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It's Only a Matter of TimeDavid Chuhran The USDollar has some catching up to do as it's only off its January 2002 high by just over 30%. To account for the last decade of domestic monetary dilution alone requires another 20+% drop taking the $USD Index into the 60's. The unknown effect lurking offshore lies in the global supply of USDollars which are uncounted. Should they wash ashore at high tide the drop in value could overshoot even the most pessimistic predictions. More ominous than these almost fully developed new bubbles is the fact that the Fed-induced, artificially low interest rates spawned the derivative "carry trade." This is where financial institutions play, unregulated, OTC derivatives that borrow short term, low interest money and lend it out at higher rates for a longer term. They collect the "spread" between the long and short rates while betting that the Fed's well telegraphed bias will remain stable or loose causing the overall value of the underlying bond portfolio to grow or at least remain unchanged. In this situation, it's "free money" and everyone wanted in on the game. These derivatives are so volcanic because they're all about leverage; and most large institutions can leverage at 20:1, but Fannie and Freddie's enormous size allows leverage as high as 50:1. The Bank of International Settlements, which is the principal center for international central bank cooperation, notionally valued global derivatives at the end of 2004Q2 just short of $220 Trillion. These derivatives are also experiencing a 23% year-over-year growth rate as banks and quasi-financial institutions, like GE and GM, play "pass the hot potato." The problem comes in a rising rate environment, like we're entering now, where the value of the bond portfolios decrease. A very rough rule of thumb is every +1% rise in yield results in a -10% drop in the bond's value. Therefore, these highly leveraged institutions are setup to take massive losses; and this might explain KPMG's recent refusal to sign off on Fannie's quarterly report. Fannie now sits in violation of SEC rules with a realized, but so far unreported, $9 Billion loss on derivatives if they were accurately "marked-to-market." As institutions attempt to slowly back out of position, they're likely finding it an extremely delicate balancing act. Many have intricately interwoven webs that are unwieldy while others will remain until the last drop of "free money" is squeezed from the slowly dehydrating markets. This virtually ensures a disorderly unwinding of the "carry trade" as one large counter-party default has the potential to cause a domino-like collapse. While the derivative problem hangs over the markets like a slowly melting ice ledge, that's sure to someday collapse under its own weight, the more immediate problem is the fact that the fiat paper USDollar is a fraud. A dollar is not really a dollar; it's a "Federal Reserve Note," issued by the non-governmental, private US central bank known as the Federal Reserve. It doesn't represent money as defined by the U.S. Constitution and it's backed by nothing of value; it's strictly faith-based! As G. Edward Griffin so accurately describes in his must-read book, "The Creature from Jekyll Island:" "Since fiat money has nothing of tangible value to offset it, government's fiat purchasing power can be obtained only by subtracting it from somewhere else. It is, in fact, 'collected' from us all through a decline in our purchasing power. It is, therefore, exactly the same as a tax, but one that is hidden from view, silent in operation, and little understood by the taxpayer." (pg.162) This is the dirty little secret that all politicians share with the private, Federal Reserve bankers. Inflation is manufactured; it is created through an expansion of the money supply. Inflation is a "hidden tax!" The Politicians spend in excess of the taxes they collect forcing the Treasury to sell bonds/notes to fund the budget deficit; and then the private bankers at the Fed "monetize" the portion of those Treasury offerings not bought by domestic or foreign investors at the quarterly auction that's now held monthly. This Fed monetization creates "new money" out of thin air causing monetary inflation! (Note: In addition to these direct Open Market Operations, the Fed can also affect inflation by adjusting the Fed Funds rate and the required reserves of member banks. Also important, but left out of this discussion, is the fact that the borrowing necessary to satisfy the current account deficit dilutes the global supply of USDollars directly affecting its real and perceived exchange rate value.) Monetary inflation sneaks its way into the economy eventually manifesting itself as price inflation in everything; it is a cancer. Not only do we pay through higher prices, but we also pay again for the interest on the deficit induced debt. Ironically, that interest is collected by those very same private bankers that run the Federal Reserve through their member banks. That Treasury debt will never be retired because the origin of all our money is debt. To retire our national debt is deflationary; if all debt were retired, there would be no money. That's why the national debt will never be repaid! The private bankers will squeeze interest out of the taxpayers in perpetuity, or until a deflationary spiral forces a debt pyramid collapse and subsequent default. From the average citizens' standpoint, taxes are but one side of the equation that visibly erodes disposable income. Inflation is the other side and virtually no one understands it because we've been conditioned to accept its inevitability. It transfers wealth from the citizens to the private Fed bankers who manufacture money at will. Inflation evaporates your disposable income; it's invisible. You have no input, no vote, and no place to hide! Well, there's one place to hide: precious metals and mining shares. The rate of increase in the global supply of USDollars is outpacing the growth in worldwide goods and services. Therefore, both internally and externally, this excess supply of USDollars is chasing the slower growing goods and services causing prices to rise. Again, monetary inflation causes price inflation and a corresponding decrease in the Forex value of the USDollar! Watch out if our foreign creditors lose faith in the Dollar! It's this covert theft-by-inflation, by a bunch of unelected, private banksters, which has left the USDollar worth only 4 cents relative to a 1913 Dollar. That was the year the Federal Reserve Act was voted in by Congress; it marked the beginning of the end. Previously, from 1776 until 1913, our money's value remained relatively stable with the expected inflationary spikes during Wars. Mild deflations were fairly common as the economy readjusted to a money supply constrained by the supply of specie (precious metals). This broken system cannot last; it was designed to fail by the Rothschilds, Warburgs, Morgans, and Rockefellers. Did they always plan for Dr. Mundell's "One World Currency?" Once you break down the sovereign currencies how far behind are the sovereign borders? I hope you realize by now that we're not getting the true global economic picture from any of our media outlets. Apparently, France and Germany desire reserve currency status for the Euro; as Europe's largest economies, they have the most to gain. Prior to the second Iraq war, they conspired with Saddam to begin selling Oil in Euros in an attempt to at least achieve co-equal exchange medium status with the USDollar. We simply could not allow that to happen as their gain in currency demand is our direct loss. If we allowed this to happen, it would very likely result in a corresponding plunge in USDollar demand leading to a precipitous collapse in its value. As the US shrugs its shoulders to recent European calls for currency intervention to stop the USDollar's slide, we are seeing the initial stages of direct economic conflict. France, Germany and Russia precipitated the need for our current War with Iraq, through the Euros-for-Oil-for-Food program; and then they collectively voted against the US in the UN attempting to block our efforts to restore economic order. Of course, Saddam did violate something like 17 UN resolutions and there were concerns about WMD, but in my opinion the war was fought in defense of the USDollar. The UN is now stonewalling our efforts to uncover the truth behind that Euro-Oil-Food scam, which has signs of involvement at the highest levels, while the Europeans, Russians, and OPEC met several weeks ago to discuss further economic cooperation. They're also pushing for appeasement treaties with Iran, much like the decade long appeasement of Iraq, while Iran secretly gathers their nuclear strength. Also, the Euro needs time to build a better foundation on firmer ground; it's not quite ready to replace the USDollar. This has the makings of a full blown World War, but if it has to be, then the US would be better off fighting it now rather than doing it on anyone else's timetable. Delay only allows the Euro time to firm up while Iran has further opportunity to develop and expand their nuclear capabilities. If faith is subsequently lost in the USDollar, or if global support is withdrawn as some OPEC countries switch to Euros-for-Oil, then the value of the USDollar will likely collapse driving our economy into a depression. I firmly believe a wider war is coming, but America's adversaries want us fighting from a position of weakness, not a position of strength. Time is on their side, not ours! Don't think for one minute
that the US is willingly or easily going to relinquish reserve
currency status. The problem is that all fiat, paper currencies
are a fraud and every major economic power wants the right to
create free money out of "thin air." That's why France
and Germany attempted to undermine the USDollar while elevating
the European Union's recently created common currency. Along
with broad currency demand comes the highly coveted prize: the
power to inflate at will. Rather than propping up the USDollar
we are allowing it to fall under market pressure while we inflate
away our deficits and debt. In effect, the recent debt monetization
by the Fed is transferring our deficit and debt burden to our
trading partners, and the foreign nations that hold our treasuries,
as they suffer currency exchange rate, and soon T-bond/note,
losses. The problem is that the market rules; and this process can spin out of control as the market seeks its own equilibrium. Unfortunately, our past habit of living-beyond-our-means has us backed into a corner; we also have few viable alternatives. The only thing that will hold up the money supply going forward is another "Guns and Butter" fiscal policy where we fight a wider war for a just cause. I can hear the sabers rattling with Iran. It's only a matter of time. David Chuhran 321gold Inc |
