Thursday, July 28, 2011

And then all hell breaks loose...

"The bigger the pile of debt gets, the more it stinks."
 -Bill Bonner

The headlines are cluttered with dire warnings regarding the debt-ceiling debate.  Judging by the headlines alone, the sky is about to fall, and the world is about to be thrust into a permanent darkness.  The common theme of the stories below the headlines goes something like this:

"With brinkmanship over the ideologically charged dispute seeming likely to go on through the weekend, investors and ordinary Americans are increasingly nervous that a previously unthinkable U.S. default could spark a new financial crisis."

"Spark a "new" financial crisis"? Why is the media so hell bent on this "threat"? The US is STILL in the middle of the same financial crisis that has led us to this debt debate. Raising or not raising the debt ceiling is not going to "fix" or "prevent" a damn thing. The PRESENT financial crisis is going to get much worse all on its own. 20% of Americans are unemployed or underemployed. Over 44 MILLION Americans are using food stamps. Millions of Americans have lost their homes completely, many more have lost the equity in their homes, or owe much more on them than they are worth. There has been no recovery from the financial crisis, so there can be no "new" financial crisis.

My favorite headline of the week was this one witnessed yesterday afternoon:

BBC News
The new head of the International Monetary Fund (IMF), Christine Lagarde, has warned the "clock is ticking" on a deal to tackle the US deficit and raise its debt ceiling.

Genius ALERT!  How lucky for the world that Mrs. Obvious was chosen to lead the International Monetary Fund.

I think what irritates me the most about this entire debate is the insistence by the Republicans AND the Democrats that their respective "plans" "if passed" will put the economy on "firmer footing".  What an utter load of hogwash!  They would like you to believe raising the debt ceiling will guarantee the economy recovers "quickly", but the simple fact [and the simple math] is that the economy will only SUFFER from any rise in the debt ceiling.  THE COUNTRY'S DEBT IS THE PROBLEM!  Adding to that debt is NOT going to help the economy is any way, shape or form.

The most absolutely amusing development in the entire debate this week, is that the "rating agencies" are now back tracking on their credit downgrade threats of US Debt.

NEW YORK (Dow Jones)--U.S. Treasury debt would remain the world's bond benchmark, even if a ratings agency cuts its rating on the U.S. government in the coming weeks, Fitch Ratings said in a new report Wednesday.

Credit Agency Tells Congress a Default Is Unlikely
WASHINGTON — The United States is unlikely to default on its debt obligations but its credit rating could still be lowered if it doesn’t come up with an adequate plan to address spending and its soaring budget deficit, an official from one of the country’s largest credit rating agencies told a House panel Wednesday.

In the words of Alex Johnson, head of portfolio management at Fischer Francis Trees & Watts:

"The US dollar is a fiat currency. At heart, it represents a claim on the productive capacity of the U.S. economy. What does a rating even mean in the context of the United States?"

Quite. But because so many investment decisions are rules based and embedded into the financial system, markets have suffered considerable volatility and weakness because of the perception that a ratings cut was all but inevitable.

There is no liquid alternative to U.S. Treasuries, so their status in finance will continue - as will the benefits that brings to funding a massive budget deficit.

Well Alex, there is this stuff they call Gold...

It is somewhat amusing that amidst all the squabbling over raising the debt ceiling, few have asked: "Who is going to buy [fund] all this new debt?"

If the US can't boost confidence in its currency anytime soon, we could be standing at the gates of a long anticipated dollar crisis.

This ongoing charade regarding the debt ceiling is less about "preventing a new economic crisis" and more about delivering a message that Washington hopes will prop up confidence in the US Dollar.  Unfortunately, globally, confidence in the US Dollar has already been lost.  Sadly, the politicians in Washington will be the last to realize this fact, as once the debt ceiling is raised [and it will be raised], any remaining confidence in the US Dollar will quickly evaporate as the realization sets in that the only way the US will be able to fund their new debt "needs" is by the Federal Reserve printing the money to buy the debt themselves.  The current economic crisis will only get worse.  The only thing "new" to come from all of this will be the all-time highs of the Precious Metals as investors drop US Treasuries and Dollars in exchange for REAL MONEY.

This next headline below might just be the silliest of them all this week.  "Mainstream" economists seem to confuse the supply and demand fundamentals of the economy, with the supply and demand fundamentals of the currency ALL commodities are priced in, US Dollars.  Demand for commodities, other than Gold and Silver, may drop "physically" because of a slowing in the global economy, but that will not "automatically" cause the prices paid for them to drop.  If the demand for US Dollars drops, and with it the value of the Dollar, the prices paid for commodities will rise because they are priced in Dollars, even though physical demand for them may wane, a depreciating US Dollar will make them cost more. 
"With the exception of precious metals, we still think that commodity prices will fall sharply in the event of an actual U.S. downgrade or default," Julian Jessop, chief international economist at Capital Economics, said in a research note.

Commodities have risen since Standard & Poor's put the U.S. on watch for a possible downgrade, but Jessop said not to read too much into those moves.

"We would be wary of interpreting such small moves as evidence of strong safe haven demand," he said. "Crucially, other asset prices have been relatively stable over this period, with U.S. equities and government bonds little changed and the dollar down only 2 percent or so on a trade-weighted basis."

In Jessop's view, commodities are trading in line with equities and will continue to do so.

"The prices of industrial metals in particular remain as closely tied as ever to equity prices. Correspondingly, if equities fall in response to a U.S. downgrade or default, as they surely would, industrial metals prices should drop back too," he said.

Capital Economics is predicting the S&P 500 will end the year at 1,200, falling 10 percent from its current levels.

That would mean bigger losses for commodities, according to Jessop.

"This would be consistent with a drop of at least 20 percent in the prices of industrial metals. In the case of copper, this would imply a price target of no more than 8,000 dollars per tonne, which happens to be our end-year forecast too," he said.

Gold and silver could be major beneficaries of a downgrade of U.S. debt as investors search for tangible assets, Jessop said, but he can't make the same case for other commodities.

"While this is a compelling argument in favor of gold, and perhaps silver, it makes much less sense for other commodities," he said.

Jim Willie, CB
The economic theory in textbooks must be updated to account for Fiat Soft Science. An important third factor determines price. It is not demand, as most Deflationist Knuckleheads claim. It is not supply, as the moronic followers of Laffer Curve advocates insist. Instead, it is the falling USDollar since all commodities are priced in US$ terms. Lower demand will not result in lower commodity prices, since the monetary effect trumps all. The twist lies in the pricing denomination units, not in the Price Demand dynamics. An inflationary recession is deeply rooted in progress, with a depression next to occur. The price effects continue to confuse the dullard economists who have actually foreseen almost nothing in the current ongoing crisis. Their collective value is far less than garbage collectors who tend to the landfills, or landscapers who improve the appearance of home lawns. The crisis toward wreckage all occurs like a wrecked house floating over a waterfall for all to observe in sheer horror, as wealth evaporates and national sovereignty is forfeited to creditors.

What follows is my analysis of the erroneous path taken by the myopic Deflationist fools. The entire table of commodity prices is rising. Since the advent of QE, QE-Lite, and QE2, the full price structure has been rising steadily and noticeably. As the USDollar declines in value, the price of any commodity priced in US$ terms rises. The USDollar is not the constant, as they along with Wall Street mavens believe. Gold is constant, and the USDollar is falling versus Gold. This is basic science, but something that demand side Deflatinionist fools miss, and something that supply side Laffer fools miss. It is best to offer some solid evidence to these people with dull intellectual capacity, and move on without waiting for their awakening. Sadly, it is over their heads. Gold is the constant, as the USDollar moves in shifting patterns within its stable golden sphere. The commodities therefore all change in US$ terms as a result. The Knuckleheads miss utterly basic principles, spout nonsense repeatedly, remain steadfastly ignorant of their errors, learn nothing in the process, sound arrogant while on the wrong path, and continue to litter the landscape with their drivel and mental excrement. They are an annoyance, even inside the gold community.


As the USDollar (and all major currencies) lose value from grand debasement, the vertical scale loses its price delineation markings. The entire vertical price scale itself suffers from inflation. The numbers blur, only to come into better focus with different numbers tied to the vertical tick markings. What used to be $8 is suddenly $10. What used to be $40 is suddenly $50. What used to be $120 is suddenly $150. The Deflationist Knuckleheads expect that slower economic activity will reduce demand, and thus bring about lower price. But they miss the bigger effect of price scale alteration and decay. The fiat paper monetary system, based upon denominated debt rather than sacrosanct inert metal with no counter-party risk, is decaying into a international scrap heap. All price dynamics change. It is that simple. It is that complex.

Turd Ferguson pitched in with a comment that sets the tone. He said,"Remember Econ 101. Increasing the supply of an item decreases its value.More dollars equals a less valuable dollar. A declining dollar causes all things denominated in dollars (gold, oil, corn) to rise. The dollar is going to be declining farther with the advent of QE3. So the way must be prepared by smashing commodities first, so that they start their next upleg from a lower point. Thus, the fundamentals are overridden." Neither the demand siders nor supply siders can observe that the USDollar itself is subject to Supply & Demand dynamics, with the commodity prices as victims. The bad science artisans focus only upon Supply & Demand for the commodity, steeped in myopia. Note tragically that wages have not risen during the hyper-inflation episode that began with Quantitative Easing.

Economists say the debt ceiling debate has already damaged the U.S. economy, and many worry that a deadlock could send the country hurtling into a double-dip recession.

"Economists say."  How many of these economists, that are so often quoted in the press and on financial TV, even saw the current financial crisis we have been in since 2008 coming?  How many of them have been right about anything?

It is almost as if this entire "debt debate" has been staged to "eventually" be used to blame "the next recession" on it instead of blaming it on the facts.  Nothing that caused the Financial Crisis in 2008 has been fixed...NOTHING! ...and the bandages that were used to stem the loss of money from the system have become ragged...the Fed has been pumping money into a corpse for over three years now...if the system is dead, is it any wonder that bandages and money infusions have NOT brought the system back to life?

Consequently...confidence in the physicians [The US Federal Reserve and the US Treasury] to revive the patient [the financial system] is beginning to fade, and will soon turn to anger: "YOU SAID YOU COULD SAVE THE ECONOMY!"

And then all hell breaks loose...

Ranting Andy has a "weekend scenario" as to how this debt debate will end.  I wish to share it with all of you.  Recall that this past weekend we were warned of the dire consequences of what will happen if this debt debate was not resolved before the Asian Markets opened up Sunday evening in the US.  That was just a primer for the REAL THING this weekend:

By Andy Hoffman
The way I see it, there is no substantive plan AT ALL being proposed by either the Republicans or Democrats. The GOP is grandstanding with draconian (and impossible) spending reduction targets, whose only real target is to fool Americans into thinking they are fiscally “conservative.” They know very well that such plans could never pass into law, and frankly if they did you’d see immediate social unrest that would make what we’ve seen in Athens thus far look like Romper Room. As for the Democrats, they frankly have no plan at all, grandstanding conversely by pretending they are a champion of the people by proposing tax increases for the “rich.” Such tax increases, too, have no chance of being passed, and if they did business activity would immediately plummet. Corporate tax rates in America are already the highest of any industrialized country, and raising such rates further (on the companies and their “rich” owners”) would likely cause the same type of reaction as the communist doctrines instituted by the fictional U.S. government in “Atlas Shrugged”.

Now that we’ve passed this period of peacock-strutting, with both parties lamely making their points, we are faced with the real issue; there is NOTHING substantive on the table, and time is running out. Heck, Congress doesn’t seem capable of passing a bill that is less than 1,000 pages long, and with just five days left there no longer exists the time to even TYPE 1,000 pages, much less the most important 1,000 pages of this generation. We are now in the “deer in headlights” stage, where both parties don’t know what to do at all, it seems. Following his pathetic, nationally televised speech on Monday, Obama has been eerily quiet, praying for someone to come up with something, while Boehner and Reid are displaying their complete lack of competence for the entire world to see. No substantial plans, and just five days left!

So what do I expect to happen, as well as the ramifications? I recognize, of course, that making short-term predictions can be hazardous to one’s reputation, but it shouldn’t matter too much in this case because the impact on GOLD AND SILVER will be the same no matter what these buffoons decide.

I expect yet another weekend of suspense, where as usual nothing gets done during the week so an EMERGENCY SOLUTION needs to be crafted around a large boardroom table in Washington on Saturday and Sunday.

Remember those fun days in 2008 and 2009, when weekend bailouts (AIG, FNM/FRE, Merrill Lynch, Wachovia, Citigroup, etc.) were crafted on Sunday night, to be released just in time to prevent “market meltdowns” in “Asian trading”? Such acts of desperation are ominous signs that FINANCIAL CRISIS #2 is nearly upon us, and if you remember last weekend we experienced the same propaganda that something MUST be done by Sunday night, OR ELSE. Nothing was done, of course, due to the aforementioned political grandstanding, but then again we really had another week to get things done, which appears to have been largely squandered (as I write, headlines are hitting the tape that ABOLUTELY NO PROGRESS is being made).

I assure you, this weekend WILL BE a true crisis, as a debt limit extension must be signed by Tuesday night or the U.S. will officially default on its obligations, spurring a massive financial conflagration that will likely be sparked by everyone’s favorite WMD’s, the hundreds of billions of outstanding CREDIT DEFAULT SWAPS betting that the U.S. will default (and, just a guess, likely still backed by AIG).

As we head into tomorrow (Friday) afternoon, I expect a heightened level of rhetoric about how dangerously close the U.S. government (and by proxy, hundreds if not thousands of other sovereigns and municipalities) is to such an event, and subsequently a fever pitch of mass media focusing on how a deal MUST be announced by Sunday night before Asian trading commences. This event will gain vastly more attention this weekend than last, and I fully believe that, going INTO the weekend, there will be essentially nothing substantial on the table from either party (or the suddenly quiet “Tea Party”).

But come Sunday night, I expect a triumphant, “bipartisan agreement” to “temporarily” raise the debt limit by roughly $1 trillion, to $15.3 trillion, with essentially ZERO spending cuts or tax increases to back it up – in essence, the worst possible scenario for the dollar and the U.S.’s credibility. However, a carefully crafted communiqué, possibly accompanied by a press conference, will state that “we are confident that a more substantive agreement will be reached by year-end, and thus we are creating a no holds barred, bipartisan committee to investigate a solution.”

The White House propaganda machine will then turn up the jets to involve interviews with every possible biased media outlet in America, from “60 Minutes” to CNBC to the Wall Street Journal to even the ultimate sell-out, Warren Buffet, to convince the sheeple that government is competent and working for their best interests. And, if they’re lucky, the PPT/Cartel/ESF/HFTs will be able to buy them a day or so of “positive market reaction” before reality sets in.

And that reality will be the mother of all GOLD and SILVER rallies, as international (and possibly U.S.) rating agencies start to downgrade U.S. Treasuries, while even the average investor will start to realize the U.S. debt has not a chance in hell of ever being repaid, or for that matter of even contracting. Interest rates will become involved in an incredible battle between the bond vigilantes of the real world and the covert plus overt QE of the manipulative world, a standoff that will be long and strong, but likely eventually won by reality. Remember, even the SLIGHTEST increase in interest rates spells certain, immediate catastrophe for America, so do not underestimate how much printed money (U.S. plus Japan/EU/BOE, etc.) will be put forth in this WAR OF ALL WARS, which will rage on until the bad guys are defeated.

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