Saturday, 30 October 2010

Weekend Update – October 30 2010

Baltic Dry Index. 2678 - 49 on the week
LIR Gold Target by 2019: $3,000.

It’s our dollar, but it’s your problem”.

US Treasury Secretary John Connally. August 1971.

This weekend, more on the consequences of the Great Nixonian Error. Our failing system of fiat currencies pyramided off of the now dysfunctional fiat dollar reserve standard. To all intents and purposes, America went bust in 1971, and President Nixon bought time by putting America and the world on the current fiat currency system. But that eventually set off the bankster casino capitalist system that itself went bust 2007-2009. Now America is surviving on smoke and mirrors accounting and massive monetisation and market rigging by the Fed. The dollar reserve standard isn’t working anymore, but our leaders and the central banksters aren’t yet ready to face up to reality, and deep in denial are still willing to try yet more of the policies that have already failed. My guess is that after an incredibly bad 2011, we will finally start to address the failed system of fiat money in 2012. Stay long precious metals. Our central bankers know we must return to gold settlement, or just possibly a gold and silver mix, but it represents the complete opposite of everything they have been doing since 1971. 2011s increasing desperation will force a reversal in 2012, I think.

Below, the deepening chaos President Nixon’s blunder has wrought. The hollowed out American economy is no longer strong enough to enforce “It’s our dollar, but it’s your problem”.

“Paper money eventually returns to its intrinsic value - zero.”


Cabbage Queue Shows Poverty Challenge as G-20 Gathers in Seoul

Oct. 29 (Bloomberg) -- Housewives pushing baby strollers jostle with gray-haired men in slippers at Seoul’s Shinwon Market as the line stretches to more than 2,000 people. Fewer than half come away with the special offer: a $4 cabbage.

“I’ve never seen anything like this during my 18 years of working here,” said Chin Byung Ho, 58, a traders’ representative, as he yells through a megaphone to control the people demanding the sale start. “What has become of our ordinary people’s lives? We now have to fight over a cabbage?”

While the world leaders who will gather in Seoul for the Nov. 11-Nov. 12 Group of 20 summit are unlikely to see the market scene, their host, South Korean President Lee Myung Bak, plans to spur a discussion of poverty at the meeting. South Korea provides an example: The ranks of the poor have almost doubled as a proportion of the population in nine years.

The G-20, whose members account for 85 percent of global economic output, will draw up an “action plan” to help emerging economies’ development through means that go beyond providing them with cash, Lee told foreign reporters on Oct. 11. Finance Minister Yoon Jeung Hyun said at an Oct. 25 conference that the development issue will be high on the agenda, without providing details.

Policy makers from China to the U.S. are grappling with swelling ranks of the poor. The World Bank estimates that 64 million more people will be pushed into extreme poverty globally this year as a result of the worldwide financial crisis. About 1.4 billion people lived in extreme poverty, defined as less than $1.25 a day, in 2005, the most recent year for which data is available, the World Bank said.

----- The top 20 percent of South Korea’s households earn 7.7 times more than the bottom 20 percent, according to the government. The segment of people living in poverty made up 13 percent of the total population of 49 million in 2009, compared with 7.5 percent in 1990, its data showed.


Irish, Spanish Banks Failing to Kick ECB Habit: Euro Credit

Oct. 29 (Bloomberg) -- Greek, Irish and Spanish banks are falling behind their counterparts across Europe in reducing their dependence on emergency central bank funding because they can’t find investors willing to buy their bonds.

Lenders from those three nations took 61 percent of the loans supplied by the European Central Bank at the end of September, up from 51 percent the previous month, data from their respective central banks show. Overall, the region’s banks cut their funding to 514.1 billion euros ($716 billion), the least since Lehman Brothers Holdings Inc.’s collapse in September 2008, according to ECB figures.

Deutsche Bank AG, HSBC Holdings Plc and Societe Generale SA have sold new debt since regulators stress-tested 91 of the region’s lenders in a bid to rebuild confidence in their creditworthiness. By contrast, bonds of all lenders in Portugal, Ireland and Greece are trading as though junk rated, as are a third of banks in Spain, according to data compiled by Bank of America Corp. Their struggle to sell debt will make it harder for the ECB to curb loans to banks on Europe’s periphery.

“The ECB is going to have to support these smaller banks for many years to come,” said Simon Maughan, an analyst at MF Global Ltd. in London, who has tracked the industry for more than 15 years. “The ECB has to keep these banks alive and hope and pray that the local regulators force them to restructure and make them profitable again.”

Roubini sees US 'fiscal train wreck' ahead

The US economy is a "fiscal train wreck" waiting to happen, US economist Nouriel Roubini warned on Friday.

Published: 10:00AM BST 29 Oct 2010

He painted a bleak outlook for the world's biggest economy in a commentary for the Financial Times, saying while President Barack Obama's stimulus package prevented another depression, it was coming to an end with nothing to take its place.

The economist - one of the first to predict the US housing crash and nicknamed 'Dr Doom' - said the likely path of fiscal policy after next Tuesday’s election will mean the country "experiencing serious fiscal drag just when it needs a further boost".

While he said Mr Obama deserved credit for averting a depression and supporting “growth now” in the face of austerity drives in other nations, including Britain, he claimed stimulus had become a "dirty word" in political circles, including the government.

This left the Obama administration relying solely on the US Federal Reserve to "prevent a double dip recession" with further quantitative easing - stimulus which he believed would have little effect on US growth next year.

He argued that with a gridlock in Congress expected to get worse following next week's elections, President Obama's lack of forward looking action - such as tackling spending of social security and introducing VAT increases - meant he was trapped in a stalemate made worse "by the lack of a reason to act on the deficit".

This put the US on an "unsustainable fiscal course".

Gold Will Outlive Dollar Once Slaughter Comes: John Hathaway

Oct. 29 (Bloomberg) -- The world’s monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications.

The only questions are how long the denouement of the dollar reserve system will last, and how much more damage will be inflicted by new rounds of quantitative easing or more radical monetary measures to prop up the system.

Whether prolonged or sudden, the transition to a stable monetary system will become possible only when the shortcomings of the status quo become unbearable. Such a transition is, by definition, nonlinear. So central-bank soothsaying based on the extrapolation of historical data and the repetition of conventional wisdom offers no guidance on what lies ahead.

It’s amazing that there is no intelligent discourse among policy leaders on the subject of monetary rot and its implications for the future economic and political landscape. Until there is fundamental monetary reform on an international scale, most economic forecasts aren’t worth the paper on which they are written.

Telltale signs of future trouble aren’t hard to spot. Only a few months ago, Federal Reserve Chairman Ben Bernanke and a chorus of other high-ranking Fed officials were talking about exit strategies from the U.S. central bank’s bloated balance sheet and the financial system’s unprecedented excess liquidity. Now, those same officials are talking about pumping more money into the system to stimulate growth.

Risky Targets

And they’re not alone: Six months ago, the chief economist of the International Monetary Fund, Olivier Blanchard, suggested that raising inflation targets to 4 percent from 2 percent wouldn’t be too risky.

This sort of talk must grate on the nerves of our trading partners, China, India, Russia and others, who have accumulated pyramids of non-yielding Treasury debt. No haven there. Return- free risk may be a better way to put it. And bickering among central bankers over currency manipulation and rising trade tensions doesn’t exactly reinforce one’s confidence in a scenario of sustained economic growth and a return to prosperity.

The prospects for an orderly unwinding of the extreme posture of global monetary policy are zero. Bernanke, Jean- Claude Trichet and Mervyn King, his counterparts in Europe and the U.K. respectively, are huddling en masse upon the most precarious perch in the history of monetary affairs. These alleged guardians of monetary stability, in their attempts to shore up the system, have simply created the incinerator for paper money. We are past the point of no return. Quantitative easing may well become a way of life.

No Freak Occurrence

The consensus investment view seems to be that the credit crisis of 2008 was a freak occurrence, unlikely to repeat. That is wishful thinking. Monetary policy has painted itself into a corner. Based on our present course, there will be more bubbles and more meltdowns.

Financial markets and institutions sense trouble, as reflected in the flight to supposedly safe assets such as Treasuries and corporate-debt instruments with paltry yields, as well as the reluctance to lend by commercial banks. We are stuck in an epic liquidity trap. The irony is, if global central banks succeed in creating inflation, the value of these safe assets will be destroyed. It is a slaughter waiting to happen.

In the pedantic mentality of central bankers, their playbook creates just the right amount of inflation. As inflation accelerates, consumers will spend to get rid of their dollars of diminishing value and spur the economy. Once consumers start spending, it will be time to raise interest rates because a solid foundation for prosperity will have been established, they say.

Slender Thread

But whatever the playbook promises, the capacity of financial markets to overshoot can’t be overestimated. The belief among policy makers and financial markets in the possibility of this sort of fine-tuning is preposterous, but it is the slender thread on which remaining investment and business confidence rests.

The breakdown of the monetary system will be chaotic. When inflation commences, it will be highly disruptive. The damage to fixed-income assets will seem instantaneous. Foreign-exchange markets will become dysfunctional. The economy will become even more fragile and unpredictable.

Gold is an imperfect, but comparatively reliable, market gauge for the extent of current and future monetary destruction. The recent acceleration in the dollar price of the metal to $1,381, a record high in nominal terms, coincided with talk of a new round of quantitative easing and highly visible discord among major nations on trade and currency-valuation issues.

Naysayers’ Bubble

Naysayers point to gold’s price and see a bubble, without understanding that the only acceleration that is taking place is in the rate of decline of paper currency. The Fed is organizing an attack on the dollar’s value, believing that this is the most expedient way to defuse deflationary market forces. The man in the street is unaware, a perfect setup. Inflation can only be successful when the public doesn’t see it coming.

The sudden torrent of commentary on gold isn’t the sign of a bubble. Anti-gold pundits provide a great service to those who grasp this historical moment: They facilitate the advantageous positioning of the one asset most likely to be left standing when the dust settles.

(John Hathaway is a managing director of Tocqueville Asset Management LP in New York. The opinions expressed are his own.)

"To emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor even hereafter to be employed; being, in its nature, pregnant with abuses, and liable to be made the engine of imposition and fraud; holding out temptations equally pernicious to the integrity of government and to the morals of the people."

Alexander Hamilton.

Have a great weekend everyone.


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