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USD ready for a second leg higher – then what?

USD ready for a second leg higher – then what?

One year ago we showed the following chart to explain the relative strong dollar that was on everyone’s mind at the time. With a second leg higher in the US dollar imminent, this particular chart will be more important than ever. Claims to dollars, such as demand and time deposits, or even more opaque money-like products created by the shadow banking system is just that, a claim or derivative on the final mean of payment, namely base money. When trust breaks down and owners of dollar claims rush to exchange them for actual dollars, the price of dollars goes up in relation to goods and services because there are not enough dollars to satisfy all the claims outstanding. In monetary terms deflation takes hold and there are no market mechanism that can clear this anomaly (because it was never a proper market to begin with) as the price of the underlying and the derivative will move in perfect proportion to each other. In enter the Federal Reserve with their QE programs, id est base money creation, to meet dollar demand and stem the ensuing panic.

Unfortunately, something even more sinister has been going on with dollar derivatives internationally. In addition to domestic claims to dollars, there are a massive market for dollars internationally called Eurodollars. Foreign banks, particularly European banks, help global investors, merchants, exporters and importers trade and settle in USD, with very few actual dollars present. As long as everybody trust each other, this highly efficient system can operate smoothly with a high degree of leverage. Money market funds and filthy rich commodity exporters have a long tradition for placing their money in these markets allowing the financial system to benefit greatly.   dollar-leverage-3…click on the above link to read the rest of the article…

You are currently living through the dumbest monetary experimental end game in history (including Havenstein and Gono’s)

You are currently living through the dumbest monetary experimental end game in history (including Havenstein and Gono’s)

We have seen several explanations for the financial crisis and its lingering effects depressing our global economy in its aftermath. Some are plain stupid, such as greed for some reason suddenly overwhelmed people working within finance, as if people in finance were not greedy before 2007. Others try to explain it through “liberalisation” which is almost just as nonsensical as government regulators never liberalised anything, but rather allowed fraud, in polite company called fractional reserve banking, to grow unrestrained. Some point to excess savings in exporting countries as the culprit behind our misery. Excess saving forces less frugal countries reluctantly to run deficits, or so the argument goes.

While some theories are pure folly, others are partial right, but none seem to grasp the fundamental factor that pulled and keep pulling the world into such unsustainable constellations witnessed in global finance, trade and capital allocation.

Whenever we try to explain the reasons behind the crisis, such as the build-up in non-productive and counterproductive debt (see herehere and here for more details) people ask us why did this happened now, and not earlier? It is a fair question that we have thought about and believe have one simple answer. Bottom line, the world economy is running on a system with no natural correcting mechanisms.

As we are never tired of pointing out, the Soviet Union only had one recession, the one in 1989. The system was stable, until it was not. A system that does not correct internal imbalances grows just like a parasitic cancer, eventually killing its host. If unsustainable capital allocations are allowed to continue unchecked, the pool of real savings will at some point be depleted. At that point recession hits because the structure of production is too capital intensive relative to the level of real saving available.

…click on the above link to read the rest of the article…

How Italy will fail and drag down the European Project

How Italy will fail and drag down the European Project

Greece, Portugal and Ireland were mere test subjects for what will come. Spain would have been a challenge, but were narrowly avoided. Italy will drag the whole structure down if it continues on its current trajectory, and there is nothing to suggest it will change course.

The main problem for Italy is its stagnating level of nominal GDP, which we refer to as “Japanificaton” of the economy. While people usually think of deflation when they hear “Japan”, that is not an entirely correct observation. It is true that nominal GDP flat lined after the crisis in the 1990s which dragged down revenue. However, if it was truly a deflationary period, expenditures should fall also as prices paid for services rendered would drop concomitantly. This has not been the case and it is more correct to say Japan has been trapped in a revenue / NGDP deflation, hence the perceived need for Abenomics, or in plain English, the creation of a helluva lot of currency units to boost NGDP and revenue and thus reduce the need for bond issuance. As our first chart show, so far it has been modestly successful. Please note that Abenomics have nothing to do with creating real prosperity (no one can be that ignorant), but all about getting the spiraling debt problem under control by jacking up the inflation tax.Italy 1

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