Archive for May, 2010

May 29, 2010



Jim O’Neill, who did not make any friends within the bear community earlier today, has written an interesting paper on the IMF’s Special Drawing Rights, and whether this hypernational currency can ever become a reserve currency as is, and/or with the CNY as a constituent member. While O’Neill as usual focuses on the angle of the “next paradigm” BRICs, and how they will increasingly dominate global economics, he does pose an important question: with the dollar likely to suffer the side effects of either hyperdeflation, hyperinflation, or hyperstagflation, will the next reserve currency be a diluted melange of other flawed fiat constructs (i.e., the SDR), or the currency of the one country, which for all its flaws, still has the cleanest balance sheet backing its own fiat construct. On the other hand, the question of whether this analysis is moot to begin with, and the world will revert to the gold standard as the ongoing crisis of confidence in all paper money flares up, is not raised even once… We wonder (not really) what Jim O’Neill would have to say on that particular issue.

Here are the main bullets:

  • The issue of the ‘international reserve currency’ and the possible role of the IMF’s Special Drawing Rights (SDR) has moved from obscurity to the centre of discussions about the future.
  • Given China’s importance in terms of its share of world trade, the CNY should now be part of the SDR. The case for including it can only become more obvious as this decade progresses.
  • However, actually including the CNY as a constituent of the SDR is likely to remain a challenge without the CNY becoming more widely used internationally, including as a reserve asset.
  • The case for including other BRIC currencies in the SDR, especially the RUB, is also likely to become stronger over the coming decade.
  • Although the Dollar will probably not be as dominant in 2020 as it is today, it is far from clear that it needs to be replaced by the SDR—or by anything else—as the main reserve currency.
  • For the SDR to be attractive to private users, it will need to include the CNY and possibly other BRIC currencies. However, this alone would not guarantee that the SDR would be more attractive to private investors.

The paper is a critical follow up to anyone who found Albert Edward’s earlier analysis of collapsing global FX reserves relevant.

Will The USD Be Replaced By The SDR Or The CNY As The Next Reserve Currency? | zero hedge

May 28, 2010



Cash may be king for criminals but bonds – and bearer bonds in particular – are the currency of choice for money launderers.

Cash may be king for criminals but bonds – and bearer bonds in particular – are the currency of choice for money launderers.

In simple terms, a bond is an IOU: the lender, typically a government, borrows money in exchange for a certificate. The bond pays interest and can be sold but, and here’s the problem for the criminal, the lender has to register ownership.

This is where the bearer bond comes in. Like cash, the bond belongs to whoever is holding it. “To be flip, possession is 100 per cent of the law with a bearer bond,” one financial analyst said.

They are not registered, which makes them useful for anonymity, and for money laundering. A spokesman for Barclays Bank said bonds were popular because of their convenience and the aura of trust they carry in financial markets.

“You get a large amount of money on a small piece of paper,” he said. “Even if you couldn’t get all £4.4bn on one bond it would only take a few pieces of paper compared with the thousands of £50 notes.”

Bonds are usually guaranteed by a government or a financially sound company. “They would give an assurance of trust and they are more likely to be accepted than a large bag of notes that may not necessarily be exactly what they seem,” the Barclays man said.

Bond fraud, is an old game, from the 19th century. And a bond scam involving phoney or stolen ones is a key element in F. Scott Fitzgerald’s The Great Gatsby, when Gatsby is involved in a scheme to pass them.

Most frauds involve forgeries of US bonds, with several originating in the Far East. In November, 1997, the US Secret Service opened an office in London to monitor bond fraud after ones allegedly issued to anti-communist Chinese fighters in the 1940s began circulating in the City. Three men had been arrested trying to deposit $800m (£500m) of fake US Treasury bonds.

The City of London is the centre of the eurobond market and a great attraction of the euromarkets is the prevalence of “bearer bonds” that conceal the identity of the owner. The US Treasury stopped issuing bearer bonds in 1982 and the few remaining ones make up only 0.14 per cent of the market. It says only $5.2bn (£3.25bn) in paper certificates is outstanding.

May 20, 2010




“All of this means that the deficits are structural. And that the debt accumulation was not only visible well before the crisis (which of course means that SGP supervision has failed) but was also caused by the expenditure side of the Government balance sheets.”

This is what upset the applecart in the first place. Governments, (not just ours) besotted by Keynesian power, began to spend money that they didn’t have on a majestic scale. The banks obliged them and boosted their loans to all and sundry on the basis of the government’s interest payments boosted by whatever multiple was thought acceptable.
FF snuck back in the last election before it all fell apart. Labour in the UK spent every last penny but still didn’t manage to fool the electorate. Hence the scornful note left at the Treasury — “there is no money left”.


Keynes advocated saving during the harvest years to cope with the famine years. This wasn’t done in the UK, Ireland or almost anywhere (other than China!). So, I don’t accept that Brown was a Keynesian. He was enthralled with Alan Greenspan. He thought the City of London had become a perpetual motion machine creating endless wealth which he could divvy up and share out on a ‘fair’ basis. But the risk models undrlying Greenspanism were frankly cranky, as described by Taleb. Taleb says the crisis wasn’t a black swan event because anyone who wasn’t ideologically motivated could have seen the faults in the risk models underlying the boom. Ahern and Cowen seem to have also worshipped at the same altar of Greenspan, hence Ireland’s predicament


Gordon Brown know’s the ‘city of london’ paper business is not wealth creation. They and he know it is a codology for stealing the value of labour from workers around the world.

Link the robbing of value of labour with the idea of a war between speculation and savers underway. See this link

May 19, 2010


May 18 (Bloomberg) — Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.

The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, the regulator said.

The move came as Chancellor Angela Merkel’s coalition seeks to build momentum on financial-market regulation with lower- house lawmakers due to begin debating a bill tomorrow authorizing Germany’s contribution to a $1 trillion bailout plan to backstop the euro. U.S. stocks fell and the euro dropped to $1.2231, the lowest level since April 18, 2006, after the announcement.

Germany to Ban Naked Short-Selling at Midnight (Update2) –

May 16, 2010



“Brussels was unwise to talk of smashing the wolf pack speculators and defeat the worldwide organised attack on the Eurozone. As Napoleon said, if you set out to take Vienna, take Vienna. Besides, the language of the EU priesthood ex-ECB board member TomassoPadoa-Schioppa talks of the advancing battalions of the anti-euro army frightens Chinese and Mid-East investors needed to soak up EU debt. These metaphors are a mental flight from the issue at hand, which is that vast imbalances masked by EMU, indeed made possible only by EMU have been decorked by the Greek crisis and now pose a danger to the entire world.”

Bingo again! Since the foundation of the EU in its modern incarnation – in other words since the mid 1990s, Brussels did nothing in terms of economic policies other than issue lofty plans and guidance documents – which promptly went nowhere real, and blame ‘others’ for its own troubles. At times, this reminded me of the good oldSovietskies whose entire edifice of the state was supported – from the early 1970s through the late 1980s – solely by the threat of ‘others’ coming to take over the Motherland.

True Economics: Economics 16/05/2010: EU on the brink


Euro Doom –


Probably the slickest beer theft in the world… | The Post

May 16, 2010


Here’s how this game is played. The Government flies kites (“we’re gonna thump the pensioners”), then reels them in (“musha, sure, we wouldn’t touch a hair on their precious heads”). They leak this cut and that cut to compliant hacks, who dutifully discuss the whys and wherefores. The Government denies the accuracy of each leak. After a while, the issue is not whether we should pay the bill for the speculators’ party — it’s which of us pay and how much.

Here’s an example of how Mr Cowen rigged the deck. In his long-winded speech, he had to show he was not alone in misreading the economy, as Minister for Finance. He quotes at length from the incompetent fools who misled him.

These include the bloody eejits at the IMF and the stupid gobshites at the OECD who fooled him by heaping praise on his pre-collapse policies.

Then, a few pages later, he sets out to prove that his current ‘feed-the-banks-and-starve-the-economy’ strategy is the right one. So, he quotes at length from those insightful masterminds at the IMF and the absolute geniuses at the OECD, as they heap praise on his current policies.

He must wrap the past in words and bury it, so he can convince us to keep paying for other people’s greed — and impress us by showing that his fellow travellers abroad agree with him.

Above all, Mr Cowen’s media blitz manages to throw a smokescreen over the battlefield. It’s allegedly all about the precise moment he realised there had been “stunning failures of corporate governance” at the banks.

In truth, what Mr Cowen knew and when he knew it is damn all use to anyone.

The smokescreen disguises the reality of Ireland then and Ireland now. Not a word about the land hoarders who pushed prices over the top.

The speculators, big and small, who were encouraged by tax breaks to buy a dozen houses or a thousand, for “investment”, pushing up prices for people who needed houses as homes.

Or the professionals — led by the lawyers and accountants — who jacked up prices. Or the “auditors”, and the “regulators” if you’ll pardon the expression.

Or the developers and the estate agents for whom a fair profit wasn’t enough — they had to juice the market.

Remember when estate agents took to systematically lying about prices to the property supplement of The Irish Times? How exactly was that not a fraud on the market? Or the bankers who bankrolled all this by borrowing money from gamblers abroad. Or the gamblers who didn’t care how mad this all was — the mugs would pick up the tab if anything went wrong.

Somehow, all the above remain in place — prosperous by our standards — while the rest of us are told there’s no alternative but to do as we’re told. These, of course, are the people our politicians wine with and dine with. They’re the people they go to the races with, the people from whom they take advice. They’re the people who fund their parties.

The infamous bank guarantee has, we’re told, removed any choice from the Government — they must pump in whatever amount of billions is required to animate the dead Anglo. And the guarantee must be renewed in September. There is no alternative.

Meanwhile, we must continue to deflate the economy by whipping the low-paid, by withholding benefits from people who worked for decades to pay for them.

Fine Gael whinges that Mr Cowen owes the Irish people an apology. To hell with that. We can’t spend an apology; we can’t go to work in an act of contrition. This isn’t about flaws in an individual, it’s about politics.

The economy was captured by ignorant politicians in thrall to a right-wing fantasy. They could run an economy on borrowed money, because if we all kept selling houses to one another at ever-increasing prices, we’d get ever richer. The media used the truly awful economists employed by banks to tell us this was true.

Now, the people who brought us the “then and there” are positioning themselves to dig deeper into our pockets in the here and now.

Mr Cowen has a verbal tic. He seldom says anything without prefacing it with the term, “in all fairness”. Fairness, old son, has bugger all to do with it.

May 16, 2010



Shane Ross

Greece fiddled the books and we, in Ireland, broke the rules recklessly. In company with the tipsy club-med countries, we nearly sunk the euro.

Our bankers hurtled us into skid row, but we added to the mess by managing our public finances like drunken sailors.

Ditto the other PIGS countries. We all took our more sober European colleagues for granted. For several years, I have listened to Leinster House spinners whispering that Germany would see us right.

So how can we blame Angela M, the paragon of Germanic sobriety, for seeking a vigilante role?

So far, she is not demanding control or even total abstinence, but is putting pressure on the wayward nations to reduce their intake of the hard stuff. Otherwise, Angela and her equally unamused sister nations could head for the hills or seek expulsions.

Ireland’s recent record merits a period of probation.



“I love the line that Gordon says,” Stone said. “You never got it, kid, it’s just a game. It’s not about the money, it’s just a game. They lose sight of the actual worth of the money. It’s about beating the other guy. I was with Rupert Murdoch the other night and it was very warm and he was, like, saying money is fungible. It’s not about the money, it’s about what you do with the money. He’d rather run a media empire. Other people would take their money and they’d wanna transfer it to something else, like take over a bank or swap mortgage home loans. It doesn’t matter; it has no social purpose.

May 12, 2010



Ron Paul Grills Bernanke On The Massive Expansion To The IMF’s New Arrangement To Borrow


Submitted by Tyler Durden on 04/15/2010 10:23 -0500

As we reported a few days ago, the IMF massively expanded its last resort bailout facility (NAB) by half a trillion dollars, in which the US was given the lead role in bailing out every country that has recourse to IMF funding. Yesterday, Ron Paul grilled Bernanke precisely on the nature of the expansion of the US role to the NAB: “The IMF has announced that they are going to open up the NAB which coincides with the crisis in Greece and Europe and how they are going to bailed out. The irony of this promise is that in the new arrangement Greece is going to put in $2.5 billion in. I think only a fiat monetary system worldwide can come up and have Greece help bail out Greece and be prepared to bail out even other countries. But we are going from $10 to $105 billion… We are committing $105 billion to bailing out the various countries of the world, this does two thing I want to get your comments on one why does it coincide with Greece, what are they anticipating, why do they need $560 billion, do we have a lot more trouble, and when it comes to that time when we have to make this commitment, who pays for this, where does it come from? Will this all come out of the printing press once again, as we are expected to bail out the world? Are you in favor of this increase in the IMF funding and our additional commitment to $105 billion?” Bernanke, of course, washes his hands of any imminent dollar devaluation – it is all someone else’s responsibility to bail out life, the universe and everything else. Bernanke pushes on “I think in general having the IMF available to try to avoid crises is a good idea.” Yet Paul pushes on “Where will this money come from? We are bankrupt too.” Indeed we are, but nobody cares – that is simply some other poor shumck’s problem.

May 12, 2010


“Somewhere ahead I expect to see a worldwide panic-scramble for gold as it dawns on the world population that they have been hoodwinked by the central banks’ creation of so-called paper wealth. No central bank has ever produced a single element of true, sustainable wealth. In their heart of hearts, men know this. Which is why, in experiment after experiment with fiat money, gold has always turned out to be the last man standing.” Richard Russell

The interview is refreshing because Mr. Rickards lays his thoughts out clearly and without excessive jargon. I found his rationale for China’s desire to increase its gold holdings to be intriguing. The price objective of $5,000 – 10,000 is somewhat arbitrary, but directionally correct if it is not accompanied by a reissuance of the currency, which I think is much more probable. Essentially it works out to be the same, since the new currency is likely to be a factor of 1 for 100 exchange for current dollars. If this seems outlandish, it should be kept in mind that this is not all that far removed from the fairly recent post-empire experience of the Soviet Union.

Jim Rickards audio interview on King World News

Highlights (aka Cliff’s Notes):

  • There is obviously not enough gold and silver to cover the physical demand if holders of paper certificates in unallocated accounts demand delivery, and most likely only a small fraction could be covered with the practical supply available. Cash settlement will be enforced in the majority of cases.
  • Cash settlements would be for a price as of a ‘record date’ which is likely to be much less than the current physical price which would continue to run higher
  • There is more here than meets the eye – if you holding metal in an unallocated account you are likely to be considered an unsecured creditor
  • 100:1 leverage is reckless no matter commodity or asset it involves – little room for error
  • There is no way to pay off the existing real US debt without inflating the currency in which the debt is held, to the point of hyperinflation
  • If the Fed’s mortgage assets were marked to market the Fed itself would be insolvent
  • Anything involving paper claims payable in dollars (stocks, bonds) are a ‘rope of sand,’ a complete illusion that is fraught with risk
  • $5,500 per ounce of gold would be sufficient to back up the money supply (M1) as an alternative to hyperinflation and a reissuance of the currency. Target price is 5,000 – 10,000 per troy ounce in current issue US dollars
  • The break point will be when the US debt can no longer be rolled over. US will not be able to finance its debt without taking drastic action on the backing or nature of the currency
  • China needs to have about 4,000 tonnes of gold, and only has 1,000 tonnes today
  • China cannot fulfill this goal by taking even all of its domestic production for the next 10 years. The Chinese people are showing a strong preference to hold gold themselves.
  • From 1950 to 1980 the US gold supply declined from 20,000 to 8,000 tonnes, basically moving from the US mostly to Europe.
  • The Chinese are frustrated that they cannot obtain sufficient gold at reasonable prices as Europe did, to withstand the currency wars and the reworking of international finance
  • Holding your gold in a bank correlates you to the banking system, the very risks which you are trying to avoid
May 12, 2010


In essence, White was saying: “it’s the debt, stupid.”  When aggregate debt levels build up across business cycles, economists focused on managing within business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.

This short-termism that White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.

It seems that Mr. Harrison has it figured out.  He goes on to spend a lot of digital ink on the periphery of the bottom line, which is that we continue to think of debt in terms of service costs (indeed, you’ll hear Bernanke talk about it, but never about the actual gross financial system debt outstanding.)

When you boil all this down, however, you get to the following chart (trendline added by moi):