Tuesday, May 4, 2010

The Greatest Magic Show On Earth

There is an unending blather in some corners of the financial news media regarding the "rallying" US Dollar. This is pure hogwash. ANY and ALL "strength" in the US Dollar this year is directly related to the weakness of the Euro.

If you are reading this blog, you certainly already understand this. And you understand that the reason Gold is rising in a "rising Dollar" environment is because of the "Euro factor" in the currency market. Today I hope to show us "why" the the supposed Dollar rally is false, and why Gold is rising in the face of a rising US Dollar.

First we must recognize that when the "value" of the Dollar is referenced in the financial media, it is relative to the US DOLLAR INDEX. The value of this "index" is what is always quoted when the Dollar is mentioned. What is the US DOLLAR INDEX?

U.S. Dollar Index
From Wikipedia, the free encyclopedia
The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

It is a weighted geometric mean of the dollar's value compared only with

Euro (EUR), 57.6% weight
Japanese yen (JPY), 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight and
Swiss franc (CHF) 3.6% weight.

USDX started in March 1973, soon after the dismantling of the Bretton Woods system. At its start, the value of the US Dollar Index was 100.000. It has since traded as high as the mid-160s and as low as 70.698 on March 16, 2008, the lowest since its inception in 1973.

The makeup of the "basket" has been altered only once, when several European currencies were subsumed by the Euro at the start of 1999.

USDX is updated whenever US Dollar markets are open, which is from Sunday evening New York time (early Monday morning Asia time) for 24 hours a day to late Friday afternoon New York time.

As you can see from the list of currencies that make up the "basket" above, the Euro is OVER 50% of the basket. Clearly then, if the Euro tanks, the Dollar will rise. Conversely, if the Euro should rise, the Dollar would tank.

It is curious that the country with whom the US has the largest trade deficit, China, is absent from this basket of currencies. Perhaps this has something to do with the Chinese Yuan peg to the Dollar, but that is an issue for another day.

Today it is my intent to show that in spite of the "strength" in the Dollar so many seem intent on misrepresenting, the US Dollar is actually one of the weakest global currencies in the market.

Dollar Loses Value Against Emerging Economy Currencies
Jeffrey Nichols, Senior Economic Advisor to Rosland Capital
Looking at the dollar's performance against other currencies demonstrates its true weakness. So far this year the U.S. currency has lost about five percent against the Canadian dollar and 6.9 percent against the Mexican peso. Together these two countries account for considerably more U.S trade than does the European Union. Yet the greenback's decline against these other North American currencies seems to be overlooked.

Other world currencies where the dollar has lost value this year and how far in percentage terms include economies that are growing and from which we import many goods and services:

India (4.5%), Indonesia (4.4%), South Korea (4.9%),

Malaysia (6.8%), Philippines (4.7%), Singapore (2.5%),

Taiwan (2.0%), Thailand (3.4%), Russia (3.9%),

Australia (3.1%), Colombia (4.5%), Guatemala (4.0%),

Costa Rica (8.5%).

To be sure, there is an even longer list of countries against whose currencies the dollar has appreciated – but many of these are poorly managed, developing countries, or the economic basket cases of the world.

And, you can be sure the dollar would lose considerable value against China's yuan if the People's Bank of China weren't artificially pegging the yuan/dollar exchange rate well below its purchasing power parity. We expect that a managed gradual appreciation of the yuan will commence in the months ahead . . . and this will touch off further up-valuations of some other Asian currencies whose foreign-trade sectors compete with China in world markets.

Rising foreign currencies – particularly in the gold-friendly Asian zone – benefit the price of gold in several ways:

•First, stronger currencies make gold cheaper and more affordable to investors and jewelry buyers in those countries, boosting demand.

•Stronger currencies of rapidly growing Asian economies makes their raw-materials imports less expensive, further boosting consumption of everything from oil to steel and aluminum to soy beans and rice – raising the dollar price of many commodities in the process.

•Stronger foreign currencies make America's imports of autos, toys, blue jeans sneakers, and thousands of other products manufactured in the Asian region, Canada, Mexico and other strong-currency countries more expensive, contributing to higher consumer price inflation in the United States.

The U.S. dollar is an inherently weak currency – one that's losing real purchasing power, thanks to America's reflationary monetary policy, huge current Federal deficits and massive accumulated public-sector debt. It is only a matter of time before gold more accurately reflects the continuing decline of the dollar.

Thank you Mr. Nichols! It should be clear now for anybody reading this why the current US Dollar rally is not only false, but completely misrepresented by the US financial media. The shock over the rising Gold price, in spite of and contrary to a rising Dollar, should be a surprise to no one willing to accept reality. Gold is money. Gold is the TRUTH.

The US Dollar is bereft of value, and completely worthless. The only thing backing it is MORE US Debt as the country perpetually takes on more debt to pay off old debt. America's wealth has been sucked down the well of greed by nation's biggest banks, the Federal Reserve, and the highest levels of the federal government. To protect your wealth, you MUST OWN GOLD.

In reality, no variety of "prosperity" has ever been built on debt. The very notion is absurd. The notion of regaining lost prosperity by issuing even more debt is even more absurd. The ONLY way out of the mess we are in, is to return to sound money. Better to get there first while the "authorities" founder... and dig the grave of the paper system even deeper.
-Bill Buckler, the-privateer.com... April 24, 2010

Is the US facing a Cash Crunch?
By: Gordon T Long
The US Government is caught in a cash vise and is being squeezed between too slow a rebound in tax revenues and the limitations on how quickly it can realistically take its funding requirements to the US Treasury auction. The US Treasury was saved in March by what the government reports as “proprietary receipts”. Those receipts require an explanation that is not well publicized since it begs the question of what happens next month without the $117 BILLION journal entry.

The March cash management numbers from the US Treasury’s Financial Management Service are alarming and in my estimation have become perilous. The economy is simply taking much too long to recover which is affecting urgently required tax receipts.

If the US Treasury issues even higher debt supply to the market too fast, it threatens driving up interest rates prematurely and thereby elevating already strained government financing costs despite already increased supply. Since the US government has steadily reduced maturity duration over the last few years to obfuscate a growing debt problem, the issue is compounded by the rapidly increasing levels of roll-over funding now additionally being required.

It is a tricky balance between gauging how fast tax receipts will return and what supply the monthly treasury auction is able to absorb. Cash flow is the primary reason small businesses fail unexpectedly. This is also why sovereign governments fail abruptly.

On April 14th the Financial Management Service, a bureau of the US Department of the Treasury released its
Monthly Treasury Statement for March 2010.

The report shows US Treasury receipts were down disturbingly and almost all government outlays were up. I personally have had Profit & Loss responsibility on numerous occasions during my career and I would have been apprehensive facing the auditors or board of directors with such a blatant example of mismanagement. Absolutely no cuts in expenses, with falling revenues, all made to marginally appear better than the February report by a single line item called “other”. Executives get fired for such a report but governments just carry on until the inevitable crisis event finally occurs. Then the traditional blame game begins, blame is assigned and belated and poorly formulated policy responses are enacted.

So what is this ‘other’? When you examine the Outlay Ledger of the Department of the Treasury for March 2010 (below) you see it to be a onetime item classified as a negative outlay. For the non accountants, this is a government receipt that is placed in the outlays as a negative amount, thereby showing government outlays to be smaller than they otherwise would have been. Though this is acceptable accounting it would lead to the wrong conclusions, unless you read the details buried in the back pages. This ‘other’ is referred to as a “Proprietary Receipt from the Public”.

An IRS document explains just what that means in an accounting context: "Proprietary Receipts from the Public are collections from outside the Government that are deposited in receipt accounts that arise as a result of the Government’s business-type or market-oriented activities. Among these are interest received, proceeds from the sale of property and products, charges for non-regulatory services, and rents and royalties."(2)

This is a $117.3 BILLION amount!! The total 2010 US Tax receipts for US Corporations is only budgeted to be $157 Billion!

My investigations suggest that it is likely TARP (Troubled Asset Relief Program) money being returned to the US Treasury, along with a slowdown in TARP issuance versus budget. Assuming this is the case, and not simply an aircraft carrier or two we have sold and are now leasing back, like California is doing with all state owned buildings, we still have a major problem. What happens next month? The TARP fund returns will stop or we will run out of aircraft carriers. Is unemployment going to surge or are corporate tax receipts going to expand by over $117B next month?

Timothy Geithner and the US Treasury somehow dodged the bullet because of ‘other’ this month. How does it look for next month for cash management?


Dollar rally? Pay no attention to the man behind the curtain. The US Dollar rally is nothing more than a cheap magicians trick. More to the point, the current Dollar rally is supported, at best, by a seedy accounting gimmick. The US Government has bought just about all the time it can afford while sowing the seeds of our nation's NEXT financial disaster.

The western financial news media is obsessed with the Greek Debt Crisis and it's "global" implications. The Greek Debt Crisis is an education in obfuscation. How do magicians successfully perform their tricks? They use misdirection. By focusing on the Greek Debt Crisis the financial media hopes to deflect for the US Government the elephant in the bathroom...The American Debt Crisis. And what a deception it has been...

The Great Interest Rate Explosion of 2010-2011
By Mike Larson
Now, a NEW massive bubble is starting to burst. Now, a grave new threat is staring you in the face... That bubble? The Treasury bond market!

This is no small backwoods corner of the financial world. Quite the contrary, the bond market is enormous. As of year-end 2009, there were $34.7 trillion of U.S. government, corporate, municipal, and other bonds outstanding. By comparison, the entire market capitalization of the broad Wilshire 5000 Total Market Index for stocks is just $13.9 trillion.

Translation: The U.S. bond market is two-and-a-half-times the size of the U.S. stock market! Among the categories of bonds outstanding, the U.S. has $2.8 trillion of municipal securities and $2.4 trillion of bonds backed by credit cards, auto loans and similar assets.

But the biggest sector of the bond market is, by far, U.S. Treasury securities. Marketable Treasury bills, notes, and bonds outstanding (which excludes those held in certain government trust funds and accounts, as well as those at the Federal Reserve) totaled $7.6 trillion in mid-2009. That has more than doubled in just seven years...

Bottom line: Each and every day, Washington is sowing the seeds of our nation’s NEXT financial disaster ... and one of the biggest threats to your wealth that’s looming in 2010-2011 — a crash in the U.S. bond market. And, since exploding long-term interest rates are simply the mirror image of crashing bond prices, the interest rate explosion is equally inevitable.

The Treasury Department and Federal Reserve are driving us inexorably in that direction with every inflation-fueling promise of free money ... every budget-busting bailout ... and every multi-billion dollar bond auction. Our foreign creditors are growing more disgusted, and the day of reckoning is rapidly approaching.

A Sovereign Debt Crisis: In late 2009 and early 2010, a sovereign risk crisis struck Europe. The euro currency plunged, while yields surged on government bonds issued by the so-called “PIIGS” countries — Portugal, Ireland, Italy, Greece, and Spain.

The common cause of the sell-offs in these countries: Massive debts, massive deficits, and no realistic plan to deal with them.

A Sovereign Debt Crisis: In late 2009 and early 2010, a sovereign risk crisis struck Europe. The euro currency plunged, while yields surged on government bonds issued by the so-called “PIIGS” countries — Portugal, Ireland, Italy, Greece, and Spain.

The common cause of the sell-offs in these countries: Massive debts, massive deficits, and no realistic plan to deal with them.

How serious is this sovereign debt crisis? Deadly serious!

Now here’s the thing: Many analysts believe the PIIGS problem will stay bottled up in the PIIGS countries. They believe that what happens over there won’t affect the bond market over here. My view: They couldn’t be more wrong. After all, the underlying problems in the PIIGS nations are virtually the same as those in the U.S.!

Just look at the table I’ve included here. It shows the projected debt-to-GDP ratios and projected budget deficit-to-GDP ratios for the PIIGS countries, the U.K., and the U.S. The key conclusion: The U.S. is NOT the least vulnerable. Quite the contrary, other than its shaky status as the world’s dominant economic power, it is among the most vulnerable — with the third-worst debt-to-GDP ratio and the fourth-worst deficit-to-GDP ratio in 2010.

Many investors just assume that if Treasury yields rise, the Fed can counteract that. They think the Fed is all-powerful. And indeed, the Fed has tried all it can to hold long-term rates down.

As part of a massive attempt to boost Treasury prices launched in March 2009, the Fed purchased $300 billion in government notes and bonds. But despite all the Fed’s buying, bond prices have continued to fall and interest rates have continued to rise.

Plus, in an even larger effort to support mortgage bond prices — and to suppress mortgage rates — the Fed poured a whopping $1.25 trillion into direct purchases of mortgage-backed securities (MBS). It also bought $175 billion of debt securities sold by Fannie Mae and Freddie Mac. But again, even after spending hundreds and hundreds of billions of dollars, mortgage bond prices are still falling and rates are still climbing.

Clearly, the Fed has failed to stop this new phase of the debt crisis, and one of the key reasons is obvious: To buy bonds, the Fed must print money. But the more it prints, the more it fans inflation fears and the more it chases away bond investors, who realize they’ll be paid back in cheaper dollars.

In other words, it’s a massive Catch 22. If the Fed buys fewer bonds — or sells the bonds it has already purchased — rates will go up as supply overwhelms natural buyers. If the Fed buys more bonds, fear of the resulting inflation and perceived damage to the U.S. government’s credit will rise and rates will go up anyway. The Fed has no way out!

Bottom line: If you’re counting on the Fed to bail out the U.S. Treasury Department
or bond investors — forget it!


"Paper is poverty, it is but the ghost of money... not money itself."
-Thomas Jefferson

When John William speaks, I LISTEN. This man works 24/7 to report the TRUTH, the whole truth, and nothing but.

John Williams: A Hyper-Inflationary Great Depression Is Coming
TGR: With all this new paper money coming into the system, wouldn't we see a bigger bubble than we've ever seen prior to a hyper-inflationary great depression?

JW: No, in fact, it's a very unusual circumstance that we have now. Put yourself in Mr. Bernanke's situation—he had to prevent a collapse of the banking system. He was afraid of a severe deflation as was seen in the Great Depression, when a lot of banks went out of business. The depositors lost funds and the money supply just collapsed. He wanted to prevent a collapse of the money supply and keep the depository institutions afloat. Generally, that has happened. The FDIC expanded its coverage and everything that had to be done to keep the system from imploding was done. The effects eventually will be inflationary.

In the process, what Mr. Bernanke did was to expand the monetary base extraordinarily, more than doubling it over a period of a year. The monetary base is money currently in circulation plus bank reserves. If you go back to before September 2008, the bank reserves were in the $50 to $60 billion range. Where the currency was maybe $800 billion, we've gone over $2 trillion in total reserves. Most of that is in excess reserves and not required reserves that banks have to keep to support their deposits. Normally banks would take their excess reserves and lend them out into the regular stream of commerce, and in doing so, that would create money supply. Instead they're leaving the excess reserves on deposit with the Fed. Money supply and credit are now generally contracting. We're going to see an intensified downturn in the near future. I specialize in looking at leading indicators that have very successful track records in terms of predicting economic or financial turns. One such indicator is the broad money supply.

Whenever the broad money supply–adjusted for inflation–has turned negative year over year, the economy has gone into recession, or if it already was in a recession, the downturn intensified. It's happened four times before now, in modern reporting. You saw it in the terrible downturn of '73 to '75, the early '80s and again in the early '90s. In December of 2009, annual growth in real M3 turned negative. It's now at a record low in terms of decline, down more than 6% year over year. What that suggests is that in the immediate future you're going to see renewed downturn in economic activity.

In all the prior instances that I mentioned, this event led recessions, except for '73 to '75. That's when you had the oil spike and a recession that came from that. When the money supply turned down in that recession, the economy accelerated in its decline. We're going to see something along those lines, now, with about a six-month lead time. You're going to have negative economic growth this year. The implications for that are extraordinary, because the projections on the federal budget deficit, a number of the state deficits, and the solvency and stress tests for the banking system all were structured assuming positive economic growth in the 2% to 3% range for 2010. Instead it's going to be negative. Many states are going to be in greater difficulty than they thought. Most likely, you're going to have federal bailouts there. The banks are going to have more troubles. All this means more government support, more government spending, greater deficits and greater funding needs for the U.S. Treasury. We have a global market that already is increasingly reluctant to hold the dollars and U.S. Treasuries.


Gold: Needed Now More Than Ever
By James Turk
April 30, 2010 - Greece’s debt troubles are well known. Less recognized is the worrying truth that Greece is just the tip of the iceberg.

There have been plenty of warnings. These include, for example, the recent downgrades of the debts of Spain and Portugal. By highlighting the risks, the debt rating agencies have sent a signal with one certain outcome. Heightened awareness over sovereign credit risk will grow, and rightly so.

A report released just last month by the Bank for International Settlements, entitled “The future of public debt: prospects and implications”, made some startlingly frank and sobering conclusions.

“First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures…As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing...In the aftermath of the financial crisis, the path of future output is likely to be permanently below where we thought it would be just several years ago. As a result, government revenues will be lower and expenditures higher, making consolidation even more difficult…

Second, large public debts have significant financial and real consequences. The recent sharp rise in risk premia on long-term bonds issued by several industrial countries suggests that markets no longer consider sovereign debt low-risk…

Third, we note the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth…

Finally, looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability...unstable debt dynamics could lead to higher inflation: direct debt monetisation, and the temptation to reduce the real value of government debt through higher inflation.”

Please read that last paragraph again about the significant risk to monetary stability. In other words, governments will not cut spending and bring their budget back into balance. They will simply lean on their central bank to print and print and print. Everyone holding sovereign paper will get their euros and dollars and pounds repaid to them, but those currencies will have only a fraction of their present purchasing power. The rest will have been inflated away.

I have always wondered why people – after paying 40% or so of their income in taxes – then put what they manage to save in government paper. Further, it always struck me as somewhat bizarre that they then call the paper they purchased “risk free”, even though nothing in our real and imperfect world comes without risk. It is a conundrum with only one explanation – it is irrational. All of us have seen this behavior before.

The so-called “risk-free” sovereign debt bubble has only recently begun to pop.

The signs are all around us. Iceland, Dubai, Latvia, Greece with Portugal and Spain not far behind, and the UK and even the US and most every other country on the not-too-distant horizon. The sovereign debt crisis – which is actually a latent bank crisis because banks are stuffed full with the worthless paper of over-indebted sovereigns – is a powder keg, and the fuse has already been lit. So what should we do? What can we do?

The answer is simple. Own physical gold instead of someone’s promise. Its time-proven record built up over the centuries clearly illustrates that gold is the ultimate safe haven. Gold is the best way to avoid counterparty risk, which is essential today as the sovereign debt bubble continues to lay bare the stark reality that governments throughout the world are bankrupt, and more to the point, that the bubble has popped. People holding sovereign paper are already heading for the exits. As a result, everyone needs gold now more than ever.


As I was putting this mornings post together, we are once AGAIN treated to financial news headlines "blaming" Greece for a drop in equity prices. Yes, the TRUTH must really hurt because there is no sign of it. As seen on Yahoo Finance at 9:56AM est:

Top Stories
Stocks Fall in Early Trade as European Debt Fears Weigh- AP
Stocks are falling investors remain wary of European debt problems. Investors have been conflicted in recent days, buying up stocks one day only to sell them off the next as upbeat domestic economic reports are offset by worries about debt problems overseas and a potential overhaul of financial regulation.

The same European debt fears didn't seen to be much of a drag on equity markets yesterday. Commodities are getting beat down by the marvoulous rally in the US Dollar, yet Gold remains strong. Silver took it on the chin as it's industial metal connections lumped it in with a general decline in all base metals because of the "strength" in the Dollar. Most likely an excellent buying opportunity for Silver traders/investors.

This raises an interesting observation. With the "observed" strength in the Dollar, it would not be surprising to see a number of commodities get hit on price. Particularly Oil and the base metals. Platinum and Paladium would get hit hardest based on their connections to the auto industry. Gold on the other hand remains mysteriously strong. Why?

Gold is NOT a commodity. It has been mistakenly lumped in with other commodities in an effort to hide it's true dispostion as the ultimate form of currency. Silver has fallen victim to this erroneous characterization worse than Gold, but it is a very much in demand industrial commodity.

Gold continues to rise inspite of the "rising" Dollar because more and more investors are coming to the realization that fiat currencies are as worthless as sovereign government promises to repay their debts in those currencies. Gold is the currency of last resort. Silver is the people's currency. Both will rise to unimaginable heights as the curtain of deceit rises on the magic show we all know as central banking.

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