Chinese students laughed at Timothy Geithner's assurances over the Dollar

This says it all! It's a tribute to Chinese students that they are up-to-speed on the Dollar. It's also an embarrassment for the world's foremost power.
http://www.gata.org/node/7461

Can Paul Volcker Save The US and Capitalism Again?

In his fascinating speech given yesterday former Federal Reserve Chairman, Paul Volcker, gives his analysis and reactions on how the US and the world's economies have weakened "at a shocking rate" over the last year. ( See below ) What is most interesting about his speech is how he explicitly avoids what he and the President's team will do about the crisis in the coming days. There are strong hints that the banking system is going to be organised and regulated in manner far different from before. He is probably working with most of the world's governments to put together international regulations on banks to take account of our global business world: something the previous US administration did not have the wit nor relationships to do. It is increasingly apparent that the manner in which the world's banks and financial institutions were regulated had more in common with the Victorian age than with our own. Volcker thinks that he can save "capitalism" by doing this. But by his own admission if he fails, so too, will the capitalist world as we know it.

It was Paul Volcker who saved the US economy and its dollar in the early 80s with high interest rates. The cost of this was the destruction of much of the US's industrial base. At 81 whether he and his economic team can salvage the capitalist economic system remains to be seen. Due to globalisation the economic problems this time are far greater and higher interest rates would damage the US and much of the world's economies. Masses of jobless, homeless, starving people would demand a revolution and a different economic system.

In an interview with Charlie Rose last September Volcker offered a vignette about FDR Roosevelt closing the banks for several days to sort out the good ones from the bad. Roosevelt gave a fire-side chat on the radio to reassure Americans that the new banks would be safe and when the banks opened after four days the US public believed him. They trusted the banks that reopened because of the President's crediblity. Volcker laughed at this because Roosevelt knew that there was no way that the banks could have been thoroughly checked out in that time. It was a piece of theatre intended to inspire public confidence, something that most bankers and politicians are unable to emulate today. Roosevelt inspired confidence and that made the difference. Of course, the US economy and others around the world continued to suffer the effects of the Depression because their economies were too badly led and damaged before Roosevelt's arrival in office. Banks are the backbone of capitalism and if Volcker and Obama's economic team can restore confidence in banks the rest will fall into place.

By the way, the other thing that FDR Roosevelt did that should have been done before he entered office was to devalue the dollar and increase the price of gold. His predecessor and his advisers did not understand the damage that a strong dollar would inflict on the US economy. Somehow I don't think Volcker and Obama will repeat this mistake.

The Manipulation of Gold Prices from Seeking Alpha

An excellent and ingenious article which explains why gold and silver prices must go much higher soon
http://seekingalpha.com/article/109210-the-manipulation-of-gold-prices

The Death of the Dollar? (from Radio 4)

This is an excellent 30 minute programme which casts a historical as well as contemporary eye on the role of the dollar in the world's financial system.
"Dollars and Dominance" from "Analysis".
http://www.bbc.co.uk/iplayer/episode/b00f07g5

GSE Woes and More Fed Easing Ahead by Frank Barbera

In one of the best articles of its kind Barbera explains how rising unemployment figures reveal how the US and the West are already in recession and how they are probably well on their way to a major depression. He goes on to reveal the differences between CDOs and CDS and their relationship with clarity and insight and he demonstrates how when significant CDOs go belly up the results will cause a systemic catastrophy for the US financial system and its main representative, the Dollar. In short, it's a enlightening read.

http://www.financialsense.com/Market/barbera/2008/0819.html

The Federal Reserve's rescue has failed

This is Ambrose's first article for two months and it looks like a good one, too.

The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

	The Federal Reserve building in Washington

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

Looks like Ambrose is scared!

"For the first time since this Greek tragedy began, I am now really frightened."
For more:
By Ambrose Evans-Pritchard,
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml

Shayne McGuire: The Early Innings of a Gold Boom

Shayne McGuire: The Early Innings of a Gold Boom

by John Rubino

http://www.dollarcollapse.com/iNP/view.asp?ID=64

James Howard Kunsler's "Burning Down The House"

Read James Howard Kunsler's latest, "Burning Down The House".

It's a very sober read. He thinks we only have a few weeks left.

http://www.kunstler.com/index.html

WELCOME to visitors from Goldtent

Click on the image to see the animated version!

Ever since Fullgoldcrown's post there has been a rush of visitors to this site from Goldtent, the premier site for gold and silverbugs on the Net. I feel honoured to receive fellow goldbugs. I just wish my site was easier to navigate because I've made several gold, silver and bank related posts since last July. If I had my chance to start again I would have used Wordpress. However, try the labels on this post and likely words in the search box.

When the exams are on and the students are at college I tend to post more on literature. Otherwise it's gold and related topics that interest me.

Whoever you are, welcome and may we all profit from the coming major rise in gold and silver with their related equities!

Thanks also to Fullgoldcrown, an administrator at Goldtent, for his generous comments. I need to join your site to comment and I'll do so ASAP!

Bush convenes Plunge Protection Team By Ambrose Evans-Pritchard

Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/07/ccview107.xml&CMP=ILC-mostviewedbox

Flight to gold as investors lose faith in money

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/06/ccgold106.xml&CMP=ILC-mostviewedbox

The last time gold touched $850 an ounce, the world was visibly spiralling out of control.

Soviet tanks had just rolled into Afghanistan. The Mullahs had seized US hostages in Iran. Pax Americana was on the ropes, and so was capitalism. Inflation had reached 14 per cent in the United States.

If The Dollar Falling Is Falling Like This . . .

Gold and silver equities should shortly do something like this:

Credit derivatives' volumes exceed $ 45 trillion: ISDA survey

The half-yearly credit derivatives data released by ISDA says that credit derivatives volumes, as of end June, 2007, have gone beyond $ 45 trillion, at about $ 45.46 trillion. This scales a growth of 32% from the $ 34 trillion data as of end 2006, and nearly 75% growth over the half year of 2006.

Credit derivatives have been growing at an annual rate of nearly 100% over the past 3-4 years.

During the tremendous credit squeeze that started in the wake of the subprime crisis, credit derivatives volumes are likely to be affected this year. There are several reasons for this - hedge funds who became primary players in credit derivatives in 2004 onwards are likely to stage a retreat, or at least slow their activity this year. CDO activity is completely moribund post July 2007. In general, the market has become risk averse.

Increased role of hedge funds has increased risk of correlated movements in credit markets: Fitch

Rating agency Fitch recently came up with a special report on the role of hedge funds in the credit markt [Hedge Funds: The Credit Market's New Paradigm, report dated 5 June 2007]. The report states something that anyone having an insight into the credit derivatives market might surely know, but what might look shocking to an outsider. The credit derivatives market is not where banks meet to swap each other's credit risks. It is fast becoming an arena for risk-takers and betters who take leveraged positions on credit risks. Hedge funds occupy nearly 60% of this market today.

Apart from the sheer volume of trade, "(T)he impact of hedge funds on the credit markets can not be measured simply by trading volumes, but also must consider hedge funds’ willingness to be risk takers by investing lower in the capital structure. By investing in instruments that are themselves levered, hedge funds are able to create a multiplier effect by
combining financial leverage with so-called economic leverage. The combination of the two can be thought of as the effective leverage", says Fitch.

There is ample evidence that hedge funds, in search for high returns, take subordinated positions in pools of credit. That apart, they are major players in equity tranches of the indices.

What does this highly leveraged position of hedge funds imply for the credit market? The downgrades for GM and Ford in May 2005 brought sharp MTM losses for several players because of the highly correlated moves by several hedge funds trying to unwind their positions due to their mandates or deleverage triggers. Fitch says that a similar result is almost inevitable. "Credit assets could behave in a more correlated, synchronous fashion if one or a number of hedge funds were forced to liquidate positions following some catalyst event in the markets. Investor redemptions and/or increased margin calls from prime broker banks could exacerbate a larger unwind of credit assets". Hedge funds are far more unstable investors than buy and hold investors of relationship banks.

Besides, hedge funds are typically short-term strategy based. Many of them have short horizons within which they either perform or must wind up. While hedge funds have continued to improve their risk management abilities, there is no way they can eliminate risks, and the next downturn in business cycle may really bring forth this critical situation.

Will Helicopter Ben Drop Another Load Tomorrow?

I don't know whether Ben Bernanke and the FED will lower rates tomorrow and provide welfare for "suffering" millionaire Wall Street bankers and hedge fund managers. But I do know that he will be dropping billions of dollars from his helicopter over the next few months to reflate the US economy and avoid deflation. Right on! Helicoper Ben!

"The Counterfeiters" : how the Germans tried to destroy the British and American economies by printing money during the World War II.

Money is being printed at an ever increasing rate in most countries in the world. It's around 14% in the UK and maybe more than 10% in the US. Of course, the public are not aware of this as they have been told that inflation is only linked the CPI (the Consumer Price Index). This is widely said to be around 2-3%. What a joke as the index is composed of items that mainly exclude inflation and items that do, food, oil, house-prices, are excluded. Geobels would be proud of how modern governments manipulate statistics. Perhaps that is why these governments are so proud of them. Statistics are used for measuring everthing. The problem is they set false goals therefore statistics are merely an illusion and not worth a damn! The modern obsession with "target setting" can be reduced to a modern mania for creating illusions for the public mind control.

The excellent, recent German film, "The Counterfeiters" is based on real events. The Germans tried to use a master forger and his team to destroy the currencies of the UK and USA by printing money worth several times more than each country's reserves. This German inspired effort also represents the last big attempt to flood Britain and the US with specially printed money! However, one could argue that each country has been doing this already since the Fed was founded in 1913! For inflation has reduced the value of each currency by around 98% since the First World War.

Counterfeiters - Trailer

Posted Sep 19, 2007

Towards the end of World War II, the National Socialists forged millions of British pounds in order to weaken the enemy's economy. A counterfeiting plant was set up with prisoners in the concentration camp in Sachsenhausen.

German Team Damn UK Economic 'Miracle' As A Sham by The Telegraph's Ambrose Evans-Pritchard

The latest by Ambrose Evans-Pritchard is an excellent piece on the sham economics of Britain over the last 15 years and well worth repeating here in full.

German team damn UK economic 'miracle' as a sham By Ambrose Evans-Pritchard, International Business Editor
23/10/2007

Britain's economic resurgence over the last fifteen years has been driven by record levels of household debt and a public spending spree that cannot continue, according a German-led team of economists.

Ambrose Evans-Pritchard: Did the Fed hit the brakes too hard?
HSBC warns of hot money exodus from Britain
Get the latest news on the UK economy

In a damning new report "More Mirage than Miracle" published by the free-market think tank Policy Exchange, the analysts said Britain was relapsing into high-tax and high-regulation sclerosis just as the rest of Europe begins to shake itself out of statist lethargy.

The country's underlying slippage has been masked by a housing boom that creates a false sense of wealth and encourages people to over-spend by drawing cash from their homes.

The British are resorting to a Faustian Pact that leaves many of them with an ever greater debt burden.

"From 2001 to 2006, a total of £256bn in equity was extracted from UK property values in this way. Dependent as it is on rising house prices, housing equity withdrawl cannot continue to prop up our consumer spending at its current level," said the report.

The dramatic change in attitudes to debt has caused the UK savings rate to plummet from 8.3pc of disposable income fifteen years ago to around zero. Personal debt has risen by 137pc since June 1993 to £1,343bn, greater that annual GDP for the first time.

"Just as private households have been living beyond their means, so has the state. The expansion of the public sector artificially inflates GDP growth data: it cannot continue much longer.

"Judging by the fiscal deficit trend, the UK is now in worse fiscal shape than almost any other major Western country. In the event of an economic downturn, the UK now has little leeway for stimulus," it said. The report was mostly written by two German economists: Holger Schmieding, chief Europe economist for Bank of America, and Policy Exchange's chief economists Oliver Hartwich.

"We're two Germans who came to Britain believing its was a free-market haven and we're disturbed by what we've found. This is the year when the state sector in the UK as a share of GDP rises above the level in Germany. It's shocking," said Dr Hartwich. "The rest of Europe has been cutting taxes and pushing through reforms, and what has Britain done? The economy has in effect been been 'bailed out' by housing inflation and debt," he said.

The report cited a World Bank study showing that Britain earned top score as a place to do business in just one respect; "the ease of getting credit". It came 54th in the category of dealing with licences, a sign that the regulatory arteries are furring up.

Separately, Barclays said it was downgrading its forecast for the UK economy and now expects the Bank of England to cut rates a quarter point in Feburary and again in May, rather than remaining on hold deep into next year.

Barclays said the debt markets have not yet returned to normal following the August credit crunch in America and the Northern Rock debacle in Britain. Households and firms are likely to face a "pronounced rise in the effective borrowing rate".

"We now think domestic demand will slow markedly in the next few quarters," said the bank's UK economist George Johns. Britain's heavy reliance on the City will also take its toll. Barclays expects growth to fall from 3.1pc this year to 2.2pc in 2008.

Bank of America is forecasting four rate cuts to 4.75pc by the end of next year as the chickens come home to roost in Britain, with sterling dropping from £2.03 to around to £1.84 against the dollar.

In a sign of changing perceptions in Europe, the Spanish financial group Coface said Britain faces a "dangerous cocktail of a real estate bubble and household indebtedeness".

The group also put Spain on negative watch, warning that the country would soon follow the US and the UK into trouble as the property dominoes topple.

Britain's household debt levels are the highest of any major economy in Europe or North America, but with rates at 5.75pc it has ample room to ease monetary policy to cushion a hard-landing.

Those southern Euro-zone countries facing deflating property booms may not be so lucky. Their interest rates are now set in Frankfurt, largely to meet the quite different needs of Germany and Northern Europe.

The coming months for gold and the dollar

Jim Willie agrees

"We are witnessing a failure of economic and banking stewardship, management, and performance. The entire world is held hostage. Their banking systems are reinforced by gargantuan sums of US$-based securities. To call them 'secure' at all is a bad joke and a misnomer in every sense. The backlash from the subprime bond export, complete with fraud, mispricing, mislabeling, and premeditation, has in no way been fully played out. With the European, British, and Japanese central banks frozen on policy, urged to hold on interest rates at the point of a gun, the gold price will serve as a relief valve. These major central banks are expanding the money supply in magnificent fashion, over 14% together. With the US Federal Reserve certain to cut rates further, and with far less likelihood of foreign major central banks to follow suit, the USDollar is in great jeopardy. With the Arab states which form the Gulf Coop Council contemplating a removal of the US$ peg, a fracture in the PetroDollar defacto standard is near. Implications to the USDollar negatively, and to gold positively, are profound. The Asians and Arabs are hedging against US$-based bond losses by purchasing increasing amounts of gold. The transactions are not being hidden. Gold is heading for $1000 in the coming several months. The USDollar is heading for DX=70 in the coming several months. The euro is heading for 150 in the next several months. The Canadian Dollar is heading for 110 in the next several months. The precious metal mining stocks are poised for a substantial runup in the next several months. The season will work favorably until the spring."

For more from Jim Willie:
http://www.321gold.com/editorials/willie/willie100407.html

Citigroup says "mining shares are poised to surge"

Fleet Street's most honest and best economic journalist has just published another thunderous report on the dollar and gold.

Dollar crunch puts gold centre stage
By Ambrose Evans- Pritchard
Last Updated: 1:30am BST 03/10/2007
Have your say Read comments
The dominoes are toppling. What began as a credit crunch has turned into a dollar crunch. We are witnessing a run on the world's paramount reserve currency, an event that occurs twice a century or so, and never with a benign outcome.
The US dollar has fallen through parity against the Canadian dollar and plummeted to all-time lows against a basket of currencies. This is dangerous. None of the mature economic blocs seems able to take the strain, let alone step in to restore order.
Ultimately, Europe and Japan are in worse shape than the US. A mood of sauve qui peut is taking hold.
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Is this what gold is sniffing as it breaks out against all currencies, smashing through €500 an ounce against the euro, and vaulting to a 28-year high of $743 against the dollar?
"Central banks have been forced to choose between global recession or sacrificing control of gold, and have chosen the perceived lesser of two evils," said Citigroup in a fresh report.
"We believe that the policy resolution to the credit crunch will take the form of a massive, extended 'Reflationary Rescue', in a new cycle of global credit creation and competititive currency devaluations. This could take gold to $1,000 an ounce, or higher."
The report's authors, John Hill and Graham Wark, say the avalanche of central bank bullion sales earlier this year was "clearly timed to cap the gold price".
They do not explain this explosive allegation, long promoted by the gold group GATA. But it would not surprise me if the European Central Bank's motive for selling 37 tonnes in April and May was to hold the euro price of gold below €500.
Citigroup said the game was up once the Federal Reserve slashed rates a half point and opened the liquidity floodgates.
Talk of "competitive devaluations" is a new twist, although Bernard Connolly from Banque AIG has been warning for a long time that this would be the denouement. Gold bugs often prattle about the dollar's demise - condign punishment for a country that has amassed $3 trillion of net liabilities abroad, slashed its savings rate below zero and spent itself into a debtor's gaol - but they rarely ask what currency it is supposed to collapse against.
China is a leveraged play on US shopping malls. Japan is already buckling. Its economy contracted 0.3pc in Q2. Wages have fallen for eight months in a row. The Abe government has fallen - the first sub-prime victim, but not the last.
Until now, the euro has served as the "anti-dollar", the default choice for Asians and petrodollar powers wary of US assets. This cannot last.
A rate of $1.43 (it was 83 cents in 2000) will combine, after a one-year lag, with deflating property bubbles in the Club Med bloc to cause a crisis in 2008. It will then become clear that the needs of the Germanic and Latin zones are incompatible and that a coin with no treasury, debt union, or polity to back it up cannot displace the dollar - if it survives at all.
Airbus is already underwater, unable to meet its dollar contracts unless it shifts plant from Europe. Every 10-cent rise in the euro costs €1bn.
French President Nicolas Sarkozy is in guerrilla warfare against the ECB, threatening to invoke Maastricht Article 109, which gives EU politicians power to set a fixed exchange rate (by unanimity) or a "dirty float" (by majority).
The mood is moving his way. Eurogroup chair, Jean-Claude Juncker, has stopped pretending that all is well. "We have begun to have great concern about the exchange rate of the euro," he said.
Europe will not let America export its day of reckoning to the rest of the world. It will counter with its own devaluation.
No doubt Ben Bernanke will use all means to avert disaster, including the "printing press" he invoked in November 2002. By this he meant that the Fed could inject unlimited stimulus by purchasing as many bonds and assets as it wants. He believes the Fed could have avoided the Depression if it had been more creative in 1931.
Even so, I am not sure that the Bernanke Fed will move fast enough, given fears of moral hazard, or, indeed, whether the rate cuts on offer are enough to head off an insolvency crisis. The chart of S&P 500 looks eerily similar to October 1987, the last time a tumbling US dollar set off a crash.
A Bundesbank rate rise was the trigger then. If the ECB's hawks are pig-headed enough to ram through one last rise on October 4, we might see a replay.
Large parts of the global credit system are still shut. The $2.2 trillion market for commercial paper has shrunk by $368bn over the past seven weeks as lenders refuse to roll over loans. The $2.5 trillion market for "structured finance" remains frozen.
US sales of new houses are down 21pc in a year. Median prices have fallen 14pc since March to $225,700. Builders are having to slash tariffs to move stock at all.
We wait to see what happens as "teaser rates" on some $1.5 trillion of mortgages jump with a venomous kick in coming months. The Fed should have thought about this three years ago when rates were 1pc. It is too late now.
How do you play gold rally? Citigroup says the mining shares are poised to surge after lagging badly, offering a "Gold beta" leverage of 2.36. "The market is likely to be shocked at how much cash the major Golds generate at $700 an ounce," it said.
It certainly looks as if gold has at last "decoupled" from the stock markets, regaining its role as the ultimate store of value. Whether the mining equities have decoupled is another matter.
If Wall Street takes a beating this autumn, the safest play is pure metal.

Fiscal Crisis 2007 - The deep breath before the plunge

J. Palme shows insight in his webcasts. He made this one on August 21st.