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In spite of a large one-day dollar rally the official US policy at the G7 Finance Minister and Central Bankers Meetings was abandonment of the dollar to lower levels. You don’t listen to what they say you watch what they do. The Europeans have lost patience with the administration and banking community in the US. They are outraged that they are stuck with massive losses in CDOs and ABSs’ and the lie of a strong dollar policy. The latest fiasco will cost them over $1 trillion and they have heard the same story of a strong dollar for six years. As you can see there is no honor among thieves.

The dollar, because of American policy, is out of sync with Europe and everyone else. If it weren’t for foreign dollar buying the dollar would have collapsed long ago.

Europe wants to see something positive from the US and nothing is happening. Europe has created real jobs that pay good wages and salaries and the US has created virtually all service jobs paying very low wages and the US-BLS uses the birth/death ratio, which creates phantom jobs. We can assure you that Europe knows what we know regarding these Mickey Mouse statistics. The budget deficits in Europe are peanuts compared to our monstrous $850 billion deficit that is 6% of GDP. Just how long do you think Europeans, Asians and others are going to continue to put up with a falling dollar? They have been bearing losses for years and we believe that forbearance is coming to an end.

Americans do not realize it but the EU economic GDP is $16 trillion versus $14 trillion in the US economy. Europe wants an end to US credit expansion but they know at this late stage that is impossible. They either expand money and credit or collapse. We are also interested to know if the other 18 major central banks that have been doing the same thing will start cutting back. We saw the ECB cut M3 back from 12.7% in July to 12.6% in August and 12.3% in September. One more lower month and a trend will have been set by the ECB. If the ECB is reversing and the other central banks follow there will be a collision if the US doesn’t follow. We do not expect they can follow. They are too far down the road and there is no way back.

August was a benchmark month. The credit crunch became obvious, the CDO, ABS and CP problems became obvious and the foreign flow of funds went negative. The net foreign outflow was $163 billion versus an inflow of $94.3 billion in July or a net turnaround $257 billion. Since then interest rates and the discount rates have been lowered and the dollar has fallen. As the dollar falls gold and silver rise. America has become a subprime country.

You ask, where are we headed? One answer is bankruptcy. Either that or the world’s central banks bail out the US. That is a possibility. There would be guidelines and stabilization of the dollar probably at a euro level of $165. The dollar would become a fixed managed currency with strict rules. This happened to the UK in the 1930s and again in 1956. The first thing to do would be to bring all US forces throughout the world home. Next would be a balanced budget and a long-term plan for government debt reduction. Raising the debt ceiling would end. Interest rates would rise and America would have recession/depression that the entire world would participate in. A major world purging would take place. Part of such an arrangement would be that the US dollar would lose its reserve currency status, and that the euro would be the next world monetary standard. That alone would shove the US into second world status in all respects. The US, since 1971, has gambled that the rest of the world doesn’t want depression. In the absence of such an agreement currencies will form blocks, such as the Bank of the South, in South America. As we cited earlier the flow of foreign funds to the US is reversing and countries are selling dollars and as a result, the dollar is falling. It will do so, without an agreement, and crash. Crash would be 40 to 45 on the USDX. The result is unbelievably higher gold, silver and commodity prices and stronger foreign currencies, which have there own set of problems and have been falling against gold for three years and are at recent lows against gold. In the final analysis gold will be the only place to be.

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Bernanke’s theory is that the money that is not flowing into housing will flow into the general economy increasing GDP. At the same time allow the banking system to recover from its non-performing loans. There is no savings so they cannot flow into the economy, so only this super-heated money and credit can flow into the system. That flow goes into non-productive activities.

It is not the debt level that causes the crisis, but the loose monetary policy. The cut in interest rates and the promiscuous lending by banks over the past three months and for probably longer, will disrupt financial markets in the future, and, of course, cause hyperinflation. Those who do not understand what the Fed is doing and the consequences are going to lose a great deal of money. Those who do grasp what the Fed is doing, could make a great deal of money in gold and silver.

The subprime spillover is in its beginning stage. It will have some real negative affects on the consumer who is 70% to 72% of GDP. Those equity and cash out loans that in part allowed this conspicuous consumption, are getting more and more difficult to get. This shows up in the heightened use of revolving credit-card debt. Consumption growth was 4% from 1996 to 2006. A blast of almost $10 trillion, or almost 20% of world GDP. We have to laugh when we are told that the other successful countries of the world can prosper and function without the help of the US economy. Again, the US was the world engine for growth and will be in the foreseeable future.

Income growth has lagged badly over the past six years and with inflation buying power for Americans has faltered badly. Compensation growth has been 17% versus 28% in previous years. The consumption trend has been fed by appreciating assets, principally residential property. The net equity extraction surged from 3% of disposable personal income in 2001 to 9% in 2005, which was the peak, which was more than sufficient to offset the shortfall in real income to keep consumption growing.

The game of increasing credit card debt, which temporarily supplanted income growth and equity withdrawal, is coming to an end. That means excessive demand is about to end. The money tree has died and employment is falling, even by official figures, which are bogus. In construction and real estate alone, which is 25% of the economy, new home construction will fall 60% and employment 50% from peak to trough.

There will be no global decoupling, an increasingly popular piece of propaganda that depicts a world economy that can prosper without the contribution of the US. All the Asian, European, Canadian and Mexican economies will be hit hard. By example, Asia’s export share has doubled over the last 25 years from 20% of GDP in 1980 to 45% today. As that unfolded, domestic consumption has fallen from 67% to 50%. Twenty-one percent of Chinese exports go to the US. China should fare decently, but the rest of Asia, including Japan, will be in deep trouble.

The Fed that was created to stop recessions and depressions deliberately caused the stock market boom of the 1990s and the collapse, and consciously created the real estate bubble. Today the consumer and the banking system are both at risk never mind the stock market. Never in the history of modern times has 72% of GDP been supplied via consumption. This in part has been caused by inexpensive foreign goods, which are inexpensive because almost all our trading partners have devalued their currencies against the dollar creating an un-level playing field. This is free trade. We want fair trade, but the elitists, and our president and Congress wouldn’t allow us to have fair trade. This is why we have to have trade tariffs on goods and services to again level the playing field.

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GOLD, SILVER, PLATINUM, PALLADIUM AND URANIUM

All you people who have tried to time the gold and silver markets these past two months have been left at the gate, as has almost every gold pundit and newsletter writer, especially those using charts, waves and cycles. The top commentators have again missed this move. The fundamentals were there and so easy to see. This was a $40 move and it is not yet over. In fact, it is just beginning and some poor souls are still on the sidelines. We have seen terrible advice over the past few years and it has cost investors lots of money.

Jewelry demand for gold set a new record of $14.5 billion in the second quarter up 27% yoy. This is part of what is behind the continued enormous physical off take globally. Our hats are off to the ladies of the world for destroying the Illuminist gold suppression cartel, especially the women of India. There was very strong demand in July and August and September was a little softer. The economies of India and China were very strong and Turkey had normal demand plus demand borne of war. This last quarter should be robust due to India’s Diwali, the Festival of Lights, which marks the beginning of the Hindu New Year, the main Indian wedding season. We have been told that lines to buy gold at the dealers stretch for blocks.

In addition industrial demand for gold also reached a record level of $2.5 billion in the second quarter as industrial activity strengthened worldwide.

In the third quarter a total of 174 tons of gold was imported into Dubai, 47% higher than the 118 tons yoy. This is the highest third quarter imports recorded in the last seven years. During the same period, 68 tons was exported, 28% higher than 53 tons yoy.

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-- Posted Thursday, 1 November 2007 | Digg This Article