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Jim Willie CB is the editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.

The USDollar is offered futile support in the grand scheme by large government related entities possessing titanic vested interests, even as the world reserve currency benefits from the lack of organization of world currency alternatives. They hold the USDollar aloft, but their endeavor can only succeed in buying time, then buying even more time, in a hopeless pursuit to save the doomed greenbuck. In a perverse zero sum game, the global floating currency system under its current design is destined to careen downhill, however in ultra-slow motion. Beneficiaries of a stronger currency standing in opposition to the buck are paradoxically rendered as agents of harm, doled slowly over time as their economies react and adapt corrosively to a rising domestic currency. This is, as Von Mises claimed, a race to the bottom. 

Consequently, the gold market has been and will remain restrained like a magnificent bull with numerous gigantic reins, hardly rampaging, but surely towing the gaggle of central bankers uphill. Imagine two smallish men attempting to walk a mastiff hound weighing 170 lbs (80 kgm) when a cat crosses the path. Gold will run in an endless march uphill powered by phony money and omnipresent printing presses, whose machine operator hacks will be continually motivated to avert an economic meltdown from bubble collapses. Since the currency system is unfixable, and debt must accelerate, the gold bull will breathe endless life, since the alternative is a rampaging recession aggravated by debt default and asset deflation. Such is not a viable acceptable option. Attempts to subdue the bubble propagation will be brief and fitful, sure to be abandoned, since the USEconomy urgently requires them for sustenance. Silver will ride gold’s back, aided by depletion, widespread industrial usage, restricted delivery, and unpublicized default. 

To claim that the gold bull has ended is equivalent to a claim of a stable USEconomy powered by a broad-based manufacturing sector, free from trade deficits, a USGovt budget nicely in balance with restrained spending offset by ample revenues, consumer spending held in check, debts under control, leveraged derivatives as docile, and the nation at peace with its neighbors, trade partners, and ideological adversaries. Such claims are indubitably delusional in each and every criterion stated, hence an endless gold bull market. Ironically, all efforts by the close compromised cadre of central bankers to forestall the decline of the USDollar, and eventually all fiat currencys, will supply the gold bull its fuel. The duration of the gold bull will be directly and intimately linked to the effort to keep the system going in its current structure. My fear is that the structure will change before long. A reliable seat belt and life preserver might come in real handy.

This article provides an outline of the major points made in a Special Report within the Hat Trick Letter series of reports, with some added words. “The Resistant Dollar & Credit Status” was posted in mid-January for members. The Davos Economic Summit warnings on improper pricing of risk in stock and bond markets. Fresh bond market danger signals, with indirect gold implications, are addressed in the upcoming February report for members due in mid-month.

THE USDOLLAR RESISTS CORRECTION

Central bankers worldwide have an enormous vested interest to prevent the USDollar from any precipitous decline. If the buck falls 20% in a plummet over a short period of time, as it most assuredly deserves from horrendous fundamentals, then the Japan piggy bank drops $60 billion, the Chinese piggy bank drops $30 billion, the major Persian Gulf oil producer piggy banks drop accordingly. Numerous other such hoards decline in value proportionally. It is debatable whether a ratchet downward in US$ exchange rates would drag down national banking systems. My view is that foreign reserve accounts and banking systems are inextricably linked. How could they not be? Dissenters claims they are independent, thus insulating the banking system from damage to FOREX reserves held. Nonsense. It is widely accepted that a grand inflow from trade surpluses creates a surge of bank lending on the positive side, with inherent risk. Conversely, a downgrade in the reserves value would inhibit such inflows into the same banking system. Denial is absurd. So central banks prevent the plummet in the USDollar, but they cannot halt or reverse the downtrend. The same flimsy asymmetrical argument has been used and promulgated within financial circles concerning the US housing decline risk to the USEconomy. It benefited on the upside, but somehow will do no harm on the downside? Rubbish!

Never in the history of central bankers has the hidden coordination, influenced pressure, gargantuan money creation, doctored statistics, and interference with financial markets been so broad, so deep, and so profound. My allegation is clear, that we now live in Weimar times, as has been warned for two years worth of scribbles. Collectively, they have abused the privilege of printing money, and in doing so, have guaranteed a gold bull market. The Y2K flip of the switch, the 2000 stock bust, these events set the global economies and markets into a lockstep unison. As central banker desperation grows to preserve the system, their printing press will be strained to maximum limits of operation, as seen vividly in the last couple years. Foreign economies are bound to preserve their export market, namely the USEconomy. Some regard the United States as the engine for growth. My view is more like a parasite on Asian growth, depositing its feces in Asian banks in the form of cancerous USTBonds. The gold price serves as the meter for temperature on the overused printing presses used in the frenzy. The more heavily the counterfeit press dispenses electronic dollars, devoted to operations, to credit, to consumer spending, to military adventures, to good old fashioned fraud, the gold bull benefits from ample new oxygen and blood flow.

This feeding of the gold bull will not end. If it ends, then the dawn of global recession and possibly depression will be upon us. My vote is that central bankers will choose grander inflation instead, and test those recklessly dangerous waters. Wall Street will surely urge them to inflate further, especially since the stock market stands first in line for inflation benefits, the path of least resistance, the forward price discount mechanism, the purchase power regulator. So will politicians and legislators urge accommodation. As for the public, their votes are muted, since the system has been transformed into a process wherein each crinkled dollar carries one vote. The ruling chambers are mere dens no longer beholden to the interests of commoners, where orders are taken from board rooms. The new age of the Mussolini Business Model is upon us and already deeply rooted from the last few years. Sadly, it is seen as necessary if not normal. One of its purposes is to suppress gold, but that battle is futile. The market is bigger than men. Any opinion to the contrary in defense of the system is at best idealistic and unrealistic. 

The global currency and financial system holds together remarkably well, or at least it avoids implosion with surprising resilience. The USDollar defies the requisite severe downgrade deserved to any Banana Republic performance, toward which the USEconomy trade deficit and USGovt budget deficit amply testify. How long can the music remain strumming by the maestros? Who knows? Probably much longer than anyone imagines. My personal viewpoint holds firm in the opinion that when the system breaks, and it will, the political system will also change, and its structure will indisputably become a form of totalitarianism. That discussion belongs on another journal forum. The gold community seems somewhat unprepared for systemic political change which would accompany financial changes thrust upon us in bonds and currencys. 

While strength is boasted, weakness cries aloud. The weak links to the untenable US$-based system are many. The most prominent in my view are 1) the burdened US consumer no longer buffeted by housing, 2) foreign central bankers losing faith or in open revolt, 3) ill-advised military pursuits which invite retaliation, bold counter maneuvers, and global disrespect. As each link gives way, gold will benefit.

OFFICIAL BANKER ACCORDS

The recent history of currency swings testifies to the Von Mises principle of competing currencys inflicting sequential harm on each other. As the nation bearing the weight of a rising currency must operate on an uphill field from increases in export prices, its economy slows, interpreted by some as the export by the United States of its overvalued currency. In response, the US$ exchange rate benefits, not from US strength but from less relative weakness. Standard medicine to combat price inflation, such as higher interest rates, unfortunately can kill entire industries, like what happened with the US steel sector following radical Volcker rate hikes in the late 1970 decade. The US$ rose sharply from higher rates, as bond speculators entered the fray for ridiculously easy profits in the wake of carnage, as they exploited the onset of rising rates. The 1985 Plaza Accord addressed the problems of a rising US$, but it worked too well in bringing the buck down. The 1987 Louvre Accord was struck so as to prevent damage to the German economy from a rising DMark currency. Think “zero sum game” and you will comprehend the problem of floating currencys.

Nowadays, the global bankers are in a constant perennial Louvre mode. The USEconomy cannot cope with a Volcker medicinal treatment of much higher interest rates. The avalanche of bankruptcies, defaults, foreclosures, plant closures, job disintegration, combined with stock market crash would be inevitable. So the system chugs along, broken. Bankers keep the game going out of vested interest, defending the USDollar. It is far too late to fix anything. Nobody even talks about another Plaza Accord or Louvre Accord. Instead, an unedited interpretation of central bank discussions emanating from G7, G8, and G9 finance minister meetings sounds more like a combination of management of the US$ collapse, defense of the US$ by the West, opposition of it by the East, and pockets of outright revolt among frontier nations. 

Newer players like Russia and Venezuela choose not to play the game which clearly permits Americans to enjoy benefits without work, invest without savings, pilfer money off the counterfeit press, and conduct wars on a credit card. Even longstanding friends like Norway object. The central banker game has inextricable ties to the crude oil world, since the USEconomy imports almost 60% of its oil. Fat, corrupt, and bully best describes the US position holding the world hostage using the USDollar in what could be called a grand extortion. Former US Treasury Secy John Connally put it best. “The deficits are our responsibility, but they are your problem.” Well put. Nowadays, USFed Chairmen do not fight inflation, they propagate it, they guarantee it, they manage it, even as they serve as underwriters to any and all financial accidents of their own creation. My suspicion is that power is being shifted back to Old Europe after 60 years of Pax Americana, whose candle has all but burned out.

PHONY STATISTICS PLAY VITAL ROLE

Do not expect a return to normalcy in the United States, not now, not ever. The players are organized as brethren, sworn to uphold the aristocracy. If not coordinated interventions (clear rebukes of any free market claims), then corrupted accounting is the name of the game. A raft of economic statistics supports the broken USDollar global system held in place by brute force. Each statistic wanders farther from the path of veracity and righteousness. We might soon be treated to a revision of the Consumer Price Index. It seems we have been deceived that the true price inflation rate is actually lower than told. This will aid claimed growth even further.

The doctored statistics are critical, vital, and urgently needed to prop the USDollar. They sell the currency which serves as denomination for the bond and stock market, and once upon a time the housing market (no longer forefront). Sometimes the flawed statistics more simply benefit from convenient designated categories in basic tallies. Sure, the US gross domestic product is lifted routinely by the under-estimated price inflation. In recent years, that adjustment process has been corrupted. Conveniently, whatever price inflation is not removed is falsely labeled as economic growth. That exaggerates the GDP by 4% to 5% in every quarter, and thus renders the USEconomy as recession proof, quite the bragging right. USEconomic strength is thus a deception which aids in prolonging both the managed elevated USDollar and the managed low yielding USTreasury Bond. Protection rackets suck in money for overvalued stocks and offer pitiful yields for bonds. If accurate price inflation was reported, then prevailing interest rates would have to be 8% to 10% in order to compensate for the asset erosion risk.

One of my favorite topics of discussion is phony economic statistics, their methods, their impact, and their role in policy making. The other grand statistical deception of convenient tally comes from the US manufacturing base, one of my major pet peeves. In recent weeks more than a little amusement comes to me from hearing public relations puppets from the USGovt and motivated promoters from Wall Street speak of the US mfg revenues never being stronger, exceeding those of any other nation. A close check reveals two significant categories in US mfg statistics: electricity generation, pharmaceuticals. As Americans indulge themselves in larger, less economical homes, with oodles of gadgets, leaning on electrical heat sources in newer structures, relying upon powerful air conditioning systems, the US manufacturing statistic appears stronger. As Americans heat, light, and power up all those shopping malls, both large and small, as well as the gambling casinos, neither serving to add to wealth, the US mfg statistic appears stronger. As Americans treat their myriad maladies, most real, some mysterious, the US mfg statistic appears stronger. They purchase medications more than any nation in the history of the world, and to be fair, are bombarded by advertisements more than any citizenry on the planet. As they treat with prescription drugs cases for depression, diabetes, obesity, high blood pressure, high cholesterol, hypertension, poor circulation, and allergies, the US mfg statistic appears stronger. Then you have the bogus maladies like sluggish leg syndrome, better treated by getting off one’s arse, limbering up those limbs, and going for a walk. Let us not forget the Viagra and Cialis and related drugs to produce bedroom monoliths, whose prolific rise in sales supposedly help those who struggle to enjoy the benefits of intimate union. It is no coincidence to me that a nation which boasts of great power on the global stage has a severe impotence problem in the rear chambers. As bedroom performance is pursued via treatment, the US mfg statistic appears stronger. Indulgence and sickness, even gambling and bizarre frolic, these are essential apparently for USEconomic strength as measured by the accounted US mfg statistics!!! Lastly there is waged war, where defense contractors build more weapons, also adding to the US mfg statistics.

THE EUROPEAN MONETARY UNION STRUGGLES

Stress was seen within the European Monetary Union in 2005. Votes of NO were registered from dispute over the right for sovereign nations to print money with abandon, as they see fit, and the right to control their own legislative systems, as they see fit. Sovereignty was the issue. Therein lies the levered pump to push gold higher. Dissension will continue within European nations. History has demonstrated amply that this continent has no desire, no capability, and no ken to join into a centralized state. Its varied cultures, distinct languages, vastly different ethnic tribes, and unrelenting resentments will not tolerate it. A side note, the enlarged European Union economy now surpasses the size of the USEconomy.

Strains can be traced to several corners:

• The rotating leadership of the Euro Central Bank assures factional agendas

• Exporters, led by Germany, object to a fast rising euro currency

• Member nations want to retain the right to manage their own counterfeit operations

• Interest rate hikes lead to a rising euro currency, but slow their economies

• Refusal to hike rates leads to asset bubbles of an American type

• The degree of asset bubble prevalence is not homogeneous across Europe

• With further euro upward valuation comes more corrosion to their mfg base

• Italy has openly talked about breaking free of the EU and EMU

• A member nation to break free can devalue its currency and revitalize export trade

• Eastern European nations seek membership, but add strain with lower labor costs

• With enough new eastern members joining, the EU core will fracture

• Currency competition has surfaced between the euro and the British pound sterling

The euro currency will not displace the USDollar as the sole world reserve currency. However, the constant nipping at its heels will actually prolong the gold bull and keep that bull well fed. A chronic undermine to the US$ serves the gold market well.

CHINA HOLDS MORE & MORE CARDS

Two graphs tell it all, when pointing out the shift in economic power, which will resolutely dictate a shift in geopolitical power. The “BRIC” nations of Brazil, Russia, India, and China are growing from broad based industrial expansion. Contrast their growth to the growing dependence by the USEconomy upon asset bubbles and financial engineering, otherwise known as bond speculation and carry trade gratuities. A grand wealth transfer is in progress, from the nations insisting on printing money for illusion of wealth, to those nations relying upon old fashioned commercial growth. The savings accounts for developing nations in non-gold reserves now stands at $2000 billion greater than the savings accounts for industrial nations. It is in no way a coincidence that the disparity widened after 1996, when Greenspan betrayed the nation in succumbing to demands to continue to provide liquor at the Wall Street investment orgies and Main Street investment group parties. The BRIC nations are not beholden to the United States, but rather are more renegades. They will prefer gold, a preference already displayed.

The second graph is of the burgeoning skyrocketing foreign reserves being accumulated by China. Their hoard has topped $1000 billion, enough to spark new debate, while Beijing leaders wrestle with the disputable wisdom in adding to an already colossal mountain of bad paper. My theory all along has been that the Chinese will gradually divert trade surplus money into oil stockpiles, and into stockpiles of prized ores like silver, iron, nickel, zinc, other industrial metals, and key structural metals. They will copy the Russian policy eventually, soon to be announced in my conjecture, to gobble up all Chinese gold output from their mines. My added suspicion is that China will also use its trillion dollar piggy bank for military purposes, to purchase a deep water navy and a modern air force. A combination of heavier Chinese Govt investment in gold bullion and military power will take gold to the heavens. A global confrontation lies directly ahead between the United States and China. They wish for a more prominent seat on the geopolitical financial table. They can easily use USTBond sales and gold purchases to accomplish their goals. What is to stop them? Would it be effective? Yet bet. In fact, bet with gold & silver.

China and India add a twist to the environmental movement, much like a dagger twisted into an ailing soldier. The biggest violations from industrial pollution are seen in the emerging Asian back yard. The BRIC nations are not clean. See the Amazon Rain Forest in Brazil, for instance, whose destruction might be but a key complementary component to the global warming causing havoc in the energy market. While the United States is harped at for not conforming to the Kyoto Accord on greenhouse gas emissions, Asian nations operate one hundred years behind the US and the West in pollution standards. Continued progress on this matter in the West would essentially “turns the lights out” in western shops, with associated job loss and income sacrifice, while Asia hums along making big strides in both as it does harm to the environment reminiscent of the chaotic days in 1900 US life. The days without regulation are vividly described in the novel “The Jungle” by Upton Sinclair regarding the meat packing industry. China’s meat is the wide array of consumer products destined for US store shelves.

WEIMAR MONEY CREATION

The central bankers and government leaders would have you believe that global savings is escalating as evidence of a strengthening economic system. The truth is more like a veritable flood of counterfeit money spewed by the clique of central bankers in order to sustain the US Ponzi scheme of debt sitting atop debt, and credit derivatives attempting to hold things in place. Heck, even Greenspan admits the derivative situation is beyond repair or even simple monitoring. Is the backlog of derivative trade confirmations conducted over the counter still three months? Better yet, is it the latest suppressed statistic?

Global monetary growth is mammoth, a confirmation of my claim that we have already entered the Weimar Modern Era of unbridled money growth. The official figures for global liquidity growth ran at 15% annually in 2006, up from almost 7% in 2005. That is acceleration. The worst abuser among the industrial nations is Britain, which has seen fit to increase money supply by over 14% over the most recently recorded twelve months. They might be geared to avert a housing crash. India and China are understandable, owing to broad investment in an industrial base, more aligned to the old fashioned time tested valid growth. Russian money supply growth is staggering, perhaps not so much inflationary as reflecting massive investment in their energy industrial base, new projects, supply chains, and extended pipelines. With unchecked monetary growth comes the conditions ripe for corrosive destruction of asset values in a natural retreat. The United States is clever in exporting its inflation to Asia, in an exchange of bad debt paper for finished product goods. This process delays the onset of the gold bull stampede further. The process is akin to directing your sewage pipes into your neighbor’s artesian well water source. Nevertheless, a US-Chinese trade war is invited in retaliation, which is due before 2010. Gold will be an arbiter asset in ANY trade war. When falling asset prices dictate enhanced monetary inflation, executed via vast liquidity infusions to rescue financial markets, gold will respond in giant steps, like always.

Even beleaguered Iran has radically increased its money supply, by 36% in 2006. Rather than investment, the Iranian Govt prefers to have economic policy set by Dumb & Dumber among the mullahs. Their price inflation is screaming along at 15% annually. Their oil exports are falling rapidly. They charge the public only 9 cents per liter of gasoline, equal to 38 cents per gallon, as part of a broad welfare system in place. They are not investing as much as they are hemorrhaging, even at refineries which are leaking badly.

© 2007 Jim Willie, CB
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