Signs and portents

Over at Financial Sense University, Jim Willie paints a frightening picture. He claims that the US Federal Reserve has been secretly giving dollars to foreigners to buy US Treasury Certificates, so (temporarily) supporting US bonds and the dollar. Meanwhile, big banks are waiting for smaller banks to suffers losses on commercial loans, at which point they will gobble up their smaller competitors. But the big banks are insolvent, so rather than a healing juncture, it'll be a vampire puncture.

Studying the US Dollar Index, Willie uses a measure that Karl Denninger has previously cited, namely, a comparison of two trends: the 20-week moving average with the 50-week moving average. When the first crosses the second, the second will eventually follow - in this case, downwards.

In my previous post, I referred to signs and portents. This is because when big things are happening, the fog of lies thickens, so we have to look for betraying details and use our intuitions. Art is often the canary in the mine - you hear the coming conflict in the discords of Stravinsky's 1910 "the Rite of Spring". The disturbed children that I teach have recently been exploring zombies. Some also play computer games at home, that involve stabbing opponents in the eyes or genitals. One child's graffiti tag is JABZ.

Doodling, they draw pistols, rifles, knives, swords; but still read Postman Pat and Spongebob Squarepants. Gossiping, they talk of their mother's vibrator, their father's merkin, but (at age 11) don't quite understand and are looking forward to learning the facts about sex next week, which our curriculum now requires me to deliver. They come in shadow-eyed from gaming, but also from (in one case) accompanying their father late at night as he hunts down and savagely beats people who tied up and soaked with petrol an uncle suspected of stealing a motorbike. Where are the police? you may ask; the father is an ex-policeman. The Monarch's writ does not run where our underclass have to live; to have normal social inhibitions would be dangerous in such an environment.

Some may accuse me of moral panic; but I didn't grow up with the currently prevailing sense of moral ambiguity, despair and social collapse. Are we breeding a nation of future child guerrilla-band soldiers? And how tragic, how culpable, that the entertainment industry is playing its part in this; and that the Government hopes to shore up its vote by perpetuating the financial dependence of its claimants.

But it won't happen to us, will it? "Wat geht dat mik an?" as the mediaeval Germans would say: "What's it got to do with me?" Years ago, my Prussian grandmother described Der Flucht, the flight from the Red Army in 1945. They would come to a farm and be very grudgingly permitted to sleep in the haybarn; two days later, the owners would be on the road themselves.

We are in this together; but I cannot see how the present political arrangement can tackle the challenges. There are too many ways for our leadership to be distracted, to be suborned and to escape consequences personally.

Return of the spiv

Schiff's on a roll - read him. It's long, but worthwhile, epecially the predictive part at the end. An Eastern credit strike, a collapsing dollar, rapid inflation, price controls and the development of a black market.

Unless we bite the bullet and accept high interest rates and a further, bigger crash in house and share prices.

Charles Hugh Smith agrees.

Fasten your seatbelts

I've relayed rumours of these things here earlier: a dollar crash and US bond default. Now a respected Japanese ratings agency is preparing us for the reality. (htp: Karl Denninger)

Rapid fire

(Picture source and story)

Duff McDonald in New York Magazine (Saturday) goes through various doomsters' scenarios. How many bullets can we dodge, especially when the system is becoming automated?

By the way, he says CNBC calls Peter Schiff "Dr Doom" - surely that would be Marc Faber?

Will US protectionism pull the trigger?

The Appalachian Hatfield-McCoy feud

An article by D R Schoon in GoldSeek (26 September) alerts us to a bill heading for a vote in the US Congress this autumn. It seeks to impose a 20% tariff on Chinese imports.

... China will retaliate; and, dumping $1.33 trillion of US Treasuries on the open market will be an all too easy and accessible option. It would destroy the US dollar and deal the US economy a body blow from which it would take years to recover...

Now unless US politicians are really abysmally stupid, they must have a backup plan to stop a torrent of dollars pouring back into the States - exchange controls? Repudiating the debt? If Russia's default forced the bailout of LTCM to prevent systemic crisis, what would a giant American default do?

We must hope for cool heads all round. US multinationals are already urging calm.

The hard stuff

Richard Greene in Financial Sense on Wednesday paints a very worrying, but credible picture of accelerating financial instability and official attempts to disguise the crisis. He looks at the worst case, and says that nothing beats holding the bullion yourself:

In this scenario you don’t accept futures, you don’t accept ETFs, you don’t accept any paper promises; you only accept the real physical gold and silver in your possession. It may take more time for this to occur in the US, but overseas this IS occurring right now, particularly in the Far East and the Middle East. This is exactly what has been necessary to break the fraud and suppression of the gold and silver price that has kept them from reaching a fair free market value. It is happening as we speak...

...if defaults and bankruptcies became prevalent the banks could easily cancel your credit cards, not have any of your cash on hand, and deny you access to your own assets. We don’t expect this worst case scenario to play out soon but then again we find it incredible how few are prepared; and it is a substantial risk. So again to play it safe: have some of that green funny money on hand, definitely have some gold and silver, and have a nice stockpile of canned foods on hand to deal with unexpected emergencies. Do it now! If these things come to pass don’t be surprised to see gold moving up hundreds of dollars per day.

The red highlight is mine - I've suspected for some time that the gold price is being held down by undisclosed releases of bullion onto the market, by central banks.

Meanwhile, I'm interested to test sentiment about the markets - please see the poll on the sidebar and have a go.

Inflation, here we come

Jordan Roy-Byrne's article featured in Financial Sense last week examines various types of inflation and gives graphs, facts and his thoughts on future trends. He concludes:

It is my belief that the Fed's recent cut is the wake up call that will finally stimulate rising inflation expectations. Moreover, the public awakening towards inflation is coming at a time when monetary inflation, commodity inflation, currency inflation and wage inflation, already at significant highs, are set to rise even further.

He predicts a sharp acceleration when gold breaches $1,020 per ounce - itself a price level about 38% higher than today.

Although his remarks have most relevance for an American audience, it is worth remembering the recent Telegraph article (5th October) that forecast sterling dropping even faster than the dollar. Our determination to be as financially reckless as our Transatlantic cousins may result in our facing similar problems.

The good news? Our enormous holding of US Treasury stock may turn out to have been a reasonable investment, in sterling terms. The bad news? Perhaps we should have put that money into bonds denominated in a stronger currency. The Euro, maybe?

Interview: "The Dollar Crisis" by Richard Duncan

While I am finishing Richard Duncan's book, please see here for an interview in which the author explains his analysis and proposed solutions. This man is no Chicken Little - he's worked for the International Monetary Fund and the World Bank. The problems he describes are very real and very important.

As I understand it, America is like a gourmet and the Far East is his favourite cafe. With the party of friends he brings, he is by far its most important customer - but he pays for the meals in IOUs. He's been such good business that the cafe has borrowed from the bank to build an extension and hire extra staff.

But some start to worry that America won't be able to settle the now-enormous bill. What to do? If he pays up, he runs out of money and stops visiting the restaurant. America will go on a diet of bread and water and the cafe will go bust. On the other hand, if the restaurant accepts that his IOUs are worthless, it's bust anyway.

One solution is to look for new customers before the crisis hits, so the cafe can keep going. And another is to outlaw IOUs - if you haven't got the cash, you don't get the meal.

So Mr Duncan proposes:

(a) a global minimum wage, so poorer people around the world can have the money to buy the goods and services the Far East is geared up to provide.

(b) a global bank, to oversee financial balances between countries and prevent these credit problems recurring.

Meanwhile, America must face a much lower standard of living for a long time, until he's out of the hole he dug for himself. And maybe he'll be allowed a discount on his debt (i.e. inflation). The cafe is going to suffer a loss; the question is whether the business can find a way to survive it.