Sunday, October 31, 2010

Simulation of a US State Defaulting

"At the recent Buttonwood economic conference in New York City, a team of economists addressed the question "What If a State Defaults"..."

Double Dip Recession Delayed, Not Derailed

"The BEA Advance GDP for Third Quarter 2010 came in at +2.0%. However, Table 2. Contributions to Percent Change in Real Gross Domestic Product shows that Change in private inventories contributed +1.44 while real final sales contributed a mere .6.

How sustainable is that?

The answer is not very. This is likely the last hurrah for inventory replenishment even without factoring in upcoming cutbacks at the state level..."

Signs Hyperinflation Is Arriving

"Back in late August, I argued that hyperinflation would be triggered by a run on Treasury bonds. I described how such a run might happen, and argued that if Treasuries were no longer considered safe, then commodities would become the store of value.

Such a run on commodities, I further argued, would inevitably lead to price increases and a rise in the Consumer Price Index, which would initially be interpreted by the Federal Reserve, the Federal government, as well as the commentariat, as a good thing: A sign that “the economy is recovering”, a sign that “normalcy” was returning..."

The Fed's Secret Gold Swap Arrangements

"...Some analysts think that China and Saudi Arabia have accumulated far more gold than they're reporting and are accumulating still more gold surreptitiously – China to hedge its dollar foreign exchange surplus, Saudi Arabia to hedge both its dollar surplus and the depletion of its oil reserves – but that China and Saudi Arabia can't acknowledge this accumulation lest they spook the currency markets and devalue their dollar surpluses before those surpluses are fully hedged..."

The Global Monetary System is in Crisis

"The recognition of currency war, which has been going on for years, reflects the failure of international cooperation and the failure the G-20 to find a solution of the beggar-thy-neighbor policies of almost every nation. The result has been growing geopolitical dislocation, which G-20 has yet to find a solution for..."

Fraud Caused the 1930s Great Depression and Current Financial Crisis

"Robert Shiller - one of the top housing experts in the United States - says that the mortgage fraud is a lot like the fraud which occurred during the Great Depression. As Fortune notes:

Shiller said the danger of foreclosuregate -- the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt -- is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly..."

Saturday, October 30, 2010

China minister says dlr printing "out of control"

"...Dollar issuance by the United States is "out of control", leading to an inflation assault on China, the Chinese commerce minister said in comments reported on Tuesday.

Chen Deming, speaking at a trade fair in southern China, said that exporters had done a good job of preparing themselves for exchange rate changes as well as rising labour costs, but were suddenly confronted with new challenges.

"Because the United States' issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing firms big problems," Chen was quoted as saying by the official Xinhua news agency.

Chinese officials have criticised U.S. monetary policy as being too loose before, but rarely in such explicit language.

At the G20 meeting in South Korea which ended on Saturday, Chinese Finance Minister Xie Xuren said that issuers of major reserve currencies -- code for the United States -- must follow responsible economic policies..."

Is the Fed Plunge Protection Team Manipulating the Stock Market?

"Rumors are, the U.S. government "is propping up the stock market."
'By far, the most frequent question we've been asked recently at EWI's Message Board is this: "What is your take on the persistent internet chatter that the Federal Reserve is holding up the stock market via QE2, POMO, etc.? How can stocks ever decline again if the Fed is in control?" Here is an eye-opening chart that will help shed more light on this issue. Read more..."

Is the U.S. heading for Zimbabwe Style Hyperinflation?

"...Perhaps when the US was 40% of Global GDP, we could have gotten away with it but now we are 20% and falling fast yet we still attempt to run our foreign and economic policies as if we are large and in charge.

This is not the way the rest of the World sees us anymore. To the rest of the World we are unrealistic children with dangerous spending habits who happen to owe them A LOT of money. We borrowed $15Tn and our "plan" is to pay them back with hyper-inflated dollars that are already discounted 33% from where we began cranking up the borrowing in 2002 (to pay for wars and tax cuts).

Already, other nations are refusing to lend us more money so we have begun to engage in what Bill Gross, the world's biggest bond buyer, calls "a brazen Ponzi scheme" in which the Federal Reserve of the United States "buys" whatever notes the Treasury Department of the United States chooses to print to pay for their continual borrowing (currently $100Bn per month) and the joke of it is that the Federal Reserve doesn't actually have ANY money. In fact, they themselves are $2.5Bn in debt as every check they write is technically just another IOU, backed by whatever assets they purchase AFTER they write the check..."

G20 Currency War One Sided Compromise

"...As we have described for several years, the US economy is virtually locked into a long arc of decline. There are no politically palatable solutions to this quandary. Until Americans are ready to take their lumps and accept a steep drop in their standard of living, the US government will have no leverage with the creditor nations and no ability to keep its promises. Therefore, we should celebrate when China even gives our Treasury Secretary an audience.

If China does manage to topple the US dollar from its perch as the international reserve currency, our economy will very likely move into free fall as decades of inflation come pouring back into the country. We will be forced to live within our means or face hyperinflation. Losing a few votes at the IMF is a small cost to delay this eventuality, but it also puts us one step closer to it..."

Tuesday, October 12, 2010

The Final End of Bretton Woods 2?

"The inability of global leaders to address global current account imbalances now truly threatens global financial stability. Perhaps this was inevitable - the dollar has not depreciated to a degree commensurate with the financial crisis. Moreover, as the global economy stabilized the old imbalances made a comeback, sucking stimulus from the US economy and leaving US labor markets crippled. The latter prompts the US Federal Reserve to initiate a policy stance that will undoubtedly resonate throughout the globe. As a result we could now be standing witness to the final end of Bretton Woods 2. And a bloody end it may be..."

New Foreclosure Crisis Has Much Broader Implications

"There is still a large overhang of U.S. properties with severe mortgage delinquencies and this problem is likely to continue for several more years. As early as three years ago however, problems with implementing the foreclosure process became evident. During the housing bubble, banks became sloppy and didn't properly transfer ownership papers when loans were securitized into bonds. The current owners of those bonds frequently can't produce the appropriate documents in foreclosures cases in the 23 states that require court action for a foreclosure. This led to the 'show me the note' movement after a federal judge ruled in 2007 that Deutsche Bank lacked standing in 14 foreclosure cases because it could not produce the relevant documents. A number of similar judicial rulings followed..."

Greece and the fiscal crisis in the Eurozone

"The saga of the Greek public finances continues. But this time, Greece is not the only country that suffers from doubts about the sustainability of its fiscal position. Quite the contrary. The public finances of most countries in the Eurozone are in a worse state today than at any time since the industrial revolution, except for wartime episodes and their immediate aftermaths. And the problems are not confined to the Eurozone, extending to other EU member states, like the UK and Hungary, Japan, and the US..."

China’s Plan to Dethrone the U.S. Dollar as Worlds Reserve Currency

"..."China's currency is likely to be granted a global status on par with the current major currency trading pairs for purposes of settling international transactions, whether the West wants that to happen or not," Fitz-Gerald wrote in a May 2009 article. "In fact, I'd even go so far as to say the dollar's days of dominance are numbered and with each new round of bailout chicanery, the clock is winding down ever faster."

Securitised Mortgage Debt Threatens Second Phase of Financial Crisis

"It has been revealed that Bank of America, JP Morgan and numerous other banks will be halting all foreclosure activity due to incompetence and possibly fraud related to the packaging, pricing, and trading of the underlying collateral in thousands of mortgage-backed securities. Some analysts are warning that there are financial weapons of mass destruction lurking in the securitized mortgage debt market and that they could potentially lead to another banking and systemic crisis..."

Monday, October 11, 2010

Rules for a Frugal Superpower

"As I argue in my new book The Frugal Superpower: America’s Global Leadership in a Cash-Strapped Era, the burden that these obligations will impose on Americans – in the form of higher taxes and fewer benefits – will weaken public support for the expansive international role that the United States has played since World War II.

This will change the world, and not for the better. American foreign policy, for all its shortcomings, has underpinned political stability around the world. How, then, should the US adapt what it does abroad to minimize the damage to global security caused by its straitened circumstances? Here are three rules for a frugal superpower.

Rule I: No More Nation-building

During the first two post-Cold War presidencies, the US conducted military interventions in Somalia, Haiti, Bosnia, Kosovo, Afghanistan, and Iraq. The motives for these interventions varied, but all led to American efforts to establish working governments – nation-building – that proved protracted and frustrating..."

Triffin’s Dilemma, Reserve Currencies, and Gold

"Nearly 50 years ago, Yale University economist Robert Triffin identified the inevitable future deterioration of the dollar in his book, Gold and the Dollar Crisis: The Future of Convertibility (1960). Essentially, Triffin argued, under the Bretton Woods system in which the U.S. dollar was the world’s principal reserve currency (instead of gold, for example), the United States had to incur large trade deficits in order to provide the rest of the world with the liquidity required for functioning of the global trading system.

Unfortunately, Triffin wrote, U.S. trade deficits eventually would undermine the foreign exchange value of the dollar because foreign accounts would hold an increasing quantity of dollars...

Lewis Lehrman and John Mueller revived the discussion of Triffin's dilemma, without calling it that, in an article that appeared on December 15, 2008, in National Review Online. They suggested that the proper international reserve currency should be gold. I agree and wrote as much in a commentary, in the Christian Science Monitor, November 17, 2008..."

US Economy Doing a Great Imitation of a Developing Double Dip Recession

"The September Non-Farm Payrolls report was not good news.

This is a remarkably unnatural US economic recovery, with gold, silver, and other key commodities soaring in price, the near end of the Treasury curve hitting record low interest rates, and stocks steadily rallying as employment slumps and the median wage continues to decline.

The US is a Potemkin Village economy with the appearance of prosperity hiding the rot of fraud, oligarchy, and political corruption.

As monetary power and wealth is increasingly concentrated in fewer hands, the robust organic nature of the economy and the middle class continues to deteriorate.

This is what is happening, and monetary policy cannot affect it. The change must come from the source, which is in political and financial reform. And the powerful status quo is dead set against it..."

Sunday, October 10, 2010

12 Ominous Signs For World Financial Markets

"#1 Corporate insiders are getting out of the U.S. stock market at an absolutely blinding pace. It is being reported that the ratio of corporate insider selling to corporate insider buying last week was 1,411 to 1, and this week the ratio has soared even higher and is at 2,341 to 1.

#2 Many of the world's wealthiest people are buying absolutely massive quantities of gold right now.

#3 It is being reported that J.P. Morgan is gobbling up the rights to as much physical gold as it possibly can.

#4 The United States Mint has announced that it has run out of 1-ounce, 24-karat American Buffalo gold bullion coins and that it will not be selling any more of them in 2010.

#5 It is becoming increasingly difficult to explain the unusually high option volume that we are witnessing right now.

#6 Some very large investors are making massive bets that the S&P 500 is going to take a serious tumble during the month of October..."

Currency Wars: A View from the Trenches

"Recent weeks have seen much talk about "currency wars". This talk suggests that many countries are seeking the devaluation of their currencies in order to promote their exports, which in turn forces other countries to respond with similar efforts. It harkens back to the disastrous beggar-thy-neighbor policy that was seen between the two world wars. While the foreign exchange market is one of many arenas in which nation states compete for advantage, calling what is happening now a currency war is not only wrong — it is dangerous..."

Are U.S. States the Next Federal Bailout?

"In an interview with Meredith Whitney of Meredith Whitney Advisory Group on Bloomberg last week, she stated, some states are a ticking time bomb. She published a detailed report rating the finances of the 15 largest U.S. states. California has one of the largest deficits that exists relative to their budget gap by size, but it has a real estate problem as well with a large amount of foreclosures. Florida has a bigger issue relative to foreclosures and real estate. The drain on tax receipts in Florida due to the foreclosure issue could cripple the states budget similar to California’s in the coming year. The bottom line of the report is the U.S. government may face a bailout for states within the next 12 months. This is not good news for taxpayers.

The municipal bond market is more than $3 trillion in size and it is owned by individuals and institutions. If there is a bailout from the Federal Government, it could dwarf that of the bailed out banking system in 2008. The bad news is the owners can’t take stock or preferred stock as collateral on the loans to the states. The primary concern near term is the rating on the state and municipal bonds. If these start to erode, the values will decline and investors will once again pay the price..."

IMF Calls for Huge New Round of Bank Bailouts

"The IMF is calling for a huge new round of bank bailouts.

As the Telegraph noted yesterday:

Lenders across Europe and the US are facing a $4 trillion refinancing hurdle in the coming 24 months and many still need to recapitalise, the Washington-based organisation said in its Global Financial Stability Report. Governments will have to inject fresh equity into banks – particularly in Spain, Germany and the US – as well as prop up their funding structures by extending emergency support..."

Gold, Get it While You Can

"Jeff Clark, Casey's Gold & Resource Report writes: We've got it easy right now. Click or call, and you can quickly and conveniently own a gold coin or bar. But if global concerns cause another panic or the dollar breaks down, you could find yourself standing in a line at the local coin shop or getting a busy signal. Simply, for reasons I'll discuss here, you may find it very difficult to get your hands on physical gold when that time comes.

It's happened before. Though there were no precious metal ETFs in 1980, the demand for physical gold was so great that you literally had to wait in line at a coin shop to buy, with plenty of occasions when you would have been turned away due to lack of inventory. And you'll recall we saw serious shortages, unexpected delays, and soaring premiums in late 2008.."

U.S. Economy is Faltering, Inflationary Depression is in Progress

"In spite of the disinformation, misdirection and outright propaganda the economy is faltering without the addition of stimulus and quantitative easing. The benefits of inventory accumulation over the past 17 months, which accounted for 60% of the strength in the economy is at an end. We either get more stimulus either governmental or from the privately owned Fed or growth is going to continue to drop. We are looking at indexes that for the most part are at or near their lows. We see short reactive rallies but certainly nothing that leaves us to believe that any kind of a recovery is at hand..."

Tuesday, October 5, 2010

How a financial crisis morphs into a currency war

"In a synchronized global economic downturn, the temptation for policy makers is to view economic growth as a zero-sum game and to take policies that, while favourable to domestic constituents, end up ‘stealing’ growth from elsewhere. The thinking goes: "If I can’t get the economy to grow quickly, I’ll have to depend on exports to do the heavy lifting until things stabilise." But what’s good for the goose is good for the gander and once we head down the path of today’s neologisms of quantitative easing, fiscal austerity, and competitive currency devaluations, the die is cast; there will be no domestic growth except that which comes at the expense of others..."

The Fed Is Selling Paper Gold And Buying Physical Gold

"...Officialdom will never admit it and it will NEVER be reported in the mainstream financial news but our financial system has NEVER been in a more precarious state. A banking crisis of unparalleled proportions is coming – probably soon – the exact timing is still sketchy.

Got physical precious metal yet?"

A new global war has broken out

"A new global war has broken out. But this war is economic. So far, it's not a shooting war - at least, not a shooting war involving physical bullets. Yet each nation is firing financial bullets at its own currencies.

This international currency war already involves China, Japan, Brazil, Korea and even the United States, to name just a few of the main combatants, with each country's central bank taking the point position on the front line.

Through the central bank, each nation is attempting to help its own economy by lowering the value of its national currency in foreign exchange terms. The central bank that succeeds will see its country's export total zoom and will either narrow (or even eradicate) an existing current-account deficit, or (as is the case with countries such as Korea and China) will see its currency reserves soar.

You see, this war is over the ability to export finished products, to importing nations. It is about keeping your own citizens employed during an extended economic slowdown in global demand, even if that means damaging national relationships. This war will vault the winners into positions of global leadership, while severely penalizing the losers..."

Foreclosures Continue to Hit U.S. Housing Recovery

"Don Miller writes: Banks seized more homes in August than in any month since the housing bubble burst in 2007, even as the number of homes entering the foreclosure process dropped for the seventh month in a row, according to data compiled by RealtyTrac Inc.

In all, banks repossessed 95,364 properties last month, up 3% from July and an increase of 25% from August 2009, RealtyTrac said. August was the ninth month in a row that the rate of homes seized by banks increased on an annual basis. The previous high was in May.

Additionally, almost one-quarter of all U.S. home closing transactions involved properties that were in some stage of mortgage distress and sold at a 26% discount on average in the second quarter..."

Gold's New Record Highs on BOJ's Buying Assets and Zero Interest Rates

"Gold rose in all currencies and rose 1% to new record dollar highs (nominal) at $1,327.90/oz this morning. The Bank of Japan pledged to pump more funds into the struggling economy and keep rates "virtually at zero". This surprised markets and given that the Federal Reserve and other central banks look set to soon provide fresh injections of economic stimulus is leading to demand for gold as a store of wealth..."

Gold and Silver Jump Again as Fed Threatens to Print Money

"THE PRICE OF SILVER and gold bullion leapt overnight in Asian and early London trade on Tuesday, hitting new highs vs. the Dollar as world stock markets also rose on fresh promises of quantitative easing on either side of the Pacific..."

Monday, October 4, 2010


"New orders for manufactured goods in August, down three of the last four months, decreased $2.2 billion or 0.5 percent to $408.9 billion, the U.S. Census Bureau reported today.  This followed a 0.5 percent July increase.  Excluding transporation, new orders increased 0.9 percent.  Shipments, also down three of the last four months, decreased $2.5 billion or 0.6 percent to $415.1 billion.  This followed a 1.2 percent July increase.  Unfilled orders, down following four consecutive monthly increases, decreased $0.1 billion to $804.0 billion.  This followed a slight July increase.  The unfilled orders-to-shipments ratio was 5.59, up from 5.53 in July.  Inventories, up seven of the last eight months, increased $0.7 billion or 0.1 percent to $526.4 billion.  This followed a 0.9 percent July increase.  The inventories-to-shipments ratio was 1.27, up from 1.26 in July..."


"What is critical here is the orders-to-inventories ratio, which leads the headline ISM by roughly three months and strongly suggests that we will be sub-50 and as such ‘double dip’ talk will re-emerge before the end of the year. See what this ratio has done in recent months:
May: 1.44x

June: 1.28x

July: 1.07x

August: 1.03x

September: 0.98x

Ouch! Detect a pattern here, folks? The orders-to-inventory ratio is all the way back to January 2009 levels, when the economy was knee-deep in recession. All we can tell you is what the historical record says — at this level in the past, the economy slipped into contraction 75% of the time.”

Sunday, October 3, 2010

Are Or Aren't France And China Plotting An Alternative To The Dollar?

"A pair of very conflicting news articles over the weekend about secret currency talks caps yet another week full of central bank interventions in the FX arena (and, as Bruce Krasting points out, many more to come). Yesterday, the FT reported that France and China had been in secret talks over "heightened co-ordination of exchange rates" which is another way of saying finding alternatives to the rapidly debasing US Dollar. "The talks and their content have been kept secret, in an attempt to draw China into a discussion on global currency co-ordination, a subject that Beijing has been reluctant to countenance in the past. In an ambitious move reminiscent of the currency accords of the 1980s, President Nicolas Sarkozy hopes to open a debate on the subject when France takes over the presidency of the G20 group of leading nations in November, according to people familiar with the matter." Yet China's desire to engage in a currency axis away from the US is no secret, and many have alleged that Beijing has approached both Russia and Germany in the past about a USD substitute. The timing of the latest escalation of the battle to the currency bottom is not surprising: "The move comes against the background of rising concern over exchange-rate interventions by a host of countries, most notably China but also Japan and South Korea, to prevent their currencies from rising against the dollar." Perhaps China, which has been reticent in exposing its CNY domination plans in the past, was just waiting for the correct provocation to go public with its plans. And last week's move by Congress to retaliate against China and impose duties on imports because of undervaluation may be just that provocation..."


China Flexes It’s Rare Earth Muscles

"The stakes of the recent dispute between China and Japan over the Japanese detention of a Chinese fishing trawler has reached a head with China blocking the export of precious rare earth metals to Japan. No official announcement has, however, been released and the Chinese Commerce Ministry has strongly denied the imposition of such an embargo. Any official ban on exports would allow Japan to complain to the World Trade Organization (WTO) but with no official Chinese statement and only the reported prevention of ships being loaded, there’s little room for Japan to react. Japan has not received any official communication about a ban either.

Japan and the US are heavily dependent on China for rare earth metals and are China’s primary customers. Japan has been trying to secure its supplies to some extent by setting up rare earth processing units in northern Vietnam, which has small reserves of the metals. Rare earths smuggled from southern China are also processed here but China has been implementing strong measures to limit smuggling.

As reported last month, China, which owns 97% of the global supplies, produced 120,000 tonnes of rare earth metals in 2008 followed distantly by India with 2,700 tonnes. Further, China’s low prices have pushed most other companies out of the rather costly rare earths production market. To top it all, China has been limiting its export quotas and increasing the fear of a global deficit. Prices of rare earth metals have skyrocketed ever since July when China announced a 72% cut in its export quota for the rest of the year..."

America Trending Towards and Inflationary Economic Depression

"...We are in an inflationary depression and have been since February 2009. Bogus government statistics in GDP, CPI, and PPI and in employment are masking the ugly truth. It’s the 1930s all over again except this time it will be much worse. No recovery can sustain because all the Fed, Treasury and the administration are doing is throwing money at the problem and that is not the solution. We just saw a five quarter bounce borne by $2.5 trillion and now the Fed and the administration are planning two more such rescues for the next two years, which will cost a minimum of $5 trillion. They should end up in hyperinflation and a realignment of currencies, devaluation, revaluation and multilateral debt default. In the ‘30s the economy jumped 8% not 3-1/4%, with the same kind of stimulus and the market rose 50%. This time it rose from 6550 on the Dow to 11,700. A repetition of 1932-33. Along the way many individual investors have left the market after realizing the Fed and the government had it rigged for Wall Street. Front running, insider trading and naked shorting are tolerated on a massive scale. Everyone seems to forget that between 1930 and 1936 gold and silver shares, during a deflationary depression, appreciated 500%..."

Irish Financial Crisis Worsens, Peter Sutherland and Ireland’s Sovereign Wealth Fund

"Last week, on “black Thursday” the Irish government in essence finally nationalized Allied Irish Bank. In response to the horrific national financial picture painted by Mr. Brian Lenihan, Ireland’s finance minister, Peter Sutherland, former Irish attorney general, hit the media road. Mr. Sutherland’s mantra was similar to that previously presented by his acolyte Mr. Honohan (head of the Irish Central Bank). This mantra stated that though the figures were lamentable they were “manageable.”

U.S. Declares Trade War Against China

"The House of Representatives on Wednesday passed a bill giving the executive branch the power to impose punitive duties on exports to the US of any country whose currency is labeled “fundamentally undervalued.” The measure was pushed by the Democratic leadership and supported overwhelmingly by Democratic congressmen, with substantial Republican support.

The vote was 348 to 79, with 99 Republicans joining 249 Democrats voting in favor, and 74 Republicans voting “no” alongside five Democrats.

The bill was openly directed against China, which has come under mounting pressure from the Obama administration to more rapidly raise the exchange rate of its currency, the Renminbi, so as to make Chinese exports to the US more expensive and US exports to China cheaper..."