers or businesses. Banks are not lending – at home, that is. They are collecting on past loans. This is why the U.S. savings rate is jumping. The “saving” that is reported (up from zero to 3 per cent of GDP) is taking the form of paying down debt, not building up liquid funds on which to draw. Just as hoarding diverts revenue away from being spent on goods and services, so debt repayment shrinks spendable income.
So Bernanke created $2 trillion in new Federal Reserve credit. And now (October 2010) the Fed is proposing to increase the Fed’s money creation by another $1 trillion over the coming year. This is what has led gold prices to surge and investors to move out of weakening “paper currencies” since early September – and prompted other nations to protect their own economies accordingly.
It is hardly surprising that banks are not lending to an economy being shrunk by debt deflation. The entire quantitative easing has been sent abroad, mainly to the BRIC countries: Brazil, Russia, India and China. “Recent research at the International Monetary Fund has shown conclusively that G4 monetary easing has in the past transferred itself almost completely to the emerging economies … since 1995, the stance of monetary policy in Asia has been almost entirely determined by the monetary stance of the G4 – the US, eurozone, Japan and China – led by the Fed.” According to the IMF, “equity prices in Asia and Latin America generally rise when excess liquidity is transferred from the G4 to the emerging economies.”
Borrowing unprecedented amounts from U.S., Japanese and British banks to buy bonds, stocks and currencies in the BRIC and Third World countries is a self-feeding expansion. Speculative inflows into these countries are pushing up their currencies as well as their asset prices, but. Their central banks settle these transactions in dollars, whose value falls as measured in their own local currencies.
U.S. officials say that this is all part of the free market. “It is not good for the world for the burden of solving this broader problem … to rest on the shoulders of the United States,” insisted Treasury Secretary Tim Geithner on Wednesday.
So other countries are solving the problem on their own. Japan is trying to hold down its exchange rate by selling yen and buying U.S. Treasury bonds in the face of its carry trade being unwound as arbitrageurs are paying back the yen that they earlier borrowed to buy higher-yielding but increasingly risky sovereign debt from countries such as Greece. Paying back these arbitrage loans has pushed up the yen’s exchange rate by 12 per cent against the dollar so far during 2010. On Tuesday, October 5, Bank of Japan governor Masaaki Shirakawa announced that Japan had “no choice” but to “spend 5 trillion yen ($60 billion) to buy government bonds, corporate IOUs, real-estate investment trust funds and exchange-traded funds – the latter two a departure from past practice.”
This “sterilization” of unwanted financial speculation is precisely what the United States has criticized China for doing. China has tried more “normal” ways to recycle its trade surplus, by seeking out U.S. companies to buy. But Congress would not let CNOOC buy into U.S. oil refinery capacity a few years ago, and the Canadian government is now being urged to block China’s attempt to purchase its potash resources. This leaves little option for China and other countries but to hold their currencies stable by purchasing U.S. and European government bonds.
This has become the problem for all countries today. As presently structured, the international financial system rewards speculation and makes it difficult for central banks to maintain stability without forced loans to the U.S. Government that has long enjoyed a near monopoly in providing central bank reserves. As noted earlier, arbitrageurs obtain a twofold gain: the arbitrage margin between Brazil’s nearly 12 per cent yield on its long-term government bonds and the cost of U.S. credit (1 per cent), plus the foreign-exchange gain resulting from the fact that the outflow from dollars into reals has pushed up the real’s exchange rate some 30 per cent – from R$2.50 at the start of 2009 to $1.75 last week. Taking into account the ability to leverage $1 million of one’s own equity investment to buy $100 million of foreign securities, the rate of return is 3000 per cent since January 2009.
Brazil has been more a victim than a beneficiary of what is euphemized as a “capital inflow.” The inflow of foreign money has pushed up the real by 4 per cent in just over a month (from September 1 through early October). The past year’s run-up has eroded the competitiveness of Brazilian exports, prompting the government to impose 4 per cent tax on foreign purchases of its bonds on October 4 to deter the currency’s rise. “It’s not only a currency war,” Finance Minister Guido Mantega said on Monday. “It tends to become a trade war and this is our concern.” And Thailand’s central bank director Wongwatoo Potirat warned that his country was considering similar taxes and currency trade restrictions to stem the baht’s rise, and Subir Gokarn, deputy governor of the Reserve Bank of India announced that his country also was reviewing defenses against the “potential threat” of inward capital flows.”
Such inflows do not provide capital for tangible investment. They are predatory, and cause currency fluctuation that disrupts trade patterns while creating enormous trading profits for large financial institutions and their customers. Yet most discussions of exchange rate treat the balance of payments and exchange rates as if they were determined purely by commodity trade and “purchasing power parity,” not by the financial flows and military spending that actually dominate the balance of payments. The reality is that today’s financial interregnum – anarchic “free” markets prior to countries hurriedly putting up their own monetary defenses – provides the arbitrage opportunity of the century. This is what bank lobbyists have been pressing for. It has little to do with the welfare of workers.
The potentially largest speculative prize of all promises to be an upward revaluation of China’s renminbi. The House Ways and Means Committee is backing this gamble, by demanding that China raise its exchange rate by the 20 per cent that the Treasury and Federal Reserve are suggesting. A revaluation of this magnitude would enable speculators to put down 1 per cent equity – say, $1 million to borrow $99 million and buy Chinese renminbi forward. The revaluation being demanded would produce a 2000 per cent profit of $20 million by turning the $100 million bet (and just $1 million “serious money”) into $120 million. Banks can trade on much larger, nearly infinitely leveraged margins, much like drawing up CDO swaps and other derivative plays.
This kind of money already has been made by speculating on Brazilian, Indian and Chinese securities and those of other countries whose exchange rates have been forced up by credit-flight out of the dollar, which has fallen by 7 per cent against a basket of currencies since early September when the Federal Reserve floated the prospect of quantitative easing. During the week leading up to the IMF meetings in Washington, the Thai baht and Indian rupee soared in anticipation that the United States and Britain would block any attempts by foreign countries to change the financial system and curb disruptive currency gambling.
This capital outflow from the United States has indeed helped domestic banks rebuild their balance sheets, as the Fed intended. But in the process the international financial system has been victimized as collateral damage. This prompted Chinese officials to counter U.S. attempts to blame it for running a trade surplus by retorting that U.S. financial aggression “risked bringing mutual destruction upon the great economic powers.
From the gold-exchange standard to the Treasury-bill standard to “free credit” anarchy
Indeed, the standoff between the United States and other countries at the IMF meetings in Washington this weekend threatens to cause the most serious rupture since the breakdown of the London Monetary Conference in 1933. The global financial system threatens once again to break apart, deranging the world’s trade and investment relationships – or to take a new form that will leave the United States isolated in the face of its structural long-term balance-of-payments deficit.
This crisis provides an opportunity – indeed, a need – to step back and review the longue durée of international financial evolution to see where past trends are leading and what paths need to be re-tracked. For many centuries prior to 1971, nations settled their balance of payments in gold or silver. This “money of the world,” as Sir James Steuart called gold in 1767, formed the basis of domestic currency as well. Until 1971 each U.S. Federal Reserve note was backed 25 per cent by gold, valued at $35 an ounce. Countries had to obtain gold by running trade and payments surpluses in order to increase their money supply to facilitate general economic expansion. And when they ran trade deficits or undertook military campaigns, central banks restricted the supply of domestic credit to raise interest rates and attract foreign financial inflows.
As long as this behavioral condition remained in place, the international financial system operated fairly smoothly under checks and balances, albeit under “stop-go” policies when business expansions led to trade and payments deficits. Countries running such deficits raised their interest rates to attract foreign capital, while slashing government spending, raising taxes on consumers and slowing the domestic economy so as to reduce the purchase of imports.
What destabilized this system was war spending. War-related transactions spanning World Wars I and II enabled the United States to accumulate some 80 per cent of the world’s monetary gold by 1950. This made the dollar a virtual proxy for gold. But after the Korean War broke out, U.S. overseas military spending accounted for the entire payments deficit during the 1950s and ‘60s and early ‘70s. Private-sector trade and investment was exactly in balance.
By August 1971, war spending in Vietnam and other foreign countries forced the United States to suspend gold convertibility of the dollar through sales via the London Gold Pool. But largely by inertia, central banks continued to settle their payments balances in U.S. Treasury securities. After all, there was no other asset in sufficient supply to form the basis for central bank monetary reserves. But replacing gold – a pure asset – with dollar-denominated U.S. Treasury debt transformed the global financial system. It became debt-based, not asset-based. And geopolitically, the Treasury-bill standard made the United States immune from the traditional balance-of-payments and financial constraints, enabling its capital markets to become more highly debt-leveraged and “innovative.” It also enabled the U.S. Government to wage foreign policy and military campaigns without much regard for the balance of payments.
The problem is that the supply of dollar credit has become potentially infinite. The “dollar glut” has grown in proportion to the U.S. payments deficit. Growth in central bank reserves and sovereign-country funds has taken the form of recycling of dollar inflows into new purchases of U.S. Treasury securities – thereby making foreign central banks (and taxpayers) responsible for financing most of the U.S. federal budget deficit. The fact that this deficit is largely military in nature – for purposes that many foreign voters oppose – makes this lock-in particularly galling. So it hardly is surprising that foreign countries are seeking an alternative.
Contrary to most public media posturing, the U.S. payments deficit – and hence, other countries’ payments surpluses – is not primarily a trade deficit. Foreign military spending has accelerated despite the Cold War ending with dissolution of the Soviet Union in 1991. Even more important has been rising capital outflows from the United States. Banks lent to foreign governments from Third World countries, to other deficit countries to cover their national payments deficits, to private borrowers to buy the foreign infrastructure being privatized, foreign stocks and bonds, and to arbitrageurs to borrow at a low interest rate to buy higher-yielding securities abroad.
The corollary is that other countries’ balance-of-payments surpluses do not stem primarily from trade relations, but from financial speculation and a spillover of U.S. global military spending. Under these conditions the maneuvering for quick returns by banks and their arbitrage customers is distorting exchange rates for international trade. U.S. “quantitative easing” is coming to be perceived as a euphemism for a predatory financial attack on the rest of the world. Trade and currency stability are part of the “collateral damage” being caused by the Federal Reserve and Treasury flooding the economy with liquidity in their attempt to re-inflate U.S. asset prices. Faced with U.S. quantitative easing flooding the economy with reserves to “save the banks” from negative equity, all countries are obliged to act as “currency manipulators.” So much money is made by purely financial speculation that “real” economies are being destroyed.
The coming capital controls
The global financial system is being broken up as U.S. monetary officials change the rules they laid down nearly half a century ago. Prior to the United States going off gold in 1971, nobody dreamed that an economy – especially the United States – would create unlimited credit on computer keyboards and not see its currency plunge. But that is what happens under the Treasury-bill standard of international finance. Under this condition, foreign countries can prevent their currencies from rising against the dollar (thereby pricing their labor and exports out of foreign markets) only by (1) recycling dollar inflows into U.S. Treasury securities, (2) by imposing capital controls, or (3) by avoiding use of the dollar or other currencies used by financial speculators in economies promoting “quantitative easing.”
Malaysia successfully used capital controls during the 1997 Asian Crisis to prevent short-sellers from covering their bets. This confronted speculators with a short squeeze that George Soros says made him lose money on the attempted raid. Other countries are now reviewing how to impose capital controls to protect themselves from the tsunami of credit from flowing into their currencies and buying up their assets – along with gold and other commodities that are turning into vehicles for speculation rather than actual use in production. Brazil took a modest step along this path by using tax policy rather than outright capital controls when it taxed foreign buyers of its bonds last week.
Read the entire article HERE.
October 6, 2010
One of the Federal Reserve’s original stated purposes was to manage the nation’s money supply through monetary policy that provides for stable prices without inflation or deflation. Shocking just about the whole world except for NIA members, the Federal Reserve this past week shifted its purpose from being an inflation fighter to now being an inflation advocate. Charles Evans, President of the Federal Reserve Bank of Chicago, is now saying that inflation in the U.S. is too low and the Federal Reserve needs to publicly declare a new goal of having inflation that is much higher than its informal 2% target. William Dudley, President of the New York Federal Reserve, is calling current low levels of U.S. inflation “a problem” because “it means slower nominal income growth”.
Dudley believes “slower nominal income growth” is unacceptable because it “means that less of the needed adjustment in household debt-to-income ratios will come from rising incomes. This puts more of the adjustment burden on paying down debt.” In other words, he wants to monetize our debts by printing so much money that all Americans are earning enough income to pay back their debts. NIA fears that one of the unintended consequences of such a policy will be an insurmountable currency crisis; this will lead to a U.S. societal collapse with class warfare, millions of Americans starving to death, and a return to a barter based system that will last until we can come up with a new form of workable government based on sound money that is backed by gold and silver.
When our government creates inflation with the goal of generating higher incomes, the real incomes of Americans always decline dramatically. Inflation never creates wealth, but instead misallocates resources that would have went towards productive purposes if the free market was allowed to operate. During periods of high inflation, no matter how fast incomes rise nominally, they never keep pace with rising gold prices. (Try to picture Zimbabwean President Robert Mugabe trying to keep pace in a race against Olympic gold medalist Usain Bolt.)
Back in 1970, the median family income in the U.S. was $9,870. During the next decade, the U.S. government created unprecedented amounts of inflation, which led to the median family income rising in 1980 to $21,020 for a gain of 113%. Gold was only $35 per ounce in 1970, but rose to a high in 1980 of $850 per ounce for a gain of 2,329%. One year of income in 1970 would have bought 282 ounces of gold, but one year of income in 1980 would have only bought 25 ounces of gold. Priced in gold, families saw their real incomes decline during the 1970s by 91%.
On July 19th of this year, with everybody in the mainstream media warning Americans about the threat of deflation, NIA predicted that the Federal Reserve was, “quietly getting ready to implement ‘The Mother of All Quantitative Easing’”. NIA said that, “come this October, Bernanke is likely to shoot up his largest ever dose of quantitative easing.” Then on July 28th with gold down to $1,158 per ounce and silver down to $17.63 per ounce, NIA sent out an alert entitled, “Gold and Silver Capitulation is Near” in which we said, “The sentiment on gold and silver has abruptly changed to the negative like nothing we have ever seen before and to us this means the big move to the upside is right around the corner.”
NIA called the bottom on gold and silver perfectly. Since July 28th, gold and silver have both risen 34 out of 49 days, with gold rising by 16% and silver rising by 30%. Many people are asking us when precious metals are going to dip. Although gold and silver will make many dips in the years to come, NIA is never going to make an attempt to predict these short-term, temporary dips. It is far too risky and dangerous to sell gold and silver with the hope of buying back on a dip. Those who actively trade gold and silver, usually go long the U.S. dollar while they are waiting for a dip. There will come a time when the U.S. dollar crashes, with gold rising hundreds or even thousands of dollars in a day, and silver potentially doubling or tripling in value in a day. Trust us, you do not want to be on the wrong side of the trade on that day. NIA is focused on the long-term risk of hyperinflation and is not concerned about short-term volatility.
NIA believes that if the Federal Reserve doesn’t reverse course immediately, we are on a direct path to all Americans becoming billionaires by the year 2020, if not much sooner. Being a billionaire in dollars won’t mean anything. The wealth of Americans later this decade will be calculated based on how much gold and silver they own. We are at the beginning stages of a massive worldwide rush out of the U.S. dollar and into gold and silver.
Gold, at a new all time high of $1,344 per ounce, is still very undervalued. If gold’s total bull run from its 2001 low of $256 per ounce equals a percentage gain of 2,329% (just like the 1970s) we will see a gold price of $6,218 per ounce. Silver, at a new 30-year high of $23 per ounce, is still an absolute steal. Just like NIA predicted, the gold/silver ratio has declined in recent months from 70 down to 58, but is still well above the historical average of 16. In our opinion, because silver has been undervalued for so long with artificially high gold/silver ratios, once JP Morgan is forced to cover their naked short position in silver we could see the ratio decline to an artificially low level as low as 8. Therefore, if we see $6,218 per ounce gold, we wouldn’t be surprised to also see $777.25 per ounce silver.
Dudley’s solution to our current economic crisis is to “find ways to increase the amount of stimulus we currently provide via our balance sheet.” This is pure insanity. Bush’s $200 billion stimulus sent oil prices to $147 per barrel, Obama’s $800 billion stimulus prevented massive price deflation (that would have made cost of living in America a lot more affordable) during a period of rapidly rising unemployment, and now the Federal Reserve believes even greater stimulus will fix our economy. Dudley is calling for the Federal Reserve to purchase $500 billion in bonds, but the Federal Reserve’s real quantitative easing will be much greater. Dudley doesn’t want to steal the show from Bernanke. He must allow Bernanke to be the one who first suggests the “genius” idea of having quantitative easing of $1 trillion or more.
The truth is, the exact amount of the Federal Reserve’s short-term purchases is absolutely meaningless. Keep your eyes on the big picture and remember that if the Federal Reserve’s treasury purchases aren’t enough to create massive price inflation in the short-term, they will continue to unleash even larger doses of quantitative easing. Our gut feeling is that we are practically at the point where the U.S. economy is about to overdose on any further quantitative easing. A “Meltup” is currently taking place, exactly like NIA predicted in our documentary ‘Meltup’ that was released on May 13th (it has now been viewed by over 808,000 people).
We may be forced to soon change our hyperinflation forecast from the years 2014-2015 to as soon as the year 2012.
Read the entire article HERE.
Web 2.0 Expo NY: Gary Vaynerchuk (Wine Library), Building Personal Brand Within the Social Media Landscape: Building Brand Equity
At the Web 2.0 Expo, entrepreneur Gary Vaynerchuk gives a shot in the arm to dreamers and up-and-comers who face self-doubt. The Internet has made the formula for success simpler than ever, he argues. So there’s now no excuse not to do what makes you happy.
More info on Gary Vaynerchuk HERE.
Justice Litle, Editorial Director, Taipan Publishing Group
Wednesday, September 29, 2010
As Taipan more or less predicted, the global “currency wars” are now officially underway. The ultimate beneficiary of the coming turmoil will be gold.
Were governments listening in?
The theme of Taipan’s Las Vegas annual summit was “Opportunities in a Global Cash War.” On Monday – just after the conference ended – a highly placed Brazilian official echoed the exact same idea.
Said Guido Mantegna, the finance minister of Brazil:
“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.”
As the Financial Times notes – and as we have explained many times in these pages – a weak currency lowers the cost of exports, which helps the exporting country sell more. The trouble is, not everyone can have weak paper at the same time. Currencies trade in relative terms. They are valued against one another. Dollars are always priced in yen, euros, and reals or vice versa. So if one is weak, one or more of the others must be stronger.
When countries go head-to-head in an effort to weaken the exchange rate, it’s called “competitive devaluation.” In the 1930s, the term for this was “beggar thy neighbor.”
As the WSJ reported last week,
Beggar-thy-neighbor currency devaluations proved ruinous for the global economy in the 1930s. Is the world setting off down the same slippery slope again?
Japan’s decision to intervene in the currency market to drive down the value of the yen blew a hole in the developed world’s united effort to persuade China and other Asian countries to stop artificially holding down their currencies. Meanwhile, speculation that the U.S. and U.K. could soon resume quantitative easing has hit the value of the dollar and sterling.
As rhetoric heats up and economies struggle, governments start to lose patience with each other. This is where aggressive trade policy comes in. Part of the trouble in the 1930s was a surge of protectionism (as embodied in the Smoot-Hawley Tariff Act), which led to a collapse in global trade.
As you likely know, policies of “quantative easing” (QE) are also dilutive to a currency’s value, for the same reasons as to why taking Monopoly money from the bank makes the price of Boardwalk and Park Place go up. As countries “stimulate” at home, prices get pushed higher.
The relationship is not always simple, of course. Sometimes extra stimulation fails to push prices up, because the extra money pumped into the system gets soaked up by debt. Or sometimes the stimulation only pushes up the price of certain things – like gasoline or groceries or junk bonds – while having zero effect on, say, wages or the price of real estate.
This is why your editor favors looking at the financial system as a sort of plumbing system, with central bankers as the master plumbers. Unfortunately, these plumbers are nowhere near as skilled as the Super Mario Brothers of Nintendo fame. They often send liquidity down the wrong pipe, causing some other pipe to burst. They rarely get the liquidity just where they want it. And sometimes the pipes jam up completely, in which case the liquidity arrives in the wrong place or fails to arrive at all.
The other tricky thing about this whole business is, countries can actually export inflation or deflation.
For a while, the topic du jour on matters of trade was “the China price.” The China price was usually the lowest price you could find for a manufactured good, because Chinese workers were willing to produce at the lowest cost. As these low-priced goods made their way into economies around the world, non-Chinese workers found they could not compete. Thus, the influence of the “China price” was deflationary.
At the same time, and as we know all too well, China has had strong inflationary impacts on the system too. For example, it was Asia and the Middle East exporters who played a large hand in keeping the bubble going, by selling oil and “stuff” to Americans on credit and then recycling the dollars back into U.S. Treasury bonds.
When America bought, say, $100 billion worth of crude oil or “stuff,” China and the big oil exporters would take that $100 billion and sock it right back into U.S. Treasury bonds for safekeeping, thus keeping American interest rates low. This in turn helped the cheap credit boom continue.
America, too, has managed to export inflation quite effectively by sending its paper dollars everywhere. For example: As Brazilian farmers sell their goods in the global marketplace, they get dollars in their bank accounts. Those dollars are then exchanged, at the home bank, for Brazilian reals (the local currency). A flood of dollars coming in thus threatens to push up the value of the real, for simple reasons of supply and demand. So the central bank of Brazil has to print up fresh reals to keep the currency value “competitive.” Voila – more inflation pressure.
(Currency may be in the news, but it’s not the only thing moving the market right now. Sign up for Taipan Daily to receive my and fellow editor Adam Lass’ investment commentary.)
The Trade Collapse Threat
And yet, lest you think all this printing is a one-way ticket to hyperville, keep in mind that a collapse in global trade – like a worldwide housing double dip – would be a very deflationary event.
If the “currency wars” get hot enough, the rhetoric among nations will turn nasty. (It already has between China and Japan, which we will explore later this week.) As retaliatory trade measures are taken, trade flows slow down or stop completely. This is bad for business and bad for the global economy. When exporters go out of business, wages are cut back and jobs are lost. Banks get hit as their exporter business loans go sour. The weight of debt hangs heavy as tax revenue and profits dry up. All this is deflationary.
Then, too, there are geopolitical factors at work that could lead to a mighty surge in the $USD just when the dollar bears least expect it – but we’ll save that topic for another day.
At this point, the only thing that can be said with firm certainty is that the ongoing currency wars will be of strong benefit to gold. The yellow metal has the unique property of being an attractive asset in times of inflation OR deflation, in part because of gold’s long-standing value as a safe haven (you could say its “brand” is thousands of years old) and because gold prices are hard to manipulate.
This, in turn, is because gold itself functions as a sort of neutral currency – a stateless one that cannot be printed. As yours truly observed at the conference,
What would it look like for the euro, the U.S. dollar and the Japanese yen to all be subject to mass printing press forces at once? The currency relationships between various currencies might stay stable, sort of like the relationship between two cars traveling at 80 miles an hour. If two or more cars are traveling fast at exactly the same speed, it’s theoretically possible for a chain linking the cars together to hold.
But certain other assets – like gold – will see prices skyrocket when the above scenario occurs. That’s because gold is the one form of “currency” that central bankers can’t conjure up from thin air at will. And in a world of macroeconomic danger and fear and persistently high unemployment, that means gold is an extremely attractive asset…
Read the original article HERE.
“I thought I was prepared,” says documentary filmmaker Charles Ferguson — prepared for what he’d learn about the “bad behavior” among Wall Streeters that led to the global financial meltdown.
Not so much.
“I had grossly underestimated the level of extraordinarily unethical and even fraudulent behavior that had occurred on such a large scale,” Ferguson tells All Things Considered host Melissa Block, in a conversation airing Friday.
Investment banks selling defective securities — even designing securities to be defective, so they could make a profit betting against them?
“If somebody had told me in the fall of 2008 that this had gone on on a huge scale — tens of billions of dollars — I would have said, ‘No, that’s just too extreme. People don’t do that. And if you do do it, you would go to jail.’ They did do it, and nobody’s gone to jail.”
The movie, opening Oct. 8, includes a testy exchange between Ferguson and former Bush adviser Glenn Hubbard, who’s now the dean of Columbia Business School — and, Ferguson argues, part of an academic culture that has allowed the financial services industry to corrupt the study of economics itself.
“Very prominent professors of economics, often people who’ve also held high government posts, are paid to testify in Congress,” Ferguson explains. “They are paid to be expert witnesss in both civil and criminal trials. They’re often paid to write papers that praise the financial services industry, and argue on behalf of deregulation of the industry. They make millions, in some cases tens of millions of dollars, doing this. And this is usually not disclosed.”
That analysis might be why Hubbard, when Ferguson asks him whether he’s got ties with financial services firms, responds with a cool one-word answer: “Possibly.”
“You don’t remember?” Ferguson presses.
“This isn’t a deposition, sir,” Hubbard replies. “I was polite enough to give you time — foolishly, I now see. But you have three more minutes. Give it your best shot.”
Ferguson says meeting Hubbard and other powerful figures in the industry was a eye-opening experience.
“These people were not used to being challenged,” he says. “They’d never been questioned about this issue before. They clearly expected to be deferred to — by me, and I think by everybody.”
Read the entire article HERE.