Money Problem: Obama, the Fed, and you.

IF INFLATION DOES NOT EXIST…WHY IS GOLD, SILVER, COPPER PRICES SKYROCKETING?  What happens to Stocks when the Fed Stops buying?  What happens to Prices if the Fed Stops printing money we do not have?

Gold prices have increased 12 straight years!  “The University of Texas endowment fund  took physical delivery of $1 billion Gold Bars. That’s an enormous bet from some of the wealthiest and best-informed investors in the world that the US monetary system falls apart.  Finally, in what we believe is the ultimate death knell for the US Dollar, our trading partners are moving out of the Dollar and into gold.  Mexico, for example, one of our most important trading partners, just purchased almost 100 tons of gold.  All around the world, more and more central banks are selling Dollars and Buying Gold.  They’re doing so because they can plainly see America’s credit has become unreliable and the value of the Dollar is likely to decline.”

US DEBT  –   $17.4 TRILLION vs $9 TRILLION in 2008

US DEBT to GDP   – 107%  Vs. ( China’s debt of 7% to GDP )

  • Australia           37%
  • England             91%
  • France                94%
  • Greece                149%
  • Ireland               127%
  • Russia                 32 %
  • Italy                    135%
  • Japan                  220%
  • California           19.9%

31 states – $55 billion in shortfalls for the 2013 fiscal year

“Fed up with what it sees as Washington’s malign neglect of the dollar, China is busily promoting the cross-border use of its own currency, the Yuan.”

“Displacing the dollar, Beijing says, will reduce volatility in oil and commodity prices and belatedly erode the ‘exorbitant privilege’ the United States enjoys as the issuer of the reserve currency at the heart of a post-war international financial architecture it now sees as hopelessly outmoded.”  In fact, in the past couple years; China has signed international currency agreements with Germany, Brazil, Russia, Australia, Japan, Chile, the United Arab Emirates, India and South Africa.

CHINA AND INDIA GOLD DEMAND:

  • China    36,314,375 ounces
  • India     41,884,926 ounces   versus
  • US          6,352,737 ounces

Robert Fisk, Britain’s newspaper, The Independent, wrote, “In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealing for oil, moving instead to a basket of currencies including the Japanese Yen, Chinese Yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.”

Fisk interviewed a Chinese banker who said, “These plans will change the face of international financial transactions.  America… must be very worried.  You will know how worried by the thunder of denials this news will generate.”

CNN on the dollar

The IMF on the dollar

CATO on the dollar

Prior to WW I, most countries were on the gold standard.  Currency issue and value was secured to the gold held in reserves.  Any country whose gold holdings dropped reduced its money supply accordingly.  Economic inflation was close to zero because countries closely monitored both sides of the money.  Hence, governments could not print money as the US Federal Reserve does today.  However, they were forced to massively spend during WW I and many eliminate the gold standard for the printing of money.  The US ended it in 1971.  For example, Germany went off the gold standard in 1914.  They could not effectively return to it because reimbursements cost most of its gold reserves.  During the Occupation of the Ruhr, the central bank issued enormous sums of non-convertible marks to support workers and to buy foreign currency for reparations.  This led to the German hyperinflation of the early 1920s.  Enter you know who and led to WW II.

At that time, the bulk of gold production came from Russia and South Africa, and others refused to be at the mercy of those two countries for future money supply.  Nations turned to printing money and it started a period of unprecedented inflation.

Governments today will not consider their money supply being anchored to gold because it is not flexible and professional politicians would fail to meet voter expectations when inflation occurs.  To avoid inflation the Fed prints money; To avoid a crisis, the FED prints money;  To temporarily solve economic problems, the Fed and government prints money.

How long can the shell game last?  Perhaps we should ask Bernard Madoff.

Competitive devaluation of currency by different countries caused world trade to sink by almost 80%.

Then in 1944, leaders of 44 nations met “Bretton Woods.”  Their solutions:

  1. International Monetary Fund
  2. International Bank for Reconstruction and Development
  3. Introduction of an adjustable pegged foreign exchange rate system

Currencies were now secured to gold and the IMF was granted authority to intervene when a nation’s financial imbalance of payments occurred.  British economist J M Keynes favored a new international currency, Bancor, anchored in 30 commodities.  Yet, no political effort was made then or now to reduce the volume or money printed by any nation, so the “Dollar” became the staple currency used for international banking.  Why?  US economic, political, and use of the “gold standard.”

Today, the US has no gold standard; skyrocketing deficits; world trade deficit; and prints money to avoid inflation and pay bills.  Refer to the debt to GDP mentioned earlier; the US owes $5.71 Trillion to these and other foreign nations:

  1. China                                    $1.4 Trillion
  2. Japan                                    $1.2 Trillion
  3. Caribbean Banks              $290 Billion
  4. Brazil                                    $247 Billion

Hmmm…doing the math… who do we owe the rest?  Mostly each other (your neighbor)

Now, in 1969 the IMF created a monetary instrument called “SDR.”  The SDR is an international reserve asset to supplement its member “official reserves.”  Its value is founded on “four” key international currencies, and SDRs can be exchanged for usable currencies.  The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold which, at the time, was also equivalent to one U.S. dollar. Today the SDR is based on the four currencies:  Euro, Japanese Yen, Pound Sterling, and U.S. dollar.

The U.S. dollar-equivalent of the SDR is posted daily on the IMF’s website.  It is calculated as the sum of specific amounts of the four basket currencies valued in U.S. dollars, based on exchange rates quoted at noon each day in the London market.  The SDR is linked to a basket of currencies with a weight of 44% for the dollar, 34% for the euro, and 11% each for the yen and pound sterling.

Since 1970, the IMF has issued $21.4 billion SDRs or $32 billion at today’s exchange rate.  The proposed new issue worth $250 billion will be far larger.  Yet, it pales in comparison with trillions of dollars held in forex reserves globally.  Forex is the foreign exchange market (currency market).  It is a global decentralized market for the trading of currencies.  The main participants in this market are the larger international banks.

Obama increased US debt $8.4 Trillion in five years (almost doubling it).  The Fed is printing trillions of dollars to stimulate the US economy and our largest foreign debtor, China, other nations, the IMF, the UN and Moody’s fear the dollar will falter.  What options China have?  SDRs.  New SDRs could be one more stimulus for the sagging world economy.  SDRs will probably be issued to countries in proportion to their IMF proportion:  India – 2%, China – 3.7%.  Not a good solution for either nation, but it’s better than the dollar.

Ironically, the U.S. opposes creating “new” SDR, claiming it’s “funny money.”  If Obama persuades Congress to approve the proposed $250 billion worth of SDRs, Congress will strongly oppose SDR creation on a scale big enough to rival the dollar as a reserve currency.

Now, remember Obama wanting to use every loophole to bypass Congress.

The problem for China or India?  If India wants to use its SDRs, it would ask the IMF for dollars in exchange.  The IMF then debit’s India’s SDR account, credit America’s SDR account and requests the US for the corresponding dollars for India.  The SDR really solves nothing for other nations and forces the US to, you guessed it, “print” more money.

How does this cycle end?  The Fed has no intention of ending it.  “To quell the latest financial crisis, The Federal reserve smashed interest rates to the floor by buying bonds with the money it prints.  Since 2008 assets on the Fed;s balance sheets, including those bonds, have tripled to $3 Trillion.”  

The Fed cannot stop printing money because “quantitative easing” will cause inflation.  And as the Fed’s bond holdings grow, the portfolio becomes more vulnerable to a sudden rise in interest rates.  As a result politicians argue that quantitative easing doesn’t need to end immediately, it shouldn’t be continued indefinitely

The ultimate problem: Fiscal policy wins over monetary policy. There is no way for the Fed to fully compensate when Obama and Congress fail to pass a budget; fail to address annual deficits; and fail to reform the tax system.

So we are forever caught between a rock, default, and creation of a new world currency.  Because “we the people” fail to elect politicians who have the “balls” to fix it.  Some time soon we will reach a crossroads: fix it or the IMF/United Nations will…



Categories: Economics, Obama

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