Thursday, March 19, 2009

For The Dollar, Fed News Goes Over Like A Lead Balloon

China has been the biggest buyer of U.S. Treasury securities due to their large trade surplus with the United States. Now, Chinese officials have made it clear that they will not be buying as many U.S. Treasury bonds, agency bonds, and government securities of other nations, due to the fact that their trade surplus with the rest of the world is falling and their huge foreign exchange reserves have stopped growing rapidly.

Further, the Chinese have been spending more of their money purchasing raw materials as they continue to buy up base metals, oil, and other reserves to stoke their economic machine. Chinese officials have made statements recently that their purchases of bonds will fall as their trade surplus falls.

This is the primary reason that the U.S. yesterday announced the purchase of $300 billion of U.S. Treasury bonds by the Federal Reserve over the next six months. This is Quantitative Easing, or to put it more plainly, printing money. The long term effect is highly inflationary.

We predict that this is only the first of many Quantitative Easing activities, and the U.S. will have to print more money to buy much of the $2 trillion in new bonds that are going to be issued in the coming year. This will have large effects, including:

1. A decline in the value of the U.S. dollar. (The decline began yesterday as soon as the announcement was made.)

2. Substantial inflationary pressures.

3. Long-term upward pressure on the prices of fixed assets, gold, commodities, real estate that produces steady income, stocks that can grow.

4. Serious negative effects on the economic future of coming generations of Americans (personally, I blame the U.S. political class for their unmitigated shortsightedness.)”
- Monty Guild,

The gold market has seen two significant pulse-up moves in the last 24 hours and in general, the gold trade was able to consolidate those gains. The bull camp clearly seems to have embraced the prospect of inflation but with some players in the stock market questioning the recent moves from the US Fed one can't discount the prospect of ongoing flight to quality buying interest in the precious metals. With another massive range down pulse in the Dollar, soaring oil prices and general strength seen in a long list of physical commodity markets, the number of bullish influences for gold was rather extensive. In fact, given the weakness in US economic readings on Thursday morning, the bull camp could probably suggest that the state of the economy was also supportive of their case.

The silver market also managed two distinct upward thrusts on the charts over the last 24 hours and in general the market was able to consolidate a good portion of those gains. Clearly inflation expectations are more prevalent than at the beginning of the week and certainly the declines in the US Dollar are becoming significant enough for the bull camp in silver to use the Dollar action as another justification for silver price gains. Apparently silver and other industrial metals markets were undaunted by the patently weak flow of scheduled US data on Thursday morning.”

- The Hightower Report, Futures Analysis and Forecasting

Federal Reserve Will Fail With Quantitative Easing
Quantitative easing; everybody is doing it like the Bank of England, Japan and even Switzerland. Quantitative easing is a tool of monetary policy. The effect is an increase in the quantity of currency without regard to maintaining its quality. Quantitative is relating to, measuring, or measured by the quantity of something rather than its quality. On 18 March 2009 Bloomberg reported that the Federal Reserve announced the intent to purchase $300B of longer-term Treasuries. Predictably, the Federal Reserve has decided to exacerbate the quantitative easing party.

What is really going on is the great credit contraction. The system does not collapse but evaporate. As the evaporation has continued and intensified capital, both real and fictitious, has sought safer and more liquid assets by moving down the liquidity pyramid. A significant, but still miniscule amount, of capital has already evaporated over the past year. This is basic economic law being asserted. A predictable consequence has been for Treasury rates to near 0% because they are considered among the safest and most liquid assets.

But the United States Treasury bubble is the biggest of all and there are reasons how and why the Treasury bubble will burst.

At all times and in all circumstances gold remains money. Gold is the ultimate form of payment and is always accepted. Gold is the safest and most liquid asset. As I surgically explained, the ETFs GLD and SLV are NOT gold or silver. The question then becomes: Will capital move up or down the liquidity pyramid?

How did gold perform in reaction to Bernanke’s announcement? A monstrous and almost immediate rise of about $60 per ounce. The gold cartel GATA has shined a light on must of had its hands full today. This is all the more ominous because gold is not just a commodity or portfolio asset but a currency which, through tools like GoldMoney, can be used in ordinary daily transactions. Because silver is also money; the chronic silver backwardation is equally if not more ominous.

China said to support Russia on replacing dollar
MOSCOW -- China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday.

Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Gold to Soar
By: Clive Maund
You may have heard the old saying that "the Market is the news", and it is true. You don't have to look for explanations regarding yesterday's response by the markets to the Fed's announcement that it will buy $300 billion of Treasuries, you only have to look at the reaction of the markets. The dollar index tanked by nearly 3% - it's biggest drop for over 2 decades. That alone tells you all that you need to know.

While the Fed is certainly very much to blame for the horrible dilemma in which it now finds itself, which has its roots in a litany of crassly irresponsible policies going back years, such as the slashing of interest rates to near zero in 2003 which ignited the housing boom and fuelled rampant leveraged speculation, one can understand why its present reactions to the financial crisis can be classed at best as clueless and at worst as desperate and reckless. Right now the hackneyed old saying "between a rock and a hard place" applies very well to the unenviable situation it finds itself in. Up until yesterday it had to make one of two choices, to support the Treasury market or not support it. Vast quantities of money have to be raised to finance the deficit, the government and to pay for the numerous bailouts, requiring the issue of a flood of new Treasuries. The problem is that overseas buyers are abandoning ship - they don't want them anymore because they have a miniscule yield, and besides they have plenty of problems at home that require urgent attention. This means that the US Treasury market is verging on collapse, and in the absence of intervention it will collapse. To prevent this and the resulting ruinous spike in interest rates, the Fed and the Treasury would have to monetise the new Treasuries, in other words, buy their own rubbish, and to do this this they will have to create vast quantities of new dollars. Yesterday was a momentous day because the Fed came down off the fence and announced that this is exactly what they they are going to do. Of course, major financial news networks tried to put a positive spin on it by proclaiming that this "would ensure adequate liquidity for the upcoming economic recovery", but the real news was the reaction of the dollar, which plummetted like a lead balloon. This news telegraphs that the course has been set towards collapse of the dollar and hyperinflation because yesterday's announcement has opened the floodgates - they can't stop with buying $300 billion of this stuff, just like the bailouts they will find themselves obliged to buy more and more until they crumple up completely like an exhausted junkie. If the Fed thinks it can prop up the Treasury market by creating money to backstop it, it is in for a rude awakening - the huge near 3% drop in the dollar index yesterday will have scared the **** out of foreign investors in US government paper. So Treasuries spiked yesterday, but the gains were almost entirely erased by the drop in the dollar, and then you have to factor in the drop in the yield for potential new buyers. So in an environment where the Fed and Treasury are going to have to create dollars, i.e. dilute the currency, to prop up financial instruments which have almost zero yield, due to a serious shortfall of demand, meaning that their real worth will decline because of the steeply depreciating currency, who but a complete imbecile is going to buy them? Less and less investors is the answer, and that being the case the Treasury market will collapse in due course anyway despite, and perhaps even because of the Fed's desperate and reckless attempts to backstop it.

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