The Beginning Of The End
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It’s Currency War! – And Japan Has Fired The First Shot

Currency War - Public DomainThis is the big problem with fiat currency – eventually the temptation to print more of it when you are in a jam becomes too powerful to resist.  In a surprise move on Friday, the Bank of Japan dramatically increased the size of the quantitative easing program that it has been conducting.  This sent Japanese stocks soaring and the Japanese yen plunging.  The yen had already fallen by about 11 percent against the dollar over the last year before this announcement, and news of the BOJ’s surprise move caused the yen to collapse to a seven year low.  Essentially what the Bank of Japan has done is declare a currency war.  And as you will see below, in every currency war there are winners and there are losers.  Let’s just hope that global financial markets do not get shredded in the crossfire.

Without a doubt, the Japanese are desperate.  Their economic decline has lasted for decades, and their debt levels are off the charts.  In such a situation, printing more money seems like such an easy solution.  But as history has shown us, wild money printing always ends badly.  Just remember what happened in the Weimar Republic and in Zimbabwe.

At this point, the Bank of Japan is already behaving so recklessly that it is making the Federal Reserve look somewhat responsible in comparison.  The following is how David Stockman summarized what just happened…

This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad.

Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year—-a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.

The Japanese are absolutely destroying the credibility of their currency in a last ditch effort to boost short-term economic growth.

So why would they want to devalue their currency?

Well, there are too main reasons why nations do this.

One reason is that it makes it easier to pay off debt.  The government debt to GDP ratio in Japan is approximately 250 percent at the moment, and the total debt to GDP ratio is approximately 600 percent.  When you have lots more money floating around, servicing crippling levels of debt becomes more feasible.

Secondly, nations like to devalue their currencies because it makes their products less expensive on the world stage.

In other words, it helps them sell more stuff to other people.

But in the process, this hurts other exporters.  For example, what the Bank of Japan just did is already having serious consequences for South Korean automakers

In Seoul, shares of auto makers Hyundai Motor and Kia Motors fell 5.9% and 5.6%, respectively, on Monday.

South Korean and Japanese companies often compete head-to-head in the same product groups in global markets, notably cars and electronics goods.

From the Bank of Japan’s standpoint, “you’re giving your industry a head start relative to someone else’s,” said Markus Rosgen, regional head of equity strategy at Citi in Hong Kong. “The perception in the equity market will be that they [South Korea] will have to take a hit from the lack of competitiveness versus the Japanese.”

This is why I said that there are winners and there are losers in every currency war.

If you boost your exports by devaluing your currency, you take away business from someone else.  And ultimately other nations start devaluing their currencies in an attempt to stay competitive.  That is why they call it a currency war.

For now, the Japanese are celebrating.  On Friday, Japanese stocks surged almost five percent for the day and reached a seven year high.  Investors tend to love quantitative easing, and they were very pleasantly surprised by what the Bank of Japan decided to do.

But of course rising stock prices are not always a good thing.  As Kyle Bass recently explained, wild money printing caused Zimbabwe’s stock market to skyrocket to unprecedented heights as well and that turned out very, very badly…

Amid the euphoria… Kyle Bass provided a few minutes of sanity this morning in an interview with CNBC’s Gary Kaminsky. Bass starts by reflecting on the ongoing (and escalating) money-printing (or balance sheet expansion as we noted here) as the driver of stock movements currently and would not be surprised to see them move higher still (given the ongoing printing expected).

However, he caveats that nominally bullish statement with a critical point, “Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs” as purchasing power is crushed. Investors, he says, are “too focused on nominal prices” as the rate of growth of the monetary base is destroying true wealth. Bass is convinced that cost-push inflation is coming (as the velocity of money will move once psychology shifts) and investors must not take their eye off the insidious nature of underlying inflation – no matter what we are told by the government (as they will always lie when its critical). Own ‘productive assets’, finance them at low fixed rates (thank you Ben)…

And just like we have experienced with quantitative easing in the United States, Japan’s money printing has done very little to help the real economy.  Here is more from David Stockman

Notwithstanding the massive hype of Abenomics, Japan’s real GDP is lower than it was in early 2013, while its trade accounts have continued to deteriorate and real wages have headed sharply south.

So up to this point Japan’s experiment in crazy money printing has been a dismal failure.

Will printing even more money turn things around?

We shall see, but I wouldn’t hold your breath.

Meanwhile, there are reports that the European Central Bank is getting ready for more quantitative easing.  Central banks all over the planet are becoming increasingly desperate for answers, and the temptation to print, print and print some more is extremely strong.

Nobody is quite sure how this currency war will play out, but I have a feeling that it isn’t going to be pretty.

12 Numbers About The Global Financial Ponzi Scheme That Should Be Burned Into Your Brain

Brain - Public DomainThe numbers that you are about to see are likely to shock you.  They prove that the global financial Ponzi scheme is far more extensive than most people would ever dare to imagine.  As you will see below, the total amount of debt in the world is now more than three times greater than global GDP.  In other words, you could take every single good and service produced on the entire planet this year, next year and the year after that and it still would not be enough to pay off all the debt.  But even that number pales in comparison to the exposure that big global banks have to derivatives contracts.  It is hard to put into words how reckless they have been.  At the low end of the estimates, the total exposure that global banks have to derivatives contracts is 710 trillion dollars.  That is an amount of money that is almost unimaginable.  And the reality of the matter is that there is really not all that much actual “money” in circulation today.  In fact, as you will read about below, there is only a little bit more than a trillion dollars of U.S. currency that you can actually hold in your hands in existence.  If we all went out and tried to close our bank accounts and investment portfolios all at once, that would create a major league crisis.  The truth is that our financial system is little more than a giant pyramid scheme that is based on debt and paper promises.  It is literally a miracle that it has survived for so long without collapsing already.

When Americans think about the financial crisis that we are facing, the largest number that they usually can think of is the size of the U.S. national debt.  And at over 17 trillion dollars, it truly is massive.  But it is actually the 2nd-smallest number on the list below.  The following are 12 numbers about the global financial Ponzi scheme that should be burned into your brain…

-$1,280,000,000,000 – Most people are really surprised when they hear this number.  Right now, there is only 1.28 trillion dollars worth of U.S. currency floating around out there.

-$17,555,165,805,212.27 – This is the size of the U.S. national debt.  It has grown by more than 10 trillion dollars over the past ten years.

-$32,000,000,000,000 – This is the total amount of money that the global elite have stashed in offshore banks (that we know about).

-$48,611,684,000,000 – This is the total exposure that Goldman Sachs has to derivatives contracts.

-$59,398,590,000,000 – This is the total amount of debt (government, corporate, consumer, etc.) in the U.S. financial system.  40 years ago, this number was just a little bit above 2 trillion dollars.

-$70,088,625,000,000 – This is the total exposure that JPMorgan Chase has to derivatives contracts.

-$71,830,000,000,000 – This is the approximate size of the GDP of the entire world.

-$75,000,000,000,000 – This is approximately the total exposure that German banking giant Deutsche Bank has to derivatives contracts.

-$100,000,000,000,000 – This is the total amount of government debt in the entire world.  This amount has grown by $30 trillion just since mid-2007.

-$223,300,000,000,000 – This is the approximate size of the total amount of debt in the entire world.

-$236,637,271,000,000 – According to the U.S. government, this is the total exposure that the top 25 banks in the United States have to derivatives contracts.  But those banks only have total assets of about 9.4 trillion dollars combined.  In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 25 to 1.

-$710,000,000,000,000 to $1,500,000,000,000,000 – The estimates of the total notional value of all global derivatives contracts generally fall within this range.  At the high end of the range, the ratio of derivatives exposure to global GDP is about 21 to 1.

Most people tend to assume that the “authorities” have fixed whatever caused the financial world to almost end back in 2008, but that is not the case at all.

In fact, the total amount of government debt around the globe has grown by about 40 percent since then, and the “too big to fail banks” have collectively gotten 37 percent larger since then.

Our “authorities” didn’t fix anything.  All they did was reinflate the bubble and kick the can down the road for a little while.

I don’t know how anyone can take an honest look at the numbers and not come to the conclusion that this is completely and totally unsustainable.

How much debt can the global financial system take before it utterly collapses?

How recklessly can the big banks behave before the house of cards that they have constructed implodes underneath them?

For the moment, everything seems fine.  Stock markets around the world have been setting record highs and credit is flowing like wine.

But at some point a day of reckoning is coming, and when it arrives it is going to be the most painful financial crisis the world has ever seen.

If you plan on getting ready before it strikes, now is the time to do so.

Russia Threatens To Abandon The U.S. Dollar And Start Dumping U.S. Debt

The Kremlin - Photo by Pavel KazachkovThe Obama administration and the hotheads in Congress are threatening to hit Russia with “economic sanctions” for moving troops into Crimea.  Yes, those sanctions would sting a little bit, but what our politicians should be made aware of is the fact that Russian officials are promising “to respond” if economic sanctions are imposed on them.  As you will read about below, one top Kremlin adviser is even suggesting that Russia could abandon the U.S. dollar and start dumping U.S. debt.  In addition, he is also suggesting that if sanctions are imposed that Russian companies would not repay the debts that they owe U.S. banks.  Needless to say, Russia could do far more economic damage to the United States than the United States could do to Russia.  The U.S. financial system relies on the fact that the rest of the planet is going to use our currency to trade with one another and lend gigantic piles of it back to us at super low interest rates.  If the rest of the world starts changing their behavior, we are going to be in a massive amount of trouble.  Those that believe that the United States is “economically independent” are being quite delusional.

In order for U.S. economic sanctions against Russia to be effective, Europe would also have to get on board.

But that simply is not going to happen.

As I noted yesterday, Russia is the largest exporter of natural gas on the planet.  And Russia is also Europe’s largest supplier of energy.

There is no way that Europe could risk having Russia cut off the gas, especially considering the economic condition that Europe is currently in.

To get an idea of just how incredibly dependent the rest of Europe is on Russian natural gas, check out the chart in this article.  A whole bunch of European nations get more than half their natural gas from Russia.

And according to the Telegraph, even the UK has already completely ruled out economic sanctions…

Europe would be pushed back into recession, Russia into financial meltdown. This is not the sort of self harm Europe is prepared to contemplate right now. Indeed, thanks to the indiscretion of a UK official, who was snapped going into Downing Street with his briefing documents on display for all the world to see, we know this to be the case. Trade and financial sanctions have already been ruled out.

So the U.S. can do whatever it wants, but Europe is not going to be any help.  Perhaps Canada will stand with the U.S., but that will be about it.

On the flip side, the Russian Foreign Ministry is promising “to respond” if the United States does impose economic sanctions…

Russia said on Tuesday that it would retaliate if the United States imposed sanctions over Moscow’s actions in Ukraine.

We will have to respond,” Foreign Ministry spokesman Alexander Lukashevich said in a statement. “As always in such situations, provoked by rash and irresponsible actions by Washington, we stress: this is not our choice.”

So what would the response look like?

Lukashevich did not say, but top Kremlin adviser Sergei Glazyev is suggesting that Russia could abandon the U.S. dollar and refuse to pay back loans to U.S. banks…

“In the instance of sanctions being applied to stated institutions, we will have to declare the impossibility of returning those loans which were given to Russian institutions by U.S. banks,” RIA quoted Glazyev as saying.

“We will have to move into other currencies, create our own settlement system.”

He added: “We have excellent trade and economic relations with our partners in the east and south and we will find a way to reduce to nothing our financial dependence on the United States but even get out of the sanctions with a big profit to ourselves.”

Glazyev also stated that Russia could start dumping U.S. debt and encourage other nations to start doing the same.  The following comes from a Russian news source

“We hold a decent amount of treasury bonds – more than $200 billion – and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner,” he said. “We will encourage everybody to dump US Treasury bonds, get rid of dollars as an unreliable currency and leave the US market.

Clearly Russian officials understand the economic leverage that they potentially have.  In fact, Glazyev seems fully convinced that Russia could cause “a crash for the financial system of the United States”

“An attempt to announce sanctions would end in a crash for the financial system of the United States, which would cause the end of the domination of the United States in the global financial system.”

On that last point Glazyev is perhaps overstating things.

On their own, the Russians could do a considerable amount of damage to the U.S. financial system, but I doubt that they could completely crash it.

However, if much of the rest of the world started following Russia’s lead, then things could get very interesting.

Just yesterday, I wrote about how China has chosen to publicly stand in agreement with Russia on the Ukrainian crisis.

If China also decided to abandon the U.S. dollar and start dumping U.S. debt, it would be an absolute nightmare for the U.S. financial system.

And keep in mind that the Chinese were already starting to dump a bit of U.S. debt even before this latest crisis.  In fact, China dumped nearly 50 billion dollars of U.S. debt in December alone.

The only way that the current bubble of debt-fueled false prosperity in the U.S. can continue is if the rest of the world continues to lend us trillions of dollars at ridiculously low interest rates that are way below the real rate of inflation.

If the rest of the world stops behaving in such an irrational manner, interest rates on U.S. government debt would rise dramatically and that would also mean that interest rates on virtually all other loans throughout our financial system would rise dramatically.

And if that happened, it would be a complete and utter nightmare for our economy.

Unfortunately, most Americans have no understanding of these things.  They just assume that we are “the greatest economy in the world” and that nothing is ever going to threaten that.

Well, the truth is that we are rapidly approaching a “turning point”, and after this bubble of false prosperity pops things will never be the same in the United States again.

The Kremlin - Photo by Pavel Kazachkov

9 Signs That China Is Making A Move Against The U.S. Dollar

The U.S. DollarOn 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.

Today, the U.S. financial system is the core of the global financial system.  Because nearly everybody uses the U.S. dollar to buy oil and to trade with one another, this creates a tremendous demand for U.S. dollars around the planet.  So other nations are generally very happy to take our dollars in exchange for oil, cheap plastic gadgets and other things that U.S. consumers “need”.

Major exporting nations accumulate huge piles of our dollars, but instead of just letting all of that money sit there, they often invest large portions of their currency reserves into U.S. Treasury bonds which can easily be liquidated if needed.

So if the U.S. financial system is the core of the global financial system, then U.S. debt is “the core of the core” as some people put it.  U.S. Treasury bonds fuel the print, borrow, spend cycle that the global economy depends upon.

That is why a U.S. debt default would be such a big deal.  A default would cause interest rates to skyrocket and the entire global economic system to go haywire.

Unfortunately for us, the U.S. debt spiral cannot go on indefinitely.  Our debt is growing far, far more rapidly than our GDP is, and therefore our debt is completely and totally unsustainable.

The Chinese understand what is going on, and when the dust settles they plan to be the last ones standing.  In the aftermath of a U.S. collapse, China anticipates having the largest economy on the planet, more gold than anyone else, and a respected international currency that the rest of the globe will be able to use to conduct international trade.

And China is not just going to sit back and wait for all of this to happen.  In fact, they are already doing lots of things to get the ball moving.  The following are 9 signs that China is making a move against the U.S. dollar…

#1 Chinese credit rating agency Dagong has downgraded U.S. debt from A to A- and has indicated that further downgrades are possible.

#2 China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency.  This agreement will result in a lot less U.S. dollars being used in trade between China and Europe…

The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.

“It’s a way of promoting European and Chinese trade, but not doing it with the U.S. dollar,” said Brooks. “It’s a bit like cutting out the middleman, all of a sudden there’s potentially no U.S. dollar risk.”

#3 Back in June, China signed a major currency swap agreement with the United Kingdom.  This was another very important step toward internationalizing the yuan.

#4 China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.

#5 Mei Xinyu, Commerce Minister adviser to the Chinese government, warned this week that if the U.S. government ever does default that China may decide to completely stop buying U.S. Treasury bonds.

#6 According to Yahoo News, China has already been looking for ways to diversify away from the U.S. dollar…

There have been media reports this week that China’s State Administration of Foreign Exchange, the body that handles the country’s $3.66 trillion of foreign exchange reserve, is looking to diversify into real estate investments in Europe.

#7 Xinhua, the official news agency of China, called for a “de-Americanized world” this week, and also made the following statement about the political turmoil in Washington: “The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized.”

#8 Xinhua also said the following about the U.S. debt deal on Thursday: “[P]oliticians in Washington have done nothing substantial but postponing once again the final bankruptcy of global confidence in the U.S. financial system”.  The commentary in the government-run publication also declared that the debt deal “was no more than prolonging the fuse of the U.S. debt bomb one inch longer.”

#9 China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations.  But instead of slowing down, the Chinese appear to be accelerating their gold buying.  In fact, money manager Stephen Leeb says that his sources are telling him that China plans to buy another 5,000 tons of gold.  There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.

So exactly what would happen if the Chinese announced someday that they were going to back their currency with gold and would no longer be using the U.S. dollar in international trade?

It would change the face of the global economy almost overnight.  In a previous article, I described some of the things that we could expect to see happen…

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy.  Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar.  At that point you could forget about cheap gasoline or cheap Chinese imports.  Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively.  If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living.  Today, most U.S. currency is actually used outside of the United States.  If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.

The fact that we get to print up giant mountains of money and virtually everyone around the world uses it has been a huge boon for the U.S. economy.

When that changes, the word “catastrophic” is not going to be nearly strong enough to describe what is going to happen.

According to a Rasmussen Reports survey that was released this week, only 13 percent of all Americans believe that the country is on the right track.  But the truth is that these are the good times.  The American people haven’t seen anything yet.

Someday people will look back and desperately wish that they could go back to the “good old days” of 2012 and 2013.  This is about as good as things are going to get, and it is only downhill from here.

Does China Plan To Back The Yuan With Gold And Make It The Primary Global Reserve Currency?

Chinese Renminbi Yuan - Photo by MiLu24What in the world is China up to?  Why are the Chinese hoarding so much gold?  Does China plan to back the yuan with gold and turn it into a global reserve currency?  Could it be possible that China actually intends for the yuan to eventually replace the U.S. dollar as the primary reserve currency of the planet?  Most people in the western world assume that China just wants a “seat at the table” and is content to let the United States run the show.  But that isn’t the case at all.  The truth is that China doesn’t just want to compete with the United States.  Rather, China actually plans to replace the United States as the dominant economic power on the planet.  In fact, China already accounts for more global trade than the United States does.  So what would happen one day if China announced that it was backing the yuan with gold and that it would no longer be using the U.S. dollar in international trade?  It would cause a financial shift so cataclysmic that it is hard to even imagine.  Most of those that write about the “death of the U.S. dollar” usually fail to point out that China is holding a lot of the cards as far as the fate of the dollar is concerned.  China owns about a trillion dollars of our debt, China is the second largest economy on the planet, and nobody uses the dollar in international trade more than China does except for the United States.  Up until now, China has had to use the U.S. dollar in international trade because there has not been an attractive alternative.  But a gold-backed yuan would change all of that very rapidly.

And without a doubt, the Chinese government has already been very busy promoting the use of the yuan in international trade.  In a recent note, John McCormick of RBS Group stated the following…

Financial crises in the US and Europe mean the world needs a new, more stable global reserve currency, and trade in RMB is growing rapidly. In the FX market, for example, our figures show that volumes are now worth around USD 5-6 billion daily – double what they were a year ago.

A number of factors suggest that the Chinese authorities want to make RMB internationalisation happen by 2015.

For China, having a global reserve currency is not just about economics.  It is also about power.

McCormick ended his recent note this way…

China’s new leadership faces a number of problems. The country’s economy is slowing and, although we would expect the rate of GDP growth to pick up a little, it is unlikely to be a steep rebound.

But promoting RMB as a global reserve currency, with all the economic benefits that will bring in addition to exerting more political influence on the global stage, clearly remains high on their agenda.

Similar sentiments were echoed in a recent article in the Wall Street Journal

Beijing is undertaking a long, gradual campaign to establish the yuan as a more market-oriented, international currency. China’s State Council, or cabinet, said in a statement this month that the country would draft a plan to allow the yuan to become fully convertible. Meanwhile, the People’s Bank of China is guiding the currency higher and set the median point of its permitted daily trading band last week at the strongest level ever.

We don’t hear much about these sorts of things in the western media, but the convertibility of the Chinese yuan is a very big deal.  Up until recently, the yuan was only directly convertible into dollars and yen.  But now that is rapidly changing.  So far this year, the Chinese government has entered into currency convertibility agreements with Australia and New Zealand.

So instead of having to change yuan into U.S. dollars to trade with Australia and New Zealand, now China can cut U.S. dollars completely out of the process.

But right now there is nothing that really gives the Chinese yuan a significant competitive edge over the U.S. dollar.  If Chinese authorities truly want the yuan to end up replacing the U.S. dollar as the primary reserve currency of the planet, they need to do something that will make the rest of the world want to use it.

And they could do that by backing the yuan with gold.  In fact, there are persistent rumors that China has been busily preparing for that.

For example, the Economic Policy Journal recently pointed out that Dr. Pippa Malmgren, the President and founder of Principalis Asset Management who once worked in the White House as an adviser to President Bush, is claiming that China has plans to turn the yuan into “a hard, gold-backed currency” that will have a distinct competitive edge over the rapidly depreciating paper currencies that the rest of the globe is currently using…

The most interesting piece of the puzzle is that the Chinese have emerged as the biggest buyers of gold, mainly off-market. They want the yuan to emerge as a hard, gold-backed currency in a world where everyone else has chosen to inflate and devalue.

The recent bilateral currency deals with Australia, France, Russia and Singapore, and many others, reflect this desire to displace the USD as the world’s reserve currency.

It may be an interesting and long race between the Chinese reaching for convertibility and the Western central banks straining credibility.

Other analysts are also fully convinced that the goal of the Chinese is a gold-backed yuan.  The following is what money manager Stephen Leeb told King World News recently

Countries have been battling each other in order to cheapen their currencies. The problem with a cheaper currency is that commodities cost more. So China has decided to opt for a higher currency.

The move in the yuan overnight was one of the most significant upticks I have seen. Like I said, the yuan moved to an all-time high. The yuan has advanced roughly 5% against the US dollar in just nine months. China also imported over 200 tons of gold for the most recent month. That is an extraordinary number. At that rate that’s over 2,400 tons of gold per year on an annualized basis.

This simply speeds up the point at which China will be the largest gold holder in the world. China saw gold come down and they didn’t just buy on the dip, instead they bought as much as the market would give them. And, again, you see the yuan going up so that is making the price of gold even cheaper for the Chinese.

It’s only a matter of time before the Chinese back the yuan with gold. This will push the yuan front and center as a key element in terms of being part of the world’s reserve currency basket. China gets the message. They are doing whatever it takes to establish their dominance in the world, particularly in the commodity arena. Their currency is flying and they are importing as much gold as they possibly can.

And without a doubt, China has been hoarding massive amounts of gold.  Everyone agrees on that.  But what nobody knows is exactly how much gold China currently has stockpiled, because China is not telling anybody.

One recent estimate put China’s gold reserves at more than 7,000 tons of gold, but it could potentially be far higher than that.  When China does finally tell the rest of us how much gold they have, they will probably be just a move or two away from checkmate.

What we do know is that China is importing absolutely enormous amounts of gold right now even though China is also the number one gold producer on the planet.

According to Reuters, more than 223 tons of gold was imported into China from Hong Kong in March.  That smashed the previous record of 114 tons in December.

Overall, Chinese imports of gold from Hong Kong tripled in 2012, and the final number for 2013 is going to absolutely smash what we saw in 2012.

Obviously something is happening.

China is massively hoarding gold at the same time that it is trying to substantially raise the international influence of the yuan.

It doesn’t take a genius to see where all of this is headed.

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy.  Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar.  At that point you could forget about cheap gasoline or cheap Chinese imports.  Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively.  If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living.  Today, most U.S. currency is actually used outside of the United States.  If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.

So keep an eye on China, and look out for any news about the yuan.

It won’t happen next week or next month, but eventually we could see China back the yuan with gold.

When that happens, it is going to be a complete and utter financial disaster for the United States.

 

11 Reasons Why The Federal Reserve Should Be Abolished

The Federal ReserveIf the American people truly understood how the Federal Reserve system works and what it has done to us, they would be screaming for it to be abolished immediately.  It is a system that was designed by international bankers for the benefit of international bankers, and it is systematically impoverishing the American people.  The Federal Reserve system is the primary reason why our currency has declined in value by well over 95 percent and our national debt has gotten more than 5000 times larger over the past 100 years.  The Fed creates our “booms” and our “busts”, and they have done an absolutely miserable job of managing our economy.  But why do we need a bunch of unelected private bankers to manage our economy and print our money for us in the first place?  Wouldn’t our economy function much more efficiently if we allowed the free market to set interest rates?  And according to Article I, Section 8 of the U.S. Constitution, the U.S. Congress is the one that is supposed to have the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.  So why is the Federal Reserve doing it?  Sadly, this is the way it works all over the globe today.  In fact, all 187 nations that belong to the IMF have a central bank.  But the truth is that there are much better alternatives.  We just need to get people educated.

The following are 11 reasons why the Federal Reserve should be abolished…

#1 The Greatest Period Of Economic Growth In The History Of The United States Happened When There Was No Central Bank

Did you know that the greatest period of economic growth in U.S. history was between the Civil War and 1913?  And guess what?  That was a period when there was no central bank in the United States at all.  The following is from Wikipedia

The Gilded Age saw the greatest period of economic growth in American history. After the short-lived panic of 1873, the economy recovered with the advent of hard money policies and industrialization. From 1869 to 1879, the US economy grew at a rate of 6.8% for real GDP and 4.5% for real GDP per capita, despite the panic of 1873.  The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8%, while the GDP was also doubled.

So if our greatest period of economic prosperity was during a time when there was no Federal Reserve, then why shouldn’t we try such a system again?

#2 The Federal Reserve Is Systematically Destroying The Value Of The U.S. Dollar

The United States never had a persistent, ongoing problem with inflation until the Federal Reserve was created in 1913.

If you do not believe this, just check out the inflation chart in this article.

The Federal Reserve systematically penalizes those that try to save their money.  Inflation is a tax, and the value of each one of our dollars goes down a little bit more every single day.

But over time, it really adds up.  In fact, the value of the U.S. dollar has fallen by 83 percent since 1970.

Anyone that goes to the grocery store on a regular basis knows how painful inflation can be.  The following is a list that shows how prices for many of the things that we buy on a regular basis absolutely skyrocketed between 2002 and 2012

Eggs: 73%

Coffee: 90%

Peanut Butter: 40%

Milk: 26%

A Loaf Of White Bread: 39%

Spaghetti And Macaroni: 44%

Orange Juice: 46%

Red Delicious Apples: 43%

Beer: 25%

Wine: 60%

Electricity: 42%

Margarine: 143%

Tomatoes: 22%

Turkey: 56%

Ground Beef: 61%

Chocolate Chip Cookies: 39%

Gasoline: 158%

Even the price of water has absolutely soared in recent years.  According to USA Today, water bills have actually tripled over the past 12 years in some areas of the country.

So how can the Federal Reserve get away with claiming that we are in a “low inflation” environment?

Well, what Ben Bernanke never tells you is that the way that the government calculates inflation has changed more than 20 times since 1978.

The truth is that the real rate of inflation is somewhere between five and ten percent right now, but you will never hear about this on the mainstream news.

#3 The Federal Reserve Is A Perpetual Debt Machine

The Federal Reserve system was designed to be a trap.  The intent of the bankers was to trap the U.S. government in an endless debt spiral from which it could never possibly escape.

But most Americans don’t understand this.  In fact, most Americans don’t even understand where money comes from.

If you don’t believe this, just go out on the street and ask regular people where money comes from.  The responses will be something like this…

“Duh – I don’t know.  I’ve got to get home to watch American Idol.”

This is why it is so important to get people educated.  I think that most Americans would be horrified to learn that the creation of more money in our system also involves the creation of more debt.

The following is a summary of money creation that comes from one of my previous articles

When the U.S. government decides that it wants to spend another billion dollars that it does not have, it does not print up a billion dollars.

Rather, the U.S. government creates a bunch of U.S. Treasury bonds (debt) and takes them over to the Federal Reserve.

The Federal Reserve creates a billion dollars out of thin air and exchanges them for the U.S. Treasury bonds.

So what does the Federal Reserve do with those Treasury bonds?  I went on to explain what happens…

The U.S. Treasury bonds that the Federal Reserve receives in exchange for the money it has created out of nothing are auctioned off through the Federal Reserve system.

But wait.

There is a problem.

Because the U.S. government must pay interest on the Treasury bonds, the amount of debt that has been created by this transaction is greater than the amount of money that has been created.

So where will the U.S. government get the money to pay that debt?

Well, the theory is that we can get money to circulate through the economy really, really fast and tax it at a high enough rate that the government will be able to collect enough taxes to pay the debt.

But that never actually happens, does it?

And the creators of the Federal Reserve understood this as well.  They understood that the U.S. government would not have enough money to both run the government and service the national debt.  They knew that the U.S. government would have to keep borrowing even more money in an attempt to keep up with the game.

Men like Thomas Edison and Henry Ford could not understand why we would adopt such a foolish system.  For example, Thomas Edison was once quoted in the New York Times as saying the following…

That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.

Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost.

But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good.

Unfortunately, today most Americans don’t even understand how the system works.  They just assume that we have the best system in the entire world.

Sadly, the reality is that the system is working just as the international bankers that designed it had hoped.  The United States has the largest national debt in the history of the world, and we are stealing more than 100 million dollars from our children and our grandchildren every single hour of every single day in a desperate attempt to keep the debt spiral going.

#4 The Federal Reserve Is A Centrally-Planned Financial System That Is The Antithesis Of What A Free Market System Should Be

Why do we need someone to centrally-plan our financial system?

Isn’t that the kind of thing they do in communist China?

Why do we need someone to tell us what interest rates are going to be?

Why do we need someone to determine what “the target rate of inflation” should be?

If we actually had a free market system, the free market would be the one “managing” our economy.

But instead, we have become so accustomed to central planning that any alternatives seem to be absolutely unthinkable.

For example, CNBC cannot possibly imagine a world where the Fed (or some similar institution) was not running things…

But suppose the law were taken off the books? The Fed’s job—in simple terms—is to manage the nation’s money supply and achieve the sometimes-conflicting tasks of full employment, stable prices while fighting inflation or deflation.

How would the U.S. economy then function? Something has to take its place, right?

Global markets would also need some sort of economic direction from the U.S. The Fed manages the dollar — and as the world’s leading currency, a void left by a Fed-less America could throw those markets into chaos with uncertainty about who’s managing U.S. interest rates and the American economy.

I’ve got an idea – let’s let the free market “manage” U.S. interest rates and the American economy.

I know, it’s a crazy idea, but I have a sneaking suspicion that it just might work beautifully.

#5 The Federal Reserve Creates Bubbles And Busts

Do you remember the Dotcom bubble?

Or what about the housing bubble?

By dramatically distorting interest rates and financial behavior, the Federal Reserve creates economic bubbles and the corresponding economic busts.

And guess what?

Now it is happening again.

When will the American people decide that they have had enough?

If you can believe it, there have been 10 different economic recessions since 1950.  And of course the Federal Reserve even admits that it helped create the Great Depression of the 1930s.

Perhaps it is time to try something different.

#6 The Federal Reserve Is Privately Owned

It has been said that the Federal Reserve is about as “federal” as Federal Express is.

Most Americans still believe that the Federal Reserve is a “federal agency”, but that is simply not true.  The following comes from factcheck.org

The stockholders in the 12 regional Federal Reserve Banks are the privately owned banks that fall under the Federal Reserve System. These include all national banks (chartered by the federal government) and those state-chartered banks that wish to join and meet certain requirements. About 38 percent of the nation’s more than 8,000 banks are members of the system, and thus own the Fed banks.

And even the Federal Reserve itself has argued that it is “not an agency” of the federal government in court.

So why is there still so much confusion about this?

We should not be allowing a private entity that is owned and dominated by the banks to make decisions that dramatically affect the daily lives of all the rest of us.

#7 The Federal Reserve Greatly Favors The “Too Big To Fail” Banks

Since the Federal Reserve is owned by the banks, should we be surprised that it serves the interests of the banks?

In particular, the Fed has been extremely good to the “too big to fail” banks.

Over the past several decades, those banks have grown tremendously in both size and power.

Back in 1970, the five largest U.S. banks held 17 percent of all U.S. banking industry assets.

Today, the five largest U.S. banks hold 52 percent of all U.S. banking industry assets.

#8 The Federal Reserve Gives Secret Bailouts To Their Friends

The Federal Reserve is the only institution in America that can print money out of thin air and loan it to their friends any time they want to.

For example, did you know that the Federal Reserve made 16 trillion dollars in secret loans to their friends during the last financial crisis?

The following list is taken directly from page 131 of a GAO audit report, and it shows which banks received secret loans from the Fed…

Citigroup – $2.513 trillion
Morgan Stanley – $2.041 trillion
Merrill Lynch – $1.949 trillion
Bank of America – $1.344 trillion
Barclays PLC – $868 billion
Bear Sterns – $853 billion
Goldman Sachs – $814 billion
Royal Bank of Scotland – $541 billion
JP Morgan Chase – $391 billion
Deutsche Bank – $354 billion
UBS – $287 billion
Credit Suisse – $262 billion
Lehman Brothers – $183 billion
Bank of Scotland – $181 billion
BNP Paribas – $175 billion
Wells Fargo – $159 billion
Dexia – $159 billion
Wachovia – $142 billion
Dresdner Bank – $135 billion
Societe Generale – $124 billion
“All Other Borrowers” – $2.639 trillion

If you will notice, a number of the banks listed above are foreign banks.

Why is the Fed allowed to print money out of thin air and lend it to foreign banks?

#9 The Federal Reserve Is Paying Banks Not To Lend Money

Did you know that the Federal Reserve is actually paying U.S. banks not to lend money?

That doesn’t make sense.  Our economy is based on credit, and small businesses desperately need loans in order to operate.

But the Fed has decided to pay banks not to risk their money.  Section 128 of the Emergency Economic Stabilization Act of 2008 allows the Federal Reserve to pay interest on “excess reserves” that U.S. banks park at the Fed.

So the big banks can just send their cash to the Fed and watch the money come rolling in risk-free.

As the chart below demonstrates, the banks have taken great advantage of this tremendous deal…

Excess Reserves Parked At The Federal Reserve

#10 The Federal Reserve Has An Astounding Track Record Of Failure

Over the past ten years, the Federal Reserve has been an abysmal failure when it comes to running the economy.

But despite a track record of failure that would make the Chicago Cubs look like a roaring success, Barack Obama actually decided to nominate Ben Bernanke for a second term as the Chairman of the Federal Reserve.

What a mistake.

Just check out some of the things that Bernanke said prior to the last financial crisis.  The following is an extended excerpt from an article that I published previously

*****

In 2005, Bernanke said that we shouldn’t worry because housing prices had never declined on a nationwide basis before and he said that he believed that the U.S. would continue to experience close to “full employment”….

“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

In 2005, Bernanke also said that he believed that derivatives were perfectly safe and posed no danger to financial markets….

“With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

In 2006, Bernanke said that housing prices would probably keep rising….

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

In 2007, Bernanke insisted that there was not a problem with subprime mortgages….

“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”

In 2008, Bernanke said that a recession was not coming….

“The Federal Reserve is not currently forecasting a recession.”

A few months before Fannie Mae and Freddie Mac collapsed, Bernanke insisted that they were totally secure….

“The GSEs are adequately capitalized. They are in no danger of failing.”

*****

There are many, many more examples that could be listed, but hopefully you get the point.

And now it is happening again.  Bernanke is telling the American people that everything is going to be just fine and that no major problems are ahead.

Do you believe him this time?

#11 The Federal Reserve Is Unaccountable To The American People

What is the most important political issue to most Americans?

Survey after survey has shown that the American people care about the economy more than anything else.

So why do we allow an unelected, unaccountable entity that is privately-owned to make our economic decisions for us?

The Federal Reserve has become so powerful that it has been called “the fourth branch of government”.  Every four years, presidential candidates argue about who will be best at managing the economy, but the truth is that it is the Fed that manages our economy.

We are told that the “independence” of the Federal Reserve is absolutely critical, but don’t the American people deserve to have a say in the running of the economy?

Our system is broken.  It is a system that will continue to create more bubbles and more debt until the entire thing finally collapses for good.

Thomas Jefferson once stated that if he could add just one more amendment to the U.S. Constitution it would be a ban on all government borrowing….

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing.

But instead of banning government borrowing, we have allowed ourselves to become enslaved to a system where government borrowing actually creates our money.

We do not need to have a central bank.  There are much better alternatives.  We just need to get people educated.

Please share this article with as many people as you possibly can.  These are things that every American should know about the Fed, and we need to educate the American people about the Federal Reserve while there is still time.

The Great Seal Of The United States - A Symbol Of Your Enslavement - Photo by Ipankonin

Petrogold: Are Russia And China Hoarding Gold Because They Plan To Kill The Petrodollar?

Petrogold: Are Russia And China Hoarding Gold Because They Plan To Kill The Petrodollar?Will oil soon be traded in a currency that is thousands of years old?  What would a “gold for oil” system mean for the petrodollar and the U.S. economy?  Are Russia and China hoarding massive amounts of gold because they plan to kill the petrodollar?  Since the 1970s, the U.S. dollar has been the currency that the international community has used to trade oil around the globe.  This has created an overwhelming demand for U.S. dollars and U.S. debt.  But what happens when the rest of the globe starts rejecting the increasingly unstable U.S. dollar and figures out that gold can be used as a currency in international trade?  The truth is that it doesn’t take a lot of imagination to figure that out.  Demand for the U.S. dollar and U.S. debt would fall off the map and there would be a rush into gold unlike anything we have ever seen before.  So are Russia and China accumulating unprecedented amounts of gold right now because they eventually plan to cut the legs out from under the petrodollar and they want to gobble up huge stockpiles of gold before the cat is out of the bag?  Of course they will never admit this publicly, but there are rumblings out there that this is exactly what is happening.

Not that you can really blame any nation that wants to get into gold right now.  News outlets all over the globe are telling us that we are in the midst of a “currency war” as central banks all over the planet race to devalue their currencies.

So why would anyone want to be in paper in such an environment?

And of course the Federal Reserve is one of the biggest offenders.  The Fed has been printing money like it is going out of style, and nobody at the Fed or in the U.S. government really seems too concerned that all of this money printing could be endangering the petrodollar.

But the truth is that the Fed is endangering the petrodollar.  Just read some foreign news stories about the U.S. dollar.  They mock us for our reckless money printing.

In the end, our recklessness will make it very easy for the rest of the world to ditch the U.S. dollar.

At some point, it will happen.  In fact, there are persistent rumors that Russia and China actually intend to make it happen.

Many believe that this is the reason both nations have been hoarding so much gold recently.

Just check out how much gold Russia has been accumulating.  The following is from a recent Bloomberg article

When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

And Russia’s gold hoarding appears to have accelerated last year.  According to one recent report, Russia added 3.2 million ounces of gold to their reserves in 2012 alone.

But of even greater concern is China.  Nobody really knows how much gold China has, because they do not tell us, but all indications point to the fact that Chinese gold hoarding has gone into overdrive.  The following is from a Zero Hedge article from a few months ago…

Because while earlier today we were wondering (rhetorically, of course) what China is doing with all that excess trade surplus if it is not recycling it back into Treasurys, now we once again find out that instead of purchasing US paper, Beijing continues to buy non-US gold, in the form of 68 tons in imports from Hong Kong in the month of June. The year to date total (6 months)? 383 tons. In other words, in half a year China, whose official total tally is still a massively underrepresented 1054 tons, has imported more gold than the official gold reserves of Portugal, Venezuela, Saudi Arabia, the UK, and so on, and whose YTD imports alone make it the 14th largest holder of gold in the world. Realistically, by now China, which hasn’t provided an honest gold reserve holdings update to the IMF in years, most certainly has more gold than the IMF, and its 2814 tons, itself. Of course, the moment the PBOC does announce its official updated gold stash, a gold price in the mid-$1000 range will be a long gone memory.

As I wrote about the other day, nobody produces more gold than China does, and nobody imports more gold than China does.

Everyone agrees that China seems to have an insatiable appetite for gold, but nobody can agree on exactly how much gold they actually have.  One recent estimate put China’s gold reserves at more than 7,000 tons of gold, but it could even be much higher than that.  Nobody really knows.

So what are Russia and China up to?

Well, for a long time both nations have expressed displeasure with the fact that the U.S. dollar is the de facto currency of the world.  Leaders from both nations have suggested the possibility of adopting a new global reserve currency, but up to this point no real contenders have emerged to dethrone the U.S. dollar.

So for now, the U.S. dollar reigns supreme in international trade.  Sadly, even though most Americans greatly benefit from the petrodollar, most of them do not even know what it is.  For those that do not fully understand the petrodollar, the following is a good explanation of the petrodollar from a recent article by Christopher Doran

In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.

This means that every country in the world that imports oil—which is the vast majority of the world’s nations—has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.

And all of this has worked out very nicely for the United States.  It has created a massive demand for U.S. dollars and U.S. debt.

But what would happen if the rest of the world rejected the petrodollar system and adopted a “petrogold” system instead?

A recent article by Jim Willie discussed how a petrogold system might work…

The crux of the non-US$ trade vehicle devised as a USDollar alternative will be the Gold Trade Note. It will enable peer-to-peer payments to be completed from direct account transfers independent of currency, and most importantly, not done through the narrow pipes and channels controlled by the bankers with their omnipresent SWIFT code system among the world of banks. The Gold Trade Note will act much like a Letter of Credit, serve as a short-term bill, and maybe even push aside the near 0% short-term USTreasury Bills that litter the banking landscape. Any bond or bill earning almost no interest is veritable clutter. The zero bound USTreasurys open the door in a big way for replacement by a better vehicle. The new trade notes will involve posted gold as collateral, whose entire system for trade usage will bear a massive gold core that also will include silver and platinum, maybe other precious metals. The idea is to avoid the FOREX systems, to avoid the USDollar, and to avoid the banks as much as possible in a peer-to-peer system that can be executed between parties holding Blackberry devices or simple PC to complete the payments on transactions. If Gold is ignored by the corrupt bankers, then Gold will be the center of the new trade system and the solution in providing a globally accepted USDollar alternative.

And Russia and China would greatly benefit from a petrogold system.

Today, Russia is the number one oil exporter on the planet.

China is the number two consumer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.

Does it make sense that they should remain locked into a system that forces them to use U.S. dollars for all of their oil transactions?

And now Russia even has the number one oil company in the world.  The following is from a recent article by Marin Katusa

Exxon Mobil is no longer the world’s number-one oil producer. As of yesterday, that title belongs to Putin Oil Corp – oh, whoops. I mean the title belongs to Rosneft, Russia’s state-controlled oil company.

Rosneft is buying TNK-BP, which is a vertically integrated oil company co-owned by British oil firm BP and a group of Russian billionaires known as AAR. One of the top-ten privately owned oil producers in the world, in 2010 TNK-BP churned out 1.74 million barrels of oil equivalent per day from its assets in Russia and Ukraine and processed almost half that amount through its refineries.

With TNK-BP in its hands, Rosneft will be in charge of more than 4 million barrels of oil production a day. And who is in charge of Rosneft? None other than Vladimir Putin, Russia’s resource-full president.

And Russian gas giant Gazprom supplies a huge percentage of the natural gas that Europe uses…

Gazprom, the Russian state gas company, already has Europe wrapped around its little finger. Russia supplies 34% of Europe’s gas needs, and when the under-construction South Stream pipeline starts operating, that percentage will increase. As if those developments weren’t enough, yesterday Gazprom offered the highest bid to obtain a stake in the massive Leviathan gas field off Israel’s coast.

Gazprom in control of Europe’s gas, Rosneft in control of its oil. A red hand stretching out from Russia to strangle the supremacy of the West and pave the way for a new world order– one with Russia at the helm.

Russia and China have a tremendous amount of leverage when it comes to energy.  What if they got together with a bunch of oil producing nations in the Middle East and decided to set up a system where oil is traded for gold?  Would not much of the rest of the world go along with such a system?

Of course if that happened the U.S. financial system would crash.  We would no longer be able to export our inflation to the rest of the globe and prices would rise dramatically.  Demand for U.S. government debt would go through the floor and interest rates on that debt and on everything else in our economy would skyrocket.  Economic activity would grind to a standstill and the financial markets would collapse.

And that would just be for starters.

Most Americans simply don’t understand that Russia and China have the power to collapse the U.S. economy by going to a gold for oil system.  All they have to do is pull the trigger.

The other day I wrote an article entitled “Show This To Anyone That Believes That ‘Things Are Getting Better’ In America” which discussed all of the reasons why the U.S. economy is already collapsing.  But as bad as things are now, this is nothing compared to what things will be like when the petrodollar dies.

So pay keen attention to anything in the news about Russia or China suggesting that oil should be traded for gold.  When Russia and China pull the trigger, things will get messy very quickly.

Gold

The Giant Currency Superstorm That Is Coming To The Shores Of America When The Dollar Dies

By recklessly printing, borrowing and spending money, our authorities are absolutely shredding confidence in the U.S. dollar.  The rest of the world is watching this nonsense, and at some point they are going to give up on the U.S. dollar and throw their hands up in the air.  When that happens, it is going to be absolutely catastrophic for the U.S. economy.  Right now, we export a lot of our inflation.  Each year, we buy far more from the rest of the world than they buy from us, and so the rest of the world ends up with giant piles of U.S. dollars.  This works out pretty well for them, because the U.S. dollar is the primary reserve currency of the world and is used in international trade far more than any other currency is.  Back in 1999, the percentage of foreign exchange reserves in U.S. dollars peaked at 71 percent, and since then it has slid back to 62.2 percent.  But that is still an overwhelming amount.  We can print, borrow and spend like crazy because the rest of the world is there to soak up our excess dollars because they need them to trade with one another.  But what will happen someday if the rest of the world decides to reject the U.S. dollar?  At that point we would see a tsunami of U.S. dollars come flooding back to this country.  Just take a moment and think of the worst superstorm that you can possibly imagine, and then replace every drop of rain with a dollar bill.  The giant currency superstorm that will eventually hit this nation will be far worse than that.

Most Americans don’t realize that there are far more dollars in use in the rest of the world than in the United States itself.  The following is from a scholarly article by Linda Goldberg

The dollar is a major form of cash currency around the world. The majority of dollar banknotes are estimated to be held outside the US. More than 70% of hundred-dollar notes and nearly 60% of twenty- and fifty-dollar notes are held abroad, while two-thirds of all US banknotes have been in circulation outside the country since 1990

For decades we have been exporting gigantic quantities of our currency.

So what would happen if that process suddenly reversed and massive piles of dollars started coming back into the country?

It is frightening to think about.

Well, I guess the key is to get the rest of the world to continue to have confidence in the U.S. dollar so that will never happen, right?

Unfortunately, there are lots of signs that the rest of the world is accelerating their move away from the U.S. dollar.

For example, it was recently announced that the BRICS countries are developing their own version of the World Bank

The BRICS (Brazil, Russia, India, China and South Africa) bloc has begun planning its own development bank and a new bailout fund which would be created by pooling together an estimated $240 billion in foreign exchange reserves, according to diplomatic sources. To get a sense of how significant the proposed fund would be, the fund would be larger than the combined Gross Domestic Product (GDP) of about 150 countries, according to Russia and India Report.

And as I noted in a previous article, over the past few years there have been a whole host of new international currency agreements that encourage the use of national currencies over the U.S. dollar.  The following are just a few examples…

1. China and Germany (See Here)

2. China and Russia (See Here)

3. China and Brazil (See Here)

4. China and Australia (See Here)

5. China and Japan (See Here)

6. India and Japan (See Here)

7. Iran and Russia (See Here)

8. China and Chile (See Here)

9. China and the United Arab Emirates (See Here)

10. China, Brazil, Russia, India and South Africa (See Here)

Will this movement soon become a stampede away from the U.S. dollar?

That is a very important question.

But you don’t hear anything about this in the U.S. media and our politicians are not talking about this at all.

Meanwhile, our “leaders” seem to be doing everything that they can to destroy confidence in the U.S. dollar.  The Federal Reserve is printing money like there is no tomorrow, and the federal government continues to run up trillion dollar deficits year after year.

They do not seem to understand that they are systematically destroying the U.S. financial system.

Other world leaders get it.  For example, Russian President Vladimir Putin once said the following…

“Unreasonable expansion of the budget deficit, accumulation of the national debt – are as destructive as an adventurous stock market game.
During the time of the Soviet Union the role of the state in economy was made absolute, which eventually lead to the total non-competitiveness of the economy. That lesson cost us very dearly. I am sure no one would want history to repeat itself.”

Wow.

Why can’t most of our politicians see how destructive debt is?

What the federal government continues to do is absolutely insane.  The national debt increased by more than 24 billion dollars on the day after Thanksgiving this year.  But utter disaster has not struck yet, and most Americans are not really that concerned about the debt.  So things just keep rolling along.

And of course our national debt of $16,309,738,056,362.44 is nothing when compared to the future liabilities that our federal government is facing.  Just check out what a recent article in the Wall Street Journal had to say about all this…

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.

Other economists paint an even gloomier picture.  According to economist Niall Ferguson, the U.S. government is facing future unfunded liabilities of 238 trillion dollars.

So where are we going to get all that money?

Well, why don’t we just print more money than ever before so that the U.S. government can borrow and spend more money than ever before?

Don’t laugh.  That is actually what some of the top economists in the country are actually recommending.

The most famous economic journalist in the entire country, Paul Krugman of the New York Times, is boldly proclaiming that the solution to all of our problems is to print, borrow and spend a lot more money.  He insists that there is no reason to fear that the giant mountain of debt that we are accumulating will someday collapse the system…

For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that America will default on its debt — I’d say no risk at all if it weren’t for the possibility that Republicans would once again try to hold the nation hostage over the debt ceiling.

But if the U.S. government prints money to pay its bills, won’t that lead to inflation? No, not if the economy is still depressed.

Now, it’s true that investors might start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, would actually help rather than hurt the U.S. economy right now: expected inflation would discourage corporations and families from sitting on cash, while a weaker dollar would make our exports more competitive.

Of course what he is prescribing is complete and utter madness.

At some point this con game is going to collapse and the rest of the world is going to say a big, fat, resounding “NO” to the U.S. dollar.

Why should they continue to use a currency that is becoming extremely unstable and that is constantly being manipulated?

And when the rest of the world rejects the U.S. dollar, the value of the dollar will drop like a rock because there will be far less global demand for it.

In addition, if the rest of the world is not using the U.S. dollar for trade any longer, other nations will cease to soak up our excess currency and huge mountains of our currency that are floating around out there will start flooding back to our shores.

At that point we will be looking at inflation unlike anything we have ever seen before.  The era of cheap imports will be over and we will pay far more for everything from oil to the foreign-made plastic trinkets that we buy at Wal-Mart.

Most Americans don’t even know what a “reserve currency” is, but when the U.S. dollar loses reserve currency status it is going to unleash a nightmare that most economists cannot even imagine.

So enjoy this holiday season while you can.  There are still lots and lots of cheap imports filling the shelves of our stores.

Once the coming giant currency superstorm strikes, we will dearly wish for the good old days of 2012.

Yes, the U.S. dollar is alive and ticking for now.  But at the pace that our authorities are abusing it, I would not say that things are looking good for a long and healthy lifespan.

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