Venezuela Devalues Almost 47% — Too Late For Many [wealthcycles]

Just like that, boom, devaluation happens, the snap decision of a desperate government with socialist desires to just give and give and give—but first it must take.

Venezuela just devalued its currency, the bolivar, by 46.69%.

If you as a Venezuelan had $10,000 held in bolivars earlier today, it is too late to buy gold and silver to protect from this loss; you now have less than $5,400 in purchasing power this afternoon. If you stored or saved your hard-earned wealth in silver or gold, congratulations: you have preserved 100% of your wealth; and it could even be said your wealth went up 46% in bolivar terms.

Venezuela Bolivar vs Dollar 2002

Japan has promised to print big quantities of yen, an even bigger printing push than the Federal Reserve’s program of $85 billion dollars printed monthly, but Japan said it would do it… in 2014. The Bank of Japan has consistently expanded monetary policy “in drips and drabs” and has not impressed upon the market its determination to weaken the yen. It takes quite a bit of printing to effect a significant depreciation in exchange rates. As these two legacy, debt laden economies—Japan and the U.S.—duke it over which can implement the weakest policies, Venezuela has brought “a nuclear bomb into a currency war knife fight,” as Zerohedge writes.


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Fiat Money Kills Productivity [azizonomics]


I have long suspected that a money supply based on nothing other than faith in government is a productivity killer.

Last November I wrote:

During 1947-73 (for all but two of those years America had a gold standard where the unit of exchange was tied to gold at a fixed rate) average family income increased at a greater rate than that of the top 1%. From 1979-2007 (years without a gold standard) the top 1% did much, much better than the average family.

As we have seen with the quantitative easing program, the newly-printed money is directed to the rich. The Keynesian response to that might be that income growth inequality can be solved (or at least remedied) by making sure that helicopter drops of new money are done over the entire economy rather than directed solely to Wall Street megabanks.

But I think there is a deeper problem hereMy hypothesis is that leaving the gold exchange standard was a free lunch: GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by just pumping money into the system.

And now I have empirical evidence that my hypothesis has been true — total factor productivity.

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No **** — More Debt Doesn’t Work? [market-ticker]

I’m done being nice.

If you didn’t figure it out this morning you deserve a middle finger in response to any sort of crap email you send me on the subject of what you do when you’re too far in debt.

LONDON—Investors fled from Spanish government debt on Monday, an immediate rejection of the country’s planned bank bailout by the constituency it most desperately needs to impress: the buyers of its own government bonds.

The market rout puts Spain and the euro zone in a dire position. The bailout plan—in which Spain agreed to accept up to €100 billion ($125 billion) to recapitalize banks—was hatched to alleviate the concern that Spain itself could be dragged down by the declining fortunes of its lenders.

There is no solution — here or anywhere else — to excessive and bad debt found by taking on more debt.  That is exactly identical to opening a new credit card when your current one hits its limit and comes back declined!

I’m simply not going to put up with people claiming that we must “borrow more” or “spend more” as a means of solving this.  I don’t give a damn which political party or what persuasion you come from in this regard — all will get one-line middle-finger image in response, and if you run that crap on my forum you’ll do it exactly once, so make your departure memorable.

I’m tired of Lyin’ Ryan, Mittens who both bans guns and has claimed he won’t cut the budget his first year, Obama who can’t get his lips off Blankfein’s and Dimon’s schnozz and folks like Pelosi, Stiglitz and Krugman, all of whom claim that the way to evade a “debt deflation” is to print and spend more money, or Bernanke who claims that “in the intermediate term” we must fix our deficits but “for now we can’t tamper with the recovery.”  And I’m tired of people like Gary Johnson who claims he’s submit a 43% cut federal budget but doesn’t appear to understand what this means in economic terms nor does he address it, nor will he address the places he can mitigate the instantaneous damage that would appear through things like putting a stop to the immoral and outrageous monopolist practices in the medical industry — practices that can only happen with the explicit enforcement capacity of government force.

The Party of Principle eh?  How about just another head on the same damned snake?

All of these assclowns have had four years to prove their thesis and it has been resoundingly disproved by the factual record of what has actually happened.

Hiding the truth does not change it.  Lying does not change facts.  Claiming that crap assets are good does not make them change in character and payment prospects.  All claims of expected compound growth on an indefinite forward basis are pyramid schemes andunlawful for this reason, yet they’re still being made right here, right now, today.  And claims that “deflation” is “bad” when it is the correction of an intentional and fraudulent credit inflation that you allowed to take place over the space of 30 years, which should have resulted in the banksters and pension fund managers involved drawing 20-to-life prison terms decades ago for running intentional and knowing ponzi schemes are outright lies.

Yeah, sure, there will be more “can kicking.”  I’m sure of it.  But I’m also sure it won’t work, because it can’t.  I said back in 2007 that he only solution to this problem was to ring-fence the government (not take the bad debts onto the government), cram down all the bondholders and stockholders and protect the depositors, force the derivatives to be covered with capital for every dollar of underwater position without exception and let what comes from that happen.  What would have (and still will, if we do it) come from that would be that a lot of so-called “rich” people would be rendered instantly bankrupt and the people they robbed with their knowingly-false promises would then sue them and pick their carcasses clean.


Yes, it would have sucked.  Yes, it will suck (worse) now, because we’ve done stupid things in the four interim years.  But it is no less necessary today than it was in 2007 — in fact it’s more necessary as we’re now $5 trillion poorer in terms of federal debt and in terms of total systemic debt we have more now ($54.642 trillion) than we did at the end of 2007 ($50.898 trillion) – 7.4% more!

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Eurozone citizens moving billions to Switzerland [SoberLook]


Bloomberg/BW: – Switzerland saw its foreign currency reserves balloon by 66.2 billion Swiss francs ($69.5 billion) over the past month as the country’s central bank spent heavily to prevent its currency from appreciating against the euro, according to data released Thursday.

The franc is considered a safe haven for investors concerned about the euro-zone debt crisis.

The Swiss National Bank held foreign currency reserves worth 303.8 billion francs in May, an increase of 28 percent from the 237.6 billion francs in April.

“A large part of the increase in foreign currency reserves between the end of April and the end of May can be traced to the purchase of foreign currency to enforce the minimum exchange rate,” said SNB spokeswoman Silvia Oppliger.

Indeed we had a big spike in foreign currency reserves of the Swiss National Bank in May.

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The Fiasco of Fiat Money [Mises Daily]


Today’s worldwide paper-, or “fiat-,” money regime is an economically and socially destructive scheme — with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine.

Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society’s morals; and it will ultimately end in a depression on a grand scale.

All these insights, however, which have been put forward by the scholars of the Austrian School of economics years ago, hardly play any role among the efforts of mainstream economists, central banks, politicians, or bureaucrats in identifying the root cause of the current financial and economic crisis and, against this backdrop, formulating proper remedies.

This should not come as a surprise, though. For the (intentional or unintentional) purpose of policy makers and their influential “experts” — who serve as opinion molders — is to keep the fiat-money regime going, whatever it takes.


The fiat-money regime essentially rests on central banking — meaning that a government-sponsored central bank holds the money-production monopoly — and fractional-reserve banking, denoting banks issuing money created out of thin air, or ex nihilo.

In The Mystery of Banking, Murray N. Rothbard uncovers the fiat-money regime — with central banking and fractional-reserve banking — as a form of embezzlement, a scheme of thievery.[1]

Rothbard’s conclusion might need some explanation, given that mainstream economists consider the concept of fiat money as an economically and politically desirable, acceptable, and state-of-the-art institution.

An understanding of the nature and consequences of a fiat-money regime must start with an appreciation of what money actually is and what it does in a monetary exchange economy.

Money is the universally accepted means of exchange. Ludwig von Mises emphasized that money has just one function: the means-of-exchange function; all other functions typically ascribed to money are simply subfunctions of money’s exchange function.[2]

With money being the medium of exchange, a rise in the money stock does not, and cannot, confer a social benefit. All it does is reduce, and necessarily so, the purchasing power of a money unit — compared to a situation in which the money stock had remained unchanged.

What is more, an increase in the money stock can never be “neutral.” It will necessarily benefit early receivers of the new money at the expense of the late receivers, or those who do not receive anything of the new money stock — an insight known as the “Cantillon effect.”

Because a rise in the money stock benefits the money producer most — as he obtains the newly created money first — any rational individual would like to be the among the money producers; or even better: to be the sole money producer.

Those who are willing to disrespect the principles of the free market (that is, the unconditional respect of private property) will want to obtain full control over money production (that is, holding the money production monopoly).

Once people have been made to think that the state (the territorial monopolist of ultimate decision making with the right to tax) is a well-meaning and indispensible agent, money production will sooner or later be monopolized by the state.

The (admittedly rather lengthy) process through which government obtains the monopoly of money production has been theoretically laid out by Rothbard in What Has Government Done to Our Money?.[3]

Having obtained the monopoly of money production, government will replace commodity money (in the form of, say, gold and silver) with fiat money, and the regime of legalized counterfeiting gets started.

Commercial banks will press for fractional-reserve banking, meaning that they should be legally allowed to issue new money (fiduciary media) through credit extension in excess of the reserves they obtain from their clients. Fractional-reserve banking is a rather attractive profit-making scheme for lenders; and it provides government with cheap credit for financing its handouts (well) in excess of regular tax receipts.

Fiat money will be injected through bank-circulation credit: banks extend credit and issue new money balances which are not backed by real savings. Economically speaking, this is worse than counterfeiting money.

Fiat money is not only inflationary, thereby causing all the economic and societal evils of eroding the purchasing power of money and leading to a non-free-market related redistribution of income and wealth among the people; banks’ circulation credit expansion also artificially lowers the market interest rate to below the rate that would prevail had the credit and fiat-money supply not been artificially lowered, thereby making debt financing unduly attractive, especially for government.

It is the artificial lowering of the market interest rate that also induces an artificial boom, which leads to overconsumption and malinvestment, and which must ultimately end in a bust. Mises put it succinctly:

The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.[4]


A fiat-money regime depends essentially on the demand for money. As long as people are willingly holding fiat money (and fiat-money-denominated government, bank, and corporate bonds, for that matter), the fiat-money regime can be run quite smoothly, for then people raise their demand for fiat money as its supply increases.

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Bank of England to consider £50bn stimulus for economy [Telegraph]

Bank of England policymakers may opt to inject a further £50bn of stimulus into Britain’s ailing economy this week, according to leading economists.

Bank of England to consider £50bn stimulus for economy

Worsening economic prospects could force the hand of the Bank’s Monetary Policy Committee, which last month voted to pause its purchase of government bonds after pumping £325bn into the market through quantitative easing.

Since then however, the data have painted a picture of a worsening, not improving outlook for the British economy, and there is no sign of a solution to the eurozone crisis.

The Office for National Statistics said the recession that began in the first quarter was deeper than it initially thought, with the economy shrinking by 0.3pc in the first three months of the year and not 0.2pc as it previously estimated.

Then on Friday the Markit/CIPS manufacturing PMI showed the sector shrank at the fastest pace in three years in May, suggesting manufacturing will be a drag on the wider economy in the second quarter.

George Buckley, economist at Deutsche Bank, said the grim manufacturing PMI survey was “a game changer”.

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A Fractional Reserve Banking Simulator

Frackin’ Reserve Web Edition is a web port of Frackin’ Reserve, which is a desktop version of Frackin’ Reserve Web Edition.

Frackin’ Reserve Web Edition lets you simulate the cycles and processes of fractional reserve banking and compound interest. It’s almost the same as the desktop version, but the range of parameters is more limited and some percentages are used instead of pure numbers.

Try the simulator

The Europe Crisis from a European Perspective


The purpose of this report is to give readers the essential background to the economic problems in Europe and to bring you up-to-date in what has become a fast-moving situation. At the time of writing, there has been a lull in the news flow, but that does not mean the problems are under control. Far from it.

Flawed from the Start

When we talk about Europe today in an economic context, we really mean the Eurozone, whose seventeen members are the core of Europe and share a common currency, the euro. The euro first came into existence thirteen years ago, on January 1, 1999, replacing national currencies for eleven states; Greece joined two years later. In theory, the idea of a common currency for European nations with common borders is logical, and it was Canadian economist Robert Mundell’s work on optimum currency areas that provided much of the theoretical cover.

However, the concept was flawed from the start.

The euro would have made sense if the economies of the member states had been allowed to converge — that is, evolve — so that they had similar characteristics. While this was the intention from the outset, the mistake was to put convergence in the hands of politicians and their economic advisers, who (if not representing socialist parties) were and still are all interventionists. This meant that they pursued their own national agendas by intervening in their respective economies while paying lip-service to the greater European ideal. Therefore, convergence was never going to happen.

The point everyone missed is that the only way convergence could occur is if all member states relinquished government planning and control of their individual economies, so that an undistorted free market across national boundaries could have developed. Instead, central planning by individual member states was the order of the day. Control mechanisms, such as limits on government borrowing as a proportion of GDP and permitted budget deficits, were breached with impunity, and the fines that should have been imposed under the Stability and Growth Pact of 1997 were never implemented. Today all Eurozone members are in breach, with the minor exceptions of Finland, Estonia, and Luxembourg.

The naïve ambitions behind the Maastricht Treaty were only the start of the euro-fudge. The whole point of the euro, so far as France and the Mediterranean countries were concerned, was to escape the monetary straitjacket of the deutschemark, with which their individual currencies were unfavourably compared in the foreign exchange markets. The Bundesbank, Germany’s central bank, was truly independent of government, and operated with the single mandate of price stability, while the other national central banks were extensions of high-spending governments. It was to de-politicise note issuance that, based on the Bundesbank model, the European Central Bank (ECB) was created to be independent of all governments.

Looser Standards, Easier Money

However, while the Bundesbank was focused only on price stability, the ECB relies on a wide range of indicators to guide monetary policy. So where the Bundesbank was single-mindedly objective in its approach, the ECB has become variously subjective, being able to choose its statistical indicators at will. While the ECB is regarded by most commentators as following restrictive monetary policies, they are considerably more expansionary than the old Bundesbank.

Anyway, the result was that borrowing costs for France and the Mediterranean countries fell rapidly to a significantly lower margin over Germany’s, which was taken as the “risk-free” rate. European banks geared up their lending to benefit from the spread, locking in a one or two percent differential between German bond yields compared with, for example, Italian government bonds. Gearing (i.e., levering up with further debt) this differential ten or twenty times was a no-brainer, particularly when it was backed by the implicit guarantee of the whole system. This was party-time for banks, and amounted to ready finance for profligate governments, which was the underlying reason that Greece joined — to benefit — two years after the start of the Eurozone.

In order to be eligible for monetary union in the first place, the future Eurozone members had to put their houses in order to meet the convergence criteria. For those with unacceptable debt-to-GDP ratios, this meant shifting debt “off balance sheet,” typically by dropping nationalised industries from the national accounts. Various other fudges were devised to make appearances acceptable for the target year of proof of convergence: 1997.

This means that even today, declared government debt is only part of the whole government debt story, with government guarantees, actual and implied, giving a far greater potential problem than headline debt figures suggest.

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Central Banks Show No Signs Of Shutting Down Printing Presses []


Bank of Japan (BOJ) continues to take its turn at reflating the global economy via various forms of currency creation. In its semi-annual report, Japan’s central bank announced it would increase the total quantity of printing by an additional 10 trillion yen ($123 billion), effectively extending its asset-purchase program 6 months.

The media distracts, talking about the “disappointing” 0.2% increase in Japan’s Consumer Price Index, which continues to stubbornly resist BOJ’s 1% target price inflation rate.

Previously this year, the BOJ, under pressure from impatient lawmakers threatening to change its governing structure, surprised investors on Valentine’s Day in February, pumping $120 billion worth of yen into its economy, as reported in the premium article Bank of Japan Yen Flood Fails to Buoy Trade Deficit—bringing Japan’s debt-to-GDP ratio to a whopping 235%. Andy Xie describes the knife-edge on which we rest:

“If the stable national debt is 120 percent of GDP, the yen needs to be devalued by 40 percent because devaluation is ultimately equal to the nominal GDP increase. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue. Japan has only one way out – a massive devaluation. Yen devaluation is likely to unfold quickly. A financial bubble doesn’t burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days.”

Today’s announcement was another meager attempt at weakening the yen through expanding the balance sheet, considering that the printing program has only totaled around 15% of GDP. Perhaps officials are wary of the scenario above, as the BOJ did not increase the rate (flow) of purchases, only the total quantity (stock). They also said 5 trillion yen of supply would be removed from a bank loan program due to low demand.

Japanese Prime Minister Noda will be talking trade (deficits) with the Whitehouse today. Xie sees this topic, the new, and enormous Japanese trade deficit as the canary in the coalmine for new pressure on the yen, the snap devaluation leading to a regional – Japanese, Chinese and Korean economic collapse. This would send equities and commodities used in industrial production on their next leg lower.

Up next for market watchers is the expected 25bps-50bps rate cut from the Royal Bank of Australia (RBA) this evening, and news from the European Central Bank’s (ECB) monthly policy meeting Thursday.

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Michael Krieger On The Rebirth Of Barter [Zerohedge]

Via Michael Krieger of ‘A Lightning War For Liberty’ blog,

Justice in the hands of the powerful is merely a governing system like any other. Why call it justice? Let us rather call it injustice, but of a sly effective order, based entirely on cruel knowledge of the resistance of the weak, their capacity for pain, humiliation and misery.
– Georges Bernanos

Outwardly we have a Constitutional government. We have operating within our government and political system, another body representing another form of government, a bureaucratic elite which believes our Constitution is outmoded.
– Senator William Jenner
(1908-1985) U.S. Senator (IN-R)

The Final Act of the Uruguay Round, marking the conclusion of the most ambitious trade negotiation of our century, will give birth – in Morocco – to the World Trade Organization, the third pillar of the New World Order, along with the United Nations and the International Monetary Fund.
– Government of Morocco
April, 1994   Source: New York Times, full page ad by the government of Morocco

The Rebirth of Barter
One of the most important articles I have read this week comes from Forbes contributor Gordon Chang.  In it he states that China is preparing to avoid U.S. sanctions on Iran by paying for oil with gold.  Not only that but he also mentions that China has already been bartering with Iran to get a hold of petroleum.  He states:

So how can Beijing keep both Iran’s ayatollahs and President Obama happy at the same time?  Simple, the Chinese can avoid the U.S. sanctions through barter.  China has already been trading its produce for Iran’s petroleum, but there is only so much gai lan and bok choy the Iranians can eat.  That’s why Iran is also accepting, among other goods, Chinese washing machines, refrigerators, toys, clothes, cosmetics, and toiletries.

The barter trade works, but Iran needs cash too.  As it is being cut off from the global financial system, the next best thing is gold.  So we should not be surprised that in late February the Iranian central bank said it would accept that metal as payment for oil.   Last year, China imported $21.7 billion in Iranian oil and exported $14.8 billion in goods and services.  As the NDAA goes into effect, look for Beijing to ship gold to Iran to make up the difference.

Thus, the leadership in America in its infinite stupidity has actually accelerated the demise of the U.S. dollar as the world’s reserve currency.  After its “kinetic action” in Libya succeeded in toppling the regime there, Washington’s geopolitical hubris grew and it has attempted to muscle Iran into a corner.  Instead, all it has done is alienated our “allies” that need Iranian oil to survive and in the process quickened a move away from the dollar to settle certain transactions.  Read Gordon’s article here.

In a similar move on a more micro level, the government of Spain in a similar desperation has banned the use of cash transactions above 2,500 euros (read this great article here on it).  How do you think citizens are going to respond to this?  People are already in the streets.

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Carmel on Spain


An interesting presentation by Carmel Asset Managementon Spain has recently made the rounds. Except for a few small details, it doesn’t contain anything that readers of this blog don’t know already, but it does represent a well researched and  comprehensive overview of the problem (in spite of the fact that it also contains a few small inaccuracies, but these are mere trifles).

It should be noted here that in Europe we have Edward Hugh, who as we have pointed out previously must be regarded as the expert on Spain – and not only because he actually lives there.

The people putting together the presentation did pick his brain as it were and used some of his chart work as well. Specifically it appears that Edward advised them on all the hidden debt and contingent liabilities in Spain, which are truly staggering. Readers may remember that we have mentioned this in the past as well and pointed to the same work of Edward’s regarding Spain’s true liabilities that Carmel uses in the presentation. In fact, if all these liabilities are added up, Spain’s public debt-to-GDP ratio is already at 100%, not the officially acknowledged 68%.

So they had expert advice, with the end result that there is now a credible and all-encompassing analysis of Spain ‘out there’ that flatly contradicts all the happy talk emanating from the eurocracy.

Some of the statistics in the piece were actually new to us as well, such as the fact that there are now so many houses in Spain due to the expired real estate boom that there are only 1.7 Spaniards per home – fewer people per home than anywhere else in the world. For two decades in a row, Spain’s population growth was perfectly matched by real estate developers in that one house was added to the housing stock for every person added to the population.  Moreover, 80% of the wealth of Spaniards is tied up in real estate, with 24% of Spain’s citizens owning a second home.

Given the fact that prices still have a long way to fall, you can imagine that we have a problem at hand here that dwarfs even the famous real estate bubble collapse of Japan. In fact it most definitely is a far worse situation, as Japan never saw unemployment soar to double digits during its slow-motion depression, whereas in Spain it is now close to 25%, with youth unemployment at nearly 50% (sounds like the stuff revolutions are made of).

In addition, as we have been pointing out frequently over the past two years, the exposure of Spain’s banking system to real estate credit is vast.

Given the enormous supply of houses in Spain,  the market will have a long and tortuous road to travel until it reaches its clearing level. Carmel rightly asks: who is going to buy all these houses? Spain’s demographic situation is worsening rapidly as well – there simply won’t be enough demand.

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So Long, US Dollar

By: Marin Katusa

There’s a major shift under way, one the US mainstream media has left largely untouched even though it will send the United States into an economic maelstrom and dramatically reduce the country’s importance in the world: the demise of the US dollar as the world’s reserve currency.

For decades the US dollar has been absolutely dominant in international trade, especially in the oil markets. This role has created immense demand for US dollars, and that international demand constitutes a huge part of the dollar’s valuation. Not only did the global-currency role add massive value to the dollar, it also created an almost endless pool of demand for US Treasuries as countries around the world sought to maintain stores of petrodollars. The availability of all this credit, denominated in a dollar supported by nothing less than the entirety of global trade, enabled the American federal government to borrow without limit and spend with abandon.

The dominance of the dollar gave the United States incredible power and influence around the world… but the times they are a-changing. As the world’s emerging economies gain ever more prominence, the US is losing hold of its position as the world’s superpower. Many on the long list of nations that dislike America are pondering ways to reduce American influence in their affairs. Ditching the dollar is a very good start.

In fact, they are doing more than pondering. Over the past few years China and other emerging powers such as Russia have been quietly making agreements to move away from the US dollar in international trade. Several major oil-producing nations have begun selling oil in currencies other than the dollar, and both the United Nations and the International Monetary Fund (IMF) have issued reports arguing for the need to create a new global reserve currency independent of the dollar.

The supremacy of the dollar is not nearly as solid as most Americans believe it to be. More generally, the United States is not the global superpower it once was. These trends are very much connected, as demonstrated by the world’s response to US sanctions against Iran.

US allies, including much of Europe and parts of Asia, fell into line quickly, reducing imports of Iranian oil. But a good number of Iran’s clients do not feel the need to toe America’s party line, and Iran certainly doesn’t feel any need to take orders from the US. Some countries have objected to America’s sanctions on Iran vocally, adamantly refusing to be ordered around. Others are being more discreet, choosing instead to simply trade with Iran through avenues that get around the sanctions.

It’s ironic. The United States fashioned its Iranian sanctions assuming that oil trades occur in US dollars. That assumption – an echo of the more general assumption that the US dollar will continue to dominate international trade – has given countries unfriendly to the US a great reason to continue their moves away from the dollar: if they don’t trade in dollars, America’s dollar-centric policies carry no weight! It’s a classic backfire: sanctions intended in part to illustrate the US’s continued world supremacy are in fact encouraging countries disillusioned with that very notion to continue their moves away from the US currency, a slow but steady trend that will eat away at its economic power until there is little left.

Let’s delve into both situations – the demise of the dollar’s dominance and the Iranian sanction shortcuts – in more detail.

Signs the Dollar Is Going the Way of the Dodo

The biggest oil-trading partners in the world, China and Saudi Arabia, are still using the petrodollar in their transactions. How long this will persist is a very important question.

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Floating Exchange Rates: Unworkable and Dishonest []

By Keith Weiner

Milton Friedman was a proponent of so-called “floating” exchange rates between the various irredeemable paper currencies that he promoted as the proper monetary system.  Many have noted that the currencies do not “float”; they sink at differing rates, sometimes one is sinking faster and then another. This article focuses on something else.

Under gold, a nation or an individual cannot sustain a deficit forever.  A deficit is when one consumes more than one produces.  One has a negative cash flow, and eventually one runs out of money.  The economy of a household or a national is therefore subject to discipline—sooner or later.

Friedman asserted that floating exchange rates would impose the same kind of forces on a nation to balance its exports and imports.  He claimed that if a nation ran a deficit, that this would cause its currency to fall in value relative to the other currencies.  And this drop would tend to reverse the deficits as the country would find it expensive to import and buyers would find its goods cheap to import.

Friedman was wrong.

To see why, one must look at the concept known to economists as “Terms of Trade”.  This phrase refers to the quantity of goods that can be purchased with the proceeds of the goods exported.  For example, country X uses the xyz currency.  It exports xyz1000 worth of goods and it can thereby pay for xyz1000 worth of imports.  But what happens if the xyz drops relative to the currency’s of X’s trading partners, because X is running a trade deficit?

The country exports the same goods as before, but they are now worth less on the export market.  So X can pay for fewer goods than before.  Buying the same amount of goods will result in a larger deficit.

At this point, one may be tempted to say “Ahah, Friedman was right!”  But remember, we are not talking about a gold standard.  We are talking about an irredeemable paper money system.  Money is borrowed into existence. Looking at the trade deficit from the perspective of Terms of Trade, we see that trade deficits lead to budget deficits, which leads to a falling currency, which leads to increased trade deficits.  It is not a negative feedback loop, which is self-limited and self-correcting.  It is a positive feedback loop.

There is no particular limit to this vicious cycle until the country in question accumulates so much debt that buyers refuse to come to its bond auctions. And this is not a correction or a reversal of the trend; it is the utter destruction of the currency and the wealth of the people who are forced to use it.

And, of course, Friedman had to be aware that America was likely to be biggest trade deficit runner in the world.  Its currency, the dollar, was (and is) the world’s reserve currency.  That means that every central bank in the world held dollars as the asset, and pyramided credit in their own currencies on top of the dollars.

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Contra Bernanke on the Gold Standard []



In his lecture at George Washington University on March 20, 2012, Federal Reserve chairman Ben Bernanke said that under a gold standard the authorities’ ability to address economic conditions is significantly curtailed. The Fed chairman holds that the gold standard prevents the central bank from engaging in policies aimed at stabilizing the economy after sudden shocks. This in turn, holds the Fed chairman, could lead to severe economic upheavals. According to Bernanke,

Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy.… Because you had a gold standard which tied the money supply to gold, there was no flexibility for the central bank to lower interest rates in recession or raise interest rates in an inflation.

This is precisely why the gold standard is so good: it prevents the authorities from engaging in reckless money pumping of the sort Bernanke has been engaging in since the end of 2007 by pushing over $2 trillion in new money into the banking system.

The Federal Reserve balance sheet jumped from $0.889 trillion in December 2007 to $2.247 trillion in December 2008. The yearly rate of growth of the balance sheet climbed from 2.6 percent in December 2007 to 152.8 percent by December 2008. Additionally the Fed has aggressively lowered the federal-funds rate target from 5.25 percent in August 2007 to almost nil by December 2008.

Consequently the yearly rate of growth of the AMS measure[3] of the US money supply climbed from 1.5 percent in April 2008 to 14.3 percent by August 2009.

Contrary to Bernanke and most mainstream thinkers, such pumping has inflicted severe damage to the process of real wealth generation. It has severely impoverished wealth generators and laid the foundation for serious economic troubles ahead.

Allowing the money supply to be determined by the production of gold leads to stability and not chaos as Bernanke suggests. In an environment where money is gold and no one is engaged in the act of money printing, economic swings, i.e., boom-bust cycles, cannot emerge. (Note that money printing sets in motion an exchange of nothing for something, i.e., an act of embezzlement.) Contrary to Bernanke, it is policies that aim at stabilizing the economy that result in instability and economic chaos.

Bernanke holds that another major negative of a gold standard is that it creates a system of fixed exchange rates between the currencies of countries that are on a gold standard. There is no variability as we have it today, he argues:

If there are shocks or changes in the money supply in one country and perhaps even a bad set of policies, other countries that are tied to the currency of that country will also experience some of the effects of that.

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By Martin T., Macronomics

“The degree of leverage now being reversed is staggering, and the underlying global imbalances – notably between the savers and the spenders – will require long and painful adjustment.”
Vince Cable

In their latest Scorecard Nomura is wondering if the corporate deleveraging implies a new golden age for credit given that credit has outperformed equities over the last decade:

Credit returns are leveraged to have the same volatility as respective equities over this horizon – Nomura

They make the following interesting points in their note:

-Corporates around the world have been deleveraging for longer than most people realise, starting around the time of the tech bubble in 2000.
-Deleveraging is generally bad for equities, but good for credit assets.
-In the US, Europe and Japan, credit has outperformed equities by any reasonable measure (e.g. volatility, drawdowns, absolute).
-As credit is far less volatile than equities, some leverage is sensible. Even leveraged credit can be less risky than unleveraged equities.
-Among other indicators, corporate leverage is a key focus of theScorecard.s credit positioning. This has enabled the Scorecards to outperform standard long-only credit.
-Unlike corporates, financials have just started what is likely to be a long deleveraging process, suggesting opportunities in financial credit.
-As dealers, they will carry lower inventories. As investors, they will have less demand for assets. And they will be supplying assets to the market.

Point number 1: Corporates in US, Europe and Japan have been de-leveraging for some time

“Events since 2008 have highlighted the excessive leverage of households, banks and various governments‟ balance sheets in US and Europe. However, less well-recognised is the fact that corporate leverage (ex-financials) in these countries has been on a steady decline since 2000 (Figure 2).

Figure 3 shows the same trend by looking at free cash flow to debt ratios. Free cash flow is the cash available within a company for distribution among its various security holders. An increase in this ratio, therefore, denotes an increased ability to repay debt holders. The decline in company debt may be linked to increased corporate conservatism in the US and EU after the many high profile defaults at the turn of this century. The same behaviour was visible much earlier in Japan. After the leverage bubble of the 1980s, Japanese corporates have spent nearly two decades trying to repair their balance sheets.”

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The T Report: Two Types of Credit Losses [TF Market Advisors]


There are signs that the credit situation in Europe is deteriorating. Bond yields and spreads are worse across the board once again. Of some concern is that Italy is underperforming Spain a bit today, in CDS, the 5yr, and 10yr points. The “firewalls” can’t really handle Spain, but there is nothing to do if Italy becomes the focal point again. Curves are flattening again in Spain and Italy, with 2 year yields out almost 20 bps in each country. Two year bonds were at the heart of the LTRO, so their continued weakness is very concerning. The moves remain small (20 bps is barely 0.3% on a price basis), but the fact that weakness has seeped into the most “protected” part of the curb is a clear sign that the weakness is real.

The other warning sign I saw today is an increase in bid/offer spreads in Europe.Yesterday the big guys maintained ½ bp markets in Main, and only some weaker dealers resigned themselves to obscurity with ¾ bp markets. Today, some big dealers have shifted to ¾ bp markets and the hangers on have shifted to 1 bp markets. See here for our old description of how CDS Index trading works. Fast momo is probably killing it today. Dealers definitely widen bid/offer spreads sooner than they used to. Job preservation has become more important than bragging rights for who kept the tightest markets longer, but it is a clear sign that client activity is sporadic, and at least some dealers are caught off-sides.

Which leads right back to the two ways to have credit losses.

The one way to lose money in credit is when you buy a bond and it defaults. That is the way that comes to mind for most investors. This is by far the easiest to protect against. With enough analysis and care, you can avoid defaults. You can construct portfolios so that you are compensated enough on the bonds that work out, that you make up for your defaults. In any case, this takes time and can be managed, but is the easy part of credit trading.

The credit losses that are harder to control, are when you are forced to sell because the risk becomes too great. It is a subtle difference, but is the key driver. Investors buy too much of a bond because the perceived risk is low. As spreads widen and volatility increases, the perceived risk increases. This may cause them to cut positions and take “credit” losses. Whether or not the default risk has changed, the perception of that risk has changed and you get forced sellers. Hedge funds are a prime example. There are many ways to get to 10% returns in the credit markets, but one common strategy, particularly when risk is perceived as being low, is to lever up trades. If you think LTRO is solving everything, and there is no way credit is going wider, how do you get to 10%? You buy some 5 year Spanish debt at 4% and leverage it at least 2:1. As yields hit 3.5% you look like a genius. Not only are you getting “carry” but some nice price appreciation. But now as yields bak up to 4.6% what do you do? Your premise that LTRO saved everything is shaky at best. Bonds that you bought in late January at 101.1 are now trading at 98.6. That is a 2.5% loss, or over 6 months of “carry”. If you were leveraged 2:1, the loss is closer to 5%, and is still over 4% including accrued interest. It takes a lot of conviction in the world of monthly returns to ignore the fact that these same bonds traded at 92 back in November.

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The Royal Canadian Mint develops its own digital currency

The Royal Canadian Mint (100% owned by government of Canada) develops its own digital currency. This only further strengthens bitcoin as a currency.

MintChip – The Evolution of Currency

Today’s digital economy is changing faster than ever, and currency has to change too. It is, introducing MintChip, from the Royal Canadian Mint – the evolution of currency.

MintChip brings all the benefits of cash into the digital age. Instant, private and secure, MintChip value can be stored and moved quickly and easily over email, software applications, or by physically tapping devices together.

Change is good, this is better.

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Charles Biderman: The Problem with Rigged Markets

Chart Of The Week: This Is Who Is Selling [Zerohedge]

Tyler Durden's picture

Submitted by Tyler Durden on 04/01/2012 11:59 -0400

As we have pointed out before, the ongoing market tension is so palpable it can be cut with a knife. As a reminder, institutional investors are now about as “all in” as they can be, spinning narratives about economic growth, housing bottom, and general improvement (despite all facts to the contrary), while waiting for one simple thing: to get retail investors buying again. Because unless the Fed or ECB pumps another trillion or so in new liquidity there is simply no new purchasing money.


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Financial Repression? []

By: Doug Noland

S&P500 recorded a total return for the quarter of 12.59%. The S&P 400 Mid-caps returned 13.50%. Apple gained 48%. The Morgan Stanley High Tech index jumped 21.7%. The Morgan Stanley Retail index (trading to a new all-time record high) rose 15.5%. The S&P500 Homebuilding index jumped 31.6%. The German DAX increased 17.8%, Japan’s Nikkei 19.3%, and Brazil’s Bovespa 13.7%.

For the quarter, total global corporate debt issuance of $1.16 TN just surpassed 2009’s first-quarter record. According to Bloomberg, developing nation debt issuance of $190bn was a new first quarter record – and was up about 50% from the year ago quarter. At $433bn, U.S. corporate debt issuance posted a new first-quarter record.

Today’s Bloomberg Headline: “Corporates Beat Governments in Best Start Ever.” According to Bank of America indices, global corporate bonds returned 3.85% for the quarter. Investment grade corporate debt earned 3.36%, while junk bonds returned 7.04%. European corporates returned 12.9%, led by an eye-catching 22% gain on Europe’s lowest rated corporate debt. U.S. municipal debt returned about 2.0% for the quarter. The benchmark Markit North American Investment Grade Credit defaults swap index posted its largest quarterly decline (28.6 bps, according to Bloomberg).

Watching it all, I struggle even more with the notion of “financial repression.” “Saver repression” and “bear suppression” make sense to me. Returns for the rationally risk averse investor are being depressed, no doubt about that. Yet for the financial speculator it’s an altogether different story: Instead of repression, it’s Financial Liberation. Never has the investment landscape been so stacked against the saver and investor in favor of the speculator community.

Over the years I’ve enjoyed Bill Gross’s monthly writings. At times I’ve taken exception with his (and his colleagues’) macro analysis – and I’ve as well tipped my hat. I look forward to his insights – plus there’s always the intrigue: Will he don the hat of the savvy analyst, the yearning statesman or the master poker player? No matter what, Mr. Gross sits enviably in the catbird’s seat overseeing history’s greatest Credit Bubble and financial mania. These days I read with keen interest.

Mr. Gross’s latest is cogent and insightful. Our analytical frameworks share important commonalities, although this month he takes one giant leap of faith that I imagine most readers would easily gloss over: From Mr. Gross: “On the whole, however, because of massive QEs and LTROs in the trillions of dollars, our credit based, leverage dependent financial system is actually leverage expanding, although only mildly and systemically less threatening than before, as least from the standpoint of a growth rate.” Systematically less threatening than before? The $64 Trillion question.

Along the lines of Mr. Gross’s view, I’ve held that notions of systemic deleveraging are largely urban myth. Here in the U.S., household debt has been contracting mildly (from a historically extreme level). The corporate balance sheet keeps expanding, although nothing compared to the ballooning of federal obligations. For three years now I’ve posited the “global government finance Bubble” thesis. There is overwhelming evidence supporting the “granddaddy of all Bubbles” view, not the least of which is that federal liabilities have doubled in only four years.


Gold Price Manipulation: Bullion, Gold Stocks Undervalued [ibtimes]


Some industry experts believe the gold price has been artificially suppressed due to its strong impact on interest rates and government bond values, leaving many gold equities “significantly” undervalued.

One such expert is Bill Murphy, chairman of the Gold Anti-Trust Action Committee (GATA).

“It’s been an ongoing maneuver especially of late,” Murphy told the International Business Times. “There has never been an asset class that’s been going up 12 years in a row.”

Murphy believes the price of gold has been “artificially low for the past 12 years” as it has been manipulated by bullion trading banks, central banks with large gold holdings and the U.S. government.

“This gold cartel only allows gold to advance so much in a year,” Murphy said.

“When you own gold, you’re fighting every central bank in the world,” geopolitical analyst James G. Rickards told CNBC during a September 2009 interview.

Echoing Rickards’ view, Chris Powell, GATA’s secretary and treasurer, said last year, “Gold is a currency that competes with government currencies and has a powerful influence on interest rates and the value of government bonds.”

To support his remarks, Powell cited an academic study published in 1988 in the Journal of Political Economy by Lawrence Summers, then professor of economics at Harvard and since then a U.S. treasury secretary, and Robert Barsky, professor of economics at the University of Michigan. The study is entitled “Gibson’s Paradox and the Gold Standard.”

“This close correlation among gold, interest rates, and government bond values is why central banks long have tried to control — usually suppress — the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power,” Powell said.

“As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it,” Powell added. “Because gold is the vehicle of escape from the central bank system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government.”

Paul Mylchreest, in his most recent issue of Thunder Road Report, offered a detailed analysis of what he sees as technically illegal and large scale manipulation of the gold market since the U.S. sovereign debt lost its “AAA” credit rating on Aug. 5, 2011.

Mylchreest, a former resource industry analyst, claims to show absolute proof of the existence of manipulation and how it is taking place. He used a succession of Kito daily gold price charts to back up his argument.

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How to Prevent Other Financial Crises [Taleb]

By Nassim Nicholas Taleb and George A. Martin

This article argues that the crisis of 2007–2008 happened because of an explosive  combination of agency problems, moral hazard, and “scientism”—the illusion that  ostensibly scientific techniques would manage risks and predict rare events in spite  of the stark empirical and theoretical realities that suggested otherwise. The authors  analyze the varied behaviors, ideas and effects that in combination created a financial
meltdown, and discuss the players responsible for the consequences. In formulating a  set of expectations for future financial management, they suggest that financial agents  need more “skin in the game” to prevent irresponsible risk-taking from continuing.

Let us start with our conclusion, which is also a simple policy recommendation, and one that is not just easy to implement but has been part of  history until recent days. We believe that “less is more” in complex systems—
that simple heuristics and protocols are necessary for complex problems as  elaborate rules often lead to  “multiplicative branching” of  side effects that cumulatively  may have first order effects.  So instead of relying on thousands of meandering pages of  regulation, we should enforce  a basic principle of “skin in  the game” when it comes to  financial oversight:  “The captain goes down  with the ship; every captain  and every ship.”
In other words, nobody  should be in a position to  have the upside without sharing the downside, particularly  when others may be harmed. While this principle seems simple, we have  moved away from it in the finance world, particularly when it comes to  financial organizations that have been deemed “too big to fail.”

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Sometimes, Money Printing Sets The Stage For Lower Prices

By  on iBankCoin

Not all printing is inflationary.

I know, what I have just said must resonate as nothing short of heresy amongst most of your ranks.  You’ve been worshipping at the altar of currency devaluation for so long now you probably can’t even begin to fathom life without the dogma.  What would you do, if separated from your ceaseless chanting and repetitious arguments?

But I’ll say it again; not all money printing inevitably leads to higher prices.  Sometimes, money printing sets the stage for much, much lower prices.

For instance, look no further than the U.S.’s own banking system.  There is to be witnessed the very contact point for where all this currency is going.  It is the direct beneficiary of free money.  Yet, how are things fairing for them?

Revolving credit, the kind you usually find most prevalent with business, is dropping consistently.  While perhaps the numbers of U.S. dollars in circulation is forming a record apogee, the velocity of money continues to drop.  Banks have fewer and fewer outlets to invest all that free money into.

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That’s the only way to describe the reaction that future historians will have when they look back and study the utter perversion that is our global financial system.

We live in a time when a tiny handful of people have their fingers on a button that can conjure trillions of dollars, euro, yen, and renminbi out of thin air. In the United States, it comes down to one man. Just one.

With a single decision, he controls the lever that dominates the entire economy. When you control the money, you control everything– financial markets, consumer prices, risk perceptions, investment habits, savings rates, hiring decisions, pay raises, sovereign debt, housing starts, etc.  One man.

This irrational, arrogant system presupposes by design that a central banker is smarter than everyone else; that markets are incapable of determining appropriate risk and value; that he is more effective at allocating our time, capital, and labor than we are.

Future historians will probably also be dumbfounded when they see how long people allowed worthless, unbacked fiat paper to pass as money.  It’s extraordinary that most people today happily accept a digital abstraction of paper currency controlled by a single individual as ‘valuable’.

It was more than 5,000 years ago that primitive commodity money was used in Mesopotamia, and it’s been over 3,000 years since metal coins began circulating.  For more than 99.2% of human civilization, money actually meant something… right up until 1971 when Richard Nixon ended any remaining link between the dollar and gold.

Ever since, the US government has refused to acknowledge precious metals as money… yet if the Treasury’s financial statements are to be believed, Uncle Sam is still holding  261,498,900 troy ounces of gold. Let’s dismiss the tungsten possibilities for now and presume that it’s real gold. At today’s prices, the value would be about $437 billion.

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Under Which Conditions Will Fed Money Printing Create High Inflation?

An interesting presentation by Torsten Slok, Ph.D. – Chief International Economist, Managing Director – Deutsche Bank Securities, Inc.



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