"Dow 9,000", UK loans to US, poll, doom

Not as bad as this, we trust...

Dow 9,000 update

The Dow is currently at 13,806.70, up slightly from its July 6 valuation of 13,611.69. But gold has risen from $647.75 to $783.50 in the same period - up 21% in 113 days, or around 85% annualised. This means the "gold-priced Dow" is worth 11,414.54. At this rate, Robert McHugh's prediction will be fulfilled by March 8 next year.

UK holdings of US Treasury securities

The dollar has dropped by 1.8% against the British pound since July 6, which may not seem like much, but is equivalent to 5.72% annualised. The capital loss pretty much wipes out the income payable to the UK.

I have tried to publicise Britain's recent heavy increase in ownership of US debt, but it seems nobody wants to make political capital out of it. Perhaps this is because some think the pound will eventually drop even faster than the buck. Or maybe the silence is because the markets are jittery enough already, without further evidence of American financial crisis.

Poll

Please take part in the "Wall of Worry" poll (sidebar)!

Hogarth on corrupt electioneering practices

Doom

Some people are so Eeyorish that you start to cheer up. Although an American, Jeffrey Nyquist gave us a good dose of Northern European apocalyptic prophecy in Financial Sense yesterday: computer viruses, Russia and China on the march, debt, war - the lot. Pass Pappy the liquor, son, and go git mah fiddle.

Bluegrass

Having said that, the (commendably) idealistic young and their left-wing Pied Pipers should learn more about the real nature and continuing threat of communism. George Orwell said the British Left played with fire and didn't know that it was hot. I suspect that happiness for the many is more likely to come from a restrained, green-conscious form of capitalism, than from the destructive dreams of millenarian socialists.

I also suspect that a major theme this century will be the contest between Marxism and Islam. I hope for a bloodless final end to the former, which has caused such suffering to so many millions in the last century; and the ascendancy of the civilised, cultured, intellectual and tolerant traditions within the latter.

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?

US bond pressure mounts

...and China has been selling off US Treasury bills, according to Gary Dorsch of Global Money Trends, featured in GoldSeek today:

"Beijing sees a “veto proof” protectionist bill sailing thru the US Congress later this year, and has been a net seller of US T-bonds for three straight months by a record amount of $14.7 billion, the longest period of sales by China since November 2000."

UPDATE

More on this from the Daily Telegraph here.

Safety first

Dan Denning comments on the recent rush for cash and safe bonds in The Daily Reckoning Australia today. He also repeats Marc Faber's point about an "earnings bubble" that skews p/e ratios:

Be careful about using low P/E ratios as a buying indicator. We read in this morning's paper that the average P/E on the ASX 200 is the lowest its been in 12 months. That doesn't automatically mean stocks are "good value." In fact, in the past, low P/E ratios have been a sign of the market top. Why?

At the height of an economic cycle, corporate earnings are high. When earnings rise faster than share prices, the P/E ratio will look low, flashing a "buy" signal. But this may be just the time that earnings themselves have peaked. That's definitely not the time to buy a stock.

And even commodity shares have to be chosen with care, when you factor-in rising costs.

Marc Faber update

.............................................. Real growth: farmland

A most interesting and informative interview with Marc Faber on Bloomberg TV, last Friday. He thinks we've seen, not a correction, but the start of a bear market. In his opinion, the central banks intervention is inappropriate and will cause inflation. He thinks they "should let the crisis burn through the system, and eliminate some players". The Dow should correct by 20 - 30%; and as hedge funds "de-leverage", i.e. reduce their borrowings, the prices of most assets will drop.

In answer to the defence that p/e ratios are still good (i.e. the share price divided by the dividends, one way to test whether shares are over-valued), he says that at the peak of a market, there is a bubble. In 1999 it was a share price bubble, but now there is a bubble in earnings, and we will see "earnings disappointments" in the near future. So the p/e ratio is misleading and shares are not reasonably valued.

He points out that around the time of Dow peaks in July and August, we were also seeing several hundred shares hitting yearly lows, so underneath the surface a recession has already begun. The Dow has held up because of certain areas, such as oil stocks; but in present conditions, he thinks it will be "very difficult for the market to make new highs". Faber says that realism will return when we see a fall in popular stocks such as Research In Motion, Apple and Google.

The fundamentals of emerging markets are sound, and he foresees their economies de-coupling from the fortunes of the USA; but currently their stockmarkets are also over-valued and may correct when deleveraging causes money to flow back out of them.

As to the dollar, he thinks that if the Fed resists the temptation to cut interest rates, the dollar could strengthen against emerging market currencies. Against the Euro and the yen, he's not so sure. "I think against gold, all currencies will depreciate over time".

In relation to property, he says depressed areas like Detroit probably can't fall much further, unlike Miami and Southern California. Asian property looks promising - he mentions cities like Manila, Jakarta, Kuala Lumpur, Bangkok, Hanoi and Ho Chi Minh City. And relative to financial assets, farmland is depressed.

Accused of bearishness, Faber counters that to be bearish about assets is to be bullish about cash, which he has made plain for several months now. He even thinks that US Treasury notes and good-quality commercial bonds are a good investment.

I'm amazed how much valuable information this generous man gives away for nothing.

..................................................... Modern Manila

Could the Dow AND gold BOTH go up?

In unusual circumstances, normal behaviour changes, as Richard Bookstaber recently observed. If the dollar's decline continues, and gold maintains its "real" value, a 17% dollar devaluation would mean a corresponding 20.48% increase in the price of gold, carrying the yellow metal over the $800 threshold.

A weaker dollar makes imports more expensive - both finished goods and raw materials - but is a stimulus to some exports. Maybe, if it didn't all happen too suddenly and scare everyone off the market, the Dow would rise.

It would also mean paying back foreigners with cheaper money, a trick played on the world by Britain's Harold Wilson in the devaluation of 19 November 1967, when the pound's foreign exchange value was cut abruptly by 14%.

The US Treasury's figures for May 2007 show there's a total of $2.18 trillion in foreign-held securities. A Brit-style 14% devaluation would lose Uncle Sam's partners about $305 billion. John Bull's share of that loss would be some $23 billion, or around £11.5 billion.

Maybe that would finally get the British news media to notice the recent huge UK support for US government debt. I can hardly wait. Be still, my beating wallet.

There's a political price to pay, but US Presidents can't serve more than two terms anyway, not since they changed the Constitution to stop another Roosevelt reign.

Harold Wilson resigned in 1974, citing ill health, but I did once hear a rumour that the IMF, which bailed us out in 1975, had made Wilson's resignation a precondition of the loan. In these document-shredding and email-deleting times, a paranoid would say you know it's the truth when it's officially denied.

Meanwhile, please place your bets in the two polls opposite!

Should US Treasury bonds be downgraded?

iTulip's President, Eric Janszen (Wednesday) goes over the now-familiar arguments for a coming period of US recession/inflation, caused by the trade, budget and fiscal deficits.

He also links to Paul Farrell's article in Marketwatch (Monday), which questions America's creditworthiness as a result of having to finance the war in Iraq. Maybe we're going around the same track as with Vietnam, which burned up money (I remember a contemporary American cartoon of a steam engine with dollars being shovelled into the firebox).

Has the UK tied one of its little boats to the anchor chain of the Titanic? I calculate its loan to Uncle Sam's Treasury to be worth $2,757.65 per capita (British heads), or £1,345.99.

My wife and I could have a nice little holiday on that, which would be more fun, or a day at the races, which might get us a better return.

Desperately holding down gold

Jim Willie of the Hat Trick Letter thinks that bank selloffs of gold are to make dodgy bonds look better than they are. If the mortgage bonds unravel, there's a lot of fast talking to be done by banks and brokers.

Bank of England investment in US Treasuries; gold

Let's combine the recent mystery about Britain's massive investment in US Treasury securities, with the worldwide asset bubble.

This is Doug Casey speaking to the Agora Financial "Rim of Fire" conference in Vancouver this week, on YouTube (thanks to "Daniel" for alerting me to it).

His view on American bonds? "A triple threat". Why?: (1) interest rates are very low and are going to become very high; (2) credit risk: he says he would not wish to be a lender now, with so much debt everywhere -he refers to a possible "financial credit collapse"; (3) currency risk - he says dollars say "IOU nothing", and compares them to the Argentinian peso 10 years ago.

So, why has the UK invested an extra $112 billion in US-dollar-denominated Treasury bonds, between June '06 and May '07? To dramatise this figure somewhat, let's look at the Forbes list of the richest people in America (Sep 2006): the top 5 billionaires are worth $155 bn between them. Britain is now into America for $167.6 bn. The increase in the last year alone is more than the net worth of Bill Gates and Warren Buffett combined. I wonder (rhetorically) whether they would bet their entire fortunes on US Treasuries?

We already know what Casey thinks about cash held in dollars, and he regards stocks and property as overvalued, too.

So what does he favour? Gold. "It's not just going through the roof, it's going to the moon". He's been a gold bull for the last 7 years. He picks mining stocks, but warns that they are very volatile, even more than Internet stocks. But there are other ways to own gold.

Meanwhile, is there anyone here in the UK who is willing to grill the supposedly independent Bank of England (it wasn't the British Treasury, after all, it seems) about the rationale for its vast punt on "triple risk" US bonds?

Let's finish with Bill Bonner's keynote speech at the same conference, on the difference between the real boom of the Far East and the Ludwig von Mises "crack-up boom" of our inflationary economies:

Futurology

Continuing the argument about sovereign wealth funds, what might this portend for US Treasury securities?

If foreign governments pull the rug out, there could be a run on the dollar on a scale that the US government wouldn't dare correct with proportionately high interest rates, seeing how indebted everyone is. The doomsters are probably right that it could happen, which is why everybody will make sure it doesn't.

And such a fall wouldn't be in the interest of creditor nations who still value the trade surpluses they enjoy with Uncle Sam. Many Chinese light manufacturing industries are working on narrow margins and don't want to see their profits disappear through foreign exchange movements (though their State is sufficiently powerful and ruthless to go that way if it wants to). I suspect that China will continue to develop towards heavier industries and gradually allow the trainer-stitching work to go to even poorer countries like Vietnam. Meanwhile, it's in no hurry to kill the US cow while she's still giving milk.

So here's my bet:

1. For domestic political reasons, the US will not do what is needed to get the economy back on the level. It will continue to borrow but, fearful of its vulnerability to potentially unfriendly foreigners, lean on its friends for more finance.
2. The US Treasury securities held by China will remain much the same, or even gradually increase in dollar terms, but "ally nations" will increase their holdings proportionately faster. There's not much an emotionally or politically vulnerable British PM won't do for a pat on the back at G8 summits, Bilderberg tie-looseners etc. Goodness knows how much of our future has been sacrificed to the last one's ego.
3. Creditor nations will increase their sovereign wealth funds, favouring investments that are involved in the supply lines from their manufacturing concerns to our end purchasers. Marxism has moved on: you have to have control of the means of production, but even more so of the means of distribution.
4. They will also invest in the lines leading towards their industries: energy, industrial metals and infrastructure. I also guess China will explore healthcare, energy-efficiency, food-oriented genetic research and environmental protection. And water. And foreign farmland (Bill Bonner and Marc Faber are really smart). City planning in all its aspects could become really important.
5. If these countries were private investors, we'd be seeing their portfolios alter their balance between bonds and equities, in the direction of higher risk, higher returns. And like good long-term investors, they will get richer. Maybe eventually, as James Kynge says, demographics and healthcare will eat into this wealth, but it's not going to benefit the West much either way.
6. In the US and the UK, our collective concern will be how to handle the social disruption in our own societies; our concern as individuals will be how to save and invest while we still can, and how to set up our own children in relative security.

They are the masters now - or will be soon

The BBC Ten o' Clock News last night featured an article about China's purchase of a share in Barclays Bank. I have posted a video of part of Chris Mayer's speech at Vancouver (see below), where he discusses "sovereign wealth funds".

China, India and Japan have enormous surpluses of money from their trade. They have bought US Treasury securities (bonds, i.e. loans to the US), but this is a thing governments do to park money that they might need back in year or two, when the trading balance has altered. Since the US/UK (etc) trade deficits are long-running, these eastern countries can now start thinking like young private investors, in which case equities become attractive - offering income from dividends AND the potential for capital growth.

These countries are turning our debt into their ownership, like an old Punch cartoon where a plumber took his customer's house in payment for his work.

This issue is big.

More on US Treasury bonds

Another concise overview by David Galland in today's Daily Reckoning Australia. Part of it goes like this:

Make no mistake, we are in uncharted water; it is unprecedented that the claims represented by the fiat currency of one government - that of the U.S. - have been accumulated in such massive quantities for the reserves of other governments. And we're not just talking China but virtually the world. And the world is getting nervous.

To quote Thai Finance Minister Chalongphob Sussangkarn in his recent address to the annual meeting of the Asian Development Bank in Kyoto:

"Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies."

This is why I am theorising that the UK's massively increased support for US Treasuries may be an emergency measure by the British Government. Though it has been pointed out to me that this money may have also come from hedge funds and conventional funds - the Treasury stats don't say that the purchases are official.

Another country that has significantly increased its US bond holdings is Brazil (145% up, from $33.3 bn to $81.6 bn). Maybe that's to do with its increasing oil exports. According to the US government's Energy Information Administration, Brazilian production is projected to rise long-term.

Coming back to the Treasury bond stats: of those who previously held at least 1% of total foreign-held US Treasury debt, the top five reductions are:

Caribbean Banking Centres
Mexico
Korea
France
Switzerland

The top three in this list account for almost $50 bn of the total $72 bn that foreigners withdrew. I thought the conspiracy theorists believed Caribbean Banking Centres were part of the US government's secret plan for supporting the dollar? Perhaps somebody would kindly pay for me to go on a "fact-finding mission" to the Caribbean. Please.

UK, US Treasury securities, and blogs (continued)

Well, I've got some sort of response from Iain Dale's commentators, starting with an ad hominem accusation of being emotionally needy (scared, more like!).

Here's my main argument, however inexpertly expressed:

Over the last 12 months, 10 countries have reduced their loans to the US by a combined total of $72 billion; we've increased our commitment by $112 billion, moving us from 10th place to 3rd place in the list of America's creditors. And our own finances aren't that good, either.

America is in hock to foreigners to the tune of 2.18 trillion dollars and rising. Effectively, they're running up a very big credit card bill to maintain domestic living standards. The US Comptroller General has very recently commented that this indebtedness could be used against the US by unfriendly foreign powers.

Our greatly increased support for America's finances is at the cost of some risk to ourselves, because if the borrowing spree continues unabated, we may find we get repaid in dollars that are worth far less than they are today. Can we afford to keep bailing out a spendthrift?

The borrowing is a powerful economic stimulus to China which, despite its relative poverty, is the second biggest creditor to the US. By sending the money back to America in the form of loans (purchase of US Treasury bonds), they avoid having their own currency appreciate. So their wage rates remain fantastically low and they continue to take business and jobs from the West - us included. Think of the transfer of the Swan Hunter shipyard to south India, or the purchase of Rover by China (don't tell me they're desperate to create long-term employment in Birmingham, when the average per capita wage in China is less than £1,000 per year). We're seeing a shift from higher-paid industrial work to lower-paid service jobs - perhaps the economic profile and geographical distribution of the readership of this blog means that it isn't obvious to them. China and others are hoovering up world resources in the dash to industrialise, right down to our iron manhole covers. James Kynge's "China shakes the world" is easy to read and very enlightening about what's going on.

Japan, America's greatest creditor, also buys US bonds to keep excess money out of its own system, so its interest rates are low, so the yen stays low and protects its well-established export markets. Also, a lot of money powering the world's stockmarkets is cheap money borrowed from Japan and invested elsewhere - the so-called "carry trade". All right if it goes on forever - but it can't. You cannot live for the rest of your life on borrowed money.

If currencies were responsibly managed, the trade deficit would cause the US to start to run short of cash, US wages would go down and exports back up, and trade would eventually (if painfully) come back into balance. But the Americans - and others, including ourselves again - respond by increasing the money supply (mostly through bank lending - up another 13% this year on both sides the Atlantic), which leads to price inflation, hence the rise in house prices and the stock markets. But borrowed money has to be repaid someday and then the tide will go out - but this time, we'll be left without much industrial capacity.

There's a fear that to prevent a 3os-style Depression, governments will print money even faster, but this leads to hyperinflation and eventually no one wants the currency at all (cf. Germany in 1923). So we could well have both a slump and high inflation. It may sound dull and technical, but then money is boring - until you haven't got any.

An American Congressional committee recently grilled the chairman of the Federal Reserve (like our Bank of England) and at least one Congressman admitted he realized he didn't understand inflation; the only one who seemed to was Ron Paul, who said that if we can make a living by printing money, we should all quit our jobs and do that. Most of Ron Paul's own investments are in gold and silver; the world's richest investor, Warren Buffett, has been sitting on many billions of dollars of cash for a long time and has recently disclosed that he's hedged by buying into a foreign currency, to protect against financial loss from a falling dollar.

If the value of the dollar (and possibly the pound) starts to collapse through overproduction, we really will notice - it's not just going to be bargain fares to Disneyworld. Americans - rich, expert ones, who manage big funds - are sounding the warnings loudly, clearly and angrily.

The collapse hasn't happened yet, partly because the dollar is the world's standard trading currency. This is changing; already, Iran is demanding payment from Japan in yen, not US dollars. When more countries start to impose similar conditions, the demand for the dollar will drop significantly, and so will its exchange value. China is beginning to de-link from the dollar, in favour of a wider basket of currencies; meanwhile, it's widened the range within which its currency (the renminbi, or Chinese yuan) can move against the dollar. They're not in hurry to appreciate their money, for reasons of international industrial market share; but that's the way the pressure is building.

Although our economy is much smaller than America's, we have (to some extent) similar problems ourselves. Yet here we are, lending money to our bigger cousin. I don't think we can sub him indefinitely, and I don't think we have begun to address the question of our own economic future. Without that, there'll be lots more hoodies to hug.

Michael Panzner relays the alarm

Michael Panzner's latest post discusses a warning from David M. Walker, the nation's chief accountant, about America's vulnerability to potentially unfriendly foreign creditors. This confirms me in my feeling that the recent purchases by the UK of US Treasury securities is extremely significant (see recent posts on Bearwatch).

I have attempted to elicit interest in various quarters, including Iain Dale's influential political blog ("Tuesday open thread", 24 July) but so far I seem to be speaking to the profoundly deaf. Today I submitted the following comment to Iain's Diary, but without much hope of a response - as I have said in an email to Michael Panzner today, the Brits add apathy to financial ignorance:

Okay, one last Cassandra-like call and then I'll admit defeat:

Does it really not matter to your sophisticated political readership that the UK (presumably the Treasury under Gordon Brown) has recently purchased an absolutely massive amount of American Treasury securities, most of it in the last nine months, which quite probably will lose us many billions of pounds through currency depreciation? We have gone in one wild leap from 10th largest holder of American debt, to third place.

The potential downside from this crazy investment (I think it has already lost the equivalent of the first year's interest) worry me less than the implication, which is that the US is using its "special relationship" with the UK to defer (for a short time) the end-stage of a US debt-fuelled global inflationary spiral, with the prospect of a deep economic depression and possibly a wealth-destroying hyperinflation. The problems this would give us make the current floods seem a minor inconvenience.

Or is it that everybody here knows already, and is merely filling the time in the rattling tumbrils with political chit-chat and mutual insult? Is it aristocratic insouciance, or financial ignorance? Surely not the latter, when Americans are discussing their economic problems so openly and extensively.

More on UK purchases of US Treasury securities

I have sent the following email to George Osborne, the shadow Chancellor:

"Please find attached a document from the US Treasury website, detailing major foreign holdings of US Treasury securities (web address top left of document). I emailed this document to the Daily Mail newsdesk yesterday, in the fervent hope that somebody might take an interest.

Between June 2006 and May 2007, the UK has leapt from being the 10th largest foreign holder of American debt to 3rd place (behind Japan and China, both of whom, although increasing in dollar terms, have actually reduced their overall share of foreign commitment to the US).

We have contributed an extra $112.1 billion, i.e. around 55% of the $205 billion total increase in investment by foreigners over that 12 month period. To put it another way, 10 countries have reduced their holdings in dollar terms, by a combined total of $72 billion; we have covered these withdrawals and added another $40 bn.

For comparison purposes, the UK's increase in US Treasury securities is equivalent to some 50% of the £104 billion budget for the NHS for next year (http://www.timesonline.co.uk/tol/comment/columnists/article2039584.ece)

The effect for the UK has been to more than triple its exposure to US Treasury instruments, at a time when the dollar is dropping - and some predict it will fall much further. The potential loss of our national wealth easily matches (and will quite possibly dwarf) that from the sale by Gordon Brown of much of our gold reserves some years ago."

News: huge investment by UK in US Treasury securities

Never mind the conspiracy theorists and the rumoured use of "Caribbean Banking centres" to buy US Treasury bonds; look at this document from the US Treasury, dated 17 July 2007. It shows that in the last 12 months, holdings by foreigners increased by 10.37%, but the UK's holdings shot up over 202% in the same period, from $55.5 billion to $167.6 billion. And the dollar has dropped against the pound at the same time. Can our little island afford such generosity?

Puplava on debt and credit

Financial Sense, 14 July: Jim Puplava notes that there is a US credit contraction underway. Real incomes are falling by 6% per year; bank credit is going down; the quality of loans is worsening.

Consumers appear to loading up their credit cards to maintain living standards, but this is more expensive than mortgages; the Federal Reserve is buying Treasury bonds to keep the interest rates down, hoping to prevent a real estate recession from becoming a depression.

Consequently, Puplava anticipates lower discretionary spending and a cut in interest rates by the end of the year.

Peter Schiff - corrosive effects of debt

Peter Schiff has revamped his site, and is generally increasing his media profile.

His economic commentary reports that the US has sent an official to China to ask them to buy into mortgage-backed securities! (The man will deserve a medal if he succeeds.) But it's not only subprime loans that are risky - Schiff says that many home valuations were inflated for mortgage purposes, and foreclosures realize less than half such values.

Turning to government debt, he says Treasury bonds will be hollowed out by a gradual devaluation of the dollar (by maybe 50% over the medium term), plus soaring interest rates. Further ahead, he sticks to his Crash Proof prediction of hyperinflation.

How long can Japan power world stockmarkets?

An interesting audio file of Gary Dorsch (Global Money Trends, Sir Chartsalot) being interviewed by Jim Puplava (Financial Sense) on 16 June.

He notes UK Chancellor of the Exchequer (i.e. finance minister) Gordon Brown's denial that increases in the money supply are closely correlated with inflation, and says that this is why governments around the world don't raise interest rates fast enough and high enough. (Now that Gordon Brown is Prime Minister, I don't expect a sudden change of heart.)

Dorsch also notes that foreigners are becoming reluctant to keep pumping cash into US Treasury bonds, and bond yields are rising. He regards the yield on the 10-year bond as critical for housing and stockmarket valuations.

He also notes that Japan is resisting rises on its own 10-year bond yield, for fear of a strengthening yen and weakening trade balance; but the rate (c. 2%) is still so incredibly low that traders are borrowing vast sums (the Japanese have $7.5 trillion in bonds, I think Dorsch stated) to invest in global equities. So until there is a significant hike, the "carry trade" will continue to help inflate stocks. He wonders whether at some point, "bond vigilantes" will have enough strength to force an interest rate rise.

Meanwhile, Dorsch notes growing interest in commodities. He likes producing countries such as Canada, Australia and Brazil, and thinks that the ever-growing demand for base metals and energy (especially oil) from China and India will bear them up on the tide.

Peter Schiff: will Japan pull the plug on America?

Peter Schiff, in The Market Oracle yesterday, reports that Japanese monetary inflation is about to show up in their consumer prices. They may be able to cover it by fudging the inflation index (some of us have seen that done elsewhere), but it can't fool everyone forever.

For a long time, Japan has increased its money supply and exported the excess cash by purchasing US Treasury bonds. This keeps the yen steady against the weak dollar, protecting Japan's exports; and it also keeps US interest rates low, so reducing the pressure to raise rates in Japan.

Schiff felicitously terms this a "vendor financing scheme", but regards America's economic collapse as "inevitable". He thinks hyperinflation is too high a price for Japan to pay, and if she retreats from the brink and alters her monetary policy, then the result will be inflation in the US, forcing higher interest rates, and collapsing stock and real property values.

This is what Schiff has predicted in his book, "Crash Proof" (see my review here) and it's interesting to note that the author has been appearing more frequently in the news lately. Either he thinks the turning point is close, or he's marketing the book more actively.

Schiff also comments on the fear of deflation, saying "falling consumer prices are one of the natural rewards that people enjoy in market economies", a point made in Richard Daughty's masterly performance on You Tube. It's so funny and succinct that I re-watch this myself from time to time - have another look:



UPDATE

For a counter-view (in the sense that he doesn't expect the crisis for some years yet), see Puru Saxena as I reported on July 28 here.