Tuesday, February 16, 2010

The ECB and the BIS have a secret weapon

So much for transparency and open, honest government. ABC News reports that "Behind closed doors and with no cameras present, President Obama signed into law Friday afternoon the bill raising the public debt limit from $12.394 trillion to $14.294 trillion." Nothing like keeping the 'ol skeleton in the closet...eh?

Will history look back on this moment as the "beginning of the end" for the US Dollar as the global reserve currency?

Our unsustainable U.S. national debt
By Neal Boortz
Do we really understand what we’re doing to our children, our grand children and future generations of Americans here? Without much fanfare, Barack Obama signed another $1.9 trillion increase in our debt ceiling. So, with this increase our allowable debt ceiling is $14.3 trillion. How much wiggle room does that give us? Our current debt level is still an astounding $12.3 trillion. Will it be weeks or months before The Community Organizer signs yet another increase in our ceiling?

Taking that $12.3 trillion into consideration … add up the interest paid on that debt, plus the cost of entitlement benefits like Social Security and Medicare … and by the year 2020, that spending alone will consume 80% of all federal revenues. That does not include any spending for military or homeland security.

Within the next few years, the national debt is expected to rise to 100% of our GDP. To put into perspective, Greece – which is going through a major financial crisis – currently has a debt equivalent to 124.9% of the GDP.

US debt will keep growing even with recovery
WASHINGTON – It's bad enough that Greece's debt problems have rattled global financial markets. In the world's largest economic and military power, there's a far more serious debt dilemma.

For the U.S., the crushing weight of its debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial scenario — a full recovery and a return to prerecession employment levels.

The government already has made so many promises to so many expanding "mandatory" programs. Just keeping these commitments, without major changes in taxing and spending, will lead to deficits that cannot be sustained.

Take Social Security, Medicare and other benefits. Add in interest payments on a national debt that now exceeds $12.3 trillion. It all will gobble up 80 percent of all federal revenues by 2020, government economists project.

That doesn't leave room for much else. What's left is the entire rest of the government, including military and homeland security spending, which has been protected and nurtured by the White House and Congress, regardless of the party in power.

The U.S. debt crisis also raises the question of how long the world's leading power can remain its largest borrower.


The headline above should read "even 'IF' there is a recovery". There is far too much certainty about an economic recovery. We'll be lucky if we have economic survival. One has to wonder if the rest of the World has tired of funding our deficit.

Foreign demand for Teasury securities falls
WASHINGTON (AP) -- The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.


This should come as no surprise. It certainly knocked the wind out of the Dollar's sails today. Coupled with last week's very poorly received 10 and 30 year debt offerings by the Treasury, this news may be just the catalyst to cripple the irredeemable US Dollar once and for all, and expose it's "safe-haven" status as the utter folly that it is.

Gold caught a firm bid overnight, and Silver followed in it's footsteps. Little reported was news that Gold hit a new high price basis the Euro today.

Gold broke thru overhead resistance at 1108 just after midnight est, then rising quickly towards 1118 after the CRIMEX open only to be capped by the 2% rule the Gold Cartel firmly adheres to during their New York criminal operations. 1135 looms overhead as the next level of resistance.

Silver made it's way back above the fulcrum price of 16, but must clear 16.30 with some authority before we can safely declare an interim bottom is in at 14.63 and begin to really pressure the shorts in that market. A close above 16.30 could prove to be the launch point of Silver's next rally towards new highs.

Ed Steer's Gold & Silver Daily [http://www.caseyresearch.com/displayGsd.php] today offered the MUST READ essay "Greece Is the Word" that explains the necessity of the Western financial system to revalue its gold upward by a huge amount to cover its otherwise unpayable debt." The essay is lengthy, but well worth the time to read if you need more proof that the US Dollar is NO safe-haven.

The ECB and the BIS have a secret weapon. They don't want to have to use it because they don't want to be seen as the instigators of the dollar's collapse. They would prefer the market to take care of it for them. But don't doubt for a second that they won't use it before sitting back and watching permanent damage come to the euro system.

Just imagine how Greece could deal with its problems if its gold were valued at $55,000 usd per ounce. In terms of current exchange rates that would raise Greece's liquid assets to 50% of its public debt. In other words, instead of being a "sub-prime" borrower, Greece would instantly become a PRIME borrower.

Rumors have been circulating for a few months now about some large physical buyers on the public LBMA being cashed out with a 25% premium and being sent to the private cash market to get their gold where such a purchase at a premium would not move the official price. This rumor suggests a relative shortage to demand for physical on the official price-setting markets. And this tightness is confirmed by the low GOFO or Gold Forward Offered rate reported by the LBMA which is currently languishing at lows only seen twice before. Both times in close proximity to backwardation events that both times signaled that the system was teetering on the edge of collapse, only to be rescued by some entity supplying physical gold to market at an intentional loss.

COMEX being in the US and the LBMA being in London leaves the ECB and the BIS with "the nuclear option" if things ever get desperate enough to use it. This nuclear option is A) for the BIS to begin operation of a public "physical only" market for gold to be used by the really giant participants, primarily sovereign entities and billionaires, and B) for the ECB to use the price discovered by the BIS in its quarterly reserve asset "marked to market" adjustments.

Such a move would put Greece, and all the PIIGS for that matter, in a much better position almost overnight. Of course it would have devastating effects on the value of the dollar and the rest of the paper gold market. You see, in order for the BIS to supply actual physical gold to each and every giant that was ready to buy, the price would have to rise high enough that someone else with an equally huge amount of gold was willing to become a seller. And right now, at today's prices, we know that the central banks of the world have become net buyers! So the question is, just how high would the price have to rise in order to balance out the demand of the world with the supply, in a physical-only official price discovery market?

Chances are that what would be revealed by such a market would have an eye-opening and breathtaking effect on the rest of the world and demand would skyrocket. What passes today for enough demand to almost break the paper markets would quickly shift all players from paper to physical and add new savers that hadn't even considered gold before. Literally, the entire world would shift its view to gold.

And because this would be a physical-only market in the presence of a credit money contraction it would have no way to bubble in price beyond actual demand. Instead it will finally plateau once the Thoughts of all the giants and savers of the world reach their Nash equilibrium. And the price will be high enough that it becomes a coin toss as to whether you'd rather be in cash or gold. What it will come down to is your own time preference and your appetite for investing back into an economy that must be rebuilt.

The euro architects knew the difference between the monetary functions. They knew that the infinite growth, store of value function was the dollar's Achilles' heel. So they designed the euro to be a stable transactional and accounting currency even if the world chose non-euro physical assets as a store of value. The dollar does not have this design.


No comments:

Post a Comment