Archive for November, 2009
The many parallels between 1924 Germany and present-day United States are
cause for concern. Though the U.S. has not yet reached the depths to which
Germany descended in that era, few can look at the constant depreciation of
the dollar since the early 1970’s and fail to be alarmed. It seems contemporary
America differs from 1924 Germany only in the duration between cause and effect.
While the German experience was compressed over a few short years, the effects
of the American inflation have been more drawn out.
By Sandrine Rastello and Kim Kyoungwha
Nov. 3 (Bloomberg) — The International Monetary Fund sold 200 metric tons of gold to the
Reserve Bank of India for about $6.7 billion, its first such sale in nine years.
The transaction, equivalent to 8 percent of global annual mine production, involved daily
sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said
in a statement yesterday. The average price to India, the biggest consumer, was about
$1,045 an ounce, an IMF official said on a conference call. Gold for immediate delivery gained
“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their
portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public
Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.”
The IMF sale accounts for almost half the 403.3 tons that the Washington-based lender in
September agreed to sell as part of a plan to shore up its finances and lend at reduced rates
to low-income countries. Asian nations, which have amassed stockpiles of foreign currency
reserves since the 1998 financial crisis, have shown increased interest in diversifying out of
U.S. assets as the dollar loses value against other currencies.
Gold for immediate delivery gained to $1,061.60 an ounce at 3:42 p.m. in Singapore and was
about $9 below its record $1,070.80 an ounce reached Oct. 14.
“The most important thing is that people want gold even at these prices,” said Ghee Peh,
head of mining research, with UBS AG in Hong Kong. “There’s good support for prices for now”
from the IMF’s disposal of bullion, he said.
Proceeds from the sales and other IMF resources as well as individual contributors would help
pay for discounted interest rates on loans to low-income countries, the IMF said in July. It
plans to grant as much as $17 billion in extra loans to poor nations through 2014. The 403.3
tons the IMF agreed to sell amount to one-eighth of its stockpile.
“This transaction is an important step toward achieving the objectives of the IMF’s limited
gold sales program, which are to help put the fund’s finances on a sound long-term footing
and enable us to step up much-needed concession lending to the poorest countries,” IMF
Managing Director Dominique Strauss- Kahn said in an e-mailed statement.
The gold purchase was done as part of Reserve Bank’s foreign exchange reserves
management operations, the central bank said in a statement on its Web site today.
India’s foreign-exchange reserves advanced $684 million to $285.5 billion in the week
ended Oct. 23, the central bank said Oct. 30. That included foreign-currency assets
of $268.3 billion, gold reserves of $10.3 billion and the special drawing rights with the IMF.
“There seems to be consensus among the central banks that it’s better to cut down on
currency holdings and diversify into assets like gold, which has upside potential,” Krishna
Reddy, a precious metal analyst at Way2Wealth Commodities Pvt. said in Mumbai. “The
Reserve Bank of India gold purchase is a clear reflection of this belief.”
China, the world’s biggest gold producer, has increased reserves of the metal by 76 percent
to 1,054 tons since 2003 and has the fifth-biggest holdings by country, Hu Xiaolian, head
of the State Administration of Foreign Exchange, said in April.
The nation may purchase some of the 403.3 tons of gold being offered by the IMF, Market
News International reported in September, citing two unidentified government officials.
The lender has said it is ready to sell directly to central banks and later make transactions
on the open market if necessary. The IMF official declined to say yesterday whether other
central banks have expressed interest in purchases.
The IMF, which helped shore up economies from Pakistan to Iceland over the past year,
has sold gold on several occasions. The last transaction was authorized in December
1999 and took place off-market between then and April 2000.
“Gold production has been declining for the past seven years, while demand, particularly
the investment demand has been growing steadily,” Way2Wealth’s Reddy said. “Central
banks and even ordinary investors want to own more gold.”
Gold is now the only market that reached new highs. It is a quiet bull.
Every major bull market has 3 phases. The first phase of a bull market is the
accumulation phase. It’s an early phase when informed investors accumulate
the item because it is underpriced. The second phase of a bull market,
usually the longest phase, involves the funds, the pro-s, and smart money to
take positions. This phase is characterized by many abrupt reactions and corrections
that cause the public to dump. The third phase of a bull market is the speculative
mania phase, when we see sharply rising volume as the public enters the market and
Wall Street “experts” start hyping gold. Gold had the manic phase in 1977-1980.
I believe we are currently in the second phase of the gold bull, about to enter the
third phase. Expect gold to perform like technology stocks in 1999.
By KATHLEEN MADIGAN
About the only bright spot in a U.S. recession is a
shrinking trade deficit. But despite the severe drop in
domestic demand, this downturn has seen only a short-
lived improvement in trade.
The reasons: China and the downsizing of U.S.
manufacturing. As a result, the trade sector is unlikely to
offer much lift to the economy.
There has been some progress. The U.S. gap
narrowed from almost $65 billion in July 2008 to $26.38
billion in May 2009. But improvement is usually larger.
During the mild 1990-91 recession, for instance, the trade
balance briefly shifted into surplus.
Since the summer, the deficit has widened. As reported
Friday, the September trade shortfall rose to $36.47
billion, partly because of rising oil imports but also because
imports overall rose much faster than exports did. The
higher-than-expected trade gap suggests real gross
domestic product grew closer to an annual rate of 3.0%
last quarter, instead of the 3.5% first reported.
Further deterioration could be on the way. On Friday, the
Chinese Commerce Minister said he hoped China’s exports
would grow in 2010. That would mean more shipments to
the U.S., one of China’s biggest markets. China hasn’t
allowed its currency to strengthen much against the ever-
weakening dollar that has made many imports more
expensive. As a result, Chinese imports have dropped
15.6% in the year ended in September, while all U.S.
merchandise imports were down 22.1%. And the U.S.-
China trade gap hasn’t narrowed nearly as much as the
total U.S. trade deficit has.
An increase in imports wouldn’t be worrisome–indeed, it
would be a sign that domestic demand is rebounding–if
the U.S. could expect exports to also pick up. The
problem is that less manufacturing is done in the U.S. So,
while exports may rise as a result of the weaker dollar and
better global growth, the gain won’t be enough to offset
the increase in imports and, consequently, the trade gap
In a research note, Brian Fabbri, economist at BNP
Paribas, said manufacturing is only 13% of U.S. GDP and
all goods production is only 27.8%. Services are where the
U.S. has a comparative advantage, but goods exports are
the area that picks up first as emerging nations invest in
That’s not to say that U.S. companies won’t profit from
the global recovery. But goods carrying U.S. brand
nameplates are increasingly made overseas, or the input
materials are manufactured abroad. That’s good for
multinationals, but not necessarily positive for domestic
production or workers.
It is worth noting one piece of good news for the outlook
within the trade report: Consumer goods imports in the
third quarter barely increased. That suggests retailers are
being true to their word that they were building
inventories cautiously heading into the holiday season in
order to avoid deep discounting.
That strategy looks smart given that consumers are still
quite wary about the economy. The early-November
Reuters/University of Michigan consumer sentiment index
unexpectedly dropped to 66.0, from the final-October
reading of 70.6.
Households were particularly worried about the future,
suggesting another weak gift-giving season this year. But
if retail stocks are already lean, total inventories can’t fall
as sharply as they have in previous quarters. As a result,
the inventory sector could contribute more to fourth-
quarter GDP growth than is now expected.
by C. Fred Bergsten, Peterson Institute for International Economics
Article in Foreign Affairs, Volume 88 No. 6, November/December 2009
Even as efforts to recover from the current crisis go forward, the United States should
launch new policies to avoid large external deficits, balance the budget, and adapt to
a global currency system less centered on the dollar. Although it will take a number
of years to fully implement these measures, they should be initiated promptly both to
bolster confidence in the recovery and to build the foundation for a sustainable US
economy over the long haul. This is not just an economic imperative but a foreign policy and
national security one as well.
A first step is to recognize the dangers of standing pat. For example, the United States’
trade and current account deficits have declined sharply over the last three years, but
absent new policy action, they are likely to start climbing again, rising to record levels
and far beyond. Or take the dollar. Its role as the dominant international currency has
made it much easier for the United States to finance, and thus run up, large trade and
current account deficits with the rest of the world over the past 30 years. These huge
inflows of foreign capital, however, turned out to be an important cause of the current
economic crisis, because they contributed to the low interest rates, excessive liquidity,
and loose monetary policies that—in combination with lax financial supervision—brought
on the overleveraging and underpricing of risk that produced the meltdown.
It has long been known that large external deficits pose substantial risks to the US economy
because foreign investors might at some point refuse to finance these deficits on terms
compatible with US prosperity. Any sudden stop in lending to the United States would drive
the dollar down, push inflation and interest rates up, and perhaps bring on a hard landing
for the United States—and the world economy at large. But it is now evident that it can
be equally or even more damaging if foreign investors do finance large US deficits for
US policymakers, therefore, must recognize that large external deficits, the dominance of the
dollar, and the large capital inflows that necessarily accompany deficits and currency
dominance are no longer in the United States’ national interest. Washington should welcome
initiatives put forward over the past year by China and others to begin a serious discussion
of reforming the international monetary system
Nomi Prins, former managing director at Goldman Sachs, exposes the revolving door
between Wall Street and Washington. This is a must read. Corruption must end
and the system must be restored before we can talk about the new boom and the
end of the crisis in the USA. The crisis is a culmination of what has been going on for
some time – the crony capitalist system and unfair profits for Wall Street at the expense
of the real economy. By perpetuating the same system that has led to the crisis, the
collapse will only deepen. This economic crisis cannot be solved by printing money;
the financial system must be reformed and the corruption must end.
JH: Now, we hear a lot about the little people’s irresponsibility
in all this — in the collapse. They took on more debt than they could sustain,
they thought the good times would roll forever. You argue this was never about
the little guy, right?
NP: Neither the crisis, nor the bailout was about the little guy. Former
Treasury Secretary Henry Paulson was explicit in stating several times,
and in several ways, that the government should not be bailing out homeowners
who got in over their heads. And true to those sentiments, it didn’t. Instead, amidst
trillions of dollars of subsidies to the industry were made available in the most original
and creative of ways, and no heed was paid the jointly humane and economical solution
which would have been to find ways to restructure personal mortgages and loans,
as opposed to dumping buckets of money over the top layers of the financial community
and promising it would somehow trickle down and loosen credit for the “little guy.”
The people that blame the Community Reinvestment Act for the avalanche of
predatory lending are missing the true numbers that represent the situation.
Only $1.4 trillion worth of subprime loans were extended between 2002 and 2007.
On the back of those loans, the industry created $14 trillion worth of various types
of assets and borrowed up to 10 times that amount using those new assets as collateral.
If the government had wanted to help homeowners and contain the costs of the bailout,
it could have subsidized underwater mortgages directly at the loan level, or made it mandatory
for banks to renegotiate credit terms or mortgage balances with individuals, as opposed to
making it a mild suggestion that the banks have no incentive to follow.
For the money spent on subsidizing the industry, the government could have bought
out every single outstanding mortgage in the country. Plus, every student loan and
everyone’s health insurance. And on top of that, still have trillions of dollars left over.
That’s why I get so enraged at the bizarre notion that a 10-year, $900 billion health
care option is somehow egregious and government interfering with our lives. We should
all take $90 billion a year to sustain our health and access to health care over lavishing
trillions on the banking system any day, no matter what our political party affiliation is.
In case you failed to catch it in our previous articles this year, we thought we’d state it
outright for our readers this month: the United States Government is on a trajectory
to default on their obligations. In its current financial condition, it will not be able to
fund its forecasted budget deficits and unfunded Social Security and Medicare promises
on top of its current debt obligations. This isn’t official yet, and we don’t know when
the market will react to it, but there is no longer any doubt about the extent of their
trajectory. There simply isn’t enough taxing power, value creation or outside capital
willing to support its egregious spending.
Stating the obvious may be construed by some as fear mongering, ‘talking up our book’
or worse, but our view is not as severe as you might think. In the Federal Reserve Bank
of St. Louis’ Review from July/August 2006, Lawrence Kotlikoff stated that “partial-equilibrium
analysis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will
be unable to pay its creditors, who, in this context, are current and future generations to
whom it has explicitly or implicitly promised future net payments of various kinds.” 2 He
went on to suggest that the US should immediately close the Social Security program to
reduce future liabilities (could you imagine?), use a voucher system for Medicare to limit
costs, and replace personal, corporate, payroll and estate taxes with a single federal sales
tax. All this, published in an article from 2006, well before the credit crisis and subsequent
meltdown had even begun!
Three years later, the financial condition of the US government is completely untenable.
The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars.
How on earth does anyone expect them to raise this capital? As we stated in a previous
article, in order to satisfy US capital requirements, all existing investors would have had
to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however,
only increased their purchases by a mere 28% from September 2008 to July 2009 – far
short of what the US government required.4 The US taxpayer can’t cover the difference
either. According to recent estimates, tax revenue from all sources would have to increase
by 61% in order to balance the 2010 fiscal budget. Given that State government income
tax revenues were down 27.5% in the second quarter, the US government will be lucky
just to maintain its current level of tax revenue, let alone increase it.
The bottom line is that there is serious cause for concern here – and don’t be
fooled into thinking this crisis will fix itself when (and if) the economy recovers.
Just how bad is it? Below we outline the obligations of the US Federal Government
from 2004 to 2009. We present two sets of numbers, as government accounting
can vary widely depending upon the source. In column A, we outline the
Total US government Obligations, using actuarial reports from the Social
Security Administration and the Medicare Trustees Reports. In column B we identify
Total Federal obligations according to GAAP accounting provided by Shadow Government
Statistics, calculated on a US fiscal year end basis with estimates for 2009. The
differences in the absolute amount of total obligations ($114.7 trillion vs. $74.6
trillion in 2009) are a function of timing, the calculation timeline for Social
Security and Medicare, and other obligations included under GAAP rules.
Either way we choose to calculate it, the total number is preposterously large.
From 2004 to 2009, US unfunded obligations increased by an average of almost 50%
over this six year period under both calculation methods, while US government
revenue increased by only 12%.6 No company or government can increase its liabilities
by more than four times the rate of its revenue and stay solvent for an extended period of time.
DOLLAR CRISIS IN THE MAKING
By W Joseph Stroupe
Increasingly ominous clouds are gathering in what could soon be the perfect storm against
the United States dollar and against the present dollar-centric global financial order.
This is not shaping up to be a storm that anyone is trying to initiate, not even those who
are actively driving for a new global financial order that is no longer centered on the dollar.
Instead, it will result from a correlation of forces arising out of the deepening global financial
and economic crises, coupled with recurring and conspicuous miscalculation on the part of
some of the world’s political, financial and economic leaders.
The storm has the potential to cause upheaval on a grand scale, opening the door to swift,
and largely uncontrolled, fundamental transformation.
As is widely recognized, the present financial order that is inordinately reliant on the US
dollar must some day give way to a new order that is more balanced, stable, resilient and
reliable, one that is based on multiple currencies and that therefore won’t be plagued by
the extremely dangerous structural drawback of an increasingly worrisome elemental single
point of failure (the dollar).
But if the current dollar-centric financial order should become more seriously shaken than
it already has been, perhaps even suffering a collapse, as a casualty of the present deepening
global crisis, then the transition to any new global financial order is most likely to be disorderly,
disruptive and unmanageable rather than gradual and orderly.
We can hope – but cannot be at all confident – that world leaders and global investors will
act coherently, cohesively and intelligently enough in this crisis so as to ensure that the
policies and actions being undertaken will not put at further serious risk the fundamental
structure of the current dollar-centric financial order, and that they will instead be effective
in bolstering deteriorating global confidence in the present order and in the safety of the dollar,
at least until we get through this crisis.
Unfortunately, we cannot be confident that world leaders know what they are doing in
seeking to resolve the crisis. Are their measures attacking the heart of the problem, or
only its periphery? Are they exacerbating the crisis, either by enacting certain misdirected
measures, or by failing to enact certain required measures? Are they setting up conditions
that make a dollar crisis and radically increased financial upheaval virtually inevitable,
by blindly pushing ahead with a simplistic agenda of trying to spend their way out of the
If the dollar is being put at significant short- and medium-term risk by such measures,
then we’re seriously risking plunging the global financial order into a depth and breadth
of transition that we cannot adequately control.
This chart says it all… The Fed has an objective to promote economic growth
with moderate inflation. Since their birth in 1913, they achieved periodic severe
economic crises with much less growth and a whole lot more inflation. The
dollar lost 97% of it’s purchasing power.
Option Arms resets wll start to accelerate some time in the Spring of 2010,
most likely causing another leg of the credit crisis in the Fall of 2011.
Credit Suisse (CS) estimates that the resets will begin to accelerate next
spring, rising from about $4 billion resetting in March 2010 to a peak of $14 billion in
September 2011. The current level is about $1 billion. About $500 billion of option
ARM loans are outstanding, according to the bank. “Things have gotten pushed out,”
says Chandrajit Bhattacharya, director in U.S. Mortgage Strategy for Credit Suisse.
“Right now it looks like the big increase is probably going to be somewhere toward the
middle of next year.”
Option ARMs typically reset after five years, at which point the monthly bill increases
65% or more. About 37.5% of option ARMs originated in 2005 are still outstanding, 63%
of the 2006 vintage are outstanding, and 82% of the 2007 loans remain, according to
Barclays Capital (BCS). And about a third of the outstanding loans in these years are
In a given month, between 4% and 5% of borrowers who are current on their option
ARMs taken out in 2006 and 2007 default in the following month, says Sandeep Bordia,
Barclays’ head of residential credit strategy, who also expects resets to be delayed until
next year. “These things have been performing horrendously,” Bordia said. “I don’t know
how much of it will last into the recast.”