21 November 2010
Jim Willie CB,  “the Golden Jackass”





Special Report #1

EXTREME HIGH RISK OF QE FALLOUT

The Quantitative Easing Round #2 conducted by the US Federal Reserve will cause enormous problems. It is born from desperation after the QE1 program achieved nothing. USFed Chairman Bernanke is embattled in a firestorm, as he shows ignorance of a main feature of capitalism, namely capital formation that generates jobs and income. He is fighting insolvency with liquidity in a horrendous display. Global outcry by foreign central bankers and political leaders is matched by internal criticism within the United States. Unlike QE1, the QE2 will not fence in the newly created money or sterilize its effect. Many competent analysts expect hyper price inflation to result. My forecast is for a powerful rise in the cost structure of the USEconomy without much of any export growth, but with worse unemployment. The EuroZone will be compelled to follow suit with the reckless USFed, just as they were compelled to reduce interest rates to 0% reluctantly two years ago. The baton is in the process of being passed to China for global power, but the emerging economies have great challenges ahead. They must contend with rising currencies and dangerous hot inflows of money. The topics are scattered, much like the firestorm unfolding.

◄$$$ G-20 WAS A FLOP, A GRAND HUMILIATION TO THE UNITED STATES. TWO GLOBAL FINANCE GREENHORNS WERE ON STAGE FROM THE WHITE HOUSE, AND USDEPT TREASURY. FOREIGN HEADS OF STATE REFUSED TO SUPPORT ANY INITIATIVE FROM THE USGOVT. THEY TOOK THEIR LEAD FROM CHINA. THE BATON IS BEING PASSED. CHINA MUST DEAL WITH A GIGANTIC GROWING SURPLUS THAT IS CAUSING INTERNAL PROBLEMS. $$$

The South Korean G-20 Meeting seemed to feature heads of state more than in past meetings, with fewer central bankers and finance ministers in the spotlight. In my view, the forum was a humiliation for the United States, led by the total repudiation all of its spectrum of policies. The flow of power to the East continues in earnest unabated. The US contingency seemed like greenhorns. President Obama embarrassed the nation fully, as he actually claimed that the US is the focus of so much attention because of its innovation and new ideas. Hyper monetary inflation is not a new concept, just the last chapter of US financial engineering. Check the Weimar Republic. Obama and Treasury Secy Geithner, who is looking more like a dim small bulb with each meeting, also attempted to use the forum to push for consensus retribution against China for currency manipulation. The greatest offender is clearly the USGovt with the USDollar, widely recognized at the forum. That rogue perception neutralized all comments by the American delegation.

The finance ministers refused to push China into permitting its Yuan currency to rise, in the specter of a global currency war threatening to turn into a global trade war. The vacant compromise came as a joint statement, including Obama and Chinese President Hu Jintao, issued to the effect that they agreed to refrain from competitive devaluation of currencies. The G20 leaders also pledged to pursue policies that reduce the trade imbalances between nations, another vacant promise. They might as well have agreed to world peace and good health, like airhead beauty pageant contestants. The stark reality is that China must permit its Yuan currency to be higher, since their trade surplus is exploding, no exaggeration. China's trade surplus widened in October from September, as strong export growth continued. Their trade surplus gapped up to $27.15 billion for October from $16.9 billion in September, as per the Xinhua news agency. Imports grew 25.35% for the month, while exports were up 22.9% on a much bigger core. Whether or not China derives an unfair trade advantage from its currency, it must respond to the exploding trade surplus. The hot money is causing a domestic fever that must be addressed. See the Market Watch article (CLICK HERE).

The Chinese Economy finds stability relative to the USEconomy by means of a managed Yuan currency peg. But their labor differential led to the great industrial globalization advantage. The USEconomy has found instability from a careening federal deficit and out of control USFed monetary largesse in USDollar creation to cover its ballooned debts. Its industry has been largely gutted or shipped overseas. Most of the nations in attendance were extremely angry over the US Federal Reserve plan to pump $600 billion into debt monetization, sidestepping the responsibility for financing its gargantuan deficits. They see the inflation option as a reckless scheme to flood markets with USDollars, driving down the value of the US currency and flooding their nations with hot money in search of higher bond yields. Combine with foreign rising currencies, and the hot money pays handsomely, helped along by higher commodity prices. Critics warn that US interest rates have been kept too low for too long, a policy certain to inflate new asset bubbles and to lift the price of commodities. The leaders vowed to fight protectionism while they pursue the precursor of trade war, namely currency war. The G-20 Seoul Summit did agree to a 6% shift of quota shares to favor emerging economies in the Intl Monetary Fund. It is a small step but a meaningful start. The US delegation reportedly offered a bigger IMF vote to China in exchange for a higher Yuan currency value, which seemed to fall on deaf ears. See the China Daily article (CLICK HERE).

Differences were so huge that the G-20 envoys could agree on so little that they found accord only in postponement of agreement on several issues. Details toward indicative guidelines for measuring global imbalances will wait until next year. Debate over currency matters was too heated to seal any pact. Positions taken by China, Brazil, and Germany showed solidarity in confrontation. The three nations believe USFed monetary policy will drive down the USDollar and fuel speculative capital flows that risk asset bubbles in their countries. One notable quote came from Yu Jianhua, a director general at China's Ministry of Commerce. He said, "Don't make other people take the medicine for your disease. Quantitative Easing will have a very big impact on developing countries including China." The dark clouds of trade war loom as G-20 nations gathered and settled nothing except to release some tension. The main outcome was a consensus that the US is uniformly disrespected and that leadership has shifted to China.

◄$$$ BERNANKE INVOKED THE FRIEDMAN PRINCIPLES IN DEFENDING THE QE2 DECISION, VERY IMPROPERLY. MILTON WOULD OBJECT STRONGLY TO THE IMMEDIATE PRICE EFFECT, AND DECEPTION ON CURRENT PRICE SETTING. THE CURRENCY DEVALUATION MOTIVE OF IMPROVING COMPETITIVENESS IS A GRAND DECEPTION, A COMPLETE RUSE. IT IS PAINFULLY APPARENT THAT BERNANKE DOES NOT UNDERSTAND CAPITAL FORMATION, A BASIC TENET OF CAPITALISM. $$$

USFed Chairman Bernanke invoked the inflation fighting legacy of the deceased Nobel laureate economist Milton Friedman. At a conference in Jekyll Island Georgia, he responded to criticism in an opinion article submitted in the Wall Street Journal by Allan Meltzer. A respected USFed historian, Meltzer argued forcefully that Friedman, who ironically influenced many economists such as Bernanke, would not support the central bank's decision to monetize more debt securities. Bernanke offered a bland half-moronic opinion, when he said "We are doing everything Milton Friedman would have us do. What Milton Friedman would say is that the Federal Reserve is responsible for the stability of nominal aggregates including prices, and that means that particularly with respect to inflation. You do not want inflation to be too high but you also do not want it to be too low. I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy. Our credibility must be maintained. It is critical for us to maintain inflation at an appropriate level. Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation, which I think we all agree would be a worse outcome." The lunatic chairman actually believes he can restrain price inflation if and when it shows up. He could not even recognize a bond conflagration three years ago. Invoking a name does not make it so.

The USFed has already lost is credibility, now seeking to manage price inflation. The USFed and USGovt sponsor amplified deception on the price inflation levels, with a 5% to 6% lie in their under-statement. Critics like Meltzer, a professor at Carnegie Mellon University in Pittsburgh Pennsylvania (the Jackass alma mater), argue in rebuttal that the central bank risks setting off uncontrollable inflation. They already lit the fuse once, and are lighting it again, this time without protective gear (sterlization). In front of Greenspan and a dozen current and former USFed policy makers, Bernanke dismissed the idea that the central bank will increase inflation higher than it prefers. He is so locked into monitoring inflation expectations that he cannot identify price inflation in its most basic forms. The USGovt agencies do a yeoman's job in keeping price inflation out of the official statistics. The USFed even purchases the TIPS, to keep down the inflation warning signal. He appears like a pyromaniac with a torch in his hands promising not to set fires, even thought the curtains have lit up in flames. He has set fires that he cannot recognize in commodity and gold prices. His credibility has been lost, and respect shown to him was notably absent. Then again, he took over after the early Greenspan resignation in order to serve as their chosen bagholder.

New York Fed President William Dudley and Chicago Fed President Charles Evans raised the idea in October that the USFed could target higher inflation temporarily so as to aid growth. Another heretic concept by shallow economists, since inflation causes capital destruction, the opposite of growth. What is needed is capital formation and favorable tax policy, aided by cooperative labor unions. Recall that Bernanke in a Florida speech in early November argued that the unconventional monetization policy will avert a decline in inflation and spur the US recovery. He claimed the goal of reducing borrowing costs, adding stimulus, and hopefully creating a faster recovery with an inflation rate consistent with long run stability. The borrowing costs have been near 0% for 18 months with no economic response, making his point again vacant, myopic, and stupid. He is fighting an endemic insolvency problem with amplified monetary inflation. A voice with hint of wisdom came from former New York Fed President E Gerald Corrigan Corrigan. He said, "Even in the face of substantial margins of under-utilization of human and capital resources, efforts to achieve an upward nudge in today's very low inflation rate make me somewhat uncomfortable." His experience came under ex-USFed Chairman Volcker during the late 1970 decade, who raised interest rates to 20% to combat inflation, pushing the economy into the 1981-82 recession. That was the final chapter of anti-bubble USFed chieftain linneage. Since Greenspan, it has been full speed ahead with inflation engineering, asset bubble creation, permitted bond fraud, careful collusion, and reckless management, with total failure to show for it. See the Bloomberg article (CLICK HERE).

The claim by Bernanke and a supporting chorus of economists that QE2 will bolster USEconomic competitiveness is fallacious, and patently backwards as usual. It will turn the US into a wasteland, a vestibule to the Third World. New money does not cure an insolvent banking system or insolvent households. It presents a new problem of significiant price inflation. Producing high value products efficiently and cost effectively makes the nation competitive. Imposing a fair tax structure that is stable, reasonable, and with proper incentives makes it competitive. Having a strong education system makes it competitive. A weaker currency raises the cost structure, increases import costs, and assists the export trade if a nation has one. The United States has shipped a large segment of it away in the last 10 years to China, after having shipped a larger segment away in the 1980 decade to the Pacific Rim. The QE2 initiative will be disastrous from many angles, certain to push the nation into an Inflationary Depression.

◄$$$ NO STERILIZATION OF QE2 IS IN THE PLAN. IT WILL ALSO BE DONE IN THE SHADOW OF COLOSSAL OPEN MORTGAGE FRAUD. QE1 PUT THE NEW MONEY INTO THE EXCESS BANK RESERVES, SEQUESTERED FROM THE USECONOMY IN A RECAPITALIZATION EFFORT. THE NEW QE2 MONEY APPEARS TO HAVE NO RESTRICTIONS. THE HIGH RISK IS TO GENERATE TOO MUCH DOMESTIC COST INFLATION DURING A MINOR BOOST IN EXPORTS. THAT IS MY FORECAST, THE HOLLOWING OUT OF THE USECONOMY FROM A MASSIVE COST DRAIN WITHOUT BENEFIT, COMPOUNDED BY INCOME EROSION. $$$

QE1 in 2009 is done and QE2 set for 2011 is on track. A radical difference between the two Monetization programs is evident, sure to be clear when completed. The US Federal Reserve announced on November 3rd that it will create approximately $600 billion of new money to fund USTreasury Bond purchases, and will utilize up to $300 billion of past printed money to purchase mortgage bonds. Any implication that the QE2 initiative would be a continuation of a past program is entirely incorrect. QE2 is radically different from QE1. It contains more danger, with much higher risk, and clear desperation after lack of benefit from the past program. The next initiative will contain no sterilization of the newly created money, no offset of the new money with old money put aside in compensation. It will be of the old-fashioned monetization, with direct infusion of a huge amount of money, with potentially sudden and dire results. The USFed will not work through the USDept Treasury in the USTBond purchases. It will instead intervene in the Treasury bond markets. Therefore, the USFed will create an artificial USTreasury market, in which a nearly unlimited amount of newly created money will be used to purchase USTBonds from private investment banks and financial institutions, thereby shoving the funds into those firms without controls. From there, it will fan out into the system like a centrifuge. That did NOT happen in QE1, a major difference.

The previous QE1 was done by the USFed and Euro Central Bank in a manner that economists refer to as sterilized. The process usually involves the central banks removing an equivalent value of assets from the banking system so as to offset the impact. Imagine robbing your kid's college fund to pay for a second car, rather than using a bunch of credit cards to expand the loan balance. Using the college fund is sterlized, but using the credit cards is not. An offset was imposed for QE1 that does not exist in the QE2 plan. The offset came in the form of a QE1 corral, whereby incentives were given for the big banks to put the extra money into the USFed cash savings, and earn an interest yield (never done before). The big banks were essentially given a free carry trade to exploit the yield curve, to borrow short-term and earn long-term, in order to recapitalize themselves. In the upcoming round, they WANT to create some price inflation, and they will succeed. Inflation is caused when the new money to pay banks for securities escapes into the general money supply. The process of releasing newly printed money is not free. The consequent cost rise ends up hollowing out the economy, reducing the value of hard earned savings. Great care is usually done to protect the new money from escaping into general circulation. How this causes job growth is part of the USFed and US economist insanity, better yet, their deep lack of knowledge about capital formation and its destruction. Jobs will be lost, not gained, as a profit squeeze occurs for businesses, and households will be left with less discretionary money after dealing with higher costs.

In the detailed description of planned assets for purchase, of the description of non-conventional steps to be taken, and of the Jackson Hole general weapons to be unleashed. No direct reference to the sterilization was made for these new funds. No promises were given that the funds would be kept out of the money supply. Expect them to find their way into circulation, from the pockets of the sellers of the $600 billion in USTBonds to the USFed at the very least. If no restrictions are imposed on the sellers, then the received funds will be jettisoned far and wide. They will chase assets as US$ hedges like crude oil or Euro currency, chase other bond types, end up as commercial or new home loans, or end up in myriad other destinations. They might even use the money to pay for mortgage Put-Backs, the huge upcoming expense to reverse mortgage bond sales. Expect the funds to be used as a powerful offensive weapon in the currency war. The goal could be as simple as weakening the US$ enough to grant an export advantage to the USEconomy, and to remove the lower labor cost advantage in Chinese possession. As Chinese and other imported products rise in price, they would lose market share, with the sales going to US based companies, if the US has competitive products or even offers such products, or can ramp up volume. It is highly doubtful that US workers would produce items that fill the shelves of Wal-Mart and KMart and Best Buy rather than China. Where are the US plants? Nowhere! This QE2 is a reckless plan.

The USFed is directly threatening to generate a strong whiff of price inflation, which will drive down the value of its currency, making other nations unwilling to hold US$-based assets. The backfire of unintended consequences is centered on the risk of creating a cost squeeze for US businesses instead, which reduce their workforces. That is my forecast, not an expansion of export trade. The USEconomy does not have that critical core of export industry in order to capitalize on the high risk initiative that is QE2. The domestic USEconomy will be hollowed out while it drains capital to pay for the higher cost of everything. This is a grandiose plan that will send bullet ricochets into the US body economic, perhaps deadly shots. See the excellent essay entitled "Radical Difference Between Monetization 1 and QE2" by Daniel Amerman on Financial Sense with internal links (CLICK HERE).

◄$$$ RUBIN WARNED THAT QE2 MARKS DANGEROUS TERRITORY, CARRIES RISK OF BOND MARKET IMPLOSION, AND CONTAINS EXCESSIVE RISK. HE BELIEVES QE2 COULD TRIGGER A USTREASURY ROUT WITH BROAD SELLING ACROSS ASIA EXCEPT CHINA. THE TRIGGER EVENT COULD BE RAISING THE USGOVT DEBT CEILING SOON. OBTUSE BERNANKE FORECASTS THAT QE2 WILL CREATE UP TO A MILLION NEW JOBS. QE1 DID NOTHING FOR THE HOUSING & MORTGAGE MARKETS, A FAILURE WITH NOTHING LEARNED. $$$

Robert Rubin, former Treasury Secy in the Clinton Admin who enabled the lease and sale of the majority of the USTreasury gold inventory, opened up with a salvo of criticism for the QE2 program. Rubin has a second distinction, of having destroyed the Citigroup corporate structure from overly aggressive expansion into every phase of failed finance. For these two feats, Rubin is revered as a hero, his guidance sought on all matters of high finance. Rubin's criticism of QE2 means the Obama Economic Team has a split from the USFed!! A smart man, Rubin shared some worthwhile pearls of wisdom. He believes QE2 puts the United States in a terribly dangerous territory, and sets up the USTreasury Bond market for potential implosion. The soaring USGovt budget deficit and the USFed monetization of half a year of its debt combine to amplify the risk. Rubin spoke at the Pierre Hotel in New York City, and in doing so, joined the growing number of current and former officials (foreign and domestic) who show disapproval for QE2. He emphasized the general risk level, and mentioned the horrendous foreign reaction. He repeated a similar warning at a Financial Times conference in October.

A possible trigger event was identified, the USCongress vote to raise the federal deficit ceiling next spring. It could be the trigger for a rout in the USTreasury market in Rubin's opinion. A standoff on the debt ceiling could create a spectacle, heighten attention, and spook international investors, as the US could paint itself as a Banana Republic. He said a financial version of the Cold War concept of Mutual Assured Destruction will likely prevent China from dumping USTreasurys. They will not choose to send cannon balls into their own ship with heavy bond sales. However, other Asian nations starting with Singapore, Hong Kong, and Malaysia are highly likely to sell their midsized USTBond holdings, enough to start an Asian rout. Rubin escapes criticism for his USTreasury Gold management and his Citigroup leadership for simple reason. He is a syndicate don from Goldman Sachs, an elite group. The Jackass puts Rubin in a special class of the Top10 American traitors in history. He should be pressured to explain the missing gold in Fort Knox, as well as the missing $10 billion from the Bureau of Indian Affairs held at Citigroup.

Bernanke specializes in wrong economic outlooks with uncanny consistency. He claims QE2 will create up to one million new jobs and control price inflation. He does not identify where the jobs would spring, since likely in Mexico, Peru, and China where industry is brisk. The USEconomy has little industry outside financial engineering and home construction. The US does not make televisions, home stereos, washing machines, or cameras. The USEconomy will suffer a serious rise in price inflation, a concept he is a babbling moron about. In a closed door meeting with US Senators, mainly 11 Republicans whose backlash has eroded support, Bernanke defended his plan to vastly expand the monetary stimulus. He made a feeble limpwristed appeal for the Congress to take the lead in setting economic policy. Some believe Bernanke has gone down the Rabbit Hole, lost touch with reality. The Jackass thinks Bernanke is extraordinarily incompetent and totally ignorant of what money is and what legitimate income means, even blind to concepts of capitalism like capital formation. The system is restored by having people earn legitimate income, not putting money in their hands. He is an inflation engineer and apologist. QE1 failed to produce stability for the housing and mortgage markets, as household insolvency and continued job cuts continue to undermine both markets. So hit the accelerator and orders a QE2. The generated inflation will not revitalize the USEconomy. Only in America!! See the Global Economics Analysis article (CLICK HERE).

◄$$$ THE SOLUTION TO THE USECONOMY AND FINANCIAL STRUCTURE IS LONG PAST AVAILABLE WITH THE REMOVAL OF THE USTREASURY GOLD. HERE IS A SOLUTION THAT COULD HAVE WORKED. QE2 IS THE OPPOSITE OF A SOLUTION. COLLATERAL, INDUSTRY, AND SMALLER GOVERNMENT ARE THE CORNERSTONES TO A SOLUTION. THE QE2 PATH IS THE OPPOSITE TO A WORKING SOLUTION. $$$

The $500 billion in gold collateral that Rubin kidnapped and sold into slavery for private Wall Street gain would be useful nowadays. People grope for bonafide solutions. Try this: Multiply the gold price 7-fold to obtain a hefty realistic $10,000 price level, sufficient to provide $3.5 trillion for US banking system collateral. Presto, some stability for the USDollar vis-a-vis the USGovt debt. Then the task shifts to reducing the USGovt deficit by means of terminating the endless war for narcotics dominance, ending Medicare, cutting entitlements from pensions, eliminating several agencies (like Energy, Interior, and Homeland Security), and offering major incentives for the return of US manufacturing industry to US shores. The defense budget must be cut by 60% to 70%, and be declared no longer sacred. These steps would construct the foundation for recovery, with $300 to $600 billion in budget cuts. Painful but progress. In two years, the deficit would be tremendously reduced. That math works for me, but it is too late. Rubin and his ilk are well-dressed thieves with a pedigree who stole the national future, kept kicking the can down the road. That road leads to the Third World. The opportunity for solution begins with a placement of gold collateral and a basis of industry for income, followed by severe budget cuts. All are absent, as debt suffocates the system.

◄$$$ THE EUROZONE WILL EVENTUALLY JOIN THE USFED WITH ANOTHER QE PROGRAM, ALL IN TIME. THE EURO CENTRAL BANK HAS RELUCTANTLY FOLLOWED THE USFED WITH ULTRA-LOW INTEREST RATES TO REMAIN IN SYNCH. THEY MUST JOIN THE USFED WITH A NEW QE2 ROUND, LIKELY TO FUND THE P.I.I.G.S. NATIONS. JIM SINCLAIR OFFERED HIS JUSTIFICATION FOR THE EVENTAL EUROZONE NEXT QE2 PROGRAM. HE CALLS THE ENTIRE MOVEMENT AN UNAVOIDABLE BUT WRONG APPROACH. $$$

In the first week of November, the Bank of England and the European Central Bank left their key interest rates at record lows, out of respect (or fear) for the US Federal Reserve. All three bodies are desperate, since low rates have not enabled any recovery whatsoever. The Bank of England decided against any new stimulus measures for Britain, leaving its main interest rate at 0.5% again. They are content with the ongoing monetization project, a bond purchasing program at 200 billion Pounds (=US$322B). Tepid economic data precluded the need for expanded purchases of government debt, in their thinking. The services sector and manufacturing reported an unexpected growth in October, mere quivering of the cadaver. Quantitative Easing remains a viable policy option. The Euro Central Bank left its benchmark interest rate at 1% again. They ponder another big bank bailout. It needs to be much bigger than the last one. See the New York Times article (CLICK HERE).

Intrepid independent gold mining manager and philanthropic analyst Jim Sinclair calls the Euro Central Bank second round of Quantitative Easing unavoidable, but wrong headed. Their austerity measures in place will make urgent a QE2 program hastily enacted. The EuroCB must engage in the currency war, and by whatever means, prevent the Euro currency from rising more. So far, the Irish and Greek Govt debt pastures have provided sufficient stench to disrupt the bull run in the Euro. Portugal is willing to add to the fetid odors of European sovereign debt from the infamous PIIGS pen. Sinclair wrote the following, expecting a QE to infinity and a march past the $1650 gold price. He believes the USFed has passed a watershed event. Their decisions have taken place in the face of overwhelming objections domestically and internationally. He labels the QE2 program as an extension to the phony FASB accounting rules that give pretense of solvency to the big US banks. Sinclair wrote:


"Mark my words, the EuroZone will join the USFed in Quantitative Easing before this chapter of the darkest days of finance in human history draws to a close. The FOMC vote was almost unanimous for QE. The austerity measures in the EuroZone are, without any doubt, going to come back and bite them hard in the rear. QE is wrong, but there is no other alternative to the powers that be. It is the lesser of immediate economic evils as compared to the austerity of balance sheets, thanks to the FASB. I think the most salient point of what has taken place today is not the number [QE planned bond monetization volume] but more so the fact that the Fed took a stand in the face of both national and international, in fact fierce international criticism of the policy. You really must wonder whether or not Bernanke actually set up all of this criticism, to come out and look for the first time like a very strong Fed, even if their direction might be misguided. I do not think QE is good. I would not defend the economics of it, but I do not think there was any alternative. The need is for the QE to expand basically to infinity and that is I think what you can call today as a watershed event. The need basically is because the balance sheets of the financial community are all a product of FASB permission to value assets that do not exist, that are not there, that are entirely fabricated. The Fed has the entire picture of what it is holding on its balance sheet. The Fed knows the extent and difficulty of the problem. The Fed has kicked the can down the road one more time because there is no other choice. If the Fed had not acted to bail out the international investment banks when the Over The Counter derivative meltdown first came, you would have had a rollover you would not believe [nuclear meltdown]. So the nation is stuck between a rock and a hard place. It is not right what they are doing, but there is no other alternative."

◄$$$ CHINA DOWNGRADED UNITED STATES CREDIT, AN OPEN INSULT BEFORE THE G-20 MEETING. FURTHERMORE, A CHINESE LEADER SHOWED GREAT DISRESPECT FOR THE USDOLLAR, CALLING IT ABSURD AS A GLOBAL RESERVE CURRENCY. $$$

A few months ago, the Chinese rating agency Dagong Global Credit downgraded the US credit rating due to outsized federal deficits and a weakening economy. Two weeks ago, the same outfit downgraded the US again due to the reckless QE program. They cut long-term US sovereign rating one notch to A+ from AA, with a negative outlook. They stated, "The serious defects in the US economy will lead to long-term recession and fundamentally lower the national solvency. The credit crisis is far from over in the United States and the US economy will be in a long-term recession. A weaker USDollar will hurt US ability to attract dollar capital reflow. In essence, the US government's move to devalue the dollar indicates its solvency is on the brink of collapse." The USFed might counter that capital flow can be provided by the zero cost Printing Pre$$, evidence of its insanity. The obvious trend is of depreciation of the USDollar, and the continued deepening of credit crisis in the United States. The Quantitative Easing Round #2 encroaches on the interests of foreign creditors, regarded as a waning intention by the USGovt to repay debt. The debt is seen by American leaders as a privilege to hold. The crisis confronting the USEconomy cannot be resolved through currency depreciation. It requires a restoration of industry and a revitalization of what can produce legitimate income, something the US leadership from all corners has turned blind about. See the Zero Hedge article (CLICK HERE) and the Market Ticker article (CLICK HERE).

The chief advisor to the Peoples Bank of China called the USDollar 'absurd' for its performance and integrity as a global reserve currency. Li Daokui said, "To a visitor from outer space, it would seem absurd that the dollar holds [the global reserve] role, given problems in US financial regulation and the country's economic difficulties. The same assessment could be made of the nation's ability to keep issuing currency according to its own needs." That comment came from a central bank castle, a damning indictment. The US$ fails to qualify and it is abused for national needs. To deflect attention from the Chinese Yuan currency, the PBOC permitted a singleday 0.51% upmove two weeks ago before the G-20 Meeting, the most since the revaluation period. They also lifted bank reserve requirements by 50 basis points. See the Zero Hedge article (CLICK HERE).


◄$$$ NASSIM TALEB GAVE AN INTERVIEW WHERE HE HARSHLY CRITICIZED THE USFED AS INCOMPETENT. THEY IMPROPERLY ASSESS RISK. THEY FAILED TO RECOGNIZE OR HEAD OFF THE INITIAL PHASE OF THE FINANCIAL CRISIS IN 2007. THE USGOVT MUST FACE AUSTERITY AND REDUCE SPENDING. TOO MUCH DEBT SLOSHES INSIDE THE SYSTEM. THEY ARE ADDING TO PRICE INSTABILITY. TALEB DID NOT ADDRESS THE INSOLVENCY PROBLEM, WHICH IS DIAGNOSED BY THE USFED AS A LIQUIDITY PROBLEM. $$$

Nassim Taleb of the Black Swan fame gave an interview to Bloomberg. The Jackass observed and took notes. Taleb went on for 20 minutes in a harshly expressed viewpoint of the USFed and its inept leadership. He believes the USFed and its collection of regional presidents do not comprehend risk. The USFed did not foresee the crisis in the first place, and did not detect the heightened risk in 2005 through 2007. He is reminded of the LongTerm Capital Mgmt folks, brilliant but still at the helm during blowups. The USFed does not learn from the previous misuse of its own tools. It talks of benefits from policy initiatives without proper assessment of risks and acknowledgement of past errors. Like with an airline pilot, they are concerned about speed but not safety. They add to already high risk, while claiming their actions add to insurance. He said, "The pilot who crashed the plane is back in the cockpit seat. The actions they talk about as insurance actually raise the risk significantly, the exact opposite." As to who bears the risk, it is savers, retirees, pension funds, and foreign creditors. However, this list of parties did not in any way bring us to the problem area. The USFed did with poor banking oversight, sequential swings into artificially low interest rates, and constant meddling in the bond market. He did not mention the major initiatives with Interest Rate Swaps to keep the cost of money chronically low for two decades.


Taleb offered a glimpse into the future, as he sees it. First and foremost is the USGovt deficit problem. Look for a major effort to cover their losses by debasing the USDollar currency even as the deficit increases more. The USGovt must face austerity strictures, and reduce spending. The USFed should focus on price stability, when they are doing the exact opposite, producing vast new liquidity. Higher commodity prices are being transferred to goods and services in the last several weeks. There is simply too much debt in the system. The price stability status is very jittery, just like with Third World nations. The USFed is steadfastly trying to change the body to fit policy, rather than changing the method of financial management. They are employing an important surgery in order to shape the body to fit the fixed suit. They are trying to change the world to fit their agenda and purpose.

My view is that the USFed has made two gigantic errors. First, they claim that low price inflation warrants quick strong action so as to produce a sufficient level of price inflation. The actual CPI is above 8.5% annualized, hardly tepid or in need of being jacked up. Second, they misdiagnose the current malady and disease as one of inadequate liquidity, when it is rather a dangerous level of banking system insolvency, household insolvency, and federal budget insolvency. The Jackass suspicion is that the USFed talks about liquidity as the problem, when they are well aware of the bank insolvency and are scared to death of the insufficient demand for USTreasurys to finance the USGovt deficits.

◄$$$ THE BANK OF JAPAN OFFERED DETAILS ON ITS NEXT MAMMOTH Q.E. PROGRAM, ONE MORE IN AN ENDLESS SKEIN. THEY WILL LAUNCH AN EVEN BIGGER QUANTITATIVE EASING PROGRAM THAT INCLUDES THEIR STOCK MARKET. $$$

On November 5th, the Bank of Japan left its overnight interest rate range at 0% to 0.1% but gave details on the assets it will buy under its expanded Quantitative Easing program, the 173rd in all, or maybe the 137th in all, lost track here. The central bank will buy funds linked to the Topix index and Nikkei Stock composite index of 225 stocks. It will also used printed money to buy Japanese real estate investment trusts (REITs) rated at least AA. Of course, it began to buy the usual fare of Japanese Govt Bonds last week. They know how to destroy a financial system with turbo-charged strength, still the great lackeys of the USGovt and UKGovt. See the Market Watch article (CLICK HERE).


◄$$$ JOHN EMBRY GUARANTEES HYPER-INFLATION IN THE UNITED STATES. WITH THE FAST RISE IN ASSET PRICES, HE EXPECTS THE STANDARD OF LIVING IN THE UNITED STATES TO FALL BADLY. $$$

In a King World News interview, John Embry shared his unequivocal opinion that hyper-inflation is a certainty. He added his name to the list that includes Art Cashin of UBS Securities, with added comments about a potential gold price squeeze of the shorts. He said, "I am another person that worries hugely about hyper-inflation. I mean the monetary path that they appear to be following, I guarantee you will lead to hyper-inflation. Also, this time the physical gold market is robust, and I am told there is not a lot of physical gold available right now. We could very easily overrun the shorts at the COMEX and force them to cover, even though they have extraordinarily deep pockets. If that happens, we are going to see some really spectacular price moves as a result. I think that is why when these things move, all the gold stocks, I think you are going to feel like your hair is on fire they are going to move so fast." Embry went on to describe the harmful fallout from the USDollar decline. The standard of living will be a major victim. Hard assets will gain huge ground in US$ value terms. He said, "What it is really going to collapse against is hard assets. I really do not think people have any idea the extent to which the standard of living can fall in North America, particularly in the United States. I mean when a currency collapses against everything else, basically that is saying that the standard of living is going to fall. In fact, it could fall by 30%, 40%, or 50% just to pick some wild numbers. That is not out of the question. Things have been pretty good for the last 60 or 70 years in North America. People think they will be good forever. It is not going to happen that way." See the King World News interview (CLICK HERE). By the way, John Embry has been a Hat Trick Letter subscriber for over two years.

◄$$$ INDIA HIKED THE OFFICIAL INTEREST RATE BY 25 BASIS POINTS. THE RESPONSIBLE NATIONS WITH ACTUAL BALANCED ECONOMIES ARE ACTING WITH DISPATCH TO WARD OFF INFLATION. $$$

The Reserve Bank of India on November 2nd raised its official interest rates by a quarter point in order to head off inflationary pressures to prices. They raised the repurchase lending rate to 6.25%, while increasing the reverse repurchase rate to 5.25%. It left the cash reserve ratio at 6.0%, the amount of deposits that commercial banks are required to keep with the central bank. See the Market Watch article (CLICK HERE).

◄$$$ KNIGHT RESEARCH FORECASTS AN END TO THE EMERGING ECONOMY EXPANSION AND THE START OF A NEW DANGEROUS ERA. THEY CALL IT "GAME OVER" BOLDLY. THE COMMODITY PRICE RISE AND HOT MONEY PROPAGATING FROM US LOCATIONS HAS CAUSED GREAT DAMAGE. WATCH USECONOMY COSTS, BRAZIL STABILITY, AND CHINESE ASSET BUBBLES. $$$

Knight Research believes simply it is Game Over for the emerging markets, which are on the defensive from numerous systemic threats. The commodity price rise has forced too much prosperity, if possible, with vast sums of hot money moving into their nations. They must contend with price inflation. The semi-permanent 0% rates out of the US and Europe have sent vast sums of hot money in search of a moderate bond yield. They must contend with expanding flows into their financial sectors in the wake of higher commodity product income. Knight believes "the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyze a wholesale change in sentiment and an historic repositioning of risk assets. The emerging market global growth story is over." They put forth their asymmetric outlook for grand disruption, beyond the tipping point. The commodity market has pushed emerging nations into a turmoil certain to grow worse. Major factors in their view, highly reasonable, are Chinese Govt new policy actions, the rise in US interest rates, the USFed's emphatic commitment to QE2, sovereign debt pressures across Europe, broadly rising commodity prices, and foreign nation efforts to control hot money flows. They point to a magnificent change in sentiment and a historic repositioning of risk assets. They describe in unique terms an intersection of Government Policy versus Resource & Industry Management versus Economic Security, which plays out in terms of global trade in foreign exchange rates, commodity prices, and the trade finance. Their arguments are compelling.

Knight Research believes conditions and factors indicate a continued breakdown in economic and financial order. They highlight those deteriorating conditions as 1) The structural breakdown of the credit and labor markets in the developed world and the anemic outlook for nominal GDP growth. 2) The immaturity of the developing world and their vulnerability to credit shocks and uncontrollable inflation. 3) Chinese dependence upon non-economic, and unsustainable credit expansion to maintain growth far beyond natural export and domestic demand. 4) Asian dependence upon imported energy and agriculture. Knight expects the weak global economy to override the financial flight to pursue working USDollar hedges, a point of Jackass disagreement. My forecast is for the crude oil to reach $100 level and later to fall badly. Knight expects stress fractures to become evident in the coming months are a rise in the USDollar and broadbased weakness across the commodity sector, a dramatic widening of emerging market credit spreads (higher bond yields), and a stampede of hot fund flows out of the emerging markets. They concluded, "We believe that the end of the Great Consumer Credit Cycle and the vast structural differences in the terms of trade between the United States, the European Union, and China have finally caught up with the secular bull thesis on Emerging Market and Commodities. Quite ironically, the Fed's aggressive policies will likely prove to be the catalyst which breaks China's unbridled expansion of credit and non-economic growth, ushering in a wholesale rebalancing of risk assets." See the Zero Hedge article (CLICK HERE). The keys in my view are the the rise in USEconomy cost structure, the instability of Brazil, and the continued managed crash in asset bubbles in China. One thing to remember. Nobody has ever been consistently made correct forecasts on the China story in a generation. They remain a puzzle wrapped in an enigma, with fierce independence, unlimited patience, unlimited labor, powerful emphasis on trade, and strong desire for global respect.

◄$$$ BRAZIL FACES TOUGH PROBLEMS FROM HOT MONEY AND RISING COMMODITY PRICES. BRAZILIAN BANKS ARE ENDURING SHOCKS. THE SHOCK ABSORBER IS A SUFFICIENTLY LARGE MANUFACTURING BASE. BOTH BRAZIL AND RUSSIA LACK IT, AS DOES THE UNITED STATES. EMERGING ECONOMIES FACE GREAT CHALLENGES IN MONETARY POLICY, SINCE THE USFED HAS EXPORTED THE CRISIS. NATIONS THAT SEEK SURVIVAL MUST ABANDON THE USDOLLAR. $$$

The Brazilian Real currency versus the USDollar has appreciated from 4.0/$ to 1.7/$ in a decade. Without its government intervention, the currency would have appreciated much more. Brazil still reports a small trade surplus of $1 billion per month. Brazil benefits as a major exporter of natural resources, lifted as a US$ hedge during the USFed monetization binge. The Brazilian Govt has a challenge to slow the rapid capital inflows. They have had installed capital controls to tax funds in arbitrage of its higher bond yields. During November, a large Brazilian bank is on the verge of failure, succumbing to pressures. The bank crisis has spread to Brazil, where Banco Panamericano is caught in a death spiral.

Russia is better able to withstand the external shocks, due to large energy exports and $500 billion FX reserves, double that of Brazil. China is better able to withstand the same shocks than either nation, due to its $2600 billion FX reserves and substantial manufacturing base. A reverse in the commodity fired liquidity flow would aid the Chinese competitiveness, but not without upheaval to its banking system. The Chinese Economy has yet to adapt to lower property prices generally, sure to deliver a massive shock to their banks. The weak USDollar, whether from policy or market action, has increased the vulnerabilities of emerging economies. They find themselves in need of quick urgent action in defense. The only true defense for emerging economies is abandoning the USDollar in trade settlement, including crude oil. The harsh reality is that the USFed will continue its Quantitative Easing, then do it again in a vicious cycle of unlimited proportions. The QE hot money will double or triple for sure. The United States must inflate or else die suddenly, and in my view, inflate then die gradually anyway. A huge internal challenge exists for Brazil to quiet the fast rising food prices. My hunch is that drought from excessive slashing & burning of the Amazon Rain Forest has finally caught up to them. Brazil does not import a high volume of foodstuffs.

Andy Xie claims that emerging economies must stop hot money by any means, regardless of free market dogma. He believes that emerging economies must increase interest rates decisively to cool inflation and asset bubbles. They must avoid powerful price inflation as an extension of the commodity price rise, the failsafe USDollar hedge mechanism. However, by lifting interest rates and bond yields, Brazil slows the credit flow internally while attracting even more foreign hot money. Thus the tax by Brazil on speculative funds in arbitrage. What the USFed has done is export extreme conditions in heavy seas from which emerging economies must negotiate in their own monetary policy waters. THEY ARE MOTIVATED TO REPLACE THE USDOLLAR, TO KICK OFF A NEW GLOBAL CURRENCY, AND TO BOOT THE UNITED STATES INTO THE THIRD WORLD IN THE ULTIMATE IRONY. The path will become clear over time, as the Eastern Alliance movement is well along, gathering new participants. Brazil will eagerly join the core nations of Germany, Russia, and China. See the Andy Xie article on the Chinese Caing website (CLICK HERE).