How the Euro will Finish What Osama Couldn't Achieve

May 8, 2003

The US has flexed its military muscle, and Iraqi's and the whole world marvel at the might of the US military machine - a not unintended side-benefit to "siccing" Saddam, destroying a hotbed for terrorist activity, and preventing other oil countries' conversion from dollars as "the" oil currency to euro.

Yes. In November of 2000, Saddam announced that he decided to conduct all "food for oil" transactions under the UN program in euro instead of the traditional US dollar (and, coincidentally, that was the month the euro stopped dropping and began its slow but relentless rise to where it is today).


The Fed's Continuing Dilemma 05/08

The FOMC’s statement that the risks of deflation are greater than that of a pickup in inflation indicates that the Fed is more concerned about the prospect of deflation than it is willing to admit. It also contradicts its own assessment that the upside and downside risks of sustainable economic growth over the next few quarters is equal. After all, if growth in overall demand picked up deflation is less likely to be a problem. That the Fed is concerned about growth was also evident in the March 18 meeting minutes that were released today. At that meeting, which took place just as the Iraqi war was about to get underway, members expressed their concern that the economic numbers had fallen short of expectations expressed at the January meeting. Some members discussed the possible negative effect of the prospective war, although it was clear that they far from certain that this was the cause. At Tuesday’s meeting, which took place after the war, the Fed continued to show concern, and in our view, that concern is highly justified.

The current meeting was just a continuation of the ongoing dilemma facing the Fed ever since it let the financial and economic boom get out of control in the late 1990s. In November 1999 we wrote, “…tightening by the Fed could burst the speculative market bubble, resulting in worldwide recession and deflation. It is therefore apparent that, despite the current robust economy and low inflation, Greenspan is actually walking a high wire. He is afraid to exacerbate the bubble, bit is equally afraid to puncture it as Japan did in 1989, and there is little maneuvering room in between.”

What the Fed eventually did was tighten money just enough to break the market bubble and engender the beginning of a recession. Hoping to avert the Japanese experience it then engaged in a massive loosening of monetary policy, slashing the fed funds rate from 6.50% to 1.25%. While the policy was successful in keeping the recession mild, it did so only at the expense of cutting short the necessary corrective process that had to take place following the bursting of the bubble. With technology and capital spending in general falling apart, the housing and auto sectors, aided by low interest rates and greatly increased debt, kept the economy afloat. The problem now is that the housing and auto sectors can no longer carry the load while the economy is still facing strong headwinds from the uncorrected structural imbalances—record debt, inadequate consumer savings rates, a massive trade imbalance and excess capacity.

The U.S is therefore facing the same dilemma that Japan did during the 1990s. Easy money has not worked for the first time since 1929-1932, and with the economy still weak, deflation is becoming an increasing probability. Core consumer prices were up at an annual rate of 0.8% in the first quarter while the Fed’s favorite inflation indicator—the consumer price deflator—has also been running under 1%. The Fed has spoken about taking non-traditional measures if interest and inflation rates appeared to be headed toward zero, but we doubt that they will work. If banks can’t or won’t lend money, or if no one wants to borrow, the money supply can’t expand, and the reflationary policy won't work. As we’ve stated before that is the classic “pushing on a string”. It happened in Japan, and it can happen in the U.S. as well.


Here is an important article (SafeMoneyReport)
Mounting Job Losses Signal Double-Dip Recession! 05/08

The grim unemployment data released today tells only part of the story. Sure, it sounds bad that unemployment claims have surpassed the critical 400,000 mark for the 12th straight week. But other data rolling in also shows America is facing a jobs crisis!

Here are some facts...

The more reliable 4-week average hit 446,000 -- a new one-year high!
The official unemployment rate hit 6% in April. That means there are 8.8 million people looking for a job who can't find a job -- any job. But there are also 1.4 million "discouraged" men and women not officially counted because they stopped looking for work entirely. There are also 4.8 million people who are working part time because they can't find full-time jobs.
Employers announced over 146,000 layoffs in April on top of more than 85,000 job cuts in March, according to outplacement firm Challenger, Gray & Christmas. Since most of those layoffs have yet to hit the economy, that should send the unemployment rate soaring!
The payroll survey reveals 525,000 jobs disappeared in the past three months. Going back to World War II, the economy never lost jobs for three months in a row -- except during recessions!
So it's no surprise to us that today, Wal-Mart, JC Penney, Sears, Federated and other big US retailers said April sales were just terrible. With jobs disappearing left and right, consumers are pinching their pennies.

This is dismal news for the US economy. Capital spending by corporations dried up three years ago and still isn't coming back. Consumer spending -- which accounts for 70% of all goods and services produced -- is one of the last legs supporting our tottering economy. As consumers hunker down, the economy is going to slump right into a deeper, more grinding second leg of a double-dip recession.

Indeed, America is probably already sliding into recession, though Washington and Wall Street don't realize it. When investors wise up, the stock market will fall right into the gutter, too.



What would happen if the euro were to become "the" oil currency of OPEC? The US dollar would crash, the euro's already-underway march toward world reserve-currency status would be vastly accelerated, and the US' legendary economy would burn to the ground in sudden hyper-inflation.

You see, the US dollar's status as the world 's only reserve currency since the Bretton Woods agreement in 1945 gave it (and the US) certain advantages other countries didn't have.

The dollar underpinned the domestic currency of every country in the entire world. All of their respective central banks hold dollars "on reserve" to bolster their own currency's value.

Since over 75% of all foreign central banks reserves are US dollars, there are "a whole lotta dallas" floatin' around out there. What's more, because of that, all foreign trade transactions are settled in dollars, upping the amount in foreign circulation even more - and creating an enormous demand for the American currency.

All of that essentially allowed the US to literally export it's domestic inflation to other countries, thus escaping the unavoidable consequence of "monetary" inflation (increase in the volume of money) - namely price inflation (more money chasing the same goods and services in an economy, thus driving up their prices).

Instead of experiencing price inflation at home, the US could "export" it by sending it abroad (when buying oil for example).

That was all fine and good until the euro started to appear on the scene. For the first time since Bretton Woods, the dollar now had a competitor: a single currency of a combined market that is actually bigger in population size than the US - and a currency that has a positive relationship to the price of gold.

For, the euro countries mark their gold reserves "to market." That means they value their gold reserves at gold's market value, which in turn means that the euro's value goes up when the price of gold rises. And the price of gold is rising, not least of all because the euro countries' central banks have agreed to limit their gold sales and gold leasing activities.

The dollar, on the other hand is stuck in a rat race against the price of gold. When gold rises, people in America think it's "inflation time" and they pull in their consumer horns - which is bad for the economy, and that makes it bad for the dollar's foreign exchange value. Americans buy less stuff, and foreigners buy less American stuff (stocks, bonds, etc.), and the foundation of the house of cards starts getting a bit shaky.

But now, imagine that all those foreign trade and reserve dollars start heading "home" as the euro methodically replaces them, country after country, transaction after trade transaction. Now the house of cards doesn't just fall, it gets buried under an unimaginable avalanche, a veritable deluge of dollars.

Remember post-WWI Germany, when people had to have a wheelbarrow of paper cash (of RM 10,000,000 bank notes) just to buy a loaf of bread? Well, that will seem like paradise when the US dollar chickens start coming home to roost.

Without the almighty US dollar, how long do you think the mighty US military machine will last? How long do you think before communist China starts thinking that its now safe to "reunite" with Taiwan and launch an attack from its Panama Canal beach-head into the southern US? (Thanks, Jimmy)

Don't think for a moment that this is all just some rambling columnist's speculation. Russia's central bank has already sold dollars for euros. China's has, too. After Saddam got "religion" and converted to euro, Iran has made similar noises.

The OPEC's "chief", Javad Yarjani, gave speech at a Seminar on the International Role of the Euro on April 14, 2002, in Spain. During that speech he presented a virtual "how to" lesson in what the OPEC countries expect form the Euro nations before they would "convert" to euro for all of their oil transactions.

The certain effect of a flood of dollar "homecomings" is also not the stuff of speculation.

So, what's the US financial establishment's reaction to this threat?

According to an Associated Press report of April 7, 2003, by Martin Krutzman, the US money-supply tsar, His Excellency Sir Alan Greenspin, had this creative epiphany:
"the central bank is signaling that it is poised to move beyond its traditional buying and selling of short-term Treasury securities to the direct purchase of longer-term securities in an effort to pump more money into the banking system and influence long-term interest rates."
Oh, goodie!! More inflation!!
"Also, Fed officials have indicated they are prepared in the event of an unexpected shock to the system to lend massive amounts of money directly to commercial banks to make sure that financial markets do not freeze up."
Yippieee!! More debt!!!

What should President Bush do then? (Counting on Alan is obviously a waste of time).

As long as the dollar's relationship to gold is inverse, the euro has already won the war. What President Bush needs to do is to get Congress to flush the laughable, outdated "official" US gold price of $41.222 per ounce (the market price is currently at $323.00), start valuing US official gold reserves at market prices to boost the value of the dollar in the face of the inevitable rise in gold prices, and ditch "too big to fail" bullion banks (who have sold gold short for decades to artificially help prior administrations prop up the dollar.)

Doing this will surely cause the kinds of 'cascading cross-defaults' Mr. Greenspin warned of in the lead-up to Y2K. But these cross-defaults will be peanuts in comparison to the certain consequences of even a partial but significant displacement of international reserve dollars.

In Iraq, George W. has shown he has the guts to do what everyone else thought impossible - and he succeeded. But his victory in Iraq will be short-lived if he keeps listening to Alan Greenspan too much longer.

For in that case, the euro will complete what Osama tried, but couldn't do: bring the "Great Satan" America to its knees. As bad as 9-11 was, Osama and the other Jihadists just kind of ticked us off. He got Americans just mad enough to get up and kick their collective booties" over in the Middle East, but the euro will finish us off, at least under a leadership that fights an economic frontal assault by hurling monetary baloney.

The only way to protect yourself from this umitigated disaster is though ownership and possession of physical gold (bullion, semi-rare, and rare coins) and maybe euro. Dollar-denominated assets will be flushed out along with the dollar.

http://www.gold-eagle.com/editorials_03/wallenwein050803.html