March 31, 2005
Posted by richardlancaster at 08:50 PM

Pakistan has been witnessing riots outside of the Karachi Stock Exchange and trading has been suspended - its looking like the Wall Street of 1929 in Pakistan! Hundreds of investors are being denied the ability to trade their investments due to volatility. There is a suspicion of insider trading and foreign manipulation. After a record run-up in the market they are experiencing record declines, with seemingly no end in sight. Where does this end, and can this happen again on Wall Street?

Pakistan Prime Minister Orders Enquiry

Your comments are always welcome.

Cheers Rich

| Comments (3)

March 09, 2005
Posted by richardlancaster at 08:05 PM

The following is an article from the Washington Post. It's a critical analysis of what Argentina went through after becoming the world's largest debt defaulter. Unemployment, social restructuring and a lot of suffering by ordinary people.

Here goes:
Lessons From Argentina
Wednesday, March 9, 2005

ARGENTINA'S DEFAULT, the largest by any nation in history, has been a social catastrophe. It drove unemployment to nearly 25 percent, and millions have been forced into poverty. But the recent restructuring of the country's debt ought to be healthy for the international financial system.

More than three years after its default, Argentina has persuaded a majority of its creditors to accept a reduction of about two-thirds in the value of its debt, a cut roughly twice as aggressive as in past sovereign bankruptcies. Although this means that investors will take painful losses, this isn't a bad thing: It sends a signal that private lenders should consider the risks of emerging markets before pressing capital on them. If investors had treated Argentina more cautiously during the 1990s, the country would have borrowed less and its ensuing collapse would have been less painful to innocent people. If investors are capable of learning lessons, the Argentina signal could take some froth out of the current lending to emerging markets.

With luck, this salutary lesson to investors won't be counteracted by a destructive lesson to borrowers: that it's better to borrow crazily and default than to run government finances responsibly. Having forced borrowers to forgive two-thirds of their debt, and having experienced growth of nearly 9 percent for the past two years, populists in Argentina and beyond may argue that stiffing international creditors is smart policy. But if they do make such claims, the facts ought to puncture them. Argentines have paid a huge price for their default: As The Post's Paul Blustein reported last week, more than two out of five citizens live below the poverty line, and salaried workers who have held on to their jobs have had to endure a 20 percent cut in incomes. The country's recent economic growth is only a partial recuperation of its earlier contraction. If you devalue your currency, cutting the dollar value of your economy by two-thirds, your new international competitiveness is bound to spur a rebound from the depths to which you've plunged. But it's weird to call that progress.

If international investors absorb the lesson that they should lend more carefully (admittedly a big if), and if borrowing countries don't make the mistake of embracing default as a policy option, capital flows to developing countries may become less crisis-prone. The advantages that they bring (faster growth in poor countries) won't be so frequently undone by the disadvantages (the risk that investors will yank their money out, bringing a country to a standstill). But although Argentina's debt deal sends a healthy signal, it still points to a problem in the way the international system works. The deal took too long to organize, unnecessarily hurting both lenders and Argentina.

This is why the world may eventually create something like a bankruptcy court for dealing with governments. If Argentina were a company, a bankruptcy judge would have taken control of the debt workout, cutting out the need for a three-year game of chicken between the country and its creditors. Once a proposed debt write-down had won the support of a majority of creditors, the minority would have been left with no option to reject the deal, whereas now creditors representing a quarter of Argentina's debt still refuse the offer. This delay and uncertainty serves nobody. Anne O. Krueger, the No. 2 official at the International Monetary Fund, put the idea of a sovereign bankruptcy mechanism on the table in 2001. She should return to the subject

For those interested here is a link to the original Krueger IMF report:
Crisis Prevention and Resolution: Lessons from Argentina

Argentina can be a great lesson for the rest of the world. 25% unemployment, debt forgiveness at huge levels, lots of pain and suffering. Is this what America has to look forward to when it's status as the world's largest debtor results in massive defaults?

Comments are always welcome.


| Comments (20)

Synthesizing Reader Input
February 25, 2005
Posted by richardlancaster at 12:24 AM


I’ve been slow getting to this summary, so apologies for dragging this in to the second month of the year! However, I think it is worth the wait, the results below are informative. I’ve read through all of the posts and then categorized them in to primarily “yes” or “no” answers where possible. This was inexact, so don’t hang me if you feel my interpretation of some answers was incorrect, I did the best I could to make sense of answers and to drop them in to one category or another. When an answer was too difficult to interpret I just didn’t count it. Next up I’ll be working on my predictions for the next 12 months, but for now enjoy this summary of reader input, I’ve repeated the survey question, followed by the results and then some of my own comments:

1. How would you invest $100,000 in '05 to achieve the best gains?
Cash/CD’s 6
Precious Metals 10
Energy 3
Tech Stocks 4
Foreign Exchange 6
Land 4
Food 2
Stock Markets 7
Bonds 2

Comment: Seems that gold came out the winner in this race, which is not too surprising as we are a bunch of gold bugs on the site! No one seemed to think that ammunition was worth investing in, which I guess is a good thing – but some folks wanted food and land. In general people are harboring their wealth in metals, cash, foreign currencies and the stock market. I guess a good summation here would be to lean heavily on metals with some diversification out of dollar denominated financial assets.

2. Will planet earth be rocked by more record breaking "earth changes"
Yes 10
No 6

Comment: The majority here felt that we’d continue to experience the trend of the past couple of years where we’ve seen increasing global warming (whether as a result of the sun or mankind) and an up-tick in seismic activity, with more earthquakes and eruptions and resultant tsunami’s – perhaps with some more hurricanes, tornadoes and storms. A lot of folks felt these events couldn’t be predicted, some felt that what we’ve been experiencing lately was normal and wrote off the notion that this was much of an issue. Personally I believe this area is as big as war, financial crisis and other man-made disasters – it’s all one big boiling soup of potential upheaval!

3. Will humanity face an epidemic of some kind during the year that will cause massive loss of life?
Yes 9
No 6
Aids Already 2

Comment: I don’t know about where you live/work but there have been 2 large flu outbreaks at my workplace in the past 3 months and they were pretty nasty, of course this happens annually but it sure as heck seems like the incidence of outbreak has increased over the years. Globally there definitely appears to be an increase in animal epidemics and airborne viruses, etc. As a group we appear to be agreeing with that interpretation.

4. Will the US be struck by another terrorist attack on a scale greater than 9/11?
Yes 8
No 6

Comment: Some folks abstained from this as it was too unthinkable for them to think about. I must say that growing up in Britain during the IRA terrorist attacks we didn’t think about it because we knew it would happen again. To be honest we didn’t even worry about it much either, different times I guess. The attacks in Britain weren’t on the scale of 9/11 and weren’t on the same frequency of what the Israeli’s experience, but they were a constant threat and people just got on with their lives. It is now mid-February, so almost one sixth of the year has already passed us by. Earlier this week there were reports that there is a rising terror threat in the US, I’m expecting a Code Orange any day now, it’s been a while and the powers that be need to ensure the system is still working and still generating unnecessary fear in the masses.

5. Where will interest rates end the year, will the Fed raise them continually throughout '05?
<3% 3
>4% 13

Comment: This was easy; nearly all of us felt that rates would rise over the 4% mark during the year. This week Sir Greenspan has made noises that another increase is on the way – so we’re easily on target to exceed the 4% level by late summer. I guess the big question is whether something unexpected happens, like the Koreans pulling out of the US $$, or the revaluation of the Chinese Yuan, etc. that could really impact the current trend. All things being equal rates should rise for some considerable time.

6. If democratic elections go ahead in Iraq this year will a Shi-ite regime come to power?
Yes 9
No 5
US Puppet 5

Comment: Looks like a Shi-ite coalition with the Kurds and “moderate” Sunni’s is on its way in to power in Iraq. I find it massively ironic that we supported puppet Saddam against the radical Iranian Shi-ite’s for a decade because he was a secular Sunni. Now we’re supporting the supposedly secular Shi-ite’s against the now “fundamentalist” Sunni’s who are now known as insurgents! I know, it’s confusing – and we all know this president is easily confused. Just how a “democracy” is supposed to work in any current Middle Eastern country is beyond me, so the future of this issue will be interesting to watch. Kuwait, Sharjah, Dubai, Abu Dhabi (UAE) appear to be stable and somewhat democratically run principalities – freedom abounds for everyone, almost, in those small, massively oil rich countries. But therein lies the rub. Almost any nation on earth can be “moved” in to the western sphere of influence, and the western materialist lifestyle, if there is endless wealth and a tiny population! Unfortunately the large Muslim states have large populations and local wealth is for the ruling class only, so religion is the opium of the masses, which pits the more radical, Muslim poor against us western secularists. So, it’s really about economics at the end of the day, but that is not what the corporate-owned media want American’s to understand. We need these people as our enemies, so we can justify our actions – for economic reasons!

7. Does Hugo Chavez of Venezuela survive 2005?
Yes 14
No 5

Comment: I hope the majority of readers are right on this, the world needs a few outspoken voices of dissent. I don’t pretend to know Chavez’ politics – I hear he is a Commie! Frankly his politics don’t matter to me, he is the leader of a small inconsequential South American nation that is not a threat to anyone. Of course, they have oil – so that makes Venezuela “strategic” – which means we have the right to mess with him and the people there. Bottom line for me is that the Venezuelan people deserve to choose their own direction, even if it’s not ours! Now if they become a threat to our physical security then that may change my perspective, after all we have the right to defend ourselves, but last time I checked the Venezuelan navy, army and airforce could probably be defeated by one US Navy aircraft carrier! Lets leave Venezuela to the Venezuelan’s and see how they do!

8. Will Osama be caught some time during the year?
Yes 2
No 15

Comment: Intriguing result here. Seems we’re all a bunch of cynics who believe that OSB is really a construct of the Western money power, or somehow a puppet of the current US regime!? If that really is the case then do we collectively believe that 9/11 was also a fabrication? These are taboo questions in almost any other environment. I know what I believe; I’ve believed it since I saw the first plane hit the first tower. There is a criminal element within the US government that is complicit in these events – at the very least. When analyzing the history of the world it is best to do so from the perspective of “who benefits.” Major events in history are rarely purely accidental, life just isn’t like that. Cause and effect is at work in the world. To me 9/11 looks like another Gulf of Tonkin or Pearl Harbor incident – there is a body of evidence now that suggests that these events were instigated by the West to enable the prevailing geopolitical agenda to be fulfilled. This is very Hegelian in construct: Thesis, Synthesis, Antithesis – if you are unfamiliar with this Machiavellian approach to population manipulation then go Google “Hegelian Dialectic” and read up on just how events are engineered to produce specific outcomes in the minds eye of society in order to manage the consent of the masses (while you are at it look up “managed consent” and learn how the media is being used to shape how society reacts to anything of importance).

9. Does the US go to war against another adversary during '05, Iran, N. Korea, etc?
Yes 6
No 12

Comment: I think the majority here have it wrong (but I hope not), in the past few weeks it has looked more and more likely that the US is gearing up for phase II of the neo-conservative, global domination plan – also known as the New World Order. Most likely the next action with be some kind of an attack, or “accident,” on Iranian nuclear installations. Whether the Mullah’s (or Moolar’s as the president calls them) should ever be allowed to have nukes is probably a real good question for public debate. I would conjecture that the western public would vote overwhelmingly to block Iran from gaining nuclear weapons – the idea of some half-crazed religious zealot having his finger on the button is abhorrent to most of us, but of course Iran isn’t the only nation with religious zealots in control now is it!?

10. Does the Chinese bubble burst in '05?
Yes 8
No 10

Comment: Well the vote was pretty evenly split on this. Interestingly no one questioned whether the Chinese economy was a bubble, just commented on whether it would burst in ’05 or later. If it bursts soon then I hope you’ve all stocked up on those cheap Chinese imports, because the materialist, mass-consumption party will definitely be over if their economy catches pneumonia. There is a symbiotic relationship between China and the US, trash and trinkets for fiat dollars – it works and it’s energizing the world’s largest population and keeping us consuming westerns doped up on cheap stuff. But just how long the US can afford to consume Chinese exports, and just how many US dollars the Chinese are able to store for a rainy day, and whether the Chinese economy can be self-sustaining without the US market, are the big questions. If the music stops in ’05, who gets the last chair?

In conclusion, I hope readers have had a great time with this little experiment in predicting the outcome of 2005. I have a feeling the vast majority of answers are correct and that collectively you are seeing the future quite clearly. Stay tuned and we’ll track just how close these predictions are over the next 12 months.

Next up, I’ll be publishing how I see the rest of 2005.

Cheers Rich

| Comments (12)

February 15, 2005
Posted by richardlancaster at 10:50 PM

Summarizing 2004 Predictions - Rich Lancaster

Frederick Nietzsche once wrote that people "on the approach of severe pain, hear the very opposite call of command, and never appear more proud, more martial, or more happy than when the storm is brewing."

How prescient Mr. Nietzsche was! We contrarians marvel at this psychological quirk in humanity. Just how does Joe Consumer remain so defiant in the face of so much evidence of the coming financial storm? The collective subconscious is astonishing in its stoicism, fortitude, delusion and denial. Perhaps humans share certain inherent traits with the Lemming?

In 2004 I titled my predictions, The Lull Before the Storm, and I still believe that title is appropriate today. The storm is still forming just over the horizon, but society is blissful in its interpretation of events current and future.

However, without the necessary flushing of our debt-burdened system (like some kind of financial colonic) we are just stalling the required adjustment and increasing its ultimate impact by layering more debt on top of existing debt. I believe that the debt-based money system foisted on us by the international bankers through the Federal Reserve Act of 1913 is ultimately responsible for the predicament we’re in – and until that entire philosophical approach to monetary control, supply, fraud and manipulation is deconstructed we are really never going to be safe from financial thunder and monetary lightning strikes. But lets save the rest of that debate for another day.

Here is my analysis of how my 2004 Predictions performed:

1. Bush re-elected. For me this was a no-brainer. Once I discovered that Kerry was another (Skull &) Bonesman it was all over. The media did an amazing hatchet job on Howard Dean and the people just took it in the shorts and said/did nothing - - again. Of course the election was rigged with rampant fraud, especially in Ohio, but lets sweep all of that under the carpet. The American governmental system has devolved in to the status of a banana republic with a junta in control. Get used to it, and be grateful and thankful for the freedoms we still have – who knows how long we’ll have them?!

2. China revalues Yuan. Wrong! They didn’t, they should have but they didn’t. It seems inevitable to me that this happens, so I’ll mention this again in my 2005 Predictions.

3. Europe struggles. They did, but they also made large gains in terms of the Euro being seriously considered as a replacement for the Dollar. The EU is a net creditor with a new fiat currency, whereas the US is a net debtor with a tired old fiat currency. Seems to me that Petro-euro’s could really help improve the EU economy over time with net inflows in to EU countries/companies that are less debt burdened than their US counterparts, and more fairly valued.

4. US Dollar stabilizes around 80 through the election. Right on the money, so to speak. The dollar has traded just above 80 since the election; it was hovering around at 81 as the New Year broke. The dollar will continue to decline in my humble opinion – but that’s not rocket-science anymore as the mainstream media arrived at this conclusion in the third quarter of ‘04.

5. Consumer prices deflate somewhat. Well we have stagflation or disinflation or really some inflation and deflation concurrently. Basically goods that deflate do not show up in inflation figures, but for sure we’ve seen prices going down on all kinds of items from cars and appliances to electronics and goods coming from China. Oil, natural gas, stocks and housing have all been inflating.

6. Gold rises to $450 by year end. This was easy. Gold moves in the inverse to the USD, so if you pick one you just do the math for the other. The coupling of gold to the USD is a bit of a mystery to me, although of course I understand the store of value issue with gold all too well. I’m just not sure why the coupling and the inversion of the two remains so absolutely rock solid. I wonder if they may decouple at some point in 2005? Anyway, my gold trades didn’t exactly rock this year as the junior mining stocks performed badly, so even being right in the big picture hasn’t helped me a great deal financially.

7. Oil continues to move upwards ending the year at close to $40 per barrel. Well I didn’t imagine oil going to $55, or the debate about Peak Oil being pushed so far to the forefront. I think it is amazing to watch CEO’s of some of the largest companies in the world start to suggest that all is not well in Denmark (or should I say Saudi, Venezuela, Nigeria, Somalia, Iraq, Iran, most of the “Stans” etc?). Even the new TV ads from British Petroleum suggest that the company is now planning its future beyond oil extraction. Oil makes the world go round (or it that electro-magnetism? I don’t know!), along with money and gold!

8. Interest rates rise towards the end of the year, but not massively. This was easy. The Fed has accurately and consistently signaled their intentions with rates now for some time, and they really haven’t deviated at all from their course, yet. What is interesting in this space is watching the central banks of other western democracies (banana republics) – they ratcheted up rates earlier than the Fed and their economies, especially housing, are starting to show signs of stalling – I’m sure this trend will continue and catch up with the US shortly as rates continue to rise.

9. Real estate drops in value and slows by end of 2Q. Real estate is all about location, so I guess I’m part right, depending on where you are talking about. As mentioned above, in the UK housing has started to stall and quite noticeably, they are the proverbial canary in the coal mine when it comes to asset deflation as a result of increasing rates. I was wrong about US real estate, my timing was wrong

10. Whiffs of deflation by Q3. I’ve covered this above more or less, it’s a mixed bag, I’ve vacillated between believing in a hyperinflationary depression to a deflationary depression that then devolves in to a hyperinflationary depression - - I guess either way I believe in hyperinflation being the outcome, but deflation does seem pretty intuitive given the monetary roulette the Fed has played for so long. Sooner or later consumers will not longer be able to consume more debt, the merry-go-round will begin to slow and deflation will start to spiral out of control. Then I see the Fed opening the flood gates in a last ditch effort to stall complete collapse – which will precede the rolling out of a new global currency that will be introduced by the BIS, IMF, World Bank and the Fed - - with the very vocal and public support of JP Morgan Chase and Citigroup and the central banks of the world’s leading banana republics (like Britain, the EU, Australia, Canada, Russia, Japan, China & assorted other aligned countries).

11. The American population remains blissfully ignorant amidst the biggest meltdown of a global financial system in the history of this Universe. Bingo, the people are on the whole absolutely clueless – or worse, willingly & enthusiastically deluded. I must say though I do detect that people in general know that something is absolutely fundamentally wrong, but they are too distracted to follow through on their suspicions, and lets face it….life is just too good to mess around learning the truth or reality!

12. Upon the conclusion of the election we start to accelerate towards the inevitable collapse of our monetary system and all of the necessary, but very painful, adjustments in our lives that comes with it. And that is what my 2005 predictions will all be about.

I meant to get ’05 predictions out by Chinese New Year, but just couldn’t pull it off. So stay tuned for the next installment. If you have comments on any of this content go ahead and add it below. I will be summarizing the 2005 Prediction Blogs shortly in another article.

Cheers Rich

| Comments (5)

January 10, 2005
Posted by richardlancaster at 08:10 PM

It appears that a lot of D2 readers are getting some useful feedback from the most recent blog on Predictions 2005. So it's probably a good idea to take this to the next level and ask for more predictions and inputs on issues that got some attention in the first blog.

If you have a moment answer for the group the following questions. Again, I'll tally the results at some point and provide an aggregate view of what you all see coming at us in '05. We're going to get away from pure economic predictions here and mix in some other topical areas.

Here goes:

1. How would you invest $100,000 in '05 to achieve the best gains?

2. Will planet earth be rocked by more record breaking "earth changes" (tsunami's, hurricane's, earthquakes, solar flares) in '05?

3. Will humanity face an epidemic of some kind during the year that will cause massive loss of life?

4. Will the US be struck by another terrorist attack on a scale greater than 9/11?

5. Where will interest rates end the year, will the Fed raise them continually throughout '05?

6. If democratic elections go ahead in Iraq this year will a Shi ite regime come to power?

7. Does Hugo Chavez of Venezuela survive 2005?

8. Will Osama be caught some time during the year?

9. Does the US go to war against another adversary during '05, Iran, N. Korea, etc?

10. Does the Chinese bubble burst in '05?

This is going to be interesting! Let's keep it friendly, but not pack any punches.

Cheers Rich

| Comments (48)

December 27, 2004
Posted by richardlancaster at 06:38 PM

OK folks, it's that time of year again when the Predictions for the following year come together. We should reflect on the past year, look in to the crystal ball for the following year and then share what we feel is going to happen next. If you've got a minute how about sharing your perspective on the following items [ending 2005], I'm sure all readers would benefit from seeing diverse perspectives:

1. Where will the dollar index end the year?

2. What will be the Price of Gold?

3. What will be the Price of Oil?

4. Where will the DOW end the year?

5. Will the Yuan decouple from the Dollar in '05, YES or NO?

6. Do you see a major Economic Collapse in '05, YES or NO?

Then add any general statement about 2005 which you feel is key to the coming year. There is no doubt in my mind that 2005 will be an important year for all of us.

Cheers Rich

| Comments (90)

GATA, streetTRACKS GLD Fund, The Bullion Desk & the "D2 Paradox"
December 09, 2004
Posted by richardlancaster at 07:12 PM

D2 is a supporter of GATA, for obvious reasons. We believe gold needs to be freed from the manipulations of central banks, private mega banks, private special interests, bank-owned/operated major gold extractors and government interventions - - and that freeing gold will bring a level of decency & honesty back to the business world not seen since the mighty Socialist Roosevelt confiscated the gold of US citizens.

There is a seeming correlation between the gold price and eroding business ethics, lets call this the D2 Paradox - - whereby gold moves in the inverse to business ethics!

Gold Up means Ethics are Down: GU = ED

In the eternal struggle for truth, in all things gold, GATA has stuck to their guns and has engaged some of the biggest economic forces in the world today. Now they are going after complete transparency and full disclosure with the new streetTracks gold ETF [GLD]. Below you can see the latest skirmish in the battle between the forces of globalization, manipulation and central control of pretty much everything you hold dear vs. the voice of sanity, decency & freedom through the organization known as GATA.

GATA needs help - do what you can.


Dear Friend of GATA and Gold: today more or less accused
GATA of causing today's smashing of the gold
price. The accusation came in a brief market
note by the site's proprietor, Ross Norman,
suggesting that the World Gold Council's new
exchange-traded bullion fund had been forced
on Tuesday to sell 15 percent of its gold
holdings on account of "a foul attempt by a
rival to raise ill-founded concerns about the
product" -- that is, GATA's call this week for
the council to explain the duplicate serial
numbers on some of its gold bars and to answer
several questions about the fund's operation.

Reuters and Dow Jones Newswires distributed
reports about the huge dishoarding by the EFT.
Here's the Dow Jones story.

* * *

Fall in StreetTRACKS' Stock
Encouraged Gold Slide: Trade

By David Elliott
Dow Jones Newswires
Wednesday, December 8, 2004

LONDON -- The 3.5 percent fall in the price of
spot gold Wednesday may have been encouraged by
the sale of 15 percent of the gold held by the
StreetTRACKS exchange-traded fund, or ETF,
analysts in London said. The total net asset
value of gold in the trust stood at 88.02
metric tons Wednesday against 103.56 tons

Gold fell to $436.90 a troy ounce at the London
fix Wednesday afternoon against $451.80/oz
Tuesday afternoon.

While most participants agree the market was
primed for a slide -- in light of an overbought
technical picture and a bounce for the dollar --
they also believe the fall in tonnage in the
StreetTRACKS trust was responsible for some
of the selling.

The fall in the StreetTRACKS tonnage highlights
the expectation by holders of the shares that the
share price and price of gold is set to fall,
said an analyst.

"It hasn't helped sentiment," said Kamal Naqvi,
precious metals analyst at Barclays Capital.

StreetTRACKS gold shares were launched Nov.
18 on the New York Stock Exchange to track
the price of gold. Each share represents
one-tenth an ounce of gold.

In the first week of trade to Nov. 26 the trust
built up a total net asset value of just over
100 tons, but since then this remained virtually
unchanged until the decline Tuesday.

Over the same period the share price for the fund
has also remained steady, closing Tuesday at
$45.11 compared with the close on the first day
of trade at $44.38. At 1626 GMT Wednesday the
shares were trading at $43.62.

"Gold was primed for a correction but it seems to
me an interesting correlation that the
StreetTRACKS tonnage fell at the same time,"
said Philip Klapwijk, managing director of GFMS

The StreetTRACKS Web site says the tonnage in the
trust for Wednesday will be updated between 1615
and 1630 EST.

* * *

The Bullion Desk's blaming GATA for the
gold crash was followed there by the
unusual posting of an open letter to your
secretary/treasurer by a Bullion Desk
reader, David Walker. The open letter
carried a preface declaring that the
Bullion Desk fully endorsed its views.

Walker's letter at the Bullion Desk can
be found here:

Walker echoed the Bullion Desk's own
complaint that GATA had wrecked the gold
market by criticizing the gold council's
ETF, and he attempted to answer the
questions GATA had directed to the gold

As authority of one of his answers,
Walker wrote that he had spoken with a
representative of the ETF, but when I
briefly engaged him by e-mail and asked
him if he was speaking for the fund or
the World Gold Council, he did not reply.
So it may be suspected that Walker's
letter was more or less ghosted for him
or that he is serving as an intermediary
for the fund or the council so that the
council might not have to engage directly
with people who press inconvenient

Later Walker's open letter was posted at here:

While GATA's questions about the ETF's
operations are still compelling -- and will
be reviewed again below -- the most remarkable
thing here is the old pattern of gold-news
Internet sites to avoid at any cost doing
real reporting on the gold market. For all
the space devoted to bashing GATA today
at the Bullion Desk and 321Gold, neither
of those sites, nor any other gold sites
to GATA's knowledge, has ever directed a
single question to the biggest participants
in the gold market, the central banks. Nor
do these sites seem inclined to question the
gold council directly even though its ETF
has been heavily publicized for months.

The Bullion Desk said today that it fully
endorsed Walker's letter about the ETF, but
how could the Bullion Desk do so without
doing or referring to any original reporting
on the fund? Would a Q&A with the gold council
or the fund's managers be so out of line for
the Bullion Desk? To most people it might
look like basic journalism.

Indeed, the greatest deficiency of the gold
market and the financial markets generally
may be the lack of basic journalism --
journalism that goes beyond the recycling
of press releases and government statements.

But to return to GATA's questions, and to
assume that Walker is acting as intermediary
for the ETF and the gold council:

1) Why does the bullion fund list ownership
of duplicate gold bars?

Tim Wood's admirable reporting last night
at, notice of which
was dispatched to you, seems to have
resolved this question, if only
unofficially, since the gold council still
does not speak directly. Different bars
refined by Johnson Matthey apparently carry
the same serial numbers and the ETF listed
the duplicate numbers without explanation,
thus erroneously suggesting double counting.
That is, the fund's practice was deficient,
was fairly questioned, and required

2) Why have all the custodians and potential
custodians of the fund's gold not been

Walker contends that they all HAVE been
identified and quotes the fund's prospectus:
"The subcustodians selected and used by the
Custodian as of the date of this prospectus
are: the Bank of England, The Bank of Nova
Scotia (ScotiaMocatta), Deutsche Bank AG,
JPMorgan Chase Bank, and UBS AG. The
Allocated Bullion Account Agreement provides
that the Custodian will notify the Trustee
if it selects any additional subcustodians
or stops using any subcustodian it has
previously selected."

But note that to notify the trustee is not
necessarily to notify the investing public
as well. Is it possible that ETF gold could
be stored with other custodians without
immediate notice to investors?

3) Why is the fund refusing to let its gold
holdings be fully and publicly audited?

Walker denies that the fund is refusing full
and public audits. But then he writes that
there indeed might not be audits if gold is
placed with certain subcustodians:

"If 100 percent of the gold bars are held
directly by the Custodian, which is the
current situation, then there is provision
provided for a 100 percent audit by the
trust as found in the SEC filings:

"'The Trustee may, upon reasonable notice,
visit the Custodian's premises up to twice
a year and examine the Trust's gold held
there and the Custodian's records concerning
the Trust Allocated Account and the Trust
Unallocated Account.'"

"However in the event a subcustodian is used
it would be up to the Custodian to audit
subcustodians per any audit provisions between
the Custodian and the subcustodian. Any gold
held would be in allocated form, thus property
rights to the gold have been established. Since
it is intended that HSBC has 100 percent control,
all gold would be subject to 100 percent audit
directly by the Trust's auditors."

4) Is any of the fund's gold being leased, made
available for leasing, or encumbered in any way?

The best Walker can do here is assume that since
no risks of leasing are cited in the fund's
prospectus, there won't be any leasing. That's
a big assumption. How much more persuasive it
would be to get a simple, straightforward yes
or no directly from the fund rather than a guess
from an intermediary. Why should such a simple
question be so difficult?

5) Exactly what is the fund's relationship with
the Bank of England, a major lessor of gold?

Walker's answer is contradictory and
disingenuous and only validates GATA's concern:

"The Fund has no relationship with the Bank of
England. The Bank of England was listed as a
POTENTIAL subcustodian that the Custodian
MIGHT use in the normal course of business.
Certainly HSBC, being the largest LBMA
member, would more than likely have dealings
with the BoE from time to time. During my
conversation with the Fund representative, Mr.
David Smith, he mentioned that there has been
talk of discontinuing the BoE as a POTENTIAL

That is, there is no relationship but the fund
prepared for a relationship and now that people
are concerned about it, the fund might not go
through with it.

* * *

Let it be said again: The mystery and
deception carefully woven around the world's
gold reserves are the foundation of gold
leasing, the suppression of the gold price,
and the manipulation of the gold market.

GATA favors anything that democratizes
and clarifies gold ownership -- which could
include an exchange-traded fund -- provided
that there is every assurance of the security
and custodianship of the gold involved and
the fund doesn't become just another
derivative for market manipulation.

So far the World Gold Council and its
associates in the ETF have not provided that
assurance, and intermediaries making arguments
for them will not be good enough. Indeed, the
use of intermediaries by the council and the
ETF can only tend to confirm suspicions that
the true answers are not good ones.

If the World Gold Council wants to speak for
gold, it will have to speak. It should speak
not only about its ETF but, more importantly,
about the open and surreptitious intervention
of central banks in the gold market, a subject
about which the council long has been
deliberately and disgracefully silent.

In the council's silence, GATA will do its
best to speak for gold.

Since the last two weeks have been full of
anguished public statements by central
bankers about currency intervention and
commentary by gold market analysts about
the likelihood of a sharp decline in the
gold price, it is absurd for the Bullion
Desk or anyone to attribute to GATA the
power to crash the gold market or any
market. Surely if we had such power we
would not have just crashed the gold
market down on our own toes. (More than
our toes, actually.)

But let's see if the Bullion Desk is right.
Here's fair notice: Once we get positioned,
we're going to see if we can do it again on
Friday, this time to the bond market, and,
if that works, on Monday to the South
African rand!

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


Would you buy stock in GLD?

Cheers Rich

| Comments (7)

The latest from Stephen Roach at Morgan Stanley
December 01, 2004
Posted by richardlancaster at 12:16 AM

Roach is possibly the best contrarian economist within the established order, as Chief Economist for Morgan Stanley. Over the weekend he made his, already "now famous," remarks about the US having a 1 in 10 chance of surviving economic catastrophe in the years ahead.

This is his first column since his weekend lecture. Here he is discussing US Consumers and what a dangerous bunch they are. I think a good debate about exactly how the average Joe Consumer will react to a rapid credit tightening, rapid inflation and basic "pay-back" scenario's might play out would be useful for all D2 readers.

Here is Stephen Roach (from New York)

Global rebalancing has quickly turned into the global blame game. “It’s the other guy,” exclaim Asians, Europeans, and Americans, when the issue of responsibility comes up. America’s Bush Administration views the rest of the world as suffering from a growth deficiency, largely brought about by under-consumption and excess saving. Conversely, Asians and Europeans view the United States as suffering from a saving deficiency brought about by over-consumption and government budget deficits. Who’s got it right?

The truth is, they probably all do. There can be no mistaking the extraordinary disparities in the global consumption dynamic in recent years. Over the 1996 to 2004 period, annual growth in US personal consumption expenditures averaged 3.9% -- nearly double the 2.2% pace recorded elsewhere in the so-called advanced world. Americans, for their part, have spent well beyond their means -- as those means are delineated by the US economy’s internal income generating capacity. Over the 1996 to 2004 period, annual growth in real disposable personal income averaged 3.4% -- fully 0.5 percentage point slower than average growth in consumer demand. As a result, the personal saving rate plunged from an already-depressed 4.6% level in 1995 to just 0.2% in September 2004. At the same time, the consumption share of US GDP surged to a record 71% by mid-2002 -- an extraordinary breakout from the 67% share that prevailed, on average, over the 25 years from 1975 to 2000. Never before has an advanced economy taken consumerism to such excess.

There’s no deep secret as to how the American consumer pulled it off. It’s all about the emerging power of the asset economy -- namely, how US consumers have turned increasingly from income generation to wealth creation in order to sustain current consumption. At work since 1995 has been the strongest and most sustained surge of above-trend growth in real household sector net worth of the modern-day, post-World War II era. American consumers were quick to make use of this windfall as an increasingly important supplemental source of purchasing power.

Moreover, there has been an important shift in the asset economy that took the US consumption dynamic to excess in recent years. The first wave came from the stock market, as household equity holdings surged from about 13% of total assets in 1991 to 35% at the peak in 2000. During the final stages of the equity bubble, individual stock portfolios supplanted real estate as the US household sector’s most important asset. By early 2000, residential property had fallen to less than 25% of total household sector assets, more than ten percentage points below the equity portion. It was only after the equity bubble popped that the asset economy took its most extraordinary twist. The increasingly wealth-dependent American consumer never skipped a beat. In large part, that was because the equity bubble immediately morphed into an even more powerful strain of asset appreciation -- a sustained burst of US house price appreciation that has continued to this very day. As a result, the real-estate share of total household assets rose back to 30% -- recapturing its role as the consumer’s leading asset class. According to Alan Greenspan, American households currently own some $14 trillion in real estate -- almost double their total equity holdings (see his February 23, 2004 speech, “Understanding Household Debt Obligations,” at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C.).

This multi-bubble syndrome was largely an outgrowth of the Federal Reserve’s aggressive post-equity-bubble damage containment tactics -- some 550 bp of monetary easing from early 2001 through mid-2003. Housing markets benefited handsomely from the support of 45-year lows in interest rates. And consumers, who had first discovered the joys of asset-driven wealth effects during the stock market bubble of the late 1990s, quickly put their newfound skills to work in reaping the gains of the housing bubble. Not only did they benefit from the psychology of feeling wealthier, but US homeowners were aggressive in taking advantage of breakthroughs in the technology of home mortgage refinancing. It wasn’t just the reduction in interest expenses, but the so-called cash-outs from rapidly appreciating housing assets enabled consumers to uncover a new and important source of incremental purchasing power. Freddie Mac puts the peak rate of equity extraction and second mortgages from residential property at $224 billion in 2003 -- almost 3% of the total value of home equity investments. Over the 2001-04, annual cash-outs appeared to average around 2% of aggregate home equity -- suggesting that households may have liquidated as much as 8% of their equity in real estate in order to fund current consumption. For an aging US society that needs to build saving in order to fund the not-so-distant retirement of some 77 million baby-boomers, even this partial liquidation of asset-based saving is disturbing, to say the least.

The asset economy does not just have its origins in America. It is very much a by-product of support from global investors and policy makers. One of the outgrowths of an increasingly asset-dependent economy is a shortfall in income-based national saving. America has taken this shortfall to an unprecedented extreme. The net national saving rate -- the combined saving of consumers, businesses, and the government sector after deducting for the depreciation of worn-out capacity -- fell to a record low in the 1-2% range in 2003-04. Lacking in domestic saving, American has had to import foreign saving from abroad -- and run massive current account deficits to attract that capital.

This is where the global enablers enter the equation. First, it was private investors seeking to share in the returns of the world’s greatest productivity story. Then, when doubts surfaced on that front, foreign central banks rushed in to fill the void. Over the 12 months ending September 2004, the “official sector” accounted for 28% of total purchases of long-term US securities -- nearly double the 15% share over the prior 12 months and about four times the portion during the 2000-02 period. This was only the latest chapter in a foreign-inspired dollar-support campaign. Dollar-denominated official foreign exchange reserves surged from $1.1 trillion to $2.1 trillion over the 1998 to 2003 period (as estimated by the BIS at constant exchange rates). That left dollar-based assets with approximately a 70% weight in official reserve portfolios -- more than double America’s 30% share in the world economy and, quite possibly, the biggest overweight in world financial markets today.

Nor is it difficult to discern the motive behind this foreign dollar-buying binge. It’s all about the lack of internal demand in Asia and Europe and the related need to draw support from export-oriented growth strategies. And, of course, central to such growth tactics are cheap currencies that underwrite export competitiveness. Asia has led the way in that regard -- with hard currency pegs in China, Hong Kong, and Malaysia and soft currency pegs in Japan, Korea, India, Taiwan, Thailand, and Indonesia. Asia’s official foreign exchange reserves surged to $2.2 trillion by mid-2004 -- more than double the holdings of early 2000. With the bulk of that incremental surge going into dollars, Americans enjoy a subsidy to domestic interest rates that is very much made in Asia. It’s hard to quantify the exact magnitude of that subsidy but my guess is anywhere from 100 to 150 bp at the intermediate and long portions of the yield curve. That means, in the absence of this foreign support campaign, yields on 10-year Treasuries would have been in the 5 to 5.5% zone -- implying a rate structure that would have been far more problematic in providing valuation support to US asset markets and concomitant wealth-driven support to America’s asset-dependent consumer. With the dollar appreciating over most of the past decade, this was a win-win strategy for Asia -- providing the region with competitive currencies, as well as portfolio gains on dollar holdings. Now that the dollar is going the other way, that calculus suddenly looks very problematic.

As the world now grapples with the imperatives of rebalancing, it is important that all parties understand the roles they have played -- both in creating the problem and in forging the solution. Asset-dependent Americans truly have an excess consumption problem. It is still astonishing to me that the bursting of the equity bubble didn’t spawn a culture of prudence that weaned US consumers from the perils of an all too fickle wealth effect. With US house price inflation now at a 25-year high of 8.8% and with 15 states now experiencing double-digit house price inflation, this voracious appetite for risk is all the more disturbing. Similarly, Asian and European financiers -- be they private investors or central banks -- need to accept responsibility for the important role they have played in keeping the music going for saving-short, over-extended US consumers. They have taken the easy way out -- putting off the heavy lifting of structural reforms needed to unlock domestic demand and choosing, instead, to recycle foreign exchange reserves into dollars and rely on currency manipulation as a means to sell everything they can to America. In my view, America, Asia, and Europe are all equally guilty of opting for an extraordinarily reckless way to run the world.

Financial markets have an uncanny knack in restoring a sense of order to a dysfunctional world. The dollar is now center stage in this global wake-up call -- as well it should be, in my view. But dollar depreciation is not the endgame of global rebalancing. It is the means toward the end -- a potential trigger for a long overdue realignment in the mix of global saving and consumption. By failing to face up to the imperatives of rebalancing, the world has collectively created the ultimate moral hazard -- a US consumer that is now “too big to fail.” This is a serious warning sign. The key to a successful global rebalancing, in my view, hinges critically on facing up to the risks of the world’s most serious excesses. The over-extended American consumer is at the top of that list. And a weaker dollar could well be key in forcing the interest rate adjustments that might well temper the asset-driven excesses of US consumption. This is a shared responsibility that the world must now collectively redress.

Long ago, I learned that most of the time it doesn’t pay to bet against the American consumer. There are rare occasions, however, when that rule doesn’t apply. That was the case in the early 1970s in the aftermath of the first oil shock. Back then, as a young staffer at the Federal Reserve Board, I was chastised by Fed Chairman Arthur Burns for being too negative on the US consumer. He argued that I didn’t appreciate the unflinching cyclical resilience of the US consumer -- a resilience that, ironically, was about to give way to America’s first consumer-led recession. A lot has changed in the ensuing 30 years. But for very different reasons, I now believe that another exception is in the offing. The American consumer is an accident waiting to happen. The sooner the world comes to grips with this problem, the better the chances of a successful rebalancing.


One of the first things that jumped in to my head after reading this was the need to characterize the average Joe Consumer - what do they look like in terms of their consumption, what are they likely to do when the dance stops and what are the ramifications for all of us?

Of key importance is the psychology of it all, for instance; is Joe Consumer, because of his undisciplined ways, more likely to panic early or resilient to impending disaster and likely to sit it out? The mass psyche is going to be the curve ball in future events, no amount of planning or strategizing can accurately predict the fall-out from economic meltdown - so based on what we know do we collectively spin out of control or do we enter an orderly disarray whereby common decency revails?

Cheers Rich

| Comments (26)

Putin & Petro-Dollar Revolt
November 26, 2004
Posted by richardlancaster at 08:52 PM

The following article is available at the authors site,, and goldeagle. I put it up here because I feel it is very worth debating. We've touched on these issues for the past few years. We've written and posted articles about the demise of the Petro-Dollar, and the prospect of a Euro-Dollar, we've also stated over time that Iraq was moving to payment in Euro's before the second war. So this information is not surprising, but it is very well put together and definitely germane to current blogs on D2.

So here it is:

Putin & Petro-Dollar Revolt
by Jim Willie CB

Subtle changes are in the wind on the energy front. As much as some people want to regard Russia as a strong American ally, their behavior on several fronts testifies to the contrary. Some truly staggering developments are underway, not adequately reported. Behind the scenes, covered little by the intrepid US press & media, a meeting was convened two weeks ago in the Urals of Russia. European leaders, and OPEC representatives, and Putin quietly are plotting to establish stronger ties between Europe and Russia in their basis for financial transactions. Putin is adroitly offering to install euro pricing of crude oil, which would surely favor Germany and other large EU nations. He strives to obtain geopolitical concessions from EU leaders, namely a more powerful voice for Russia in world politics.

OPEC appears to be willing and eager to join in new alliances to undermine the US domination from owning the world reserve currency. Enormous consequences follow, which lie completely in US blind spots. A strange contrasting parallel might exist between the United States and Russia, regarding relationships with large energy companies. The USA has evolved into a cooperative collusion with big companies like Halliburton. Russia has broken down into a confrontational situation steeped in confiscation with big companies like Yukos. The USA seems to work constructively with large firms, with governmental support. This is seen in sponsored foreign grain sales, in development of petro-chemical plants, in defense contracts for the military complex, in permissiveness toward software monopolies, in protection of the steel industry, and elsewhere. Russia seems to work in adversarial roles to steal back and forth with their big firms.

Russian legal treachery embodies a big insult to free enterprise and rights to property. One might say Yukos Oil began as a company with stolen property, or cozy deals to gather in several purchases from state-owned regions, or tax scoffs at Russian authorities enabled growth. Fine, whatever. My attention is trained on current methods, which can be aptly labeled as legal warfare, and trends which betray private property. The Yukos tax & fine bill submitted was revealed to be $18.5 billion, which exceeds the company's annual revenue, and goes far beyond the level where embarrassment is profoundly clear. The Russian government has established a modus operandi, i.e. method of operation. A company is targeted for seizure. It is charged with tax evasion. Their assets are then frozen, pending investigations and legal outcomes. Cash flow is interrupted, only to put debt service repayments in jeopardy. The courts declare debt default, a fresh new problem for the targeted company, whose stock declines in value, and possibly sharply. Under financial duress, a deal is cut, as taxes are paid as a fraction of the original demand in return for a sale of large tracts of the company's properties to the Russian govt. Charges are reduced or negotiated along with the distress sale of their property. Such a pattern has shown itself clearly with the Yukos case.

Moreover on the front tied to cooperative agreements, Russia's treachery is wholly evident in its dealings with western firms. Pan Am Silver was severely victimized, via dissolution of a partner firm and reconstitution of a new corporate entity Polimetall with those mining rights, leaving the US firm out in the cold Siberian winter. PanAm Silver appears not to be in line to share profits where silver production is forthcoming. The original company was dissolved, and along with it, all contracts with PanAm. Czarist gamesmanship with western energy companies is now in focus. British Petroleum is at risk with older contracts, while others like Conoco Philips are at risk with newer contracts. British Petroleum could be in the midst of a bold double-cross, for the craziest of sounding reasons. They exceeded licensed production amounts!

To the casual non-discerning observer, Putin appears to offer much needed support to President Bush, as seen in bilateral meetings in Texas that included a horseback ride photo opp. A closer examination reveals more ominous overtones in recent geopolitical events and high-level discussions. The summertime tragedy at the children schoolhouse in Chechnya triggered an international outcry of criticism. The US State Dept issued public statements to the effect that the Russian govt might have acted with too much force, a vivid reminder of their action taken in the Moscow theatre taken hostage a year ago. Each incident, the theater and the school, resulted in over 200 fatal victims. Putin was rankled by the criticism. Last month, after a visit by a leading US legal team to Russia, and upon urgent pleas made to the US State Dept once again, our prestigious ministry issued more criticism of Putin for their harsh legal approach to Yukos and denial of property rights, not to mention due process travesties. Several US firms have longstanding contracts with Yukos, which are now in confusion or jeopardy. Once more Putin has been angered.

Putin is in the midst of taking steps very harmful to the petro-dollar foundation of international commerce. In late October, the Moscow Times reported that President Vladimir Putin might order Russia to switch its trade in oil from denomination in USDollars to the currency flowing in the European Union, the euro. Such a move could have far-reaching repercussions for the global monetary system and its balance of power. Few US-based analysts even discuss the stability of the petro-dollar, which is assumed a fixture never to be tampered with. Not here. Few again discuss the impact of changes in basis to link the USDollar to crude oil. Implications would add fresh momentum and force to the three-year bear market in the USDollar. What harms the USA would enhance the European Union and its economy.

Putin's words and actions are telling, a key revelation of his awareness of how important the stakes are, and how Russia holds a strong poker hand with respect to the United States. At a joint news conference with German Chancellor Schroeder in Yekaterinburg, Putin strongly suggested that Russia could switch its trade in oil from dollars to euros. He said "We do not rule out that it is possible. That would be interesting for our European partners. But this does not depend solely on us. We do not want to hurt prices on the market." The importance of the event was not lost on strategic energy agencies, but hardly made a sound bite within the US financial circles.

The European Union has long objected to the financial hegemony of the United States in its dominance of global commerce and money supply. Nowhere is the battle more bitter than in reaction to the chronic abuse of the USGovt in irresponsible spending disconnected from accountability. Europe has complained for many years about the realized exploitation by the USA in expanding federal spending, domestic tax rate cuts, advocated consumer spending, mortgage finance support, and wartime expeditions. Behind these trends and excesses is the petro-dollar system, whose US$ status as world reserve currency basically means "anything goes." We have taken advantage of the situation, much like an undisciplined teenager who with impunity wrecks cars, collects traffic violation fines, goes on drunken benders, destroys property, assaults people, and expects the world's savings account to pay for all the bills and cleanup costs. The analogy might seem off the mark, but not really. Most foreign trade surpluses find their way quickly into the US Treasury market, the Fanny Mae & Freddy Mac mortgage market, and US corporate bonds which finance their retail credit operations. Resentment has grown perhaps to a critical level, where reaction is to be soon expected.

The Putin statements in the Urals Summit highlight the drawn out campaign by European Union leaders to encourage increased commerce and banking operations in the euro currency. This is a natural response to the USDollar decline. European exports have been forced to endure price hikes from currency exchange impact alone, only to stress their economies. European bank reserves have suffered a decline in value from that same currency exchange impact, only to stress their banking systems. EU leaders obviously seek two changes: more commerce priced in euros, more reserves held in eurobonds. Many regard Russia to be in the enviable position to extract concessions, to demand more prominent geopolitical stature, in return for agreements to broaden ties to Europe. In doing so, they would break links or weaken links to the USA.

It is my analysis that the USA-Russian relationship will degrade into open hostility, but in stages of deterioration. Yesterday a story was reported on a new advanced weapon system to be deployed by Russia. Its targets are uncertain, while the risks are clear. As the world's #1 oil producer, ahead of Saudi Arabia, Russia holds much new clout. An agreement by them to embrace European currency aspirations could provoke a chain reaction among other oil producers, thus stabilizing the crude oil price IN THEIR WORLD. My analytic forecast in May 2003 for crude oil to become priced in euro denomination is slowly taking root, with broad implications. As the eurobonds grow in held reserves, the euro will gradually unseat the USDollar and claim exalted status as the world reserve currency, first in de-facto action then in actual deed. US financial markets seem asleep on the issue and its frightening risk to the US Economy.

In the grand chess game of global clout, Russia wants to become a stronger player on the European continent and in the Middle East. These guys know chess and craft. USA knows force and muscle. At a Helsinki meeting in 1999, Putin showed his original intention to switch oil pricing to euros as part of a grand package which included security issues. According to Alexander Rahr, an expert on Russia at the German Council on Foreign Relations, "Putin is very much interested in changing the structure of OPEC and he cannot do that without the United States… And, he wants to get contracts for the Russian oil industry in Iraq -- for this, too, he needs the United States." We Americans tend to forget the growing commercial ties between Russia and the 300 million people who occupy the European Union plus Eastern Europe. That entire region is slowly being embraced by the EU. Yevgeny Gavrilenkov, chief economic advisor to Putin, said debate is growing on a move to the euro as Russia mulls siding with the EU. "Such an idea is really possible. Why not? More than half of Russia's oil trade is with Europe. But there will be great opposition to this from the United States." The impact to Russia would be much less than to Europe, which now feels the sting of a rising euro. Putin is playing a huge bargaining chip, or else he is bluffing in order to gain inroads into Iraqi oil production contracts. A sure benefit to Europe from a wider acceptance of the new petro-euro would be lower EU interest rates, like what the USA enjoys now (temporarily).

How about a word from Russian big oil? The opinion of Lukoil vice president Leonid Fedun is worthy of note. Three or four giant energy companies dominate in Russia, including Gazprom and Lukoil, rivals of Yukos. Fedun acknowledges that any switch to euro payments would mean only a minor difference in actual transactions and cost changes. For observers it is important to focus not on the small value differences in the commerce, but on the large tectonic shift in the system which links that commerce to the monetary system itself. The political price tag and shift of financial power matter much more. Fedun is quoted by Interfax as saying "We are ready to move to the euro if the country will be included in a visa-free regime with Europe. It's a bargaining chip." By "visa" he means passports, not credit cards. Talk is rampant that Putin is playing his chess pieces in the tradition of smart Russian masters, vying for EU concessions and World Trade Org inclusion.

Bank of Japan Governor Fukui said if a strong rival to the USDollar as a key global currency were to emerge, a stabilizing effect on the global financial system would result. Fukui referred to the dangers associated with allowing any single currency to dominate global commerce, mentioned its disruptive influence, and indirectly criticized the US financial management. Fukui told a recent conference "In such a situation, the economy of the key currency is easily tempted to focus its economic policy on domestic considerations… In today's globalized economy, this could lead to undesirable ripple effects on the rest of the world, through the fluctuations of the external value of the key currency." The message is clear. We have been warned, but our bond market seems in total indifference.

Asians, with their collective $1900 billion in foreign exchange reserves, stand to lose significant capital in their banking systems, since the majority of these reserves are in US$-based securities. Asians, most notably Japan and China, find themselves in an awkward position. If they extend deeper support to the US$, their risk rises. If they diversify or withdraw with more conviction, their capital losses could be staggering. For certain, rhetoric both in Asia and Europe is bubbling over. A severe backlash is coming for the USDollar for its profligate abuse and irresponsible management. We have used the world currency US$ as an agent for bubble generation and Ponzi Economics. This topic receives sparse coverage in the US press & media, with little or no appreciation of importance.

Youssef Ibrahim is the managing director of the Strategic Energy Investment Group in Dubai and a member of the US Council on Foreign Relations. His words included the word "catastrophe" in recent quotes. His voice carries great influence, perhaps as much in the European-Arab petro world as Alan Greenspan in our world. Ibrahim speaks from the world of the petro system and its root in tangible world of trade, while Greenspan speaks from the world of the monetary system and its roots in inflationary financial engineering.

Between 60% and 70% of world currency reserves, from trade surplus and oil export, are kept in the form of USDollars and US$-denominated securities such as USTBonds. Since surpluses are stored in the US$ system, the US Economy enjoys a risk-free benefit, and sidesteps all market mechanisms in response to imbalances. The USA should have interest rates prevail to 3% to 5% above the rest of the world, from a current account deficit basis alone. Instead, Asia and the Persian Gulf emirates keep our rates artificially low. The USA should have a currency exchange rate 20% to 35% lower than current rates, from a current account deficit basis alone.

A world euro foundation would enable development of its poorer eastern provinces such as Hungary, Czech Republic, Poland, Romania, perhaps even the Ukraine and western Russia. In the last several years, the US$ standard has encouraged mindless US consumer spending, oversized home construction, housing speculation, stock & bond speculation, and more. Those days will see a sunset. They represent the legacy of US indulgence, greed, and corruption of the system. Ibrahim warns that "There are already a number of countries within OPEC that would prefer to trade in euros." He speaks of a growing fallout from the Iraqi War, that traditional ally Saudi Arabia might switch also, though its government has not come down firmly on one side. First come the hint from rumblings, then comes the denial. After backroom preparation for change, finally we see the reality of change in action.

What follows must be heard closely, as it carries extreme significance regardless of your political position. Iraq has changed the geopolitical stage and its alignment. "There is a revision going on of its [Saudi] strategic relationship with the United States. Already, they are buying more [French-made] Airbuses," Ibrahim said. "The Saudi Crown Prince [Abdullah Bin Abdul Aziz Al-Saud] visit to Russia was of great significance and the regime is talking about closer cooperation with Lukoil and other Russian companies." One must consider a secondary motive in why the US attacked Iraq, related to preservation of the petro-dollar. Such a view is totally out of the field of vision by American observers and analysts. He went on with"There is a great political dimension to this. Slowly more power and muscle is moving from the United States to the EU, and that is mainly because of what happened in Iraq."

The implications are vast, worthy of discussion. In the last 15 years, the USA has learned through positive reinforcement a bad lesson in economics. The current administration, it appears, operates under the notion that twin deficits are stimulative and positive. SO IS CARDIAC ELECTRICAL SHOCK WITH PADDLE BOARDS STIMULATIVE TO A HEART ATTACK VICTIM FLAT ON HIS BACK. It is not positive. A catastrophe is in the making, as the erosion of the petro-dollar foundation continues inexorably. Such a development will undermined the USDollar in a lost world reserve status. Many inexperienced watchers proclaim SO WHAT ??? False bravado can be the accusation to defiance. To act in isolation with attitude strikes at the heart of the world currency responsibility. To act in isolation with attitude is foolhardy when we are so dependent upon world savings. Well, the answer is that soon, the US Economy will witness the consequences of fiscal and financial irresponsibility in the form of higher interest rates, as well as higher production costs and energy costs !!! No more carte blanche, blank check, free ride, endless freedom, unleashed behavior.

To some degree, a petro-dollar system shields the US Economy from higher prices for crude oil, diesel, heating oil, and gasoline. Foreign nations like Japan, and trading blocks like the European Union must collect large tranches of USDollars in order to conduct transactions for energy supplies. In doing so, they accumulate US$-based reserves. This phenomenon has softened the decline in the USDollar. Removal of the petro-dollar foundation will both push the US$ lower and lift the crude oil priced in US$ higher.

Observers and analysts alike are focused upon terrorist risk. They should pay greater notice to financial retaliation and grand shifts in its foundational structure. The United States owns tremendous superiority on the military battlefield. Our greatest vulnerability is financial, from the foreign dependence on credit supply, from supply chain import of energy and other commodities, and most of all from the continued acceptance of the petro-dollar system which serves as the foundation of the world monetary system. The petro-dollar is showing cracks, decay, and moss. Rivots are loose on the USDollar manhole cover, with chips and rust showing. One can clearly see Russian and Islamic feet attempted to tilt the manhole cover off its rim. Prepare for change.

These topics are fully discussed and analyzed in my private newsletter, and especially in special reports. Two (perhaps three) energy stocks in the portfolio are poised to rise 10-fold. The November issue cites three silver miner stocks which are also set to rise dramatically. In the coming year, look for silver to gain in price far more than gold as investment demand for the white precious metal kicks in. Meanwhile, don't look now but the Canadian Dollar is the strongest currency on earth. The ongoing and future development of its western provinces, the ongoing and future acquisition of their properties by China, these will only serve to gather even more momentum for both the looney currency and commodities.

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

| Comments (36)

Memo on the Fed
November 22, 2004
Posted by manystrom at 01:55 PM


To: SSU Students
From: Jude Wanniski
Re: The Federal Reserve

Everyone talks about “the Fed” and practically everyone in the world knows the chairman of the Federal Reserve Board of Governors is Alan Greenspan. But very, very few people know what it does, what it can do and what it can’t do. Today’s lesson is prompted by the remarks Greenspan made Friday at a banking conference in Frankfurt. Here is the lead of the NYTimes account today:

Alan Greenspan came to the home of the euro on Friday and suggested that the relentless decline of the dollar might well continue, offering little relief to those here who worry that the United States is seeking to gain a competitive advantage for its industries from a weaker currency. In a speech to a banking congress here, Mr. Greenspan, the chairman of the Federal Reserve, said that ballooning foreign borrowing on the part of the United States poses a future risk to the dollar`s value. He said that foreign investors, who help finance the large American trade and budget deficits by buying Treasury securities and other dollar-denominated assets, would eventually resist lending more money to the United States, causing the dollar to fall further.

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