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Thread: weekend commentary - the 'jungle drums' are beating loudly [ US dollar devaluation ]

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    Default weekend commentary - the 'jungle drums' are beating loudly [ US dollar devaluation ]

    all sorts of 'interesting' tidbits are showing up in today's financial news ...

    - Fed May Boost Discount Rate Before Next Meeting, Economists Say ...

    - Central Banks Rapidly Accumulating Gold: What's the Message? ...

    - Beijing is trying to head off pressure from U.S. lawmakers for President Barack Obama to have China declared a currency manipulator ...

    - Lost Force of Our Demand: The US No Longer Controls the Price of Oil ...

    - Currency stress tests indicate Beijing 'readying' yuan move
    SocGen says one-off 5%-10% appreciation coming in April or May ...


    and this piece of commentary from ...

    (snip)"Tim Geithner and Christina Romer tried to paint another rosy economic picture in front of the House Appropriations Committee ("there's progress, though it's challenging"), but even their own fellow Democrats don't buy into it anymore. American politics as a system has ceased to function, because the system has gone from representing people to representing money. And that is something that can only go well as long as the people have at least some of that money. Now that they're increasingly shut out, the system shuts down; it's inevitable. Which is why even rating agency Moody's comes with an at first glance curious warning: even the credit raters now predict pitchforks.

    We've seen tear gas in Athens recently, and that was just a little taste. As you may know, I’m spending some time in France right now, and it's not hard to predict what will happen here if and when the government starts slashing salaries (as it must soon). The French simply won't understand what's happening, and mass protests will be the result, some peaceful, some violent. It’s every democratic politician's ultimate conundrum: if you don’t tell people the truth, they'll turn against you down the line; if you do tell them, they'll turn against you right away. That makes it obvious to figure out which politicians actually do get elected. Where the government is left, it will swing right, and vice versa, in ever more extreme denominations.

    And yet, it's all just a prologue. There's nothing easier for politicians than to play people against each other, in order to divert -negative- attention away from themselves. And so they will.

    We have a baby boomer generation that has just about all the money that's left in our societies. Their children, though, have nothing. Except for some hand-outs from their parents (I’m not talking individuals here). Unemployment among young people in many countries is downright scary, often in the 40%-50% range. No jobs, no money, no prospects. In times and places throughout history, this has brought populist dictators to the foreground, and pitchforks and torches into the streets, and there is no reason why it won't now. Today's political power is firmly in the hands of the 40-year and older crowd; they have elected incumbent politicians, and more importantly, they have the money and thus the power. The younger generation has no money and no power, but they also have nothing left to lose.

    That is a dangerous combination, and how we deal with it will be what decides our futures. Our societies, already barely able to survive current debt and deficit loads, are slowly -though increasingly faster- being eaten up by the monster of unfunded liabilities: healthcare and pensions. Be it the US Medicare, Medicaid and Social Security varieties, or their European and Japanese counterparts, we're looking at ticking explosives counting down the hours, days and years. Down here at the Automatic Earth we've long said that nobody presently under 50 (and planning to retire at 65) will ever see a penny from pensions or government retirement plans (well, perhaps that one penny).

    The world's pension plans have lost fortunes in the 2008/9 crash, and they will lose more going forward (they're playing double or nothing now to make up the losses). Your private pensions have entered the casino, and they ain’t never coming out again. Government obligations will not be honored, because the younger generation must and will at some time take over, through elections or otherwise, and vote themselves (again, through elections or otherwise) an ever bigger piece of the pie. And the pie will have gotten a lot smaller to boot. If time is money, and money is power, than time will be power too at some point: the young have the final advantage.

    Most people are far too complacent when it comes to the consequences of a shrinking economic system. Many claim that we can easily downsize to smaller homes and smaller lives, since there's so much we don't really need anyway, that we will move in together and return to "good" conversations, growing our own tomatoes and all that. But that's just not going to happen voluntarily, not on a large and wide scale. The human mind has no reverse. It doesn't even have a steering wheel. We are built for one of two things: go forward or crash. It looks like there's no forward left before a major crash happens first. It also looks like there's not a whole lot of people who realize this. "(snip)

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    Default Re: weekend commentary - the 'jungle drums' are beating loudly

    and the 'interesting' tidbits continue through the weekend ...

    India raises Key Rate by .25% to Help Fight Inflation ...

    Australia Raises Benchmark Interest Rate to 4% ...

    Asia's Inflation Genie Leaps Out Of the Bottle ...

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    Default Re: weekend commentary - the 'jungle drums' are beating loudly

    if you aren't following what this worldwide 'jungle drum' beating is all about, try reading this treatise from Peter Schiff of Euro Pacific Capital ...

    (snip)"Paul Krugman Versus Reality

    (snip)"Recent rhetoric from Washington has put the economic relationship between the U.S. and China squarely on the front burner, and Krugman is demanding that we crank up the flame. This week 130 members of Congress sent a letter to Treasury Secretary Timothy Geithner demanding that the Obama administration designate China as a "currency manipulator". Following that, a bipartisan group of senators introduced a bill that looks to force the Obama administration's hand. For its own part, Beijing invites criticism by continuing to deny its utterly obvious currency agenda.

    As these tensions escalate, most economists urge Washington to tread lightly because of the negative fallout for America if China were to begin selling its enormous cache of U.S. Treasury bonds. Krugman pushes back, asserting that the U.S. risks little by playing hardball, and that China has more to lose. He asserts that a Chinese decision to end its purchases of U.S. Treasury debt would make only a marginal impact on long-term interest rates. Did you hear that Stockholm?

    According to Krugman, our secret weapon of economic invincibility is the Fed's ability to print dollars endlessly. If China were to foolishly decide to attack us by selling our debt, the Fed could simply step in and buy the excess with newly printed greenbacks. (In other words, Krugman sees no difference between funding the debt and monetizing it. See my latest video blog on the subject.). For Krugman, China would gain little from such an attack, but would lose the ability to export to its best customer and suffer severe losses in the value of its dollar holdings. Krugman's worldview is reassuring - but it has absolutely nothing to do with reality.

    There is a huge difference between selling your debt to another and "selling" it to yourself. When China buys our debt, it uses its own savings. In order to purchase a trillion dollars of U.S. Treasuries, the Fed would have to expand our money supply by a corresponding amount. Even Krugman acknowledges that this would cause the dollar to lose value; however, he feels that a weaker dollar is good for America and bad for China.

    Krugman does not believe that a tanking dollar will translate into higher interest rates or higher consumer prices at home. No matter how many dollars the Fed creates, or how much value those dollars lose relative to other currencies, he is confident that as long as unemployment remains high, rates will stay low and inflation will remain under control. This is absurd.

    If the dollar were to nosedive, the Fed would normally look to protect the currency by raising interest rates, thereby increasing foreign demand for the currency. But with an economy currently on crutches, the Fed will ignore a weakening dollar and continue to try to boost employment with near-zero rates.

    But keeping the Fed Funds rate low only holds rates down for U.S. government debt. If the dollar weakens substantially, other rates offered to other borrowers will rise as investors demand greater returns to compensate for inflation. To keep rates low for homeowners, credit card borrowers, corporations, municipalities, and state governments, the Fed would be forced to buy, or guarantee, all forms of dollar-denominated debt. The Fed would become the lender of only resort.

    Once the Fed shows that its commitment to low rates is limitless (the value of the dollar be damned), private creditors will quit the game. Even average Americans would hit the Fed's bid. It would be a race for the exits, with no one wanting to be left holding a bag of worthless paper dollars.

    Most economists, Krugman included, see cheap money as a panacea for all ills. And while it's true that a falling dollar, by lowering the real value of U.S. wages, would help make U.S. goods more competitive, it would also lead to skyrocketing consumer prices, rapidly rising interest rates, and a collapse in American living standards. Make no mistake: this is the end game of Krugman's "get tough on China" policy.

    This apocalyptic scenario can only be avoided if Washington jealously guards the status quo, avoiding confrontation with China at all costs. Yet, even that is an outcome that no one can rationally expect. Given exploding U.S. government deficits and the inability of U.S. citizens and corporations to repair their balance sheets, the United States faces financing needs that even China's gargantuan savings stockpile will be unable to cover.

    Krugman is right about one thing - China's currency peg is destabilizing the global economy and must end. But he fails utterly to understand the implications for the U.S. and China. If China were to reverse its role in the U.S. Treasury market, both economies would be destabilized in the short-term. But in the medium- and long-term, China would clearly emerge as the winner.

    Absent Treasury-bond purchases, the value of the Chinese currency would rise sharply, causing goods prices to tumble in China. This long-delayed increase in purchasing power for everyday Chinese will unleash pent-up demand in what is already the largest middle class in the world. Chinese factories would retool in order to produce goods for their own citizens to consume. In RMB terms, commodity prices would plunge, making it easier for China to produce all kinds of stuff, such as automobiles, while also making it cheaper for the Chinese to buy gas. Millions will trade in bikes for cars, and Chinese oil imports will swell.

    The opposite would occur in America, where an artificial, consumer-based economy, supported by Chinese lending, will come tumbling down. Without the ability to import cheap goods from overseas, Americans will pay more and get less. While gas and food become cheaper for the Chinese, they will simultaneously become much more expensive for Americans - so too will automobiles, consumer electronics, furniture, and just about every other product we want or need (even those few we still make ourselves).

    Washington's best option is to recognize that the current relationship is unsustainable and to plan, as best as possible, for a more viable future. We Americans also must be honest with ourselves and recognize that we have been living beyond our means and that our lifestyle has been largely financed by austerity in China. We must conceive of a plan that weans us from this dependence without provoking China to pull the rug out from under us before we have a firm footing. To construct a policy around Krugman's ridiculous assumption that we benefit China more than they benefit us is to invite catastrophe on an unimaginable scale."(snip)

    from

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    Default Re: weekend commentary - the 'jungle drums' are beating loudly [ US dollar devaluatio

    and a totally non-sugar coated version from Martin Armstrong

    (snip)"In succinct synopsis of what lays just over the horizon ~ "the cycle of economic implosion" ~ for the ill-conceived amalgam known *today* as the European Union, phinance's phavorite political prisoner, Martin Armstrong, cautions that:

    - "the EU is in dire position", on the precipice of shattering into default and civil unrest;

    - the sovereign debt crisis materializing across Europe will soon reach US shores;

    - the CFTC will curtail currency speculation by slashing leverage from 100:1 to 10:1, which "can cause a liquidity crisis that backfires, magnifying everything."



    Since "debts will never be paid and interest expenditures are the greatest transfer of wealth in history", Armstrong suggests:

    - freezing all national debt;

    - issuing coupons whereby the debt is redeemable for local currency, which may then be invested in domestic debt or equity;

    - each European nation establish an independent currency pegged to the Euro;

    - swapping US debt to coupons that may be spent domestically.



    Seeking to impart light from within the dark seclusion of maximum security solitary confinement, Armstrong concludes his (relatively minuscule by Armstrong standards) missive with stern warning.

    " Western society is falling apart .... If we do not act, civil unrest will explode. The current choice is DEFAULT or HIGHER TAXES & CIVIL UNREST .... Someone has to step forward to save us or we may be doomed. It's time to wake up for this is the future of our children and their children at stake. ""(snip)


    from

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    Default Re: weekend commentary - the 'jungle drums' are beating loudly [ US dollar devaluatio

    as well as this chart which basically says it all ...



    ... the 'take-away' from this chart, of course, is that for the last several months the additional 'stimulus' and other federal spending ( funded by additional FED money printing / additional borrowing from foreign lenders via printing and selling new US Treasury bonds ) no longer create a positive 'multiplier effect' on the overall US economy. Instead this additional gov't spending ( funded by money printing / Treasury bond printing ) have become a significant NEGATIVE drag on whatever economic recovery might have otherwise taken place. However, the future debt burden DOES increase.


    (snip)"20 March 2010
    Debt Saturation in the US Dollar Economy

    The debt must be liquidated and income in the form of real wages must increase to bring this relationship back into balance.

    This is going to be a dangerous path for the US monetary authority to tread, because a misstep will lead to an inflationary spiral that will surprise most economists as did the stagflation of the 1970's, which up until that point was considered to be almost impossible according to the prevailing theory of that day.

    The financial engineers will keep at this until they hit they wall. If we were not in the car with them it might be a more interesting exercise to observe. The answer of course is to get out of the car as best you can."(snip)

    from

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    Default Re: weekend commentary - the 'jungle drums' are beating loudly [ US dollar devaluatio

    Proving once again that Paul Krugman is the dumbest Nobel Prize winner in Economics ever. He'd get the overall prize for Nebel winning stupidity were it not for Al Gore, Jimmy Carter and our current President.

    Krugman ignores history and basic economic common sense in cheerleading continued loose money from the Fed. He won't be happy until we emulate Weimar Germany and Argentina. The really scary part is that Obama is appointing "soft money" people to the Fed.
    They want to peg the money supply to the unemployment rate and little else. Their model was used by Arthur Burns and was a proven disaster in the late 70's when we had BOTH high inflation and high unemployment.

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    Default Re: weekend commentary - the 'jungle drums' are beating loudly [ US dollar devaluatio

    The Nobel Prize doesn't seem to be what it was before.

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    Default Re: weekend commentary - the 'jungle drums' are beating loudly [ US dollar devaluatio

    here's another very disturbing development along the same lines ...


    (snip)"Obama Pays More Than Buffett as U.S. Risks AAA Rating

    March 22 (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

    Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

    The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

    “It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”

    Moody’s Warning

    While Treasuries backed by the full faith and credit of the government typically yield less than corporate debt, the relationship has flipped as Moody’s Investors Service predicts the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7 percent of taxes for debt payments in 2010 and almost 11 percent in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.

    “Those economies have been caught in a crisis while they are highly leveraged,” said Pierre Cailleteau, the managing director of sovereign risk at Moody’s in London. “They have to make the required adjustment to stabilize markets without choking off growth.”

    Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund. "(snip)

    from


    Unfortunately, where economic / political realities are concerned, there simply isn't any way to simultaneously reduce gov't stimulus spending without choking off 'real' US domestic economic growth. There IS a way to reduce 'real' deficit levels owed to foreign holders of US Treasury Bonds, however ... devalue the US dollar's exchange rate !

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