The US Dollar and a Rising China

From the Economic Collapse Blog:

On the global financial stage, China is playing chess while the U.S. is playing checkers, and the Chinese are now accelerating their long-term plan to dethrone the U.S. dollar.  You see, the truth is that China does not plan to allow the U.S. financial system to dominate the world indefinitely.  Right now, China is the number one exporter on the globe and China will have the largest economy on the planet at some point in the coming years. 

The Chinese would like to see global currency usage reflect this shift in global economic power.  At the moment, most global trade is conducted in U.S. dollars and more than 60 percent of all global foreign exchange reserves are held in U.S. dollars.  This gives the United States an enormous built-in advantage, but thanks to decades of incredibly bad decisions this advantage is starting to erode.  And due to the recent political instability in Washington D.C., the Chinese sense vulnerability.  China has begun to publicly mock the level of U.S. debt, Chinese officials have publicly threatened to stop buying any more U.S. debt, the Chinese have started to aggressively make currency swap agreements with other major global powers, and China has been accumulating unprecedented amounts of gold.  All of these moves are setting up the moment in the future when China will completely pull the rug out from under the U.S. dollar.

Don't Freak Out: Gold, the Debt Crisis and Janet Yellen

I just wanted to write some quick notes about the last week and the issues involved with gold reaching its lowest point since July of 2010, Janet Yellen replacing Ben Bernanke and the US government shutdown and the impending debt ceiling and what it means and does not mean.

I will likely come back and update this post to expand in the coming days so you may want to revisit it Sunday or Monday.

The government shutdown and debt ceiling.
This subject is never really explained well by media or is explained poorly. In addition, some politicians are out right misrepresenting what will happen for political purposes to scare citizens into action.

The previous spending bill agreed to by Congress and the President has now expired. When they cannot agree on a new spending bill we get a "government shut down". What that means is that discretionary spending cannot continue but essential services are continued. Since two thirds of government spending are made up of entitlements like Medicare, Medicaid and Social Security, that part is unaffected. The rest, either continues or not depending on whether they are essential services or not. One example is most military spending. So as of today's writing about 80% of the normal level of government is still operating unchanged.

The debt ceiling is something different.

Getting to ONE: the Dow / Gold Ratio

I've written about the Dow / Gold ratio several times noting that there seems to be a long term cycle where the ratio hits one or nearly one. We were quickly moving back toward a ratio of one when the Fed embarked on Quantitative Easing to reflate the Dow and then in 2011 began to intervene in the gold markets to keep the dollar relatively strong and the gold price week. Though the economy wallows in low growth recession/depression the Fed has been successful in reflating the Dow and knocking down the price of gold. But Fed intervention loses its efficacy the longer it drags on requiring ever larger amounts of dollar printing to keep the prices from reverting to their natural equilibrium.

Its my belief, this is unavoidable and eventually either the forces of inflation will over power gold's manipulation or the Dow must decline towards its intrinsic value once the collective minds of the market admit there is no recovery. Today I examine commentary from Jim Rickards and Richard Russell who are both legends in their own right. One examines gold and how it gets to $5,000 and one who examines the Dow and how it reverts to 5,000. In essence, together, how the Dow/ Gold ratio gets to one

A Reminder of the US Debt Limit and its Correlation with Gold

As Washington fight over the upcoming debt limit, I thought it would be time for a good reminder of the historically high correlation between the US national debt, the debt ceiling and the price of gold.

WA Times: Volcker sees US Economic Disaster by March 2014

From the Washington Times dated October 25, 2012. All bolded emphasis is mine.

The central problem is that America is the bank of the world. What this means, simply, is that the dollar is the world’s currency (often termed the “reserve currency”). Throughout the world, nearly all traded goods, oil, major commodities, real estate, etc., are denominated in dollars. The world needs dollars, and the U.S. provides them and provides confidence that the dollar is the “safest” currency in the world. Countries get dollars by trading with us on attractive terms, which enables Americans to live very well. Countries support this system and cover their risk by investing in dollars through T-bill auctions and other mechanisms, which enables us to run budget deficits — up to a point.
The central issue is confidence in America, and the world is losing confidence quickly. At a certain point, soon, the United States will reach a level of deficit spending and debt at which the countries of the world will lose faith in America and begin to withdraw their investments. Many leading economists and bankers think another trillion dollars or so may do it. A run on the bank will start suddenly, build quickly and snowball.

The Dollar After the Fed's Decision Not To Taper

Egon von Greyerz via KWN (Bold emphasis is mine):

Eric King:  “Egon, astonishingly, you correctly predicted that there would be no Fed tapering this week.  That Fed decision certainly shocked the world and shocked the financial markets.  Where do we go from here?”

Greyerz:  “Yes, Eric.  It did not surprise me at all that the Fed did not taper because for a patient on life support that is not the time to turn off the machine because that machine is what keeps the patient alive artificially.  So how can the Fed possibly slow tapering? 

The US is a country with a total government debt of $220 trillion, unemployment at 23%, the job participation rate at the lowest level since the 1970s, median household incomes at multi-decade lows, and real-GDP declining since 2006.  We have also seen federal debt double since 2006, and consumer credit has been exploding.  So the picture is clear....    

Shanghai Slam Breaks Gold Market

I haven't posted for a while because I've been working on progress towards making the first Gold Bullion Debit Card a reality. If you're interested in learning more you can check out the beta website being developed at http://goldbulliondebitcard.cloudaccess.net/

Now to Shanghai. From ZeroHedge:

There was a time when, if selling a sizable amount of a security, one tried to get the best execution price and not alert the buyers comprising the bid stack that there is

(substantial) volume for sale. Of course, there was and always has been a time when one tried to manipulate prices by slamming the bid until it was fully taken out, usually just before close of trading, an illegal practice known as "banging the close." It appears that when it comes to gold, the former is long gone history, and the latter is perfectly legal. As the two charts below from Nanex demonstrate, overnight just before 3 am Eastern, a block of just 2000 GC gold futures contracts slammed the price of gold, on no news as usual, sending it lower by $10/oz. However, that is not new: such slamdowns happen every day in the gold market, and the CFTC constantly turns a blind eye. What was different about last night's slam however, is that this time whoever was doing the forced, manipulation selling, just happened to also break the market. Indeed: following the hit, the entire gold market was NASDARKed for 20 seconds after a circuit breaker halted trading!