Friday, December 21, 2007

Give GOLD This Christmas

"Why would anyone buy dollars?" -- Jim Rogers of Quantum Fund

Five years ago, 86 US cents could buy one euro. Today one needs some 147 US cents to buy one — meaning, in terms of euro, the dollar has fallen by 75 per cent in five years. Benchmarked with gold, less than $275 could get an ounce of gold in 2002; today $800 cannot. So, the dollar, rated with gold, has depreciated by over 290 per cent.

Take the black gold — crude. One needed, as 2002 turned, $21 to buy one barrel of crude which now costs $90. Rated in crude prices, the dollar has fallen by 430 per cent.
As of the second quarter 2007, the total forex reserves held by different countries is $5.7 trillion.

Assuming two-thirds of it is invested in dollars, the global forex reserves invested in the dollar will top $3.8 trillion. That others hold $3.8 trillion means that they hold US securities or assets. Like bank deposits are to a bank, the $3.8 trillion held by others is a debt, a liability of the US to other countries.

Why did this huge debt occur? In one word: the Fed. In less than 15 years, by calibrated strokes of the pen, the US Fed has habituated the once responsible American households to spend beyond their current income and turned them into reckless gluttons.

See how the US Fed achieved this result. By repeated interest cuts, from 20 per cent to just 1 per cent in 20 years from 1981 to 2001, the US Fed got US households addicted to buying regardless of needs. At rates of 1 per cent interest, US households saw no meaning in saving. No wonder they felt justified in spending beyond their income.

The fallout? The US savings rate to GDP, which was 18 per cent in 1970s, first came down to 9 per cent in 1990, then to an average of 2.8 per cent in 10 years from 1996 to 2005 and finally to a negative figure of 0.6 per cent in 2006. This drift directly led to households getting addicted to borrow and to spend.

The US household dues on credit cards rose from $338 billion in 1990, when the Fed rates were around 8 per cent, to $1.5 trillion in 2003, when the Fed rate became 1 per cent. Today the dues on credit cards are over $2.46 trillion and the number of credit cards in use is 1.2 billion.

An average American is addicted to 13 credit obligations, nine credit cards and four instalment loans! It is difficult to de-addict them today. The result, in just 15 years, US households have handed over all their money to the corporates and become indebted.

The Fed’s spend-beyond-incomes policy risked domestic inflation. To de-risk against it, the US government had to go for liberalised imports, cut the import tariffs and make import of foreign goods cheap in the US. So trade liberalisation became more a domestic compulsion of the US rather than, as it pretends, a global obligation.

Consequently, the US began buying more goods and services from the rest of the world, than it supplied to them. This led to in increasing deficit on the US current account with the rest of the world. Once this trend started, it intensified like virus.

The numbers are startling. For the 10-year period from 1990 to 1999, the aggregate deficit of the US was $300 billion.

In the subsequent five years from 2000 to 2004 alone, the deficit had aggregated to $2.5 trillion – more than eight times the aggregate for the previous 10 years! Meaning that during the five years 2000-2004, the US has borrowed $2.5 trillion from other countries to settle its current account deficit.

Yes, it is true that today US consumption drives global economy. But who funds the US consumption? The very countries that sell goods to the US, like China and Japan, Korea and Taiwan, Malaysia and Indonesia, Hong Kong and Singapore, and finally, India too.

Their dollar reserves represent moneys lent to the US to help the US buy goods from them, like a shopkeeper lending money to his clients and asking them to buy his goods. It’s worse in fact. It is more like the shopkeeper selling his goods on credit against the client’s pro-notes.

After all, in the end, the $3.8 trillion securities held by other countries are merely pro-notes of the US. So all that those who exported goods or securities to the US have on hand are the accumulated pro-notes for $3.8 trillion. Are they not just unpaid vendors? The pro-notes held by them are losing value by the day and hour against the euro, gold, oil and also against the rupee.

Startling statistics aren't they? To see how all these pieces of debt fit together, and spell the demise not only of the US Dollar, but perhaps our "American way" of life, please read the entire essay The $3.8 trillion pro-notes depreciating by the hour by S. GURUMURTHY here:

What is perhaps most staggering is the insignificance of the World's Dollar Reserves when stacked up against the towering mountain of derivatives debt that is about to go nuclear in a Financial Armageddon never imagined. A conservative estimate by Jim Sinclair puts the "shaking mountain of derivatives debt" at $20 trillion. In effect, the debt bomb the US has unleashed on the planet is almost three times the size of the World's Dollar reserves. The World's Dollar reserves combined with the US $13 Trillion economy barely equal two thirds of that. How in God's name are we going to come up with the cash to extinguish the Debt Bomb? Print it? Yeah, that's the ticket!

Consider this: The $500 Billion that the European Central Bank "loaned out" [yeah right, loaned out, LOL] this past week equals 13% of the World's US Dollar reserves. As if $500 Billion would even put a dent in a cancer that is $20 Trillion strong. You have got to be kidding. That $500 Billion would be akin to giving a death bed patient morphine to ease their pain as they slipped into the afterlife. It will neither solve or save the World's Banking System from it's inevitable demise caused be The Death Of The US Dollar.

Most often in a currency collapse, the last ones to realise their is a problem with their money, are those that use it every day and take it for granted. Americans, as a whole, have little understanding and even less of an idea of what is about to literally destroy their "way of life". Few if any realise that they don't work for "their boss", they work for their
creditors...indentured servants of their banks. The least of Americans worries should be "terrorists", for the real terror is just over the horizon: Financial Armageddon. American's need not worry abouta collapse by being attacked from the outside, they're doing a good enough job from within, via the Death Of The Dollar.

Ah, but what the hell! It's Christmas damn it! Get out that platic and spend, spend, spend. It may be the last spending we do for a long, long, long time. Very soon it will be time to pay for all that spending.

I'd like to thank everybody and anybody that reads these blog entries of mine. I love writing them as it allows me to get this stuff out of my head. I hope everybody benefits and profits from the information I pass along. What good is information, if it isn't shared?

Merry Christmas! I hope your Holiday Season is filled with Silver and Gold!

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