SPECIAL ISSUE
Record foreign held debt could trigger dollar crisis, threaten
investor portfolios
Adrian van
Eck, who publishes the widely read Money Forecast Letter, has
forgotten more about the workings of the Federal Reserve than
most analysts know. "[R]ight
now", he says, "M3 (which is still being added up in
secret by the Fed and privately used by them to make policy)
is actually up by some two-thirds of a TRILLION dollars since
the Summer of 2005. If I carried this back to mid-2004 I am quite
sure you and I would soon realize that during the entire period
of so called 'money tightening' the Fed was pumping ONE TRILLION
NEW DOLLARS new money into the U.S. banking system and on to
American businesses and consumers."
Van Eck gives us a reading
on the inner workings of the U.S. economy to which most are not
privy, but there's more to the developing dollar problem than
just the rapid growth in the money supply. Seemingly, if the
Fed were printing too much money, it could simply put on the
brakes and the inflationary trend could be stopped in its tracks.
That is what has happened in the past with the early 1980s Paul
Volcker Fed serving as a good historical example.
Regrettably,
there is another, more troubling, aspect to the dollar problem
which may lie outside the Federal Reserve's control. And that
has to do with the trillions in U.S. Treasuries building up in
places like China, Japan, and the oil producing states where
our trade deficits have been converted to massive Treasury debt
holdings. These amount to a sword of Damocles hanging over the
U.S. economy.
With such a large portion of
the public debt now in the hands of foreigners, much of the Fed's
power to control the money supply and inflation has been transferred.
In the recent past, the constant inflow of funds from overseas
has frustrated attempts by the Fed to push interest rates higher.
That is why mortgage rates, for example, managed to stay in check
even as the Fed attempted to push interest rates higher.
Still there is an even darker
aspect to the problem of foreign held debt. What is now a trickle
of returning U.S. dollars could become a torrent should public
and private money managers in these countries begin to lose faith
in the greenback. This, in turn, could trigger an uncontrollable
inflation and dollar crisis both in the United States and globally.
Some analysts have pointed
out that such an exodus would be farfetched in that the holders
themselves would have a great deal to lose by unloading a large
portion of their positions. The fact of the matter, though, is
that the exodus has already begun. For example, Russia last week
announced that it was juggling its reserves to purchase Japanese
yen. Chinese officials recently suggested that its central bank
might exchange some of its $1 trillion in reserves for gold and
oil. Others have made similar pronouncements.
Panics have been touched off
for substantially more benign reasons in the past, so, with nothing
less than national reserves on the line, it would be hazardous
for private investors to ignore the problem now. Even a slow-motion
unraveling, or a simple withdrawal from regular U.S. debt purchases,
would have a devastating effect on the value of the dollar. The
Federal Reserve under such circumstances would be forced to print
money to finance the federal government.
U.S. foreign held debt now
stands at an unprecedented $2.2 trillion dollars -- and growing
rapidly. By way of contrast, the total federal tax receipts for
2005 were roughly the same figure ($2.2 trillion). The percentage
of public U.S. debt held by foreigners now stands at roughly
45% -- a figure which illustrates just how deeply dependent the
U.S. federal government has become on foreign largesse.
In a recent interview, former
Treasury Secretary Robert Rubin put it this way: "[W]e live
in a globalized environment and in a country which has enormous
fiscal and external deficits. So you have to figure out some
way -- which I have not done I might add -- to protect yourself
if we should have a real currency problem here."
He avoids using the four letter
word "Gold" but one can read between the lines.
Related: See "China and Gold" below.
China may trim Treasury holdings, buy gold.
Also Related: "Talking
with Robert Rubin" - This Citibank interview is quoted
above, and was originally offered as part of a USAGOLD NewsGroup.
If you wish to join our NewsGroup, please go to our quick and
easy registration
page.
Note
to our clientele:
There's been quite a bit of concern among gold owners about the
current downward direction of the market. Let's not forget that
even with the correction from the $725 level in May, gold is
still ahead roughly 14% on the calendar year, and it has risen
22% since last October (year over year). That performance speaks
for itself. I would characterize this correction as healthy and
a good buying opportunity. Let's not allow the short-term thinking
of CNBC and the mainstream press divert us from the fundamental
reasons for gold ownership.
Inflation:
What happens if things get out of control?
"If
history teaches anything, it is that government cannot be trusted
to manage money. When currency is not redeemable in gold, its
value depends entirely on the judgment and the conscience of
the politicians. (That is the situation in this country today.)
Especially in an economic crisis
or a war, the pressure to inflate becomes overwhelming. Any alternative
may seem politically disastrous. Whether it be the Roman emperors
repeatedly debasing their coinage, the French revolutionary government
printing a flood of assignats, John Law flooding France with
debased money, or the Continental Congress issuing money until
it was literally "not worth a Continental," the story
is similar. A government in financial straits finds its easiest
recourse is to issue more and more money until the money loses
its value. The entire process is accompanied by a barrage of
explanations, propaganda and new regulations which hide the true
situation from the eyes of most people until they have lost all
their savings. In World War I, Germany--like other governments--borrowed
heavily to pay its war costs. This led to inflation, but not
much more than in the U.S. during the same period. After the
war there was a period of stability, but then the inflation resumed.
By 1923, the wildest inflation in history was raging. Often prices
doubled in a few hours. A wild stampede developed to buy goods
and get rid of money. By late 1923 it took 200 billion marks
to buy a loaf of bread.
Millions of the hard-working,
thrifty German people found that their life's savings would not
buy a postage stamp. They were penniless. How could this happen
in a highly civilized nation run at the time by intelligent,
democratically chosen leaders? What happened to business, to
wages and employment? How did some people manage to save their
capital while a few speculators made fortunes?"
Photo: Germany, 1923. Buyers
line up at bakery in early morning to beat afternoon price increases.
Read The
Nightmare German Inflation at the USAGOLD Gilded Opinion
page. Find out which investments did well, which didn't.
Dr. Moneywise
advises first-time investors: "Gold is different."
When
considering your inaugural gold purchase, the first thing you
need to do is set aside all the principles, devices and logic
you apply to the stock, bond or futures markets. They have no
value in the physical gold market. No, I am not encouraging you
to act before doing the things any prudent investor would do.
I simply mean that gold cannot be judged under the same set of
criteria you use when choosing a paper-based investment. It's
different. Most who purchase gold do so as portfolio insurance,
not as an investment for profit. Would you wait for the price
of automobile insurance to hit a bottom before you bought it?
Of course not. It's the same with gold. If you don't have it,
you probably need it. You do not need technical or fundamental
analysis to ring the bell for you. None of the old timing cliches
will save or make you money. Trend analysis is meaningless when
all you really need to do is protect yourself. So if your gut
is telling you to buy gold, get your brain in motion. Our USAGOLD
website offers a very strong introduction to gold ownership.
From there, common sense, and one of our highly qualified representatives,
will help you to the finish line. Don't forget: We educate first-time
investors. And. . .There's no time like the present.
Why I
visit the USAGOLD Public Forum daily
One of my favorite
pastimes is to visit our USAGOLD Forum and occasionally participate
in the discussion. I like the spontaneity of developing an observation
or analysis and then having the ability to immediately post it
to a large group of readers. Many others feel the same way making
for an interesting venue. I also like to see what other gold
owners and advocates have to say as situations develop in the
financial markets. We have some of the best posters on the internet
at our Forum, and their primary interest is gold and how world
politics and economics affects it.
The piece linked
below on China and its burgeoning dollar reserves began here
at the NewsGroup as a five-star article recommendation. Subsequently,
I posted my own reflections on the China situation at the Forum.
If you have an interest in keeping up with gold news and opinion
as it happens, I think you would and enjoy and benefit from regular
visits to our USAGOLD Forum.
China
and Gold
"One of the most far-reaching
and potentially destabilizing revelations in the FT article is
a 'blunt statement' (as characterized by FT) made by Zhou Xiaochuan,
governor of the Peoples' Bank of China that China has 'enough
reserves.' Further on in the article, Xia Bin, an economist at
the Development Research Council which advises the State Council,
states that China needs about $700 billion (of its $1000 billion)
'set aside in reserves in the traditional sense, as a national
insurance fund, against financial risk. That infers that $300
billion will be directed to other uses presumably including as
outlined above in gold and oil.
Keep in mind that China is
netting about $20 to $25 billion monthly in new dollar reserves
-- an amount that will also be looking for a home should this
plan move forward. To give you an approximation of what this
might mean, $300 billion would purchase 15,500 tonnes of gold
-- the equivalent of almost twice the U.S. Treasury's hoard of
roughly 8000 tonnes."
Complete article
Here's the link to the USAGOLD Forum. We invite your visit. Don't forget
to bookmark. You never know what surprises await. We also invite
your participation in the discussion.
"The
end of gold's bull market, not!" by Peter Schiff:
"The purpose of these sharp declines
is two fold. First, it helps purge the weak hands from
the market, including the momentum players, highly leveraged
speculators, and "Mad Money" aficionados. Second,
it helps interject a healthy dose of fear into the market, and
helps erect a steep "wall of worry" for this bull market
to scale.
Bull markets hate excess baggage, and before the next big surge
higher, all that excess baggage must be ejected. After
the momentum players have been burned once too often, the stage
will be set for a major advance. Gun shy from previous
false break-outs, such players will be too timid to pull the
trigger. As such, they will remain on the sidelines, watching
in fear as the train finally leaves the station without them.
Many people feel that these declines are orchestrated by central
banks or major investment houses. It's possible that the
conspiracy theorists have a point. But in reality, it makes
little difference. All they are doing is creating excellent
buying opportunities for the rest of us. Remember, though
they may be able to slow gold's ascent, they can not alter its
trajectory. If they could, would gold have really risen
from below $300 per ounce to its recent high above $700?
Gold's bull market is far from over. In fact it has barely
begun. The fact that each correction is immediately interpreted
as being the bursting of a bubble, with precipitous declines
looming on the horizon, actually supports this view. Genuine
bull markets, especially those that take on bubble like proportions,
seldom fail to make record highs. In the case of gold and
silver, neither has achieved such milestones. When prices
are adjusted for inflation, they haven't even come close.
Believe me, by the time this bull market really ends, those highs
will be distant memories."
More
_______________________________________________________________________________________________
"Lenin
was certainly right. There is no subtler, no surer means of overturning
the existing basis of society than to debauch the currency. The
process engages all the hidden forces of economic law on the
side of destruction, and does it in a manner which not one man
in a million is able to diagnose."
