Tuesday, August 16, 2011

The US Dollar - 40 Years Of Fiat: Pathetic Is The Word That Comes To Mind

"The leaders of the European Union have next-to-no idea how to solve their enormous fiscal crisis. Likewise, the leaders of the US have next-to-no idea how to solve America’s life-threatening fiscal crisis. Pathetic is the word that comes to mind."
 -Eric Fry, The Daily Reckoning

Here is an example of how headlines deceive:

Prices touch a high above $87, buoyed by strength in U.S. stocks

Oil was up $2 because the US Dollar fell over 1% yesterday.  Sadly, strength in US stocks was linked to the fall in the US Dollar.   Oil prices therefore were up NOT because of strength in US stocks, but because of weakness in the US Dollar.

Why was the US Dollar weak yesterday?  Well, because the Euro was stronger than the Dollar yesterday of course!  The European Central Bank spent $32 BILLION buying up bad debt yesterday...why wouldn't the Euro rise?

But wait, what's this obscure piece of news hidden over here:

WASHINGTON—Private foreign investors sold a record amount of U.S. Treasurys in June as the U.S. debt-ceiling debate intensified, but China boosted its holdings for the third month in a row.

Private foreign net purchases of long-term Treasury bonds and notes fell by $18.3 billion in June, following a $16.4 billion increase in May, according to the monthly Treasury International Capital report, known as TIC. The previous record drop was set in June 2000, when private foreign investors sold $16.5 billion in Treasurys. The declines in June of this year were concentrated in Luxembourg and the Cayman Islands, suggesting private funds were doing the selling.

However, China's holdings actually rose in June, by $5.7 billion to $1.166 trillion, following net buying of $7.3 billion in May. Analysts caution the data may not reflect the full spectrum of China's activity in the market, however. The Treasury recently adjusted its estimate of China's holdings based on use of proxies in other countries.

Japan, meanwhile, was a net seller of Treasurys. Japan remained the second-largest holder of Treasurys, but cut its holdings to $911 billion from $912.4 billion in May.

The biggest sellers of Treasury bonds, notes and short-term bills, were in the Caribbean ($8.9 billion), Canada ($6.5 billion), Russia ($5.4 billion) and Brazil ($4.3 billion.)

It should be noted that China has to buy US Treasury's as part of it's program to keep their currency, the Yuan, pegged to the US Dollar.  The question is, is China selling the long end of Treasuries, and buying only the short end?

Also of note is that this selling of US Debt is from back in June.  This is before the raging debt-ceiling debate in July.  This would appear to me that the World was "downgrading" US debt weeks before S&P came out and made the US debt downgrade "official".

The argument the talking heads will make is that the "world" has been rushing to US Treasuries the past two weeks as the global equity markets have sunk proves demand for them has been unaffected by the downgrade.  LOL!  Cash has always sought refuge in US Treasuries when equities tank, last week was no exception.  The rise in treasury prices was much less to do with a vote of confidence in them, than it was a simple move to liquidity out of a falling stock market.

This morning the US Dollar has caught a bid on poor economic growth data out of Germany.  The Euro falls, the Dollar rises.  Pathetic is the word that comes to mind.

Gold no longer seems to care what the Dollar, the Euro, or any fiat currency is doing these days...it just keeps going up.  Consider the ONLY weakness in Gold recently was induced by a 22% CME margin hike at the CRIMEX.  Once again, Gold is up and Silver is down.  Silver remains chained to the Dollar with all other commodities.

Note Silver's strength yesterday with the Dollar down over 1%.  Silver closed the day in New York yesterday evening up over 2%.  Oil closed the day up almost 3%.  The CRB Index finished up over 1%.

This morning's bid in the Dollar has Silver and Oil both down, and Gold up.  Gold has become the Currency of Choice in the face of global economic uncertainty.  Silver's day is coming, and sooner than many believe.  Stay focused on the 73.50 level of the US Dollar Index.  That Dollar index closed yesterday at 73.84.

Bernanke's pipe dream of a stable Treasury market, a rising stock market, and a stagnant commodity index is just that, and a lot of smoke.  By keeping interest rates at zero into mid-2013, Bumbling Ben has clearly sacrificed the US Dollar.  He is absolutely insane if he believes he can levitate the equity indexes with a falling Dollar, and not drive commodity prices higher in the process.  It is absolutely crystal clear now that the Fed intends to solve the US debt dilemma by devaluing the US Dollar by inflating the money supply further.  Pathetic is the word that comes to mind.

“Paper money eventually returns to its intrinsic value – ZERO”
 -Voltaire, 1729

Many of you are aware that yesterday marked the 40th anniversary of President Nixon's shocking decision to "close the Gold window" and end the US Dollar's convertibility to Gold by foreign central banks.  So large were the official dollar debts in the hands of foreign authorities that America's gold stock would be insufficient to meet the swelling official demand for American gold at the convertibility price of $35 per ounce.  President Nixon ended the US Dollar's link to Gold on August 15, 1971.  Over the next 10 years, the price of Gold rose to equal those huge US Dollar debts at a price of $880 an ounce as the value of the Dollar fell.

Does this 40th anniversary of the US Dollar's plunge into fiat signal a renewed rise in the price of Gold to once again equal the HUGE US Dollar debt?  Gold would be $27,000 an ounce today if the US gold reserves were at the same percentage (52%) of us debt as in 1913 when the Fed was founded.

Has 30 years of Gold price suppression led to "the physical Gold window" being closed any day now?  If 32 of every 33 ounces of Gold traded are "paper", will physical demand soon overwhelm today's "price of Gold" sending it towards a price in excess of $50,000 an ounce if all trading were backed by physical gold.

By Edmund Conway
After trust evaporated in gold and silver coinage, we had the gold standard and then the Bretton Woods system and now, today, fiat money – but the routine is painfully familiar. The main difference with fiat money is that whereas under the gold standard it was all too obvious when politicians were spending beyond their means (they would simply run out of gold reserves), these days it is slightly more difficult to tell quite how close the system is to breakage.

Nonetheless, as we look back at the chaos of the past few weeks, it is quite clear that our current version is on its last legs. This, in essence, was the point Sir Mervyn King tried to make again and again in the Inflation Report press conference last week: 2008 was only one stage in a far bigger crisis of confidence in the way we have structured the world economy.

Over the past 40 years, in the absence of a coherent international monetary system and under the veil of floating currencies, countries which would otherwise have been penalised for doing so were allowed to borrow enormous amounts (eg. The US and UK, or Greece). Other countries (eg. China or Germany) indulged them by lending enormous amounts. In the meantime, investors convinced themselves that the apparent economic growth fuelled by this debt was genuine rather than an artificial product of a binge.

The 2008 crisis represented the first recognition that those increases in asset prices and economic growth were chimerical. The recent relapse represents a recognition that the losses have merely been transferred on to sovereigns' balance sheets.

But what next? The Panglossian answer is that those imbalances are slowly but surely put right: indebted countries borrow less and repay their creditors. But countries rarely go gently: what seems more likely is that the next stage of the crisis represents a crisis of confidence in the very system which, founded as it is on trust rather than measurable yardsticks, has no reliable, inbuilt way of righting itself.

If low interest rates, courtesy of the Fed, caused the current financial crisis, how are zero interest rates going to fix the problem?  If excessive sovereign debt is threatening the global financial system, how does increasing that debt fix the problem?  Clearly, the world's fiat money system has no reliable way to fix the global financial crisis.  Pathetic is the word that comes to mind.

Is Gold the answer to the question, "How do we fix the global financial system?"

The answer should be a simple "yes", since it was the "closing of the Gold window" that lead up to today's financial crisis.  Easier said than done, but it would seem inevitable that at some point, money must once again be backed by something of real value, and not just a promise.

By John Tamny
Looking back on the forty years since policymakers unlinked the dollar from gold , though we’ve made astounding economic progress, it’s important that we consider the unseen in this equation. While it’s our nature to evolve and innovate, what will forever remain unknown is just how much more advanced we’d be if the dollar’s stability had remained policy.

Floating money values have fostered ever more frequent recessions, financial crises, and faulty investment decisions that have hampered our advancement. Worse, they’ve forced the term “inflation hedge” into the investment discussion such that capital flows toward the immobile asset classes of yesterday, and away from the less taxable intellectual concepts of tomorrow.

Ever-enterprising individuals can thrive no matter the chaos foisted on them by feckless monetary authorities. But the question is how much more successful we’d all be if money had maintained its simple purpose as the facilitator of trade and investment. Floating money values, though not a policy of the past, will, if allowed, author our descent into it. To reverse a needless decline, it’s essential that we revert to the historical norm of stable, gold-defined money values that are so essential to a thriving, evolving economy.

By by , Mises Daily
We can continue the journey started on August 15, 1971, or acknowledge that it was a tragic error of dire consequences.

Defenders of unlimited Leviathan advocate additional doses of quantitative easing and the creation of a single currency controlled by a world central bank.[2] Along this line, major central banks could take unified and oligopolistic action under the pretext of coordinating monetary policies. This would mean total disaster and the ultimate triumph of the system that has led to the current crisis.

The alternative is a return to sound money, a restoration of the true currency, spontaneous creation of the social order, and a rejection of the meddling of governments and central banks.

If Gold is the answer to our mushrooming global financial crisis is it...

By Egon von Greyerz
The answer to the above question is a categorical NO. Virtually no major investor group has participated in gold’s spectacular rise. In spite of a seven fold increase in the gold price, only circa 1% of world financial assets are invested in gold. Whenever I talk to major institutional investors, not only do they not own gold, but they don’t understand gold either. I was speaking at a conference for Family Offices recently where there were circa 250 family office managers present representing substantial funds. Not only did no one own gold, but they had no understanding of gold’s role as an investment class or the fact that measured in real money, i.e. in gold, their investments were declining precipitously. It must be unprecedented that an important asset class can go up for such a long period with so few investors participating. In my view this is the most bullish sign ever for gold. The mess the world is in will lead to unprecedented money printing in the US, EU, the UK and many more regions. And gold will continue to reflect the destruction of paper money. In addition, investors will increasingly mistrust paper gold and invest in physical gold only. Due to the very limited availability of physical gold, the increase in demand can only be satisfied at substantially higher prices.

The world is in an absolute mess, economically, financially, politically and morally. And let me be very clear; this has been evident for at least 10-15 years. The only thing that has not been clear is how long governments and central banks could deceive the people by kicking the can down the road in an endless creation of worthless pieces of paper that they call money. The lone voices of some market analysts, forecasting that the manipulation and mismanagement of the people’s wealth would end in disaster, have for long been silenced by the establishment in order to betray the gullible masses.

Intellectually dishonest and corrupt politicians and bankers have devised a system which has created perceived, debt-based wealth for the people whilst buying votes and generating massive wealth for the bankers.

But this Ponzi scheme is now coming to an end. When printed money can only be repaid with more printed money and when there are no buyers for the worthless debt instruments created by governments except for the government itself, then we have reached the end of the road with a “can too big to kick”.

It is time for all of us to stop trying to trade every tick up or down in Gold and Silver.  The position to be in, and held to firmly, is purely physical bullion.  In time, physical Gold and Silver will prove to be The ONLY Money.  Begin accumulating these Precious Metals, while there is still metal available to purchase, and time to do so.  If you believe as I do, that in time the prices of both Gold and Silver will rise exponentially, prices today are of little concern.  Possession of the Precious Metals themselves should be your number one concern.

Ranting Andy gets today's last word:

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