International Forecaster Weekly

The Dollar As A Store of Value is Being Destroyed

The mistakes of the central banks can hurt you, free markets no longer free, cost of bailout is staggering to all of us, bailout economics the only solution on the table, euro threatened, liquid market for toxic waste, declining numbers point to reality, rewarding failure is deeply disturbing to everyone

Bob Chapman | April 4, 2009

The first line of defense for anyone in this world today is to protect themselves against central banks’ printing money and issuing credit to cover up their mistakes.

As we have pointed out on numerous occasions the confidence and trust in the financial system, globally, is as bad as it can be. Yes, it probably will get worse. As a result of this loss of faith investors have turned to precious metals, gold and silver. It is a flight to quality at a surprising early stage. We expected this late in the hyperinflationary cycle or in the early stages of deflation. This flight is on the way to absorbing tons and tons of gold and silver worldwide and it is just getting underway.

Obviously investors are mindful of the unbelievable debt incurred by governments, banks, Wall Street, individuals and others. In fact, there are those professionals who believe that a number of governments could go bankrupt. That is easy to believe with government and Fed commitments now past $13 trillion. England and a number of European countries are in trouble as well. At least 5% of investors worldwide know an inflationary time bomb is growing as governments continue to borrow, and print money to stimulate economies.

It once was true that free markets were self-regulating. That is no longer true because they are no longer free, they are manipulated by the US and British governments.

Part of this corporatist fascist model has caused great discontent among the public. They are outraged at the privatization of gains and socialization of losses and they are equally disturbed with management income. People are deeply disturbed that failure is being rewarded. They do not want government replacing private sector activity. They disagree with massive subsidies to prevent home prices from falling.

The cost of bailouts is staggering and we have only seen the beginning. Government is keeping market forces neutralized by competing with them. The massive creation of money and credit has continued unabated for more than five years with no end in sight. In the end government knows they will lose. No government in history has accomplished what they are attempting to do. The Fed and the Treasury are destroying the dollar as a store of value. The stimulus package is a spending package, very expensive and it creates nothing. It is not sustainable nor does it create anything sustainable. It is inconceivable that when inflation rises that government and the Fed would reduce M3 and increase interest rates. If they did we’d immediately be overwhelmed by deflation. Unfortunately at the present time Treasury has no clear direction and course changes unpredictably. That is because they know they have no real exit strategy. Inflation is the easy course, at least temporarily; it bails out those in debt. The inflation and reinstituting of foolish monetary policy, allows temporarily for housing prices and inventory to run parallel, but in the end the same foreclosure activity and inventory build will reassert itself as we experience another mini-bubble collapse. This will only be temporary relief. 105% loans to 650 or lower FOIC, carried by Freddie Mac is not going to work. They are sucking in fresh speculation money as well that will eventually be lost further destroying Americans’ asset base. The Treasury and the Fed are desperate and we know for sure this is what they are up too. You saw that letter to the editor from a fellow subscriber in the last issue. He is a real estate loan expert. You saw what Wells Fargo and the other big banks are up too.

Wealth continues to be destroyed and that continues to be offset by Treasury and Fed debt and totally fiat spending. They both have no other solution than bailout economics.

Professionals are still using too much leverage and each day it is a scramble for derivative writers to complete their contractual obligations. It is certain that a reduction in the excessive policy is desirable,. But players continue to use it.

The question now is how do we attempt to solve the problems? First bank bailouts have to cease. Insolvent banks should be merged with healthy banks. All derivative transactions should be frozen and settled as best as possible. Legislation is needed, at least temporarily, to eliminate tax deductibility of interest, for everyone.Corporate taxes should be cut to 17% to allow corporations to compete with foreign corporations, which already have cheap tax rates. And close the tax havens of the world like the Cayman Islands.

If derivatives are still to be used they have to be regulated on an exchange and marked-to-market daily. All bets have to be collateralized. This would tend to reduce leverage along with the loss of the interest deduction. Complex contracts, not able to be put on an exchange, would have a special set of rules for daily monitoring as well.

Fannie Mae, Freddie Mac and FHA should be phased out and healthy lending institutions should replace them. This Ponzi scheme has to end. Such loans and guarantees make house prices more expensive and unaffordable to new buyers. Their existence is unnatural in a free domestic market. This is not about political will because 85% of congress has been bought off. The problem is Wall Street and banking are run by Washington and that has to come to an end. That would also be accompanied by new rules for corporate compensation, which has gone crazy.

There are a few ideas to get started with although we know Washington and Wall Street are not interested in what we think. They are only interested in their survival, dominance and total power over our everyday lives; then ultimately world government to permanently cement total control.

The only reason the dollar is hanging on at relatively high levels versus other currencies that investors are still cashing in hedge funds, de-leveraging and the cash outs are done in US dollars. The USDX high on the dollar was 89.62 on 3/4/09 and it is currently about 84.40. Were it not for de-leveraging and manipulation the dollar would still be at 71.16. What else can we expect in fiscal 9/30/09 when we will see a budget deficit of 12% of GDP. M2, as measured by the St. Louis’s MZM, shows broad money supply at an annual rate of 17% in the last six months to March 16th. That means M3 is back up over 17%. If you throw in the $12.8 trillion the Treasury and the Fed are creating it tells you the dollar is doomed.

As far as currencies are concerned they are all terrible with the exception of the Swiss franc and the Norwegian Krona. The euro could break up. They have Ireland, Spain, Greece and Italy, any of which could destroy the euro. In spite of it being strong recently the yen has major problems. Its export economy is collapsing and their stimulus program is not working. China has the same problem Japan had in 1992; they have unpayable domestic bank debt of $1.2 trillion. They devalue their currency perpetually. What will they do when nations put trade tariffs on? In spite of the $2 trillion in foreign reserves China has very serious problems.

Since 1969 the SDR has been hopeless. It was once linked to gold but now is 63% US dollar and 41 euro cents plus yen and sterling. Just another fiat excuse of a currency. If this $100 billion weakling were to be an international reserve currency of $10 trillion, that creation would engender massive inflation. Worse yet everyone’s sovereignty would be lost and IMF bureaucrats would be running our finances. Inflation would perpetually grow like Topsy. No one would vote on anything. The bureaucrats would make all the decisions, which is every bit as bad as a one world currency. Further, the IMF forbids its members from linking their currencies to gold. What China should do is back their yuan with gold and work their dollars off over time. We do not expect them to do that.

Chandler, Grey & Christmas says planned layoffs fell in March to their lowest in six months, but quarterly job losses are at the highest in more than 7 years. Losses fell 19.3% in March to 150,411. Financial center jobs losses fell.

The Federal Reserve and its member banks are directly responsible for the depression we are now enveloped in, yet they recognize no responsibility nor do they intend to change course anytime soon. There is absolutely no accountability and an excessively easy monetary policy since 2001 has produced what should become the worst depression since the 1930s.

The lack of criticism is not surprising to us. The Illuminists own the media, Wall Street, banking, insurance and the biggest corporations in corporate America. The Fed is buying trillions of dollars in debt by creating money out of thin air. We learned long ago that taking away the punch bowl was the Fed’s job, now filling it perpetually.

The Fed has taken over the mortgage market with the help of government’s Fannie Mae and Freddie Mac. This is the monstrosity the Fed created with low interest rates and absolutely no oversight of what banks were doing – or so they say. We believe they directed the banks and the rating agencies to do what they did. They are buying back all the toxic waste that they helped to create, which will raise mortgage costs and in a couple of years destabilize housing again in a new bubble.

If that wasn’t futile enough, they are buying and monetizing Treasury notes and bonds. This is to accommodate a government that is determined to run budget deficits of more than 10% of GDP as far as the eye can see. Incidentally this is what the Weimar Republic did in the early 1920s and you are all aware of how that ended up. This is the modus operandi of a banana republic, something worthy of Latin American dictatorship. The antics crowd out other borrowers creates inflation and destroys wealth.

After 21 months of financial and monetary upheaval we still have no idea whether America‘s biggest banks are bankrupt. These are the same legacy-money center banks that got into the problems they have presently who are ready to re-embark on the same fateful mission again, by making bad loans in real estate. There are no rules. The Fed and their banks do as they please. This is a long-term program of destruction. Our president tells us that he will be $1 trillion over budget for the next 8 years. Interest rates are zero and will remain there for some time and the creation of money and credit is again in excess of 17%. These excesses will not come to a head this year but in two or three or four years, maybe even more years. this economic and financial crisis, which Greenspan and Bernanke created will eventually overwhelm America and the entire world.

The only way to solve this problem is first to do away with the Fed, which has been a disaster. The whole concept of a privately owned bank, owned in part by non-Americans is insane. We cannot have private banks and Wall Street running Washington and our country as their private fiefdom. We are on the wrong path and we will pay a dear price for our stupidity in allowing these crooks to run our nation for almost 100 years.

The jobs lost in March were 663,000 and most were lost in small business. The Birth/Death model added 114,000 in March otherwise the true number would have been 777,000. 161,000 manufacturing jobs were lost in March, down from 169,000 in February. Construction lost 126,000 after losing 107,000 in February. Services cut 358,000, down from 366,000 the prior month. The BLS says 6,000 in manufacturing were added and the BLS has 23,000 construction jobs being added. We see service industries shedding 358,000, but BLS has 21,000 created, plus 41,000 in leisure and hospitality. Lies, lies and more lies.

The U6 unemployment figure was 14.8% in February and in March it is 16.2%, up from 9.3% a year ago – the fastest yoy gain since the great depression. Our U6 figure for March is 19.2%, headed for 22% plus by yearend. If unemployment rises the US Treasury has to borrow more to pay for unemployment. This also pushes the dollar lower. Gold should have exploded on this news, but our enemy, our government, again rigged the market.

The March ISM non-manufacturing index was 40.8 versus February’s 41.6.

The Baltic Dry Index dropped 31% in March due to lack of financing. This is why part of the G-20 financing will go into this area of finance.

As an after thought the market for Lehman’s toxic assets, worth billions of dollars, is trading at 12 cents bid, 13 cents offered. This is a relatively liquid market for $150 billion of toxic waste.

Incidentally, PIMCO’s Distressed Mortgage Fund is off 34%.

This past week the Dow rose 3.1%; S&P 3.3%, the Russell 200 rose 6.3% and the Nasdaq 100 rose 5.2%. Retails rose 7.6%; cyclicals 8.3%; consumers 2.5%; transports 7.2%; utilities 1.7%; high tech 7.4%; semis 4.6% and biotechs fell 3.9%. Broker/dealers rose 5.3% and banks 5.6%. Gold bullion fell $31.00 and the HUI index fell 5.5%.

Two-year T-bills rose 5 bps to 0.91%; the 10’s rose 13 bps to 2.86% and the 10-year German bund rose 13 bps to 3.22%.

Freddie Mac 30-year fixed rate mortgage rates fell 8 bps to 4.78%, the 15’s fell 6 bps to 4.52% and one-year ARMs fell 10 bps to 4.75%.

Fed credit fell $2.3 billion to $2.049 trillion. Over the past 52 weeks it is up 135%. Fed foreign holdings of Treasury, Agency debt jumped $14.6 billion to a record $2.609 trillion. Custody holdings for central banks expanded at a 4.8% rate ytd and were up $403 billion yoy.

Bank credit fell $21.6 billion to $9.699 trillion. Bank credit was up $163 billion yoy, or 1.7%, or $307 billion over the past 29 weeks. Securities credit added $1.9 billion. Leases and loans fell $235 billion and C&I loans fell $6.7 billion, up yoy 2.9%. Real estate loans gained $8.6 billion as consumer loans fell $9.2 billion. Securities loans fell $24.9 billion and other loans expanded $8.6 billion.

M2 narrow money supply fell $2.9 billion to $8.372 trillion, up 16.7% over the past 27 weeks, or in just six months and $753 billion over the past year or 9.9%.

Total money market fund assets dropped $22.2 billion to $3.834 trillion; that is up 9.6% yoy.

Total commercial paper outstanding fell $14.8 billion to $1.477 trillion. CP has declined $205 billion ytd, or 49% annualized and 19.2% yoy. Asset-backed CP fell $1.1 billion to $701 billion with a yoy fall of 13.5%.

The dollar index declined 1.1% this week to 84.16.

While the going remains tough for U.S. manufacturers, they may be past the worst of this recession.

The Institute for Supply Management reported Wednesday that its March manufacturing index stood at 36.3 from 35.8 the month before. While that reading marked the 14th straight month of falling activity for this hard hit part of the economy, it was an improvement over the prior month. Moreover, some of the details of the report suggested conditions may be forming that will at least allow the free fall in activity to stop. That's the first step to a return to growth at some point in the future.

In the details of the report, the ISM said its production index stood at 36.4, from 36.3 in February. The new orders index came in at 41.2, from 33.1. This was the first time this index was above 40 in seven months, and something that cheered the ISM, because new orders eventually lead to fresh production.

Still, hiring had yet another bad month at a reading of 28.1, from 26.1. Inventories continued to shrink, coming in at 32.2, versus the prior month's 37.0.

Meanwhile, inflation pressures, reflective of weak demand, continued to retreat, albeit at a less rapid pace, with the prices index at 31.0. It was 29.0 in February.

Online job advertisements fell by 100,000 in March and the drop has resulted in a decline of over 1.1 million advertised vacancies in the last four months.

The March decline reported by the non-profit Conference Board follows a modest dip of 6,600 ads in February, but is well below the record drops of 507,000 and 506,000 in December and January. Online job ads have declined over 25 percent since November.

"The March numbers indicate that we are not at the bottom of the employment cycle but that the declines in labor demand may be slowing," Gad Levanon, senior economist at The Conference Board, said this week in a news release. "The next two months, April and May, are when employers typically ratchet up their spring hiring."

Thornburg Mortgage Inc., the "jumbo" home lender racked by the collapse of US mortgage markets, said it plans to file for bankruptcy protection and shut down.

World leaders neared an agreement to tighten rules on financial markets, crack down on tax havens and channel more cash to the International Monetary Fund as they narrowed differences over how to fight the deepest global recession since World War II.