If USD collapses

[Dr_Who]

Aussie

I was recommending Gold as a buy here on Sharetrader circa 2001 when it was around $250. Most people thought I was mad, but I went ahead at that time and bought both gold and silver at bargain basement prices.

I did recall a very wise and experienced broker telling to buy gold back then. I should have listen to him.

[Aussie]

I did recall a very wise and experienced broker telling to buy gold back then. I should have listen to him.

Some might say it's still relatively cheap today, certainly a long way off it's inflation adjusted price.

[Aussie]

Clearly a move away from the USD by the world's largest oil producers is on the cards here . . . the results of this would be devastating for the US. Imagine if the US had to convert it's currency into this new one (like everyone else) in order to buy oil?

GCC leaders approve Monetary Union as members seek to host Central Bank
By Sunil K. Vaidya, Bureau Chief
Published: December 30, 2008, 23:46

Muscat The GCC leaders put their final seal on the Gulf Monetary Union on the concluding day of the two-day 29th summit yesterday but the question of the location of the Central Bank remained unresolved.

"There are four countries staking a claim to host the GCC Central Bank," Mohammad Al Mazroui, assistant secretary-general for economic affairs, told Gulf News at the end of the summit on Tuesday.

He said the UAE, Bahrain, Qatar and Saudi Arabia were keen to host the GCC Central Bank.

He said he hoped a decision would be taken by year end.

Gold reserves

In reply to a question on gold reserves for the GCC Central Bank, Al Mazroui said "that is a matter to be pondered over later.

"We first have to decide on the location of the Central Bank, then the Central Bank and Monetary Council will have to decide on the gold reserves for the Central Bank," he said.

Oman had pulled out of the common currency in 2005 citing unpreparedness but had decided not to object to the other five members going ahead with it.

Ironically, it was during the 2001 GCC Summit in Muscat that the plan for the common GCC currency was mooted and it was given the final nod here in Oman yesterday without the participation of the hosts.

It was decided to speed up the creation of the Monetary Board to oversee technical requirements for Monetary Union. The proposed board will finalise details for setting up the Central Bank and the issuance of the single currency.

Common currency

Saudi Arabia's King Abdullah Bin Abdul Aziz proposed that the committees working on the GCC economic integration process should speed up their work and complete the whole process by September 2009 so as to benefit GCC nationals.

The leaders also reviewed the functioning of the GCC common market and adopted a document containing principles, market requirements and objectives and mechanisms for implementation.

Al Mazroui said that the common market draft proposed by the finance ministers went off smoothly and was adopted but some issues of revenue have to be sorted out as far as the Customs Union issue was concerned.

On the name for the common GCC currency he said there were some names that had come up. When pressed, he agreed that Khaleeji was ahead in the race.

Al Mazroui said that the railways project feasibility study was also given the approval along with the $7 billion (Dh25.69 billion) GCC power grid. "The power grid should be functional in the first half of 2009," he said.

He, however, added that the GCC finance ministers had shown concern about the cash flow.

http://www.gulfnews.com/business/Economy/10271396.html

[Aussie]

Gulf Cooperation Council leaders yesterday concluded their 29th annual summit meeting in Muscat, Oman with a final approval for the creation of a single currency for the six-nation economic bloc, still targeted for 2010.

Saudi Arabia is the largest economy in the GCC and boasts substantial gold reserves. But whether gold will be included in the currency basket has not yet been decided.

Golden opportunity

GCC assistant secretary-general Mohammad Al Mazroui told Gulf News: ‘We first have to decide on the location of the Central Bank, then the Central Bank and Monetary Council will have to decide on the gold reserves for the Central Bank’.

The creation of the GCC single currency - likely to be known as the Khaleeji which means Gulf in Arabic - is a major gold event for two reasons.

First, the breaking of their dollar pegs by the Gulf Arab nations is clearly dollar negative. Secondly, any inclusion of gold either as a part of the monetary basket, or in the reserves of the new GCC Central Bank will create additional demand for the precious metal.

2009 deadline

The project is gathering pace, and no lesser a figure than Saudi Arabia’s King Abdullah has directed that GCC economic integration committees speed up their work and complete the whole exercise by September 2009.

It is only a couple of months since a group of Saudi businessmen allegedly bought $3.5 billion worth of gold, believed to be the largest ever single transaction for the precious metal. Perhaps in 2009 it will be gold rather than local currencies which become of interest to speculators about monetary reform in the GCC.

Gulf countries are keen to break away from the link with the US dollar because it ties them to inappropriate monetary policies that exaggerate the boom-to-bust cycle in their economies.

http://seekingalpha.com/article/1127...y-include-gold

[JBmurc]

Fed has abandoned monetary policy, critic says
Sat Jan 3, 2009 9:58pm EST

SAN FRANCISCO (Reuters) - The Federal Reserve has embarked on a campaign of unsupervised industrial policy to end the country's financial crisis, a move that could undermine its independence, a former top U.S. official said on Saturday.
John Taylor, who was under secretary of treasury for international affairs from 2001 to 2005, said the explosive growth of the Fed's balance sheet since September was "unbelievable."

"This doesn't really seem like quantitative easing in the sense of finding a growth rate in the money supply," he told a panel discussion during the annual meeting of the American Economics Association.

"What you are looking at now is really being determined by other considerations. How much should we buy of mortgage-backed securities? How much should we loan to foreign central banks? This is really more like an industrial policy," he said.
The Fed's balance sheet has more than doubled in size to over $1.2 trillion in recent months as it has tried to shield the U.S. economy from the worst financial crisis since the Great Depression by supporting key credit markets.

This has included direct purchases of mortgage-backed bonds by the Fed and support for top-rated non-financial borrowers in the crucial commercial paper market, as well as hundreds of billions of dollars lent to banks on the basis of collateral.

"If you have a situation where the Fed is borrowing to invest in all these sectors it seems to me you have a huge governance issue...that demands a lot of thought," Taylor said.

Taylor said the U.S. Congress has a legitimate right to demand a say in who the Fed lends money to. The outcome would be "radical reform" that would risk monetary policy independence, he said.

This concern was echoed somewhat by the president of the St Louis Federal Reserve Bank, James Bullard, who also took part in the panel discussion. He said the close collaboration between the Fed and U.S. Treasury in fighting the crisis could have unintended consequences.

"We are blurring the institutional arrangements a little," Bullard said. "I am concerned about independence. Fed independence is very important," he told reporters.

[Aussie]

Things are way more out of control than anyone in Washington or Wellington would dare let on . . .


A Future U-Turn In A One Way Street

The Federal Reserve has boxed itself into a corner. With official US rates at (effectively) zero, they have only one way to go in future - UP! As a direct consequence of this, US Treasuries are standing on a trap door. The mad stampede over the past two months into Treasuries for “safety” simply means that these holders of US official debt now stand on that trap door. US Treasuries are the main assets held by the rest of the world’s central banks as reserves behind their own national currencies. US yields are certain to climb as the US Treasury tries to borrow more than $US 2 TRILLION this year. When yields climb, bonds - ALL bonds including US Treasury bonds - fall in value.

US Treasuries are the last bubble, following after stocks, real estate and commodities which have already deflated. When the US Treasury bubble bursts, the carnage on the global bond markets will be awesome.

A Now Invalid US Benchmark

In the staircase of ascending risk, government debt paper - bonds, notes etc. - have long been deemed the safest. Only after government debt comes the debt issued by the private civil economy. It is deemed more risky because this debt is exposed to commercial risks which government debts are not. The problem is that government debt is exposed to political risks.

Today, the climbing political risk of US Treasuries is radiating all around the world. Most of the rest of the world’s other central banks hold in their vaults US Treasury and Agency paper “valued” at $US TRILLIONS. When US Treasuries start their fall, this will contract the valuation of the “reserves” of every global central bank. That will in turn contract their reserves, forcing all their own interest rates upwards. Were the US Dollar fall along with Treasuries (an almost certain event), then many foreign central banks would face a double jeopardy situation. As their holdings if US Treasuries fell in market value because of climbing US interest rates, a falling US Dollar would tear their holdings of official reserves apart. These foreign central banks would have to take desperate measures to replenish their reserves. They would have to do so in public in order to “reassure” the public. Any foreign central bank which failed to do this would risk losing their standing as the backstop for their commercial banking sector. At that point, the US political risk would spike up to a global crisis level since, clearly, US Treasures, Agencies or even the US Dollar itself could no longer be valid reserves. In outline, these are the already built-in monetary and financial features of the global situation which is arriving.

The Looming US Debt Default

As things stand economically, the Obama “stimulus” package is woefully too little and too late. It amounts to throwing money into a US deflationary hurricane. But that same “stimulus” package opens the door politically for the later claim that since the rest of the world refused to lend the money to save the US economy, we will no longer service our external debts to the world. From that comes debt default. But even that is only the start because it then becomes critically necessary to stop an immense outflow of foreign funds presently invested in the US. That means US currency controls. Under such controls, an American who wants to make payments offshore will have to justify their action. Foreigners will have to justify why they should be allowed to take some of the US Dollars they own out of the US. Foreigners outside the US who are today holders of US Dollars will have to explain why they want to send some of their US Dollars back inside the US and what they intend to buy there.

Historically, there is not an item in this which has not been done in the many instances of debt default.

The Likely US Triggers

The most likely global trigger event will be when a US Treasury debt issue is under-subscribed (i.e. an issue is left on the counter because it faces a global buyers’ strike) or when US interest rates start their climb, the US Treasury is forced to offer a higher rate because of international fears of a US debt default. An under-subscription or a higher US Treasury offer rate required to sell new US debt paper are really two sides of the same economic coin. Either or both will signal that the US Treasury has reached its global credit limit and can borrow no more. At that point, the Treasury will stand in the same position as any person receiving a letter in the mail that says their credit card has been totally maxed out.


Permission hereby given to quote short excerpts - provided full attribution is given:
© 2009 - The Privateer
http://www.the-privateer.com
capt@the-privateer.com
(reproduced with permission)

[Aussie]

The bond bubble is an accident waiting to happen

The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.

More . . .

http://www.telegraph.co.uk/finance/c...to-happen.html

[Dr_Who]

I agree the bond bubble will pop one day.

What to we buy or sell to benefit from the bond bubble popping?

[Aussie]

All Roads Lead to Default

Unfortunately, the above title is mathematically correct. From here all roads do, and will lead to default. But default of who? You, me, the company we work for? Possibly. The coming default I am referring to is that of governments and their currencies. Default can happen in several different manners, each of which has one central theme in common. SETTLEMENT, or in this case, lack of. I will get back to this term later but for now, how or why must all roads lead to default?

Default can occur when the debtor does not, can not, or refuses to pay. Please remember while reading this piece that the U.S. Dollar is the world's reserve currency and that almost all currencies use "Dollars" as their "reserve" or foundation for value. The way I see it, the U.S. has several paths to go down, they can try to borrow until eternity, they can try to raise taxes, they can try to print enough Dollars to make payment [notice I didn't say settlement], they can cut spending, or they can just throw their hands up and say "we're broke" and can't pay. The current and past official plan has always been to "out grow" the debt and thus the payments, anyone looking at a chart of debt growth and economic growth side by side knows that this theory is a complete fallacy.

None of these options has a prayer of working either intellectually nor in reality. No matter how "big" the bozos in Washington think they, or the government is, there is a limit as to how much they can borrow. There is a limit as to the amount of global capital available, a limit to what can mathematically be "afforded", and a limit as to the amount of confidence the world will have in our ability to pay. Borrowing to eternity is a nice concept, however when dealing in finances, eternity is an impossibility because of the restraints of reality.

They can try to raise taxes but this cannot work either. You can only raise taxes to 100% of income or even confiscate assets but this only serves to destroy the system and create incentives not to produce and to trade in black markets. Long ago we passed the threshold where the national debt could be paid off by increasing taxes since the increase in taxes will only serve to shrink an already shrinking economy. The military, the embedded entitlements, and interest due are now more than tax receipts so paying the debt down with current taxes is mathematically impossible.

The Fed can try to print enough "Dollars" to pay the debt down but this option will destroy the value of all existing Dollars and cause a foreign central bank panic out of Dollars. This option is ultimately where I believe we are headed but to no avail, governments have tried this many times before only to ultimately blow up their currency. This amounts to trying to make payment with a fictitious entity created out of thin air and of no value, mathematically possible but true and fair settlement is not attained.

Washington can also try to cut spending. They can try [they will be forced] to cut military spending, domestic spending [resulting in riots], but the debt will remain and thus the interest payments. Spending money is what Washington does best, tightening their belts [ours] will not happen. Even if it were to happen, the amount of debt and interest due is beyond payment. Washington is in a position where the mortgage payment is already $25,000 per month with an income of only $10,000.

They can stop going to the grocery store, not use electricity, park their car and not even leave the house, they cannot make the payment without borrowing more.

Washington can try all of these at the same time or in any combination, it will not work. IT IS MATHEMATICALLY IMPOSSIBLE! No matter what option or combination of options are tried or chosen, the key element of SETTLEMENT can never occur. Settlement is the bottom line to any transaction going back to caveman times. As silly as it sounds, even cavemen expected to get something in return for their labor or produce, they expected settlement! Since 1971 settlement has been denied anyone and everyone who accepted Dollars, Pounds, Yen etc. in return for their product or labor. All you received was a piece of paper that you could pass on [or hoped to] to another party in exchange for something else of value. Settlement has been denied ever since Nixon closed the Gold window and withdrew any real backing to the Dollar. The world will demand settlement thus forcing default!

Whether you know it or not, we have been living in a "never pay" world. Think about this for a moment, if you can create currency out of thin air and continually borrow more, do you ever really pay anything, or is it always "something for nothing"? Not only has the system been set up as a Ponzi scheme, it has used a fictitious currency of no value to boot. Most all of the worlds' production for going on the last 40 years has not been "paid for" nor settled, this lack of settlement will ultimately result in one gigantic bankruptcy where those who believe they were paid will find out differently. Values [true, real values] will shock millions to tears or worse as the reality will set in of having "saved" for a lifetime only to find out that what they were saving was of no value.

This is not just a U.S. problem though the Dollar is at the heart of it. Perceptions of values worldwide will be turned upside down in what will feel like a a living hell to those caught unprepared. The world was conned into believing that pieces of paper and debt instruments that promised even more pieces of paper were stores of value, they are not and the rude awakening is coming. This coming default will come about by the world changing its perception and demanding settlement. Unfortunately some governments will not have the ability to settle as they participated in rigging the Gold market, their Gold is gone and can only be replaced through mining. As strange as it sounds now, miners will replace banks as the true "blue chip" investments and settlement will be demanded for any and all transactions. This "never pay" model will be discredited, as well it should!

Regards, Bill H.
via Le Metropole Cafe

[Aussie]

What to we buy or sell to benefit from the bond bubble popping?

Dr, here's a Canadian ETF that has US Treasury bull and bear funds. Some poking around a few message boards tells me that the 30 year "bear fund" HTD.TO sounds like a popular vehicle.

http://www.hbpetfs.com/fundSummary.asp

http://reports.theglobeandmail.com/j.../html/jovianf/

A Canadian dollar investment might be a good way to play it as they drop - I'd be curious to see what others here think, if I find some spare capital I might jump in it myself. But DYOD.

Cheers