Deep Economic and Debt Frictions Triggering Competing Currency Wars

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Some prefatory
stories are highly revealing. Bank of America is badly on the ropes.
On the same weekend at the end of July, when the Bank For Intl Settlements
executed a 340-ton gold swap contract, two other events happened.
The London metals exchange apparently suffered coordinated delivery
raids, all legal, but painful nonetheless, stripping the embattled
exchange of much gold bullion. My source from the German banking
fortress shared that the BIS might have rescued the London Bullion
Market Assn, and thereby prevented a near default at the exchange.
Spurious stories about aiding commercial banks, even the Portuguese
central bank, were floated to distract the masses.

The second
event was that on the same weekend, Bank of America suffered a failure.
But the USFed pulled it out of the fire by Monday morning with fresh
huge infusions of funny money. This week, another $13 billion infusion
came to BOA by way of much darker corners of USGovt agencies, from
nether recesses. It is getting that bad! So BOA had been propped
by the USFed and the USCongress in the past, but by the syndicate
now. In time, they will remove the valued assets and exit the burning
building. Unexpected consequences are sure to come, a fact of nature.
The BOA story came after a prompted inquiry as to which banks might
next succumb to the rising gold & silver prices. BOA was at
the top of the list of banks mentioned, but others were mentioned
too. They appear in the September Hat Trick Letter, the usual suspects.


My best description
of QE2, the Quantitative Round #2 Launch, is simply stated a monetary
cancer, an admission of failure, and the trigger for the next breakdown
in the global monetary system. The QE2 Launch is a US flag flying
upside down at the central bank command center. Imagine trying to
justify printing money to cover debts, and retaining credibility.
The belief stated by USFed Chairman Bernanke, that zero cost comes
from printing money, is pure heresy with dire consequences. The
cost is lost confidence in the monetary system, in the currencies,
and in the central bank franchise system. The QE initiatives kill
the requisite confidence. Thus the rise in the Gold price in response.
The financial news anchors struggle to hide their growing awareness
that gold is the safe harbor from a destroyed monetary system, wrecked
currencies, discredited central banks, and insolvent banks. They
are awakening, as are those in the investment community.

Three additional
sides are revealed on the Quantitative Easing desperation. The Bank
of England has a US plant residing within. Adam Posen is an American
who sits on the Monetary Policy Committee at the bank. He inflamed
concerns about monetary instability with a speech to the Chamber
of Commerce in Hull on Tuesday. He urged the major central banks
to pursue more aggressive bond buying in order to rescue the world
economy from stagnation that persists. He spoke of the fear of looking
ineffective from inaction, mitigated by usage of extreme tools.
He actually said, "Thus, policymakers should not settle for
weak growth out of misplaced fear of inflation." So there you
have it, inflation full speed ahead. A clarion call to inflate.
The risk is hyper-inflation. Their policies in the last cycle produced
unforeseen problems. In fact, the central banks, in particular the
USFed, fight the last war only to create the most monster, on a
consistent basis, in a pattern of serial events. Their colossal
monetary inflation is breaking all historical records. It is given
political cover by virtue of doctored price inflation statistics
to hide its chronic 5% to 7% range. Posen pushed for further monetary
easing undertaken in the United Kingdom, even to the extent of corporate
debt purchases. Of course, to keep the order, they should begin
with simple UKGilt (bond) purchases. He acknowledged that a QE program
will not be able to create sustained recovery on its own. He fears
a 1990s Japan style scenario, when a collapse of the Western monetary
system is the more possible ugly outcome. He advises more effective
coordination of large scale asset purchases by the central banks
working together. This is a trumpet call to the Competing Currency
War, where peace is declared at first, but which will vanish in
the din of a threatening crisis.

A second warning
came from Bill Gross of PIMCO, the newest target of informal inside
trader accusations. His bond funds seem to have been benefiting
handsomely from advanced notice of many special USGovt programs
to purchase bonds. The PIMCO funds might front-run the USGovt policy,
certainly doing very well for their investors. They could be the
newest invited player in the fascist business model privileged group.
Gross is on record this week as warning that the Quantitative Easing
programs, those that involve vast bond purchases with newly printed
USDollars, backed by nothing, fully diluting the national currency
and undermining the central bank integrity, will lead to a worsening
strain on the USDollar and a decline in the American standard of
living. That is a slick backdoor way of saying significant price
inflation. Nobody on stage wishes to warn of price inflation as
a consequence to the current policy. Nobody on stage wishes to contradict
the low price inflation environment portrayed falsely by bank officials,
which justifies the magnificent monetary inflation being ordered.

The third warning
came from Yu Yongding, a former adviser to the Chinese central bank.
He called the USDollar as being one step nearer to a crisis while
debt levels in the US rise to frightening levels. Yu also called
a devaluation of the USDollar inevitable while the USGovt debt rises.
He stressed that USTreasurys fail to provide safety or liquidity.
Yu openly expressed concern over the safety of its FOREX reserves,
including those invested in USTreasurys. China is the largest foreign
investor in this sanctioned asset bubble, falsely deemed a safe
haven. Its pursuit globally has transformed it to an asset bubble.
China is trying to shed USGovt bonds, as they have cut holdings
by 10% to $847 billion in the twelve months ended July, according
to the USDept Treasury data. The invitation given to Fannie Mae
to reside under the same USGovt roof as the USTreasurys has greatly
increased the risk to the USDollar. The guarantee has been declared
as explicit.


Any new QE2
chapter will probably have minimal positive effect, but much negative
effect. The beneficiary will be gold & silver, but no specific
currency, since tied to the same papyrus raft. No cure will come
from a prescribed Quantitative Easing Round #2. The first round
accomplished nothing. Curiously, the central bankers exhibit a strange
sense of caution, as though they realize the great risk of much
deeper capital destruction, and heightened risk of triggering price
inflation. A selloff of the USDollar might soon motivate a similar
QE2 by Europe. Except this time around, the Europeans must admit
their Bank Stress Tests were a total fraud and sham staged event.
The QE2 will ultimately serve as the catalyst that speeds up the
processes riddled in crisis that are already underway. Tremendous
destruction of wealth comes next, from the USGovt creditors and
US citizens alike.

In order to
mitigate the severe damage to the USEconomy and US financial structure,
the US will induce Europe to join in the destruction. The cause
celebre will be to avoid a fast rising Euro currency. My forecast
is that the high risk of a significant USDollar decline will induce
European leaders to join in the currency debasement. They will announce
a nearly simultaneous rescue soon, a similar EU bank bond redemption
initiative, but without much time delay like last time. It will
coincide nicely with the USFed QE2 Launch in order to minimize the
currency impact and isolated USDollar swoon effect. European leaders
will push for a matching QE Launch, since their export trade lies
in the line of fire with a higher Euro currency. In joining the
deadly tango on the currency dance floor, Europe and the United
States will define the primary forces in the Competing Currency
War, best described as a race to the bottom. In my view, the hesitation
to execute a renewed QE2 program is foreknowledge of its extreme
risks and admission of central bank failure at a certain level.
It will deplete the central banks of weapons in their toolbag. They
will be failure standing naked on the monetary stage in full view.

The advent
of the QE2 Launch might have served as the final straw for former
USFed Chairman Volcker. The man of extreme stature, perhaps the
last effective central banker of US vintage, delivered a scathing
tirade to a gathering of bankers and economists, harshly criticizing
them in impromptu fashion. He left no financial stone without a
stain or dent, in the most ringing, acerbic, rattling harangue qualifying
as internal indictment in US history!! That is not an exaggeration,
not in the least. Such a shrill speech has never been witnessed
in US history. Volcker particularly expressed disappointment that
the Financial Regulation Bill actually granted the USFed even more
powers, when the original intention was to limit it. That was my
stated forecast in the summer Hat Trick Letter reports, since bankers
control the USCongress and the reform process. My personal belief
is that the QE2 Launch is understood by Volcker as a green light
toward a full speed careening downhill ride down into the chasm
for the US Economic Ship of State. He must in his mind’s eye realize
that the Third World awaits. Isn’t it interesting how the concept
of Third World has gained traction in the US alternative press,
after the Jackass forecasted it in October 2008? It is mentioned
with greater frequency lately.


The competing
currency war is ramping up, with gross interventions, open disputes,
notable desperation, friction among trade partners, and urgent need
to take action. Nations are taking positions against each other
increasingly. In defending their economies, they are pitting themselves
against allies and foes alike. The number of bilateral squabbles
has never been greater. The winner will be Gold, as all paper currencys
will circle the toilet and lose. The Gold price acts as a meter;
it will rise in spectacular fashion. It rises due to the profound
debasement in a death process of the currency system. The undermine
is being sanctioned by the major nations. This process follows inevitably
after the grotesque insolvency of the US banking system, the UK
banking system, and much of the European banking system. Their economies
are dying on the vine as a result of the dysfunctional credit systems.

the rest of the article

30, 2010

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