Great Empire or Grand Illusion?

Hi I am just wondering if someone knows any book or reading material regarding US economic & financial policies and its relevance to GAME theory...??

Sohail, this is Imran Zali`s sister...trying to contact you..this is the only way...my email is shaziaj@hotmail.com.........Shazia

SR, I did not mean I making any serious decision on your advice right away. I think even if you are 100% correct in your assessment it will take many years for rest of the world to come into terms with it. As usual I would probably be waiting in line with rest of the herd to buy gold when it happens...but Thanks for clarification anyway.. I know when our women buy gold from a jewler it is sometimes over 100% overmarked for craftsmanship or labor etc...that is why I mentioned my biwi`s gold purchases in my post.

Bhatti sahib, you are most welcome. Let me hasten to add that I DID NOT offer you any investment advice. To do so would be a violation of SEC regulations and get not only me but also the Chowk website in trouble. What I had written was a purely hypothetical scheme which I would follow myself if I had $250 K in spare change.

Having gotten that cleared, I would like to comment on gold in the form of Jewelery. I have spent all my life bitterly arguing with my sisters, bhabi`s and my mother as to the utter waste that jewelery is. It is absolutely the worst way to buy gold. In fact I would not even call that investing in gold. Jewelery is purely anexpense. Luckily, my wife is not one that goes for it and has only fake jewelery (well, with maybe two or three exception items, small token items, that I bought for her -- to placate her -- from various trips to places like Bangkok, Sri Lanka, India and Dubai)... But I recognize that is somewhat uncommon.

When one buys coins or bullion one pay`s a premium of between 1% to 7% depending on what one buys and where one buys it from. However, if one was to buy the same weight of gold in the form of jewelery, one pays anywhere from 35% to 70% in premium, over and above the intrinsic cost of the metal as determined by the daily published London spot market price (or the New York Comex settlement price). Be that as it may, if I am even half right about the coming Perfect Storm in the financial world, then even gold bught as jewelery will become profitable because the price of gold is likely to shoot well past the $1,000 an ounce. (These are troy ounces, 31.1 grams, or 3.75 troy oz = 10 tolas)

As an aside, I wish to add that the present theoritical value (by one way of measuring) of gold is about $700 per ounce. The market value today, amazingly, is only in the $350 to $370 range. By my calculus gold is selling at a deep discount and this price abnormality cannot last for ever. When mass psychology changes, as change it will, the market price could easily shoot well past the theoritical price. We see that absurdity in tech stocks today.

...SR

Thanks SR sahib. I am not sure I will/can follow your advice exactly but it just struck to me that one item you mentioned I am already heavily invested in. First (before some chowkwallas come to robb or kidnap me for ransom) I don`t have $250K cash. It was a hypothetical question. But I am invested more than 10%(of my cash) in Gold. Thanks to biwi.(although she probably bought 1 tola for $200 while it costs $80 in coins). According to her estimate it is 50/50 we have in gold and stocks.:) allah bachaye biwiyoN ke rehmo karm se.

addendum to # 87

Gold, particularly the metal (not gold stcks), is like an insurance policy. One buys it and puts it away and stops worrying about its fluctuating price. It`s like a life vest on a ship that is navigating through a trecherous sea lane full of hidden icebergs.

When the ship (Titanic?) starts to leak, the smart passangers grab a hold of a floating life vest before the crowd wakes up starts scrambling for them. One does not succumb to the temptation of trading the life vest with a fellow passanger even for a Picasso original that he is willing to offer in return.

...SR

Bhatti Sahib

Since I have no idea about your personal circumstances, it would be irresponsible of me to give you any investment advice, as far as what you should do. But I do not hesitste to say a few thing that you should not do. Also I can share with you what I would do if I had an extra $250K to invest. Whether you should do the same or not is not my place to say. But first, what not to do.

We are in a long term (secular) bear market and (almost) everyone loses in a bear market. The winner is the one who loses the least.

Like I mention in my previous posts and other articles, you should stay away from US Bonds (btw, on Aug 8, Warren Buffet reported to the SEC that he has sold off his US Treasury Bonds-- $9.1 Billion worth).

The other things to stay away from are US Stocks and Real Estate --in US, UK, Netherlands, Ireland, Spain and Scandanevia. Particularly the stocks to avoid at all cost are SOX and INX.X components (semiconductors and internets).

In general the main risk is in being vested in the US Dollar. Canada is a much better deal, relatively speaking.

Now, what I would do with that amount would be roughly the following:

First and foremost, I would pay off any and all debt that I could pay off (mortgage, cars etc).

Assuming that I had already paid off all my debts and still had $250 K available, then I would buy $25,000 worth of gold and silver bullion coins. That`s 10% right off the top. It can be reduced to 5% at most, but no less.

Then I would buy mining company stocks worth another $50,000 to $75,000 (20 -30%). The two that I would absolutely buy are Newmont Mining (NEM) and Pan American Silver (PAAS). Other mining companies that I would consider (any diversify by investing in AT LEAST five of them) and do research on before I invest are (in no particular order): Batch 1 -- RGLD, PDG, RANGY, ABX, AEM, CBJ, GLG, GG, PDG, HL; Batch 2 -- NRI, WTZ, RBK, RIC, GPXM, AFKDY; Batch -- 3 ORV,MVG, MWA, AQI, GSS, EGO, DSM, CGD, BZA, BGO, BDG.

One more: SSRI, is a silver, as opposed to gold, mining company.

Then I would go to EVERBANK (its on the internet) and shop around for their foreign currency CD`s. That way, I would convert my US dollars to other currencies. I`d allocate another $50,000 to $75,000 (20 - 30%) to buy CD`s with. My currencies of choice for diversification would be Canadian Dollar, Chinese Renmimbi, Japanese Yen and maybe also some Euro (7 - 11%, 7 - 11%, 4 - 5% and 2 - 3% respectively).

The remaining amount I would put in agricultural land and/or real estate but not in the countries mentioned. If (and only IF) I was originally from India, I would seriously consider India. Other choice countries where I`d look for property would be Argentina, Panama, Nicragua, Thailand, and Canada. (This after doing some research on location.)

This is just one of the several combinations that I would consider.

...SR

SR: With all these apocalyptic forecasts in mind what you think average individual in US should do with his or her money? Real Estate is all time high. putting money in it for investment purposes seems risky. Even if the home prices stay stable, the return on investment(rents etc) does not justify the price they are demanding. What are your suggestions other than investing in harnessing the professional skills? Suppose I $250,000..what should I do with it?

zeemax [``...it`s America`s unique ability to print endless amount of cash ! And get away with it ! ...``]

Is this a danger to the world economy?

For many years, America`s strong-dollar policy served the world and chiefly the United States very well. Their currencies cheap against the US dollar, Asian manufacturers profited by making relatively inexpensive exports and selling them in the United States at a healthy profit. In a kind cat-and-rat-farm analogy, in which the cats eat the rats, are skinned for their fur, and then are fed back to new rats, the Americans benefited by getting cheap goods that kept their consumer-led economy roaring. The financial communities benefited from the repatriation of those profits as the funds flowed back in a ceaseless waterfall into US stock markets, treasury and corporate bonds, money-market funds and other financial instruments.

But perpetual-motion machines don`t work. The monumental scale of Asia`s dollar reserves and the size of America`s deficit are starting to make economists and strategists nervous. Wayne Godley, an economist at the Levy Economics Institute in New York, writes: ``If the balance of trade does not improve, there is a danger that over a period of time the United States will find itself in a `debt trap`, with an accelerating deterioration both in its net foreign-asset position and in its overall current balance of payments (as net income paid abroad starts to explode). Such a trap would call imperatively for corrective action if it is not at some stage to unravel chaotically.``

It has been widely reported that the US must take in about $1.3 billion a day - about $55 million an hour - in foreign investment to finance its overseas debt. If that river of money falters or dries up, the difference must be made up by an inexorable fall in the value of the US currency. Indeed, if it had stopped already, the fall in the US stock markets since equities began to lose their luster in 2000 would have been catastrophic.

Certainly, Asia has been on a buying spree in US securities of all types. Despite a three-year economic pause in the United States, Asians bought a record $201 billion worth of long-term US paper in 2002. That includes another record $97 billion in US government securities. Asian central banks, with their enormous overhangs of US dollars, are increasingly doing the buying.

Over the past months, US Treasury Secretary John W Snow has begun to try to talk the US dollar down. It had fallen by more than 25 percent against the euro, the Eurozone`s common currency and the world`s other reserve legal tender, before increasingly optimistic economic news and a rising stock market checked the dollar`s fall. Although it has since risen against the euro by about 4 percent, many economists believe the dollar`s precarious position will cause the slide to continue.

The currencies of Asia, however, have almost all remained firmly tied to the dollar, either through currency pegs, reserve boards or, as in the case of Japan, as governments have bought dollars to keep their currencies static and thus to preserve their terms of trade.

Despite the US attempts to talk the dollar down, Asian governments regard any negative changes in their trade balances as inimical to their economies. While supposedly loosening restrictions so that their consumers can participate in a demand-led consumer revolution, Asia in fact is more dependent on exports today than at any time over the past two decades.

China, whose share of exports in total gross domestic product (GDP) averaged 10.8 percent in 1985-89, now is producing exports at 28.4 percent of GDP. South Korea`s exports were at 23 percent during the same period and now are at 54 percent of GDP. Hong Kong, then at 77.8 percent, is now at 153.5 percent of GDP. These figures are being repeated across virtually every economy in Asia. These exports continue to flow into the United States despite a three-year economic downturn that, if rationality were to prevail, should have slowed consumer purchases. The US Federal Reserve`s easy-money policy and record cuts in interest rates, however, have kept consumers buying at a feverish pace, far too often on credit.

``So long as America continues to secure easy funding, there is no pressure on policymakers in Washington to do anything other than run super-easy policies to try to keep their own consumer credit cycle going,`` says Christopher Wood, global emerging-markets equities strategist for CLSA Hong Kong. ``Like any profligate debtor, market discipline will only be imposed on America when foreign investors demand an interest-rate premium for owning dollars.``

Wood tends to grow apocalyptic. ``The current trend can continue for a while,`` he writes in his 110-page first-half 2003 overview of the world economy, published last month. ``But the longer American excesses are financed, the more inevitable will be the ultimate collapse of the US paper-dollar standard that has been in place ever since Richard Nixon broke with Bretton Woods by ending the dollar`s link with gold in 1971. The result will be a massive devaluation against gold of Asia`s hoard of dollar-exchange reserves.``

Japan`s foreign reserves currently total $496 billion, followed by China at $310 billion and Taiwan at US$170 billion, according to figures compiled in April by the Hong Kong Monetary Authority. Hong Kong, with 7.5 million people, has reserves of $114 billion, nearly seven times the total money in circulation in the territory. Other Asian treasuries are similarly bulging with dollars.

In answer to statements by Treasury Secretary Snow that the country should let its currency float upward, China`s central bank governor, Zhou Xiaochuan, said at the end of June that he sees no possibility that the yuan, which trades in a narrow band at about 8.28 to the dollar, would be revalued upward. Nor is there a possibility that it will rise against the currencies of any of its other major trading partners. China intends to eat everybody`s lunch.

Confronting the prospect of additional economically difficult integration into the World Trade Organization, and faced with the task of creating tens of millions of jobs for its sacked state-owned-enterprise workers, China`s leaders believe it is crucial to keep growth above 8 percent. Severe acute respiratory syndrome (SARS) took half a point off growth in March through June. President Hu Jintao and Prime Minister Wen Jiabao have demanded, under a policy statement called ``Double Victory``, that growth continue at the maximum possible rate. There is not the slightest intention to help the United States cure its trade-balance problem by either making US exports to China more attractive or raising the price of exports to the US.

Likewise, Japan, vainly attempting for the 13th year to export its way out of its economic quagmire, is keeping the yen within a range near 115 to the US dollar. Since the beginning of the year, the Bank of Japan is believed to have bought as much as $60 billion in US securities - $30 billion in March alone - to keep the yen where it is. Its purchases have been increasing at a record pace.

Asia does not have to follow this path, Christopher Wood of CLSA says. ``Asian central banks could abandon their mercantilist policies. They could let their currencies rise, which is what would happen given Asia`s high savings rates if market forces were allowed to prevail. This would in turn boost Asia`s consumer demand cycle. This is also what should be happening from a theoretical standpoint, as satiated American consumers have already borrowed a lot and need to rebuild their balance sheets.``

Then, turning truly apocalyptic, Wood predicts that by the end of the decade there will no longer be a possibility that the world`s central banks can control the situation, and there will be a truly massive devaluation of the US dollar. ``The view here is that the US dollar will have disintegrated by the end of this decade. By then, the target price of gold bullion is US$3,400 an ounce.`` That is roughly 10 times gold`s current level. If that were to happen, Asia`s holders of dollars would be forced to start selling them or see their own reserves collapse. If they start to sell them, the price of America`s paper will fall even faster.

That is truly apocalypse now, or in 2010. Is it possible? The policymakers in the administration of President George W Bush in Washington are far more sanguine. They regard economists, often said to be the only field in which two individuals have shared the Nobel Prize for saying exactly the opposite things, to be basically irrelevant, and presumably by extension strategists. The administration, facing an election in a year and a half, and the Federal Reserve intend to keep the party going if they can.


x=x=x=x=x=x
(This entire response, though exactly reflecting my own views, is a cut and paste job from Asia Times Online. It fit perfectly so I am posting it. I couldn`t have said it better myself) :))

...SR

#83 by SR

[Where do you see the positive US “cash flow”? Please tell me?]

Of-course we come back to the same point .. it`s America`s unique ability to print endless amount of cash ! And get away with it !

Rgds

zeemax #82 [“… U.S. government obligations are $43 trillion, while total net-worth of U.S. households is just over $40 trillion. So US is technically insolvent. …”]

One cannot argue against facts. Technical insolvency of the US gets worse as each day passes. This is the point I’ve been arguing for some time now but most people are unable to even contemplate the possibility. But still facts are inconvenient little things, they keep raising their ugly heads.

Congressman Ron Paul stood in the US House of Reprsentatives, on July 10, 2003, and mentioned the same $43 Trillion that had I mentioned in the article. But the congressman made a slight error in the speech. These $43 Trillion are NOT the total obligations (that number would be infinitely larger), this $43 Trillion is the present value of the SHORTFALL. This shortfall is on the obligations that are treated as being “off the books” and we don’t see them mentioned anywhere in public, not even in the annual budget documents. Paul O’Neil, former Secretary Treasury, tried to include them in the 2004 budget document and got fired. These are numbers that NO ONE in the American media is even whispering about (then you tell me that there is no censorship?), yet these are unclassified public records and anyone can research them from the Congressional records. This $43 Trillion shortage is in the so-called “un-funded” retirement benefits that are enshrined in US Law.

It is important to understand that the officially declared annual US federal budget deficits and current account deficits that keep piling up, year after year, and are now in the vicinity of $8 Trillion, plus the private house hold and corporate debt all of which in their totality approach $32 Trillion are NOT INCLUDED in the above mentioned $43 Trillion shortfall. So if truthful accounting is done the Grand Total of the ocean of red ink that is going to sink the ship is (32 + 43) or $75 Trillion. This is simply an impossible situation to get out of without suffering any adverse consequences.


zeemax: [“… One can be `technically` insolvent but still remain a `going concern` and continue in business. It all depends on the cash flow …Citibank, although technically insolvent, was still a going concern, and had an immense franchise. The same applies to the US. ..”]

I am very glad you brought up the example of Citibank. First, I totally agree that “technical insolvency” of a “going concern” is potentially a manageable condition. But to go through chapter 11 reorganization an entity has to do some major structural re-adjustments. Let’s take your Citibank example. During the crisis period, if you remember, the company stock was driven into the dirt.

Likewise with the United States. It is a great “going concern” and it shall keep going no doubt. I never for a second suggest that US will go totally belly up. No, that is not happening. What will, however, happen is that the present reality will have to change in fundamental ways and change drastically.

If we use the analogy of a corporation to describe the financial parallels with a country we can explain things in simpler terms. The GDP of a country is analogous to the Total Gross Revenue of a corporation. The currency of the country is akin to the common stock of a corporation and the interest rate of a country is like the dividend of a corporation. If you see the logic of this analogy between a country and a corporation, then it must be very clear to you that as the country goes through “reorganization” its stock price may plummet in the market. Likewise, with the above mentioned problems and the low interest rates, I don’t care how much the Asian exporters try they will eventually fail to keep the dollar propped up and the decline of the dollar is simply an inevitability.

To say that the US will eventually come out of it, is not being disputed. Of course the US economy will eventually come to a new equilibrium but at what level? only time will tell.

zeemax: [“…How will the (US) cash flow become adverse? I don`t see it happening unless the world`s monetary system undergoes a major reversal, or everyone stops exporting to US. Do you see that happening? …”]

Where do you see the positive US “cash flow”? Please tell me? Revenues are at steeply lower and expenditure is skyrocketing. At some point US dollar holders world wide are going to get nervous when they continue to see their dollar value shrinking like an ice cube melting in the sun and their returns dimishing. It`s not a question of ``IF`` it`s a question of ``WHEN.``

zeemax: [“… US to create dollars out of thin air and still manage to keep inflation and interest rates low…”]

If you actually believe the “low inflation” story-line that the government claims, then I have a deep water submarine to sell you at a great price. It sits in the middle of the desert.

…SR

#81 by SR

I read the speech by Dr. Ron Paul. You had e-mailed the link to me as well. Very revealing facts and very profound thoughts.

I agree with everything in it and all of what you say re the economy of US. So the dollars are being pumped in using all of these various wars, and increasing the size of the Government e.g. the Department of Homeland Security, instead of reducing the Government. Now I get the picture. So all of this additional money supply is coming from non-productive expenditure.

Yes it does appear the US economy is on an edge. The most interesting statistic that sticks to my mind is that the total U.S. government obligations are $43 trillion, while total net-worth of U.S. households is just over $40 trillion. So US is technically insolvent.

However, being technically insolvent is different from being bankrupt. One can be `technically` insolvent but still remain a `going concern` and continue in business. It all depends on the cash flow. Citibank was technically insolvent in late 80`s when they had to write off their South American assets, and Prince Talal Bin Aziz bailed them out by buying, if I`m correct, 30% of their shares. I`m sure you know about that episode. Why he did that was beacuse Citibank, although technically insdolvent, was still a going concern, and had an immense franchise. The same applies to the US. So far, US is a `going concern` even being insolvent, and has a huge franchise over the world.

How will the cash flow become adverse? I don`t see it happening unless the world`s monetary system undergoes a major reversal, or everyone stops exporting to US. Do you see that happening?

The unique ability of US to create dollars out of thin air and still manage to keep inflation and interest rates low, stems from the world monetary settlement system, which in turn stems from everyone`s need to export to the US domestic market.

Just a thought, and I have expressed it before. The 9/11 attacks may not really have been aimed at the twin towers. I think they were actually aimed at the US consumerism. Maybe there`s an economist in Bin Laden`s coterie as well.

Cheers.

zeemax #80 [“… my … arguments against … impending Doom for the dollar… has … been … how can the Dollar weaken when the rest of the world is compelled … to keep it propped up ? I`m glad you`ve come round to that view. …”]

I have not said anything different. The only difference we have had is that you believe that the dollar will continue to win out indefinitely, whereas I hold that the scam has lasted long enough and we are approaching the beginning of the end. In my article I wrote:

The foreigners, particularly Asians, are caught in a monkey trap of their own that has worked wonderfully for America, until now. But the scales could tip the other way at some point.

In order to keep their own exports going they have become addicted to shipping their goods to America and are therefore willing to accept more Federal Reserve issued paper (a.k.a. ‘dollars’) in exchange. For three decades now they have been willing to trade their materials, their sweat equity, and their living standards in exchange for paper that America prints at essentially no cost. How long will they keep playing this game is anybody’s guess? Establishment professionals tell us that this gravy train will never leave the American station. They claim that the foreigners, chiefly Asians, cannot afford to lose the American market and therefore the dollar will never lose its lure.

However, as the exporting countries’ dollar savings get cheaper and cheaper because of excessive printing by the US mint, at some point the pain of owning those ever-growing mountains of dollars, whose value is ever-shrinking, will become greater than the pain of losing their exports to America. When that happens, the party shall be over.


zeemax [“…(inflation is not necessary) if the excess … currency created is … sucked back out of the money supply … through treasury bills operations ... at a huge cost to the central bank (which ultimately impacts fiscal resources) due to unfavorable interest differentials between Dollar and all the world`s currencies except the J.Yen. … if a central bank decides not to sterilize due to fiscal constraints, your contention will be correct and the excess liquidity floating around will be inflationary, otherwise not. …”]

You are thinking with the mind-set of a central banker from a non-reserve currency country. If you were a US Federal Reserve official you would not have cared (as Fed officials don’t) that your dastardly deed of monetary manipulation “…ultimately impacts fiscal resources… due to unfavorable interest rate differentials…”

If you, or any of your counterparts in other non-US central banks around the world were busy creating more and more of your country’s fiat currency (at the rate of 17% of GDP per year) you would have sharply rising interest rates, especially at the long end of the yield curve. You couldn’t possibly hope to increase money supply with such abandon as does Greenspan and still “manage” to keep the thirty year treasury bond close to four and a half percent. They do that through their “open market operations.’ This is what you Karachi wallas call dada-geerey.

Please indulge my digression for a minute: I want to rant and rave.

(The US Fed, unlike the central banks of Somethingstan or Whathaveyouland, is NOT a federal government owned entity. The US Fed, as you surely know but some other reader may not, is a private corporation owned by an international cartel of big private banks. The Fed operates (for profit) under the charter of the federal government.

The ‘ultimate owners’ of the Fed are Rothschild Bank of London, Warburg Bank of Hamburg, Rothschild Bank of Berlin, Lehman Brothers of New York, Lazard Brothers of Paris, Kuhn Loeb Bank of New York, Israel Moses Seif Banks, Goldman, Sachs of Italy, Chase Manhattan Bank of New York, Warburg Bank of Amsterdam.

It is the biggest scam imaginable. It is worse than robbery.

But if you go to the Fed’s website they plainly lie and deny this fact in an outright lie and claim that the Fed is “…not owned by anyone, it is an independent entity...” That is pure horse manure.

If you look through the Fed’s website, burried inside their FAQ section you will also find the statements, that contradict the lie quoted above:

Who owns the Fed?

Although Fed member banks own stock in Reserve Banks, their ownership rights are restricted. If the Federal Reserve Banks were to be liquidated and their assets sold, Fed member banks would only receive back what they paid for their stock. The value of the Fed`s stock over and above that would be returned to the U.S. Treasury.

Where does the Fed receive its income?

Most of the Fed`s earnings come from its portfolio of U.S. government securities. The interest on them, for example, accounted for most of the Fed`s $20.9 billion operating income in 1994. From its revenues the Fed pays its expenses and a 6 percent statutory dividend on its member banks` stock. The remainder is returned to the U.S. Treasury. In 1994 the Fed paid approximately $20.7 billion to the U.S. Treasury…” ) end of rant.


This private for-profit cartel called the Fed, “creates” new money out of nothing and injects it into the economy through bank liquidity and also lends it to the US Treasury (by purchasing T-bills) and earns interest income that is paid by the US taxpayer. This is a mechanism of transfering wealth (in the form of interest on T-bills) from the taxpayers to the private banks that own the stock of the Federal Reserve. The creation of this new money costs the Fed absolutely nothing and they earn interest on it which is essentially a kind of parasitic blood sucking. How can this be good for retaining the exchange rate value of the dollar?

I urge you to check out the 73rd annual report of the Bank of International Settlements which was issued in June 2003. I`m sure you have it at your office. If you`ve looked at it, you`ll know that its very long but well divided up into sections. Even the BIS is nervous about the dollar. The report raises serious concerns about the US `twin deficits,` and this inspite the fact that BIS is a loyal dog of the US Fed (The US is the largest stockholder of BIS -- 17% -- and all the US Fed governors are also its board members. BTW, SBP is NOT a member-- why??) They point out in the report that the huge US current account deficit is distributed such that at most half of it is with those Asian countries (ex-Japan) that have their currency either pegged to the USD, e.g., China, or they are engaged in ``propping up`` the USD by purchase of USD assets and/or debasing their own currencies in the race for competative devaluation that I referred to in the article. According to the BIS report, therefore, most of the USD value errosion takes place with respect to the Euro , Yen, Loony, Aussie, Kiwi, and other European currencies (ex-Swiss). So my friend read the writing on the wall. There is way too much dirty linnen stinking up the US financial system, and indeed, the global fiat monetary system. All the gung-ho US Tech BULLs here should take note. BUY GOLD and SILVER for your family`s financial insurance. You`ll be glad you did.


Zeemax: [“…It certainly does appear from the phenomenal increase in US Money Supply that US is trying to stir up consumer demand - but using what tools are these dollars being pumped in? … I know of no large infrastructural projects underway, and the tax cuts have not been effected yet. What seems probable is that Fed is retiring a proportionate amount of Government Debt owed to banks and the general public. Is that the case? …”]

There are no public works projects like they were during FDR’s New Deal or Johnson’e Great Society. What you have right now is the Perpetual Preemptive War. War against Drugs. War against Terrorism. War against Civil Liberties and the Bill of Rights.

As far as “retiring debt” is concerned, you must be joking. The tresury debt is rising is rising faster than the space shuttle rises after launch. I am not joking. The national debt ceiling was just raised by congress by almost a trillion dollars last month.

I strongly urge you to read a speech by Congressman Dr. Ron Paul, who is a republican member of the US House of Representatives, from Texas. He gave this speech on July 10, 2003.

Please read it at this web address:

http://www.lewrockwell.com/paul/paul110.html

cheers...

...SR

#79 by SR

[Today`s Financial Times reports that the German Chancellor wants European Central Bank to weaken the Euro against dollar.]

I hope you recall my oft repeated arguments against your contention about impending Doom for the dollar. My argument has always been that how can the Dollar weaken when the rest of the world is compelled by default to keep it propped up ? I`m glad you`ve come round to that view.

[To buy dollars your central bank has to create more of your own currency, and this is inflationary. ]

Not necessarily so; i.e if the excess local currency created is `sterilized` i.e. sucked back out of the money supply by the central bank through treasury bills operations. Sterilization is however at a huge cost to the central bank (which ultimately impacts fiscal resources) due to unfavorable interest differentials between Dollar and all the world`s currencies except the J.Yen. Thus, if a central bank decides not to sterilize due to fiscal constraints, your contention will be correct and the excess liquidity floating around will be inflationary, otherwise not.

It certainly does appear from the phenomenal increase in US Money Supply that US is trying to stir up consumer demand - but using what tools are these dollars being pumped in? I mean I know of no large infrastructural projects underway, and the tax cuts have not been effected yet. What seems probable is that Fed is retiring a proportionate amount of Government Debt owed to banks and the general public. Is that the case? Your research into this will throw much needed light on the issue before your question re `the ultimate winner -- inflation or deflation?`, as well as the future of fiat money, can be answered.

Rgds

I gasped today when I saw the latest statistic on the broad money supply (M-3). For the week ended June 20, money supply just exploded by a hefty $63.1 billion. These are brand spanking new dollars. ``Hot off the press`` so to speak (only they are ``electronic`` and not ``paper`` dollars, so it didn`t even cost paper and ink). Add that to the two previous weeks of $20 billion each, and you have a bit over $100 billion added to the money supply in the last three weeks alone. That`s at an annualized rate of around $1.7 trillion.

Folks, these are US dollars that the Fed simply “creates” out of thin air. The fact is that the creation of new money in the US has gone totally wild.

In the meantime, the US trade deficit widened to $41.8 billion, close to its widest ever for a third straight month -- the US demand for imported good continues to rise. Thus, the US trade deficit is almost running at an annualized half a trillion dollars.

Beijing announced yesterday that Chinese industrial production surged 17 percent in the first half of 2003 along with a 33 percent rise in exports.

Today`s Financial Times reports that the German Chancellor wants European Central Bank to weaken the Euro against dollar.

The battle for exports continues, and one of the weapons is competitive devaluation. These are strange economic events. The idea is to keep your country`s currency ``cheap`` against the dollar. Therefore you reduce interest rates, thus making your currency less attractive to hold. Or your central bank buys dollars to keep the dollar strong against your own country`s currency.

To buy dollars your central bank has to create more of your own currency, and this is inflationary. On top of this, selling your products to the US means dollars coming into your country. As the billions of dollars build up in foreign nations, these nations build factories and other sources of production. World production (particularly in Asia) continues to rise, and this global increase in production means that all the over-produced goods cannot be digested by the consumers of the world.

Thus we have the pressure of world deflation as nations produce an ever-increasing amount of goods and yes, services. To offset the forces of deflation, the US floods the system with liquidity. Can the US stave off deflation? That`s what the battle is all about today.

So far, there seems to be a stand-off. The ultimate winner -- inflation or deflation? No one knowst know yet, but ultimately, I believe, inflation wins even if deflationary winds blow at gale force in some areas. Either way, the future of fiat money (i.e., purely ``paper money`` that the government can create by decree) world-wide is bleak.

…SR

#77 by soysauce

``Maybe they are all independently wealthy singles to whom Chowk is the family.``

You got it !

Rgds