Currency War

The Economic Collapse

Are you ready for a currency war? Well, buckle up, because things are about to get interesting. This week Japan fired what is perhaps the opening salvo in a new round of currency wars by publicly intervening in the foreign exchange market for the first time since 2004. Japan's bold 12 billion dollar move to push down the value of the yen made headlines all over the world. Japan's economy is highly dependent on exports and the Japanese government was becoming increasingly alarmed by the recent surge in the value of the yen. A stronger yen makes Japanese exports more expensive for other nations and thus would harm Japanese industry.
But Japan is not the only nation that is ready to go to battle over currency rates. The governments of the U.S. and China continue to exchange increasingly heated rhetoric regarding currency policy. In Europe, there is growing sentiment that the euro needs to be devalued in order to help European exports become more competitive. In addition, exporters all over the world are already loudly complaining about the possibility that the Federal Reserve is about to unleash another round of quantitative easing. Virtually all major exporting nations want the value of the U.S. dollar to remain high so that they can keep flooding us with lots of cheap goods. The sad reality is that our current system of globalized trade rewards exporting nations that have weak currencies, and many nations have now shown that they are willing to take the gloves off to make certain that their national currencies do not appreciate in value by too much.
Some nations have been involved in open currency manipulation for some time now. For example, Singapore is well known for intervening in the foreign exchange market in order to benefit exporters. Also, the Swiss National Bank experienced losses equivalent to about 15 billion dollars trying to stop the rapid rise of the Swiss franc earlier this year.
But as we race toward the end of 2010, currency manipulation is becoming a major issue on the world stage.
Rumors that the Federal Reserve is considering a substantial new round of quantitative easing is already causing many major exporting nations around the world to howl in outrage.
Why?
Well, quantitative easing by the Federal Reserve could put substantial downward pressure on the value of the dollar and that would make exports significantly more expensive in the United States. The reality is that even a relatively small change in the value of the U.S. dollar can have a major impact on exporters.
But what could really set off a massive currency war is the ongoing dispute between the U.S. and China.
For years, China has kept the value of their currency artificially low. Even though China has made a few small moves toward a more free-floating currency policy, at this point China’s currency is still pretty much pegged to the U.S. dollar. It is estimated that the Chinese government is keeping China's currency at a value about 40 percent lower than what it should be. This is essentially a de facto subsidy to China's exporters.
This has enabled China to flood the United States with cheap goods and it is killing entire industries in the United States. Americans have loved rushing out to Wal-Mart to get super low prices on all kinds of stuff, but in the process we have slowly but surely been shipping our manufacturing base and our standard of living over to China.
In recent years both the Bush administration and the Obama administration have been whining about this currency manipulation by China, but both administrations have stopped short of taking any real action.
But are there now signs that the Obama administration is going to get serious and start a currency war?
Well, last week Barack Obama did send the head of his national council of economic advisers, Larry Summers, to Beijing to discuss currency issues.
But what can we do other than whine at this point?
Are we willing to start a trade war?
Considering the fact that China holds nearly a trillion dollars worth of U.S. Treasuries, that probably would not go so well for us.
Even though China's currency manipulation is absolutely raping the U.S. economy, China has so much leverage over us at this point that it isn't even funny.
For example, China has almost a complete and total monopoly on rare earth elements. If China totally cut off the supply of rare earth elements, we would have no hybrid car batteries, flat screen televisions, cell phones or iPods. Not only that, but rare earth elements are used by the U.S. military in radar systems, missile-guidance systems, satellites and aircraft electronics.
But something has to be done. Essentially we are caught between a rock and a hard place.
Today, the United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States.
Last month, the monthly trade deficit with China was approximately 26 billion dollars. For the year, the trade deficit with China will be somewhere in the neighborhood of 300 billion dollars or so. The transfer of wealth to China that represents is absolutely mind blowing.
The U.S. economy is getting poorer and the Chinese economy is getting richer each and every month.
We are in decline and China is on the rise. In fact, one prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.
This would not have ever happened if we had not put up with China's open and blatant currency manipulation all this time.
But now they have us over a barrel and standing up to China would be incredibly painful for the U.S. economy in the short-term.
So will we actually see a currency war break out soon?
Well, it seems almost a certainly that countries throughout the world will continue to manipulate their currencies in order to gain a competitive advantage, but if you are waiting for the Obama administration to truly stand up to China you are probably going to be waiting for a very, very long time.

theeconomiccollapseblog.com

Going Out with a Bang: Americans Using Credit Cards They Can’t Pay Back

Mac Slavo

As usual, Schiff is a bull on gold and precious metals commenting that silver "is going a lot higher." Though he didn’t have a specific number in mind, he sees a likely and continued uptrend that can reach levels much higher than where it is today. "I think silver is going to go, ultimately, fifty dollars an ounce, a hundred dollars an ounce, who knows how high it can go?" forecasts Schiff.
When asked what sort of time frame he expects for silver to reach these levels, Schiff’s response closely mirrors our own view on when we can expect a significant move in precious metals and other essential commodities like food and energy:

It could happen very soon. It all depends, I think, on when you really have a collapse in the dollar. I think the dollar index, which is trading a little bit above 80, I think it’s headed down to 40. Whether it gets there in two years, three years, I don’t know. It just depends on when the world wakes up and figures out what’s going on. I mean the United States right now is completely powerless to prevent runaway inflation.

It is our view that not only have the major powers in the world like China, Russia and Europe woken up, but they are very well aware of what is going on. The Europeans, whose banks are closely allied with those in the United States may get slammed just as hard as US banks. And the Dollar and the Euro could very well see the same fate over the course of the next decade, which, in our view, would essentially be a complete destruction of their value in terms of buying power.
The Chinese and Russians, who are not as exposed to US and European financial problems from the banking side, are likely biding their time. We often hear that we have global collaboration in geo-politics, economies and finances, but make no mistake, China and Russia have no interest in seeing America succeed. At some point in the future, the Chinese are going to pull the plug on buying our Treasuries - their purchases are already down 10% year-over-year as of July 2010 - and when this happens we can expect other countries to follow. There will be a rush to the exits by Central Banks and institutional investors across the world as everyone holding any kind of US paper is going to be selling.
It is at this time that the US "bailout bubble," a term coined by trend forecaster Gerald Celente, or as financier George Soros refers to it, " the super bubble," will burst. Interest rates will sky rocket and the US dollar will collapse.
Why would China do this if they know that this would have a significant negative impact on their own economy? Because they are patient, that’s why. The Chinese powers-that-be are willing to take a short-term, multi-year hit to their economy, no matter how badly their people are affected if the end result will be a downfall of the world’s current super power. If you haven’t guessed by now, this is a global war being fought on multiple fronts over many generations.
The Chinese know where we’re headed, as do the powers that be here in the US, as we described in our recent article assessing Timothy Geithner’s recent comments to the Wall Street Journal.
In fact, not only do those in the top echelons of government and finance understand what is happening, according Peter Schiff it is clear that even consumers know the end game:

You definitely want to stay away from Mastercard - any company that’s leveraged to the US consumer. Remember, one of the reasons so many Americans are using Mastercard is because they’re putting their food on it, they’re putting their basic necessities on it.
I think a lot of Americans are so willing to use their credit cards because they’re so far in debt, they know they’re broke, and they might as well go out with a bang. A lot of people have no intention of paying back the money that they’re using whether it’s Visa or Mastercard.

As above, so below. It’s clear that maxing out debt on all levels is the strategy of the day (decade?) in America. The government is spending so much money, and pulling forward so much time and energy yield from our children, grandchildren and great-grandchildren that it is simply impossible to ever pay back our national debt without inflating the dollar. In other words, it is a mathematical impossibility for us to ever pay back what we owe in real US dollar terms. The only way to do it is to print more money and pay off debt with dollars that are worth less.
US consumers, already getting hit hard with permanent job losses that are never coming back, wage decreases, and depreciating real estate prices, understand that with their current debt load, most will never be able to pay back the money they owe. So, instead of defaulting on their debt with available credit remaining on their cards, they’ve decided to max out those cards before they stop paying.
This author has personally witnessed two separate instances of just this phenomenon. A close friend and Citibank credit card holder recently saw a rate increase from roughly 10% to 29.99% on their existing balance. Already running on a tight budget, his payment increased from a monthly $150 per month to over $400 per month. Our friend, rather than simply stopping his payments because he was no longer able to afford them, promptly took his Citibank card to a local outdoor goods store, purchased several thousand dollars worth of guns, ammunition, and camping gear. He never made another payment. That’s a $20,000 delinquency on Citibank’s books - and that debt will never be collected. We can talk about the ethics and morality of this move, but that is irrelevant at this point. Tens of thousands, perhaps millions, of Americans are doing exactly the same thing with credit cards and home loans.
Eventually, the US government itself will follow. This is the reason for why we recommend hard assets - because your paper currency will be worthless.
Watch Peter Schiff on CNBC September 13, 2010:

www.SHTFplan.com

Wampum

Don Stott

When the Pilgrims landed at Plymouth in 1620, they eventually made contact with the Indians, and further on, began to trade with them. The Indians loved the white man's guns, clothes, and other then civilized things the Indians had never thought of, but to which took an immediate liking. The Pilgrims had brought with them some silver and gold coins, but the Indians had no use for them, as they had their own silver and gold mines, and even offered to show the Pilgrims where they could find some gold.
Indians were great hunters, and the Pilgrims wanted their furs and pelts to take back to England to sell at a profit, and the Indians had plenty of that, but wanted what the white man had. The Colony was supposed to show a profit for its investors, and trade was the only possible way to show one, which meant developing a system of 'money' for trade. In 1624, the Dutch trading agent Isaac de Rasiere introduced the Pilgrims to wampum, the white and purple shell beads that quickly became the medium of exchange in New England and revolutionized trade with the Indians. By the early 1630s, Plymouth had established a series of trading posts that extended all the way from the Connecticut River to Castine Maine.
Wampum consisted of strings of cylindrical beads made from either white periwinkle shells or the blue portion of quahog shells, with the purple beads being worth approximately twice as much as the white beads. To be accepted in trade, wampum had to meet scrupulous specifications, and both the Indians and the English became expert at identifying whether or not the beads had been properly cut, shaped, polished, drilled, and strung. A fathom of wampum contained about three hundred beads, which were joined to other strands to create belts that varied between one and fine inches in width. When credit became difficult to obtain from England during the depression of 1640, (there have been over a hundred 'depressions' since then), the colonies eased the financial burned in New England by using wampum as legal tender. The Indians had provided the English with what became an American way of doing business!
Wampum no longer exists as legal tender, but believe it or not, old wampum beads have become extremely collectible! Many years later, the Indians realized that wampum was merely beads, with gold and silver being the real valuables. They simply took millions of beads and discard them, threw them into the ocean, or even buried them. Today, on rare occasions, three hundred year old wampum beads can be found by beachcombers, and they are highly collectible. What all this proves, aside from a note on American history, is that what is scarce is valuable, in this case, wampum beads. There is a finite supply of Model A Fords, Tiffany lamps, gold and silver. Trees can grow, and paper money can be printed from paper made from trees, ad infinitum. As GM is now about to prove, millions of stocks can be printed, diluting the value of those already held. Banks create dollars by making loans of them, which dollars have been created out of thin air. Gold and silver do not grow on trees, nor can they be created out of thin air. People around the world are beginning to realize the self worth of gold and silver, and are buying it in ever increasing amounts. The entire world is scared, and especially of government created paper wampum. Eventually, due to their desirability and availability, gold, silver, Model A Fords, and Tiffany lamps, will continue their ascendancy in paper money prices, even though they are exactly the same Model A Fords, Tiffany Lamps, gold and silver. This is why my son and daughter, and myself deal in actual, historic, valuable, beautiful, eventually scarce, gold and silver.

www.coloradogold.com

Fed "Tap Dances On A Land Mine"

Tyler Durden

John Williams Sees The Onset Of Hyperinflation In As Little As 6 To 9 Months
John Williams, arguably one of the best trackers of real, unmanipulated government data via his Shadow Stats blog, has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today. With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the Fed doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams’ argument? Read on. Incidentally, even if some fellow bloggers disagree with Mr. Williams’ assesment, we believe it is in our readers’ best interest to have them make up their own mind on this most critical economic development.

Summary Outlook
Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable
Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years. Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt. When that land mine explodes - probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background. The general outlook is not changed.

U.S. Economy
Already the longest and deepest economic contraction of the post-World War II era, the current downturn in the U.S. economy is re-intensifying, with no near-term stability or recovery on the forecast horizon. After an initial plunge, broad-based business activity bottom-bounced at a low-level plateau for more than year. Shy of short-lived bumps in activity from stimulus measures, there has been no recovery. Reflecting an intense real (inflation-adjusted) annual contraction in broad systemic liquidity (SGS-Ongoing M3 estimate), the economy has started to contract anew. In the popular media, where the hype of a recovery-at-hand readily was accepted, the renewed downturn already is being called a "double-dip," but underlying reality is that of an extremely protracted, deep and ongoing contraction. If there is a double-dip, it is in the combination of the two major economic downturns of the last decade (see graphs).

Structural problems tied to lack of real consumer income growth - and worsened now by a credit-intensified contraction in consumer liquidity - pushed the economy into recession by early 2007, almost a year before the officially-clocked onset of December 2007. Such helped to trigger the credit collapse, which exacerbated the unfolding downtown and threatened systemic collapse. Despite extraordinary efforts to prevent a failure of the banking system, the structural consumer liquidity issues have not been addressed. Until they are, sustainable growth in U.S. business activity will be lacking.

The current contraction likely will meet my definition of depression (a greater than 10% real decline in peak-to-trough activity). In response to a likely hyperinflation, the current circumstance would evolve into a great depression (a greater than 25% real decline in peak-to-trough activity). Ongoing contractions in the world’s largest economy have sharply negative implications for global economic growth, but the hyperinflation risk for the United States likely will not spread to the more-stable major U.S. trading partners.

U.S. Inflation
Risk remains exceptionally high in the next six-to-nine months for a combination of massive U.S. dollar selling and heavy Federal Reserve monetization of Treasury debt to boost inflation, and to open the early stages of a U.S. hyperinflation. As discussed in the Hyperinflation Special Report, runaway inflation is a virtual certainty by mid-decade.

Defining inflation (deflation) in terms of annual change in the prices of consumer goods and services, consumer prices currently are about as contained as they have been since before the financial crises began to break in 2007, even as measured by the SGS-Alternate CPI measures. Tied to wild swings in oil and related gasoline prices, the CPI began to pick-up sharply in 2008, as oil prices soared, but prices then retreated to a period of short-lived official deflation in 2009, as oil prices collapsed. The current "contained" circumstance will not last, and the problem ahead very likely is not going to be deflation, partially because the Fed has indicated that it will act to prevent deflation, and it has the ability to do so.

First, though, again, as point of clarification, I define inflation in terms of changes in consumer prices, not in terms limited purely to changes in money supply growth (annual broad nominal growth is negative), nor in terms of asset inflation or deflation (a stock market crash does not necessarily lead to contracting consumer prices).
A sharp annual contraction in money supply, as seen at present in annual M3 (the SGS-Ongoing M3 estimate) legitimately can and has raised fears of deflation. Federal Reserve Chairman Bernanke has noted (see his 2002 comments in the Hyperinflation Special Report) and effectively confirmed in his recent Jackson Hole, Wyoming speech that a central bank in conjunction with its central government always can debase its currency (create inflation) in order to prevent deflation.

A central bank indeed can do that, if it so desires. The quantitative easing undertaken by Japan never was designed to debase the yen. Similarly, Mr. Bernanke’s quasi-effort at dollar debasement in the trillion-dollar-plus expansion of excess bank reserves was aimed specifically at banking system stability, not at creating inflation, per se. The deflation fight, though, is at hand and will be discussed further in the Systemic Stability section.

Current projections on the federal budget deficit, U.S. Treasury funding needs, banking industry solvency stress tests, etc. all have been predicated on some form of economic recovery. There is and will be no recovery for the foreseeable future; and the negative implications of that for U.S. funding needs and for systemic stability should act as eventual triggers for massive dumping of the U.S. dollar. Those circumstances also should lead to funding difficulties for the U.S. Treasury, putting the Federal Reserve in the position as lender of last resort to the Treasury. Such lending would be direct monetization of U.S. Treasury debt, which would feed directly into the money supply.

Actions already taken by the Fed and the U.S. Government in the ongoing crises have pushed major U.S. lenders to the brink of abandoning the U.S. dollar as the world’s reserve currency, and to the brink of dumping dollar-denominated assets. Keep in mind that a weak U.S. dollar can be extremely inflationary, particularly when dollar-denominated oil prices rise in response to such weakness, as has been seen in the last several years.

Systemic Stability
Threatened with systemic collapse at the time of the 1987 stock crash, then-Federal Reserve Chairman Alan Greenspan began serious efforts to forestall an eventual day-of-reckoning for the economy and financial system, through encouraging massive debt expansion, with leverage built upon leverage. As the economy faltered in early 2007, the system began to fall apart. The financial system did face collapse, and the Fed and the U.S. government did all in their powers - spent whatever money they thought they had to - to prevent it. A systemic collapse would have represented a complete functional failure of the U.S. government and the Federal Reserve. Such had to be, and still has to be, avoided at all costs, as far as the government and Fed are concerned. The big problem is there are no viable solutions.

The federal government effectively is bankrupt, unable to meet its long-range obligations or even to cover physically its annual shortfall in operations (see the Hyperinflation Special Report). Accordingly, the efforts at fiscal stimulus rapidly are approaching their practical limits, the point at which the U.S. Treasury will have difficulty raising needed funds. There are three options open to the government for meeting its impossible fiscal needs: balancing its books, reneging on its obligations or printing the money it cannot possibly raise through taxation.

The option for balancing the books would mean the U.S. government reversing its ever-evolving social-system policies of the last 75-plus years, abandoning the concept of federal government social programs supporting the income, retirement and health needs of the broad public. The economy cannot expand enough, taxes cannot be raised enough and other expenses cannot be cut enough otherwise to balance the books.

Specifically needed are slashing of the Social Security, Medicare and Medicaid programs, as well as the nascent fiscal shortfalls already building up as a result of the healthcare system control recently seized by the federal government. Such change is an extremely unlikely political possibility in the current system and circumstance, which leaves open the general options of government default on its obligations or government printing of money to meet its obligations. The latter option is the usual and likely one to be taken.

With no easy or politically-practical solutions, the available options all are bad; the choices being made and likely to continue being made are aimed at delaying systemic turmoil as long as possible. Ironically, it likely will be the efforts at saving the system that push the system into its ultimate day-of-reckoning in a hyperinflationary great depression. The general background material provided in the Hyperinflation Special Report again is referenced here, as I do not want to get overly repetitive with key points of the broad picture.

Consider, though that the "quantitative easing" entered into by the Fed had minimal impact on the money supply, as it involved mostly the purchase of mortgage-backed securities, with the created excess bank reserves being deposited with Fed, earning interest. As result, bank lending into the normal flow of commerce has been in contraction, and the broad money supply has followed. Now the Fed is considering the possibility of inducing banks to lend, by cutting the interest rate it pays on reserve balances.

The Fed’s primary function - as a private corporation owned by commercial banks - is to protect the banking system. Supporting economic growth and containing inflation are secondary concerns, but the renewed economic threat now also can shatter the fragile appearance of banking-system stability. Indeed, the banking system is far from stable, which is one reason lending is down.

Separately, a number of states will need financial bailouts, insolvent pension funds will seek government backing, the unemployed will be looking for greater support, etc., and all these pressures will be on top of a renewed decline in federal tax revenues. The most likely course of action here remains ongoing efforts to spend or create whatever money is needed to keep the system from collapsing. Where the options are for devil’s choices, the one that buys the most time and is least politically painful usually is the one chosen.

Greenspan abandoned the U.S. dollar for a while following the 1987 stock crash. The dollar and foreign investment likely will become secondary concerns for political Washington against a U.S. populace looking to kick out the political miscreants - both sides of the aisle - who have lead the U.S. system into this crisis over decades. The ultimate cost in domestic inflation will be horrendous.

What does this mean for US financial markets? (take a wild guess)

In these circumstances, the financial markets likely will be highly unstable and volatile. Looking at the longer term, strategies aimed at preserving wealth and assets continue to make sense. For those who have their assets denominated in U.S. dollars, physical gold and silver remain primary hedges, as do stronger currencies such as the Canadian and Australian dollars and the Swiss franc. Holding assets outside the U.S. also may have some benefits.

Shadow Stats

Holdren uses free market to get back to stone age

Jo Nova



Sept 17, 2010
Nearly 40 years ago John Holdren (now “science” advisor to Obama) wrote a book with the infamous Ehrlichs. In the “recommendations” at the end of 1973 book Human Ecology: Problems and Solutions, they said: “A massive campaign must be launched to restore a high-quality environment in North America and to de-develop the United States”.
It’s a weird use of the word. But there is no mistaking “de-develop”: to undo development, to go backwards, to get rid of advances…
And it was hardly a juvenile slip of the tongue; 37 years later, all this time passes, and when asked about that passage he acknowledges it’s still on his agenda:

“What we meant by that was stopping the kinds of activities that are destroying the environment and replacing them with activities that would produce both prosperity and environmental quality. Thanks a lot.”
CNSNews.com then asked: “And how do you plan on implementing that?”
“Through the free market economy,” Holdren said.

Just imagine what twisted, sicko “free market” would freely choose to do some de-developing?
Holdren’s version of freedom is just another grand control scheme: “Let me tell you how to live”. “Free market” has become the false advertising banner of the totalitarians. A market is not free if you have to coerce people or jail them into joining the market.

“De-development means bringing our economic system (especially patterns of consumption) into line with the realities of ecology and the global resource situation,” Holdren and the Ehrlichs wrote.
“Resources must be diverted from frivolous and wasteful uses in overdeveloped countries to filling the genuine needs of underdeveloped countries,” Holdren and his co-authors wrote. ”This effort must be largely political, especially with regard to our overexploitation of world resources, but the campaign should be strongly supplemented by legal and boycott action against polluters and others whose activities damage the environment. The need for de-development presents our economists with a major challenge. They must design a stable, low-consumption economy in which there is a much more equitable distribution of wealth than in the present one. Redistribution of wealth both within and among nations is absolutely essential, if a decent life is to be provided for every human being.”

There are plenty of world-peace-type-problems to discuss. But the mindset that thinks 1973 USA was “overdeveloped”, and that development itself is the problem is two dozen beers short of a slab. If people are unfed, sick, or homeless then problem is not the development, but that the development is only half done.

Populations can’t keep growing exponentially, sure. But the only countries which have got control of their population surge are the ones which developed.
Read the whole report on CNS.
H/t Climate Depot (see also John Holdrens Ice Age Warning in 1971)
The man just wants to stop everyone else flying around in planes, having fun:

In their 1971 chapter, Holdren and Ehrlich speculate about various environmental catastrophes, and on pages 76 and 77 Holdren the climate scientist speaks about the probable likelihood of a “new ice age” caused by human activity (air pollution, dust from farming, jet exhaust, desertification, etc.).

He also wrote that trees ought to be able to sue in court…

Giving “natural objects” — like trees — standing to sue in a court of law would have a “most salubrious” effect on the environment, Holdren wrote  the 1970s.
“One change in (legal) notions that would have a most salubrious effect on the quality of the environment has been proposed by law professor Christopher D. Stone in his celebrated monograph, ‘Should Trees Have Standing?’” Holdren said in a 1977 book that he co-wrote with Paul R. Ehrlich and Anne H. Ehrlich.

If you met him at the pub, he’d be the guy you might egg on just for sake of a good dinner party anecdote to use after the fact, but he’s not just the nutter at the bar, he’s one degree of separation from the The Leader of The Free World.