Saturday, January 26, 2013

US Dollar .... The beginning of the end ?


Germany has been quietly repatriating its gold reserves from around the world - pulling over 670 tons of its holdings out of the New York Fed, and all of it from both London and Paris depositories and shipping it back to Germany. At 3,396 tons of the precious metal, Germany's gold reserves are the second largest in the world, lagging only behind the US reserves which are believed to be twice as large. The New York Fed holds 45 percent of Germany's gold. The transfers will take several years for completion. Ostensibly, Germany says that the repatriation is to boost confidence of its citizens in the accuracy of their country's gold reserves.

Is this the beginning of the end for the US dollar as the world's fiat currency ?

Do you recall how Treasury Secretary Geithner, touting the Obama administration position when he was first appointed as Secretary, openly speculated about whether or not it would be such a bad thing afterall, if the US dollar was no longer the world's reserve currency .... and just how quickly he changed tune and reversed position after being rebuked by Wall Street insiders and the Federal Reserve for his naivete ?

As the US Fed has printed and put into circulation more phony "de novo" dollars since, through its Quantitative Easing (QE) programs and variants, the price of gold - the antithesis to a paper dollar - has steadily risen in price while the world's supply of funny money dollars has ballooned.

Throughout there has been speculation as to whether or not the US actually had the gold bullion reserves it claimed since abandoning the gold "standard" in the 70's in favor of the fiat paper US dollar.

Rumors circulated that Ft. Knox was literally empty with most of the reserves being sold off and liquidated secretly during the George H W Bush and Bill Clinton presidencies or that they were replaced with "fake" bars of bullion.

Congressman Ron Paul, never a fan of the Federal Reserve, introduced legislation to force the Fed to submit to a Congressional audit - which in turn would have ended that controversy, as well as others, as to whether or not the reserves and, or their presumed quality actually existed. The legislation never passed into law.

Then a few years ago questions arose again as to whether or not and how much of the gold bullion in central bank depositories around the world might actually be "counterfeit" - nothing more than bars of tungsten clad in layers of gold. Claims were made that London "good" delivery bars - those of 500 troy ounces - salted with tungsten were turning up in Asian central banks.

To the extent the concerns were taken seriously, for about two years it was virtually impossible to find capacity at London assay offices (where most of the world's gold bullion is traded) since they were committed to physical audits of the world's bullion reserves for central banks. This year the Fed conducted its own physical audit and test drilled gold bars to look for tungsten. The results have never been publicized. Though the Fed promised to release them by the end of 2012. They didn't.

But last year a 1 kilogram gold ingot turned up in England that had been counterfeited with tungsten replacing 40 percent of the gold.

Recently, fake retail size 10 oz bars of gold of the Pamp Swiss brand have surfaced in New York's jewelry district.

So, have central banks dodged this bullet or have their bullion reserves too fallen as prey to tungsten substitution ?

There have been claims made that the fake gold originated in the US during the G H W Bush term as part of an elaborate effort to destabilize the economies of foreign governments hostile to US interests and foreign policy goals.

China, for a time and perhaps still the largest US creditor, was owed more than 1 trillion dollars by the US and holding the largest foreign currency reserves in the world of US dollars, enacted laws that prohibited Chinese producers from exporting gold out of that country. China's central bank, as well as others around the world have been steadily buying gold bullion since to boost their reserves of the metal.

China also has been very vocal about establishing it's own currency, the "yuan" as a world fiat currency to replace the US dollar. China and some of its trading partners have entered into agreements which permit each country to use the other's currency to settle debts without having to use US dollars. Russia, too, has taken a position questioning the wisdom of the US dollar remaining the fiat currency.

Germany, which has been very dubious all along about measures in the US by the Fed, and the Obama administration's and Congress inability to curtail spending and get its financial house in order, has its own legacy of hyperinflation and the destruction of its currency to contend with. During the Weimar Republic the German Deutschmark became worthless and directly led as a consequence to the rise of the Nazi's. German authorities have vowed to never allow the same economic conditions to prevail again.

Germany's high court has ordered a physical audit of all of Germany's gold bullion reserves in part to rule out tungsten "adulteration" and over the next 7 years the New York Fed will send back to Germany a portion of the bullion it has held in trust for the German government. Why so long and why only 20 % of their holdings - presumably because the Fed is calling the shots - and the speculation is that the Fed doesn't have all the gold the Germans want back. After all, logistically the Germans could transport all of their gold holdings in a week back to Germany. But the Fed will have to purchase it without causing disruptions in the markets.  The Germans haven't been able to demand their gold, they've had to petition the Fed for it.

But in view of liberal progressives, especially administration darling economist Paul Krugman, in the US openly contemplating the issuance of a pretend trillion dollar platinum coin to resolve its debt crisis rather than coming to grips with the resolve necessary to reduce spending, analysts see the German repatriation of gold as an extraordinary breakdown in the trust among central banks and nations. Saying it's a sign that the fall of the US dollar as the world's fiat currency has officially begun.

Krugman and Obama were rebuked mid-January by the Fed and Treasury issuing a statement - "Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit," said Treasury spokesman Anthony Coley.

But according to a senior administration official it was the Fed that actually  killed the proposal telling Obama, in effect, "to take a hike!". The REAL boss, the Fed, has spoken.... saying it would not have credited the US Treasury’s accounts for the vast sum for depositing the bogus coin.

And just why would the Fed even care ? Because since its inception the Fed has had a virtual monopoly on the US money supply and its creation and by extension after the institution of the US dollar as the world's fiat currency, incredible influence and sway with the economies and politics of other nations. They aren't about to allow an uninformed nitwit in the White House to interfere with or jeopardize that authority and power.

Ever since its creation in 1913 the Fed was nothing more than an elaborate device for extracting the wealth of the United States by underwriting its debt. The interest on that debt was the mechanism for money to flow to the bankers and central banks of any foreign countries holding the US debt.

And it all worked fine. As long as the economy (GDP) of the US continued to grow and the debt didn't outpace either the growth rate or the ability of the US government to pay off its debts. Everything was sustainable. Now, however it is not. 

Deficit spending has skyrocketed during the George H. Bush and Obama terms. Revenues to the US government have fallen - two short term offsets to this financial mess have been the successful implementation of depressed interest rates and the printing of money by the Fed - but neither are sustainable indefinitely, and each carries significant consequences for the long term. The Fed, in turn, has repeatedly warned Congress that it must get its fiscal irresponsibility under control. And, their warnings have been ignored by a polarized Congress and a socialist ideologue in the White House.

In addition to the Fed much of the rest of the world's central bankers understand how precarious the financial situation is in the US because of the political gamesmanship underway with the Obama administration.

 “The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP" - China's Macroeconomic Research Platform

Our debt now today only 2 short years later is far worse at 103 % of GDP.

Here's the dilemma confronting the US - the only way we can continue to fund our 16 trillion dollar national debt is for the interest rate on that debt to remain artificially low. But the only way the interest rate can remain that low is for the U.S. dollar to remain absolutely dominant in demand in economic trade the world over. And when the rest of the world rejects the U.S. dollar as its fiat currency then the game here in the US is over. 

At 2000 interest rates around 6.5 % our interest cost on our 16 trillion dollar national debt would be a staggering 1 trillion dollars a year ! Can the Fed keep interest rates as low as they are long enough for a US economic turnaround ? Clearly they think they can but will Obama and the Tax and Spend Democrats screw it all up ? (witness the past and future threats by the credit rating agencies to further downgrade the US credit rating because of Congressional inaction)

But if the world decides it no longer needs or wants to rely on US dollars, then interest on the US debt will rise, and quickly, and painfully ....

BZZZZTT ! You Lose ! Thanks for playing. Try Again ?

And to the consternation of the Fed much of the world is posturing and in some instances already moving away from the US dollar.

The German gold repatriation isn't helping from the Fed's perspective, but the Germans aren't stupid, either. They understand that the United States is no longer politically or financially secure - we're headed further down a path that ends in catastrophe - Superstorm Sandy showed New York's vulnerability to the forces of nature; 911 demonstrated its vulnerability to terrorism and New York remains acknowledged as a prime terrorist target still; and the potential for financial upheaval from US partisan politics - no one knows.

Germany parked its gold in New York after World War 2 as a safeguard against being overrun by the Soviets - now they're asking themselves where is the greater threat - Russia or impending financial, political and societal disaster in the US ? It's pretty clear that they've decided it's better to start putting their gold in their own country than risk not having access to it in ours.

And, following the Germans, the Dutch now propose to repatriate their gold from the New York Fed where they have the majority of their 610 tons of gold bullion reserves on deposit, making the Netherlands one of the top 10 gold reserve nations.

Whose next ?

In the late 60's France withdrew its gold reserves out of England and the New York Fed and the Bretton Woods currency crisis erupted with Great Britain ultimately being forced to devalue its currency or watch its economy collapse all together.

Disorderly gold repatriation is like a depositor "run on a bank" - imagine that if any of the world's gold reserves are actually adulterated with tungsten to a significant degree then the supply of gold is less than what is thought to exist - and with nation's demanding their deposits of gold those who hold the reserves in trust, like a bank short on cash, will have a difficult time making good on the deliveries they are obligated to make. And once made public a difficult situation in the financial markets will go quickly from simply bad to very, very dangerous.

Can any paper currency backed by the "faith and credit" of its government, in other words trust, survive that kind of crisis with all its implications, when its government has been less than forthright all along ?

Yes, imagine that .... the folks at the Fed do !

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