There Is No -- "Way Out"

U.S. Dollar: the Good, the Bad and the Ugly
By: Axel G. Merk
This past weekend, finance ministers gave a pep talk for the dollar. They also assured the world that the focus is shifting from saving the world’s financial system from collapse to the “exit” strategy; German chancellor Merkel has been a leading voice in warning central banks that the current policies may lead to substantial inflation. Let us discuss the dynamics here briefly: a key driver of inflation is inflationary expectations – when inflation is a fear, employees will ask for higher wages; businesses will try to push for higher prices, amongst others. As a result, central banks seem to believe that printing money is no problem as long as the markets believe that central banks have an exit strategy; that central banks will mop up all the liquidity in time. To recap, why do central banks say they are working on an exit strategy? That’s what the market wants to hear. How likely is it that they are indeed going to get tough? In our assessment, it’s about as likely as a balanced budget from the U.S. administration.

We have had a lot of talk of “green shoots”, but once one looks deeper, most negative news one hears are facts, whereas most positive news appears to be subjective forecasts and expectations of policy makers. Dark clouds on the horizon include sharply rising mortgage rates (in progress); major trouble in the commercial real estate sector; a continued dislocation in the housing market where home prices cannot be sustained by income; a big wave of foreclosures yet to come as many of those who bought their houses at the peak of the market in 2007 are likely to see big challenges in the summer of 2010 as their mortgages begin to reset. In the banking sector, problems have been brushed away by easing accounting rules. In Europe, a catastrophe in Baltic countries may only be a matter of time; while the IMF and central banks around the world may ride to the rescue, does this sound like the beginning of the exit strategy? Not to us.

Add to that the amount of debt that needs to be raised by the U.S. government. According to our calculations, at least US$15 billion may need to be issued every single business day until the end of the year. This will require a substantial ramp up from the pace seen in recent weeks, a pace that saw bond prices plunge (long term interest rates rise) due to the increased supply of government bonds in the market. When considering that summer months tend to be slower months for governments to issue debt (it’s vacation time around the world), we believe long-term interest rates may have to rise substantially later this year to attract buyers. The U.S. government will be able to finance its deficits, the question will be at what cost. Interest rates are one issue; the other is whether government activities will crowd out private sector borrowers. Corporate America also needs to finance its operations, not just the government, and where is that money going to come from? What about all the other countries that are issuing record amounts of debt? Just ask Latvia – a recent government bond auction yielded zero bidders. But even established countries, say Ireland, have seen the cost of its borrowing surge.

That’s when the bad may turn to ugly: how will central banks, notably the Federal Reserve (Fed) in the U.S. react should interest rates soar? Will they allow it to happen as they currently posture? It looks to us that we risk a collapse of economic growth if the cost of financing soars. There is still too much leverage in the U.S. economy, at the consumer level in particular. At this stage, a broken system has been propped up; the housing market is seen as key to an economic recovery – and all that money printing will have been in vain if market forces overwhelm the Fed by pushing interest rates higher. Naturally, the Fed puts up a brave face. Ultimately, this may be a game of chicken where Fed talk aims to keep interest rates low. However, we believe the Fed may blink first, and increase its financing activities of the U.S. deficit; by printing the money to finance government debt, the Fed may jeopardize the U.S. dollar, in particular if the Fed, as we believe, will be “more efficient” at printing money than other central banks around the world.

Will events unfold as described here? We don’t know, but we believe the risk is real; and if investors agree this risk is real, they may want to consider doing something about it in their portfolio allocation. We have not exchanged our gold for Federal Reserves Notes.
http://news.goldseek.com/MerkInvestments/1245172584.php

De-Dollarization: Dismantling America’s Financial-Military Empire
by Prof. Michael Hudson
On the economic front there is no foreseeable way in which the United States can work off the $4 trillion it owes foreign governments, their central banks and the sovereign wealth funds set up to dispose of the global dollar glut. America has become a deadbeat – and indeed, a militarily aggressive one as it seeks to hold onto the unique power it once earned by economic means. The problem is how to constrain its behavior. Yu Yongding, a former Chinese central bank advisor now with China’s Academy of Sciences, suggested that US Treasury Secretary Tim Geithner be advised that the United States should “save” first and foremost by cutting back its military budget. “U.S. tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of ‘fighting two wars.’”6

At present it is foreign savings, not those of Americans that are financing the US budget deficit by buying most Treasury bonds. The effect is taxation without representation for foreign voters as to how the US Government uses their forced savings. It therefore is necessary for financial diplomats to broaden the scope of their policy-making beyond the private-sector marketplace. Exchange rates are determined by many factors besides “consumers wielding credit cards,” the usual euphemism that the US media cite for America’s balance-of-payments deficit. Since the 13th century, war has been a dominating factor in the balance of payments of leading nations – and of their national debts. Government bond financing consists mainly of war debts, as normal peacetime budgets tend to be balanced. This links the war budget directly to the balance of payments and exchange rates.

Foreign nations see themselves stuck with unpayable IOUs – under conditions where, if they move to stop the US free lunch, the dollar will plunge and their dollar holdings will fall in value relative to their own domestic currencies and other currencies. If China’s currency rises by 10% against the dollar, its central bank will show the equivalent of a $200 million loss on its $2 trillion of dollar holdings as denominated in yuan. This explains why, when bond ratings agencies talk of the US Treasury securities losing their AAA rating, they don’t mean that the government cannot simply print the paper dollars to “make good” on these bonds. They mean that dollars will depreciate in international value. And that is just what is now occurring. When Mr. Geithner put on his serious face and told an audience at Peking University in early June that he believed in a “strong dollar” and China’s US investments therefore were safe and sound, he was greeted with derisive laughter.7

Anticipation of a rise in China’s exchange rate provides an incentive for speculators to seek to borrow in dollars to buy renminbi and benefit from the appreciation. For China, the problem is that this speculative inflow would become a self-fulfilling prophecy by forcing up its currency. So the problem of international reserves is inherently linked to that of capital controls. Why should China see its profitable companies sold for yet more freely-created US dollars, which the central bank must use to buy low-yielding US Treasury bills or lose yet further money on Wall Street?

To avoid this quandary it is necessary to reverse the philosophy of open capital markets that the world has held ever since Bretton Woods in 1944. On the occasion of Mr. Geithner’s visit to China, “Zhou Xiaochuan, minister of the Peoples Bank of China, the country’s central bank, said pointedly that this was the first time since the semiannual talks began in 2006 that China needed to learn from American mistakes as well as its successes” when it came to deregulating capital markets and dismantling controls.8

An era therefore is coming to an end. In the face of continued US overspending, de-dollarization threatens to force countries to return to the kind of dual exchange rates common between World Wars I and II: one exchange rate for commodity trade, another for capital movements and investments, at least from dollar-area economies.

Even without capital controls, the nations meeting at Yekaterinburg are taking steps to avoid being the unwilling recipients of yet more dollars. Seeing that US global hegemony cannot continue without spending power that they themselves supply, governments are attempting to hasten what Chalmers Johnson has called “the sorrows of empire” in his book by that name – the bankruptcy of the US financial-military world order. If China, Russia and their non-aligned allies have their way, the United States will no longer live off the savings of others (in the form of its own recycled dollars) nor have the money for unlimited military expenditures and adventures.

US officials wanted to attend the Yekaterinburg meeting as observers. They were told No. It is a word that Americans will hear much more in the future.
http://www.globalresearch.ca/index.php?context=va&aid=13969

Investors Are Ganging Up on the U.S. Dollar and Gold
By James West
What is the significance, you may wonder, of the Russian Finance Minister suggesting the reserve currency days of the U.S. dollar are surely numbered, followed the next day by a statement from his deputy contradicting him thoroughly?

Apparently a coincidence, Japan’s finance minister just happens to state publicly that same day that Japan has ‘full confidence” in the U.S. dollar.

Somebody, it would seem, is running around the international backstage putting the arm on government finance types to wax supportive of the U.S. dollar. As a result, we now have press headlines issued minute by minute that contradict each other completely.

“Dollar down on Russian comments,” reads one at 10:47 a.m.Tuesday. Two minutes later, “Dollar advances as Russia says no alternative to U.S. currency”.

One thing is clear. The U.S. dollar is in some serious international doubt, both as a reserve currency and as a sound currency. When the volatility of emotions runs the gamut from completely bullish to completely bearish within the same government, you know that stability is no longer a factor in the subject currency’s character.
http://seekingalpha.com/article/143946-investors-are-ganging-up-on-the-u-s-dollar-and-gold?source=email

Jobless benefit rolls post first dip since January
WASHINGTON (AP) -- On the surface, the government seemed to signal Thursday that more Americans are finding jobs: The number of people receiving unemployment aid fell for the first time since early January.

But that doesn't necessarily mean more companies are hiring. Fewer people are receiving jobless aid largely because more of them have exhausted their standard unemployment benefits, which typically last 26 weeks.

Government figures, in fact, show the proportion of recipients who used up their jobless benefits averaged 49 percent in May, a record.

And while many analysts expect the recession to end by late summer, they warn that unemployment will stay high into 2010.

"It is unlikely that new hiring has picked up in any meaningful fashion," Joshua Shapiro, chief economist with MFR Inc., a consulting firm, wrote in a note to clients.
http://finance.yahoo.com/news/Jobless-benefit-rolls-post-apf-1306581616.html?x=0