Accelerating the Dollar’s Demise

Addison Wiggin – June 28, 2011

  • Central bankers give dollar the gimlet eye, look longingly toward gold
  • New warnings about the threat Greece poses to the “safest” place to put your money
  • The state that can’t pay this month’s light bill and needs a payday loan
  • The “sun tax” — newest in a long line of strange taxes, weird fees
  • “I hope we die” and other cheerful thoughts from readers on a sunny summer day

Uh-ho… the Swiss mega-bank UBS completed a survey of 80 central bank reserve managers yesterday. More than half predicted the U.S. dollar would be replaced as the world’s reserve by a “portfolio of currencies” sometime in the next 25 years.

That UBS even conducted a survey on the dollar’s validity represents a sea change in attitude since we first published Demise of the Dollar in 2005.

Between them, the bank reserve managers control about $8 trillion.

“The results [of the survey],” according to the Financial Times, “are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the U.S. government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet.”

In another shift of strategy, none of the managers surveyed by UBS say they plan to sell gold over the next few years.

A few even fessed they plan to add to their stashes of Midas’ favorite metal.

The World Gold Council claims central banks are on track to make their largest annual purchases of gold this year since Richard Nixon “closed the gold window” in 1971 and cut the dollar’s last remaining tie to gold.

Russia and China are doing their part to accelerate the dollar’s demise. The two nations’ central banks have signed an agreement to conduct trade in rubles and yuan.

“This agreement,” says Russian Central Bank Deputy Chairman Viktor Melnikov, “allows for settlements through Russian and Chinese banks not only in the freely convertible currencies but also in the yuan and the ruble.” It builds on a handshake deal between Russian President Vladimir Putin and Chinese Premier Wen Jiabao that we told you about seven months ago.

“Dollar’s Reserve Currency Status at Risk Following Russia-China Deal,” reads a breathless headline on this story at oilprice.com.

“The headline is a bit overblown,” says our acquaintance, the veteran U.S. diplomat Chas Freeman, “but it — and the underlying story — is a step in the direction it posits.”

Yet the financial media seem to be concerned with an even more immediate crisis:

 

 

The news seems like old hat — a 48-hour general strike, police hauling out tear gas, parliament voting tomorrow on another “austerity” plan. Yada. Yada.

But today both Bloomberg and The Wall Street Journal are sounding a familiar alarm — about the threat Greece poses to money market funds — the “safest” place you can put your money.

“Should Greece default on its obligations” to European banks, the Journal reports, “regulators are concerned that $1.6 trillion in prime money market funds will be in jeopardy.”

That’s because those funds have about half their assets sitting in securities issued by the European banks that lent to Greece.

 

 

“Money market mutual funds still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value,” said Boston Fed Chief Eric Rosengren in a speech this month.

Translation: Money market funds aren’t any safer today than during the week Lehman and AIG fell apart back 2008.

Recall that a money market fund called Reserve Primary Fund “broke the buck” — its net asset value falling below $1 a share — thanks to all its Lehman exposure.

That set off a domino effect.

“On Thursday [Sept 18], at 11 a.m., the Federal Reserve noticed a tremendous drawdown of money market accounts in the U.S.,” recalls now-retired Rep. Paul Kanjorski (D-Pa.). Some “$550 billion was being drawn out in a matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide.

“We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn’t be further panic out there.

“If they had not done this, their estimation is that by 2 p.m. that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., [which] would have collapsed the entire economy of the U.S., and within 24 hours, the world economy would have collapsed.

“It would have been the end of our economic system and our political system as we know it.”

And none of the mess has been fixed.

“It’s starting,” writes a reader with a keen eye. “Yesterday, Moody’s said that Greek banks have ‘lost’ 8% of private-sector deposits.

“Bank clients have withdrawn 8% of their deposits. In some cases, they have invested that money in foreign currencies. In some cases, they have bought gold and put it in safe-deposit boxes. In some cases, they have taken the money out and put the cash into the safe-deposit box or household safe.

“Greek citizens are losing faith in the banking system in spite of all of the promises from the European Central Bank. They are not losing faith in the euro, as in some cases they are keeping it, just moving it. Many of them are convinced that they won’t be able to get at their money when banks close their doors.

“This is a big deal. It’s the start of the bank run, only in slow motion. If outflows reach 35% of the deposits, banks will fail. The Greek government will step in then default. The spillover effect: Contagion will hit England, Germany and France harder than E. coli. The effect will be global.

“So how much private money is quietly being withdrawn in Ireland, Spain, Portugal and Italy?

“Watch out for this one — it looks like the trigger on a smoking gun.”

The 5: We’re watching. It was Lehman then. It could be Greece now. If you haven’t reviewed our six-part preparation plan, you might want to do so now.

In the heated horse race among U.S. states to become a “home-grown Greece,” New Jersey is taking a commanding lead.

For all the austerity measures imposed by Gov. Chris Christie — budget cuts, pension reforms — it’s not enough to avert a short-term cash crunch. So the state is negotiating with J.P. Morgan Chase for the government equivalent of a payday loan.

Of course, it’s being called kinder things in public — a “credit line” or a “bridge loan.” In any event, the Garden State needs $2.25 billion to pay the bills at the start of the new fiscal year that starts Friday, to tide it over until it can float some new bonds later this summer.

The negotiations may yet break down, according to The Wall Street Journal. What happens if that’s the case no one’s saying.
As we mentioned on Friday, New Jersey came out worst of the worst in a recent study of combined state and local pension obligations. To make up the shortfall would require additional taxes of $2,475 per household, every year for the next 30 years.

Pension obligations are only one of three major factors that will determine whether your state can handle the coming economic storms. We spell out all three of them, and show you where your state stacks up, in a special report coming out this week. We’ll keep you posted.

U.S. stocks are rallying, traders again under the delusion that Greece has been “fixed,” or is about to be. The S&P is a point away from 1,290.

Traders are also taking cheer from the latest S&P/Case-Shiller home price index. The 20-city composite rose 0.7% from March to April.

 

 

“However,” cautions S&P’s David Blitzer, “the seasonally adjusted numbers show that much of the improvement reflects the beginning of the Spring-Summer home buying season.

“It is much too early to tell if this is a turning point or simply due to some warmer weather.”

In addition, the year-over-year figure is down 4%.

Gold is rebounding off $1,500, the spot price up to $1,503.
Yesterday was options expiration for the metals. That drove a fair amount of selling and drove gold below $1,500 — but not much, and only for a few hours.

Here it comes — the “sun tax” in California.

Only two weeks ago, Gov. Jerry Brown took part in a groundbreaking ceremony for what’s billed as the world’s biggest solar power project. “We are going to be a leader in solar,” he crowed, “and all the jobs it can create.”

Or not… depending on what Riverside County supervisors decide at a meeting today.

They’ve proposed a 2% tax on the gross revenues of solar projects anywhere within the county line.

“You know,” says County Supervisor John Benoit, licking his chops, “we are gonna be looking at 118,000 acres covered with mirrors, troughs and towers. There’s certainly room for a little help back to the county.”

The company behind a smaller project in Riverside County says that would amount to a $3.5 million hit. “If Riverside County were to implement this,” says Jim Woodruff of First Solar, “we would have to consider other options for this project.”

“Other options” could mean 425 new jobs wouldn’t get created.

 

 

 

The sun tax: So much for those new jobs… 

“The government will try anything and everything it can to desperately raise money,” we write in a new report we’ll release this week: “they’ll pickpocket your wealth through new taxes… propose weird new fees… even conduct ‘fire-sale’ sell-offs of state-owned roads and buildings.”

They might hit solar projects today… but they can hit you directly tomorrow. Streetlight fees, fire hydrant fees, new alcohol taxes — nothing is off-limits. The new report, titled American Oases, will help you prepare for what’s coming. We’ll let you know the moment it’s ready.

“I live in Los Angeles,” writes a reader next door to Riverside County. “Our city, county and state are broken. Our mayor bounces around the world looking for more photo ops. He is now the ‘elected’ No. 1 for the Council of Mayors.

“The public schools have a 50% drop out rate. The kids cannot perform at their grade level. The citizenry has now reelected Jerry Brown, the same governor that brought the teachers, nurses, fire and police collective bargaining. It is virtually impossible to get rid of a teacher that is not performing once they achieve tenure.

“A close friend has been an educator for 20 years. The teachers that do show up (she floats throughout the system picking up short-term gigs) do nothing to inspire the kids to want to come to school. Sorry, but we no longer have the $ to contribute to your sorry-a — retirement funds. The ads on TV by teacher’s union have sorrowful, soft voices urging one to stand up for the students and not allow further cuts.

“Start in your own backyard and quit whining about how much you aren’t getting! Too many of my contemporaries think I’m all gloom and doom, but I consider myself a realist and am sorry we don’t have our second passports yet!

“Thanks for listening… keep up the good work!”

“If employee pension and benefits (health care) are so high a percentage of state revenue,” writes another, “cut them.”

“Why can’t they just slash these payouts? If illegal, change the law. It’s better than the whole country starving and dying out. Most state pensions are lavish. Where did that start, and how long ago?

“How long will the young go without to make way for the old? The U.S. is dying from bureaucracy, not the economy.”

“During my long life,” writes a last soulful reader today, “I lived nine years in the United States, among a total of eight different countries. Nobody who has lived in the United States can deny that it was the closest thing on earth to utopia.

“I say ‘was’ because today, to my dismay and regret, America has deteriorated into what could be termed a dystopia or cacotopia. The latter can be regarded as a negative form of utopia, characterized by authoritarian systems of government, repressive social control, a marked decline in individual freedom, mass poverty for a majority of the inhabitants and a large military-like police force.

“Last week, I should have visited the cacotopia that is America to celebrate, with my surviving classmates, the 50th anniversary of our graduation from an Ivy League school. But I stayed at home. Something has gone badly wrong in America, and I no longer see it as a joyful place that I want to spend time in.

“I apologize to you if you find this news depressing. I look forward, without wildly exuberant confidence, to better times some day in the future for America… and for all that is left of the free world.”

The 5: How did it come to this?

Better yet, what should you do about it?

Next month, guests as diverse as resource guru John Embry and Consumer Electronics Association chief Gary Shapiro will debate whether it’s best to fight for the spirit of enterprise in North America… or flee with your capital to somewhere it will be treated better.

The symposium is sold out, but you can sign up right now for the next best thing — high-quality audio recordings of every session in the main hall and a concise write-up of every investment recommendation, including those in the small-group breakout sessions.

The CDs will be released as soon as we can rush them through production, so the information will still be fresh. And if you sign up right now, you lock in the best price.

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. If you’re inclined keep up the “fight,” it’s probably best to start at the beginning with The Idea of America, a new collection of essays from our own Laissez Faire Books.

“I highly recommend The Idea of America to anyone interested in the animating spirit of America’s origins,” says Rep. Ron Paul. “We hear from expected sources like Jefferson, Paine and de Tocqueville, but also from modern radicals like Mencken, Rothbard and Rose Wilder Lane. These excellent minds challenge the reader to rethink their attitudes about government, political economy and human affairs generally.”

The essays are selected by our founder Bill Bonner and Independent Institute fellow Pierre Lemieux. Copies start shipping on Friday. We’ve overseen the development of the second edition and reviewed the new jacket and must say — the whole package is quite handsome. Get yours at a 20% discount right here.

rspertzel

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