I have long said the trouble in the U.S. economy will all eventually boil down to a currency crisis. Meaning, the dollar is going to lose a whole lot more buying power before this chapter in American history is over. This is not a matter of if but when, and we are not going to have to wait too much longer. People call the buck a “safe haven” investment, but the buck is hardly safe. Jim Willie from Goldenjackass.com agrees and has written a stellar post spelling out just how vulnerable the U.S. dollar really is. Please enjoy his work below, and check out his PhD credentials after the post.—Greg Hunter.
The USDollar Paper Tiger
By Jim Willie of Goldenjackass.com
Guest Writer for USAWatchdog.com
Events in the last decade displayed a vigorous effort to defend the USDollar. The rogue nation of Iraq sold crude oil in Euros for three years, until they were liberated. Its tyrant was a scourge to be sure. Weapons of financial mass destruction seem to have replaced the traditional type, the new variety being derivatives, mortgage bonds, and even sovereign bonds from weak nations. Newer weapons from the United States feature extended hands from clearing house fronts that snatch and grab segregated private accounts, and backdoor raids of exchange traded fund precious metal. Let’s not overlook the more frontal assault weapons deployed like unseating Qaddafi and capturing his gold held in foreign accounts, along with all that cash. Liberation has its benefits. The confrontation with Iran would be comical if not so dangerous. The claims have been silly in my view for years, in the perception of Iran as a serious threat to the West. They have been subjected to cut communication lines on the Persian Gulf seabed. They have been subjected to Stuxnet viruses to obstruct their nuclear refinement process, via the Siemens rear door. They have been subjected to an influx of heroin from the north, where the USMilitary manages the Afghan situation and locale.
To be sure, Iran’s clergy qualify as a bunch of clownish fools with a tight grip on power and security forces. The shock here is that the relatively educated Tehran crowds have not disposed of their corrupt class of leaders. The clergy has been skimming from oil revenue for years, complete with hidden Swiss accounts. The same goes for the American corrupt class of leaders, with their USDollar control levers, their failures to deliver USTreasury Bonds (aka naked shorting by Wall Street firms), their hidden mechanisms behind Quantitative Easing to Infinity (QE never stopped), their insider trades to exploit financial markets (flash trades with a peek), their ETF dampers on numerous individual markets (regular inventory raids by Wall Street), their nationalization of Fannie Mae & AIG in order to put the fraud records in a warehouse (bond counterfeit, duplicate income stream usage), and their absurdly positive economic drivel data (more like chronic 10% CPI and chronic minus 3% GDP).
The big events in the last several weeks focus on the inability for US combined forces, both military and financial, to put Iran on a leash. The Tehran mongrel still roams and shares meals with neighbors. The Hat Trick Letter does not delve much into geopolitics and military weapon analysis, but the next generation Sunburn and Onyx missiles that Russia has supplied to Iran stand out as significant in their ability to neutralize great opposite forces. These two missiles are a step ahead of the Cruise, something perhaps not 5% of the US population is aware, but something that 95% of the USMilitary brass is aware. The US Fleet in the Persian Gulf might be rather easy vulnerable targets. The annual August belligerent war posturing against Iran invited my dismissals from 2004 to 2005 to 2006 to 2007 to 2008 to 2009 to 2010. But in 2011 the posturing and siren calls seemed more serious, yet still worthy of dismissal since waged battle would render massive damage to both sides. See Sunburn & Onyx again. The military maneuvering behind the scenes is not so easily tracked, which lately has extended to Syria with a Russian shadow. The entire reduced theater seems chock full of standoff factors. China might have sounded off threats of retaliation if Iran were attacked, but Russia delivers the same threats in more subtle private tones.
The USGovt has attempted to isolate Iran. To some extent they have succeeded. Price inflation inside Iran has turned acute, with numerous stories seeping through the information curtain. The pain, just like in Cuba, has been handed to the people and hardly to the leaders. One can be very certain that the mullahs continue to enjoy the good life, work little, eat well, enjoy ample time to pray, while skimming $million every week from oil revenues. However, a defiance seems more successful at the higher levels. The trend of bilateral trade deals fashioned by China has been growing, made popular by the same grand holder of over $3.2 trillion in US$-based debt securities of dubious value. Behind the trade deals are agreements to continue in crude oil purchases from oil-rich Iran.
INDIA CAUGHT IN CROSSFIRE
India shows up as a secondary victim of Iranian sanctions. The controversy between the two nations has lingered for a couple years. India received 11% of its crude imports from Iran last year. In an end-around maneuver, the nation is exploring the option of making payments for crude oil purchases through the giant Russian Gazprombank. No deal has yet been reached, but it is close to final. Russia has abstained from sanctioning Iran. Some analysts believe this payment route might work for India. Other alternative routes involve Turkey as intermediary on payments, except Turkish leaders appear to reject new proposals. The Bharat Petroleum Corp based in India had begun buying about 20,000 barrels per day of Iranian crude oil through a term contract in September. Now though, BPCL is considering whether to stop taking supplies. Other Indian companies that buy Iranian crude include Essar Oil Ltd and Indian Oil Corp. Contracts for other Indian buyers of Iranian crude oil tend to run from April to March. The refiners reportedly have yet to renew their deals with Tehran for the next financial year.
The cumulative Indian debts to Iran from refiners for purchases rose to as much as $5 billion in July, according to the Indian Central Bank. The outstanding payments threatened to jeopardize about $9.5 billion in annual trade between the nations. Officials in Iran have informed customers they would no longer receive August shipments unless the bills were paid. In a complex network, the refiners started clearing the outstanding payments in August after Halk Bank in Turkey agreed to make transfers. The middleman bank has gained a reputation in the oil market over the past 18 months for handling transactions related to trade deals with Iran. The recently passed legislation by the USGovt imposes sanctions on financial institutions dealing with Iran’s central bank, thus putting Halk Bank squarely in the spotlight. India is worth watching closely as a test of the strength of sanctions. Watch for work-arounds, especially with Russia. The Turks do not have the required muscle. The Russians do. The Kremlin leaders are highly motivated to knock a wheel off the American wagon that seems to trample pedestrians all too often.
During the 2002 to 2005 period, the Shanghai Cooperative Organization aroused a considerable amount of publicity. It was originally a cultural exchange group between Russia and China, led by the surviving republics of the Soviet Union. Its agenda grew to include security matters. Then later still, commercial trade and commodity supply entered the picture, as the resource rich nations lacking in economic development banded together. The added twist was the inclusion as guest SCO members such nations as renegade Venezuela, Iran, and others. The SCO defiance began to escalate right about when the organization faded from view. It never faded away, only from view, as it coalesced into a powerful movement behind the scenes. SCO became a hidden movement to build fortifications in opposition to the USDollar. Its main thrust has been gold accumulation in the shadows.
The key to comprehension on SCO matters is to realize that all countries in the Shanghai Coop are working vigorously to bypass the USDollar, and all are increasing their gold reserves. They work in much more secrecy, probably at the direction of Kremlin and Beijing leaders. They have learned that avoiding direct confrontation and sanctions is the path to take. The proposal to end usage of the USDollar in bilateral Russian-Iran tade came from Moscow, not Tehran. One can be absolutely certain that Kremlin leaders are as stiff spined as they are motivated to challenge the USGovt and Wall Street leadership. They remember all too well the Yeltsin years and the Western oil company role. The proposal to switch to the Russian Ruble and the Iranian Rial was raised by Russian President Dmitry Medvedev with his Iranian counterpart, Mahmoud Ahmadinejad, at a meeting in Kazakhstan. It was staged without herald as an continuance of the Shanghai Cooperation Organization. Iran has replaced the USDollar in its oil trade with India, China, and Japan. At the cusp of developments is a potential deal that could bring an important linkage between crude oil and commodity trade settlement outside the USDollar, with provision for funding the European bank rescue fund, the European Financial Stability Facility. The concept was raised by the intrepid indefatigable Tyler Durden (bloodied but resilient) of the Zero Hedge crew. The bypass of the USDollar in trade is likely soon to be engrained in the financial system. The American trumpets continue to promote the notion that all global trade is done in US$ terms, when the reality is far different, and the trends in the opposite direction, as in global revolt.
Actually, the ZH crew merely took the ball and ran with it, as they do so adroitly and consistently. In my opinion, the Zero Hedge web journal is by far the most valuable and broad single source of relevant information in the global financial crisis, bar none. The German newspaper Bild am Sonntag had said Klaus Regling (CEO of the European Financial Stability Facility) is pushing to increase guarantees to up to 30% for investors external to the EuroZone, the amount confirmed by a fund official. Although the guarantees were non-existent a year ago, EFSF officials have stressed that state guarantees had always been planned to range from 20% to 30% range, and furthermore, such offering should not be interpreted as a deepening of the endless debt crisis. Such denials serve as clear direct confirmation of a deepening crisis. Clearly, the guarantees provide incentive to attract foreign funds. The nations with big foreign reserves like China have turned their noses up at Europeans in recent rounds. The Beijing leaders want more on the table. Think industrial collateral. Think access to central bank gold. Think official bypass of the USDollar in trade settlement. Think consolidated resistance to unilateral pronouncements. Think indirect action to isolate the USGovt and its corrupt financial fortress.
IRAN & RUSSIA REPLACE THE USDOLLAR
Iran and Russia have replaced the USDollar with their own native currencies, thus solidifying trade ties. Tehran’s Ambassador to Moscow Seyed Reza Sajjadi claimed that the proposal for replacing USDollar with Ruble and Rial was raised by Russian President Dmitry Medvedev in in Astana Kazakhstan during a sidelines meeting of the Shanghai Cooperation Organization (SCO) meeting. He added that many Iranian entities are using Ruble currency for their trade deals. The Kremlin leaders stand against unilateral sanctions on Iran conducted outside the UN Security Council, their position in diplomatic circles, which WashingtonDC avoids. The USGovt has a long track record of making unilateral decisions, and attempting to impose sanctions on third party nations, all done without the blessing of global bodies. The Russians have clearly announced that they will not accept broad sanctions. The central bank in Iran is working feverishly to to circumvent and overcome plans to isolate it and cut off income. The sanctions directed by the USGovt cut off from the US financial system foreign firms that do business with the central bank in Tehran. Many even in the West believe that the move would prove futile. Most Iranian oil sales are processed by the central bank. The means to avoid the sanctions is to conduct trade settlement outside the USDollar, where the USFed would not act as processor. The peripheral impact is felt with intermediary entities such as Turkey’s Halk Bank, which will likely choose to step aside and not risk being stepped on by American jack boots bearing London brand.
During the last two years, Iran has been replacing the USDollar with other currencies in its trade with the outside world. Iran has replaced the USDollar in its oil trade with India, China, and Japan. Late in November, the Reserve Bank of India (RBI) granted the necessary permission to the Central Bank of Iran to open Rupee accounts with two major Indian banks, seen as a solution final to the payment problems. While payments for Indian oil imports would initially be in Rupees, they would be converted into a separate currency, which was yet to be decided by the Apex bank. Conclude that USGovt sanctions provide the fertilizer for a seedbed in non-US$ trade settlement. The American strongarm tactics are meeting with stern resistance, as the backlash gathers momentum and intensity. Iran could become a broken plank in the US hegemony. History is not likely to repeat. The Iraq challenges with Euro-based oil sales led to the invasion and annexation. Iran has too many partners in Russia, China, Japan, and India. Without any dispute, Baghdad was defenseless. With almost ten years to fortify its partnerships, Tehran is not defenseless. The next few months will demonstrate it.
JAPAN & CHINA BYPASS USDOLLAR
In a gesture loaded with defiance, Japan and China have embarked on a trade deal that directly bypasses the USDollar in settlement. One more platform of the USDollar global fortress has been shown to be dismantled. Its hegemony is ending, although slowly. The mercantilist relationship held firm between China and the United States has shifted into reverse during the trade war in its third year, a trade war fully anticipated and forecasted back in 2005 and 2006 and 2007 in the Hat Trick Letter. With the new pact, Japan and China have made the arrangement public. They will promote direct trade in Yen and Yuan currency without USDdollar usage, in order to encourage the development of a market for the exchange, and to cut costs for companies. The real surprise was the announced plan for Japan to buy Chinese bonds in the current 2012 year. Confirmation came from a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing in late December. Considering the huge trade volume between the two biggest economies in Asia, the pact is significant. Look for continued Yuan appreciation, and all the problems it will cause to their export industry.
Some shock waves are coming to the FOREX markets, where the USDollar is still seen as king in official circles. The year 2012 will prove to be highly disruptive to such a perception. The primary motive behind the bilateral trade deal is to reduce currency risks and trading costs. Currently, about 60% of trade transactions between the two nations are currently settled in USDollars, a practice to be reduced. China is largest trade partner to Japan, bigger than the United States, thanks to colossal direct foreign investment by American and European firms for a full decade. China already purchases Japanese debt securities. In turn, Japan holds $1.3 trillion of FX reserves, the world’s second largest war chest. They wish to purchase Chinese debt securities. Nothing will stop this movement. The list of imminent investors in Chinese debt is growing, from Austria to Thailand to Nigeria. The ultra-low USTreasury Bond yields, corrupted by Interest Rate Swap applications, fails to reward investors for risk. The USGovt deficits are chronically over $1.5 trillion annually. The growth in cumulative debt assures continued 0% bond yields and artificially low borrowing costs, a new constant for foreign investors to turn more toward China. The United States is fast losing its dominance, which when abused is called hegemony. The hegemony has been ripe and fierce since 2005. The volume of Chinese Govt Bonds denominated in Yuan has tripled up to 2011, with volume of $18 billion. Funds are moving away from the West, where sovereign debt has turned toxic and government deficits have grown like vast weeds and austerity plans are more like designer suicide pills.
USDOLLAR RISES TOWARD THE CEMETERY
Back in the spring months of 2009, the Jackass penned a public article called “Dollar Death Dance” that was well received. When the system was going through an implosion phase, albeit temporary, the demand for USDollars rose sharply. What followed for the last three years has been a gradual inexorable powerful pathogenesis toward monetary system collapse, the focus having shifted from the US to Europe. The US$ demand came from banks required to cover their US$-based debts. Recall the USFed was the first to promote an ultra-low official interest rate several years ago. So its loans were huge to Europe, England, and elsewhere. Also, the ruinous derivative trade suffered a shock wave. The settlement of derivatives, such as a bond insurance contract, tend to be exclusively in USDollar terms. The second chapter to this trend is well along. Call it the second song to the Dollar Death Dance. The woes in Europe are translating into more US$ demand, as funds flee the fires of European sovereign bonds turned toxic, as funds flee the big European banks that must meet reserves requirements, as funds in money markets return to US shores, as funds cover the derivatives.
By the way, the derivative market must qualify as the most corrupt in human history, totally unregulated, the liferaft tossed to a sinking bank system, the source of huge income, against a backdrop of obstructions on payouts for both financial firm failure and the sovereign bond defaults. A restructure does not a failure make. All the regulators and bank officials did was to declare a bond loss as a non-event in the default world. They called it redefinitions, recalibrations, total nonsense and corruption to the core. The bank leaders continue to make claims that counter-party positions offset and canceled each other, when the reality is more like they assure mutual destruction and simultaneous death. When the first Italian bank goes bust, a French bank, a German bank, and a London bank will all turn to dust immediately. One day later, a New York bank will follow to the glue factory.
The USDollar is due for some extreme shocks. Some might not think so, given the Euro depression in sentiment and the rattling of big European banks. Word has come that in late February and late March, some important adjustment events are due to kick in, enough to knock over the tables in the temple. Conjecture is wide open and ripe for imagination. For the USDollar to continue its catbird post in global trade is inconceivable. The elite controllers will do their best to keep the USDollar in its dominant post. But the rest of the world, especially on its Eastern locales, is working in the other direction. As a sage contact told me last week, “There is a clear swing in power to the East, not to return Westward in our lifetime.” The primary victim of that pendulum swing, a powerful Paradigm Shift, is the USDollar. The consequent beneficiary will be Gold, and its squire Silver. A complete list of forecasts will not be given here, since too dangerous and ugly. The world financial system will not survive in its current form. A collapse is due probably by late 2012, or early 2013 after the US presidential elections, another controlled event subject to outsourcing.
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 30 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at [email protected]
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