Possibly the Last Time to Get Out of the Dollar

From Sovereign Man: Finance, lifestyle design, Offshore Business and Expat news 

by Simon Black

March 15, 2011
Dallas, Texas, USA

It’s no secret that the United States government owes a pretty penny to foreigners. Certainly, what America owes to foreigners pales in comparison to what it owes to Ben Bernanke… but still, $4.45 trillion is no small number, even in these crazy times when terms like “kajillion bajillion” are more appropriate to quantify debt and entitlements.

China is the largest foreign buyer of US Treasuries with around $1.15 trillion in holdings… Japan is the second largest at around $886 billion. Curiously, the trend for China has been down– the Middle Kingdom has been steadily reducing its position since peaking in October 2010.

Japan, on the other hand, has been steadily increasing its Treasury holdings over the same period. Its government does have a long pattern of currency intervention, and there has been much grumbling in Tokyo about the effects of the strong yen on their exports.

Fast forward to this past weekend. Earthquake. Tsunami. Volcano. Nuclear radiation. Japan clearly has other things on its mind right now than to continue financing the ongoing largess in Washington DC.

At a minimum, Japan will likely slow (or eliminate) its US Treasury purchases, instead focusing on dumping money into its own economy. At greater risk, Japan may choose to allow much of its Treasury portfolio to simply mature, requiring the US government to repay tens of billions of dollars of principal (which it doesn’t have).

With so much uncertainty, many investors around the world are buying Treasuries at the moment, so if Japan starts selling its portfolio into that momentum, the impact may be negligible… for now. Rearranging the deck chairs, if you will.

Come June 30th, though, with the supposed end of the “I’m not printing money” money printing that is quantitative easing, the US government will have lost, in theory, two of its biggest buyers– the Federal Reserve and Japan. And with both China and the OPEC nations slashing their own Treasury purchases, it leaves one simple question:

Who will buy all of this damned US government debt?

Below are some of the possible outlets:

1) US commercial banks. They’re awash with cash and partially owned by the government anyhow. The Treasury department could easily influence banks to increase their net bond purchases. This would have the effect of crowding out (once again) small businesses and individuals’ access to credit.

2) Retirement accounts. There’s $5 trillion of fresh meat available in US retirement accounts. It would be nothing for the Congress to pass a law requiring money managers to allocate a portion of their onshore retirement accounts to the ‘safety and security’ of US Treasuries. Kiss your retirement savings’ purchasing power goodbye.

3) Higher taxes. This is a given, unfortunately. It’s erroneous to conclude that higher tax rates yield higher tax revenues– yet this is the standard mantra of politicians. Higher tax rates reduce incentives to invest, take risks, and create wealth. Economic activity falls.

4) Default. Paint China as the root of all evil, the real reason behind America’s financial decline. Find a plausible reason to single out China and default on the debt that they own. I think this is possible down the road, but it would take a few years of preparatory political jockeying to pull off. What’s more likely is….

5) QE3. It’s coming back, like a bad Stallone franchise that just won’t go away. The lender of last resort will once again be the last resort… for the US government.

After a brief period of dollar strength from reduced risk tolerance, investors will realize that the world ex-Japan did not, in fact, come to an end… and they will resume the long-term trend of selling dollars for precious metals and more stable currencies (Australia, Singapore, and possibly even Japan).

The next few months may prove to be the best (and last) time to get out of the dollar.

____________

Related:

Patience 

From Along The Watchtower by Turd Ferguson

If you bought the first dip (which I didn't), have a tight stop.

If you're trading this craziness (which I'm not), be very cautious.

First of all, I think its funny that CNBS is still breathlessly awaiting the FOMC minutes. As if it can't be all thrown out the window in light of current events. Here's why the Japan situation only further assures QE to infinity:

1) Japan must have cash to rebuild.

2) Japan will, undoubtedly, sell some treasuries to raise cash. This selling increases downward pressure on treasury price and upward pressure on rates.

3) Japan will then convert the $US it receives into yen. This selling of $ increases the downward pressure on the USDX. This buying of yen helps support value of yen against issuance of new yen to fund reconstruction.

4) Already 70%+ of the overall treasury market, the Fed is left with no choice but to not only continue QE but actually increase it.

One day soon, that realization will grip the PM "markets" and prices will shoot higher again. That day is definitely not today. It may not come tomorrow or next week, either, but that day is, most assuredly, coming. Perhaps, though, this is already being reflected in the USDX. Never, ever, ever in the past could a catastrophe like Japan happen and the dollar not rally. It is the safe haven! Well, apparently, not anymore. Look at this chart. The USDX should be up 100 basis points today. Instead, its flat to down.

With all of the continued uncertainty in Japan and with the PMs having violated their first, primary level of support, I doubt that the selloff is over. I fully expect another wave down...perhaps overnight and into tomorrow and Thursday. I have not done any dip buying today and I don't plan to. However, for me, there are some very clear entry points on the charts so I am patiently awaiting the opportunity to buy, if it comes. First, take a look at silver. This is where I'll buy first because the fundos are so overwhelmingly strong that even the slightest bit of sentiment change will send it charging back very quickly.

Around $32.50 is a point where I will be looking to buy.

In gold, the area around 1370-75 looks to be a logical entry zone.

Interestingly, those levels may be reached at roughly the same moment in time. Sort of like 1320 and 26.50 were struck in late January.

Again, first and foremost, pray that Japan is spared what could be the worst environmental disaster in recent history. Those poor people have been through enough.

If you are trading, I'd set a stop below this mornings lows and be very diligent and cautious.

More later this afternoon. TF

______-

Gold & The Big Markets - Sideways Action Ending!

Jobs: The Good, The Bad, and The Ugly

Worldwide, people with "good jobs," those who are employed full time for an employer, tend to have the highest wellbeing. The self-employed tend to have the lowest wellbeing. 


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Tokyo Electric to Build US Nuclear Plants: The No BS Info on Japan's Disastrous Nuclear Operators

by Greg Palast Global Research, March 14, 2011

Truthout

I need to speak to you, not as a reporter, but in my former capacity as lead investigator in several government nuclear plant fraud and racketeering investigations. I don't know the law in Japan, so I can't tell you if Tokyo Electric Power Co (TEPCO) can plead insanity to the homicides about to happen. But what will Obama plead? The administration, just months ago, asked Congress to provide a $4 billion loan guarantee for two new nuclear reactors to be built and operated on the Gulf Coast of Texas - by TEPCO and local partners. As if the Gulf hasn't suffered enough. Here are the facts about TEPCO and the industry you haven't heard on CNN: The failure of emergency systems at Japan's nuclear plants comes as no surprise to those of us who have worked in the field. Nuclear plants the world over must be certified for what is called "SQ" or "Seismic Qualification." That is, the owners swear that all components are designed for the maximum conceivable shaking event, be it from an earthquake or an exploding Christmas card from al-Qaeda. The most inexpensive way to meet your SQ is to lie. The industry does it all the time. The government team I worked with caught them once, in 1988, at the Shoreham plant in New York. Correcting the SQ problem at Shoreham would have cost a cool billion, so engineers were told to change the tests from "failed" to "passed." The company that put in the false safety report? Stone & Webster, now the nuclear unit of Shaw Construction, which will work with TEPCO to build the Texas plant. Lord help us. There's more. Last night, I heard CNN reporters repeat the official line that the tsunami disabled the pumps needed to cool the reactors, implying that water unexpectedly got into the diesel generators that run the pumps. These safety backup systems are the "EDGs" in nuke-speak: Emergency Diesel Generators. That they didn't work in an emergency is like a fire department telling us they couldn't save a building because "it was on fire." What dim bulbs designed this system? One of the reactors dancing with death at Fukushima Station 1 was built by Toshiba. Toshiba was also an architect of the emergency diesel system. Now be afraid. Obama's $4 billion bailout in the making is called the South Texas Project. It's been sold as a red-white-and-blue way to make power domestically with a reactor from Westinghouse, a great American brand. However, the reactor will be made substantially in Japan by the company that bought the US brand name, Westinghouse - Toshiba. I once had a Toshiba computer. I only had to send it in once for warranty work. However, it's kind of hard to mail back a reactor with the warranty slip inside the box if the fuel rods are melted and sinking halfway to the earth's core. TEPCO and Toshiba don't know what my son learned in eighth grade science class: tsunamis follow Pacific Rim earthquakes. So, these companies are real stupid, eh? Maybe. More likely is that the diesels and related systems wouldn't have worked on a fine, dry afternoon. Back in the day, when we checked the emergency backup diesels in America, a mind-blowing number flunked. At the New York nuclear plant, for example, the builders swore under oath that their three diesel engines were ready for an emergency. They'd been tested. The tests were faked; the diesels run for just a short time at low speed. When the diesels were put through a real test under emergency-like conditions, the crankshaft on the first one snapped in about an hour, then the second and third. We nicknamed the diesels, "Snap, Crackle and Pop." The forces against independent journalism are growing. Help Truthout keep up the fight against ignorance and regression! Support us here. (Note: Moments after I wrote that sentence, word came that two of three diesels failed at the Tokai Station as well.) In the US, we supposedly fixed our diesels after much complaining by the industry. But in Japan, no one tells TEPCO to do anything the Emperor of Electricity doesn't want to do. I get lots of confidential notes from nuclear industry insiders. One engineer, a big name in the field, is especially concerned that Obama waved the come-hither check to Toshiba and TEPCO to lure them to America. The US has a long history of whistleblowers willing to put themselves on the line to save the public. In our racketeering case in New York, the government only found out about the seismic test fraud because two courageous engineers, Gordon Dick and John Daly, gave our team the documentary evidence. In Japan, it's simply not done. The culture does not allow the salary men, who work all their lives for one company, to drop the dime. Not that US law is a wondrous shield: both engineers in the New York case were fired and blacklisted by the industry. Nevertheless, the government (local, state, federal) brought civil racketeering charges against the builders. The jury didn't buy the corporation's excuses and, in the end, the plant was, thankfully, dismantled. Am I on some kind of xenophobic anti-Nippon crusade? No. In fact, I'm far more frightened by the American operators in the South Texas nuclear project, especially Shaw. Stone & Webster, now the Shaw nuclear division, was also the firm that conspired to fake the EDG tests in New York . (The company's other exploits have been exposed by their former consultant, John Perkins, in his book, "Confessions of an Economic Hit Man.") If the planet wants to shiver, consider this: Toshiba and Shaw have recently signed a deal to become worldwide partners in the construction of nuclear stations. The other characters involved at the South Texas Plant that Obama is backing should also give you the willies. But as I'm in the middle of investigating the American partners, I'll save that for another day. So, if we turned to America's own nuclear contractors, would we be safe? Well, two of the melting Japanese reactors, including the one whose building blew sky high, were built by General Electric of the Good Old US of A. After Texas, you're next. The Obama administration is planning a total of $56 billion in loans for nuclear reactors all over America. And now, the homicides: CNN is only interested in body counts, how many workers burnt by radiation, swept away or lost in the explosion. These plants are now releasing radioactive steam into the atmosphere. Be skeptical about the statements that the "levels are not dangerous." These are the same people who said these meltdowns could never happen. Over years, not days, there may be a thousand people, two thousand, ten thousand who will suffer from cancers induced by this radiation. In my New York investigation, I had the unhappy job of totaling up post-meltdown "morbidity" rates for the county government. It would be irresponsible for me to estimate the number of cancer deaths that will occur from these releases without further information; but it is just plain criminal for the TEPCO shoguns to say that these releases are not dangerous. Indeed, the fact that residents near the Japanese nuclear plants were not issued iodine pills to keep at the ready shows TEPCO doesn't care who lives and who dies, whether in Japan or the USA. The carcinogenic isotopes that are released at Fukushima are already floating to Seattle with effects we simply cannot measure. Heaven help us. Because Obama won't.

Greg Palast is a frequent contributor to Global Research.  Global Research Articles by Greg Palast ____________ Related: The Idiocy and Hubris of Engineers: Will GE Get Whacked for the Catastrophic Failure of its Nuke Plants in Fukushira? By Dave Lindorff

Europe's Coming Meltdown

From The Daily Bell, Tuesday, March 15, 2011 – by  Staff Report:

Total German triumph as EU minnows subjugated ... The Iron Chancellor of Germany could not have been clearer. "Whoever wants credit must fulfill our conditions". Chancellor Angela Merkel (left) has agreed to cut the interest rate on the EU share of Greece's €110bn loan but this does not restore solvency. These conditions are capitulation by three vulnerable states on core policies, and partial loss of sovereignty for the rest of the eurozone. For Greece, the terms are a fire-sale of €50bn (£43.2bn) of national assets within four years, a tenfold increase from the original €5bn that premier George Papandreou thought he signed up to a year ago. When the IMF first mooted this sum last month he told the inspectors not to "meddle in the internal matters of the country." State holdings in Hellenic Post, Hellenic Railways, Athens Public Gas, the Pireaus port authority, Athens airport, Thessaloniki water, and ATEbank, to name a few, will not fetch more €15bn. What next? – UK Telegraph


Dominant Social Theme: The Germans are being quite reasonable. Frau Angela Merkel is benevolent.


Free-Market Analysis: The just-completed deal between North and South Europe (between Germany and the PIGS, really) is apparently almost entirely one-sided and bound to inflame not diminish civil unrest as spring begins to bloom across Europe. The lines of battle are not hardening; they look to have been set in reinforced concrete. In such an environment it would seem continued clashes within the affected countries are inevitable. Have you read this elsewhere? Here's one interpretation from the European Voice:


Herman Van Rompuy, the president of the European Council, declared that the eurozone leaders had resolved their differences over economic governance in time for the EU summit at the end of the month. A pact on competitiveness – which demands greater policy convergence between the eurozone states – has been agreed. In addition there are agreements in principle on boosting the effective lending capacity of the eurozone's bail-out funds – both the temporary arrangement, the European Financial Stability Facility (EFSF), and the permanent mechanism that will come later, the European Stability Mechanism (ESM).


Van Rompuy was speaking in the early hours of Saturday morning (12 March) at the conclusion of a meeting of the heads of state and government of the eurozone. Van Rompuy said that all 17 leaders of the eurozone countries agreed that their economies needed to be more competitive and more convergent. The pact would help achieve that, he said. Eurozone governments would make their first pledges at the end of this month as to what action they were going to take at a national level to help the eurozone. "What has changed is the political commitment," he said. Nicolas Sarkozy, the French president, hailed the pact as a "decisive step forward".


Sarkozy and Von Rompuy may be satisfied, but we would suggest that some others are not, including the heads of certain besieged Southern PIGS. The current state of affairs, in fact, is entirely in keeping with what we've been predicting for the past year or so. Europe's Southern tribes put up with the EU and especially the euro so long as it provided additional prosperity; but there is no benefit to these countries now, only eroded sovereignty and punishing austerity. The social compact has been breached and we wonder how long it will be before the debt will be rendered to Europe's spendthrift Northern banks in blood and bone rather than fiat paper – no matter Brussels' happy talk.


The Europhile Financial Times – of all papers – recently carried a hard-hitting editorial on the subject by Gideon Rachman. It was entitled, "Merkel's nightmare: the voters' revenge," and to read it is to realize how far Europe has traveled from two years ago when Eurocrats were so dismissive of European pushback to the new EU Constitution that they forced the language through by treaty, even demanding the Irish vote twice to ensure the changes were adopted. Here's an excerpt from Rachman's editorial:


In the new economic and political climate inside the EU, none of the key national governments feels it has any room for manoeuvre. On both sides of the euro divide, centrist governments are worried about the rise of nationalist and extremist parties. That makes it much harder to reach EU agreements, which worsens the economic crisis, which then worsens the political crisis. Germany is the key country pushing for tough, structural economic reforms across the eurozone. Its proposals have been made with France. But the hardline strictures on debt, deficits and later retirement ages, agreed in last weekend's euro pact, are very German in inspiration ...


[In the Netherlands] ... the rightward drift of Dutch politics has continued. The Party of Freedom of Geert Wilders, which is strongly opposed both to Muslim immigration and to the EU, is now a major force in Dutch politics. The German chancellor knows that anger about the EU and about immigration are also potent forces in her own country. Mr Wilders has spoken to enthusiastic audiences in Germany and the thought of a German Wilders is Ms Merkel's ultimate nightmare ... The trouble is, to fend off the threat of political radicalisation in Germany, Ms Merkel is demanding austerity policies in countries such as Greece that pose a long-term risk to their political stability. European leaders do not know whether to be more frightened of the bond markets or of their own voters.


One begins to question whether or not leading Eurocrats have become even further detached from reality than they already were. Every few months, now, EU leaders are gathering at a "summit" guaranteed to "reassure the markets" that the EU is "firmly behind" the euro and that Southern PIGS will not default. This latest agreement is perhaps the most disastrous as it indicates (as we have been predicting) that there is no compromise to be had.


Ambrose Evans-Pritchard of the UK Telegraph has provided us with a fairly unvarnished summation of what just occurred (see article excerpt above). The "agreement" as Evans-Pritchard points out does nothing to heal Greece's long-term economic woes. The debt load, he writes, "will approach 150pc of GDP in 2011, and debt service costs are 14.4pc of tax revenue." Meanwhile, Greece is under an affirmative obligation to privatize €50 billion in state holdings rather than €5 billion. In return, the Iron Chancellor has chopped 10 basis points from the Greek's €110bn loan package and extended the pay-back term. The deal also doubles the size of the EU bailout fund, though how the rating agencies are going to react remains to be seen.


Evans-Pritchard obviously believes the deal is a kind of non-starter. Greek joblessness, he points out, rose to nearly 15 percent of the work force – and given that government numbers always underestimate the reality, it is likely far more than that. Youth figures apparently are in the area of 40 percent. How about Portugal? "A descent into Hell," said a spokesperson for the "Bloco de Ezquerda" (Portugal's left wing). Portugal's pensions, welfare, and health-care are all being cut along with wages.


What has been the reaction, generally, in Portugal to "austerity?" Evans-Pritchard reports that almost 300,000 youth took to the streets of Lisbon and Oporto on Saturday – an open revolt of the "Desperate Generation." The Socialist Party itself is riven, with factions vowing not to endorse the just-completed compact. Five-year bonds have now climbed to eight percent, meaning that Portugal has to tempt investors to buy its paper by offering ever-rates.


Ireland is under continued pressure meanwhile to hike its low corporate tax rate, which is the foundation of what is left of the Irish economy, with both pharmaceutical and software companies settling in the Emerald Isle specifically because of the non-punitive fiscal environment. Ireland's repayment rates remained as they were because the new Irish leader Edna Kenny would not agree to raise the corporate rate. And well he should not, as that would be fastest way for Kenny to become a former "Taoiseach" in record time. Ireland is paying something like nearly six percent for its loan, while GDP has contracted over TWENTY percent.


Other PIGS are coming under increased scrutiny. Spain and Italy will experience increased scrutiny of pensions, wages, taxes and various additional government linked fiscal and economic policies. "Just as eurosceptics always feared," Evans-Pritchard writes, "monetary union has led to a state of affairs where – in order to 'save the euro' as Mrs. Merkel puts it – Europe's ancient states find themselves having to accept a quantum leap towards political union and a degree of subjugation that would not have been tolerated otherwise."


Under the agreement, debtor states will not be able to purchase their own bonds in the market to lower the overall debt burden, nor will the EU buy bonds of struggling PIGS as a matter of long-term policy. Meanwhile, Europe's Northern banks remain undercapitalized and likely unable to withstand any "haircuts" – though haircuts are exactly what they will get sooner or later. It is a matter of mathematics. Ireland and Portugal (and perhaps Spain and Italy) cannot pay their debts and are not receiving sufficient latitude from the EU to make debt-repayment possible.


In such an environment someone must pay somehow; even a debt jubilee repudiates SOMEONE'S debt. In this case, sooner or later it will be the banks. The North, in fact, is being a tad hypocritical in this regard by insisting on full repayment. German, British and French banks made a bad bet on Europe's Southern flank. Such misjudgments usually result sooner or later in a loss of capital. Merkel and the North are trying to alleviate economic losses via political pressure. Ultimately, the market is more powerful than politics; sooner or later that will become clear, we'd venture.


Evans-Pritchard does us the favor of revealing the souring sentiment in Greek's ruling PASOK party. "We should default and return to the Drachma to punish foreign loan sharks who have bled us dry" he quotes a recent PASOK editorial as suggesting. As for amiable cipher Enda Kenny: "[He] may ultimately have to choose between his EU club loyalties and his duties to the sovereign nation that elected him. Some within his coalition ranks already seem tempted to retaliate by pulling the plug on EU banks."


Interestingly, he makes the point that deep popular unrest usually appears three years after the initial crisis, citing the 1930's as his authority. Perhaps he is correct, though it seems to us that unrest is already occurring. And while many observers (and euro-investors) might be satisfied with the austerity now being inflicted – Southern Europe's welfare states being notoriously insupportable – this would be in our view a misreading of the situation.


Southern European countries are not Northern ones. Over and over, the ill-run governments of Southern Europe verged on insolvency and spread the pain though a devaluation. This solution is no longer available yet the problems are the same, only worse. From the perspective of many in the South, it is the government itself, the industrial and political elites that benefited from the largess of EU, while all that is left to the larger population is austerity.
We have advanced this view before. Southern Europe received millions – billions – of euros in order to "balance" its various economies in advance of joining the EU. This money was never well accounted for by design as it was seemingly a bribe to the various power centers of the PIGS to ensure the decision makers would bring their countries into the fold. The idea was that the political process would grind along, providing Europe with an ever-more perfect union no matter the difficulties along the way.


Something happened however. The logic appeared sensible but the implementation is increasingly plagued with resentments and violence. The Southern tribes of Europe are deeply aggrieved. It is not a question of logic but fairness, as they see it. No one likes to be snookered, Southern Europeans least of all. Who knows why it hasn't worked? Maybe the financial crisis was a good deal deeper than expected; maybe the Internet itself has revealed too much about elite manipulations.


But it seems to us that the pushback is far deeper than expected and EU paralysis is far more profound than might have been anticipated. Perhaps Europe and the EU will muddle through. More likely, sooner or later banks will be forced to acknowledge their imprudence and some, if not many, will go out business, deepening Europe's malaise. We would expect, sooner or later, as well, that one or more PIGS will withdraw from the union or at least the euro in order to default, as the EU is incapable of providing the necessary flexibility.


Conclusion: Nicolas Sarkozy and others (Merkel) can maintain "rigor" in the face of what is to come, but in a few years time the EU may look somewhat different than it does today; various compromises may have to be made to keep it together at all. It will be something of a defeat for the Anglo-American power elite that has banked on the EU as a stepping stone to world government; but the Anglosphere has experienced setbacks before. They are experiencing more of them in the 21st century than the 20th.