 Death
of Bretton Woods II
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Apr 27, 2007
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Throughout the entire 2004
and 2005 years, the global financial markets were subjected to
utter nonsense and propaganda about a new Macro Economy. Its
main pillar was the recycle of vast Asian trade surplus into
USTreasurys. The chief carnival barker for the concept was Alan
Greenspan, even as its proponents labeled the crutch the name
"Bretton Woods II" in pure heretical fashion.
The Bretton Woods Accord, linking the USDollar to gold, was real
and valid and enforced. It is about as far in function, meaning,
and validity as gold (real & tangible) is from the USDollar
(paper & counterfeit). Thus the HERESY. In the last several
months, a painfully clear trend is the ABSENCE of Asian recycled
funds. On a net basis, led by Japan and China, the Asian group
has shown flat USTBond purchases from their central banks, a
radical departure from yesteryears. The US exports its inflation
to Asia in order to pay for its bill for finished products, but
Asia has RESISTED the temptation to put good money after bad
into USTBonds. Implications concerning the faulty and stripped
mythological premise are huge.
The USDollar is exposed, soon
to be hung out to dry, with the kick over the edge being upcoming
Euro Central Bank rate hikes. The busted Bretton Woods II myth
represents a missing crucial support pillar for the broken USDollar.
No BW2 means no prevailing ideology to serve as intellectual
support. Asians will next be purchasing gold & energy,
both refined and raw ore, both securities tied to gold &
energy and related companies, alongside stockpiles of commodities,
as they eschew the US$-based system. China has already tipped
off the world powers on their intention. As with all myths, they
are mere excrement spewed by economists to justify their failed
policies, which erringly found its way in direct route to the
food tables for the financial markets. The entire departure and
cave-in for the flimsy Bretton Woods II concept will be part
of the upcoming May Hat Trick Letter report.
What does the death of Bretton
Woods II mean? Many things, all good for gold and bad for the
USDollar. 1) It means the USDollar is in for a potential free
fall, as support from guy wires is missing, and control is being
lost among principal partners. The DX dollar index now stands
below 82, in the DANGER ZONE. The main partner for support
is the oil producers, whose backyard has been turned into a war
zone. 2) It means the global support pillars for the world reserve
currency have begun to lean on the printing press more than recycled
trade surpluses. 3) It means the USTreasury Bond support will
be coerced more through brute force since mutual agreement has
begun to fail, like more war in the Persian Gulf. 4) It means
more officially sponsored attacks on hedge funds will occur,
since their liquidation of spread trades typically generates
considerable USTBond support from short covering. 5) It means
the threat of a restructuring of US debt securities is growing
more likely with each passing month, alternatives being a writedown
(from US$ devaluation) or a second USDollar itself.
In time, my full expectation
is for a domestic dollar to be used as legal tender in the Receivership
USEconomy (as in bankrupt), and a second investment dollar to
be used by foreign bond holders (demanded by credit masters).
The value of USTBonds held by foreigners will continue to be
at great risk, something the foreigners have become acutely aware
of, and expressed vocally outwardly. The loss in the US$ exchange
rate (versus euro and yen) will likely outpace any potential
rise in bond principal from a falling long-term bond yield. Europeans
have endured a loss in S&P stock holdings, with the next
loss endured to be in USTBonds. China is in no way as controllable
as Japan or Saudi Arabia. See the proliferation in reserves accumulated
by developing nations. The geopolitical power shift is underway.
The only way the United States is capable of keeping their musical
debt merry-go-round turning might be through force, namely a
wider war and trade protection. The war will keep the pressure
on the Persian Gulf nations to continue both USTBond support
and weapons outlay purchases. A higher oil price will win their
consent. The trade protection effort will backfire. Those in
deep debt cannot threaten their creditors.
(CURRENT) MACRO ECONOMY MYTH
The Bretton Woods II
myth has been shattered, decimated, and laid to waste, without
much reporting. The dominant myth from 2002 to 2006 promoted
the belief that the global financial system operated as a macro
economy which moves together, is supplied together, is coordinated
by central bank decisions, and enjoys the free brisk flow of
capital. What a crock! Its agenda and purpose is to sustain the
USEconomy and US financial system desperate for imported capital,
whereby the world's savings will be shipped for voracious US
usage, all without much interest yield paid out. What colossal
nonsense! The myth emerged from the ethos crucible without much
substance. It has vanished into the ethos dustbin as quietly
as its vacant value.
Last week, a past article (on
the PetroDollar abused in a protection racket) was resurrected.
This week another past article "Economic
Mythology" (click here) from September 2004 is resurrected,
highly relevant again. It painted a reasonable description of
the current myth in force. The principle argument was that
in order to sustain a fallacious economic system, whose foundation
is but shifting sands whipped by the ebb & flow of monetary
inflation, that system needs an utterly absurd sequence of myths
to be widely accepted as ideology, promoted by a trusted harlot.
The result is like a crowd of mindless zombies uttering mantras
like people devoid of brains, but whose bodies move enough to
cast their next order to purchase stocks or bonds. FOREX traders
do not qualify as zombies, and therein lies a problem.
The bankrupt dogma of this
Macro Economy Myth contains many ludicrous belief constructs,
uttered widely, containing no substance or validity, each totally
heretical, worth mentioning. We hear childlike nonsense like
'debt is good' for the explosive credit crack, like 'to
spend is vital' for the anti-investment consumer crack, like
'low-cost solution' for the outsourced job betrayal, like
'house is home not investment' for the unproductive housing
crack, like 'service sector is cleaner' for the manufacturing
demise crack, like 'risk is offloaded' for the uncontrolled
derivative crack, like 'military spending benefits the economy'
for the destructive drain crack, like 'USGovt bonds offer
true value' for the absent high volume highly liquid alternative,
like 'foreigners are partners' for the credit supply hemorrhage
crack, like 'Asian finished products fairly traded for US
assets' for the fraudulent payment with bad debt paper masquerading
as money, and like 'US is the global engine' for the gross
global imbalances. My viewpoint is that the current system manifests
a national liquidation of capital that is endemic to the USEconomy.
Someday we will be living downstream
from a sewage treatment plant, and told the offensive odor is
the 'scent of a new flower species' for more nonsense
explained as a new fecal orchid. Worse still is the likelihood
that we will hear 'Work Makes You Free'
in the face of rampant unemployment. That phrase has vivid meaning
only to perhaps 5% of the US population, maybe less. The next
myth in your face will be 'a lower dollar is good for the
US' which fails to consider how the entire cost structure
within the USEconomy will rise in a manner to cripple both businesses
and households.
SHATTERED MYTH PILLARS
The tougher questions
are 'Why did anyone believe such empty concepts?' along
with 'How stupid must the masses be?' and lastly 'How
compromised must pundits be?' in my book. The tragedy lies
in admission that the concepts were empty, but newer better concepts
have replaced them, each from a new empty mythology. Here are
some of the major points made over 30 months ago, each more clearly
discarded to the dustbin as having no value. The concepts were
at the time considered immutable truths, since spoken by Greenspan,
and since repeated by trusted Wall Street titans, and echoed
by talking heads in the financial press & media. These shattered
myths were mainstay dogmas to the silly Bretton Woods II belief
system, now rubble.
House bubble claimed as
valid wealth: Rising
property values and associated home equity growth is a legitimate
form of wealth generation, a viable foundation for the New Economy.
In promoting this concept, Greenspan resembled a hedge fund manager,
not a central banker. In fact, many expert financial analysts
have compared the USEconomy to a grand hedge fund, since so many
shared characteristics are evident and identifiable. As the housing
crisis and the mortgage debacle have begun to unfold, we know
better now. The reluctance shrouded in deep denial testifies
to the desperation to maintain the myth. The mortgage lender
burial ground now contains some Alt-A and borderline prime lenders,
which undercut claims of no contagion. Next is the damage to
commercial lenders, who employed the same ditzy lending practices
with 0% down payment and slim documentation methods. In fact,
the debacle in progress qualifies as a potential 3-SIGMA event
to trigger derivative accidents.
USEconomic dependence upon
housing is ok: The
main source of fuel for the USEconomy was derived from housing
jobs and lending institution jobs, with spending based on home
equity extractions. This is a nightmare design. Such a design
succeeds until the bubble retreats, or even stalls. The historically
validated concept of business investment leading the pack has
been discarded in favor of a reckless dependence upon a housing
and asset bubble (like stocks). A bigger perspective reveals
that the USEconomy has grown dependent upon a bond bubble which
extends to housing, whose size is 20 times larger than the tech
& telecom bubble in 2000. Both were destined to burst. The
current bond bubble bust is still in the initial stages of unraveling
in a mounting crisis. Note how the spring housing recovery (another
careless mythical construct last autumn) has already been discarded,
yet it served its purpose in market levitation at the time. We
have another two to four years at least in the housing &
mortgage collapse. Consumers will be affected as surely as night
follows day. No myth of constant sunshine is likely to emerge.
Manufacturing base not essential: The systemic abandonment of the
US mfg base is one root symptom of the pathogenesis marred by
chronic inflation and prominent labor unions and heavy corporate
tax structure and fringe worker benefit burdens and overstepping
safety regulators (OSEA) and omnipresent environmental regulators
(EPA). The myth which purports that the manufacturing base is
unnecessary, that the service sector can replace it, is total
absurd. History shows that the service sector follows the mfg
base in its path. Furthermore, the service sector pays lower
wages, offers worse benefits, and can offer little security when
the mfg base and its capital base provide the foundation for
business investment and economic structure.
Foreign central bank support
of USTBonds: To assume
Asians will provide necessary capital for USTreasury Bond supply
forever is pure folly. Take a closer look, and see that since
July 2005, Asian central banks have purchased in aggregate only
a small amount. They have been loaded to the gills in USTBond
paper of questionable value. China has essentially called a moratorium
on further US$-based securities in their FOREX reserves account.
Not only did this myth get shattered, nobody even noticed.
Pinprick vulnerable spots to
the Macro Economy Myth were identified 30 months ago, all of
which stand in the limelight as more clear symptoms of current
distress. See the continued Asian outsourcing of jobs, a malady
never to subside until the trade war is in a greater bloom than
already. See the Fanny Mae continued cover-up of a probable credit
derivative meltdown, certainly a bankruptcy, whose earnings restatement
and year of accounting darkness testified to receivership. The
faltering consumer spending has simply not been properly recognized,
since its pace cannot keep up with the price inflation rate,
which itself runs triple to the official number (if reality is
sought). The continued trade gap reads like a medical hemorrhage,
whose retreat would testify to the grand systemic liquidation
underway. The continued federal deficit is not so much a myth,
but evidence of basic lies. The USGovt talks of declining deficits,
yet the crash course toward the next spending limit set by Congress
approaches the next $ trillion with fewer months each time.
The conclusion of that past
article in Sept 2004 on Mythology seems appropriate here. "In
order to keep the charade going, the nation, its trading partners,
and investors worldwide must be fooled, tricked, and deceived
by myths. Without such myths, we would be forced to endure a
painful correction to inflated assets, and be subjected to a
severe debt downgrade. The consequence would be a grand
decline in the standard of living for most American households
and citizens. The world economy depends too much on our spending,
even if that spending is led by evermore debt in an overly burdened
debt environment. In all likelihood, the world economy would
enter a deep recession, or worse. So maintaining and perpetuating
myths is essential... What will the next economic myth be, sold
to the world ???"
It seems the excellent analyst
Axel Merk has written about "Dollar Myths" in
a current article (click here).
His topic is more limited in mine, but important, since propagation
of myths is essential to a crippled system. Besides, what he
calls myths are more like faulty construct beliefs within the
larger mythology in my book.
The entire body of economic
statistics represent false shadows cast against the wall, each
to support the current empty mythology. The US Gross Domestic
Product is running at minus 1.5%, not in the 3% range. The US
Consumer Price Index is running at 10%, not in the 3% range.
The US jobless rate is running at 12%, not in the 5% range. Check
the Shadow Govt Statistics for a snapshot of reality, whose calculations
are divorced from mythology and rooted in unwanted reality. These
guys remove gimmicks, otherwise known as accounting fraud, or
more simply lies. The statistical lies took root in the early
1990 decade. If the word 'is' cannot be defined, then the statistics
cannot be trusted.
PERSIAN GULF RACKET
Here is the likely
response by those who spin mythologies. Instead of a new myth,
we see massive denial of a housing bust, and widespread denial
of a mortgage contagion debacle. No new myth will be employed,
since the denial will reach an enduring crescendo, enough to
divert attention away from reality. The next solution will
very possibly be to enable a much higher crude oil price. Since
the summer of 2005, the Persian Gulf nations have replaced the
absent Asians in credit supply. Oil prices have prevailed
at a higher level, enough to generate larger Persian Gulf oil
producer surpluses. The sheikdoms have done a marvelous job of
concealing their grandiose USTreasury Bond support, using London-based
bond brokers, and London-based hedge fund mangers, and London-based
agencies dotting the archipelago offshore from the United States
along the Caribbean. England might not offer much troop assistance
in the Iraqi War, but the nation surely comes through with assistance
in banking. Besides, banking is where the real power is anyway.
Military deployment is often to support the banking enterprises.
The Iraqi War serves many purposes,
some not to be discussed since so seamy. The Bank of Baghdad
was cited as a trading pit for JPMorgan last week, where oil
funds are actually used to suppress the crude oil price. It is
a clearing house for more, a convenient bank without the encumbrance
of regulatory oversight, the perfect central bank for the cabal
in power. The more sinister overt effect from the war is the
invisible gun pointed at the heads of the Persian Gulf nations.
They each feel more insecure, since Iran has been the hidden
winner in the reckless failed war effort. Shiite influence has
grown. Persian Gulf spending on US military equipment is on the
rise, a big rise. The sheiks feel somewhat compelled to purchase
USTBonds. Any retreat spawns a quid pro quo retreat is US troop
presence. This is the Protection Racket described last week.
So the sheiks buy more US bonds and buy more US weapons. This
helps to fill the void, to provide necessary capital for the
USGovt directly and USEconomy indirectly. How will they respond
when they learn that Iraqi oil funds are used to keep down the
futures contract prices for crude oil? Perhaps the sheiks will
purchase more gold, sell USTBonds quietly, undercut the USDollar,
and BUY MORE GOLD ???
A higher crude oil price,
in my opinion, was one of the primary objectives in the Iraq
War. Recall that the
USGovt leaders serve as Senators from the State of Oil, and thrive
on a higher oil price. Greater Persian Gulf petro surpluses could
be counted upon, given the tinderbox next door. A troop withdrawal
from Iraq, ordered by US Military leaders, might be accompanied
by dropped USTreasury support by the oil sheiks, since no motive
remains. These nations might lose motivation quickly, after a
war involving US troops and weapons and vessels were to be replaced
by a civil war led by factions like Shiite versus Sunni versus
Kurd versus secular thugs versus American mercenaries wearing
different uniforms.
FROM MYTH TO MEN
As economic principles
are long foregone, as economic mythology takes their place, the
role of men in power become of paramount importance. Men are
looked toward for saving the system, as in Greenspan. Institutions
change in their role for the society. Instead of being strong
through independence, these institutions become subverted by
means of stronger associations tied to the government power center.
This is precisely the warning known to the Mussolini Fascist
Business Model. The institutions can no longer be counted upon
to assist the system, when they are the umbilical cords for illicit
profit within a system without checks & balances, where prosecution
is non-existent. The US Federal Reserve is JPMorgan. The Dept
of Treasury is Goldman Sachs. The Iron Triangle supports the
US Military. These entities do the government's bidding and execution
of programs. Not one single Wall Street firm or bank has been
marred by the rash of scandals since 2000. Only outsiders were
damaged or ruined. Sure, Citibank was harmed, but only in profit
and reputation.
Westerners prefer to look upon
MidEast and Latin American strongmen as evidence of a flawed
political and economic system. The larger than life posters,
some 100 feet high, of men like Allende or Chavez or Morales
or Castro or Hussein or Qaddafi or Assad stand as proof that
their system is inferior, since their systems are based upon
men and not institutions. In the United States, the unfortunate
conclusion is that the rule of law in the highest offices and
corridors has been compromised. Institutions have become blurred
with the USGovt itself. The current and recent economic mythology
prevailing within the US system have depended upon men, the maestros,
the wizards, and decreasingly upon the institutions. Sadly, the
biggest loser has been the stock and bond market, now under severe
control by the puppet masters, and no longer worthy of being
called free markets. Institutions have become the perpetrators.
The Working Group for Financial
Markets (aka Plunge Protection Team) is now openly discussed
by the USFed Chairman Bernanke in their activities. Cases in
point for institutional transgressions are many. Fort Knox has
been gutted of its gold from the Clinton Administration years.
Heavy profiteering has been the mainstay with the war on the
Halliburton coffers during the Iraqi War. Now the Strategic Petroleum
Reserve is likely being abused to aid in energy inventory reports.
The SPR was likely also raided last autumn in the energy decline
engineered for the elections. Law means much less anymore than
sheer power. Tragically, with the advent of mythology has come
the rise of men to supercede institutions.
RECENT SHATTERED MYTHS
The previous era myths
have long been scrapped as drivel. The funny part is that economists
still refer to the principles associated with those past nonsensical
myths as crucial historical tenets. After discredited, the heretics
continue to preach their dead dogma! The Supply Side Myth
was a mere cover for a gigantic military defense spending campaign,
complete with goofy Phillips Curve and NAIRU (non-accelerating
inflation rate unemployment). These concepts were used to link
price inflation to unemployment, and divert attention away from
money supply growth. The unsuspecting public gobbled it up like
dog food served in high style at haut couture restaurants. These
were times marred by officially admitted economic recession,
when the leaders and citizenry were eager to latch onto any rope
to pull itself out of the quicksand. The moronic Laffer Curve
actually purported to anticipate higher tax revenue with higher
tax rates, and alternatively to anticipate higher tax revenue
with lower tax rates. How absurd! The initiatives proved to cripple
the US federal budget, almost doubling the federal debt, lifting
it by $2000 billion. That myth was popular in the 1980 decade,
dismantled easily, the true Reagan legacy. What is unique about
the 1980 decade is the lack of widespread scandals upon the discredit
of its myths. When military defense firms are the main beneficiaries,
scandals seem never to come to light. Instead, the system endured
a vicious Black Monday 1987 stock bust.
The New Economy Myth, dominant in the 1990 decade, was
a mere cover for a gigantic speculative boom to justify stock
investments in technology and telecomm. The miracle at the time
was achieved through productivity, which Greenspan failed to
comprehend. Instead of leading to higher profit margins, the
system realized lower profits, now documented. The internet achieved
a level playing field, more efficient supply chain systems, and
lower prices, not higher. This concept proved to be Greenspan's
greatest blind spot, which still plagues him, but without his
awareness, or any investment community awareness. They are too
busy worshiping him, even though the housing bust and mortgage
debacle have his fingerprints all over them. The other major
component to this myth was the Strong Dollar policy enforced
by then Treasury Secy Rubin. We now know the corrupt underbelly
to that initiative was the raid, pillage, and disappearance of
most gold in the US Treasury. Being the adept currency and commodity
trader, Rubin ensured 1% lease rates which permitted a grandiose
gold carry trade. That scheme enabled borrowing gold, selling
it, buying USTBonds, and enjoying an enormous decline in interest
rates (and bond rally). The name 'Decade of Prosperity' is more
appropriately labeled the decade of the great gold heist. We
were treated to scandals, with Enron, Arthur Anderson, and WorldCom,
but the real architect of the Enron scams was JPMorgan. There
are advantages to having one's identify carefully concealed as
US Federal Reserve, in that JPMorgan cannot be successful prosecuted
or sued. The court decision last month exonerated Wall Street
firms of all liability in Enron investor losses. Heck, JPMorgan
taught Enron everything they knew on off-shore games and special
purpose entities, even executing most trades. The system, just
like 1987, was hit by another stock bust in 2000, this one worse
than before. Busts are the typical final step to a shattered
myth, with silver linings of profound opportunities.
CONCLUSION
A powerful gold and
crude oil rally is soon to be unleashed. The gold push will be
unwanted, but demanded by a weak USDollar. The oil push will
be secretly ordered. Not only has the Macro Economy Myth been
exposed as vaporous, but it has not even been the subject of
debate. Three sources have supported the gargantuan US credit
appetite in the last several years. The Asian trade surplus recycle
has essentially disappeared, without publicity or fanfare. The
Persian Gulf petro surplus recycle is going in full bore, under
the shroud of accounting diversions, with little attention paid.
The USGovt printing press has been turned loose in unprecedented
fashion, without the harsh light of tracked M3 Money Supply statistics.
Look for a higher crude oil price, like one to hit $80 per barrel,
and a higher gold price, like one to hit $750 per ounce, in the
coming months. Look for mindboggling creation of new money to
come also, under the cover of darkness, to paper over the mortgage
bond black hole, to avert associated credit derivative accidents
underway. We are in the Weimar Age of modern money. Good prefers
light; evil embraces darkness. In full light, the gold rally
would be afforded greater tailwind. Even in darkness, gold will
thrive since confidence erodes in darkness. Darkness is the constant
theme to both the current financial system which manages the
USDollar, and to a lot more of the national drumbeats.
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Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
Willie Archives
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Jackass
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Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
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