Abandoned USDollar & Paradigm Shift

A paradigm shift is underway, unrecognized inside the US kettle. Its water level is falling and its temperature is rising, even as fewer foreign born cooks stir its contents. The US banking and political leaders errantly pursue a path toward a return to normalcy, when all pathways have been washed out by powerful storms that to do abate and will worsen. Several key developments point to a new global order taking shape, as the Chinese actively work to plant global seeds that result in the Yuan currency serving more of a role in global trade. They will eventually de-throne the USDollar from its primal perch. The USDollar will be used less in global trade. The US$-based assets are being diversified. These developments are gaining traction, power, and publicity. The foreign creditors continue to protect their core US$-denominated reserves, while clearly undermining the US$ on the margin, as alternatives are chosen. To date, the alternative choice is hard assets, commodity supplies, and properties from the resource camp. The paradigm shift will change the face of the United States permanently, but to date few recognize the changing landscape.

CORRECT TIPOFF TO DOLLAR DUMP

Last week, a tipoff came that turned out to be true, shared in last week's article. A contact source passed word that on Sunday night, Asia would sell the USDollar down in a big way. Four to five large parties were involved. Seemingly small moves in the FOREX cause tremendous disruption, since entire continental economies are involved with price shifts. The US$ index did fall markedly, in a moderate quantum leap down. It fell from the mid-79s to the upper 78s, big in the currency world. The principal agent pushing the buck down was the Euro, which enjoyed a major 120 basis point upleg that has held all this week. The Euro now approaches the 143 level. So the tipoff was true. We await the follow-through, like from short covering by Euro traders who were wrong on bets. If the Euro can push past 143 (it is now 142+), then clear sailing to the 155 mark will be enabled, without any notable resistance. The USDollar index would fall enough to capture global attention. Maybe they would proclaim the advent of a Currency Crisis.

EURO IS THE KEY, ON EDGE OF BIG UPLEG

The Competing Currency War is to reach a fever pitch. The USDollar weakness will force other currency custodians to wreck their own in response, so as to avoid the further damage from a rise. A sequence of currency structural changes seems evident in three stages, a currency crisis in three stages, shared in the July Gold & Currency Report posted this week. It involves the Euro and what are more commonly called Commodity Currencies. Gold & silver (along with platinum) will be primary beneficiaries of the deepening crisis. It is called a Credit Crisis nowadays. A better description is a Bank Crisis. In time, it will be called a Currency Crisis as money will be doubted for quality and reliability.

The Euro currency is ready to challenge the 160 highs again. It is reluctant beneficiary to a crumbling USDollar. The custodians of the Euro want a stable currency, not a too strong currency. They will not have their wish. As the USDollar suffers the shameful global rejection, the Euro benefits. What is good for selling EuroBond debt is also bad for European export industries. A rising Euro keeps down economic costs across the continent, a vital buffer. However, the engine of Europe is Germany, whose export trade struggles and will feel greater stress as the Euro rises further. The reversal pattern dictates a target of 160, thus a challenge of 2008 highs. The base from last winter at 126 was a reaction low. The impulse high at 143 must be overcome, but all signs point to surpassing it. Hue and cry will come from Europe when the runup occurs. After 143 is overcome, a sudden scary fast move will come to 155, almost a 10% move with no resistance. In the currency realm, that is VERY DISRUPTIVE. The move will drag the US$ DX index down to 73-74 range, with blood on the FOREX floor.

IMAGE IS IMPORTANT

The USDollar is suffering from an image problem, tied to the harsh reality of lingering insolvency, growing federal indebtedness, and fraud still not prosecuted. Back in the late 19th century, cartoons made national news and forged imprints on the national psyche, in ways that editorials could not. Images were lasting, painful, and resulting in change. The Tammany Hall cartoons made history for over a century to follow. Here is a beautt!! The entire world notices the circus acts under the USGovt and Wall Street tents. Goldman Sachs sits in a position of control, steering vast funds its way. Main Street, the states, and almost all but the largest businesses are largely denied credit. The TARP episode makes the point clear, as does the more recent denial of CIT for federal rescue, despite funding loans for 950 thousand businesses. That is not systemically vital in the eyes of FDIC and Govt Sachs. Thanks to Tabtoon for a great cartoon. Methinks homeowners deserve a spot with joined arms to the taxpayers under the fat cats, supporting their corpulence. Also, underwater homes should be meshed with the market boat. This is an ugly image.

FORKED TONGUE USED TO US LEADERS

The Chinese pay lipservice to support the USDollar, or forked tongue. They tell what US officials want to hear, when they need to hear them, where it is required. Recent evidence is almost laughable. Their words go counter to all their initiatives (outlined here in Hat Trick Letter articles) in the last few months. This has become a game played in the open arenas. When in Rome, leading to the G-8 Meeting, the Deputy Foreign Minister He Yafei told reporters that China does not support the idea of creating a supra-national reserve currency and expects the USDollar to remain the main reserve currency for "many years to come." He must have giggled under his breath. He minimized Chinese concerns as only 'natural' in holding vast US$-denominated assets. He actually said that China appreciates the USGovt efforts to maintain the stability of the USDollar. Meanwhile, back at the office, Beijing bankers continue with global Yuan swap facilities to enable trade outside the US$ sphere. They have made important reforms to install the Yuan as the basis for their domestic banking system. They have agreed to pan-Asian regional development and security funds, also based in the Yuan currency. If truth be known, the Chinese Govt is working overtime to unload their USTreasury Bonds and USAgency Mortgage Bonds, spending them in Africa, Latin America, Asia, Australia, the Middle East, even Europe.

The Chinese leaders seem intent to mislead the US bankers, talking in two directions, so as to confuse the custodian to the global reserve currency. The very same Deputy Foreign Minister He Yafei told a group of visiting business executives in China, with no equivocation, that "The financial crisis has fully exposed some shortcomings in the international currency system. China is not seeking discussions but wants a diversified reserve currency." The Peoples Bank of China renewed shortly thereafter its call for the creation of a supra-sovereign reserve currency (the IMF concept defined as a basket of currencies) to lessen the USDollar's sole reserve status. Big changes are coming, like grand tectonic shifts in the global financial mantle.

The chairman of China Development Bank said this week that Chinese outbound investment would accelerate, where focus should go to developing economies rich in resources. Chen Yuan said, "Everyone is saying we should go to the western markets to scoop up [underpriced assets]. I think we should not go to America's Wall Street, but should look more to places with natural and energy resources." They are not fools, and wish to gather in no more impaired paper assets peddled by the US financial sector. Premier Wen Jiabao elaborated in clear terms on a new Global Shopping Spree strategy. He said, "We should hasten the implementation of our 'Going Out' strategy and combine the utilization of foreign exchange reserves with the 'Going Out' of our enterprises." He strives for Chinese companies to increase the share of global exports. The 'Going Out' strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state owned conglomerates such as PetroChina, Chinalco, China Telecom, and Bank of China. Qu Hongbin is chief China economist at HSBC. He said, "This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets." Chinese outbound non-financial direct investment rose to $40.7 billion in 2008 from a paltry $143 million in 2002, a rise of 285-fold!!

Saudis are also worried about USTreasury Bonds. They have begun to withdraw assets, even as empty assurances are given. Recent data from the Monetary Agency, their central bank, reveal the recent withdrawal of $50 billion in Saudi assets after a significant 2008 buildup. "The Saudi government is very worried about the deteriorating value of the dollar and the mounting debts of the US in the medium and long-term," said a Saudi economist. The Saudi Govt has ignored British and US pressure to give added funding to the IMF. They wish to avoid the IMF morass, preferring a home stimulus that might eventually spill over into the global economy. They posted its biggest budget ever this year, and further pledged to invest $400 billion in the coming five years on its infrastructure and petroleum industry, a tremendous commitment. The entire Persian Gulf region has been hit hard, as growth forecasts for the Gulf states have declined sharply, credit has dried up, and scores of major firms face survival challenges. Last week, Geithner met leaders in Abu Dhabi, the capital of the United Arab Emirates and clear financial center of the Arab world. Abu Dhabi is center and home to several sovereign wealth funds with billions in US$-based investments. Sultan Nasser al-Suweidi, the governor of the UAE central bank, mentioned that Geithner reiterated reassurance of the USDollar during a pandering session. It is very unclear if al-Suweidi regards the US bank figures with any credibility. Last month Geithner visited Beijing leaders and was subjected to open ridicule. The USGovt remains desperate to keep secure its longstanding creditor support.

India joins the revolt against the USDollar, as diversification is urged. India joins China and Russia in the call for a supra-national currency based upon the I.M.F. proposal. Suresh Tendulkar is an economic adviser to Indian Prime Minister Manmohan Singh. The advisor has urged the Indian Govt to diversify its $264.6 billion foreign exchange reserves, and to hold fewer US$-based assets. The majority of Indian national reserves are held in US$ denomination. Tendulkar wants formal discussion on US$ reliance taken up in international talks, even emphasizing the need to go beyond the traditional G-8 inner sanctum. He said, "They [G-8] can meet if they want to. The G-20 has a wider role, and has representation of the countries that are likely to lead the recovery process." Ouch! A quiet sting to the bankrupt G-8 nations, which themselves are dependent upon the emerging economies for valuable credit supply. The G-20 nations are flexing their muscles, while the G-8 nations are working overtime to avert mass sales of toxic paper, even devising new ways to sell it.

PARADIGM SHIFT WIDENS THE RIFT

The (hardly empty) rhetoric reveals the underlying power shift to emerging markets from the developed nations that are responsible for the financial crisis. Bank power is shifting east. THIS IS A MAJOR POINT IN THE PARADIGM SHIFT UNDERWAY. The old game is over. The new accountable system is being constructed outside the US-UK shadows of control, with an intolerance for future potential abuse. The Paradigm Shift continues. With it comes clear movement in the financial structure underpinning away from the USDollar and toward hard assets.

More complicated trade platforms are being constructed right now, behind the scenes, with little or no publicity or exposure. The primary parties involved are Germany, Russia, China, and Brazil. They will integrate buyer and seller with attendant systems. One consultant working directly on such systems wrote, "Once the meltdown occurs, the evolving system will not require reserve currencies any longer, since 95% of all transactions will be barter and/or sophisticated counter trade via a new exchange platform that is being designed and will be up an running in early 2010. This new exchange will pretty much eliminate banks from being the bottleneck in conducting trade locally, regionally, nationally, and internationally. Welcome to a very different new world order." The process will take time, but seems to be born soon from crisis bathwater. It is not installing new devices for speculation, but actual construction of platforms in progress unbeknownst to US media networks. The new system will enable trade from region to region in time, designed to cut out entirely the profligate 'deadbeat' nations that might include the United States. They essentially ride like a pack of parasites on the back of global trade. Trade in the new system will NOT be built atop bonds that are easily the object of fraud.

TRADE SETTLEMENT OUTSIDE THE USDOLLAR

The Chinese must hurry to establish the Yuan currency in global trade more broadly and deeply, so as to increase its recorded volume before 2010. They intend to win a higher weight in the new Intl Monetary Fund basket calculus set for revision next year. The Chinese Govt and bankers have a project, a goal, and a deadline. They wish to pursue a path to establish the Yuan as a global reserve currency, the third alongside the USDollar and the Euro. Their chosen path in execution is to enable the Yuan to be used on a broader basis in global commerce. During the year 2010, the Intl Monetary Fund will recalibrate the Special Drawing Rights, and reset the weights for the basket pseudo-currency according to actual global trade. So Beijing has an objective to lift the Yuan usage globaly, thus enabling more reserve status. To do so, sufficient Yuan currency must be available. So far they are using a two-part strategy. First, they issue large tranches of Yuan swaps within installed facilities (cited before many times) in nations overseas. Second, they permit Hong Kong banks to issue loans intended to further trade (also cited before), a project already underway with the support of the Peoples Bank of China. The Yuan loan program has 440 firms in Shanghai and Guangdong with current participation. They are making genuine progress. The pieces of the puzzle are coming together, and investors must detect the pattern toward a goal.

China must manage the appreciation of the Yuan in response to higher demand, a task made easier by supply mini-floods. To be sure, less US$ demand will be seen in international trade contract settlement as a result, A KEY UNDERMINE TO THE USDOLLAR. China cannot supplant the USDollar from the top down within banking circles. So they will do so from the grassroots in contract trade settlement, the bottom up. In time, the US$ fortress will wash away to the sea. In time even OPEC will accept Yuan for oil payments, a forecast made two years ago.

China & Brazil make further progress to sidestep the USDollar in trade, as China establishes its global swap facility for trade with other nations. Given China's primary role in global trade, and the sour sentiment by exporters, the USDollar will gradually lose status for international settlements. Their bilateral trade pact announced is coming to fruition, as platforms are being built. The development has been blessed from the high priests at the Bank For Intl Settlements, something the US-UK bankers must be very bothered to observe. At the BIS offices in Basel Switzerland, China's central bank governor Zhou Xiaochuan and Brazil's Central Bank president Henrique Meirelles heralded progress of the bilateral deal at the meeting. Zhou revealed plans to directly use of Yuan currency with Brazil instead of the global swap facility. Brazil needs more integrated development. The largest nation in South America (population 190 million) needs capital formation, needs development of delivery systems for transportation, and especially needs the enormous exploration & production facilities constructed for the gigantic Tumi oil & gas project. Watch China gobble up the majority of the Tumi energy output, and cut out the Americans, whose relations have not been cultivated with Latin America. US leaders are too pre-occupied with Iraq and Afghanistan.

The Yuan currency swap venture will continue for China. The Peoples Bank of China has arranged six bilateral currency swaps in large volume. They currently total 650 billion Yuan (=US$95 billion) since December with Malaysia, Argentina, Hong Kong, and several European nations. The facility acts like an Import-Export Bank. Under the arrangements, a counter-party center can lend the Yuan provided by the PBOC to domestic commercial entities toward pay for imports. Chinese exporters are thus paid in their own currency, eliminating exchange rate risks and reducing the cost of fund transfers. Thus the bypass of the US$ in settlements.

PLAYING THE I.M.F. ANGLE

China plays the I.M.F. & Western bankers like a fiddle, lining up a grand gold purchase off-market. The real story is the opposite of the official story of an IMF gold dump. China continues to threaten the establishment, forcing a reaction, even exploiting political leverage. China, by announcing its increased gold reserves from 600 to 1054 tonnes, has indirectly given open cannon warning to the USTreasurys in order to obtain a mountain of IMF gold as booty. Itself low on funds, the Intl Monetary Fund finally approved the transfer of $13 billion in gold bullion in exchange for various crappy paper owned by China, probably USTreasurys and USAgency Mortgage Bonds. Choosing the lower labor intensive route, using the global banker windows, China will acquire 400 more tonnes of gold. Refusal would have meant purchase of gold in the open market, an option still open to them. The IMF will hold more USTBond confetti and less gold. One must wonder if no more gigantic gold sales can be designed from large vaulted supplies. The last large available quantity has been jacked.

SECRECY & THE INSIDER TRADE

Bank holiday plan execution must be kept as surprise, since reactive preparations undermine the impact of the vast theft planned, both overt (from devaluations) and hidden (from confiscated accounts). Those who wait to take action lose all opportunity to benefit, and will surely lose significantly. The major central banks are very likely accumulating gold bullion on a net basis. Surely the Chinese, Russians, and Arabs are. If a planned US bank system shutdown occurs, its powerful effect would be muted by publicity of an unfolding, hence reducing insider profit potential. The pristine pure-bred Ruling Elite would be forced to share benefits with unwashed unworthy Plebeians. People would remove deposits from banks likely to be gobbled by Wall Street giant banks, as withdrawals could later be limited. People would transfer money out of the USDollar and into the Euro or Gold or Oil, before a grand US$ devaluation occurs. Next comes the threat of capital controls, limiting currency transfers across the border. The insider trade of the century will likely remain within the domain of the big bankers and other predators who have succeeded in looting the wealth of the nation. If word of the plan spreads, then people can prepare and take defensive action. No opportunity will be afforded those who wait until the news breaks. They will be subjected to different price structure on assets, perhaps a big quantum change, with the US$ lower, competing currencies higher, gold higher, and all commodities priced in US$ terms higher, led by crude oil and industrial metals. Pay little attention to formal denials, and those by the intellectual servant harlots. They have offered little truth or fair warning of crisis in the last several years. Prepare!!

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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]