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The demise of the US dollar.

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#261 Timur


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Posted 20 February 2004 - 07:35 PM

Originally posted by Firoz Ali

So nothing new, just thirteen who didn't understand the purpose of the thread again... ;)
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#262 grob


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Posted 21 February 2004 - 08:11 AM

Well, how about those weapons of mass destruction?

Kay (David Kay, former chief of the US arms search in Iraq) said he now believes that Iraq did not have banned weapons before the war and had probably destroyed them more than a decade ago. John Diamond, USA Today, 2-13-2004

And how many young men died searching for those weapons of mass destruction that now are acknowledged to have NEVER existed? Over 500 young American men & women who will never see their children grow up have given their lives battling a country that did not have banned weapons before the war and had probably destroyed them more than a decade ago.

But let me ask this question.

Was the attack on Iraq ever really about just Saddam & his supposed weapons of mass destruction? And how stupid are we going to suppose our American Intelligence really is? Are we to believe now that this was just a silly & stupid intelligence mistake?

Well, maybe I am naive but I refuse to believe that the decision to conquer Iraq ever was just about dangerous stockpiled weapons. I suppose we just discount the fact that Iraq is home of the worlds second largest oil reserves? Yes, those oil reserves are just a coincidence & their consideration did not have any influence over these war decisions.

And if the decision was simply to remove Saddam & to hand the country back over to the Iraqi people how quickly has that been accomplished? Yes, Saddam was finally found hiding in a hole, but I'd be willing to bet that it will be a long time before the US exits totally out of Iraq & hands the country back over to the Iraqi people.

But really, my intent here is not to weigh whether or not these decisions were right or wrong. But my point here is to define the inevitable future consequences of these actions.

Actually, the entire apparatus of politics that involves what is presently happening in Iraq & that general area I am not even attempting to touch with even a 20 foot pole. What is happening over there is very complicated & I am sure the US objectives are many.

But we can attempt to examine what the long term results will be by becoming more heavily involved in this very volatile part of the world. And how do we sum up simply in an understandable & uncomplicated way what is happening in Iraq today?

We are in the midst of the beginning stages of a long term war involving the interests of the East & the interests of the West. And let me repeat again that we are merely at the beginning of this conflict that will not be solved until either side totally capitulates.

And I sure do not see either side capitulating any time soon if ever.

The earlier world wars of the 20th Century did not begin overnight but the process leading up to those events simmered & stewed for years & years.

And so too events today are simmering.

But again the important point to grasp is that we are in an ever escalating war that is not going to be resolved any time soon. This conflict will involve battles for supremacy over currency, oil & domination of world markets.

Let me recommend here one individual who devotes his life to studying these conflicts today. His name is Richard Maybury & it is really worthwhile subscribing to his newsletter because this fellow does an excellent job studying & examining what is happening politically in the Middle East, Iraq & all these countries that involve the region that Richard Maybury has appropriately termed Chaostan.

But lets remain focused & go over the title of this article again, World War III & Gold.

Remember all the negative articles & negative stories about gold's growing irrelevance just a few years ago? But these negative diatribes against gold came out when the glorious bull market was heading to 100,000 & the worlds only major concern then was who was presently being entertained under the Oval Office.

But those days have changed & our world is changing DRAMATICALLY every day.

Borrowing & spending has been sustaining the US economy for so long that the phenomenon seems utterly unremarkable to most investors. Bill Bonner, Daily Reckoning, 2-12-2004

In addition to learning who Richard Maybury is another smart cookie who is worth listening to regularly is Bill Bonner & his daily commentary. Editor

The Feds flow-of -funds data show that net foreign claims on US assets already are $2.3 trillion, or about 21% of nominal GDP. That total is being added to at a current rate of about $550 billion a year, says Kasriel (Northern Trust economist Paul Kasriel.) Bill Bonner, Daily Reckoning, 2-12-2004

And as the east/west conflict grows so too is the world's positive perception of gold evolving. I know that most folks are hoping for a specific calamity to act as a switch that will trigger a sudden panic buying of gold & gold equities. Will this trigger event ever occur?

It really does not matter if a definitive trigger event ever occurs. We really do not need any sudden dramatic event to draw the world's attention toward gold.

All we really have to do is to just sit back & quietly wait for present circumstances to evolve & to continue to grow in severity.

And in what other ways are world events evolving?

Let me remind folks that the US is no longer a nation whose wealth is measured by its ability to manufacture goods for the rest of the world. But now we have a service based economy & our national wealth is based on these service sector jobs.

Now let's define these wonderful service sector jobs awaiting tomorrow's children?

Wal-Mart has replaced General Motors as the largest employer in America with over 1 million employees where, instead of earning a middle-class wage, workers earn starvation wages of $13,861 a year v a salary that is below the poverty line. Meanwhile, 4 out of the top richest people in America are relatives of Sam Walton, Wal-Marts' founder, and are worth over $100 billion. Representative Bernie Sanders, Daily Reckoning, 2-16-2004

The above data that we just read has always appalled me.

This family is worth over 100 billion but yet their employees are paid scratch & have no benefits. And did you read the documentary a year or so ago about Wal-Mart taking out life insurance policies on their employees so that Wal-Mart can profit when their employees kick the bucket?

And, according to a recent study by the Haas School of Business, 14 million white-collar service jobs, representing 11% of the total US workforce, are in danger of being outsourced overseas. US workers who have been outsourced are not moving into better-paying jobs. Daily Reckoning, 2-16-2004


The above text we just read is heavy so let's read it again.

US workers who have been outsourced are not moving into better-paying jobs.

Let me give another plug here for Bill Bonner & his daily commentary which he writes from little street cafes in France. The man is good & his analysis is right on the mark. His column is very much worth reading daily to get a good picture of what is really going on in the world. Editor

Now let's repeat what was the title to this article? World War III & Gold

Maybe these different events seem unrelated that we have covered so far: unemployment, debt, currency wars, east verses west conflicts, but do not be mistaken on what causes war. All these circumstances we have talked about are creating serious under currents of stress that will only build & intensify as time goes on. And it will be these cascading events that will eventually lead to greater regional & world conflict.

And as all these conflicts gather steam do you still want to believe that gold's role is not also growing in the scheme of things? Continue to make no doubt that gold continues to represent the best investment of this dawning new century.

But let's close by shifting our attention away from gold & on to something of even greater importance.
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#263 grob


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Posted 21 February 2004 - 08:12 AM

The home is the most powerful place on earth. It is the cradle of the soul. Our minds & personalities, our loves & our hates, our fears & our dreams are all molded in the home. It is sheer hubris to think that we are self-made women & men. We learn how to live from other people. We did not develop in a vacuum; we were taught how to function from other people & by no one more so than our parents & our siblings. James Bryan Smith & Rich Mullins, An Arrow Pointing to Heaven, 2000

Some folks do not like it when the topic of conversation shifts to moral issues. And, indeed, there are gold & financial Internet websites that have policies that prohibit writers from discussing ethical & moral issues. But as we have said many, many times before: you can make all the money in the world, but money by itself with no family to share it with really means nothing.

Many of us base our identity on what we do, or how we look, or how much money we have. But none of these form the foundation of our true identity. James Bryan Smith & Rich Mullins, An Arrow Pointing to Heaven, 2000

Actually, my Dad said it best in a letter he wrote me years ago.

My wife & I had just gone through a bit of a spat. That woman walked out on me & headed out the door for 3 weeks without so much as a note to drive her point across. And I never quit respecting her for having had the courage to do that at the time. Anyway, after we got our act & our marriage back together my Dad wrote me a letter with his own earthly wisdom. The following is a text from that letter:

I do not measure a man's success by his breadwinning ability but also his success at being a whole man, and being able to command the willing love & respect of his wife & family.

And as you invest for the future be sure to put your family first & your portfolio second.

For a conservative review of precious metals mining stocks & other significant contrarian plays subscribe to Gold Letter Alert. While Gold Letter is dedicated to the gold & silver stocks we have been asked by our subscribers to cover on occasion other contrarian plays as we run across exceptional situations.

It doesn't hurt to have a little diversity among a portfolio & while our major emphasis will continue to be gold & silver we will also share with subscribers what we consider to be exceptional non mining contrarian plays that we run across via our connections & sources.

What makes many of these issues so attractive is their potential to often generate returns of over 100 times.


Macroeconomic, Geostrategic Analysis of the Unspoken Truth about the invasion of Iraq
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#264 thirteen



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Posted 21 February 2004 - 12:42 PM

The Dollar's Not-So-Scary Swoon
Despite all the angst the greenback is generating, once put into perspective the situation isn't nearly as dire as it seems

The news wires carry the same headline almost every day: The dollar is falling against the euro. Indeed, the greenback is down some 35% compared to the single European currency over the past two years. The buck has also lost ground against the Japanese yen. Advertisement

That's sowing concern around the world. The potential peril of a dollar crisis caused by America's twin federal budget and current-account deficits was a topic of heated discussion when the world's elite recently met in Davos, Switzerland (see BW Online, 1/26/04, "The Falling Dollar's World of Hurt"). The Bush Administration's apparent policy of allowing a weak currency in an election year, which bolsters the GOP's political fortunes in manufacturing states, is sure to raise hackles when the finance ministers of the world's seven largest industrial countries, the G-7, meet in Boca Raton, Fla., the first week of February.

The main fear is that investors will lose confidence in the dollar, sending U.S. interest rates skyrocketing, disrupting international trade, and risking a global recession. It's not hard to spin out a disaster scenario after the Congressional Budget Office's recent calculation that the federal budget deficit will hit a record $477 billion this year. The accumulated deficit over the next decade could total over $2 trillion, projects the nonpartisan think tank for Capitol Hill.

STILL BUYING AMERICAN. Yet the growing sense that a dollar crisis looms -- while it can't be dismissed -- may be exaggerated. After all, the Treasury market rallied after the CBO issued its gloomy budget forecast. The stock market barely skipped a beat as it rose to levels last reached before the terrorist attack of September 11. The Federal Reserve Board, which employs more economists than any other American institution, held monetary policy steady during its latest Federal Open Market Committee meeting on Jan. 28.

And far from losing confidence in the U.S., foreign investors continue to snap up American assets, including stocks, bonds, and companies -- despite the sell-off following the Fed's decision to gently remind investors that the central bank likely will need to raise rates sometime this year.

The problem with the dollar-disaster scenario is that looking at the greenback through the lens of the euro vastly overstates the decline. The euro's strength largely reflects the European Central Bank's tight monetary policy. The ECB's benchmark interest rate is twice the Fed's, and money sensitive to interest rate differentials is flowing to the Continent.

FURTHER OUT OF BALANCE. The rub is that America's record current-account deficit reflects a world that remains too dependent on the U.S. economy. The faster the U.S. expands, the more imbalanced trade and financial markets may become unless Europe and Japan begin embarcing policies to spur their domestic economic growth.

The dollar actually isn't down all that much compared to a more diverse basket of currencies that matter to American manufacturers and service companies. The Fed's broad trade-weighted dollar index is about 12% lower than its high of about a year ago. Even that drop may be overstated, according to a new report by the global economic and strategy research team at UBS Limited led by chief economist George Magnus.

The UBS researchers created a "current-account-weighted index." The current account captures America's economic relationship with the rest of the world, including trade in goods, services, and investment flows. The UBX index comprises those nations with the biggest impact on the current account: Canada, Mexico, the euro-zone, Japan, Britain, as well as a rough proxy for China (since some of the necessary data aren't available). The result? The dollar had actually risen in value into the end of 2003.

Now, any currency index is crude, and the numbers can be massaged different ways. Still, allowing for some drawbacks, it's clear that the dollar isn't a weak, let alone crisis-prone, currency. What investors should keep in mind is that the greenback's current perceived weakness says far more about politics and economics in Europe and to a lesser degree in Japan than it does about what's going on in the U.S.

Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online
Edited by Beth Belton



The University where I got my masters in economics has more Nobel prize winners currently on staff than Russia has Nobel prize winners LIVING OR DEAD.;) :rolleyes:
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#265 grob


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Posted 23 February 2004 - 11:55 AM

Secrets by Brian Bloom

Come on Mr Market! Talk to me! What secrets are you hiding?

For about two hours I have been scrolling through the monthly charts to get a feel for the big picture. With a contrived mindset of neutralised prejudices, the most significant charts that jumped out at me were the yield charts below.

The 30 year yield chart has been following a constant angle of decline (within various channel lines) since 1989. Ie. The 30 year yield has been in a Primary Bear trend for around 15 years, and there is no sign that this is about to change. (Source: DecisionPoint.com).

Furthermore, as the yield is in the upper quadrant of the channel, the probabilities (based on history) favour a fall rather than a rise from this point.

Posted Image

The 10 year yield has also been travelling in a similarly angled downward pointing channel which began to become recognisable in around 1995. Here also, a case might be made that the 10 year yield could be riding for an imminent fall

Posted Image

Note that the 10 year yield has recently been travelling within a channel that has a steeper angle of decline, and that the yield is being squeezed into the apex of a triangle being formed by the two competing angles of decline, and from which it "might" break down. However, the PMO's break to the upside in mid 2003 supports the view that this yield "might" break up from the apex (within the confines of the shallower decline).

In context of the following chart - which shows very little downside potential for the short yields - it could be further argued that the 10 year yields have a greater chance of breaking up than down.

Posted Image

Whilst the angle of decline of the 3 month T Bill yield has been similar to that of both the 30 year yield and the 10 year yield, the 3 month yield is currently bouncing up off the lower trendline, and the PMO is giving a buy signal (see arrow).

What to make of all this??

Well, of great interest to me is the relative levels of the 30 year and 10 year yields viz 4.953% for the 30 year yield vs 4.098% for the 10 year yield as at February 20th 2004.

The yield differential (the difference between the two) typically implies a built in compensation for inflation. If the 30 year yield is close to the upper boundary of its trendline (implying low potential for further rises unless the Primary Trend reverses to become bullish (bearish for bonds)) - and if both the 10 year yield and the 3 month yield "could" break up from these levels - then, what will start to manifest is a narrowing of the yield differential.

Now, why would anyone invest at (say) 4.5% in BOTH a 30 year bond and a 10 year bond?

There is only one possible reason, and that is that the market is anticipating a decline in inflation, and there is a potential convergence of the "time value" of both 10 year and 30 year money. If inflation goes away, then investors will be indifferent regarding long dated and medium dated Treasury yields. Indeed, it could even be argued that 10 year yields might rise ABOVE 30 year yields in the event that deflation sets in. Let's let our imaginations soar for the moment.

What is the biggest potential risk facing the financial markets at present?

Well, between a possible derivative implosion and a possible debt implosion it's a close call.

But what if
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#266 grob


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Posted 23 February 2004 - 11:57 AM

In short, the most important unanswered question now is : "How are the baby boomers going to continue to support the lifestyles to which they have become accustomed?"

Post Script:

Unfortunately, the above scenario is not supported by the following chart of the oil index:

Posted Image

To my way of thinking, this chart reflects the largest single risk to the world's financial markets.

If the oil price breaks up into new territory - which it could do given the recent PMO buy signal of the oil index - there might very well be a concomitant "panic" down-leg on the equity markets.

Mr Richard Russel is one of the few men alive who have the ability to penetrate all the static and "hear" what the markets are really saying. His PTI appears to have hit a double top, and he has been pointing his readers to a possible topping out of the equities markets and to the flagrant non-confirmation of the Dow Transports of the movement in the Dow Jones Industrial Index.

The above chart might explain why the Transports have been trending southwards. Further, it represents very compelling evidence that the real underlying reason for the attack on Iraq was to neutralise the risk to the world's financial infrastructure.

And it didn't work! The oil price was supposed to fall following the attack on Iraq. That, after all is said and done, is what Mr Rupert Murdoch actually said in an interview.

Right now, the "oil price" is the biggest issue. As an oil man, George W Bush understands this, if he understands nothing else.

Right now, the Dow Transports - having failed to rise to new highs in conjunction with the DJIA - are screaming a warning signal:

Posted Image

When all is said and done, "Gold" is an insurance policy against the failure of the Central Banks to deliver on their plans.

To quote Mr Robert Burns:

"The best laid schemes o' mice an' men Gang aft a-gley"

I'll stick with my gold and silver investments.

Brian Bloom

Australia, February 20th 2004


In the late 1980s, Brian Bloom became an Assistant Vice President and, later a Vice President of one of the world's largest Venture Capital Investment Banks. In that capacity he worked on more than one multi-billion dollar Leveraged Buyout transaction. Since the early 1990s he has been providing strategic, marketing, capital raising and management advice to emerging businesses with multinational growth potential and, since 1998 has been focussing specifically on Franchising in the Fast Food and Indulgence Industries. For over 25 years he has been motivated by wanting to "do something practical" about the parlous state of economic affairs we now find ourselves facing - the evolution of which he has been watching with fascination since the late 1970s.
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#267 boppa


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Posted 23 February 2004 - 03:32 PM

well its now a year since this thread started

lets look at whats happened

usa is more hated (in everyone except their own eyes) than binladden,sadist insane and hitler combined

locally a year ago the aussie dollar was 50 cents in the dollar

now its over 80c in the dollar :-)

the war that would be over in a week
well it was (lol)

except those nasty nonwar casualties just keep on a climbin :-)

my verdict as a non usaer

looks like when the old ruskies crashed and burned

(so whens the yanks soldiers gunna start selling their equipment to survive-not long in my books)
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#268 HAZ


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Posted 23 February 2004 - 06:21 PM

anyone's mental acuity, would be in question, if you did'nt trade off a u.s. valueless, kited, yankee cyber buck....in favor of the EURO or others!

As a Cracker, there was an ole saying, here in the South. "Save your Confederate money, the South will rise again!".....it was always a laughing joke. :D ..however, now old Confederate money is probably worth more, than a yankee dollar!

Anyone want to swap 1 for 1?, did'nt think so....interested in progressive economics, read Trotsky's, The Revolution Betrayed, pay particular attention to the paper currencies, value references.

The Russians I know in Moscow are verrrry smart, why would any Russian hold a yankee dollar, instead of EURO :confused: ...a legitimate question.
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#269 Firoz Ali

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Posted 28 February 2004 - 08:38 AM

Faisal Islam
Sunday February 22, 2004
The Observer

Asian central banks are quietly moving away from holding the US dollar in their foreign exchange reserves, suggesting further weakness in the value of the greenback this year.

A new analysis by Lehman Brothers estimates that in the last half of last year as much as $133 billion of foreign exchange reserves in non-Japan Asia left the dollar for stronger, higher-yielding currencies such as the euro, pound and Australian dollar.

The research compared US Treasury statistics on foreign holders of its debt with Asian central banks' statistics on reserve holdings.

'The dollar's now sharing its reserve currency status a little - perhaps not a bad thing,' says John Llewellyn, chief economist at Lehmans.

Last week it was revealed that foreign exchange reserves held by Asian countries had reached $2 trillion, as governments overinsured against a currency crisis.

The bulk of this had been in dollars and dollar debt such as US treasuries. Asian central banks financed half of the US current account and fiscal deficits last year.

But diversifying reserves away from US dollar assets, which are low yielding and becoming more risky, has become compelling over the past year. Lehmans says its research is 'tentative' but consistent with the strength in the euro, and hints that the US dollar has further to fall.

Other leading economists agree. 'It was very clear in 2003 that these central banks did not buy anywhere as much treasuries as they have accumulated forex reserves. It was particularly marked in the second half of last year,' said Jim O'Neill, head of economic research at Goldman Sachs.

Guardian Unlimited
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#270 Firoz Ali

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Posted 24 December 2004 - 08:03 AM

where is Lumberjack?
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#271 Brisas


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Posted 16 February 2005 - 06:07 PM

THE G-7 EFFECT: Selling into Dollar-Strength

By Alex Wallenwein
Editor, Publisher: Euro Vs Dollar Currency War Monitor

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

The financial press sees the 2005 London G-7 statement essentially as a non-event and reports "no change" in China's Yuan policy. All of this is widely seen as "dollar-supportive."

Nothing could be further from the truth.

A. Sealing the Dollar's Fall from Grace
Although there is some short to medium-term dollar support coming from the absence of a Chinese timetable on their revaluation efforts, the end-effect is only this: the rug is still being pulled from under the dollar's feet. The only difference is: the rest of the world's rear-end is being spared the dollar's hard landing.

Temporary dollar-strength is exactly what the rest of the world needs - particularly Asia and Europe. Temporary dollar-strength is exactly the opposite of what the US needs - despite all of Allan Greenspan's fluff about "market pressures, which appear poised to stabilize and over the longer run possibly to decrease the U.S. current account deficit." (Blah, blah, blah)

Vaguer words were never spoken. Yet, they predictably sufficed to reverse steep dollar-losses on Friday after the disappointing non-farm payroll figures were released. People are too lazy to look at the facts and think for themselves. We have all become "expert-junkies."

The reality is that continuing dollar-weakness now could be catastrophic for the entire world-financial structure. Asians and other countries desperately want to unload their tremendous dollar surpluses - but they can't, for fear that any larger-scale sell-off might cause a rush to the exit doors.

Therefore, what they all need is a temporary reprieve, a carefully engineered environment of apparent dollar strength that will allow them to quietly unload what they could never openly propose to sell:

Their dollar reserves.

Continued, incremental interest rate hikes by the Fed, although they showed next to zero effect until the beginning of this year, are providing the public rationalization for why the dollar is suddenly rebounding. This effect is bolstered by the ECB's decision to leave its rates where they are. The result is a climate wherein pressures on the euro decrease, Asians no longer need to convert so many of their dollar surpluses to buy US treasuries, the dollar temporarily "stabilizes" - and foreign countries can keep on selling their dollars into this artificial "strength" until they are home free, safely invested in euro deposits.

The final effect on the dollar is still as catastrophic, and still as inevitable as a sudden rush to the international exit-doors - but with far less deleterious consequences to the world financial system. For, once this artificial dollar-strength dissipates after all of the major players have decreased their holdings to below panic-levels, the currency traders of the world, those who bought into this strength to cover their previous dollar-shorts, will suddenly find themselves exposed to the icy winds of rapid-fire dollar-depreciation.

Whoever ends up selling euros or other currencies to these Asian CBs in return for their dollars will get stuck. The "good thing" (at least for the dollar-selling Cbs) is that they will no longer be exposed to a full-fledged dollar-flight when it finally occurs. But their "customers" (individual and institutional forex traders) will get stuck with the full weight of the dollar-bear as it collapses right on top of them.

B. The ECB and the Fed: Tortoise vs. Hare!
I theorized long ago in an early issue of "Moneypulation Watch" in mid 2003, that the ECB will let the US Fed pass it up in lowering rates, trail the Fed all the way down the interest-rate ladder, then stay at a point above the Fed's low and let the Fed turn around, pass the CB up again, and then slowly, slowly, ever so slowly, follow the Fed's incremental hikes back up - and that's exactly what they did and continue to do!

The Fed began its rate-tightening cycle in June last year. The ECB has stayed the course and remained at 2% for nearly two years now while the Fed went through considerable rate-gyrations. The ECB now has the luxury of keeping its rates low in order to slowly reawaken the rather flattened business cycle in Europe's big economies, while the Fed rates climb and climb. Naturally, the rising rates will serve to choke off economic activity at home as US consumers watch their buying power being drawn and quartered.

At the same time, the rising US rates take pressure off the euro, which gives EU exporters a much-needed breather. Without having to intervene in the currency markets, and without having to lower its rates even further, the ECB is turning into a master of the tortoise vs. hare strategy. On paper, the US economy has been dancing circles around the EU while the dollar was falling. Now, the dollar is picking up again and is starting to do likewise. While the turtle-like EU economy is slowly recovering and strengthening, the US hare's relative speed and agility is costing it much needed energy and resources. That will be its undoing.

When the Bush administration finally realizes that it has been "had," and that the apparent US strength advantage was simply a Judo trick designed to allow it to defeat itself, it will be too late. Once international CBs have safely unloaded their dollar-excesses into this current strength, the dollar-hare will be ripe for the grave that its feverishly active hind legs have already dug for it.

The ECB surely is a new breed of central bank. It obviously doesn't play this deadly game called "let's paper-over whatever difficulties that appear" - the game the US Fed has cherished for so long. Its more prudent strategy is now paying off. China's percentage of dollars accumulated as part of its $112 billion world wide trade surplus during 2004 stands at just above 25%, a significant decline from the year before. The difference went mainly into euro-denominated assets.

C. Chinese Currency-Whiplash?
China is undeniably on a path to diversification away from the dollar - and so are most other countries whose economies are of any consequence. For example in 2004, China's exports to the EU have increased by about 30% from those of 2003, as the EU's trade deficit with China has climbed from 32 billion euros in 2003 to 42 billion in 2004 - a direct result of China reducing its dependence on the already over-extended US export market.

In Davos on January 26, 2005, the director of the National Economic Research Institute at the China Reform Foundation named Fan Gang (not a part of the official policy-making circles) remarked that China was looking to move its currency peg away from a pure dollar peg to a basket of currencies, including the euro. This remark was later disavowed by actual Chinese policy honchos. As a result, the dollar recovered from its initial slump in reaction to that piece of news.

What has apparently escaped forex traders is that this policy was actually confirmed and re-confirmed by several Chinese officials in policy-making circles. In fact, a Reuters piece of February 3, 2005, stated that an unnamed G7 source "confirmed comments made by Italian Economy Minister Domenico Siniscalco on Wednesday that at previous summits the Group had discussed with China the idea of pegging the yuan to a basket of world currencies rather than the dollar."

This is the early stage of the realization of a prediction I made back in late 2003, in an essay entitled Gold, the Yuan, the Dollar, and Taxes. In that essay, I doubted that the Chinese would lift their dollar peg anytime soon, but will likely shift it to a euro-peg so its export-advantage can be shifted from the US to Europe - once the US consumer appears to have reached his purchasing limits. That is now happening.

Bottom line: The dollar's current move "up" the forex ladder only makes its eventual decline and exit-left from the world's reserve-currency stage an even greater certainty.

D. The Effect on Gold
Since the gold price is currently still tied to the dollar's movements up and down that ladder, expect gold to continue to decline and then stagnate for a while. But when currency traders begin to realize the trick being played on them for what it is, the ongoing fall will resume all the more ferociously. Even if a "ferocious" can be avoided (unlikely but possible), the worst factor weighing in against the dollar's long term prospects is the inevitable persistence of the fall.

The dollar will go lower, ergo gold will go higher. It's as simple as that.

Eventually, of course, gold will leave its dollar-dependence behind as international investors and institutions, lead by the Chinese, will use both physical supplies and trading instruments to hedge against growing fiat-currency risks. Gold investors should follow the international CBs' examples, take advantage of current fire-sale prices, and keep selling dollars into this contrived strength, except that they should sell dollars for physical gold - not for euros (or other fiat basket-cases).

Got gold?
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#272 Brisas


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Posted 16 February 2005 - 06:09 PM

U.S. Law Still May Authorize Seizure of Gold And Silver; GATA Queries Treasury

January 27, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

MANCHESTER, Conn.(BUSINESS WIRE) --Despite recent assurances to the contrary from the U.S. Treasury Department, U.S. law still appears to empower the president to seize gold and silver coins, bullion, and shares in mining companies from private citizens, the Gold Anti-Trust Action Committee says.

While GATA believes that the law may violate the U.S. Constitution's prohibition against the government's taking private property for public use without paying fair compensation, precious metals investors may still be in some jeopardy here. So GATA has written to the Treasury Department seeking clarification and a meeting with department officials.

The text of GATA's letter is appended.

Protecting precious metals investors and the mining industry against threats like this would seem to come within the province of gold industry organizations. But since such organizations do no advocacy of precious metals when governments may get in the way, and little advocacy in any case, this work has fallen to GATA.

The Treasury Department is not likely to respond to GATA's letter without some prodding from the congressmen who represent metals investors and mining companies, so U.S. citizens are asked to share the letter with their congressmen and the mining companies in which they are invested and to ask the congressmen and mining companies to get involved with the issues the letter raises.


January 20, 2005
Roberta K. McInerney
Assistant General Counsel/Banking and Finance
Department of the Treasury
Washington, D.C. 20220

Dear Ms. McInerney:

Michael Kirk of U.S. Rep. John B. Larson's office has forwarded to me your letter to him of December 17, which answered my e-mailed inquiry to him about forcible redemption by the Treasury Department of gold and silver coins held by private citizens. You replied that a statute empowering the Treasury Department to do that, 12 U.S.C. Section 248(n), had been repealed.

But since reading your letter I have learned of a similar statute: Title 12, Chapter 2, Subchapter IV, Section 95a, which provides in part:

"During the time of war, the president may, through any agency that he may designate, and under such rules and regulations as he may prescribe, by means of instructions, licenses, or otherwise -- (A) investigate, regulate, or prohibit, any transactions in foreign exchange, transfers of credit or payments between, by, through, or to any banking institution, and the importing, exporting, hoarding, melting, or earmarking of gold or silver coin or bullion, currency or securities. ..."

Section 95a further authorizes the president to "prevent" the "use" by U.S. citizens of any property "in which a foreign country or a national thereof has any interest."

These provisions are of the greatest concern to investors in gold and silver bullion, coins, and shares of gold and silver mining companies, and to those companies themselves. So the Gold Anti-Trust Action Committee urgently requests that the Treasury Department explain how it construes these provisions. Particularly, we'd like to know:

-- How does the Treasury Department construe "the time of war"? How can gold and silver investors know when the powers described in Section 95a are in operation or likely to come into operation? Are formal declarations of war by Congress required here, or lesser declarations, or none at all, but rather declarations made only by the president?

-- How does the Treasury Department construe "hoarding"? Does it include the ordinary collection of gold and silver coins, numismatic or not, and bullion by U.S. citizens, businesses, and corporations, absent any collaboration with enemies of the United States?

-- Does the Treasury Department construe Section 95a to empower the president to interfere with the ownership of shares in gold and silver mining companies merely because shares of such companies also might be owned by foreign nationals or foreign governments, at war with the United States or not? Under what circumstances would the president be so empowered?

In essence, we need to know whether Section 95a contemplates the instant destruction of gold and silver investors and the precious metals mining industry in the United States. So the Gold Anti-Trust Action Committee asks the Treasury Department for a meeting with the officials who might become responsible for implementing Section 95a, at which we might discuss the concerns of precious metals investors and mining companies. Would you kindly forward our request to the appropriate people?

Thanks for your help.


Chris Powell, Secretary/Treasurer (860-646-0500)
Gold Anti-Trust Action Committee Inc.


The Gold Anti-Trust Action Committee was organized in January 1999 as a Delaware corporation to advocate and undertake litigation against illegal collusion to control the price and supply of certain financial securities, particularly securities involving gold. The committee arose from essays by Bill Murphy, a financial commentator, and by Chris Powell, a newspaper editor in Connecticut, published at Murphy's Internet site, www.lemetropolecafe.com.

Murphy's essays reported evidence of collusion among financial institutions to control the price of gold. Powell, whose newspaper had been involved in antitrust litigation, replied with an essay proposing that gold interests should act on Murphy's essays by bringing suit against the financial institutions involved in the collusion against gold.

The response to these essays from gold interests throughout the world was so favorable that the committee was formed. Murphy is Chairman and Powell is Secretary/Treasurer.

The committee has retained a prominent anti-trust law firm, Berger & Montague of Philadelphia, and is raising money for advocacy and litigation.

Additionally, GATA seeks to disclose and publicize the huge speculative short positions in gold taken by financial institutions and bullion banks. GATA believes that 10,000 tons of gold or more have been sold short by these speculators, even as yearly mine supply of gold in 1998 was only 2,529 tons. When, through our lawsuit and otherwise, we are able to show how short in gold even one major financial institution really is, other institutions will buy gold in quantity, knowing the short position in gold is too large to close without causing a substantial rise in the price of gold. Then the gold collusion game will be over.


The Gold Anti-Trust Action Committee seeks financial and moral support from gold mining companies, investors in gold mining companies and physical gold, and people who seek to preserve gold's vital role in the world's economy.

Contributions are used to expose and stop collusion to control the price and supply of gold and related financial securities.

GATA is a civil rights and educational organization incorporated in Delaware, U.S.A., and contributions to it are federally tax-deductible in the United States.

By mail:
Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road,
Manchester, Conn. 06043-7541 USA

By bank wire:
E-mail GATAComm@aol.com for bank routing number and account information

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#273 Brisas


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Posted 25 February 2005 - 10:08 PM

Asian banks halt dollar's slide

Recently, the dollar had seemed to be stabilising
The dollar regained some lost ground against most major currencies on Wednesday after South Korea and Japan denied they were planning a sell-off.

The dollar suffered its biggest one-day fall in four months on Tuesday on fears that Asian central banks were about to lower their reserves of dollars.

Japan is the biggest holder of dollar reserves in the world, with South Korea the fourth largest.

The dollar was buying 104.76 yen at 0950 GMT, 0.5% stronger on the day.

It also edged higher against both the euro and the pound, with one euro worth $1.3218, and one pound buying $1.9094.

Concerns over rising oil prices and the outlook for the dollar pushed down US stock markets on Tuesday; the Dow Jones industrial average closed down 1.6%, while the Nasdaq lost 1.3%.


The dollar's latest slide began after a South Korean parliamentary report suggested the country, which has about $200bn in foreign reserves, had plans to boost holdings of currencies such as the Australian and Canadian dollar.

On Wednesday, however, South Korea moved to steady the financial markets. It issued a statement that "The Bank of Korea will not change the portfolio of currencies in its reserves due to short term market factors".

Japan, too, steadied nerves. A senior Japanese Finance Ministry official told Reuters "we have no plans to change the composition of currency holdings in the foreign reserves, and we are not thinking about expanding our euro holdings".

Japan has $850bn in foreign exchange reserves.

At the start of the year, the US currency, which had lost 7% against the euro in the final three months of 2004 and had fallen to record lows, staged something of a recovery.

Analysts, however, pointed to the dollar's inability recently to extend that rally despite positive economic and corporate data, and highlighted the fact that many of the US's economic problems had not disappeared.

The focus has been on the country's massive trade and budget deficits, and analysts have predicted more dollar weakness to come.
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#274 Firoz Ali

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Posted 08 March 2005 - 08:23 AM

Doom For The Dollar--And Everything Else
Dan Ackman, 01.10.05, 6:00 AM ET

The stock market is up and economic growth has been steady, if unspectacular. But, an increasing number of economists are seeing serious storms build on the horizon. They point to ever-growing federal budget deficits, a record current-account deficit, increased consumer debt, a real estate market that looks like a bubble ready to burst, a surge in personal bankruptcies and the prospect of inflation.

Meanwhile, interest rates are on the rise, and if they increase much more, many of these problems could get dramatically worse.

Doomsayers tend to be ignored--until it's too late. This week, we give voice to five prophets of doom, starting with Peter Schiff, CEO and chief global strategist of Euro Pacific Capital.

Could the falling dollar mean we're in for a major financial disaster? He thinks so.

He has been warning about the currency's fall for a while now. Even though it lost a third of its value in the last two years against the euro, he believes it will decline even further. But, the dollar's fall is more a symptom than a cause. The real problem is that the U.S. is producing too little--and spending too much--and the result is likely to be far worse than the happy-talkers on Wall Street will ever let on.

"We are going to go through one of the most trying financial times in U.S. history, including the Great Depression," Schiff says.

Why Should We Care About The Falling Dollar?

"The basic problem," Schiff states, "is that Americans don't produce enough, and don't save enough." Indeed, over the past 15 years, the savings rate has fallen from over 6% to less than 1% in recent quarters. As a result, the goods that we are consuming are being supplied to us by foreigners. Not only are they producing the goods, but they are lending us the money to buy them, and, in doing so, are driving the U.S. deeper and deeper into debt to the rest of the world, Schiff says.

As American industry has lost productive capacity, it has become increasingly difficult for the U.S. to produce enough--and sell enough--to reduce that debt. The massive U.S. trade and current-account deficits, now at around 6% of the gross domestic product, mean that non-Americans are exchanging consumer goods today for consumer goods they will obtain in the future.

The U.S. doesn't have the ability to supply those goods, Schiff says. "We are using dollars that we print to exchange for goods that we don't produce. We have to borrow from abroad as there are no domestic sources of savings, so the value of those dollars will continue to fall."

How Bad Will It Get?

Peter Schiff, chief executive of Euro Pacific Capital

"Very bad," Schiff says. The dollar will fall a lot lower than it already has--dropping by perhaps 50% against the Japanese and Chinese currencies. How will the government respond? Could efforts to forestall the currency decline have a perverse--and ultimately negative--effect? No matter what the outcome, Americans will have to consume a lot less and save a lot more. Spending on cars, clothing and electronics will all drop dramatically--perhaps right out of the economy.

What Caused It?

"We are a society that has lived beyond its means for a long time," Schiff says, adding that while the trend has been evident for two or three decades, "in the last five years, it has gone off the deep end." Americans are relying on foreigners more and more to produce goods, rather than producing them themselves.

What Will The Results Be?

Americans will have to restrict future consumption or default on debt, whether directly or indirectly.

"I think something in the near future--maybe early this year--will make us realize the error of our ways," Schiff says. "Our creditors are going to stop. They are going to bite the bullet," which means realizing we can't repay them in the way they want and expect.

They will take a huge loss, but it will be necessary to check an unsustainable process. At that point, the people of Japan and other Asian nations will be able to consume a lot more, because they will send less of what they produce to the U.S.

"They will not be producing for us; they will be producing for themselves."

Meanwhile, to attract savings from abroad, the U.S will have to increase interest rates into the double digits. This will cause a serious wave of defaults in the real estate market and elsewhere.

"The further into the future this starts, the worse it will be for Americans," Schiff says.

When And Why Will It Bottom Out?

"I don't know. A lot will depend on the government," Schiff says. The debt to Japan, China and others has been building for a long time. The process will also take some time to reverse. But, the analysts on Wall Street don't want to say this.

"They pull their punches, because they don't want to be marginalized. But, the fact is we owe Japan a fortune; it's not the other way around." And that, Schiff says, means the dollar will be heading south for a while.

Video: The Dollar's Dip Spells Disaster

More From Forbes
Dollar Schmollar 01.11.05
A weak dollar used to make Detroit cheer, but automakers are yawning now.
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#275 Brisas


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Posted 13 March 2005 - 12:29 AM

China, Greenspan rub salt
in dollar wound

The US dollar was struggling near a two-month low against the euro on Friday as the market braced for fresh trade data that were likely to show a further widening of the trade gap. As if this weren't trouble enough for the besieged greenback, US Federal Reserve chairman Alan Greenspan stirred up the market Thursday night saying foreign investors would reduce their US asset holdings at some point, while new findings came to light that China is indeed doing so.

Saying he is not "overly" concerned about the record US trade gap or heavy consumer debt, Greenspan said the budget deficit gives him the shivers. The US current account deficit widened to a record US$164.7 billion from July through September, the most recent figures available, equivalent to 5.6% of gross domestic product (GDP). "Our current account deficit and household debt burdens do not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit," Greenspan told the Council on Foreign Relations in New York. "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability, because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances."

According to the high priest of finance, international investors have only modestly shifted their portfolios away from dollar assets so far. But he warned that they might at some point decide their portfolios are too dollar-centric, ominously adding that if the dollar keeps dropping, foreign exporters may start looking elsewhere.

Greenspan's comments came close on the heels of Japanese Prime Minister Junichiro Koizumi's startling remark on Thursday that Japan needs to diversify its foreign-exchange reserves, reviving fears of Asian central banks cutting their giant dollar reserves. Any move by Japan, which has the largest foreign-exchange reserve in the world ($840 billion), to reduce its dollar holdings could be disastrous for the greenback. The dollar has already been dropping against the yen for four straight weeks now. Koizumi's statement, though later qualified by his finance minister, will only prolong the agony.

US dollars accounted for 63.8% of the world's currency reserves at the end of 2003, down from 66.9% two years earlier, according to International Monetary Fund (IMF) figures released last April. A survey this January commissioned by the Royal Bank of Scotland Plc and conducted by London-based Central Banking Publications Ltd showed that central banks across the world were boosting euro holdings. Almost 70% of the 56 central banks surveyed said they had increased exposure to the euro.

Citing a more recent finding, Asia Times Online reported on Thursday (Dollar catching Asian flu) that Asian central banks have been quietly switching their dollar holdings to regional currencies for at least three years now. A study by the Bank of International Settlements (BIS), which acts as a bank for the world's central banks, shows that the ratio of dollar deposits held in Asian offshore reserves declined to 67% in September, down from 81% in the third quarter of 2001. India was the biggest seller, reducing its dollar assets from 68% of total reserves to just 43%. China, which directly links the yuan to the dollar and is under US pressure to allow a freer movement of its currency, trimmed the dollar share from 83% to 68% over the same period.

Bloomberg reported on Friday that according to an estimate by Lehman Brothers Holdings Inc, China's central bank has been cutting the share of its currency reserves held in dollars and replenishing them with euros. Some 76% of China's reserves were in dollars last year, down from 82% in 2003, said Lehman, the fifth-largest US securities firm.

There has been debate in China on whether it at all needs such a huge foreign-exchange reserve. China's forex chief, Guo Shuqing, a member of the National Committee of the China Political Consultative Conference (CPCC) and director general of the State Administration for Foreign Exchange Management (SAFEM), said that as an item of international payments, the growth of the foreign-exchange reserve is the result of the macroeconomic operation, but not the objective China is particularly pursuing. An adequate foreign-exchange reserve is favorable for payment abilities, comprehensive national power and creditworthiness, reducing risks of reform and safeguarding financial security, he said.

Guo pointed out, however, that excessive growth could be detrimental. In a rare and stern warning against the inflow of speculative funds, or "hot money", in the name of investment, he told local governments not to lure foreign investment "haphazardly". Regulators have been playing down the amount and impact of hot money over the past year, but Guo said China might see "no end of trouble in the future" unless local governments are acutely aware of risk mitigation in soaking in foreign funds.

"China pays great attention to speculative funds," Guo said in an interview with Xinhua on the sidelines of the annual session of the National Committee of the Chinese People's Political Consultative Conference, China's top advisory body. "Foreign-exchange administration departments and other macroeconomic departments are investigating the issue and will punish illegal activities severely."

China's foreign-exchange reserve added as much as $206.7 billion last year alone. Guo said the overall inflow of capital is "normal and legal" and reflects the "market scenario", but there are also some "worrisome" problems. "Fake foreign investment" is actually being used to purchase yuan-denominated assets and commercial housing on speculative purpose, he noted. Hot money has pushed housing prices to a very high level, making cities look "prosperous" but doing no good to the investment climate, as it leads to higher living and business costs. Typically, this means great risks for local financial institutions, enterprises and even individuals. When the real-estate bubble bursts, they will suffer from huge losses, Guo said. Hot money has also sneaked into China under capital accounts or based on no real trade, he claimed.

Guo said China's foreign-exchange reserve, second only to Japan's, is quite enough to pay the country's debts. But its debts in foreign currency may snowball to an amount that engenders "systematic risks". He revealed that newly added foreign-exchange reserves last year include $60.6 billion in foreign direct investment, $32 billion in trade surplus, $30 billion from foreign-exchange clearing under the account of imports and exports by enterprises, $35 billion in foreign debts, more than $10 billion in service trade surplus, $30 billion in individual asset transfer and earnings being brought about, and more than $10 billion in securities investment, among others.

Mountains of foreign-exchange reserves have long been an excuse used by some countries, especially the United States, to demand appreciation of the yuan, which now floats against the US dollar within a narrow band. But Premier Wen Jiabao reiterated in his government work report last week that China would keep the yuan "basically stable".

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#276 Brendon


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Posted 13 March 2005 - 12:52 AM

Originally posted by Brisas
China, Greenspan rub salt
in dollar wound

Mountains of foreign-exchange reserves have long been an excuse used by some countries, especially the United States, to demand appreciation of the yuan, which now floats against the US dollar within a narrow band. But Premier Wen Jiabao reiterated in his government work report last week that China would keep the yuan "basically stable".


The Americans say they want China to appreciate the yuan. For trading purposes I suppose.

But if China was to allow the yuan to appreciate against the US dollar it would force the Chinese bankers to dump the dollar, as they would be losing out if they held on to it. This would have a flow on effect, and other countries would have do the same for the same reason. There would most definately cause the dollar to collapse. The world markets would be in a spin.

The alternative is to allow things as they are, and the U.S. will have an ever increasing debt until it can't even afford to pay the interest repayments!

The economists who thought this out all have Nobel prizes.
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#277 Firoz Ali

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Posted 22 March 2005 - 08:11 AM


The Death of the Dollar

By Jason Hommel
March 18, 2005


Ceasar was supposed to be a god. Julias Caesar was killed on the Ides of March. (March 15th)

Today, we don't make men gods. Instead society has made our financial system into a false god.

On March 15th, 2005, (the ides of March) we may have just witnessed the beginning of the death of our financial system as General Motors stock took a nosedive from $34/share down to $30. http://finance.yahoo...l=on&z=m&q=l&c=

It does not seem like much (GM down just over 10% in one day), but as of March 17th, the stock is down to $28.35, and the market cap is down to $16 billion. (GM is down nearly 18% for the week.) It's the type of volatility that we usually only see in silver stocks!

What does this mean?

GM's stock price decline is like a dagger right into the heart of the U.S. financial system, and the dollar itself!

Why did it happen?

Apparently, someone in power did the equivalent of shouting "the emperor has no clothes" and people woke up, and are beginning to see more clearly! The media decided it was time to expose the truth that GM is nearly insolvent, and will expect to lose $1.50/share in the first quarter alone!

But the story is worse than that! GM has $300 billion in debt http://finance.yahoo.com/q/ks?s=GM

...and has a market cap, now, of $16 billion. See the problem there? The bondholders could buy the company nearly 20 times over if they used their money to buy stock instead of loan it to the company. The implication is clear--that GM is headed towards bankruptcy, and will default on the bondholders, who will then own a company worth less than $16 billion dollars!

For every one point that interest rates rise, refinancing GM's debt will cost an additional $3 billion in annual interest payments -- money that they clearly do not have! Where is GM going to get another $3 to $6 to $9 billion as interest rates rise by 1%, 2%, and 3% more? Selling cars? Nope. Selling stock? Unlikely in this market! Borrowing more? From who? The U.S. government itself is propping up this bond market, and there are no buyers even for U.S. bonds, and there haven't been for months now!

So, therefore, GM will soon be a $300 billion dollar blow-up!

How big is that? It's bigger than Enron, Global Crossing, LTCM, K-Mart, and the IRAQ war all put together!

$300 billion going belly up is a big enough event to topple the U.S. government! How so? It will shake the confidence in the entire financial system. Companies as big as GM are not supposed to go bankrupt in our "normal" world. They are "supposed" to be "too big to fail".

The value of the "official" U.S. gold hoard of 261 million oz., at $440/oz. is only a mere $115 billion.

See what this $300 billion blow-up will mean? Imagine the financial chaos as a pile of wealth almost three times larger than the current value of the U.S. "official" gold hoard evaporates!

The annual deficit is around $700 billion. How will the U.S. government sell bonds to finance the deficit if bondholders are getting wiped out?

If the government can't sell bonds while running a deficit, then the government must simply be printing money to fund the deficit--and they are, as can be seen in the rate of growth of the money supply, M3! Therefore, inflation is raging, and interest rates must keep pace, which is why GM is doomed!

Interest rates must head up, as confidence in the U.S. dollar bond market will be shaken like a tree in a hurricane!

Foreign nations are all sounding the alarm already that they will be selling U.S. bonds to diversify the holdings of their central banks: Russia, India, China, South Korea, Japan... what major foreign nation is left to buy them?

A tsunami of dollar selling is about to begin, and will make the recent dollar decline seem like a small bump in the road.

It may take a few months for this to play out. You may have time to buy silver at under $10/oz. for a few more weeks or months. But after GM declares bankruptcy, which may take between 3 months to a year, get ready for the dollar to crash by more than 90% in the following 6-12 months.

Germany's hyperinflation in the 1930's took about a year and a half. Recently, Argentina's took place nearly overnight. Who knows which way the dollar will die, whether a quick death, or a more slow and painful one?

Either way, the dollar is dead. Long live gold and silver!

Jason Hommel
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#278 DownWithFascism


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Posted 05 June 2007 - 07:29 AM

Originally posted by uglybastard
"The sky is falling! The sky is falling!"

said Henny Penny.

Lumberjack, are you Henny Pennny?

Oh dear, is the sky falling on the US dollar? Well ain
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#279 miscreant


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Posted 12 November 2008 - 03:50 PM

This 5yo thread is worth the read.
Even if most of the main contributors are no longer posting here.
Lumberjack had an accurate understanding.
It's an interesting thread to revisit 5 years on.

Some of the links to 5 y/o articles are worth revisiting too

like -


That report got him fired & his worst case scenario turned out almost prophetic.
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#280 Firoz Ali

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Posted 12 November 2008 - 05:45 PM


The Strong Dollar Illusion
by Peter Schiff, Euro Pacific Capital | August 15, 2008
Economists who now see American troubles spreading around the world are predicting that foreign central banks will ignore the gathering inflation threat and follow the Fed down the rate cutting path. Similarly, they argue that since the downturn began here, the U.S. recovery will likely be underway while the rest of world is still decelerating. These assumptions have prompted a rally in the dollar, a sell-off in gold, commodities and foreign stocks, and have cast doubts on the ability of foreign economies to “decouple” from the United States. Investors should not take the bait.

America does indeed pose a global threat, but not for the reasons these economists suppose. Foreign economies are suffering not because Americans have slowed their voracious spending, but because they are defaulting on hundreds of billions of dollars of existing loans underwritten by lenders around the world.

The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.

The current losses that banks in Europe and Asia are now suffering are real, but future losses can be avoided by suspending future lending to Americans. Shutting off this credit will of course torpedo the dollar, but that is precisely what must occur. By allowing the dollar to drop to its natural, unsupported level, not only will the American caboose be decoupled from the global gravy train, but the rest of the cars will move along the tracks much faster. Absent the U.S., there will still be plenty of consumers to buy what is produced, and plenty of investment opportunities for those with savings. Rather than dragging the global economy down, such a development would actually un-tether it.

On the other hand, left to its own devices, the American economy will implode. There will be fewer products for American consumers to buy and very little savings for anyone to borrow.

Some foolishly believe that many of the world’s problems result from dollar weakness, and that pushing the dollar back up would be good for all. For example, since the weak dollar is contributing to the rise in oil prices, a stronger dollar should help bring prices down. However, if foreign governments weaken their own currencies to push the dollar up, they will simply succeed in bringing oil prices down for Americans. Oil prices will go up for their own citizens. This can’t be an attractive bargain for any European or Asian political leader.

The weak dollar is merely a manifestation of substantial structural problems underlying the American economy. Unfortunately for us, the solution to those problems, as well as the global economic imbalances, can only be found in a weaker dollar. Efforts to artificially prop the dollar up will only exacerbate those imbalances, and make its ultimate fall that much more severe
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