NightBlogger

MIKE WHITNEY
Counterpunch
There are signs that the credit crunch is easing. Interbank lending in dollars has fallen for a ninth straight day. The various indicators of stress in the market–Libor, the TED spread, and the Libor-OIS spread–are all gradually returning to normal, but the damage to the broader economy has been substantial. Major corporations have had to stretch their credit lines just to get the money they need to cover routine operating expenses and a lot of retailers have not been able to get funding for their inventories for the holiday season, so they’ll either have to hire fewer workers or simply shut their doors for Christmas. Also, corporate defaults have increased as businesses have been unable to turn over their short-term debt. According to Fitch Ratings, the “crisis will cut growth in credit this year by 50 percent as financial firms reduce leverage, investors’ appetite for risk declines, and the worldwide economy slows.” When credit is less available, there’s less business activity and the economy slows. Unemployment goes up and quarterly earnings go down. It’s a vicious circle that starts with speculation and ends in panic. The financial system has to reestablish its equilibrium by purging the excessive credit that developed through low interest rates and lax lending standards. Financial institutions everywhere are in the process of deleveraging which is putting downward pressure on the main stock indexes and creating turmoil in the currency markets.

The US Treasury and Federal Reserve are now underwriting the entire financial system. The free market has been abandoned altogether. Everything from commercial paper to money markets is now backed by the “full faith and credit of the United States”. Without that explicit government guarantee, the credit markets would still be frozen and the system would crash. But government guarantees do not address the real problem, which is toxic assets that must be accounted for and written down. All it does is take hundreds of billions of dollars in mortgage-backed garbage onto the nation’s balance sheet and undermine the creditworthiness of the United States. Eventually, foreign central banks will see the folly of this maneuver and refuse to buy more US debt. When that happens, there will be a run on the dollar and a major dislocation in the bond market. Then, the financial system will grind to a standstill once again.

Secretary of the Treasury Henry Paulson’s $125 billion capital “giveaway” to nine of the country’s largest banks has helped to calm the credit markets, but it won’t last. The “real economy” is beginning to stumble and the stock market is gyrating more wildly than anytime in history. Wall Street is consumed with fear and investors are ducking out the exits as fast as their feet will carry them. According to the New York Times, the banks probably won’t even use Paulson’s money to extend loans to consumers and businesses (as intended), but will hoard it to make sure they are sufficiently capitalized when their mortgage-backed assets are downgraded. Even worse, the banks may use the money to gobble up smaller local and regional banks. On Tuesday’s Jim Lerher News Hour, New York Times journalist Andrew Ross Sorkin put it like this: “The other thing that some of them may do with that money is go out and make acquisitions and buy other banks, (which) means that you will not be getting this money into your pocket anytime soon….I think the larger issue is the economy and these banks, in terms of lending, are not going to start lending real money until the economy turns.”

Paulson knows what the banks are up to; after all, these are his friends. The truth is, the $125 billion was not given to the banks to soften the effects of the recession or increase lending. It was given to make the strong banks even stronger so they could monopolize the industry. Paulson’s real plan is “more consolidation” and less competition, or as economist Michael Hudson says, “Big fish eat little fish”. The Treasury Secretary is using his authority to reward his friends rather than doing what is best for the country.

In the last few weeks, the broader economy has deteriorated faster than anytime in the last 70 years. That’s why Fed chief Ben Bernanke has given the nod to another stimulus package of $150 to $300 billion dollars. The gears are rusting in place and the desperation in Washington is palpable. Calculated Risk web site provided a transcript of a conference call by MSC Industrial Supply (MSC) which summed up the prevailing mood in today’s business world:

MSC: “In the last several weeks, customers’ sentiment has turned dramatically downwards. Here are a few of the things we have recently heard and I’ll quote a few of them. One quote is our new orders are down substantially in the last few weeks. Another is that corporate has told us to reduce inventory. What we have also heard is make due with what you have. And finally, another quote is capital expenditures are on hold. Customers are concerned about the economy and the lack of available credit. They’re reducing inventories, orders, and order size and there has been a trend toward deferring capital expenditures…”

MSC: “David, we view this time as unprecedented in history. The economy is undergoing a huge change, how that is going to shake out all remains to be seen, but I think what is important to know is it’s a huge change that, frankly, no one had a chance to see coming, so we than specifically in our customer base there is a tremendous amount of fear that is gripping customers and evidenced by what we have seen the last couple of weeks in October, almost buying paralysis, that is really the way that we think about it, and frankly, in speaking with so many customers what we see happening…. What is has happened here with the credit crisis is while the economy was by no means booming, it was kind of rolling along and we almost think that what typically would have taken six, seven, eight, 9, 12 months to start to come down happened almost literally overnight.” (Calculated Risk)

Events are now unfolding so quickly, they’re impossible to follow. But this much is clear, the wheels have fallen off the cart. The Fed has lost control of the system. On Monday, Bernanke announced the creation of the Money Market Investor Funding Facility (MMIFF), which will provide $550 billion in liquidity to U.S. money market investors. It is another in a long list of steps to try to provide liquidity to a system that is burning through trillions of dollars of credit via the deleveraging hedge funds and asset downgrades. Of course, the Fed does not really have the money it has committed. It will have to expand its balance sheet, issue more Treasurys, and hope that foreign central banks do not see that the US financial system is headed for the rocks.

“It is essential we preserve the foundations of democratic capitalism,” Bush bellowed on Monday.

All that’s left of the free market is the threadbare rhetoric of our lame duck President. The world’s biggest creditor is now the most ardent defender of market fundamentalism.

Last week, banks borrowed a record $437 billion per day, topping the previous week’s $420 billion per day a week earlier. Hundreds of banks cannot meet their capital requirements without regular low interest loans from the Federal Reserve. The banking system is in shambles. The FDIC needs to determine which banks can be saved and which need to be shut down, otherwise the insolvent banks will use the money they get from the Treasury on risky bets to dig their way out of bankruptcy. Without restrictions on how they can issue credit, many of the banks will engage in the same reckless behavior and speculation that brought on the current calamity.

92 year old Anna Schwartz, who co-authored “A Monetary History of the United States” with Milton Friedman, said in a recent Wall Street Journal interview that Paulson and Bernanke “should not be recapitalizing firms that should be shut down.” Rather, “firms that made wrong decisions should fail…. By keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis.” At the same time, they have not alleviated the uncertainty among lenders “that would-be borrowers have the resources to repay them.” This is the very heart of the matter; the distrust will remain until the bankrupt institutions are shut down and confidence is restored. The good banks have to be strengthened, the bad banks have to be closed, deposits have to be insured, foreclosures have to be reduced (to stabilize home prices), and consumers need immediate stimulus (including food stamps, extended unemployment insurance, infrastructure spending and aid to states) to rev up the economy. All of these have to be done as quickly as possible to avoid further damage to the economy and greater personal suffering. According to an estimate by the UNs International Labour Organisation (ILO) “Twenty million jobs will disappear by the end of next year as a result of the impact of the financial crisis on the global economy…Construction, real estate, financial services, and the auto sector are most likely to be hit, according to the ILO’s estimate which is based on International Monetary Fund projections for the world economy.” It could be worse if the Bernanke and Paulson botch the rescue.

The FDIC’s Sheila Bair has been the one “bright light” in the present financial train-wreck. She has done a first-rate job of closing “sick” banks and renegotiating mortgages. Last week, Bair blasted Paulson for focusing all his attention on the banks and financial institutions instead of homeowners, many of who are now facing foreclosure. In an article in the Wall Street Journal, she said: “We’re attacking it (the crisis) at the institution level as opposed to the borrower level, and it’s the borrowers that are defaulting. That is what’s causing the distress at the institution level…So why not tackle the borrower problem?”

Unlike Paulson, Bair seems to grasp that the hemorrhaging in the financial sector cannot be stopped unless the rate of foreclosures is slowed and housing prices stabilize. The FDIC chief has taken a sensible approach to the crisis by writing down the face-value of mortgages and putting homeowners in conventional 30-year fixed rate loans that make it possible for them to avoid foreclosure. According to Bloomberg, “(Bair) now has the authority to offer loan guarantees that could encourage modifications by mortgage-servicing companies in an effort to avert foreclosures. The new financial rescue plan “allows the government to set standards for mortgage changes and offer guarantees for loans that meet the standards.” This gets to the root of the larger problem which is stopping the slide in housing prices so that the mortgage-backed securities market can normalize.

The actions of the Fed, the Treasury and the FDIC are likely to cost in excess of $2 trillion. That does not include the trillions in market capitalization that are wiped out by plummeting home and stock prices. Nor does it include the incalculable suffering from rising unemployment, falling living standards, or personal hardship. Eventually, the Fed’s emergency measures will result in higher taxes, soaring deficits and slower growth. As America’s “consumer-based” economy flags and the recession deepens, capital will flee US Treasurys and securities and create a funding crisis. This may be hard to imagine, now that the dollar is strengthening and US Treasurys appear to be in great demand, but the handwriting is already on the wall.

Brad Setser explains the dollar’s surprising reversal in his latest blog-entry: “The dollar’s rise since July is part of a reversal in longstanding investment trends that prevailed during years of plentiful borrowing, strong growth and low financial-market volatility. “Essentially, every large trade that built up a head of steam in the go-go years has blown up or is in the process of blowing up,” wrote Alan Ruskin, chief international strategist at RBS Greenwich Capital, in a report to clients. “That goes for almost every asset class.”(Brad Setsers Blog)

The recent surge in US Treasurys is also misleading, much of it having to do with terrified investors that are dumping their shares in stocks, mutual funds and hedge funds for the percieved safety of US debt. Foreign investors, however, seem to be losing their enthusiasm for Treasurys as America’s future continues to darken.

The net foreign purchases of long term securities in August was a mere $14 billion following an even more dismal $8.6 billion in July; not nearly enough to meet $55 billion per month the US needs to balance its consumption of foreign goods. Even worse, the purchases of long-term US securities “went negative” by for foreign private investors (by $8.8 billion) which means that the dollar is being artificially propped up by foreign central banks to avert a disorderly unwinding of the currency.

Foreign investors and central banks are no longer providing the capital to support the US $700 billion current account deficit. They have lost confidence in America’s ability to bounce back from the credit crisis which has swept through the financial system and is now hammering away at the broader economy. That means the demand for US debt will fall and the prospect of hyperinflation will grow. Even if the dollar is able to weather the storm ahead (and the nation can avoid a funding crisis) the massive deficits brought on by Bernanke’s “emergency” spending spree will force interest rates upwards and tighten credit even more. As Michael Panzer, author of “Financial Armageddon” says:

“While the U.S. may not suffer from a funding crisis in the immediate future, the voracious money-raising appetite will make life much more difficult for the private sector, in the sense that, they will be ‘crowding out’ increasingly desperate borrowers who will find their options are more and more limited.”

The Fed now faces the daunting task of trying to maintain America’s dominant place in the global system while the economy contracts, deficits skyrocket and the pillars of US-style capitalism come crashing to earth.

Christopher Laird
Now, Sarkozy and others in the EU are talking about a new Bretton Woods agreement. So now they want to replace /reform the entire world monetary system too? Do you think that will solve the problem? So, now after committing what is rapidly going to be $10 trillion and counting of public backing, which is not working, they will think up anything to try to stop what they fear, a total world financial collapse. But, no matter what they try, no matter how big, nothing works. The reason is that the Central Banks cannot replace the economy. They can try to stimulate it, but they cannot even come close to replacing millions of people working, borrowing and lending.

And the way things are going, with every bigger bailouts (that European $2 trillion move Monday was amazing) it would seem they are going to bankrupt their own government finances along with their collapsing economic sectors. They will stop at nothing to avoid what they fear, a total economic collapse. And after that, comes the currency collapses? With the way they are handling this, that appears to be in the cards. It’s already being stated that the US fiscal situation has been severely degraded by all these bailouts. The USD is still holding, but till when? More

Naked Capitalism
The Fed’s massive and numerous liquidity facilities are making things worse. The problem is more than banks unwilling to lend to each other, they are also unwilling to borrow from each other. Banks can get all the funding they need (and then some) from their central bank so they do not need to seek a loan from another bank. I believe it has gotten so bad that they don’t even bother to make a decent market for inter-bank loans anymore. No reason to, they don’t need them anymore as central banks have replaced them.

Too much central bank liquidity has destroyed the inter-bank lending market. This would be an “inside baseball” issue for the banking system except Libor is the benchmark for the “real economy” to get a loan. Libor is written into contracts and we have no good substitute. If Libor is screwed up, then the real economy pays because it needs Libor to get a loan.

This also means the market’s new favorite idea of having G7 countries guarantee all inter-bank loans will do nothing. If enacted, banks would still be missing an incentive to use the inter-bank loan market because they can get all the funding (loans) they need from their neighborhood central bank and at a much lower rate. More

Bob Chapman
The International Forecaster
After over 40 years of financial reporting and analysis, we can say, without hesitation, that the 700 billion bailout plan proposed by Fed Chairman Buck-Busting Ben Bernanke and Treasury Secretary Hanky Panky Paulson, on behalf of the Caligula Administration, is the most abusive and piggish fascist scheme we have ever heard proposed. This is the living, freaking, end. We sit hear stunned and stupefied at the sheer arrogance of a corporatist, fascist plan, so saturated with moral hazard, that it can only be described, to use the words of Jean-Pierre Roth, president of the Swiss National Bank, in his description of the breakdown in American lending standards, as “unbelievable!”

First, note how the elitists have allowed the stock markets to crash over the past two days in order to put pressure on Congress to adopt their plan. They have withdrawn PPT support in an effort to stuff this plan down Congress’s throat. And this pressure will continue until they get their way. This is what Congress gets for letting the Illuminati run our country. Now, they will have to face their constituents in a no-win situation. If they adopt the plan, they will be accused of bailing out the fraudsters, and of privatizing the profits from the sheople’s hard work in evil elitist corporations, while socializing the losses from yet another bankers’ Ponzi-scheme in the sheople as is their custom. If they don’t adopt the plan, and as a result, the credit markets freeze up and the US economy goes down in flames, they will be blamed for that as well, even though that is our best solution at this point (i.e. purging the system of its excesses). The fact that our Congress has sat on their collective duffs and allowed this financial debacle to happen, when it was quite easily avoidable with even the slightest amount of regulation and oversight, gives you every reason to vote out every one of these reprobates and sociopaths ,which we like to refer to as “incumbent scum.” The only exceptions to the coming ouster of incumbents, as far as we are concerned, are Ron Paul, and perhaps Senator Jim Bunning of Kentucky.

Congress appears to be balking, and rightly so, claiming that they need more time to deliberate over this situation, to ponder potential alternative plans, or at the very least to modify the current proposal to make it more palatable to voters, which is impossible, at least in our humble opinion. But is this just more posturing to make it look like they are not rolling over and playing dead for the elitists, or has Congress finally found their collective backbone? Only time will tell, but based on past experience, we aren’t getting our hopes up.

These filthy Bosch Pigs want to give Paulson carte blanche to pay for toxic waste at its “hold-to-maturity” value with taxpayer funds, meaning you will pay par for crap that is worth pennies on the dollar. Then you, the taxpayer, will get paid back in hyper-inflated dollars on ever-deteriorating assets, with flagging real estate prices chipping away at their value without recovery for decades, meaning that your collateral on any of these no-down-payment, give-him-a-loan-if-he’s-breathing mortgages will be impaired and next to useless in the event of default. And who is going to administer all these loans, and process the payments, and deal with defaults? And what types of toxic waste will be subject to the bailout? Will we be taking on defaulted credit default swaps, interest rate swaps, credit cards, corporate bonds, commercial paper and aircraft leases also? Will we solve the mortgage-backed securities problem only to be bitten in the butt by credit default and interest rate swaps, or other toxic paper that was equally steeped in fraud? Of course we will.

The most egregious part of the proposed bailout is that it allows Paulson to dole out the funds and deal with the toxic waste without any judicial oversight and with full immunity from any criminal prosecution. This means he can pay par with your hard-earned money, and then when it becomes clear that the cess-pool-paper is only worth a small fraction of par, he can pawn it off to his cronies at bargain basement prices, thus distributing any profits to the elitists as they see fit, and the American people can go spit in the wind.

And how is this elitist bailout bonanza going to benefit the taxpayers, or our economy? It isn’t! In fact, it is going to exacerbate an already volatile situation. Thanks to free trade and globalization, the global economy has become a tripwire economy. One wrong move, and the claymores go off, taking out the entire global financial system in a blaze of shrapnel and glory. The whole house of fraudster cards, rife with trade and investment imbalances, then collapses and gets sucked into a gargantuan financial black hole. All it will take is one nation whose citizens are fed up with rampant inflation. They will have to break the dollar pegs, cash in their US treasury bonds, and absorb the excess amounts of their domestic currencies by purchasing them with the dollars received as proceeds from the sale of the treasury bonds. This strengthens their currency, thus moderating their inflationary problems, but then their exports suffer. Meanwhile, the dollar starts to decline, and everyone else is afraid that this decline will continue and threaten the value of their reserves. The mad dash for the front door begins, and not everyone can fit through at the same time. The dollar gets destroyed, along with the US economy, as the cash from dumped treasuries finds its way back to the US through purchases of US assets by the foreign nations that are looking desperately to dump their cash, thus creating hyperinflation on a Weimar scale. That is why the FTC is no longer publishing statistics regarding foreign investment in the US, to hide this problem from the public as the dollars start pouring in. Adding to global woes, the exporting nations, whose goods are now no longer competitively priced, go down with the USS Titanic.

The United States operates at a deficit, spending more money than we gained from our own production, and we need foreigners to finance our profligacy. In order to help us finance this deficit, these foreigners buy our treasury paper with the excess dollars they obtain from their trade with the US. They do this by having their central banks print more of their domestic currency to absorb the dollar forex which is flooding their economies due to trade imbalances with the US. Their central banks simply print more of their own currency, which is then used in currency exchanges to soak up that dollar forex. This process inflates their economies by dumping their own currency on their domestic markets while bidding up dollars which are then used to purchase treasuries. While those dollars are parked in treasuries, they do little harm to US citizens via inflation, although we do have to pay interest on them. The foreign nations then enjoy a competitive price on their exports to the US because of their artificially weakened currency, but at the expense of domestic inflation. This system perpetuates the trade imbalances, and the inflation in the foreign nations. Obviously, this cannot go on forever.

And now, all these wild, lunatic bailouts will threaten the entire world economy. Why? Because we are dumping more dollars into the world economy, devaluing our currency, and therefore the value of all these foreign-owned US treasury bonds. Imagine what will happen when 700 billion dollars, in cash, is dumped into the fraudster system. If the fraudsters start lending again, that means the fractional banking multiplier, which usually runs at 7 to 8 times reserves, will then generate five to six trillion dollars of new money and credit, an amount that would swamp the US and global financial systems even if the Fed shut off its money and credit spigot completely. And who would they lend all this money to? The overextended, totally broke, unemployed, underemployed sheople who are being hyper-inflated into oblivion? Of course not. It will be used for more wild speculation, and to produce more leverage, and more fraud, and more toxic waste, which will add yet more money and credit to our already waterlogged, or should we say dollar-logged, system.

And just because there are losses does not mean that this 700 billion will be absorbed by those losses. The money that was used to produce the assets which suffered those losses is still in the system, but not where the elitists wanted it to be parked. They are trying to get that money back, at your expense, through this bailout plan. Where is that money now? It is following a path from wherever the last seller of the toxic waste, before it went bad, spent or invested the proceeds from the sale of that toxic waste. Remember, these derivatives added nothing to the system. They are just a re-bundling of existing debt-type assets, with the proceeds being used to create more debt for more re-bundling, in what is truly a Ponzi-scheme, using the same money over and over again to create more debt. The only new money produced were the fees and commissions paid to do the re-bundling. What about the money that the current owner of the toxic waste has lost on principal and interest on defaulted loans? That money is in the future earnings of the defaulted borrowers, who instead of spending it on principal and interest to cover mortgage payments, will now spend it on rent and other necessities. And what of the lost leverage? That is being replaced by the dollars coming back into the system through de-leveraging, and which will be available for re-leveraging when it comes into stronger hands, as it must, eventually.

Further, our national debt is going to grow by leaps and bounds on account of these bailouts, and this affects our ability to repay, thus weakening the dollar further and exacerbating inflationary pressures. We are like a person who earns twenty thousand dollars a year and has two hundred thousand dollars worth of credit card balances. We have news for you. Those balances are not going to be repaid. The foreign holders of dollar-denominated assets are not stupid, and the dollar suffers in foreign exchange markets every time the debt ceiling gets raised. Our debts are accelerating. They are not leveling off. And these bailouts will put that acceleration into hyper-drive. Once the exit from treasuries begins, there will be no stopping it. The elitists want to jump-start the system so they can run the markets up again to complete The Big Sting Two, but this is a futile effort because everything else is imploding. Few can qualify for loans anymore, because the credit standards are being tightened and they are broke and overextended, and the ones who do qualify do not need it. What will businesses do with loan money when they have no customers left to buy their products? As the economy and the real estate markets continue to tank, the toxic waste will become ever less valuable, and now they want to plant that future misery in the taxpayer gardens. These bailouts must be stopped at all costs, or we are going to get vaporized later.

The system must be purged, and the dollar rescued, although we believe it is probably too late for the latter. But it is sure worth giving it a try, because having the world’s reserve currency is very advantageous.

All this craziness reminds us of an old Genesis song, called “Land of Confusion.” We note that our generation unknowingly, or ignorantly, helped bring the Illuminati into power, and now the Baby Boomers, who have tasted of their venomous temptations, are going to have to take them out. We know you can do it. You are our largest generation, and you have the most to lose, so you cannot, and must not, fail. All we can do now is teach you where things went wrong. It will be up to you to set things right, if not for yourselves, then for your children and your grandchildren.

Ilargi
The Automatic Earth
Banks can now get loans through the Fed’s newly enhanced “permanent emergency” credit windows, and pose as collateral equities (stocks) and even your deposits. Yes, you heard that right. That is the condition underlying Bank of America’s purchase of Merrill Lynch. BoA can -and will- use the money in your bank account to continue Merrill’s activities, the same ones that led to Lehman’s death: securitization, swaps and derivatives.

That is one frightening development. And so, for that matter, is accepting stocks for T-bills. What if those stocks plunge, as so many are doing lately? What if companies go bankrupt? In the end, through the Treasury, it’s once again the taxpayer who’s going to be presented with the bill.

You would think that the central banks and Treasuries in the world would see the light and the signs on the wall, and refrain from putting even more of the people’s money at risk. You need to think again.

Central banks today are pumping credit like mad into the markets. Like all similar actions in the past two years, it will not save anything, or make any difference other than that the system gets to roll on for a few more months. The system cannot be saved, but it can still suck more profits out of the public purse. If this is not perverse, I don’t know what is. More

John Little
Opednews.com
There are good reasons why there is seldom more than one dominant currency. Reserve currencies have the attributes of a natural monopoly, or, in more modern parlance, a network. If it costs extra to trade with someone who uses a different currency than you, it makes sense for you to use the currency that most other people use. This makes that currency yet bigger and cheaper to use. There is a good analogy with a computer operating system. In that world, Windows is the dollar.

This networking power is why central banks store dollars in their reserves in a far greater proportion than the proportion of trade with the United States. While 30% of international trade is with the United States, 70% of central bank reserves are in dollars. It is why most commodities, like oil, copper, and coffee, are priced in dollars, wherever they are found and to whomever they are sold.

A closer look at the history of Great Britain’s demise as the world’s reserve currency in the beginning decades of the 20th Century reveals a country that was severely crippled after WWI. While Great Britain had tried its best to not get involved in the wars raging out of control on the European continent, it was nevertheless, thrust right into the First World War. This proved to be too costly for the British Empire. Although the Pound Sterling was still considered the main world currency, Britain, along with France and other allies of the war, owed millions of dollars to the United States. Great Britain found itself horribly in debt and unable to continue on the gold standard.

According to the Federal Reserve Bulletin of June, 1989, from the spring of 1925, when the gold standard was restored, to the fall of 1931, when it was abandoned, the Bank of England resisted forays on the exchange value of the pound sterling. In May 1931, a run on the Kreditanstalt, the largest Austrian bank, initiated the final defense of the gold exchange standard in Britain. From March to September 1931, the National Bank of Austria lost 55 percent of its large foreign exchange reserves as it tried to fight back capital flight. In June 1931, panic spread from Austria to Germany, and German banks scrambled to exchange sterling deposits for gold in London. From May 30 to June 30, the Reichsbank lost 34 percent of its gold and foreign exchange reserves. In July, with foreigners storming its gold reserve, the Bank of England shielded the domestic credit system by purchasing securities on the open market, by arranging a 50 million pounds credit with the Federal Reserve Bank of New York and the Bank of France, and by transferring securities from the Banking to the Issue Department to provide for new fiduciary issue. With the exchange rate below the gold export point, the Bank of England barricaded its gold reserves by raising the Bank rate from 2.5 percent to 3.5 percent on July 23 and to 4.5 percent on July 30. In spite of these protective efforts, gold reserves in the Issue Department shrank 30.9 million pounds–29 percent–from June 24 to July 29. Late in August, the Bank of England secured an additional 80 million pounds in emergency credits, but the continental and American demand for gold continued to assault the London bullion market. More

An extraordinary Treasury capital infusion may be needed to restore faltering foreign demand for debt issued by Fannie Mae and Freddie Mac, the two top home funding sources that the government is willing to rescue to save the housing market. The companies rely heavily on overseas investment, often up to two-thirds of each new multibillion-dollar note offering, to help pare funding costs and keep mortgage rates low. But foreign central banks have dumped nearly $11 billion (5.9 billion pounds) from their record holdings of this debt in four weeks, to $975 billion (522 billion pounds), and won’t return in force before it’s clear if — and how — the government will back Fannie and Freddie, some analysts say. More

James Turk
The Federal Reserve did not suddenly contract the amount of dollars in circulation. Its latest H.6 report shows that both M1 and M2 expanded in recent weeks, so there was no shortage of supply. The Federal Reserve did not raise interest rates during this period. Consequently, inflation adjusted interest rates remain negative. In other words, the annual inflation rate is higher than the amount of interest one can earn on a 1-year dollar deposit, which is highly inflationary and a major disincentive to holding dollars. There has not been any news exceptionally favorable to the dollar. In fact, the banking problems in the United States continue to mount, while the federal government’s deficit continues to soar out of control. On July 28th Reuters reported that “The Bush administration on Monday plans to project the U.S. budget deficit will soar to a new record…because of the slowing economy and an economic stimulus plan approved this year.” So what happened to cause the dollar to rally over the past three weeks? In a word, intervention. Central banks have propped up the dollar, and here’s the proof.

When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly. On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve’s custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks.

So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff and doing so ignited a short covering rally, which is not too difficult to do given the leverage employed in the markets these days by hedge funds and others. So central banks pushed in one direction and funds and traders then stepped on board. In other words, central banks ignited the fuse of a bear market rally. With this intervention, central banks have bought some time. More

Congressman Ron Paul confronts Federal Reserve Chairman Ben Bernanke on monetary policy and its consequences. 7/16/08

Ron Paul
There are reasons to believe this coming crisis is different and bigger than the world has ever experienced. Instead of using globalism in a positive fashion, it’s been used to globalize all of the mistakes of the politicians, bureaucrats and central bankers. Printing dollars over long periods of time may not immediately push prices up–yet in time it always does. Now we’re seeing catch-up for past inflating of the monetary supply. As bad as it is today with $4 a gallon gasoline, this is just the beginning. It’s a gross distraction to hound away at “drill, drill, drill” as a solution to the dollar crisis and high gasoline prices. Its okay to let the market increase supplies and drill, but that issue is a gross distraction from the sins of deficits and Federal Reserve monetary shenanigans.

This bubble is different and bigger for another reason. The central banks of the world secretly collude to centrally plan the world economy. I’m convinced that agreements among central banks to “monetize” U.S. debt these past 15 years have existed, although secretly and out of the reach of any oversight of anyone–especially the U.S. Congress that doesn’t care, or just flat doesn’t understand. As this “gift” to us comes to an end, our problems worsen. The central banks and the various governments are very powerful, but eventually the markets overwhelm when the people who get stuck holding the bag (of bad dollars) catch on and spend the dollars into the economy with emotional zeal, thus igniting inflationary fever. This time–since there are so many dollars and so many countries involved–the Fed has been able to “paper” over every approaching crisis for the past 15 years, especially with Alan Greenspan as Chairman of the Federal Reserve Board, which has allowed the bubble to become history’s greatest.

The mistakes made with excessive credit at artificially low rates are huge, and the market is demanding a correction. This involves excessive debt, misdirected investments, over-investments, and all the other problems caused by the government when spending the money they should never have had. Foreign militarism, welfare handouts and $80 trillion entitlement promises are all coming to an end. We don’t have the money or the wealth-creating capacity to catch up and care for all the needs that now exist because we rejected the market economy, sound money, self reliance and the principles of liberty. Since the correction of all this misallocation of resources is necessary and must come, one can look for some good that may come as this “Big Event” unfolds. More