GOLD

[Aussie]

I posted this is the "if the USD collapses" thread but thought it worth posting here as well for those who may be interested. Bill Buckler is one smart guy and sees things in a uniquely clear and insightful way . . . things are way more out of control than anyone in Washington or Wellington would dare let on . . . and the consequences for our local currency are very uncertain since I don't think the RBNZ has much gold and if the value of US Treasuries goes way south, what is underpinning out local Kiwi currency? Nothing else of value other than our future labour and taxes I guess.


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)