Category Archives: Currencies

We Can’t “Grow Our Way Out” of Debt, by Bill Bonner

We’re no longer getting enough economic bang from each additional buck of debt to reduce the debt pile. From Bill Bonner at bonnerandpartners.com:

YOUGHAL, IRELAND – Today, we turn to something no one cares much about, even though it threatens to cause the biggest financial calamity in US history:

Debt.

Glorious Valhalla

Total U.S. debt – public and private – now approaches $74 trillion. The economy that supports this debt has grown steadily, but nowhere near fast enough to keep up with it.

As we remarked yesterday, money is time. So when you owe money, what you really owe is time. And time is not something you can fool around with. It comes and it goes… no matter what you think or what you do.

Historically, Americans have owed 1.5 days of work in the future for every day of work in the present. That is, the ratio of debt to GDP averaged about 1.5 to 1 for the first eight decades of the 20th century.

Then, debt went up, and now stands at 3.5 days of future GDP for every day of present output.

Have we arrived in some great and glorious Valhalla, where the old rules no longer apply, where debt no longer matters… or where time is no longer our master, but our servant?

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Gold’s long-term gains have even outperformed Warren Buffett… by Simon Black

Whatever its faults, gold generally holds its purchasing power. Historically, an ounce of gold has bought a man’s suit, and it still does. From Simon Black at sovereignman.com:

Warren Buffett, despite his extraordinary investment success, has a rather famous and long-standing love/hate relationship with precious metals.

Maybe it started with his dad– Congressman Howard Buffett of Nebraska– who, as a staunch advocate for the gold standard, argued to his colleagues on Capitol Hill that “paper money systems have always wound up with collapse and economic chaos.”

Warren himself acquired a record-setting 128 million ounces of silver back in the late 1990s… which he later sold at a profit in the early 2000s.

But to listen to him talk about precious metals these days, he’s always negative.

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Oh My God, They Killed CNY! You Bastards, by Michael Every

Is Trump withdrawing from the Middle East to better focus US efforts against China? From Michael Every at Rabobank via zerohedge.com:

Cartman Blanche

Tipping points are funny things in markets and in life in general. Sometimes you see them clearly ahead of time, sometimes only in hindsight. Sometimes you still don’t see them even afterwards. But they are there regardless.

Most Americans have paid no attention at all to developments in China aside from not liking tariffs. But touch basketball and suddenly things get serious! Daryl Morey, general manager of the Houston Rockets, recently tweeted support for pro-democracy protests in Hong Kong, and the immediate reaction was China–an avid NBA market of 500m–banning the team. Morey deleted the tweet and made a very humble apology, as did the Rockets, which didn’t assuage Chinese fury; but it did create a backlash against the Rockets from the US public, who are pro-democracy, and from US politicians, who are anti-China, and whom are noticing that the outspoken-on-domestic-politics NBA runs a training camp in Xinjiang(!) Indeed, there is new focus on the issue of US firms ‘having to kowtow to Beijing’. Is it a tipping point in US-China relations as trade talks begin? Hard to say. But it’s a discussion the average American will be part of for once.

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Nixon Shock, the Reserve Currency Curse, and a Pending Dollar Crisis, by Mish Shedlock

When Nixon closed the gold window in 1971, he opened a Pandora’s box of economic evils. From Mish Shedlock at moneymaven.io:

Many problems today including deficit spending, trade deficits, and income inequality have their roots in 1971.

Nixon Shock

A reader asks “What Forced Nixon to Close the Gold Window in 1971?”

The answer is called “Nixon Shock“.

Nixon wanted to fight the war in Vietnam, not raise taxes, and not hike interest rates to finance it.

Arthur Burns, not Volcker was at the Fed.

American economist Barry Eichengreen summarized: “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one”.

Vietnam War and the Dollar Exodus Beginning

The dollar exodus had its beginnings way back in February 1965 when President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate of $35 per ounce.

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The Repo Market Incident May Be The Tip Of The Iceberg, by Daniel Lacalle

Unfortunately, Daniel Lacalle may be right. From Lacalle at dlacalle.com:

The Federal Reserve has injected $278 billion into the securities repurchase market for the first time. Numerous justifications have been provided to explain why this has happened and, more importantly, why it lasted for various days. The first explanation was quite simplistic: an unexpected tax payment. This made no sense. If there is ample liquidity and investors are happy to take financing positions at negative rates all over the world, the abrupt rise in repo rates would simply vanish in a few hours.

Let us start with definitions. The repo market is where borrowers seeking cash offer lenders collateral in the form of safe securities.  Repo rates are the interest rate paid to borrow cash in exchange for Treasuries for 24 hours.

Sudden bursts in the repo lending market are not unusual. What is unusual is that it takes days to normalize and even more unusual to see that the Federal Reserve needs to inject hundreds of billions in a few days to offset the unstoppable rise in short-term rates.

Because liquidity is ample, thirst for yield is enormous and financial players are financially more solvent than years ago, right? Wrong.

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Iran Is China’s Secret Weapon for Killing off the US Dollar’s Global Reserve Status, by Federico Pieraccini

The bulwark of the US dollar as the world’s reserve currency is the oil trade, which heretofore has been conducted almost exclusively in dollars. China seeks to change all that. From Federico Pieraccini at strategic-culture.org:

There is a strong current of change affecting the international political arena. It is the beginning of a revolution brought on by the transition from a unipolar to multipolar world order. In practice, we are faced with the combination of several factors, including the application of US tariffs on Chinese exports, Washington’s sanctions on Iran, US energy self-sufficiency, the vulnerability of Saudi industrial facilities, and Iranian capabilities for resisting US attacks, as well as its exportation of large quantities of gas and oil to China. Everything converges on one factor, namely, the looming decline of the US dollar as the global reserve currency

We have recently been witnessing events of considerable importance in the Middle East, almost on a daily basis. The tensions between Washington and Tehran are fueled above all by the Trump administration’s need to placate most of the US deep state, wedded to neoconservativism, who march in lockstep with Trump’s financiers from Wahhabi Saudi Arabia and Israel.

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De-Dollarization: Europe Joins the Party, by Ronald-Peter Stöferle

De-dollarization will be a slow, incremental process, unless some sort of crisis hastens it along. From Ronald-Peter Stöferle at mises.org:

The ongoing “World War of Currencies”, as the German journalist Daniel D. Eckert called it, the battle for the future of the world monetary system is not a shallow action film but more like Game of Thrones – a complex series with hundreds of actors and locations, stretching over decades and demanding full concentration from the viewer.

The bottom line is that what has been true for decades still applies. The US dollar continues to enjoy the confidence of markets, governments, and central banks. But faith in the US dollar weakens a little every year. Europe, China, Russia and many small countries set new initiatives every year to make themselves independent. And gold, too, plays a major role in this slow departure from the US dollar. But for the world financial system, none of their currencies offer a viable, fully-fledged alternative to the US dollar yet, which is why any news of the death of the US dollar is definitely exaggerated.

Europe’s Small Uprising

Since the Greek crisis of 2012, the American media have often given the impression that the EU and the euro have already broken up or are about to break up. This is not the case. Twenty years after its creation in 1999, the euro area is larger than ever. Of course, nothing is perfect in the EU. The debt problems of the southern states have hardly improved. The structure of the euro zone itself is also often criticized and described as being in need of renovation.

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