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DEATH
OF BRETTON WOODS II
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. 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.
The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
Jim
Willie CB is a statistical analyst in marketing research and retail
forecasting.