Every time Cheney opens his twisted lip the dollar takes a powder

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Bush Snr's major involvement in the gold business
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Feb 26, 2007

That's Just My Opinion

By Mike Whitney

Gold traders love Dick Cheney. Every time he opens his twisted lip and barks out another threat to Iran, the dollar takes a powder while gold futures shoot to the moon. Maybe that’s the way Cheney likes it. After all, he dumped about $25 million in euro-bonds before he took office. Judging by the way he and brother-Bush have flogged dollar, he must have doubled his investment by now.

The old greenback has dropped nearly 35% in the last 6 years while gold has just about tripled. In 2000 the dollar was a trim, sinewy pillar of strength. It entered the ring like a young Mohammed Ali; darting to and fro while pummeling ihis prey with quick laser-like blows that were barely visible. Now, the greenback plods along like a 60 year old Rocky Balboa, wheezing heavily and reeling with every punch; waiting for the one roundhouse that will leave him staring up from the canvas, spitting up broken teeth and blood.

Ooooh; that hurts.

The dollar’s in a heap o’ trouble and Cheney is doing his level-best to make sure that it hits the skids before he leaves office. Just yesterday the snappish Vice President said, "It would be a serious mistake if a nation like Iran were to become a nuclear power. Then he added ominously, "All options are still on the table."

That oughta put the dollar on life support, eh?

At present, the rest of the world is really wondering if dollar’s going to pull through. Central banks in Europe, Japan, and China have increased money supply and kept rates low in order to prop up the droopy greenback. But that won’t last. Eventually, they’ll all have to raise rates to slow inflation and stop equity bubbles from going haywire. (The Chinese stock market increased by a whopping 140% in one year. They probably don’t want a Dot.com-type meltdown like we had in the US.) Regrettably, once interest rates start to rise, the dollar slip quickly from view leaving only fetid trail of vapor behind.

It’s astonishing how cavalier Cheney and the gaggle of racketeers at the Federal Reserve have been regarding the dollar. After all, why kill the goose that lays the golden egg?

As the world’s “reserve currency” the fed can simply print out a couple trillion whenever it comes up short and bring back boatloads of sleek, Chinese manufactured goods or tankers weighed down with petroleum to power our boxcar-sized SUVs. Or, maybe, Bernanke would rather crank-out another $12 billion in crisp $100 bills, shrink-wrapped and loaded onto pallets and sent off to Iraq where they can vanish in the black hole of corporate malfeasance.

No prob-Bob.

But what happens when the rest of the world sees that the “stewards of the global economic system” (that’s us) are nothing but a bunch of Texas yahoos, religious zealots, and war-mongering boneheads?

See, the funny thing about money is that it requires confidence in the provider that he will honor his part of the deal and operate in good faith. Otherwise, no one would dream of exchanging valuable resources and manufactured goods for silly, green tokens of credit-based fiat money with squiggly writing and funny looking men in powdered wigs on it.

We all expect money to have value, and yet, the Bush team continue to sabotage the currency with their unfunded tax cuts, their $9 per month war in Iraq, and their 35% expansion of the federal government. (Remember when Clinton said the “era of big government is over”?) The result of this craziness was thoroughly predictable; central banks are running for the exits.

Last Firday, the government reported that net capital inflows reversed from the requisite $70 billion to AN OUTFLOW OF $11 BILLION!

The current account deficit (which includes the trade deficit) is running at roughly $800 billion per year, which means that the US must attract about $70 billion per month of foreign investment (US Treasuries or securities) to compensate for America's extravagant spending. When foreign investment stumbles, as it did in December, it puts downward pressure on the dollar.

So what does it all mean?

It means they don’t want our stinking greenbacks. And, if they don’t resume purchasing our debt (US Treasuries or securities) the dollar will join Rocky Balboa on the canvas peering up blankly at the klieg lights.

“The full faith and credit” of the USA does not mean what it did 6 years ago. That’s a fact.

The Bush-Cheney-Federal Reserve axis believe they can keep this ponzi-scheme going by cornering the oil market (attacking Iran) and forcing the oil-thirsty world to accept our feeble banknotes. But that’s just nuts. The Chinese are already killing us by buying up oil and natural gas leasing rights around the world WITH OUR OWN DOLLARS!

It wasn’t supposed to work that way. We thought we were being clever by destroying the American labor movement and shipping our industry to China. We figured we could vanquish the middle class at home while we put the “fear o’ god” in the Chinese with our “shock and awe military” that was supposed to be out of Iraq in 3 years at the most.

How’d that work out?

Now the housing-bubble millstone is pulling millions of home owners beneath the waves while the maxed American consumer is down to his last credit card. In other words, the $11 trillion of new debt that was cleverly engineered through Greenspan’s low interest rate bonanza is about to detonate and bring the whole, wretched tower of American debt crashing to earth.

The US economy hasn’t depended on productivity for years, even though the American people work harder and longer than their better-paid counterparts in Europe. This entire mess was brought on by stagnant wages, the wealth gap, and a system that rewards the villaso-raptures at the top of the economic food-chain. Like Cheney, they believe they can keep this scam going on forever; forcing the world to take worthless sheets green scrip that’s backed up by $8.7 trillion of debt and wouldn’t even make good bird-cage liner.

But, then, that’s just my opinion.


Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com

Fed has lost control over interest rates

Jubak's Journal12/5/2006 12:00 AM ET

By Jim Jubak

Squeezed by a possible recession and a troubled currency, the Federal Reserve will have to side with the world's bankers and the billions of dollars they hold.

Last week the world called the tune, and the U.S. dollar danced.

The dollar's tumble and Federal Reserve Chairman Ben Bernanke's attempts to placate overseas investors are the clearest signs to date that the foreign investors who finance the huge U.S. trade deficit have gained significant control over the U.S. economy.

A few more weeks like that, and it will be clear to everyone outside of Washington that the Fed has lost control over U.S. interest rates.

Here's what happened:

On Nov. 28, as the dollar edged toward freefall against the euro, hitting a 20-month low against that currency and plunging below key support prices in the currency markets, Bernanke got up on the ol' soapbox to say that inflation was still "uncomfortably high," growth in the economy was solid and the Fed's next decision would be whether to raise interest rates again.

That came as a big surprise to financial markets that were anticipating a cut in interest rates, perhaps as early as the first half of 2007. Just that morning the markets had, in fact, received confirmation of their view when durable-goods orders, an important gauge of the health of the economy, fell by 8.3%. That's the biggest drop since July 2000 and well above the 5% decline Wall Street had expected.

Bernanke's words didn't stop the carnage: Without some proof that the economy was as strong as the Fed said it was, the markets simply tossed off the Fed chairman's comments as a transparent attempt to talk up the dollar. It didn't help that new Treasury Secretary Henry Paulson was out -- predictably -- trying to talk up the dollar at the same time.

The dollar didn't stabilize until the next day, when revised figures on third-quarter gross domestic product showed the economy growing by 2.2%, rather than the 1.6% rate in earlier data. That was stronger growth than the 1.8% that financial markets had expected and provided enough credibility to Bernanke's remarks to push the dollar up 0.3% for the day.

Why the dollar isn't out of the woods

The dollar faces three big problems, none likely to go away quickly:

• There's that whopping U.S. trade deficit. Even though lower oil prices led to a drop in the September trade deficit to a mere $64 billion from the August record of $69 billion, it is on track to break $750 billion this year. That deficit has to be balanced by cash flows from overseas investors who provide the extra money that we spend to buy foreign goods and services. This puts more dollars in the hands of overseas investors and central banks who are already worried about what to do with the dollars they hold.
• Second, there's the slowing of the U.S. economy in 2007. Yes, the revised third-quarter GDP growth at 2.2% was good news, but the economy is still in slowdown mode; second-quarter growth was 2.6%, after all. There's a good likelihood that U.S. growth will lag growth in Europe and Japan for at least the first half of 2007.

Video on MSN Money: Jubak's Journal

As the U.S. dollar continues to take a hit around the globe, MSN Money's Jim Jubak suggests gold stocks, among other options, to counterbalance your portfolio. Click here to play the video.

• Third, U.S. interest rates aren't headed any higher at a time when the European Central Bank and the Bank of Japan are still raising rates. That will lower the yield gap between U.S. interest rates and those in Europe and Japan, and as a result, the price of U.S. notes and bonds is likely to fall, while those issued in euros and yen climb.

Put it all together -- a global dollar glut, a slowing U.S. economy and rising euro and yen yields -- and pressure on the dollar is likely to continue well into 2007. In my opinion, the dollar will stay under pressure until Japan and Europe signal a rate pause, and until the U.S. economy starts to re-accelerate or those of Japan and Europe start to slow.

The long-term implication for interest rates

This week's stumping for a stronger dollar by the Federal Reserve and the Treasury marks a shift of priority for U.S. monetary authorities. Yes, fighting inflation remains important to the Fed, and, yes, the Fed would prefer not to tank the economy. But Bernanke and company know that the tough choice must be made, managing the dollar is more important at this point than managing inflation or growth.

That's because the huge piles of dollars sitting in the vaults of the central banks of China, Russia, Japan, the OPEC countries and the European Union are large enough that they make overseas bankers nervous. When you hold 700 billion U.S. dollars in reserve (out of a total $1 trillion in foreign-exchange reserves), as the Chinese do, for example, every penny decline in the value of the U.S. dollar makes you nervous, since it represents a drop of $7 billion in the value of your dollar holdings.Sure, there are lots of good reasons to hold dollars and dollar-denominated investments. The yields are higher on U.S. Treasurys and the notes of agencies such as Fannie Mae (FNM, news, msgs). The markets are deeper. The euro is still a relatively untested currency and Japan, the home of the yen, is still crawling, maybe, out of a decade-plus of deflation.

And, most important of all, keeping currencies like the Chinese yuan cheap in relation to the dollar keeps Chinese goods cheap, keeps Chinese exports growing, keeps factories humming and provides new jobs for a restless Chinese population.

Patience has its limits

But that doesn't mean, if you're a central banker in Beijing, Tokyo, Moscow, Riyadh or Frankfurt, that you're willing to sit in dollars forever. Especially if it looks like the dollar will be worth less tomorrow than it is today. Already, Chinese monetary authorities have made it clear that they are putting a smaller percentage of their new foreign-exchange earnings into dollars.

That's a long way from selling dollars, and so far the Chinese are staying in dollars while looking for higher yields than Treasurys pay. But it shows that the Chinese, and the rest of the world's central bankers, are in the midst of an active review of their options.

All it would take for them to exercise one of those options and begin selling dollars would be a conviction that the drop in the dollar is no longer controlled and that the best choice in a bad situation is to sell dollars now before more damage is done to the value of those carefully acquired dollar reserves.

Edging toward the precipice

The Fed knows that the U.S. dollar can rely on the economic self-interest of our biggest trading partners, but it knows that the willingness to hold even a slowly declining dollar created by that self-interest isn't endless, and that continued U.S. trade deficits have eroded that willingness. The dollar is poised on the edge -- maybe not on the very edge but increasingly close to it -- of a very nasty negative feedback loop: a falling dollar leads to dollar selling which leads to a falling dollar which leads to more selling. Once a rush for the exits like that starts, it's hard to stop without some of the players getting badly hurt in the melee.

The U.S. Federal Reserve knows this and is, I believe, determined to head off the possibility of that kind of dollar panic. If strong words about the need for higher interest rates -- blamed on stubborn inflation rather than a global glut of dollars -- will do the trick, all well and good.

If it takes stronger medicine -- an actual increase in U.S. interest rates -- to do the trick, I think the Federal Reserve will raise interest rates, even if the economy is weaker than it would like. The cost of letting a dollar decline turn into a run on the dollar is simply too high. To the Fed, the domestic and, indeed, global damage of a run on the dollar outweighs the purely domestic costs of a period of slow or no growth.

Better now than later?

The choice is easier for the Fed than it would be for you or me. The Fed knows that, once started, the only way to end a dollar panic would be through massive increases in U.S. interest rates. Better to raise rates a little now, even if it creates unemployment and takes a bite out of stock and bond prices, than to face the need to raise rates so high later that it risks sending the U.S. economy into a recession that could be deep enough to take the rest of the global economy with it.

For the Federal Reserve, this dollar scenario moves the focus of policy away from managing domestic interest rates in order to control U.S. inflation and growth in the U.S. economy. The new focus has to be on keeping the overseas investors and bankers who hold so many of our IOUs relatively content with their massive U.S. dollar holdings.

Interest-rate cut less likely

Domestically, an interest-rate cut in 2007 is still on the table. The economy could slow enough so that such stimulus would be appropriate.

But globally, to a Fed that increasingly has its eye on the value of the U.S. dollar, I think an interest-rate cut in 2007 is on the edge of falling off the table. And if the dollar declines a bit more, that option will tumble right off the table. The Fed simply would not have the luxury of putting the domestic economy ahead of the interest of the overseas investors and banks that hold so many U.S. dollars.

Bernanke Is Flooding the Economy With Money: Bonddad

Nov 21, 2006

By Bonddad
bonddad@prodigy.net


With the recent passing of Milton Friedman, it is indeed fortuitous that Barry Rithotlz over at the Big Picture Blog has found a new source for M3. And folks, the picture ain't pretty:


Graph
http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/m3b_1.png


When the Federal Reserve announced they were discontinuing the M3 series there was a group of people who openly stated they were worried and/or concerned. I didn't buy into the concern, instead opting to believe the general statement from the Fed, which was "M3 isn't that important and we have other measures that are effective." (or something like that).
So, what is M3? According to my dusty and tattered copy of the Baron's Finance and Investment Handbook, 3rd edition M3 is M1 plus M2 plus time deposits over $100,000 and term repurchase agreements. Let's skip the deposits and focus on the repos.

So -- what is a repo? According to the same source, a Repo is an "agreement between a seller and a buyer, usually of US Government Securities, whereby the seller agrees to repurchase the securities at an agreed upon price and, usually, at a stated time. Repos, also called called RPs or buybacks, are widely used both as a money market investment behicle and as in instrument of Federal Reserve Monetary Policy.

A repurchase agreement is like a short-term collateralized loan. Party A (the lender) loans party B (the borrower) money. In return, Party B gives Party A an asset (usually a short-term bond like a treasury bill). Party B has to repay the loan within a short period of time. Within the banking systems, this is usually done by the US Treasury with regional member banks.
Remember -- the US banking system is like a hub and spoke system with the Federal Reserve and US Treasury as the hub and all other banks like the spokes. According to the New York Post"

FOR the past few years the U.S. Treasury has been quietly involved in what the financial markets call "repo" agreements and this near-secret operation could explain why the nation's money supply seems to be confoundingly large.

It might also explain why Washington decided earlier this year to stop publishing M3 money supply figures, the broadest and most popular measure of money in circulation.
Repurchase agreements - or repos - have long been used by the Federal Reserve to get money quickly into the hands of financial institutions, which in turn can put the money into circulation in the form of loans.

Last Thursday [November 7, 2006], for example, the Fed executed $2.5 billion in overnight repos and $8 billion in 14-day repurchase agreements. These were reported on the financial wires.

The Treasury completed a $5.5 billion repo operation on the same day under what it calls the Term Investment Option. There was no mention of the Treasury operation on the wires. In the Fed's repo deals, the banks temporarily turn over securities to the central bank in exchange for cash.

Let's go back to the chart, especially the more wobbly line. This line shows the year-over-year change in M3. Starting in the spring of this year, the annual change in M3 has fluctuated between 8% and 10% -- the largest change in over 3 years. That's a huge change in money supply.

It is not a historically large number.

So -- what is happening? I'll let Barry at the Big Picture sum it up:

This is a classic case of "ignore what they are saying, because what they are doing is speaking so loud:" While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.

Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives -- even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand -- print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.
Its not just the increase in Money Supply that should be concerning to investors -- its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?

Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.