The Fed attempts to outrun the recession with unsustainable increases in the money supply. The coffers of the oil exporters are swollen. To print money, you must monetize debt. To monetize debt, you must find customers for it. China can torpedo the US economy with the flick of a switch. Why will they? Because the dollars they receive for their goods are infected with inflation that is not compensated for by the current interest rate structure. Why won't they? Because the Chinese still believe that the US consumer is worth their life support.

The costs of dollar support are mounting, though, and the profits are eroding. This is precise actuarial science. Putting down the dollar and the American consumer with it is like putting down an injured racehorse. The US might be able to terrorize oil exporters into keeping the dollar as their preferred currency for a while longer with an attack on Iran, but it's just delaying the bell's toll in the end. A fiat currency must float against some tangible good, and currently, that's oil.

Two analysts who have reconstructed money supply data after the Fed stopped publishing it argue a coming dollar collapse will set the stage for creating the amero as a North American currency to replace the dollar.

The reconstructed M3 data – the broadest measure of money – published on econometrician Gary Kuever's website, NowAndFutures.com, shows M3 increased at a rate of 11 percent in May, compared to 9 percent when the Federal Reserve quit publishing M3 data earlier this year.

Asked why the Fed decided to stop publishing M3 data, Kuever told WND, "The Fed probably wants to hide how much liquidity is being pumped into the market, and I expect the trend to keep pumping liquidity into the market will continue, especially since the economy is slowing down."

Why is this important?

"The trend line in my M3-plus-debt chart is staggering," Kuever said. "There has been a straight, long-term trend line of M3-plus-credit increasing since 2000. Long-term, we are creating inflation and the dollar has lost almost 98 percent of its value in the past 100 years."

Kuever, a retired investor, is concerned that with growing budget and trade deficits "the dollar could collapse."

"Especially if the Fed cannot increase rates, because we have already entered a recession," he said.

Quarterly increase in the broadest measurement of the US M3, beginning in 2000:

Bob Chapman, who issued a reconstructed M3 estimate to the 100,000 subscribers to his newsletter, "The International Forecaster", agrees.

"The world is awash in money and credit," Chapman told WND. "My numbers show M3 increasing at about a 10-percent rate right now."

Chapman believes the U.S. economy entered a recession in February. In his newsletter of Dec. 9 he predicted the Fed would hold interest rates at 5.25 percent.

"The Fed is in a very tough spot here," Chapman wrote, "If they raise rates, the real estate market will collapse, and if they lower rates, the dollar will collapse."

Meeting yesterday, the Federal Reserve Open Market Committee voted, as Chapman had predicted, to hold the overnight lending rates between banks steady at 5.25 percent. This was the fourth straight meeting the Fed had voted not to change rates. In its rate announcement, the Fed affirmed the economy had slowed.

Almost immediately after the announcement of the Fed's decision, the dollar weakened to a new 20-month low against the euro, with currency markets reportedly pricing in the expectation the Fed will be forced to lower rates next year to bolster the economy. Following the announcement by the Fed, the U.S. Dollar Index, or USDX, also dropped, with the dollar going below 83.

A dollar collapse is imminent, Chapman declared.

"Technicians studying the USDX think there is a support level for the dollar at 75, but I don't think so."

How low could the dollar go?

"If the dollar breaks through 78.33 on the USDX," Chapman answered, "my guess is the dollar will go through a 35-percent correction, which would put it at 55."

"The key in how low the dollar goes is the interest rates," Chapman told WND. "In January, the Fed is going to have to make a decision which way to go. If Fed rates go up, the dollar will hold in the 78.33 range, but the stock market and the economy will tank. If next year the Fed lowers rates to keep the economy from crashing, the bottom will fall out of the dollar, and I see it going as low as 55. Once the dollar hits bottom, it will take the stock market and the economy right with it anyway. The Fed is in a box they can't get out of."

Clocker Bob predicts the Fed will lower rates in January, wringing every last ounce of euphoria out of the suckers' rally on Wall Street, and sacrifice the dollar ( of course, the elites will have evacuated the dollar before the roof caves in ). The dollar's decay will come into stark relief for the average American, and the regional currency, the Amero, will be the lifeboat offered.

bob, you ruin my day just about everyday.

fanning the flames of paranoia.

and i still haven't found the word for when paranoia is right.

people keep telling me suspicion, intuition, premonition...

not what i mean, people.


anyways, keep up the good work.

that damned fly wrote:
and i still haven't found the word for when paranoia is right.

people keep telling me suspicion, intuition, premonition...

Probability...

Ty Webb wrote:

that damned fly wrote:
and i still haven't found the word for when paranoia is right.

people keep telling me suspicion, intuition, premonition...

Probability...

Wrong
It's Nostradamus

that damned fly wrote:bob, you ruin my day just about everyday.

I'm happier knowing the risks myself. Trouble that seems to come out of nowhere ruins my day much worse.

Important point: I am a pessimist about the economy. I look *only* for bad news. Keep that in mind. I'm trying to present an alternative to the corporate-sponsored business news in the media. It's not likely that either they or I will be entirely right, as events unfold. Find your place somewhere in between, if you wish.

NEW YORK (Reuters), 12/12/06- It's only a matter of time before the beleaguered U.S. dollar loses its status as the world's reserve currency and medium of exchange, U.S. fund manager and author Jim Rogers told Reuters in an interview.

"The dollar is a terribly flawed currency," said Rogers, who co-founded the Quantum hedge fund with billionaire investor George Soros in the 1970s.

He urged investors to switch to the Brazilian real <BRBY> and Chinese yuan <CNY=CFXS> instead.

"You should hold as few dollars as possible. The dollar's decline would go on for years to come," he added.

"As recent as 1987, the United States was a creditor nation. We are now the largest debtor nation the world has ever seen," said Rogers.

"We owe the rest of the world over $13 trillion. And that's a terrifying thought. Our foreign debt is increasing at the rate of $1 trillion every 15 months," he added.

Rogers also talked about one of his favorite topics -- China. He said the 19th century belonged to the British, the 20th century to America, and the 21st century will be owned by China.

He traveled through China by motorcycle and car in the 1990s researching investment ideas and collecting material for his books.

He said he is currently invested in the renminbi and Chinese stocks and is planning to move to Asia in the near future to take advantage of the region's growth story.

Rogers said the Chinese yuan could potentially replace the dollar as the world's reserve currency in about 15-20 years provided the currency becomes freely convertible.

"The renminbi would go higher over the years. they have a huge balance of payments surplus and it's the largest creditor nation in the world."

Creditors call the shots in a debt-based global economy.

Bob,

I enjoy your post. Usually half way through one of them my heart starts racing as I start thinking about my 401K and real estate holdings. Then I usually relax and think through it for a minute;

1) The U.S. economy is always on the brink of collapse. It is always one horrific event away from total disaster.

2) The Chinese and Saudi's are making way too much money off of the American consumer to dump the dollar. China's economy is growing at a 9%+ rate, why would they risk fucking that up? They love dollars. I believe that upper class Chinese children eat them for breakfast.

3) Foreign creditors will still buy the dollar even if the fed lowers rates. They always have. Just ask the Saudis. When Bush needed money for his war (god forbid he raise taxes), OPEC lowered production- forcing higher gas prices. The Saudis cleared an extra 300 Billion or so from the American consumer, then turned around and lent it back to U.S. government (I'm making up the numbers). Why would they stop doing this?

4) The housing market is cooler than before, but when compared to historic numbers is still okay. Not great, but not as bad as everyone makes it out to be.

5) No one in the world benefits from the collapse of the dollar- not even the lizard people. When in doubt the status quo will prevail.

Obviously, the dollar is in bad shape, but I don't think we are on the verge of a meltdown. Again, I enjoy reading your post.

Happy Holidays.

R.F.F. wrote:
1) The U.S. economy is always on the brink of collapse. It is always one horrific event away from total disaster.

The debt burden has never been this large, and the engine to service it so weakened. The US economy has had several bank runs and currency failures, and one Great Depression. The US was pulled out of the Depression by the globalists in a very different world. While the US military is still critical for maintaining market stability in our hemisphere, I don't think our services are still in as much demand world-wide as they were sixty years ago. Our economy is sustained from without, based on need- if the globalists don't need to fund our defense budgets at the current level, and if the buying power of the American consumer can be replaced by emerging markets elsewhere, what maintains the demand for our debt?

R.F.F. wrote:2) The Chinese and Saudi's are making way too much money off of the American consumer to dump the dollar. China's economy is growing at a 9%+ rate, why would they risk fucking that up? They love dollars. I believe that upper class Chinese children eat them for breakfast.

The Chinese will fuck it up like this- through the promotion of the Yuan as a reserve currency, first in the Far East, then with OPEC nations. The oil importers will prefer selling oil for currency from a growing nation- that seems to be the unavaoidable course for the world's oil markets. Why sell oil for dollars that have been devalued at an historic pace by the US Fed?

R.F.F. wrote:3) Foreign creditors will still buy the dollar even if the fed lowers rates. They always have. Just ask the Saudis. When Bush needed money for his war (god forbid he raise taxes), OPEC lowered production- forcing higher gas prices. The Saudis cleared an extra 300 Billion or so from the American consumer, then turned around and lent it back to U.S. government (I'm making up the numbers). Why would they stop doing this?

The Fed may try and preserve demand for our debt by raising rates. The Fed cannot stand pat- the currency market speculators are smelling blood at 5.25%. The dollar has weakened over 30% against the Euro in eight years, and the commodity and metal prices show how much inflation is built into the dollar as soon as it leaves the presses. A reduction in interest rates accelerates that trend. An increase sinks the housing market and the equity bubble. The Fed is pinned in, they have no elbow room. Whatever course they take has severe ramifications.

The Saudis can attempt to compensate for the weaker dollar themselves by cutting production like you say, bringing in a greater quantity of weaker dollars, but what if global oil demand plateaus at the higher price? Do you think China will appreciate paying more for oil because of the Saudis in bed with the Bush crime syndicate? Seems like their smart response, as an oil importer, would be to shift their demand to exporters willing to accept currency other than dollars, like Russia or Iran. That means more pressure on the dollar- you see the dominos lining up?

R.F.F. wrote:4) The housing market is cooler than before, but when compared to historic numbers is still okay. Not great, but not as bad as everyone makes it out to be.

We'll see. It's a cash sink for property flippers looking for high returns because they're flush with cash, thanks to the tax cuts. When prices dip, hot money flees, no different than hot money fleeing Argentina or Indonesia or Enron. I don't like comparisons to earlier housing markets, either, because I don't think they factor in the amount of debt held by first-time home buyers who were teased into homes out of proportion to their incomes by cheap interest rates, and also, because of the trillions in bonds issued by freddie mac and fannie mae in circulation- those bundles are a new thing, and they're leveraged to astronomical numbers by speculators using derivatives to bet on the housing bubble.

R.F.F. wrote:5) No one in the world benefits from the collapse of the dollar- not even the lizard people. When in doubt the status quo will prevail.

Definitely not true. There are people who benefit from every currency's rise or fall, even the world's reserve currency. Someday, that horse will be put down. Just a matter of the pinnacle of the pyramid deciding that time is up. When in doubt, profit will prevail, not the status quo.

R.F.F. wrote:Obviously, the dollar is in bad shape, but I don't think we are on the verge of a meltdown. Again, I enjoy reading your post.

Happy Holidays.

Thanks for your excellent reply, and same to you.

A report scheduled to be released by the Treasury Department tomorrow is expected to show the true deficit in the Bush administration's 2006 federal budget to be an astounding $3.5 trillion in the red, not $248.2 billion as previously reported.

"The Bush administration is running a federal budget deficit at an unsustainable, system-dooming pace of about $3.5 trillion a year, econometrician John Williams, who publishes the website Shadow Government Statistics.

Williams' argument is fully validated in the Financial Report of the United States, a little-known report Congress has mandated that the Treasury Department publishes each year, reporting the federal budget on a GAAP accounting basis, not on a cash accrual basis.

The 2006 edition of the Financial Report of the United States is due out tomorrow.

"Typically, the Treasury reports the budget deficit on current accounts basis. That's why Treasury announced recently that the 2006 federal budget deficit was going to be $248.2 billion. But it is a gimmick," Williams claimed.

"When we see the Treasury report on Friday we are probably going to find out that the real 2006 federal budget deficit is more like $3.5 trillion."

Williams predicts, however, the mainstream media won't report it.

"It's not the type of news Reuters, Bloomberg and the Wall Street Journal like to broadcast to investors and the American public," he said. "Besides, the financial press won't take the time and effort to analyze the figures and comb through the footnotes. The report is going to be released on Friday and most financial reporters aren't accountants."

Why the huge discrepancy between the two figures?

"The $248 billion federal budget deficit figure results from what basically amounts to a cash flow analysis," Williams explained. "On a cash basis, the Treasury takes all the tax revenue, including Social Security taxes, as current income. The trick is that Treasury essentially steals the money that comes in on Social Security taxes, without accounting for any offsetting Social Security liability. When you run your accounting that way, the Treasury gets to report a federal budget deficit that dramatically reduces the real figure."

What's different about the anticipated 2006 Financial Report of the United States?

"Congress a few years ago mandated that the Treasury had to report one report each year that used GAAP accounting," Williams told WND. "Then, when you figure in all liabilities including Social Security and Medicare, the real 2006 deficit is huge by comparison. What I expect to show up on Friday is a real federal budget deficit of $3.5 trillion or more, not the $248.2 billion earlier reported."

"Even worse," Williams continued, "the U.S. Government's negative net worth widened to $49.4 trillion in 2005. For the first time, total government liabilities have topped $50 trillion, and the number is continuing to grow. The United States is bankrupt, whether the Bush administration wants to admit it or not."

A quick study of the following table Williams has posted on his website shows the alarming nature of the Bush administration federal budget shortfalls when GAAP accounting methods are used and all Social Security and Medicare liabilities are fully realized.

This will likely only interest a geek like me, but I find it fascinating when insiders go on the record like Kasriel does here. This is related to the 100's of billions of dollars tied up in bundled mortgages offered by Fannie Mae and Ginnie Mac.

mike shedlock's financial blog wrote:
Interview with Paul Kasriel

There has been a raging debate on Silicon Investor, the Motley Fool, Minyanville, and nearly everywhere else too about whether or not it is possible for a Japanese style deflation to happen in the United States. Almost everyone denies the possibility outright.

Because most people writing about or discussing this issue do not have a background in economics (myself included), I asked Paul Kasriel Sr. V.P. and Director of Economic Research at The Northern Trust Company for his thoughts on deflation in Japan vs. deflation in the US. We also had a brief follow up phone conversation after I received his email response. What follows is an email from Kasriel as well as a synopsis of our phone interview. These conversations took place on December 7th and 8th 2006 with one followup question over the weekend.

Email from Paul Kasriel

Japan experienced a deflation in recent years because the bursting of its asset-price bubble in the early 1990s created huge losses in its banking system. The Japanese banks had financed the asset-price bubble. When it burst, the debtors could not keep current on their loans to the banks and therefore were forced to turn back the collateral to the banks. The market value of the collateral, of course, was less than the amount of the loans outstanding, thereby inflicting huge losses of capital to the Japanese banks. With the decline in bank capital, the Japanese banks could not extend new credit to the private sector even though the Bank of Japan was offering credit to the banks at very low nominal rates of interest.

Banks are an important transmission mechanism between the central bank and the private economy. If the banks are unable or unwilling to extend the cheap credit being offered to them by the central bank, then the economy grows very slowly, if at all. This happened in the U.S. during the early 1930s.

U.S. banks currently hold record amounts of mortgage-related assets on their books. If the housing market were to go into a deep recession resulting in massive mortgage defaults, the U.S. banking system could sustain huge losses similar to what the Japanese banks experienced in the 1990s. If this were to occur, the Fed could cut interest rates to zero but it would have little positive effect on economic activity or inflation.

Short of the Fed depositing newly-created money directly into private sector accounts, I suspect that a deflation would occur under these circumstances. Again, crippled banking systems tend to bring on deflations. And crippled banking systems seem to result from the bursting of asset bubbles because of the sharp decline in the value of the collateral backing bank loans.

Hope this helps,
Paul

Followup Interview

I was fortunate to catch Paul for a brief phone interview after I received that email. Here it is.

Mish: Would you say that consumer debt in the US as opposed to the lack of consumer debt in Japan increases the deflationary pressures on the US economy?

Kasriel: Yes, absolutely. The latest figures that I have show that banks' exposure to the mortgage market is at 62% of their total earnings assets, an all time high. If a prolonged housing bust ensues, banks could be in big trouble.

Mish: What if Bernanke cuts interest rates to 1 percent?

Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?

Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

Mish: Do you have any comments regarding Greenspan?

Kasriel: Greenspan is a fascinating study. Some day I hope to write a book about him. Right now I willing to say he is the luckiest Fed chairman in history.

Mish: Greenspan is the luckiest Fed chair in history? How so?

Kasriel: He was fortunate in two very big ways. First off, he was fortunate to preside over the economy at a time when productivity was soaring and the global supply of goods was expanding rapidly because China had entered the world trading arena. In that environment the Fed could create large amounts of money and credit without causing inflation other than in asset prices.

Mish: Does that mean you believe that inflation is a monetary phenomenon related to increases in money supply and credit as opposed to rising prices?

Kasriel: Yes, and that is exactly why Greenspan was so lucky. Inflation was masked by the factors we just mentioned.

Mish: I am very glad you said the word "masked". I have used that word for quite some time but most just do not get it. What is the second way Greenspan was fortunate?

Kasriel: When the Fed slashed interest rates to 1%, the U.S. banking system was capitalized well enough to be willing and able to relend the cheap credit it was being offered by the Fed. This stimulated housing. Housing provided jobs. With jobs and with rising real estate prices people felt confident to borrow and banks felt comfortable to lend.

Mish: How does inflation start and end?

Kasriel: Inflation starts with expansion of money and credit. Inflation ends when the central bank is no longer able or willing to extend credit and/or when consumers and businesses are no longer willing to borrow because further expansion and /or speculation no longer makes any economic sense.

Mish: So when does it all end?

Kasriel: That is extremely difficult to project. If the current housing recession were to turn into a housing depression, leading to massive mortgage defaults, it could end. Alternatively, if there were a run on the dollar in the foreign exchange market, price inflation could spike up and the Fed would have no choice but to raise interest rates aggressively. Given the record leverage in the U.S. economy, the rise in interest rates would prompt large scale bankruptcies. These are the two "checkmate" scenarios that come to mind.

Well I hope that puts to bed two ideas

* That it is impossible or nearly impossible for the US to suffer Japanese style deflation

* That slashing interest rates to 1% will matter one iota if it happens.

It should also put to bed (but probably won't) the distinction between inflation (a monetary event) and prices.

Peter Schiff on the trip to China this week by Bernanke and Paulson.

safe haven, December 15, 2006 wrote:Ben and Hank's Not So Excellent Adventure

This week, in what I believe to be an unprecedented diplomatic pilgrimage, the sitting U.S. Secretary of the Treasury and the Chairman of the Federal Reserve were dispatched to China. Ostensibly they were sent to pressure the Chinese into allowing their currency to appreciate against the dollar. In reality, they were more likely sent there to do just the opposite.

Despite the hawkish public tone coming from Washington, the private dialogue was likely to have been far meeker. My guess is that Bernanke and Paulson kowtowed to America's biggest supplier and largest lender, and pleaded for them to keep the goods and credit flowing. Although it didn't take place in Macy's window, the affair may qualify as the "mother of all butt kissings."

The last thing that Paulson and Bernanke want is for the world to recognize the financial precipice upon which the U.S. economy now teeters, and China's unique ability to push it over the edge.

full article at safe haven