22 November 2009
Jim Willie CB,  “the Golden Jackass”

* The Bankers Meet & Plot
* Implications of USDollar Neglect
* Power Base Shifts Eastward


Special Report #1
Issue #68

GLOBAL PARADIGM SHIFT REVERBERATES

Bankers in charge of their central banks now have a new forum. The G-20 Meeting, with its near monthly assembly, has successfully displaced the G-8 Meeting. China has won its way. Worse, the US & UK bankers have tended to be ignored at the larger forum so far, a nasty twist. Implications to the USDollar are huge, as neglect translates into permission to find its true value. That value might be far lower than market mavens anticipate, since Third World fundamentals stare the Americans in the face. To be sure, the power base is in the process of shifting East. The wealth lies in the East, as does the industrial base, in addition to cheaper labor. The Global Paradigm Shift involves a grand movement away from the USDollar, and at the same a reduction in American and British financial power. Risks lie ahead for the Chinese to manage their mass appa ratus where far too many US$-based instruments can easily gum up the works. They must manage bubbles from a decade of trading their factory output for potentially toxic bonds. The Beijing leaders seem eager to sacrifice some loss in the staggering horde of wealth for greater global power. The process is well along.

THE BANKERS MEET & PLOT

◄$$$ THE SCOTLAND GATHERING OF BANKERS DEMONSTRATED THAT MOST BANKERS IGNORE THE US & UK ENTIRELY. THE UK PRIME MINISTER GORDON BROWN PROMOTED A BANK TAX IDEA THAT WAS TOTALLY DISMISSED. THE US & UK OFFICIALS WERE VISIBLY SNUBBED. THE MAIN GOOD NEWS IS THAT THE G-20 MEETING PURSUES THE END TO THE USDOLLAR. LET IT BE KNOWN THAT THE G-20 HAS PUT AN END TO THE G-8 MEETING. $$$

Gordon Brown used a speech at the meeting of G-20 finance ministers in St Andrews Scotland to call for a new tax to fund future bank bailouts. All previous indications by governments were opposed to such a tax imposition. Within hours of his speech, both the US and Canada rejected the plan. USTreasury Secy Timothy Geithner was openly ignored by other bankers, and shown general disrespect, according to insider reports. The formerly powerful Western bankers now hail from nations with broken banking systems and uncontrollable federal deficits, mired by stagnant if not receding economies. They face off with the creditor nations, the new kids on the global block, who have for years built huge reserves. They have begun to wield their power, as they demand more recognized official authority within the world banking community. One savvy global banker summarized in his own words, saying "In Scotland, this was a clown show where paralyzed rabbits met to look a the snakes. The US delegation was totally ignored, as could be easily noticed in the body language of Timmy G and his handler Ben Bernanke." See the UK Telegraph article on the meeting (CLICK HERE).

◄$$$ THE SCOTLAND G-20 MEETING CONVENED. BENIGN NEGLECT OF THE USDOLLAR SEEMED ITS HIDDEN AGENDA, SINCE NEVER EVEN DISCUSSED. NO LONGER DOES THE SMALLER WESTERN DOMINATED G-8 MEETING OCCUR. LOST INFLUENCE BY THE WEST IS OBVIOUS, AS POWER SHIFTS EASTWARD. THE OFFICIAL STATEMENT SPOKE OF CONTINUED NEED FOR GLOBAL STIMULUS, BUT THE MORE PROTECTED AGENDA WAS TO REPLACE THE US$-CENTRIC FINANCIAL STRUCTURE. $$$

On the first weekend of November, the expanded group of finance ministers met in St Andrews Scotland. Best-selling author Daniel Estulin claims that the key issue discussed at the G-20 Finance Ministers and Central Bank Governors Meeting, was how to dismantle the present world financial system through a planned destruction the USDollar. Estulin first reported on this initiative as being deliberated at the most recent Bilderberg meeting held in Greece in May 2009. Estulin says that the devious vile plan depends upon the ability of the US and UK representatives to convince other national governments led by Russia and China and to cooperate with their scheme. If the plot succeeds, the sudden devaluation of the USDollar would rupture the world economy through a chain reaction collapse of the entire global financial system. The US & UK appear to strive to ruin creditor reserves bound in USDollars so that the Anglos can retain power in the next phase. As discussed during the Bilderberg Groups super-secret conclave back in May that convened in Canada, the breakdown could create an opportunity to launch a new world monetary system. G-20 leaders are keenly aware that control of the world goes to those who run the monetary system and its financial markets, not so much to those holding large reserve accounts. Any such breakdown could result in a rush to consolidate the worlds monetary system. Estulin declares that the creation of the new world currency is the true meaning of globalization, which is nothing but an empire that eliminates nation states and individual rights.

The newly devised World Company would aim 'to eliminate the archaic political structure of nation state' in favor of the more modern corporate structure, Estulin postulates. Proponents call for further political integration in Europe, and then the rest of the world, as a precondition for expanding the power of a World Company, thus putting the financiers on the same levels as governments. The movement away from the USDollar as a world currency is the true intention of the G-20 meeting just held in Scotland, Estulin asserts. It was the very same site as the 1998 Bilderberg conference. In order to achieve this diabolical goal, regional power must be ceded, a highly unlikely event. Russia, China, Brazil, India, Arabs, and feisty European nations would have to yield power to a global chancellor. They would give up their power to print money, to control their financial markets, to influence their economies, essentially their sovereign power over their respective continents. This is where the global plan meets grand obstacles. Neither are the United States and United Kingdom eager for such a surrender of power, unless of course, the US and UK are destroyed. So a motive might exist to hasten their destruction without openly admission. See the PR Web article on the Scotland G-20 Meeting and the expounded theory (CLICK HERE). My belief is that Estulin's globalism theory is only a few years away for implementation, since regional powers wish to retain power over THEIR money.

IMPLICATIONS OF USDOLLAR NEGLECT

◄$$$ THE AFTER EFFECT TO THE G-20 MEETING WAS NEGATIVE FOR THE USDOLLAR. NO DEFENSE OF THE US$ WAS NOTED, OR RATHER THE US$ WAS AN ALTOGETHER AVOIDED TOPIC. CONTINUED CALLS FOR STIMULUS WAS READ AS FREEDOM TO PRINT MONEY AND FURTHER DEBASE THE MAJOR CURRENCIES. $$$

The immediate reality was the G-20 finance ministers openly avoided the USDollar as a topic, so such a noticeable degree that observers concluded quickly that its replacement and demise was desired. Rather than confront the Americans, a strategy of benign neglect might avoid military confrontation. The USDollar would be permitted to die a horrible death without coordinated support. In fact, the topic of the USDollar was avoided as much as the US Treasury Secretary himself. The G-20 call for continued stimulus was interpreted widely to mean the monetary system would suffer from relentless and powerful inflation, as major currencies would continue in gross debasement. Secondary nations, like the BRIC nations, must realize that expansion of the money supply by the older industrial nations would accomplish the same goal of weakening the G-8 influence. So full speed ahead on debasing the major currencies. The USDX index sold off.

Dan Norcini (happy to call a friend) summarized the decline of the USDollar very well in the wake of the G-20 Meeting where neglect was given the reserve currency in open discussions. He foretells of a global currency crisis, and exclusive USTreasury buying of its own debt, as in deadly monetization. Both gold and crude oil would rise in counter fashion. He points out how the HUI mining share stock index has recovered its full loss since July 2008, as the liquidity drain struck the stocks and elsewhere. The HUI has outperformed the S&P500 index. Norcini wrote on the Sinclair website (CLICK HERE) the following.

"The fallout from the G-20 summit over the weekend was sharp and predictable. In the absence of any comments about the level of the US Dollar, currency traders began to beat it with an ugly stick within mere moments of the opening of the FOREX markets. In the process traders drove it to a new yearly low and set it up for a sharp drop down to the 74 level on the USDX. There is a band of congestion on the weekly chart that appears between 72 and 74. We are in serious trouble if 72 falls, as a currency crisis will be unfolding. That massive double top formation on the weekly chart projects an eventual move to as low as 54, should things get out of hand and the Dollar come under further concerted attack by the hedge fund community. This is the reason why crude oil is acting in such a counter-intuitive fashion, rallying near $3/barrel concerned over the indifference being displayed by the US monetary authorities towards the Dollars plight. Combine that disregard with the potential for another $trillion dollar health care 'Reform' boondoggle, and the endless string of debt production by the US governing rulers, and quantitative easing is going to go on indefinitely. One has to wonder if at some point the only buyer of US debt is going to be the Fed itself. Heaven deliver us from this madness. The fade from session highs in gold towards the close is a minor cautionary note for short term oriented traders, but the trend in gold remains solidly higher. After all, it is difficult to become too bearish on the gold market when the Dollar is a near freefall and the reset of the commodity world is screaming higher. Please refer to the 12 hour chart for some technical support and resistance levels."

Enrico Orlandini summarized the decline of the USDollar well. Earlier in the last week, he mentioned the open billboard agenda to sell the US$ down the river after the G-20 Meeting. Its call for continued stimulus was seen as a veiled GREEN LIGHT to sell the US$. Orlandini wrote, "The December US Dollar Index has taken a big drop during the night trading down 0.81 at 75.13 and well below strong support at 75.66 for the second time. The Euro is back above 1.50 and the Swiss Franc is a whisker away from parity with the dollar. There is silence on Bloomberg about the decline but I suspect it has to do with the fact that India, Australia, and New Zealand are all raising rates and withdrawing liquidity, while the Fed prints more every day. In the end the rest of the world will not sacrifice their economy to save the US." The US$ DX index has seen some of its worst single days from 2009 in the last week. It appears ready to test the bottom at 70-72 very soon again. Global reflation is just another catch phrase to mean powerful monetary inflation at the direct expense of major global currencies, in particular the USDollar. Any Euro benefit will be powerful from pursuit as a US$ alternative, but it will last no more than one year from the time of the most urgent US$ decline phase into a panic. Why? Since the world is not ready for removal of paper currencies, it will turn to the Euro. After the Euro rises significantly, the EU Economy will be damaged by the rise. Export trade will possibly collapse.

◄$$$ CENTRAL BANKS CONTINUE THE PARADIGM SHIFT AWAY FROM USDOLLAR, DRIVEN BY GRAVE CONCERN OVER THE USGOVT DEFICITS, THE HUGE BLOAT OF US$-BASED ASSETS SEEKING TO DIVERSIFY INTO SAFE HARBORS, AND RECOGNITION OF ASIAN GROWTH WITH LEADERSHIP. NO LONGER IS THE WORLD TO BE US$-CENTRIC. THOSE WHO IGNORE THE WAVE WILL BE GREATLY HARMED BY IT, PERHAPS DESTROYED BY IT. $$$

Despite apparent support for USTreasury auctions, central banks lead a subtle shift away from USDollar. The support is reluctant and half-hearted. In possession of trillion$ of reserves, they are accelerating purchases of Euros and Yen, even Gold. They are worried visibly about the stability of the USDollar, made vulnerable by the record US budget deficit and profound corruption not discussed. They witness the dynamic rise of developing economies like China, Russia, India, and Brazil. They anticipate the USDollar has further to fall. Currently, US$-based assets comprise nearly two-thirds of global reserves, trending down in a falling proportion. They sense a race to the exits perhaps soon, one which would destroy the value of central bank portfolios. Bank leaders are choosing to shift more new funds into Euros and Yen without having to sell existing US$ assets. Neil Mellor is the strategist at Bank New York Mellon. He said, "I think 2009 will be remembered as a watershed moment for currencies. I do not think there will be an imminent move, but it is quite clear there is a plan to shift reserves to a more balanced portfolio." A separate Barclays research report claimed that central banks which share reserve data have put 63% of new funds between April and July into non-US currencies. Chief US currency strategist at Barclays is Steven Englander, who said "There is an incipient desire to reduce the dollar share of reserves. Central banks will use any opportunity to do it, provided it does not cause the dollar to fall out of bed." See the Reuters article (CLICK HERE). They refer to my theory of protecting their US$ assets at the core, but turning away from the US$ at the margin.

POWER BASE SHIFTS EASTWARD

◄$$$ NOLAND DESCRIBES HALF A NEW PARADIGM. HE DOES NOT ACKNOWLEDGE THE FULL BLOWN PARADIGM SHIFT, SINCE HIS EMPLOYER IS AN INSTITUTIONAL LEADER. WHILE HE DISMISSES THE RISK OF A USDOLLAR RISE FROM AN UNWINDING CARRY TRADE, HE DOES NOT SEE THAT ITS LEVERAGED SPECULATION IS A PRINCIPAL DEVICE TO DESTROY THE USDOLLAR ITSELF. $$$

Doug Noland of The Prudent Bear describes the effect of the Credit Bubble Bust on the new Paradigm. He remains somewhat conventional, but with great insight. The Periphery as he calls it is gaining far more power than he suggests, the up&coming new nations. His views coincide with mine that the Dollar Carry Trade has much farther to go, with broader participation than recognized. My view is that it will form a tightening noose around the neck of the USDollar and the US Federal Reserve, eventually putting them not only in a corner, but wearing a straitjacket. He somewhat minimizes the power of the Dollar Carry Trade surprisingly, perhaps by instruction. The Dollar Carry Trade is hardly a source of liquidity, but rather steady if not burgeoning profit with self-sustaining leveraged power. Noland wrote the following. See the Prudent Bear article entitled "About Half a Paradigm" (CLICK HERE).

"I will humbly suggest that a momentous global economic transformation is at this point About Half a Paradigm. Powerful global economic and inflationary forces have decisively shifted to the Periphery. Meanwhile, the Federal Reserve (Core) still retains remarkable dominance over global market yields. I believe we are in a transition period, with the Fed's power over global yields waning over time (or perhaps abruptly in a future crisis backdrop). In the meantime, however, global yields are mismatched to the reflationary backdrop. This predicament implies ongoing market distortions, a rather extraordinary global mispricing of the cost of finance, along with all the myriad financial and economic costs associated with unrelenting 'Monetary Disorder' (i.e. assets Bubbles, imbalances, mal-investment and over-investment, financial and economic fragilities, etc.)

Of late, there is some loud clamoring with respect to the dollar carry trade and global asset Bubbles. Little doubt the 'Carry Trade' (borrowing at low rates in the US to play higher-yielding assets globally) is a meaningful source of global liquidity, although it should not be overstated in the context of rapid synchronized Periphery Credit growth. And, clearly, speculative excess has found its way to 'developing markets' (some years ago I would write 'liquidity loves inflation' to describe how financial flows inherently gravitate toward the inflating asset classes). But I would stress that a reasonable portion of this year's spectacular market gains are associated with a fundamentally-based revaluation of Periphery and commodity-based assets. There is more to this year's global market moves than mindless buying of risk assets and Bubble excess. Furthermore, I believe the Core-to-Periphery Dynamic is a secular trend that will prove less vulnerable to bursting Bubbles than others would contend." He is saying the commodity running counter to the USDollar is not vulnerable to popping.

◄$$$ THE SHIFT IN GLOBAL POWER CONTAINS A HIGH RISK CONTROL LEVEL IN THE YUAN CURRENCY ITSELF, A LINCHPIN. ASIAN EXPERT ANDY XIE OFFERS HIS OPINION. THE YUAN WILL NOT FLOAT, AS THE RISK OF DISRUPTION AND EXTERNAL MEDDLING IS TOO GREAT FOR BEIJING LEADERS TO PERMIT. $$$

Andy Xie is an independent economist working out of Shanghai, and former Morgan Stanley Asia Pacific economic expert. He claims steadfastly that the Chinese Yuan will not float freely. By that he means it will not trade in the open FOREX market, subject to the ebb & flow of money purusing profit and gains, amplified by speculation and even leverage. The Chinese Govt has been firm in its management of the Yuan. They lose control if the Yuan is permitted to float. They actually hold the view that if floated, the Yuan would be subjected to Western control by the paper masters, a wholly justifiable fear. The tether to the US$ for over a decade continues even with loose guidelines for its permitted fluctuation in the current enforcement. The Chinese financial system (banks, stocks, property) are all stuffed with US$-based bonds. The great imbalances will be allowed to unwind and work out under Beijing aegis and guidance. They might have a big problem, but it is their problem. They wish for no more colonialist paper masters to be part of any management or resolution process, certainly not interference. The rest of the world must live downstream from their world.

Andy Xie believes that revaluing the yuan now could bring disaster to China, given its unbalanced economy and bubble obsession. The President Obama visit to China inspired another round of pressuring Beijing to revalue the Yuan. It was to no avail. The carrot & stick approach has not produced much in tangible progress on the currency front. My view all along has been that not much can be done on currency valuation to offset the 10-fold difference in wages between the US & China. Speculators have put up their positions in the non-deliverable forwards market. The gap between the forward and spot price of the Yuan has inspired arbitrage: USDollars have been converted into Yuan in the underground money market. The resulting rise in China's foreign exchange reserves justifies some revaluation. Beijing leaders steadily resist pressure, choosing to operate on their own terms, with great patience.

Xie makes strong points, with Chinese interests in mind. He wrote, "China will not and should not revalue the Yuan at this point. It would only destabilise its unbalanced economy. In response to a sharp drop in exports, China cut the mortgage interest rate, reversing its policy of cooling the overheated property sector. The ensuing surge in prices and sales erased all the tightening effects, and some. The economy has become highly dependent on the property sector. Mortgage loans boost local government revenue that serves as equity capital for further leveraging. Beyond property, most bank loans are to local government borrowing platforms. China's situation is quite similar to Southeast Asia before the Asian financial crisis. If not managed carefully, the property bubble could burst and bring calamity to the Chinese economy."

Xie raises the point about risk to China if and when a bust occurs of whatever magnitude. China appears to permit further inflation of the property bubble in an effort to offset the economic contraction impact from Yuan revaluation. Precedent exists, when Japan used the same approach after the 1985 Plaza Accord. That agreement reduced the USDollar valuation in a coordinated effort among allies, at the request of the US. Many analysts and strategists wonder if the West actively wishes for China to puff a bigger bubble, one to support the USEconomy during its breakdown and adjustment. Later, the Chinese bubbles can collapse, but it is their problem. Chinese influence would weaken, at a time when US influence could be restored. Xie claims that since 2004, a major change has occurred in the Chinese economy and society. Bubble making has become a national obsession.

Xie makes great sense, except for two aspects. The folly in the picture has two sides. First, the United States is not just going through an ordinary adjustment. Xie misses how the US is exiting its primal position, enabled by custodial control of the US$ global reserve currency. The US must adjust not only to a business cycle or credit cycle, but to a systemic cycle as well where it will be cast into what increasingly resembles a Third World destination. The flagship US$ will have been removed from its grasp. The description has been made many times in the Hat Trick Letter. Limited credit, strong price inflation, lack of industrial foundation, endless housing decline, unresolved bank liquidation, deep corruption in leadership, and a presidential puppet will contribute to much more economic deterioration than any routine adjustment Xie might envision. Second, China has a staggering war chest of over $2300 billion with which to reinforce its teetering asset bubbles. That war chest grows on a monthly basis. With enough funds, any bubble can be managed to shrink or expand or stabilize, as funds can support a patient stance. Few analysts seem to comprehend the potential influence that such a huge growing amount of money can wield. Of course, the US$ is the basis of much of those funds.

Word has it that the Chinese permit the USGovt statistics to report far far more USTreasury Bonds than they actually hold. They have been spending their USTBonds liberally, for investments the world over for several years. My belief is that China could not diversify more than half of their $800+ billion in USTBonds though, since it is too much to spend. China also continues to accumulate USAgency Mortgage Bonds, a reversal of policy ever since the Secy State Hillary Clinton visit in March. Her staff leaked the Eminent Domain agreement to the press, whereby the Chinese can convert mortgage bonds to property. The American people remain ignorant of the deal and certainly of its consequences. My father has a Chinese next door neighbor in Pennsylvania. Hundreds of thousands of Americans will someday have the same pleasure. Also, China has been and probably always will be a puzzle wrapped in an enigma, which nobody will correctly foresee completely. See the SCMP article (CLICK HERE) if still available.