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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘dollar destruction

Economic collapse is a mathematical certainty: The top 5 places where not to be

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by NewAmericaNow
Posted June 26, 2011

Interview: Jim Sinclair on Gold and the World Financial System

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The Hera Research Newsletter (HRN) is pleased to present an in-depth interview with Jim Sinclair, Chairman and CEO of Tanzanian Royalty Exploration and founder of Jim Sinclair’s MineSet, which hosts his gold commentary as a free service to the gold investment community. He founded the Sinclair Group of Companies in 1977, which offered full brokerage services in stocks, bonds, and other investment vehicles.  The companies, which operated branches in New York, Kansas City, Toronto, Chicago, London and Geneva, were sold in 1983. From 1981 to 1984, Mr. Sinclair served as a Precious Metals Advisor to Hunt Oil and the Hunt family for the liquidation of their silver position as a prerequisite for the $1 billion loan arranged by the Chairman of the Federal Reserve, Paul Volcker. He was also a General Partner and Member of the Executive Committee of two New York Stock Exchange firms and President of Sinclair Global Clearing Corporation (a commodity clearing firm) and Global Arbitrage (a derivative dealer in metals and currencies).

Hera Research Newsletter (HRN): Thank you for speaking with us today. You are one of very few people who have tried to warn investors about OTC derivatives.  Why are OTC derivatives a problem in your opinion?

Jim Sinclair: Over the counter (OTC) derivatives are the reason we are going through what we are going through now. An OTC derivative is a kind of wager on what something will do. Up until 2009, most of these wagers had very little, if any, money behind them and, if the direction you bet on didn’t come to fruition, the amount of leverage resulted in extraordinary losses. There was a major rollover in derivatives tied to real estate in 2008, as well as in other types, such as those tied to sub-prime auto loans.

HRN: Did OTC derivatives destabilize the financial system in 2008?

Jim Sinclair: Absolutely.

HRN: Don’t financial institutions use risk cancellation models to hedge risks using OTC derivatives?

Jim Sinclair: Before the failure of Lehman Brothers, OTC derivatives losses would have almost netted out to zero. You can consider derivatives like a string in a circle with various knots representing all the derivatives transactions. When Lehman went broke, the string broke. When Lehman couldn’t meet its obligations on derivatives, they could no longer be netted out to zero. That’s why the banks went down, and that’s why you had the government bailouts and quantitative easing (QE).

HRN: OTC derivatives are the real reason for the bank bailouts?

Jim Sinclair: That is a fact which can in no way be argued away.

HRN: Hasn’t the problem been cleaned up by the Dodd–Frank Wall Street Reform and Consumer Protection Act?

Jim Sinclair: The pile of OTC derivatives is over $1 quadrillion. After 2008, the International Monetary Fund (IMF) adopted a new method of valuing them called value to maturity. Value to maturity assumes all of them will function, which is a cartoon. The derivatives pile hasn’t contracted.  Basically, it has expanded, but value to maturity reduced the notional value from over $1 quadrillion to under $700 trillion. The amount outstanding is the same as it was in the first place.

The flavor of the present moment is credit default swaps against the solvency, or lack thereof, of sovereign nations. New derivatives have some margin behind them, but they only work if they are not called upon. If a nation’s debt was in fact to default, it would happen very quickly without a great deal of run up before.  Most people would expect a rescue to be coming. Let’s say a rescue didn’t come, those credit default swaps would simply not be able to function and down again would come the banking system.

HRN: Are you saying that the financial system is less stable today than it was in 2008?

Jim Sinclair: It appears more stable but that’s only an appearance. The entire equity rally took place almost to the day from when the Financial Accounting Standards Board (FASB) relaxed the mark to market rule. It allowed financial institutions to make up whatever value they wanted for their worthless pieces of paper. If they used the real values, the banks would have come down.

HRN: Wasn’t the FASB change a temporary measure to halt the decline in mortgage-backed securities?

Jim Sinclair: It wasn’t just mortgage-backed securities. It was all the paper on bank balance sheets. The balance sheets of banks appear to be in good shape but they’re not.  In fact, they will need a lot more funds.

HRN: Then the financial system is still vulnerable?

Jim Sinclair: They’ve kicked the can down the road.  The purpose of QE, in other words the printing of money, is to maintain some degree of integrity in the financial system.  Bear in mind that the grease for the wheels of equity markets is liquidity, meaning that if you create a lot of money, it goes into the hands of banking institutions and international investment houses.  So, the equity out of thin air market has been sustained by QE.

HRN: What can the government do to prevent another crisis?

Jim Sinclair: You can assume that what’s been done already will be done again.  There are no other tools in a practical sense.  The idea that there won’t be a continuation of QE is nonsense.

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Bernanke’s Press Conference: Some Responses

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“We Don’t Control Emerging Markets”

by John Rubino
April 27, 2011

THE FED CHAIRMAN’S FIRST PRESS CONFERENCE generated neither heat nor light, but did include some typically, um, questionable statements. Here are a few, followed by responses in bold:

“Keeping inflation low and boosting the economy are good for the dollar over the medium-term.”

Well, duh. But talking about controlling inflation while interest rates are at record low levels and commodities are soaring is pointless. Eventually energy and food prices will work their way through to restaurant menus and store shelves (see McDonalds and Huggies) and then inflation won’t be low — even by the government’s deceptive accounting. That won’t be good for the dollar.

“There’s not much the Fed can do about gas prices per se. After all the Fed can’t create more oil. We don’t control emerging markets. What we can do is try to keep higher gas prices from passing into other prices, creating a broader inflation. Our view is that gas prices will not continue to rise at the recent pace.”

The Fed might not control emerging markets but it does affect them. We’re exporting our inflation to them by supporting US consumer borrowing and keeping interest rates low, which creates a torrent of hot money flowing into Brazil, China and India. That’s why they’re overheating.

Put another way, they’re paying the price for our lack of self-control. China is raising rates and Brazil is at 12% already, which means they’re looking at a combination of slower growth and continued high prices. This is a huge problem for countries where many workers spend most of their paychecks on food and energy.

“The inflationary expectations we’re concerned about are long-term. Our anticipation is that oil prices will stabilize or come down. If firms aren’t passing on higher costs into broader prices, broader inflation, then we’ll feel more comfortable watching and waiting to see how it evolves… Long-term expectations are still stable. We’re confident they’ll stay down.”

Letting inflation run and hoping it doesn’t persist is extraordinarily dangerous, because by the time people figure out that it is going to persist you won’t be able to quickly change their minds. They’ll be dumping their bonds and buying real assets like gold and silver and farmland, sending the dollar down and interest rates up. Then you’ll have to spend years convincing them that they’re wrong by raising short-term rates and engineering a recession. And that’s the optimistic scenario. A recession with home prices already falling and systemic debt at record levels would risk a return to the mid-1930s, when a brief recovery turned into the Great Depression.

“We’re completing purchases by July. It probably won’t have significant impact on markets or the economy because the market already knows that. It’s not the pace of ongoing purchase that matters, but the size of the portfolio we hold. We’ll continue to reinvest, so our portfolio size will remain constant. Any changes to portfolio size would depend on pace of economic recovery.”

What he’s saying is that the Fed will continue to buy up Treasuries and other kinds of debt with the proceeds of its maturing bonds. This is a massive amount of money, hundreds of billions a year, so in effect QE 2 won’t really end.

“All I can say is, recovery is moderate, but I do think the pace will pick up over time. Over the long run, the US will return to being the most productive and dynamic economy in the world. It hasn’t lost any of its basic characteristics.”

Unfortunately the US has lost one of its most basic characteristics: a solid balance sheet. We’re effectively bankrupt, and the resulting loss of flexibility and access to capital will fundamentally change this country in the future. A few pockets of innovation won’t be able to bail out an insolvent majority.

“We’re using new tools, but nothing we’re doing is fundamentally different from what we normally do. We’re monitoring inflation as well as recovery. The problem is the same one central banks always face — which is tightening at the right time of a recovery. But we have a lot of experience with how to do this, and we’ll tighten as conditions warrant.”

Let’s consider that experience…the junk bond bubble of the 1980s, the tech bubble of the 1990s, the housing bubble, and now this, whatever it is. Not reassuring.

Why Bernanke’s next move doesn’t matter

from Phoenix Capital Research
April 27, 2011

THE FINANCIAL WORLD IS SITTING ON THE EDGE of its seat today to see just what Ben Bernanke has to say about inflation. It’s odd that a man with just a horrific track record, not to mention the fact his policies have resulted in tens of thousands of people starving or being killed in riots, should be the focus of the entire financial system.

After all, why should we listen to a pathological liar and idiot, not to mention a man void of morals or compassion? Regardless or Bernanke’s personal qualities, the fact is that it doesn’t matter what he does next. Whether or not he issues QE 3, raises interest rates, references inflation differently, or what have you is irrelevant. We will see some kind of Crisis in the near future because of his policies.

If he raises interest rates, the debt market and derivative implodes. If he launches QE 3, the Dollar collapses and trade wars erupt. If he doesn’t launch QE 3, the stock market collapses.

The idea of “success” is completely off the table at this point. It’s now simply a matter of which Crisis we will see. Even if Bernanke does become hawkish and defends the Dollar, the US’s debt load is beyond sustainable levels and will result in a debt default.

Again, there is no positive outcome from the current financial situation. The only good thing that will come out of the destruction will be the Fed being dismantled and Bernanke no longer in control (though this may take years before it’s complete). One thing that is now certain however, is that the US Dollar will be collapsing in the future. It might take two months (Bernanke indicates QE 3 is coming) or two years (Bernanke becomes more hawkish), but it will happen.

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The Day the Dollar Died

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by Inflation.US
Posted originally November 24, 2010

The first 12 hours of a U.S. dollar collapse!
http://inflation.us

A paralyzed Fed defers decision on monetary policy to Primary Dealers in an act that can only be classified as Treason

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by Tyler Durden, Zero Hedge
Posted originally October 27, 2010

[Apologies: This article should have been posted closer to time of original posting, that is, before actual QE2 official announcement. But no matter: after the event has not invalidated any of the central argument – Aurick]

AS IF THERE WAS ANY DOUBT BEFORE WHICH WAY THE ARROW OF CONTROL, and particularly causality, points in America’s financial system, the following stunner just released from Bloomberg confirms it once and for all. According to Rebecca Christie and Craig Torres, the New York Fed has issued a survey to Primary Dealers, which asks for suggestions on the size of QE2 as well as the time over which it would be completed.

It also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things: i) that the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war: in effect Bernanke will use the PD’s decision as a trump card to the Hawks and say the market will plunge unless at least this much money is printed, ii) that the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market, and, most importantly, iii) that the PDs will most likely demand the highest possible amount, using Goldman’s $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise.

This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary, and as we explain below fiscal, policy.

It also means that the Fed has absolutely no confidence in its actions, and, more importantly, no confidence in how its actions will be perceived by the market which is why it is not only telegraphing its decision to the bankers, but is having its decision be dictated by them, an act so unconstitutional it would be seen as treason in any non-Banana republic! This is the last straw confirming that the only ones left trading the market are the Fed and the PDs, passing hot potatoes to each other, and the High Frequency Traders, churning the shit out of everything else to pretend someone is still trading.

And the saddest conclusion is that this is the definitive end of US capital markets: not only is the Fed’s political subordination a moot point, but the Fed (and the purchasing power of the middle class via the imminent dollar destruction that is sure to follow as the PDs seek to obliterate their underwater assets by raging inflation) is now effectively confirmed to be a bitch of Lloyd Blankfein and his posse.

The official explanation for this unprecedented incursion by the banking crime syndicate in US monetary policy is as follows:

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The age of the dollar is drawing to a close

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by Jeremy Warner
Originally published 05 Nov 2010

From The London Telegraph, a mainstream view, and some parts I don’t go along with, but the last couple of paragraphs are now sounding a clarion call from many perspectives. But is this the intention, are we being led by the nose down this path towards a global currency? – Aurick

DOLLAR HEGEMONY WAS ITSELF A MAJOR CAUSE OF BOTH THE IMBALANCES AND THE CRISIS. Right from the start of the financial crisis, it was apparent that one of its biggest long-term casualties would be the mighty dollar, and with it, very possibly, American economic hegemony. The process would take time – possibly a decade or more – but the starting gun had been fired.

Photo: BLOOMBERG

At next week’s meeting in Seoul of the G20’s leaders, there will be no last rites – this hopelessly unwieldy exercise in global government wouldn’t recognise a corpse if stood before it in a coffin – but it seems clear that this tragedy is already approaching its denouement.

To understand why, you have to go back to the origins of the credit crunch, which lay in the giant trade and capital imbalances that have long ruled the world economy. Over the past 20 years, the globe has become divided in highly dangerous ways into surplus and deficit nations: those that produced a surplus of goods and savings, and those that borrowed the savings to buy the goods.

It’s a strange, Alice in Wonderland world that sees one of the planet’s richest economies borrowing from one of the poorest to pay for goods way beyond the reach of the people actually producing them. But that process, in effect, came to define the relationship between America and China. The resulting credit-fuelled glut in productive capacity was almost bound to end in a corrective global recession, even without the unsustainable real-estate bubble that the excess of savings also produced. And sure enough, that’s exactly what happened.

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Will bailing out the States tank the Dollar?

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by John Rubino
Posted originally Nov 3, 2010

BACK IN 2006 MEREDITH WHITNEY WAS AN OBSCURE WALL STREET ANALYST who bit the hand that fed her by declaring housing a bubble and the big banks a disaster. This took guts, both because analysts who diss their research universe tend to lose access and/or their job, and because the overwhelming consensus, from Alan Greenspan on down, held that things were fine, home ownership was good, and big banks were rock-solid.

Whitney was right, they were wrong, and since then she’s used her considerable cred to keep hammering away at the illusion of a recovering US financial system. Her current target is state and local finances, which, she says, are far worse than the mainstream realizes.  In today’s Wall Street Journal she lays out this thesis and asserts that a federal bailout isn’t coming — it’s already here.

I intended to post a few excerpts, but couldn’t find a single paragraph that didn’t contain something useful. So here’s the whole thing:

State Bailouts? They’ve Already Begun

Bond subsidies and transfers have allowed states to avoid making tough decisions. It won’t last.

The threat posed by the state fiscal crisis in the U.S. is vastly underestimated and under-appreciated—because even today too few people understand how states have been managing their finances.

A clear example of this took place in Manhattan last week at the Economist magazine’s Buttonwood Conference, where a panel role-played the federal government’s response to a near default of the hypothetical state of New Jefferson. After various deliberations and simulated threats from the Chinese government, the panel reluctantly voted to grant New Jefferson an emergency bailout of $1.5 billion to cover the state’s debt payment.

What this panel and so many other investors fail to appreciate is that state bailouts have already begun. Over 20% of California’s debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds. Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels.

California is not alone: Over 30% of Illinois’s debt and over 40% of Nevada’s debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.

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