Here is an article from The Market Oracle that is full of economic clarity. The piece contains good explanations for the eventual demise of the dollar and, for once, looks at the US dollar from outside America’s own borders, because this is where all the real and effective dollar threats originate and persist — where the Fed can no longer control or inflate its way out of its Foreign Debt Mess. The author also makes the painful and undeniable point that the US govt is now no longer capable of paying back the interest owed to its foreign creditors, let alone the trillions in debt itself. He further compares the US/China economic tussle as like that with US/Japan in 1985, where Japan was threatened with trade sanctions by the US, so Japan bent to America’s will and kept their interest rates low — and look what happened, Japan’s bubble grew and popped. And Japan still hasn’t recovered after nearly 20 years. So it is very unlikely that China will roll over and play patsy like Japan, since they are purely intent on implementing economic policies to enable their own country to survive this financial and dollar debacle as well as to protect their own savings.

U.S. Credit Turns to Debt, Will The U.S. Devalue The Dollar?
Article by Darryl R Schoon

The ability to wage war on credit gave the West an insurmountable advantage over the East. The West’s credit, however, has now turned to debt and the West has lost its advantage. But the return to parity will not be easy.

The three hundred year economic expansion fueled by debt-based capital markets is coming to an end and with it, the hegemony of the West over the East. During that period, debt-based paper money propelled first England then the US to world dominion because of the ability to wage war on credit and to print money ad infinitum.

That era is now ending because the critical balance between credit-driven expansion and debt-driven contraction has now shifted significantly in favor of the latter; and in 2010, both East and West now find themselves on the edge of a growing deflationary sinkhole created by the sequential collapse of two large US bubbles, the dot.com and US real estate bubbles.

The US caused the 1930s deflationary depression and is again cause of the current contraction; and although similarities exist between the two, the differences between them insure a far more consequential outcome today than in the 1930s.

Global demand is again falling as credit contracts, a sign that debt-driven deflation is back but, today, there is an additional danger as well. Since 1971, because of the US default on its gold obligations, money no longer possesses intrinsic value and the consequences will soon become apparent. Deflationary depressions and a collapse in the value of fiat money have happened before but never simultaneously. Soon, they will.

We are in what Stephen Roach, Chairman of Morgan Stanley Asia, calls the end-game, the resolution of past monetary excesses and imbalances, excesses and imbalances that reached never-before-seen heights in the last decade. The long awaited day of reckoning has arrived.

THE PROBLEM

Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the US, the world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more, what the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital systems.

The amount of outstanding US debt has now reached levels that can never be paid off:

“… the United States government and its agencies have, by far, the largest pile-up of interest-bearing debts ($15.6 trillion), the largest accumulation of unsecured obligations (over $60 trillion), the largest yearly deficit ($1.6 trillion), and the greatest indebtedness to the rest of the world ($4.8 trillion).”

Martin D. Weiss, www.moneyandmarkets.com

The unpayable levels of US debt are not just the problem of the US. Because the US dollar is the lynchpin of today’s fiat money system, US debt is everyone’s problem. The US dollar is the world reserve currency and a default by the US will have far-reaching consequences, especially in China, its largest creditor.

INFLATE, DEVALUE AND TAX

Bill Gross, co-founder of PIMCO, the world’s largest bond fund and an expert in matters of debt, wrote in 2006, the way a reserve currency nation [such as the US] gets out from under the burden of excessive liabilities is to inflate, devalue, and tax.

Inflation destroys the value/cost of liabilities by eroding the value of money. Debts are paid back with inflated currencies, a process which benefits the debtor and injures the creditor. This is why reserve currency nations usually inflate their way out of debt by printing what they owe.

Devaluation is another option afforded reserve currency nations. By devaluing the value of their currency, the value of what they owe falls relative to other currencies. Again, the benefit is to the debtor at the expense of the creditor.

Taxation is another option but is no longer available to the US, as its liabilities are now too high. It would be like forcing the elderly and morbidly obese to engage in strenuous exercise to regain youth. Of the three, inflating away debt is by far the preferred option but it is one the US can no longer choose.

Managing Director and Chief US Economist at Morgan Stanley, Richard Berner, recently discussed the reasons in We Can’t Inflate Our Way Out, February 24, 2010. http://www.morganstanley.com/..

It’s tempting to think that the US can inflate its way out of its fiscal problems. A faster, sustained increase in prices would erode the real value of past debt, and higher future inflation would - other things equal - reduce the real resources needed to service and pay back the promises we are making today.

However, inflating away US debt won’t work because as Richard Berner points out nearly half of federal outlays are [now] linked to inflation, meaning that increments to debt would [also] rise with inflation.

Inducing monetary inflation would also raise aggregate US debt resulting in a self-defeating cycle of higher prices and higher debt. However, there is also another more fundamental reason why inflating away US debt won’t work, to wit: Inflation is almost impossible to induce during severe deflationary contractions.

Fed Chairman Ben Bernanke understands this difficulty quite well. Bernanke’s late mentor, Milton Friedman, theorized the Great Depression could have been prevented by sufficient monetary stimulus and so in 2008, faced with the possibility of another deflationary depression, Bernanke put Friedman’s theory to the test. It failed.

http://jutiagroup.com/..

Unfortunately, when tested, Friedman’s theory didn’t work. Despite Bernanke’s massive monetary expansion, global credit is still contracting and lending is drying up.

The Telegraph UK reported on February 17, 2010: lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16%. “Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10% decline,” he [analyst David Rosenberg of Gluskin Sheff] said. The article continues: The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6% over the last three months. http://www.telegraph.co.uk/..

Inflating away debt is virtually impossible in the presence of deflation, but if US monetary expansion is sufficiently large, it could result in the hyperinflation of the US money supply, which would destroy both US debt and the US economy as well.

DEVALUING THE US DOLLAR

Devaluation is the US’ only remaining option. But, on February 25th, Comstock Partners’ special report, The Cycle of Deflation, Impediments to Debt Relief, pointed out the major impediment to a US devaluation to reduce debt—China.

“…there is a stumbling block to the normal competitive devaluations that typically take place. In the past, a country that incurred too much debt just did what they could to devalue their currency in order to export their way out of the dilemma by exporting their goods and services to their trading partners. ..[But]The Chinese have linked their currency to ours, so as we debase our currency, one of our major trading partner’s currency is also declining and China becomes the major beneficiary of the debasement of our dollar.” http://www.comstockfunds.com

The China peg to the US dollar thus prevents the US from altering its trade deficit by currency devaluation, but it does not prevent the US from devaluing the dollar for other reasons. If the US does devalue the dollar, it will not be to reduce debt—it will be to maintain its advantage over the world in general and China in particular.

YESTERDAY JAPAN TODAY CHINA

In 1985, when Japan was challenging the US for economic dominance the Japanese economy was in danger of overheating and Japan signaled the US its intent to raise interest rates.

The US responded by threatening Japan with trade sanctions, cutting off Japan from US markets. During the 1980s, the US badly needed Japanese savings to fuel Reagan’s multi-trillion dollar debt-based military buildup; and if Japanese rates were raised, Japanese savings would stay at home.

Threats of US trade sanctions forced Japan to keep interest rates low but at a perhaps fatal cost to Japan. Low interest rates combined with inflows of burgeoning trade profits ignited a speculative frenzy in stocks causing the then largest stock market bubble in history; and when the bubble collapsed in 1990, Japan fell into a deflationary trap from which it has never fully emerged.

Today, US dominance is again being challenged, this time by China. While it is not possible to know what the US will do, it is naïve to believe the US will do nothing; but whatever happens, US debt and the US dollar will be affected.

China has now significantly reduced its buying of US debt leaving the US with growing deficits and a virtual boycott by China of new US IOUs. This will impact future US/China relations.

The tentative but mutual benefits of the past are being replaced by self-interest as US spending and consequent debt is increasingly perceived as being out of control by China. That perception is correct. Since the 1980s, America’s focus has been on borrowing more, not spending less and the implications are clear.

With China moving away from increasingly risky US debt, the US is now far more likely to treat China as a challenger than as a needed creditor; and, while devaluing the US dollar would have minimal impact on overall US debt, it would have a significant impact on China.

In December 2009, total foreign holdings of US government debt equaled $3.29 trillion. With total US obligations now close to $100 trillion, a 30 % devaluation of the US dollar would impact only that debt held by foreigners—but the losses to China would significant.

China currently owns at least $1.7 billion in US dollar denominated securities; and, if the US devalued the dollar by 30 %, China’s losses on its investments would be in excess of $500 million.

As stated earlier, it is not possible to know what the US will do. But since WWII geopolitical considerations have always outweighed economic factors in US policy decisions and there is little reason to expect this to change—even as the end-game approaches.

THE END GAME AND SOVEREIGN DEFAULT

The US is trapped. Caught between rising expenditures and the need to borrow more, outstanding US debt is incapable of ever being repaid and should the credit rating of the US ever reflect its actual state, sovereign default, not devaluation would be the result.

In 2008, Kenneth Rogoff and Carmen Reinhart in This Time Is Different: A Panoramic View of Eight Centuries of Financial Crisis reviewed the history of sovereign defaults concluding the then dearth of defaults was in actuality a warning of more to come. They were right.

Then, Rogoff and Reinhart mistakenly described the US as a “default virgin”, belonging to a small group of nations that had never defaulted. But on February 26th Rogoff said that the US had, in fact, defaulted during the Great Depression by changing the price of gold from $20 to $35 per ounce.

While technically a default, the US action was actually a currency devaluation. The real default occurred in 1973 when the US officially reneged on its gold obligations under Bretton-Woods, leaving other nations holding US paper dollars that could no longer be converted to gold.

Professor Antal Fekete noted the significance of that default when he wrote in 2008,

“Thirty-five years ago gold, symbol of permanence, was chased out from the Monetary Garden of Eden, replaced by the floating irredeemable dollar as the pillar of the international monetary system. That’s right: a floating pillar. The gold demonetization exercise was a farce. It was designed as a fig leaf to cover up the ugly default of the U.S. government on its gold-redeemable sight obligations to foreigners. The word ‘default’ itself was put under taboo even though it punctured big holes in the balance sheet of every central bank of the world, as its dollar-denominated assets sank in value in terms of anything but the dollar itself.”

As the end-game progresses it is impossible to know what the US will do. It is likely the US doesn’t know itself. What the US does know is that it is now trapped by increasing levels of mounting debt from which there is no easy exit.

I’ve been saying for some time now that Fort Knox has no gold, probably hasn’t had any of the yellow shiny stuff for some decades now. Don’t believe me? Well, here is an exposé by Jeff Neilsen from Benzinga, having a quiet rant about the US Gold Reserves. I find his arguments fairly logical, irresistible and  irrefutable.

There are many who — like me — believe that gold is the only answer to global monetary stability. And there are many who would also assume that the American govt actually has some gold, and simply refuse to believe that the dollar will fall — due to its importance as a reserve currency — and if it does fall, then the dollar is bound to rise from the ashes a winner. Of course, for this to happen and be true, the US govt would have to own some gold.

Reasonable?

Article from Benzinga

In discussing the “gold reserves” of the U.S. government, the first point to make is that the only way in which this topic can be discussed is from a retrospective viewpoint. The reason for this is that while the U.S. government claims to have the largest reserves of gold in the world (supposedly over 8,000 tons) it has not allowed anyone to see this ‘gold’ in over 50 years.

Would anyone believe the balance-sheet claims of a Wall Street bank, if it had not been audited in over 50 years? If not, how could we put any credence in the gold reserve numbers of a government which is totally subservient to its Wall Street puppet-masters?

The next, most-important point to make is that the U.S. government defaulted on its gold obligations in 1971, roughly a decade after the last time any U.S. gold was actually seen. At this point, I think it would be helpful to view Wikipedia’s definition of “default”:

failure to satisfy the terms of a loan obligation or to pay back a loan.

The U.S. owed the world ten’s of thousands of tons of gold – obligations it racked-up during the Vietnam Decade, and it failed to satisfy those obligations.

Here’s a question to test readers. How often does the party defaulting on a loan end up with more money than its creditors? Answer: never. Thus, an obvious observation (yet one which is never made) is that the claims of the U.S. government to still have any gold at all after its gold-default are absurd on their surface – and the only way to rebut that absurdity would be to prove that it still held the gold, by showing it to someone.

Many times and in many articles, I have scribbled  my concern with the dominance of special interests over the workings of the Democratic Process in America. For this reason, both Capitalism and Democracy are most definitely not alive and well.

In the article below, we now have confirmation of the successful, wider spread of this corrupt influence into the major decisions of the US Justices of America. The article below claims that these Justices have made a bad decision because they are “out of touch” with the America. Well now, how convenient is that?

In the article below, the political media’s game of bluff, smoke and mirrors — such a worthwhile and convenient distraction for all, don’t you think ? — still goes on. The fault was Bush vs. Gore !! No, no…The fault was because of Bush/Cheney !! Hell, even Obama was well “flummoxed” at the Supreme Court result !! Really?….Well go figure!! And not one mention of the real culprits who are so bravely but vaguely  described as “…money flowing into Washington” within that right-tilted and poorly-written article below.  Who’s money for Chrissake ? Who are these unmentionable Shadow Gods?

As seems to pervade all political media opinion these days, no one dares question another very possible root cause for this Supreme Court ruling, even though another completely viable explanation for this decision in favour of special interests is simple bribery and corruption within the American Supreme Court system.

Since both Houses and The President are bought, paid for, and continually influenced by special interests, isn’t it therefore logical that their insidious influence should also somehow extend so easily to the purchasing of “preferred outcomes” from High Court Justices ?

Here, the political status quo or that peculiar outside quasi-power that rules the US government with such a corrupt iron hand has been maintained, it’s power completely safe and undisturbed and, as exampled with this Supreme Ruling, now at the very pinnacle of its success.

And so, dear reader, why should we be so surprised and shocked with this Supreme Court  ruling?

Article by John Dean from Truthdig

The conservative majority of the U.S. Supreme Court has given a monumental victory to special interests—i.e., the big money corporations, the folks who already dominate Washington politics—with its ruling in Citizens United v. Federal Election Commission. Chief Justice John Roberts, along with Justices Antonin Scalia, Clarence Thomas, Samuel Alito and Anthony Kennedy (who wrote the court’s opinion), have gone out of their way to further obliterate serious efforts to reform out-of-control campaign spending—spending that conspicuously distorts democracy in favor of those who can buy political influence. This ruling is of the same judical activism ilk that produced Bush v. Gore, not to mention the ensuing eight years of a disastrous Bush/Cheney presidency from which the nation has yet to recover. Understandably, President Obama is flummoxed.

This decision is long, at 183 pages. It includes a powerful dissent by the four centrist justices (there are no liberals on this court). And the ruling is chock full of nuanced information that spells out what Congress can and cannot do to reform our dysfunctional and money-hungry election system. This is not a ruling that lends itself to instant analysis. Those who follow this subject far closer than I do will be figuring it out for days, if not months. However, I would recommend the following sites for a quick take on the ruling: Slate (good overview), SCOTUSBLOG (which has followed the case closely), and, in particular, The Brennan Center (which filed an amicus brief in the case and will be leading the way in sorting out the full meaning). To understand what the court majority did, scroll down to about Page 88 of your .pdf reader and read the dissent written by Justice John Paul Stevens, and joined by Justices Ruth Ginsburg, Steven Breyer and Sonia Sotomayor. It is an eye-opener.

Aside from the fact that the majority ruling reeks of conservative politics, what I find most striking about conservative judicial activism typified by this ruling is the fact that the justices involved are totally out of touch with reality. None of the men involved in this historic decision have been elected to anything, ever. They have no idea how difficult it is for elected officials to deal in the contemporary money-flooded milieu of Washington. The work experience of those who have further opened the floodgates for money in politics is restricted to the executive branch, high-priced law firms, or the chambers of the lower federal appellate courts. Not since the late Justice Hugo Black, a former U.S. senator who retired in 1971, has the court had a member of Congress on its bench, someone who can explain the real world to the other justices. These conservative justices live in a bubble, and they have little true understanding of what they have done, other than, of course, to know that they have taken care of conservatives, the so-called Citizens United who filed this lawsuit. (Yes, David N. Bossie, the president of Citizens United, is the same fellow who worked overtime to impeach President Bill Clinton.)

After I fully digest this decision and speak with friends in Washington who have long been concerned that the Bush/Cheney legacy that now controls the high court might do as they have in fact done, I will share further thoughts about the damage this ruling will bring, and what can and will be done. For this ruling has the potential of being even more pernicious than Bush v. Gore, since it reaches not merely the presidency but every elective office in the United States. Conservatives may not know how to govern when they are in power, but they sure know how to make certain that centrists, progressives and liberals are not given a sustained opportunity to work their will.

Article from the WallStreetPit

“A dollar reserve system that might have made sense for the 20th century no longer makes sense for 21st century,” Joseph Stiglitz, 2001 Nobel Laureate and Professor in Economics at Columbia University, said at a conference in Paris. According to Mr. Stiglitz, France’s President Nicholas Sarkozy is right in his assessment that the disorder in currency markets has become unacceptable, and that the economic reality of a multipolar world will have to find sooner or later a translation on the monetary level. Stiglitz also pointed out during his presentation that France has articulated a much clearer vision of what needs to be done to fix the global financial system than the United States.

CNBC: “On both a national and international level, President Sarkozy has explained very well some of the economic, social and political reasons why something has to be done about bonuses whereas in the United States there has been no real discussion about that. Unfortunately too many people in the United States on the right have their heads buried in the sand,” said Stiglitz. “They try to pretend that we should go back to the kind of market economy that we had before the crisis. The reality is that we had a storm that the market created and it’s a storm that has happened over and over again.”

Stiglitz, who has become a leading critic of the global market economy, also said that it is only through state intervention that the global economy was saved.

Here is an accurate  assessment of the recently passed financial regulations bill and  for all of The President’s much-lauded glorious verbal bashings of the Wall Street Oligarchy, this drive-by bill is simply a package that allows Wall Street to continue to “regulate” themselves as before. Therefore,  from its outcome as compared to his rhetoric, Obama is thoroughly and equally  guilty of both two-faced hypocrisy and weak leadership. Glass-Steagall still lies hopelessly  decaying and rotting in its broken political coffin, there has been no resurrection here. In other words there has been no change, no  urgent transfer of power or regulation to the  government and thereby to the people — all is smoke, mirrors and BS from The Administration as well as from the well-leashed and subservient media — ah yes, the despicable financial status quo has been very successfully and stealthily restored,  their power safely undiluted and undiminished once again for the sole benefit of certain cherry-picked and much-favoured Wall Street financial houses.

People should be thoroughly questioning President Obama’s ineffective, unconvincing and contradicting hot-air rhetoric — in a single speech, his  hard-working lungs could surely fill and lift a good twenty hot-air balloons with such inspiring but empty blab. But what has Obama actually achieved so far during his presidential term? A leader — particularly a major western leader — should lead from the front and keep his word, but as time creeps on the pattern of continual citizen disappointment is always the same –  Obama, for all his sizzling oratory, prefers leading discreetly from the tainted lobbyist’s bleechers, his amazingly unaccomplished political and geopolitical record so far is simple testament to the fact that he is a very ordinary and unremarkable leader, and one who has little imagination, with no real thought or ability to make any significant difference to the ordinary American’s plight.

Health Bill next. More disappointment coming….

Article by Robert Scheer

Maybe I got it wrong. During the presidential campaign I wrote columns blasting Sen. John McCain for siding with the big bankers on deregulation, citing his choosing ex-Sen. Phil Gramm, currently a vice chairman of the Swiss-owned banking giant UBS, as his presidential campaign chair. Barack Obama, on the other hand, repeatedly blasted Gramm and the Gramm-Leach-Bliley Act, which the Texas Republican had pushed through Congress, with President Bill Clinton’s support—legislation that repealed the Glass-Steagall Act and radically deregulated the financial industry.

But now the roles are reversed, and it is McCain who, along with Sen. Maria Cantwell, D-Wash., has sponsored a bill to repeal Gramm’s legislation, while Obama seeks to preserve it.

The Gramm legislation, which permitted the merger of investment and commercial banks into too-big-to-fail corporations (including Citigroup and AIG, two financial giants that had to be bailed out by taxpayers), was thought by Obama the candidate to be a key cause of the meltdown. But as president he reappointed the Clinton-era officials who had sided with Gramm in ending sensible banking regulations that had protected the public for 70 years and made the U.S. banking system the envy of the world.

Rather than restore Glass-Steagall, the Obama-backed banking regulation bill passed last month by the Democratic majority in the House went along with the desire of Wall Street lobbyists to prevent the breakup of the big conglomerates and to block control of their massive trading in the derivatives that proved to be so toxic.

The result, with some deceptive reformist window dressing, is a pro-Wall Street business-as-usual cop-out, and the Senate version is likely to be more of the same. Fortunately, there is a better way, and thanks to the McCain-Cantwell bill and a companion one authored by Rep. Maurice Hinchey, D-N.Y., in the House, there is still a chance at serious financial regulation through the restoration of the key provisions of Glass-Steagall.

How odd that it now remains for McCain to stand up to the oversize banks.

“… I want to ensure that we never stick the American taxpayer with another $700 billion—or even larger—tab to bail out the financial industry,” McCain proclaimed in introducing his legislation. “… This country would be better served if we limit the activities of these financial institutions.”

But just the opposite happened under the great bailout. The big investment houses of Goldman Sachs and Morgan Stanley were allowed to suddenly attain the status of commercial banks in order to qualify for federal bailouts, and the once staid commercial Bank of America was encouraged by the Fed to buy out the investment house Merrill Lynch. As a result, banking has never before been concentrated in so few hands. As Rep. Hinchey put it:

“Today, just four huge financial institutions hold half the mortgages in America, issue nearly two-thirds of credit cards, and control about 40 percent of all bank deposits in the U.S. In addition, the face value of over-the-counter derivatives at commercial banks has grown to $290 trillion, 95 percent of which are held at just five financial institutions. We cannot allow the security of the American economy to rest in the hands of so few institutions.”

Those derivatives, that hodgepodge collection of securitized debt—including mortgages of most American homes—are at the heart of the problem, and they are not regulated in any significant way by the legislation supported by the administration. It’s no wonder, since Lawrence Summers, the president’s top economic adviser, was not only a key proponent of reversing Glass-Steagall in the Clinton White House but also supported the Financial Services Modernization Act, passed a year later, that summarily exempted those suspect derivatives from any regulation.

Although Obama has blasted “fat cat bankers on Wall Street,” it is time for those who elected him to ask for more than rhetoric. And to ask that of the Democratic leaders of the House, who refused to allow a vote on Hinchey’s amendment to include the restoration of Glass-Steagall in their so-called Wall Street Reform Act. Introducing it as a separate bill, Hinchey stated:

“The repeal of the Glass-Steagall Act was done to help large banks become enormous and to line the pockets of banking executives with more money than most Americans could ever dream of earning in their lifetime. … This bill would help right the ship and return our country to the days when banks either participated in commercial lending activities or investment activities, but not both.”

There is much logic in preventing commercial banks, which carry the hard-earned savings of depositors and a federal guarantee of their worth, from engaging in the high-roller risk-taking of investment banks.

If McCain now gets it, why doesn’t Obama?