The Devaluation of the US Dollar

The need is urgent. The recognition is broad. Supply & Demand of American debt paper demand price adjustment. The USGovt avoids the topic actively. The billboard fact of the matter, as USCongressional politicians like to say, is that the USDollar must be take a downward revaluation of significant magnitude in order to even begin to offer a semblance of equilibrium and balance. Natural forces are aligned against those in power who resist the adjustment. Imbalances are too magnificent. They invite continued global revolt and financial insurrection.

Coming out of the once revered New York Fed, a site marked by Goldman Sachs pathways, is William Dudley. The New York Fed is hardly a bastion of leadership or integrity these days, not after its prominent role in producing a Wall Street meltdown from unbridled bond fraud in the last few years, complete with September 2008 climax. Dudley hints of big USDollar devaluation, from a sideways message. The US bankers have very limited options, given the perverse systemic insolvency, and the sluggish if not moribund economy. Goldman Sachs alumnus William Dudley hints at the endgame, rather than Exit Strategy, involving a steep USDollar devaluation. He seems to concede the near permanent near 0% official interest rate. Dudley spoke of FOREX pressure to push the USDollar exchange rate down. Whether it is planned or forced upon them, the US$ is heading lower and Dudley seems to acknowledge the fact. The endgame is inevitable, due to colossal deficits, huge unfunded obligations, and the desperate need to stimulate the moribund USEconomy. He might even be implicitly urging Americans to stop saving. Dudley lays out the failed effects of monetary policy when he said, "What I would like to do today is to explain in some detail the logic underlying this expectation that economic conditions will warrant exceptionally low levels of the federal funds rate for an extended period. There has to be a further demand impulse, be it a decline in household saving rates, a rise in business investment relative to profits, a further expansion of fiscal stimulus, or an improvement in the net trade balance via an increase in exports relative to imports. The fact that our foreign indebtedness is for the most part denominated in our own currency is a huge advantage in the event the dollar were to come under significant downward pressure."

Prospects look bleak for the USGovt finances, which must greatly devaluate the USDollar and accept lower value for its sovereign debt in the form of USTreasurys. Action must be taken, if not from higher long-term interest rates, then from a lower US$ exchange rate. In fact, a higher interest rate imposes damage to foreign creditors and Wall Street speculators, surely to USEconomy participants. It raises USGovt borrowing costs too. But a US$ devaluation harms foreign creditors and USEconomy participants from higher import costs, higher commodity prices. The US$ devaluation spares Wall Street the most pain, which can short the US DX index with advanced notice and insider information, their speciality. Worse, the USDollar must be devalued according to the federal guarantees for mortgage agency debt (see Fannie Mae & Freddie Mac) and credit derivative backstops (see JPMorgan and AIG, but also Fannie Mae). Implications to gold are immediate and powerful, once monetization is no longer hidden. Gold is ready for a quantum jump upward in price.

RICKARDS, GOLD & GRAND PRESSURES

Jim Rickards is cited in the Hat Trick Letter at times. As senior managing director for market intelligence at Omnis, he commands respect. His viewpoint is usually high level but effective, without too many details, but with aggregate arguments containing much credibility and legitimate force. He describes the gold market, the USDollar, the debt situation in the United States, and the Chinese angle. He begins with a preface. The perverse aspect of the USDollar is that since it is the global reserve currency, its USGovt debt is not priced like a Third World debt security, with interest rate near 10%. Instead, the near 0% rate creates unsustainable forces in the credit market, while it encourages a global revolt against the USDollar. The adjustment process will propel the Gold price much higher, multiples higher.

The following are points made by Rickards in synopsis, elaborated upon by my commentary. He explains that obviously not enough gold & silver exists to cover the physical demand if holders of paper certificates in unallocated accounts demand delivery. He refers to the now open admissions that 100:1 leverage is used in gold inventory management at the metals exchanges. For every gold ounce in inventory, 100 gold ounces are claimed in futures contracts held. The fractional practice mimics the commercial banks with reserves and loans outstanding, a shared lethal flaw. For banks, they admit their fractional banking practice, but not the gold bankers who appear to run a criminal syndicate. Most likely only a small fraction of claims could be covered with the practical physical supply available, Rickards admits. Cash settlement would have to be enforced in the majority of cases. The terms of cash settlements would not be advantageous, to say the least. In fact, he omits to mention that the widespread policy used since December in London has been for cash settlement of long gold futures contracts, with a 25% bonus. That item was mentioned three months ago by the Jackass, and confirmed at the CFTC hearings.

The price of forced cash settlement, to relieve and unwind the huge undisclosed leverage, would be set as of a record date, limited the effect of a run on gold & silver. Rickards points out the failure to properly reward paper gold investors with such settlement dictums. Months of settlement would take place, even as the gold & silver prices zoom upward. That redemption price would be much less than the current physical price, which would continue to run higher apart from the defaulted settlement of the paper claims process. In other words, the settlement in cash would be both a contract violation of owning physical metal and a denial that claims the best price, basic contract fraud, a technicality Rickards spares the exchanges in accusation. There is more here than meets the eye, based upon technicalities. If holding metal holdings are in an unallocated account, they are likely to be considered an unsecured creditor position and used with banker discretion (read: leased & sold). The fractional banking techniques have been revealed, laden with risk. The 100:1 leverage is reckless no matter what commodity or asset it involves, leaving little room for error. The gold bankers are in a bind of their own making.

Move to the impact on the USDollar and the official US debt obligations. In no way can the existing real USGovt debt be paid off without inflating the currency in which the debt is held, even to the point of hyper-inflation. Rickards regards the risk as unavoidable, since valuation of a national currency must eventually reflect its fundamentals. Furthermore, if the USFed's mortgage assets were marked to market, the USFed itself would be declared insolvent (a point made months ago by the Hat Trick Letter, confirmed by Rickards). Anything involving paper claims payable in USDollars (stocks, bonds) is a 'Rope of Sand' in his words, a complete illusion that is fraught with risk. A $5500 gold price per ounce would be sufficient to back up the money supply (M1) as an alternative to hyper-inflation and an inflationary issuance of the currency. Either powerful price inflation is permitted, or a five-fold rise in the Gold price is permitted, in his opinion. A great point!! The pressures are unavoidable, and alternative directions might not exist. He presents a gold target price is $5000 to $10,000 per troy ounce in current issue USDollars. The break point will be when the US debt can no longer be rolled over, from REPOs or formal USTreasury auctions. He does not make the comparison. This is the typical Third World debt risk factor, which US Presidents (like Clinton & Bush II) and USFed Chairmen (like Greenspan & Bernanke) ignored for years. The Rubin Doctrine calls for putting off today's crisis by mortgaging the future. At the pace seen, the USGovt will not be in any position to finance its debt or honor its future obligations without taking drastic action on the backing or nature of the currency. Debt must be discounted via the US$ currency in denomination.

The gold picture in China has turned powerfully positive for the Gold price, in the view of Rickards. China needs about 4000 tonnes of gold for a proper reserves ratio, but only has 1000 tonnes today in possession. China cannot fulfill this goal even by taking all of its domestic production for the next 10 years. They wish to take the IMF gold from pledges, but political resistance is clear. They wish not to push up the Gold price from open market accumulation in gigantic volumes. He overlooks that official Chinese gold ownership extends far beyond the Peoples Bank of China and Sovereign Wealth Funds. My sources tell of the Chinese owning 3x to 5x more gold than 'Officially' proclaimed, something either overlooked or ignored by Rickards. The Chinese people are showing a strong preference to hold gold personally, not as part of lunatic funds managed and corrupted by fund managers as in the West. Their public purchase investment is mammoth, a major element of global gold demand, outlined in the Hat Trick Letter. The Chinese do not favor or manage Exchange Traded Funds, the greatest single device in the last ten years to control, corrupt, and negate the public demand factor. The ETFunds lately are accused of being price control devices. The StreetTracks GLD fund by under sharp criticism in particular.

From 1950 to 1980, Rickards mentions how the USTreasury gold supply declined from 20,000 to 8000 tonnes, basically moving a large amount from the United States to Europe, where the elite reside who control the US central bank. The Chinese are frustrated that they cannot obtain sufficient gold at reasonable prices as Europe did. Beijing leaders wish to survive the currency wars and the reworking of international finance. Private ownership of gold is of paramount importance to their entire society at all levels of power. Rickards believes that holding investor gold in a bank correlates the investor to the banking system, and puts the investor at the mercy of the banker whims, the very risks which must be avoided. These are the points made by Rickards.

RESPONSE TO RICKARDS

My response is one merged with the thoughts of Aaron Krowne of the Morgage Lender Implode website (CLICK HERE) that branched into other imploding entities like home builders. He is an informal trusted colleague. The Rickards argument contains two major oversights. One cannot call them so much flaws as important points not mentioned, maybe overlooked, but certainly important. My focus has been steadily on the second point, the grotesque extension to debt through obligations beyond what Rickards describes. Permit Krowne to make the points, which will be elaborated upon.

Aaron Krowne said, "Rickards is extremely generous on two points: (1) that the USGovt actually has 8000 tonnes of real non-debased gold, (2) that M1 is a useful numerator against which to measure dollar solvency, given the USGovt's short-term liabilities. Even just at the federal, public, acknowledged level, these liabilities already well exceed M1. Then start adding in Fannie & Freddie obligations, AIG, other bailout obligations, the general deficit spending, state & local government obligations, and the picture darkens considerably." Notice the term non-debased gold to mean not tungsten bars with gold plating.

The debt that must eventually be monetized is not just its partial reflection in the money supply, but all federally guaranteed debt. The commitment of USGovt debt must go beyond running federal debt total, and into nationalization of agency debt and credit derivative risk. They must be factored also into the USDollar and Gold price. So far, it has not in any scintilla or meaningful way. Thus the destabilizing events to come in a US$-based monetary crisis. Check the recent colossal Fannie Mae losses, funded by the USGovt. Check the recent colossal AIG losses, funded by the USGovt. Check, if you could, the ongoing recent colossal JPMorgan losses from credit derivatives, funded by the USGovt. The complexity of the fraud has become a cross between a tragedy and comedy. The monetization of USTreasurys is obvious to any analyst or auditor with any professional skill. The official USGovt bond inventory has in recent months contained an unusual suspect ledger item with the 'Household' category. The April Hat Trick Letter contains much more information on the fires burning possibly out of control on credit derivatives, a point raised in the last article about Dangerous Signposts, namely the long-term interest rates and the crude oil price.

The conclusion is that grossly insufficient gold exists to back the USGovt debts, and those debts must include USGovt obligations to direct funds into the nationalized Black Holes, thus resulting in tremendous extraordinary pressure for a significant USDollar devaluation. The cutting edge is the ongoing endless outsized USTreasury auctions. To call it a heavy weight of oversupply is a gross under-statement. It is 20 tonnes of bricks dumped on the 3-bedroom house from a construction crane, which itself might soon be subject to bank repossession. This is where the pressure is exerted. This is where the monetization relieves the pressure. This is the area next exposed, for both overwhelming debt issuance in supply, and hidden monetization revealed.

GOLD ON EDGE OF SPRINGBOARD LEAP UPWARD

Events in the last few weeks have conspired to create a powerfully explosive environment, one hostile to currencies in general, the USDollar in particular, and favorable to the Gold price. Major changes have occurred in the psychology of the gold market. Slowly over time, and with much unmasking in the last month, the gold market is being perceived as yet another scheme run by Wall Street and London bankers. The gold market has in all likelihood very low inventory, huge inherent risk, but protection offered by government authorities. The Gold price has begun to rise despite the USDollar holding its ground against very weak alternative currencies. The primary locus of foreign revolt against the impaired US ship at sea, might be the Gold price. It is both the nexus and weak link in the defense of fiat paper money.

The MACD (moving average convergence divergence) cyclical indicator shows great promise with an upward bias. The moving averages in general have offered support, the 100-day MA (in red) and the 200-day MA (in green) showing upward trends. The major change in gold psychology is apparent to the alert observers, soon to the entire investor community. A reversal pattern is evident, from the Dubai and Greek debt response in January, February, and March. The reversal Cup & Handle contains a positive strong neckline, a loud bullish signal. A perverse benefit given the USDollar early in 2010 will be seen soon as a loan of goodwill to be paid back in full, amidst the backdrop of alleged Wall Street fraud.

LACK OF EXIT STRATEGY OPTIONS

The Euro Central Bank and Bank of England held interest fixed in the last couple weeks, amidst the Greek crisis. The EuroCB is trapped, just like the USFed. Europe is trapped by sovereign debt. England is trapped by its federal debt and need for stimulus. The United States is trapped by mortgage debt and its own federal debt, as well as need for stimulus. The Australians saw fit to hike by 25 basis points, a world apart, as commodity prices remain firm. The European Central Bank left its benchmark interest rate at a record low of 1.0% for the 11th month in a row. Recession, sovereign debt to the South, and the need for stimulus are the dominant themes for continued accommodation. The spread between Greek and German debt is widening, in fact worse than the first glimmer of the credit crisis a few months ago. The Greek Govt 10-year bond yield went over 4.4% points above the German Bund benchmark, the highest level ever since the Euro currency was launched in 1999. Adding stress to strain, the Greek 2-year bond spread has moved up 1.2% in consistent manner. A key point was made in bank policy by Trichet. The EuroCB head told the European Parliament that so-called collateral crisis measures will not be abandoned at the end of 2010 as originally planned. The EuroCB will continue to accept lower rated government bonds as collateral from banks. It will swap garbage for government backed debt securities, but soon no more US$-based toxic bonds. Watch the Credit Default Swap data and one can see the next target nation might be France, not Italy and Spain as many analysts have anticipated.

CRUSHING WEIGHT OF LOST INTEGRITY

The stream of events in the last four years casts extremely bad light on the US financial system, soon to reflect lower value. The subprime mortgage bonds were not isolated in damage done or loans gone bad. The prime mortgages, the Option ARMs, the second mortgages, the commercials, they almost all sport delinquencies and defaults that rival the subprimes. Details are shown in the last few Hat Trick Letter reports. The TARP Fund remains unresolved except by limp efforts by the USCongress, which now attempts to at least achieve disclosure of what the $700 billion or $500 remaining billion went. The US Supreme Court appears to be running interference for the US Federal Reserve, in blocking legal attempts to force disclosure of the USFed balance sheet, and disclosure of the TARP Fund disbursements. The overseas wars involve their own black eyes, what with $50 billion missing from the Iraq Reconstruction Fund. The nationalizations of Fannie Mae and American Intl Group took place amidst widespread controversy, both in mortgage bonds and credit derivatives. The Credit Default Swap, an invention of Wall Street, has come under fire. It is being blamed for some distress in the European Govt debt markets. The CDSwap contract is under fire inside the United States even more so.

Financial reform initiatives might actually tighten their grip of power and control. One of the most funny, yet tragically true assessments in the last few years about the financial engineering topic came from former USFed Chairman Paul Volcker. He said the only meaningful contribution by the financial sector in the last 20 years was the automatic teller machine. He has been marginalized, if not silenced, since he made critical remarks, as part of his counsel to reinstate the Glass Steagal Act that separates large financial sectors.

In the following weeks we will see how much Goldman Sachs earned from their own legal challenges. In fact, a source informs me that his legal beagles regard the Paulson Abacus case as perhaps the weakest of all potential fraud cases against GSax. It might be rejected by the courts. GSax will not escape the lawsuits, but might face criminal charges. Watch the Germans, who are angry at being defrauded. Germany seems in many ways to act as the spearhead to dislodge control by Anglo-American sources. The Goldman Sachs fraud case, and cases to follow, will render severe damage to the image of the USDollar, the USTreasury, and the USGovt leadership that is dominated by the GSax alumni. My belief is that the fraud charges have opened Pandora's Box, for other complaints, other lawsuits, even class action lawsuits to be handled in federal court. The whiff of Pandora will be next seen in Germany from a broad swift response.

The crushing weight of lost integrity is vast. My suspicion is that the greatest impact from the Goldman Sachs stream of lawsuits and felony charges, complete with potential restitution attempts, will be on the USDollar and not the GS stock price or its balance sheet. What comes next is the survival reactions by nations under deep distress, weakend by sluggish if not moribund economies, weakened by exported toxic bonds from Wall Street, weakened by Credit Default Swap attacks from power centers, weakened by years of accepted USTreasurys as legitimate payment for exported finished products, weakened by broad usage of the USDollar within their banking system. The Jackass maintains a firm conviction that the first few nations that break ranks from the USDollar embrace will become the leading nations in the next chapter. A shock this way comes, from a Paradigm Shift in progress, recognized across the world, but not in the United States or England. A sudden USGovt-led devaluation could come soon, ordered by the United States banking and government leaders. It might turn out to be a vain arrogant maneuver to achieve instant stability, to maintain strongarm control, and to attempt to prevent creditor abandonment.

A grand backfire comes, since numerous platforms and paper support beams can no longer bear the weight of US insolvency and charges of widespread US fraud. A grand backlash comes. My best sources warn to expect flash events. Either the US will attempt to control the sudden rash of events, or foreign sources (dominated by US creditors) will pull the rug from under the US-UK controllers, who are fast losing control and credibility. The next victim front & center is information flow. The stream of negative news implies some degree of lost control of information itself, a vital ingredient to confidence, perception, and illusions. These factors combine to invite a global response. It will be felt and realized eventually in the USDollar. The Euro is nowhere near as weak and fraught with insolvency as the USDollar, or burdened by fraud charges. Time will prove this out.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at [email protected]