I keep yammering on about inflation, because there are alot of bozo’s our there (see: Market Analysts) who keep telling people to trade in FOREX. Heres the deal, if there is a ship in the center of a fleet of ships and it is sinking in inflation (picture the USA), and there are a bunch of other ships around it and they are sinking as well, then it doesnt matter which ship the rats jump to, its still going down the crapper!

The only solid ground right now is in commodities! Gold, Silver, Energy, and Food. 15 year run.

The United States is the center of the deflationary economic slowdown, inflation is more of a worldwide phenomenon. Inflation rates in China, for example, are higher than they are in the United States. Prices of apartments in Buenos Aires…subway tickets in Paris…hamburgers in Singapore – everything is going up.

In the past, inflation has always had a national identity card. The inflation of the ‘20s was concentrated in Germany, where hyperinflation wiped out the middle class and set the country on the road to ruin. Investors…like Jewish refugees 10 years later…had to move their savings to France or England to escape it. Likewise, in Argentina, the inflation of the ‘80s was easily avoided – just put your money in a Miami bank.

Traditionally, the dollar was a haven for people wishing to protect themselves from inflation – even though the dollar itself was losing value rapidly . In 1935, a U.S. dollar had about the same purchasing power as a U.S. dollar from 1800. Then, it began a steep decline…erasing 95% of its value over the next 70 years. Still, people with money usually preferred to keep their money in dollars, rather than in…say…australs or zlotys. The dollar may have been losing value, but at least it was doing so in a gentle, “controlled” manner.

But times have changed. Now, there’s a new kind of inflation – it is practically everywhere…in every country…and it risks spinning out of control. That is why gold is hitting new highs – against almost every currency…and every other market…in the world.

News came yesterday, that the Fed has quietly lent some $50 billion to member banks using a new method – an “auction facility” that allows banks to put up unconventional collateral. The government no longer reports a figure for M3, the broadest measure of the money supply, but shadow analysts say it is going up at 15% per year – about six times faster than GDP growth.

Most of this money ends up outside the United States. That’s where most U.S. Treasury debt ends up too. The dollar is America’s leading (and highest margin) export. This has forced foreign central banks to create more of their own currencies to buy up the dollars; otherwise they would face a competitive disadvantage, in that the dollar would fall against their local currencies, making their exports more expensive on the world market.

And so, the whole world is being smothered in paper. Paper dollars…paper euros…paper rand…paper cordobas…paper money of all sorts. Where can the investor go to get away from this paper? What can he buy to protect himself from inflation? How can he get some air?

That’s right. Gold. And it’s why this bull market in gold could be even bigger than the last one. Then, in the late ‘70s, it was primarily the U.S. dollar that suffered from inflation…and primarily Americans, and perhaps Arab oil exporters, who were buying gold. The Russians were still building cars that didn’t run. The Chinese were still recovering from their Great Leap Forward of the ‘60s and dismantling their backyard steel mills. And the Indians weren’t even awake yet.

Now, the whole world is different. It is full of more paper money than ever before…and full of billions of alert people who will want to protect themselves from it. They might try stocks…or property…or Rembrandts…but traditionally, the surest, simplest solution is gold.

For those of you out there thinking that the yellow metal is too expensive to buy now, you are halfway right. But youre a smart cookie, and you will see a good opportunity for what it is. Get a FREE Beginners Guide to Gold and Silver Investing, and register to receive a crash course in why some people will benefit while others are losing their shirts, and a little known secret on how to seriously cash in on gold.

Jeremy Grantham says he thinks housing prices in the United States will go down 20% to 30% from their peak. That’s a potential loss to Americans’ implied wealth of as much as $6 trillion. This is part of what leads Financial Times columnist Martin Wolf to describe the coming slump in the United States as the “mother of all meltdowns .”

Wolf refers to the work of New York University economist Nouriel Roubini, who argues that the housing decline will put 10 million homeowners upside down, with more mortgage than house. It will lead to collapsing credit…defaults…and huge losses to lenders. It will also bring about a big cutback in consumer spending and unavoidably push the United States into a deep recession.

One of the wild cards of the doomsday scenario is the performance of the derivatives market. No one knows exactly what is in some of these instruments…and no one knows how they will hold up in a crisis.

One thing we do know here at The Daily Reckoning is that they will not hold up as expected. We know that because the assumptions behind them were, fundamentally, nonsense. The most sophisticated mathematical model in the world is not worth a campaign promise if the theory behind it is wrong. And the idea that you can model future prices on the basis of past prices with any predictive reliability is simply wrong. Speaking loosely, it is the problem noticed by Heisenberg when was trying to observe and measure atomic particles at the same time…or ethnologists when they are watching savages gootchy goo. The act of observation causes distortions. As soon as you notice “stocks outperform bonds over the long-term,” for example…you cause a distortion in the stock market. People buy stocks, expecting better performance. Buying drives up prices. Then, higher initial prices bring lower rates of return over the long run.

Using Black-Scholes pricing model…and other sophisticated tricks…the salesmen proved that they could produce higher yields with lower risk. The models, of course, depended on the future being like the past. But never before had investors been offered such opportunities to distort the price curve!

The derivative market exploded in the 2001-2006 period, with annual rates of growth (from memory) of nearly 100%. But then, subprime debt blew up…and buyers started asking questions. In 2007, the derivatives market fell apart. And so far this year, new derivative sales are off 93% from the year before. CDOs, SIVs, Monolines…they’ve all had big trouble.

“Many CDOs could be worth less than 5 cents on the dollar,” Strategic Short Report ’s Dan Amoss tells us. “Final values won’t be clear until the loans supporting these securities go through the default and recovery process.

“Many Wall Street firms cannot simply confess their final losses, because delinquencies have just started picking up from generational lows. Also, these firms may soon discover that the insurance covering defaults of their CDO holdings is worthless.”

And now comes the Financial Times with more trouble. “CPDOs are at risk,” say the FT . What are CPDOs, we had to ask? They are Constant Proportion Debt Obligations…a kind of derivative on a derivative…a bet on the derivative index.

Not knowing anything about them ourselves, we turn to someone who does for an opinion:

“If these [structured products] do get unwound en masse, the effect on the market will be horrible,” said credit strategist Barnaby Martin at Merrill Lynch. “Between $1,000bn and $2,000bn of synthetic CDOs have been issued over the last four years. Any unwinding will likely be crammed into a much shorter time period.”

Bottom line is, we have a ways to go before its all clear, and when ships cant see the harbor through the fog, smart captains buy Gold and Silver.

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Alex’s Notes: Ok, one more quip about inflation and then Ill stop. For today.

• The People’s Bank of China is rumored to want money-supply growth of 15% per year, down from the current 18% plus;
• India’s broad M3 money-supply is rising 22.4% per year;
• Singapore’s money-supply increased by 14% in 2007;
• Britain’s broad M4 measure of money has expanded by 12.3% since Jan. ‘07;
• Western Europe is “enjoying” monetary inflation of 11.5% per year, three times the central bank’s target;
• Last year saw 16% money-supply growth in Australia, 13% in Canada, and 22% in Saud Arabia;
• The US money-supply – if the Fed still reported M3 – is now guess-timated to be showing 15% annual expansion.

An excerpt from: http://www.dailyreckoning.com.au/inflation-recession/2008/02/11/

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Alex’s Notes: As I was saying, about that inflation thing….

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by Dan Denning
The Daily Reckoning

“This is shocking,” Matthew Sharratt tells Bloomberg. He’s an economist with Bank of America in London. “It feeds concerns about inflation, and will make the Bank of England cautious about lowering interest rates too rapidly.”

Yes, the forces of inflation are on the march all over the world. In London, producer prices for chemicals, textiles, and food rose 5.7% from the year before. It’s the fastest rate since 1991.

And that’s just what producers are passing on to retailers. London’s office of National Statistics reports that he cost of raw materials increased an annual 19.1 percent, the biggest jump since they began tracking such things 1986.

But the big news yesterday is how terrified the Reserve Bank is that inflation is already out of control here in Australia. The Bank lifted its forecast for inflation this year to 3.5%. And it said it that there’s enough heat being generated in Australia’s booming economy to make things uncomfortable until 2010.

“If demand were to be stronger than expected, the forecast easing in the inflation rate would be unlikely to eventuate with the current policy settings,” the Bank said in its quarterly Statement on Monetary Policy. “Most importantly, if it is not reversed reasonably quickly, the recent pick-up in inflation carries the risk of generating an upward drift in inflation expectations, which could feed back into wage and price-setting behaviour.”

Reinforcements! Judging by the futures market, investors now expect the RBA to send at least two more rate rises “over the top” and into action by the middle of the year. Glenn Stevens fears a cycle in which producers pass on rising costs to consumers, which forces up wages and accelerates spending as people race to trade cash for something more enduring.

The rate rises will be bearish for Aussie housing and perhaps not as bullish for the dollar as you might expect. The Reserve Bank is moving in the opposite direction of most of the world’s major central banks. The Fed, the ECB, the Bank of England, and perhaps the Bank of Japan all have an easing basis.

“It can’t be bullish if the rest of the world is bearish,” our currency analyst Gabriel Andre said. “Yes, the yield difference is widening. But if the rest of the world is cutting rates to avoid recessions, then Australia’s economy will be impacted by that. The rates won’t be the main driver. Growth will. And even though Aussie growth is strong it’s forcing rates up, no country is an island in the global economy.”

Australia is, of course, an island continent. But it’s connected to the global supply chain and thus not immune from what happens abroad.

The RBA report on inflation wasn’t all bad news, however. We asked Diggers and Drillers editor Al Robinson if the RBA said anything about commodity prices. “Yes, they did,” he replied.

“Looking at the first graph below, from the report, there’s one fact that stands out. The last time global wheat inventories were this low was in the early 70’s. Old-timers will remember this as the early stages of the previous big commodities bull market.”

Wheat Inventories Plunge

“Wheat prices surged soon after,” Al reports. “They topped out in 1973…but this time, farmers don’t look as capable of filling the gap. Droughts are causing pain, China’s insatiable, and unprecedented energy demand has cut stockpiles to scary levels. I’m saddling up my bull on this one.”

But wait, there’s more.

“The second graph below depicts a bullish story for coal and iron. Its little wonder Xstrata just raised its bid for Australia’s Resource Pacific by 12%. Within the next year, the stock could easily be sitting on contract gains of over 50%. Why would anyone buy Macquarie Bank when coal and iron stocks are cheaper than they’ve been for 9 months? It’s sheer madness.”

Yes. It’s a mad, mad, mad, mad, mad, mad, mad world.

http://www.dailyreckoning.com.au/reserve-bank-inflation/2008/02/12/
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Alex’s Notes: This is an ongoing in issue in every major country around the world right now. The only way to stop inflation is to stop printing money.

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Yesterday the China Daily published an interesting editorial on inflation that may indicate what the concerns are among at least part of the leadership. Here it is in total: Early reports of shocking price hikes in areas hardest-hit by the bitter snowstorms might have made it relatively easy for the public to swallow a 7.1-percent consumer inflation in January. Given the severity of the supply shock caused by the worst snowy weather in at least half a century, a short-term acceleration of inflation at this level, though the highest in a decade, is still an acceptable result of the Chinese government’s efforts to curb overall price rises.

Had the authorities not tried hard to increase food supplies and introduced stopgap price controls on a number of daily necessities before the snowstorms, the consumer prices may have gone through the roof. On back of a 6.5-percent headline inflation in December, it took a lot of endeavors to limit growth of the consumer price index to 7.1 percent in January when both snowstorms and the coming Chinese New Year were significantly pushing food prices up.

However, while they can breathe a sigh of relief for managing to cope with short-term inflation factors, policymakers should not stop fixing their eyes on long-term inflation. Aggressive price measures that the authorities have adopted will continue to take effect and thus slow price hikes in the near future. But the country’s inflation outlook may worsen in the long run if the structural imbalance in the economy cannot be properly and promptly addressed.

The acceleration in inflation has so far been predominantly driven by food. But that does not mean the current round of inflation will be short lived if the supply of food can be raised. While food prices surged by 18.2 percent year-on-year, non-food price inflation remained low at 1.5 percent in January. The slow rise in non-food prices is rather a source of increasing inflationary pressure than a reassuring check on further inflation.

The surge in producer prices which jumped 6.1 percent in January, the fastest growth in more than three years, indicates that rising energy and food costs are considerably pushing up manufacturing costs. Besides, the enforcement of higher environmental and labor standards will add to companies’ costs. Hence, non-food price inflation is already in the pipeline. The complexity of China’s growth prospects this year makes it very difficult for policymakers to fight an all-out war against inflation. A tightening monetary policy is essential to preventing serious inflation. But it may also risk slowing the growth of the Chinese economy by too much as a US slowdown or recession weighs increasingly heavily on the country’s export sector.

The policymakers should certainly be forward-looking and prepare for the possible downturn. Yet, an inflation rate above 7 percent currently warrants more concerns over entrenched inflationary pressures than worries about a temporary farewell to double-digit economic growth.

I think there are at least two very interesting points about this article (besides the fulsome but perfunctory praise about how well the authorities have handled the inflation problem so far). First, the author seems less than confident that inflation is merely a short-term food problem. Clearly he is worried that the inflation genie has already been let out of the bottle and that inflation is spreading to other parts of the economy.

Second, he acknowledges the complexity of the economic issues surrounding financial policy-making, but he says emphatically that “the country’s inflation outlook may worsen in the long run if the structural imbalance in the economy cannot be properly and promptly addressed.” As I understand it, “structural imbalance” almost always means the currency regime and the associated monetary consequences. I am not sure what “properly and promptly” mean, but interest rates have been rising, reserve requirements have been rising, and the currency is appreciating more quickly. Either he means something else must be done, and soon, or he is arguing that the recent hints of a policy reversal (actually a lot more than just hints) are ill-considered and Chinese policy-makers must go back to the grim spirit of the October Economic Conference.

Either way I read this as suggesting that the internal policy debate is fierce and far from resolved.

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http://seekingalpha.com/article/65459-china-s-inflation-debate-fierce-and-unresolved?source=d_email

By Harry Wallop, Consumer Affairs Correspondent
Last Updated: 6:26am GMT 12/02/2008

With the cost of meals, mortgages, utility bills and council tax soaring, Alistair Darling, the Chancellor, is under pressure to abandon a proposed petrol tax increase in April.

Energy, fuel and food prices are rising at their fastest rates for 17 years
Energy, fuel and food prices have all risen at an alarming rate

Households are already burdened by record costs as domestic bills have climbed far faster than the official rate of inflation over the past year.

An analysis carried out by The Daily Telegraph shows the five biggest bills most families pay have increased by a total of more than £100 a month.

Last year, total average household monthly bills were about £1,200. This has risen to £1,307 over the past 12 months – an annual increase of £1,284.

Philip Hammond, the Conservative Treasury spokesman, said: “These figures make a mockery of Gordon Brown’s boast of low inflation.

”Thanks to his economic incompetence, ordinary families are now faced with soaring food and fuel costs. With real take-home pay falling, they will be more squeezed than ever.”

The figures released yesterday by the Office of National Statistics (ONS) shocked economists.
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They showed that the prices paid by firms for wholesale goods such as food and oil increased by 5.7 per cent in January, the sharpest increase since August 1991.

Prices on supermarket shelves have climbed at an alarming rate over the past year.

Analysts have warned these will increase further still, not only hitting hard-pressed families but also making it hard for the Bank of England to cut interest rates as it struggles to keep inflation under control.

To make matters worse, escalating prices are racing ahead of wage increases, especially those of nurses, teachers and police officers, who have suffered from Mr Brown’s insistence that those in the public sector have to receive below-inflation salary rises.

The rise in costs has intensified calls from motoring groups for Mr Darling to scrap a planned two pence increase in fuel duty.

The average price of a litre of unleaded petrol is now £1.04. According to the AA, the monthly cost of filling up a car now exceeds £100 for the first time – with an average car now costing £106, compared with £90 a year ago.

In addition to fuel and food, energy bills are also soaring. Five out of the six largest suppliers have increased their customers’ bills. Most rises came into force only in the past week or two, so are not reflected in the new inflation figures.

Energywatch, an independent watchdog, calculates that the average household has to spend £1,020 a year on gas and electricity – more than £100 extra than a year ago.

The inflation figures showed the price food factories are having to pay for goods is 8.5 per cent higher than a year ago – the biggest rise since the ONS began collecting data on food costs in 1986.

How prices have risen

MySupermarket.co.uk, which compares prices across different websites, said a basket of 24 key items had increased by 11.3 per cent compared with a year ago.

A dozen free-range eggs now costs £2.45 at Tesco, compared with £1.75 a year ago; a pack of butter at Asda is 62 per cent more expensive at 94 pence and the cost of a kilo of basmatti rice at Sainsbury’s has risen by 39 per cent to £1.25.

These increases equate to an extra £324 a year for an average household, or £527 for larger families that spend £90 a week on their supermarket shop.

The ONS partly blamed the soaring cost of dried fruit – a key ingredient in breakfast cereals, curries, and baked goods – for a sharp spike in prices in January.

John Williams, the chairman of Needwood Foods, one of the country’s largest importers of dried fruit, said: “I’ve been in the industry for 30 years and never seen anything like it.”

He added that he had already passed on his soaring costs to his supermarket customers, but was still waiting for supermarkets to pass it on to shoppers.

The rising costs are unlikely to be reflected in the official consumer inflation figures – due to be published today.

Economists warn the figures no longer reflect the true cost of most families’ escalating bills. The index of consumer prices includes a handful of luxury items which are plummeting in price, especially electrical gadgets, plane tickets, alcohol and some clothes.

This explains why the index is likely to show that inflation is climbing at just 2.3 per cent.

Ruth Lea, an economic adviser to the Arbuthnot Banking Group, said: “This is why so many people will feel such a squeeze this year. The price of essential bills affect people hugely in the way that the price of a plasma-screen TV does not.

“Pensioners are understandably baffled when the inflation figures say prices are climbing by just two per cent. They have seen their bills rocket.”

Jonathan Loynes, chief economist at Capital Economics, said: “There is far less scope for consumers to cut back on essential items, be it utility bills or food, if times are tight.

http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/02/12/ncost112.xml

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Gold Prices pushed higher in volatile trade early Monday, gaining 0.7% from Friday’s close by lunchtime in London as world stock markets dropped yet again.

The spot Gold Market stood above $927 per ounce as the broad FTSE index of Europe’s 300 largest companies slipped 0.5% for the day, while copper and most other base metals continued to gain as bad weather blocked Chinese output.

Crude oil dipped for the first session in three despite fresh threats to immediate supplies.

A North Sea oil rig was closed by a bomb alert; Hugo Chavez, president of Venezuela threatened to block oil exports to the US on Sunday; and Shell lost another 130,000 barrels per day from its terrorist-hit operations in Nigeria thanks to leaky pipes.

Meantime on the currency markets, shock inflation data sent the British Pound one-cent higher against the Dollar, knocking the Gold Price in Sterling 0.8% off the new all-time record of £477.20 hit just as London opened for business.

“High commodity prices are just a reflection of monetary inflation,” reckons Mario Innecco, a broker at MF Global in London, speaking earlier to Bloomberg.

“There is too much money chasing a limited supply of real goods” as central banks cut rates, he believes. The newswire’s weekly survey of Gold Market professionals saw 19 bulls vs. four bears and four neutrals.

The survey has a 62% strike rate over the last four years.

“[Last week was] a new high weekly close for Spot Gold,” as Christopher Langguth notes for Mitsui today. “It would have to fall to $884.50 to generate a sell signal. The selling should not become heavy unless it trades below $863.00.”

“With the Fed beginning to sound more cautious on inflation and the US Dollar unable to sustain a rally, the near-term fundamental outlook for gold continues to improve,” agree Stephen Abbriano and Robert Lockwood at Scotia Mocatta, the market-making bullion bank, in London.

“Funds continued to buy [on Friday]…Equity markets slumped but gold maintained its level as investors turn to it as a possible safe haven.”

Saturday’s news that the International Monetary Fund (IMF) may look to sell some of its 3,217 tonnes of gold – the third largest hoard in the world – failed to deter investors from Buying Gold in Asia overnight.

With the IMF looking to cover a budget deficit of $400 million per year, the US Congress would still need to approve the plan agreed by leaders of the G7 wealthy nations in Tokyo. What’s more, “every time the IMF has sold gold it has actually triggered more buying interest,” as Innecco at MF Global said to Bloomberg this morning.

“It will just make it easier for the big sovereign buyers” – the big central banks outside the G7 who want to build up their gold reserves – “to snap up cheap gold from the IMF.”

This morning saw stock markets in Japan, China and Taiwan closed for public holidays, but last week’s losses continued across Australia, South Korea and Hong Kong, where stocks fell by 2% on average.

Grain prices, in contrast, jumped to fresh record highs. The top performing commodity of 2007 according to Reuters data, wheat jumped to $11.53 per bushel – more than 70% above the price of Feb. last year.

“We haven’t seen this sort of price action in 25-30 years,” said one analyst earlier. “People will pay anything to get into agricultural commodities.”

The price of imported food in the United Kingdom rose by nearly 15% in the year to Jan., the Office for National Statistics said today, helping push input prices for UK industry to a new 16-year high of 19.1% per year.

UK-produced food rose by 36%. Output prices for manufacturers rose by only 5.7%, squeezing margins as domestic industry struggled to find pricing power.

“The January producer price inflation is really horrible and will likely send blood pressures higher at the Bank of England,” reckons Howard Archer at the Global Insight consultancy. The data will “further limit the scope of the Bank to cut interest rates aggressively to try and reduce the danger of a sharp economic downturn over the coming months.”

Last week the Bank of England cut its key lending rate for the second time since the world banking crisis began in August.

In 2007, the UK money supply grew by 12.7% – the fastest monetary expansion since the last top in the UK housing market of 1990.

http://goldnews.bullionvault.com/gold_prices_IMF_sales_food_metals_equities_021120082

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By Arthur Foulkes
The Tribune-Star
January 28, 2008

Constant, creeping price inflation may seem as normal as the leaves turning in autumn. But a general and steady increase in prices is not a natural phenomenon in the same way changes in the season are.

Economywide price increases are caused by more and more money being poured into the economy; therefore, price inflation has its roots in government policies.

We are so accustomed to constantly rising prices that we can hardly believe this is not just the ways things are. The mere idea of falling prices sends central bankers, business writers and policymakers into a panic. Yet, surprisingly, the most dramatic economic growth in American history took place during a period of generally falling prices.

From the start of the Industrial Revolution until the first decades of the 1900s, money in the United States was largely backed by gold or silver. This meant the supply of money was fairly stable.

At the same time, dramatic increases in productivity caused by industrialization meant more goods and services were available. As a result, the purchasing power of existing money grew while prices fell.

Economist Murray Rothbard wrote of this period in his book, The Case Against the Fed:

“Prices generally fell every year from … the latter part of the eighteenth century until 1940, with the exception of periods of major war, when governments inflated the money supply radically and drove up prices, after which they would gradually fall once more. … Falling prices did not mean depression, since costs were falling due to increased productivity, so that profits were not shrinking.”

Even today we see falling prices for certain goods, such as calculators, computers and other consumer electronics. Yet makers of these goods continue to grow and experience profits.

There is just one explanation for why prices in general continue to rise almost non-stop: Government policies that inflate the money supply.

The U.S. Federal Reserve creates money when it buys securities from banks and other financial institutions. To buy these securities, the Fed writes checks on itself, basically creating new money out of thin air.

After receiving this new money, banks, backed by the Fed and federal deposit insurance, lend it to borrowers who deposit these funds in other banks who then loan the new money again. This process continues until, for example, a $100 million “injection” from the Fed results in almost $900 million in new money.

Government figures show that the nation’s money supply has been growing rapidly for decades. In 1960, M2 money, which includes currency, coins, checking deposits and other highly liquid assets, stood at around $300 billion. Today M2 is around $7,500 billion – a 25-fold increase.

This explains why a bottle of root beer that cost my mother-in-law and father-in-law 5 cents on their honeymoon in 1955 costs about $1.25 today.

Economist George Reisman of Pepperdine University uses the following example to show how increasing the money supply causes higher prices.

Imagine there is only one product in the whole economy – bottled water. Imagine that after one year, 100 bottles of water were sold for a total of $100. What was the average price of goods that year? The answer is $100/100 or $1.

Now imagine that the following year, 100 bottles of water were sold for a total of $200. What was the average price of a bottle of water during that year? It was $200/100, or $2. Simple enough.

In this example, the average price of consumer goods – bottles of water – doubled. As Reisman notes, it is a mathematical impossibility for this to happen without either (1) fewer bottles of water being sold and/or (2) more money being spent during the year.

We can safely rule out that prices have been rising since World War II because there are fewer consumer goods available. If we can be sure of anything over the past several decades, it is that productivity has been rising, meaning there have been more goods and services available on the market, not less.

If the money supply had been stable in the past 60 years, more consumer goods would mean lower prices and more purchasing power for existing money. But, since World War II, greater productivity has actually gone hand-in-hand with rising prices. For this to happen, the quantity of money must be rising dramatically.

Of course, it is possible that more spending of a fixed quantity of money could also cause prices to rise; however, as Reisman notes, if there is more spending, it is still linked to the creation of more and more money. When the supply of money rises, its purchasing power drops and the incentive to hold money falls. So even if more frequent spending does account for some price inflation, it is nevertheless linked to higher quantities of money.

Most people probably believe we suffer from chronic inflation because of greedy businessmen, greedy unions or both. Some people even blame greedy consumers.

Yet none of this can explain a steady and general increase in prices. With a stable supply of money, rising prices for some goods, such as housing, would simply force lower prices for other goods whose demand was not as strong.

Price inflation is not a natural phenomenon we are stuck with. It is the result of government policies that attempt to manage the economy and protect banks and other financial interests from the rigors of a truly free market. Like almost any government action, inflating the money supply benefits concentrated, well-organized interests while the mass of consumers pay the price.

http://www.tribstar.com/business/local_story_028173354.html

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Is it a tech-stock? Is it traded on the NYSE or NASDQ? Is it even an American company?

————————————————————

PetroChina Surpasses Exxon as Shanghai Shares Surge
By Ying Lou

Nov. 5 (Bloomberg) — PetroChina Co. became the world’s first trillion-dollar company, surpassing Exxon Mobil Corp. as the shares started trading on the Shanghai stock exchange.

PetroChina’s Class-A shares almost tripled on their Shanghai debut, rising as high as 48.62 yuan from the sale price of 16.7 yuan. The listing gives mainland Chinese investors their first opportunity to own the stock.

China’s largest oil and gas producer has been listed since 2000 in Hong Kong where it advanced 78 percent this year as investors sought to profit from the world’s fastest-growing major economy. The Beijing-based company’s shares soared as the Hang Seng Index in Hong Kong rose 53 percent and the CSI 300 Index of shares listed on the Shanghai and Shenzhen exchanges increased 168 percent.

“Local investors might have a different risk tolerance level to global investors, so we may see PetroChina’s A-shares trading at a premium” to its Hong Kong stock, said Lei Wang, a co-manager of Thornburg International Value Fund in Santa Fe, New Mexico, which oversees $16 billion.

PetroChina reached 43.96 yuan at 11:05 a.m. in Shanghai, valuing the company at more than $1 trillion. Exxon is worth $488 billion on the New York Stock Exchange. In Hong Kong, PetroChina fell 7 percent to HK$18.20

`Sense Of Responsibility’

The Chinese oil producer trades at almost 60 times earnings in Shanghai, compared with Exxon’s valuation of 13 times. PetroChina’s market value is higher than Russia’s gross domestic product.

“I feel very excited today and also feel a very strong sense of responsibility,” Chairman Jiang Jiemin said at the Shanghai Stock Exchange. “This is PetroChina returning to our investors and the society.”

The company had 20.5 billion barrels of oil and gas reserves in 2006, compared with 22.1 billion for Irving, Texas- based Exxon, data compiled by Bloomberg show. PetroChina has been adding new reserves at an average annual rate of 5 percent for the past three years, a faster pace than Exxon, Royal Dutch Shell Plc and BP Plc, the world’s largest oil companies by sales.

The share sale, the world’s biggest this year, surpassed the 66.6 billion yuan generated by China Shenhua Energy Co. in September.

Mainland Chinese investors were until now prevented from directly buying PetroChina stock, missing out on a 15-fold surge as economic growth turned the nation into the largest oil consumer after the U.S. and as crude prices reached a record $96.24 a barrel in New York.

Demand For Shares

Investors applied for more than 3.3 trillion yuan of stock, almost 50 times the amount PetroChina sold. Chinese companies now represent five of the world’s 10 largest by market value, raising investor concerns that the market is too expensive.

Billionaire investor Warren Buffett’s Berkshire Hathaway Inc. sold its stake in PetroChina this year, reaping an eightfold gain that contributed to a 64 percent increase in third-quarter profit for the Omaha-based company. Berkshire had 2.34 billion shares as of the end of 2006, the largest holding after state-owned China National Petroleum Corp.

Buffett said on Oct. 24 that Chinese share prices have risen too fast.

“It’s easy to be carried away in the stock market when things are going very well,” he said in the northern Chinese city of Dalian. “We at Berkshire never buy stocks when we see prices soaring.”

`Limited Upside’

Gains in PetroChina’s Class-A stock in Shanghai may have more to do with Chinese investors seeking returns from their $2.3 trillion in savings than the outlook for the company’s exploration and production operations, or its refining business, known as downstream, said Larry Grace, an oil analyst at Kim Eng Securities Co. in Hong Kong.

“Production is static with limited upside for the next three to four years,” Grace said. “As for the downstream, the price controls and overall regulatory trend limit the company’s earnings.”

China controls fuel prices to shield consumers in the world’s most-populous nation from accelerating inflation. The policy limits the ability of PetroChina and China Petroleum & Chemical Corp. to pass on the burden of higher crude oil costs.

UBS AG’s China venture, UBS Securities Co., Citic Securities Co. and China International Capital Corp. arranged PetroChina’s Shanghai share sale.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aixBdHxWY.po&refer=news

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by: Pluto

What follows is a collection of quotes from reports and investment signals I receive every day. Most of these are not free. In fact, I pay as much as $3,000 per year for some of my subscriptions. I’ve made selections from the past four days — to give you a peek behind the curtain.

My focus is on global markets and currencies (with side orders of petroleum and commodities). Meanwhile, the world’s focus is on deliberately kicking America’s ass (even if it hurts them in the short term). Many nations are willing to take a hard economic hit to rid the world of a dangerous invading nation with an insane leader threatening to “throw atomic bombs” at his make-believe enemies. As a result, experienced U.S. investors have been dumping their US dollars (frantically over the past ten days) — except for:

1. Investment professionals who watch CNBC — the corporate-profit-driven business cable channel with a propaganda mission to drive up the Dow.

2. Investment professionals with a case of cognitive dissonance, indecisive paralysis, senile dementia, or right-wing brain rot.

Your hand-picked selection of financial quotes appears below the fold.

THURSDAY — Get Ready for Another Dollar Bashing!

What Happened:
Yesterday, the markets got wind of the latest Durable Goods Report. Core Durables came in at 0.3%, as opposed to the 7% expected. That’s a big ouch! Durables as a whole came in – 1.7% vs. +1.6 as expected.

How Markets Reacted:
The U.S. dollar got crushed as traders heard about the less than enthusiastic numbers. They dumped the dollar with new found enthusiasm.

What It Means:
Man, the U.S. dollar just can’t catch a break. This has pushed EUR/USD back above 1.4300.

Are things going to get better anytime soon? More than likely not. Just Wednesday, Bank of America announced the layoff of several thousand employees. Motorola posted a loss this quarter in today’s announcements. Also, Daimler (Chrysler) announced a loss.

So what does this mean in currency land? The dollar is down because the market is losing confidence in the greenback fast. Plus, foreigners are taking more assets from the U.S. (selling their stock holdings of these slowing companies, selling real estate, etc.) and repatriating their money out of dollars and back into their home land.

This makes foreign currencies go up and the dollar go down. Currencies are moved by both economic and sentiment levels. Both right now are in the toilet. So until this picture changes fundamentally, all stock market rallies and dollar rallies should be sold once they start to roll over.

FRIDAY — Nations are Pouring Their Investment Funds into Asia

What Happened:
Foreign powers are now more willing to inoculate themselves from weakness in the United States. They’re doing this by establishing Sovereign Wealth Funds (SWFs), or government-sponsored investment companies. Booming countries – including major oil producers in the Gulf States as well as Russia – are going to make major changes to the way they invest. And Sovereign Wealth Funds are the vehicles they’ll use.

Nations use these government-owned investment corporations to invest surplus reserves. They’re rapidly becoming a popular way for central banks to get rid of their U.S. dollar investments, which are plunging in value on almost a daily basis.

It’s estimated that SWFs currently have more than US$2 TRILLION in assets under management. That’s quite a chunk of change! However, they are expected to exceed US$13 trillion in assets just 10 years from now.

How Markets Reacted:
Already, nations are moving their investment funds into other more stable currencies such as euros and British pounds.

What It Means:
This is just the beginning. Nations will become more aggressive in investing outside the dollar, which means currencies of other nations will get bid up in the process.

We believe the Japanese yen is one currency that will benefit greatly from this trend!

See, SWFs are going to allocate a much greater share of their investments to Asia. For some countries, it will amount to investing in their home region. For others, it will simply be going where the growth is. But all of them are likely to gravitate toward Japan, which is the second-largest economy in the world.

End result:

We will see more dollars being converted into the yen and other Asian currencies.

WEEKEND — Dollar Sell Signal Rumor from Commodities Guru Jim Rogers:

Jim Rogers broadcasted his intentions to sell ALL his U.S. dollars over the next few months. He’s using some of the profits to buy Chinese yuan instead.
According to this living legend, the “policy” of the Federal Reserve is “to debase the currency.” That’s why he’s trading in his dollars for yuan.

He used this little history lesson to point out why he’s so pessimistic about the greenback.

“The U.S. dollar is and has been the world’s reserve currency, the world’s medium of exchange. That’s in the process of changing. The pound sterling, which used to be the world’s reserve currency, lost 80% of its value, top to bottom, as it went through the whole period of losing its status as the world’s reserve currency.”

So even though it’s already been under pressure for years, the dollar still has significant downside risk, yikes! According to Rogers, the Chinese yuan (or renminbi) is “the best currency to buy right now. I don’t see how one can really lose on the renminbi in the next decade or so. It’s gotta go. It’s gotta triple. It’s gotta quadruple.”

MONDAY — A Private Trade Signal for Currency “Options” — and a High-Level Explanation of the Global Money Machine

Background:
I said last Friday that if the G-7 finance ministers didn’t make a strong statement supporting the dollar, the market may perceive it as a green light to sell the buck. Well, they didn’t, and the dollar is suffering the consequences.

The G-7 decided to let the dollar decline. That’s because a falling dollar will tend to add global liquidity to all asset markets. And that was the devil’s tradeoff for the G-7, i.e. either keep the global music playing by sacrificing the buck, or take a stand on the buck and risk a big selloff in global markets and risk more contagion.

Thus, we are in an environment that has to be labeled “The Return of Risk Taking.” And it’s a very fertile environment to hold options that bet on a continued dollar decline.

A Yuan for the Yen:

So what about the yen? Doesn’t it do badly in an environment of risk taking? Well, it used to, but I think the game has changed there, too.

Though the G-7 did not support the U.S. dollar, it did collectively bash the Chinese currency, complaining the Chinese yuan is significantly undervalued. This was the first time we saw the U.S., Canada, and Europe together in such a forceful manner on this issue. I think they are finally getting serious.

The Chinese currency is at least 40% to 80% undervalued against the U.S. dollar according to most analysts — and it could be a lot more than that. The political pressure on China and the inflationary pressures in China, are growing rapidly, thanks to the policy of currency manipulation. We may have finally reached that stage where it is in the best interest of China to act, and let its currency float much higher, much faster.

Why is a stronger yuan good for the Japanese yen?

Japan competes with China on exports to the West. A stronger yuan will allow Japan to implicitly let its currency move higher. I think this will now clear the way for the Bank of Japan to finally hike interest rates. Artificially lower interest rates in Japan have suppressed the yen for a while, as you know. It has been the catalyst for the carry trade.

Thus, we now have another reason why the carry trade in the yen could become unwound, besides just risk. That’s why I am still very bullish on the yen even in an environment of risk appetite.

(This signal goes on to tell investors to buy March Yen at a certain strike price…)

For those playing along at home — I wish I could tell you that if you invest in “international funds” through your mutual fund at work — that somehow you are in the “foreign” market.

Nothing, however, could be further from the truth. As long as your investment is demoninated in dollars, you are losing money every hour of the day.

The big problem this week, is that on Wednesday the Federal Reserve may lower interest rates (to keep the U.S. corporations happy with the Dow Jones Averages) — this will simultaneously cause the dollar to lose a great deal of value around the world. But most Americans won’t notice — yet. And on Friday, an important report on U.S. employment comes out (it’s called the Nonfarm Payroll report). If this shows the U.S. is losing jobs this month (doh!) it will signal to the world that the U.S. economy is in trouble, which will kick the dollar even further down in value.

http://www.docudharma.com/showDiary.do?diaryId=1841

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Buy Gold and Silver Bullion

by Clif Droke

I received an e-mail from a financial professional this week that speaks to our question in this week’s commentary:

“Am concerned there is a real crisis brewing. Oil at $95; gold at $800 (and keep in mind that’s a suppressed price!) And Sec Lend [Fed securities lending] 4 days — is it in the last 10 days – we’re OVER TEN BILLION DOLLARS?! Is that a weekly all time all time record??!

“WHY??? Most peaks in gold are covered by a war or capped by a crash, eh?!”

Let’s examine the recent spike in the gold price before we attempt to find the answer to this question.

Gold closed at a 27-year high on Friday at $806/oz. That’s one of the highest levels seen since the all-time high was made in 1980. What on earth is the runaway gold price rise telling us?

As far as stock market crash, the odds are extremely low against this happening. With the IBES Valuation Model showing a 36% undervaluation of the stock market and with insider buying and securities lending volumes this high, a stock market crash would be unprecedented at this point. There is simply too much in the way of support for this to occur.

Now what about the second alternative, namely, war? This is a more likely scenario. It could be that gold “smells” war in the very near future and is doing what gold normally does when war is in the future. The same thing happened heading in the second war with Iraq in 2003.

This time it seems Iran has come into the crosshairs of the Bush Administration as being the next target of Mid East occupation. In June, the U.S. government issued an official warning to all Americans not to travel to Iran, according to an A.P. report. A more recent headline from the Financial Times reports, “US hits Iran with financial sanctions (Rest of world urged to follow lead).” It seems there are many in Washington who desperately want war with Iran and are going out of their way to get it!

Could the gold and oil price action be foretelling us of military action soon to come?

As an aside, if war is waged in Iran in the upcoming months, this will provide the pretext for the next increase in monetary liquidity. Remember what happened in 2003 when the war in Iraq began? The U.S. was absolutely flooded with money and a series of bull markets all across the stock and commodity arenas provided distractions to keep Americans from being overly concerned with the war.

Any war that is declared in the current economic milieu is sure to be greeted with less than an enthused response. Ergo, “a priming we shall go” will be the tune the Fed sings as the next phase of Middle East war gets underway.

The headlines of the financial newspapers have also given us reason to remain bullish on stocks from an intermediate-term standpoint. Now, after all those weeks of hand-wringing over the “credit crisis,” the press has given investors yet another reason to “be afraid…be very afraid.

The new crisis of the hour? More inflation!

Tuesday Financial Times contained an article by Michael Mackenzie, “Dollar and oil swings prompt fears of inflation.” We’ve seen this recurrent inflation theme several times in the past few days in the press and it seems to be a widespread fear. This fear is just what the market needs to keep the “Wall of Worry” intact and the bull market going forward.

Mark Dodson has an interesting take on inflation from the standpoint of the global economy. He writes, “For all the talk of so many economists who now recognize and talk about the twin forces of globalization and the technology revolution and the increase in competition that results, they continue to rely on Phillips curve style models that look at things like unemployment and capacity utilization in the US to determine if inflation is coming on the scene. They are using 20th century economic models in the 21st century.

“Even if you believe in a Phillips curve model, global capacity and global unemployment should be what you are looking for, and no one has the slightest clue what those numbers are.”

Indeed, it seems everyone is afraid of a resurgence of inflation following the Fed’s interest rate cut and they’ll be even more afraid if the Fed cuts the rate again.

But inflation (properly speaking) is the last thing the stock market and economy have to worry about. The true inflation story is contained in this long-term chart showing the continuous yield on the 10-Year Treasury. The recent spike in bond prices and corresponding drop in yields has the all the marks of money going into the proverbial “bomb shelter” seeking protection from the latest crisis of the hour. It is most certainly not a sign the market is worried about inflation.

Dodson adds, “Commodities (input prices) might be through the roof, but the final goods prices that are included in popular inflation measures show inflation that is well under control. Same old story. We like the way that ISI puts it: what emerging economies (Think China) buy, they inflate; what they sell, they deflate.”

Now what about gold stocks? Here we are in the month of November, a time known for showing seasonal improvement of the mining stock sector. December-January are normally the best months of this seasonal time frame but sometimes November can be positive as well.

The XAU’s track record in the month of November going back the past 15 years is a mixed one. There have been six negative Novembers, seven positive ones and two neutral ones. The past 15-year record shows no strong seasonal tendency one way or another.

When we look at the past four Novembers, however, we see that every November since 2003 has been a winning one for the XAU as measured from the start of the month until the finish. Here’s hoping that November 2007 will make it five in a row.

Among the other major mining companies reporting quarterly earnings, Silver Wheaton (SLW, $17.11) announced Wednesday lower net earnings of $19.2 million ($0.09 per share) from the sale of 3.1 million ounces of silver, compared with $22.5 million ($0.10 per share) from the sale of 3.5 million ounces of silver in 2006. Operating cash flows for the latest reporting period were also lower at $27.1 million versus $28.3 million a year ago. SLW’s revenues fell short of consensus. However, Silver Wheaton’s earnings-per-share (EPS) beat analysts’ consensus.

I’ll leave you with this. The following headline article was discovered on the CNNMoney.com newswire yesterday. The article’s headline says:

“Gold stocks: Few gems left to unearth (The price of gold may continue heading skyward but analysts say investors need to tread cautiously if thinking of adding mining stocks to their portfolio)”

This headline holds forth bullish implications from a contrarian standpoint and is yet another anecdotal piece of evidence that the uptrend for gold and silver stocks should continue, notwithstanding a few potholes along the way.

The Daily Reckoning
Ouzilly, France

Ai yi yi…

Yesterday, it looked like what was going to happen to Nigeria was already happening to the U.S. stock market.

Nigeria is our neighbor’s prize bull. He’s going to be slaughtered, because he’s getting old and is no longer earning his keep.

This bull market on Wall Street, such as it is, is getting old too. And yesterday, the butchers were sharpening their knives.

The Dow fell hard – down 362 points.

Why?

Commentators said investors were disappointed with the measly quarter point rate cut delivered by the Bernanke Fed on Wednesday. What? How could that be? Nine out of 10 economists saw it coming. Why would investors have such surprised looks on their faces?

Maybe it is because the Fed signaled that it there were not a lot more rate cuts where this one came from. But who would believe that?

Nah, dear reader, the explanations don’t make much sense. But why bother looking for a reason? All bulls get slaughtered – sooner or later. That’s just the way it works.

As stocks went down, both gold and oil lost a little ground…but not much. Oil is still over $93. The price of gold is over $793.

Which brings us back to numbers – we have become suspicious of them. There are only ten basic digits…but just look at them. Since we gave up Roman numerals, our numbers aren’t straight. Who can trust the number 5, for example? The squiggly little humbug! It is crooked. It has a straight bar across the top, which makes it appear on the up and up…but then it stabs down and then hooks around to the bottom. Very devious.

Still, when they are on their own, numbers – like men – seem to be fairly reliable and decent. You have one dollar. We have three chickens. The team scored nine runs. But mix ‘em and match ‘em…put ‘em in a crowd …and you can get any combination and any scammy result you want.

We mentioned yesterday that after the feds got finished scrambling the GDP numbers, they revealed growth of precisely 3.9% per year. We pointed out that “growth” itself doesn’t mean much. Life imitates academia; we begin to act like dead economists say we should act. The professors tell us that digits are important. The next thing you know people are worrying about their cholesterol count and their return on investment. Not only that, but they’re putting their wives to work in order to increase the digits in their household incomes…and watching the Fed to see what it will do with the digits in short-term interest rates.

And lo! Their interest in digits…in making money and spending it…causes the digits in the GDP to go up. Instead of cutting their own lawns or baking their own cookies, our new digitally-enhanced citizens pay someone else to do these things so they can spend their own time making more digital money.

Ah yes…dear reader…we’ve come to that. Even those ‘paper’ dollars are often not even paper. They are computer fantasies. Your bank tells you that you have a certain number of dollars in your account. You take it for granted that the dollars are there. But there are no dollars…just a spectral trace of dollars in digital form.

So, you tell someone that you have 10 dollars and 22 cents. What do you have? Ten what? It sounds precise…but the precision is as much a fantasy as the money itself. You don’t know what you have. Maybe you have nothing at all…or something that could become nothing pretty darned fast. Ten dollars was what we earned for two days’ hard labor in the tobacco fields when we were 15 years old. Now, it is what we earn every five minutes. Yes, we are older and wiser…and people pay us more money today than they did 40 years ago. We’re not the same person we were then…and the money isn’t the same either. While we gained value in the workplace, our money lost value.

The feds say the inflation rate is less than 3%. How could inflation be running at less than 3% per year while prices on the most important things in commerce – food and energy – are increasing 10 times as fast? We don’t know; it’s one of the reasons we’ve lost faith in digits. They lie.

The only way the feds could get the inflation rate down was by smashing it on the head. And guess what happened? The GDP rate popped up. Yes, dear reader, real output is calculated by subtracting the inflation rate from nominal output. The lower the inflation rate, the higher the GDP number. So, if you can beat down the inflation number, that GDP number will get bigger. Neat, huh?

John Crudele, writing in the New York Post :

“The trouble is, the GDP only grew that much because the government somehow manufactured a big drop in inflation.

“According to the Commerce Department report, inflation was only 0.8 percent in the third quarter.

“When you look at real economic growth – meaning, after inflation – every tick down in inflation causes a tick up in economic growth.

“The rate of inflation was 2.6 percent in the second quarter of 2007 and 4.2 percent in this year’s first quarter. Wall Street was expecting 2 percent inflation this time.

“Inflation at a slow 0.8 percent rate would certainly be welcome – if only it were credible.

“But even less believable is the fact that the inflation rate nose-dived at the same time oil prices were heading toward $90 a barrel – which it now exceeds.

“So, in reality, economic growth is probably much slower than is being reported. And inflation is a lot higher.”

We’re convinced; reality and digits don’t hang together anymore. Maybe they never did.

Here’s something interesting…this week, Wal-Mart says it has crossed the ‘digital divide,’ by offering a computer for less than $200. Yes, dear reader, this is a big day for us here at The Daily Reckoning . Now every yahoo with $200 in his jeans can read what we write. This is a big step forward for society, too, say the commentators, because now we will have ‘digital equity,’ meaning everyone can have access to all the digital information, news and opinions they want.

Of all the crackpot notions to come along in recent years, the idea of the ‘digital divide’ was among the looniest. If you didn’t have access to the Internet, they said, you would be left behind…doomed to live in poverty and obscurity all your life.

But what do people actually do when they get a computer? Do they go onto chat lines to exchange interpretations of Kant’s “Critique of Pure Reason?” Do they begin to read Posidonius’s account of the battle of Pydna…or search for solutions to Poincare’s last theorem? No, they play poker…watch stupid videos…or visit porno sites. In other words, digits don’t actually improve people; they just make it possible for them to indulge more abundantly in whatever shiftless pursuit they take up.

The list of famous and successful people who never even laid eyes on a computer is as long as the Encyclopedia Britannica. And even today, many of the smartest and most successful people in the world view them as time-wasting distractions.

But we are beginning to rant, aren’t we? (Colleague Jonathan Kolber will offer his rebuttal to this rant, below.)

Let’s return to the subject – what was the subject, anyway?

Oh yes…price inflation and the perfidy of digits. Well…what do you think the folks at the Department of Commerce make of Wal-Mart’s $199 computer?

We don’t know either…but we can take a guess.

Years ago, the digit persuaders who torture numbers for the government decided that they should make adjustments for quality enhancements. The theory of it was simple enough: if the price of a thing stays the same, but the thing itself is more valuable…it is if it had gone down in price. So, cometh the computer and prices collapsed. People still spent as much as before, but each year the computers became more powerful. Each year, computer consumers got more for their money…so, in theory, the cost of living was going down (even though, in reality, it was going up).

And now, here’s a computer whose price really is lower. At $199 – here’s a number that doesn’t even have to be hammered down. Happy days! With quality enhancements, this computer – according to the Commerce Department – probably costs less than nothing! When they’re finished with it, it will probably enter the inflation calculation as a free computer with a year’s supply of gasoline as a bonus.

Want to get a good return on your money? Iceland just raised its short-term central bank rate to 13.75%. Inflation in Iceland is expected to be only 4.1% this year…giving you a net yield of more than 9%.

But wait, what’s this? An economist at one of Iceland’s leading banks says he thinks the Icelandic currency – the kroner – will fall by “almost 14%” next year. Well, easy come…easy go.

“I’m thinking about buying a house in America,” said a Frenchman at a dinner party last night. “Prices are so low. This looks like it could be a good opportunity. You probably won’t believe this, but you go into almost any real estate office in Paris and you’ll find houses listed for sale in Florida. And it’s amazing what you can get for your money…a place on the water, with a swimming pool…in the Tampa area. It’s listed for just $300,000. We couldn’t get anything similar in France for that kind of money.

“One thing that is most astonishing to us in Europe is that Americans don’t really have much money. They earn a lot…or they have earned a lot…but they just don’t have much to show for it. I know people in California who earn very high salaries. Here in Europe, even with our high prices, you would live very well if you earned that kind of money. But they have children in private school…they pay a fortune for health insurance…and they have these gigantic mortgages. After they’ve paid those expenses, they just don’t have much left.”

Until next week,

Bill Bonner
The Daily Reckoning

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Road to Ruin (Excerpt)

Road to Ruin:
The gentlemen at Pimco are, once again, the leading cheerleaders for another round of easier “money.” Calling for the Fed to cut rates to 3.5%, Bill Gross commented Wednesday on Bloomberg television: “The nominal [third quarter] GDP number was 4.7%. Any time you get a nominal GDP growth less than 5% the economy is basically struggling. The U.S. needs at least 5% nominal growth in order to pay its bills on a longer term basis.”

I will, once again, take the other side of their analysis. First of all, 4.7% traditional nominal GDP growth would have easily in the past “paid its bills.” It doesn’t get it done today – even with 4.7% unemployment – specifically because of a long period of gross monetary excess. For some time now, the U.S. economy has been hopelessly finance-driven, and the greater and more protracted the Credit excesses the greater the “transformation” of the economic structure. And it is the underlying real economy that today cannot “pay its bills” and is therefore hooked on ever increasing Credit inflation. This should by now be recognized as the Road to Ruin. Contemporary finance and its operators should be held accountable.

The majority of contemporary “services” economic “output” is intangible in nature. The system creates various types of new financial claims (Credit), and this new purchasing power spins today’s economic wheels. It seemingly works wonders during the boom, but the end result is an endless mountain of financial claims backed by insufficient real economic wealth-creating capacity. Nominal GDP would “pay it bills” today only in the context of monetizing additional debt – or inflating the quantity of Credit to inflate “purchasing power” to inflate incomes and earnings – all in order to service previous borrowing excesses.

Admittedly, the Fed has opportunely administered several bouts of “reflation.” We have, however, reached the point where another round will be self-defeating. To throw out some numbers, from the Fed’s Z.1 “flow of funds” report we know that Total Credit Market Borrowings (non-financial and financial) expanded at a $3.75 TN annualized rate during the first half. To put the immense scope of recent Credit inflation into perspective, Credit Market Borrowings expanded on average $1.233 TN annually during the nineties (see chart above). Total borrowings accelerated to $1.694 TN in 2000, $2.013 TN in 2001, $2.365 TN in 2002, $2.767 TN in 2003, $3.085 TN in 2003, $3.380 TN in 2003, and $3.825 TN last year. It is this degree of Credit creation – and the associated Risk Intermediation – that is today untenable and unsustainable at any interest rate.

Before I dive into the U.S. Credit system fiasco, I was struck by a story by Jamil Anderlini from today’s Financial Times:

“The murder of a man who jumped a petrol queue in China’s central Henan province on Wednesday is the stuff of nightmares for the authoritarian Chinese government. Faced with worsening fuel shortages across the country Beijing raised petrol, diesel and jet fuel prices at the pump by almost 10% yesterday, in an effort to boost domestic supplies and exorcise the spectre of social unrest. The policy reversal came as shortages spread to the capital, which is usually immune from the country’s periodic supply crunches. But the government is unwilling to allow prices to rise too much because of a morbid fear of spiralling inflation, which has a history of toppling governments in China and is currently running at a 10-year high, above 6%… Soaring global crude oil prices…pose a serious dilemma for Beijing, which last raised its tightly controlled fuel prices in May 2006. China is the second-largest crude oil consumer after the US and although it was a net exporter as recently as 1993 it now relies on imports for nearly 5% of its crude supply. The current shortages, particularly of diesel, result from a combination of high global oil prices and strict government controls, causing huge losses for Chinese refiners that must pay more for oil but cannot raise prices at the pump.”

I pose the following question for contemplation: How much would the Chinese government, with their $1.4 TN stockpile of chiefly dollar reserves, be willing these days to pay for the necessary energy resources to sustain their economic boom and stem social unrest?

The legacy of years of runaway U.S. Credit excess includes many trillions of dollar liquidity balances circulating around the globe. Chinese reserves, for example, have inflated almost seven-fold in just five years. On the back of unprecedented global Credit and liquidity excess, energy, food, precious metals and other commodities now attract intense demand and virtually unlimited purchasing power. Our economy – our financially stretched consumers and vulnerable businesses – will now have no option other than to bid against highly liquefied competitors for a lengthening list of resources. Failure to recognize that this situation is a major inflationary problem is disregarding reality. The same can be said for suggesting that we can continue on this current course – with massive Current Account Deficits and rampant speculative financial outflows to the world fueling myriad dangerous Bubbles and maladjustment on an unprecedented global scale.

Today’s backdrop is unique. There are literally trillions of dollars of liquidity slushing around the world keen to hold “things” of value. Liquidity sources include the massive central bank reserve holdings as well as funds at the disposal of the sovereign wealth funds. Importantly, the more apparent becomes U.S. financial fragility, the keener they are to stockpile real “things”. There is as well a global leveraged speculating community, in control of trillions of liquid purchasing power. The speculators are also keen to acquire (non-dollar) “things” as opposed to our securities. Indeed, it should be noted that this is the Federal Reserve’s first attempt at reflation where U.S. securities are not the speculators’ or foreign central banks’ asset class of choice.

Not only is the pool of potential global buying power unparalleled in scope. It is fervidly attracted to tangible assets – as opposed to U.S. securities – and is highly speculative in character. At the same time, an unwieldy global boom is stoking unprecedented demand in China, India, Asia generally, and the other “emerging” markets including Russia and Brazil. Throw in various weather related issues and energy production constraints and the prospect for some very serious bottlenecks and shortages has developed.

Granted, these dynamics have been evolving for some time now. What has changed is the speed and breadth of financial crisis enveloping the U.S. financial system. When I read of mounting energy and food shortages and witness the unfolding run on the U.S. financial sector, as an analyst I must contemplate the likelihood we have entered a uniquely unstable monetary environment at home and abroad. In short, the backdrop exists where incredible dollar liquidity flows could be released (from myriad sources) upon key things (notably energy, food, metals and commodities) already in severe supply and demand imbalance. Again, how much are the Chinese willing to pay for energy? The Russians for food? The Indians for commodities in general? How much will investors be willing to pay for precious metals as a store of value? How aggressively will the speculators “front run” all of them? Can the Fed afford to continue fueling this bonfire?

I have so far this evening purposely avoided the unfolding U.S. financial crisis, a historic fiasco that took a decided turn-for-the-worst this week. I’ll admit that I am rather amazed that key financial stocks – including the financial guarantors, “money center banks”, and Wall Street firms – were hammered yet the market maintained its composure. NASDAQ was actually up on the week, as major technology indexes added to their robust y-t-d gains. I’ll assume there is a confluence of great complacency and gamesmanship, with operators determined to play aggressively through year-end (bonuses and payouts).

I wouldn’t bet on the stock market holding 2007 gains for another eight weeks. The Credit meltdown is now moving too fast and furious. Importantly, confidence is faltering for the entire Credit insurance industry, including the mortgage insurers and the financial guarantors. This is a devastating blow for the securitization marketplace, already reeling from pricing, liquidity and trust issues. The Credit system has lurched to the edge of meltdown, while the economy hasn’t even as yet succumbed to recession. It’s absolutely scary. Last week I wrote that subprime and the SIVs were “peanuts” in comparison to the CDO market. Well, the CDO marketplace is chump change compared to Credit Default Swaps and other over-the-counter (OTC) Credit derivatives that, by the way, have never been tested in a Credit or economic downturn.

The scale of the Credit “insurance” problem is astounding. According to the Bank of International Settlements, the OTC market for Credit default swaps (CDS) jumped from $4.7 TN at the end of 2004 to $22.6 TN to end 2006. From the International Swaps and Derivatives Association we know that the total notional volume of credit derivatives jumped about 30% during the first half to $45.5 TN. And from the Comptroller of the Currency, total U.S. commercial bank Credit derivative positions ballooned from $492bn to begin 2003 to $11.8 TN as of this past June. It today goes without saying that this explosion of Credit insurance occurred concurrently with the expansion of the riskiest mortgage (and other) lending imaginable. It’s got “counter-party fiasco” written all over it.

The stocks of Ambac and MBIA collapsed this week. I can only surmise that part of the selling pressure emanated from players caught on the wrong side of rapidly widening Credit default swap prices. Since these companies have limited amounts of bonds trading in the markets – in debt markets generally suffering acute illiquidity – those needing to hedge rising default risk in this industry had little alternative than to aggressively short the stocks. And the faster the stocks declined, the wider the CDS spreads and the more “dynamic” hedge-related selling required. This dynamic could play out throughout the financial sector and beyond. The “dynamic hedging” (shorting securities to offset increasing risk on derivatives written) of Credit risk today poses a very serious systemic issue.

The general inability to hedge escalating default and market risk has become and will remain a major systemic problem. Liquidity has disappeared, and there now exists an untenable overhang of risky securities and derivatives to be liquidated and/or hedged. Most playing in the Credit derivatives market lack the wherewithal to deliver on their obligations in the (now likely) event of a systemic Credit bust. The vast majority were “writing flood insurance during a drought, happy to book annual premiums while expecting to purchase reinsurance/hedge if and when heavy rains ever developed.” Well, it all happened at a pace so much faster than anyone ever contemplated. So abruptly, the flood is now poised to wreak bloody havoc the scope of which was unimaginable – and there’s no functioning reinsurance market.

Unlike this summer, this week saw the Credit crisis engulf the epicenter of the U.S. Credit system. Not surprisingly, the Fed rate cut only seemed to exacerbate market tension, with oil, gold and commodities spiking and the dollar faltering. Those arguing that the Fed needs to cut rates aggressively to avoid recession are disregarding the much higher stakes involved. There is today no alternative to a wrenching recession. The economy is terribly maladjusted, while the financial sector is at this point incapable of intermediating the massive amount of ongoing Credit necessary to keep this Bubble Economy inflated. Wall Street “structured finance” is today faltering badly, now leaving the highly vulnerable banking system with the task of sustaining the ill-fated boom. The least bad course for the Federal Reserve at this point would have a primary focus on supporting the dollar and global financial stability.

http://www.prudentbear.com/index.php?option=com_content&view=article&id=4812&Itemid=55

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by Robert McHugh

Because the U.S. Dollar Has Just Been Devalued by a Third Over the Past Five Years.

And more devaluation is coming. Perhaps another 50 percent. The markets are convinced that the Fed is going to drop rates again on Halloween by another half percentage point. This means hyperinflation, and all markets moved accordingly Friday. The Dollar hit a new low, at 77.00, and is worth 53 percent of what a Euro is worth. This is a massive currency devaluation right before our eyes. It means the cost of everything is going up, which the Master Planners figure will diminish the debt load as debt contracts are expressed in Dollars from the past that were worth more than they are now. Those debts can be paid back in the future with dollars that are worth less. But this thinking requires folks to get their hands on a greater quantity of these devauled dollars. This thinking is ludicrous, but reality.

When the Master Planners devalued the dollar over the past five years, they raised the cost of living for everyone. The Middle Class is getting annihilated from this silent event. Incomes are not keeping up. This was done because this administration “equates stock market success with economic success and has directed their efforts to drive up equities at literally any cost,” to quote one of our subscribers. This is pure fallacy as market declines are proven to be beneficial to Middle Class investors who use the safe, time-tested investing strategy of Dollar Cost Averaging (occurring in 401(k)’s for example), where stock market declines can actually accelerate wealth generation. All this administration has accomplished is to ensure that Wall Street Banking Firms continue to make huge profits. This is not to bash Republicans, as this was not the case under Republican Ronald Reagan.

M-3 remains hidden by the Fed, so that We the People can’t know what the Federal Reserve is up to, like supplying the PPT with money to buy markets. Where’s the transparency Ben? We continue to monitor the monster charted below — it tells you all you need to know about what the Fed has been doing with M-3:

The situation has deteriorated as we see a decisive break below the neckline. The Dollar could drop faster than perhaps anyone thought. The pattern is a Head and Shoulders top. These patterns are highly reliable. It is now a “confirmed” pattern, meaning prices dropped decisively below the neckline, below 80.00 to 77.00ish. This means the probability of the minimum target of 40.00ish being hit is great. Now that the Dollar dropped down to 77.00, we are in a high risk situation of a devaluation of the dollar all the way down to 40.00. Remember, this mess started with the Dollar at 120.00 five years ago. 40.00? Not all at once, but over the course of several years. Perhaps all at once, should the government elect to flat-out issue an edict that a dollar is now worth 50 cents. Would they? Maybe. Why? It is a way to repudiate half of all the debt in the United States. Why would they want to do that? Perhaps if a recession became a depression, or the risk thereof. Perhaps if Housing was to absolutely dive into the tank. It would be a way to relieve mortgage holders of a huge chunk of their obligations in lieu of mass foreclosures, and bailout financial institutions holding substantial portfolios of mortgage backed securities – IF households can get their hands on enough of these hyperinflated dollars.

However, the problem for the middle class, is will any of this monetary hyperinflation find its way into their checking or savings accounts? Will their incomes rise from this artificial economics policy? We don’t think much of it will. The Master Planners figure if they give the money to Wall Street, enough of it will trickle down to enough of the small folks on Main Street to alleviate widespread economic distress. But how can this happen if folks do not own the equities that this master plan requires folks to own? No, Wall Street will get richer and that is about it.

If the plan is to monetize our nation’s debt through extraordinary injections of money supply in exchange for Treasuries, if the plan is to support equities through injections of money into Plunge Portection Team Wall Street surrogates who then support stock prices, how does that help mom and pop with their debts? How does that help them pay for rising insurance premiums, and real estate taxes, and tuitions, and home repairs, and on and on? It won’t.

If the Master Planners are going to devalue the Dollar another third or by even half, they better figure out a way to get all those freshly printed dollars directly into the hands of households.

This is all extraordinarly good for precious metals, the HUI Gold Bugs index, and other inflation defensive assets. But will Main Street be holding enough of them to keep breath above water?

http://www.safehaven.com/article-8711.htm

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By ANNE D’INNOCENZIO

NEW YORK (AP) – The calculus of living paycheck to paycheck in America is getting harder.

What used to last four days might last half that long now. Pay the gas bill, but skip breakfast. Eat less for lunch so the kids can have a healthy dinner.

Across the nation, Americans are increasingly unable to stretch their dollars to the next payday as they juggle higher rent, food and energy bills. It’s starting to affect middle-income working families as well as the poor, and has reached the point of affecting day-to-day calculations of merchants like Wal-Mart Stores Inc., 7-Eleven Inc. and Family Dollar Stores Inc.

Food pantries, which distribute foodstuffs to the needy, are reporting severe shortages and reduced government funding at the very time that they are seeing a surge of new people seeking their help.

While economists debate whether the country is headed for a recession, some say the financial stress is already the worst since the last downturn at the start of this decade.

From Family Dollar to Wal-Mart, merchants have adjusted their product mix and pricing accordingly. Sales data show a marked and more prolonged drop in spending in the days before shoppers get their paychecks, when they buy only the barest essentials before splurging around payday.

“It’s pretty pronounced,” said Kiley Rawlins, a spokeswoman at Family Dollar. “It seems like to us, customers are running out of food products, paper towels sooner in the month.”

Wal-Mart, the world’s largest retailer, said the imbalance in spending before and after payday in July was the biggest it has ever seen, though the drop-off wasn’t as steep in August.

And 7-Eleven says its grocery sales have jumped 12-13 percent over the past year, compared with only slight increases for non-necessities like gloves and toys. Shoppers can’t afford to load up at the supermarket and are going to the most convenient places to buy emergency food items like milk and eggs.

“It even costs more to get the basics like soap and laundry detergent,” said Michelle Grassia, who lives with her husband and three teenage children in the Bedford-Stuyvesant section of Brooklyn, N.Y.

Her husband’s check from his job at a grocery store used to last four days. “Now, it lasts only two,” she said.

To make up the difference, Grassia buys one gallon of milk a week instead of three. She sometimes skips breakfast and lunch to make sure there’s enough food for her children. She cooks with a hot plate because gas is too expensive. And she depends more than ever on the bags of free vegetables and powdered milk from a local food pantry.

Grassia’s story is neither new nor unique. With the fastest-rising food and energy prices since the 1980s, low-income consumers are stretching their budgets by eating cheap foods like peanut butter and pasta.

Industry analysts and some economists fear the strain will get worse as people are hit with higher home heating bills this winter and mortgage rates go up.

It’s bad enough already for 85-year-old Dominica Hoffman.

She gets $1,400 a month in pension and Social Security from her days in the garment industry. After paying $500 in rent on an apartment in Pennsauken, N.J., and shelling out money for food, gas and other expenses, she’s broke by the end of the month. She’s had to cut fruits and vegetables from her grocery order _ and that’s even with financial help from her children.

“Everything is up,” she said.

Many consumers, particularly those making less than $30,000 a year, are cutting spending on nutritious food like milk and vegetables, and analysts fear they’re further skimping on basic medical care and other critical services.

Coupon-clipping just isn’t enough.

“The reality of hunger is right here,” said the Rev. Melony Samuels, director of The BedStuy Campaign against Hunger, a church-affiliated food pantry in Brooklyn.

The pantry scrambled to feed 5,000 new families over the past 12 months, up almost 70 percent from 3,000 the year before.

“I am shocked to see such numbers,” Samuels said, “and I am really concerned that this is just the beginning of what we are going to see.”

In the past three months, Samuels has seen more clients in higher-paying jobs _ the $35,000 range _ line up for food as the fallout of the subprime mortgage woes takes hold.

The Regional Food Bank of Northeastern New York, which covers 23 counties in New York State, cited a 30 percent rise in visitors in the first nine months of this year, compared with 2006.

Maureen Schnellmann, senior director of food and nutrition programs at the American Red Cross Food Pantry in Boston, reported a 30 percent increase from January through August over last year.

Until a few months ago, Dellria Seales, a home care assistant, was just getting by living with her daughter, a hairdresser, and two grandchildren in a one-bedroom apartment for $750 a month. But a knee injury in January forced her to quit her job, leaving her at the mercy of Samuels’ pantry because most of her daughter’s $1,200 a month income goes to rent, energy and food costs.

“I need it. Without it, we wouldn’t survive,” Seales said as she picked up carrots and bananas.

John Vogel, a professor at Dartmouth College’s Tuck School of Business, worries that the squeeze will lead to a less nutritious diet and inadequate medical or child care.

In the meantime, rising costs show no signs of abating.

Gas prices hit a record nationwide average of $3.23 per gallon in late May before receding a little, though prices are expected to soar again later this year. Food costs have increased 4.5 percent over the past 12 months, partly because of higher fuel costs. Egg prices were 44 percent higher, while milk was up 21.3 percent over the past 12 months to nearly $4 a gallon, according to the Bureau of Labor Statistics.

The average family of four is spending anywhere from $7 to $10 extra a week _ $40 more a month _ on groceries alone, compared to a year ago, according to retail consultant Burt Flickinger III.

And while overall wage growth is a solid 4.1 percent over the past 12 months, economists say the increases are mostly for the top earners.

Retailers started noticing the strain in late spring and early summer as they were monitoring the spending around the paycheck cycle.

Wal-Mart and Family Dollar key on the first week of the month, when government checks like Social Security and public assistance generally hit consumers’ mailboxes.

7-Eleven, whose customers are more diverse, looks at paycheck cycles in specific markets dominated by a major employer, such as General Motors in Detroit, to discern trends in shopping.

To economize, shoppers are going for less expensive food.

“They’re buying more peanut butter and pasta. And they’re going for hamburger meat,” Flickinger, the retail consultant, said. “They’re trying to outsmart the store by looking for deep discounts at the end of the month.”

He said the last time he saw this was 2000-2001, when the dot-com bubble burst and the economy went into a recession after massive layoffs.

For now, low-price retailers are readjusting their merchandising and pricing.

Wal-Mart is becoming more aggressive on discounting. It announced Thursday it is expanding price cuts to 15,000 items, ranging from Motts apple juice and Progresso soups to women’s fleece tops, heading into the holidays.

Family Dollar, whose food offerings were limited to candy and snacks until two years ago, has expanded its mix of groceries like fruit cups, cereal and such refrigerated items as milk and ice cream while cutting back on shoes. This summer the chain began accepting food stamps.

Food pantries are also getting creative. Samuels said her church, Full Gospel Tabernacle of Faith, just started offering free cooking classes to teach clients who are diabetic or have other health conditions how to prepare vegetables like squash. It’s also offering free exercise classes.

“We are trying to make them health conscious,” Samuels said. “It’s not right to give them just anything. Our mantra is eat well and live well.”

http://dailynews.att.net/cgi-bin/news?e=pub&dt=071019&cat=news&st=newsd8scetqg0&src=ap

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By Mary Anne & Pamela Aden

Gold is glittering, soaring more than $100 since mid-August, to a new bull market high and to its highest level since January 1980. The six year bull market is strong and solid.

Crude oil, platinum, lead and wheat have been even more impressive, reaching record highs. Lower interest rates have given the commodity markets a boost. A mega rise is underway and it’ll likely last for years.

REASONS WHY GOLD AT NEW HIGH

Weak Dollar

The most obvious reasons why gold surged higher is due to the falling dollar. The dollar index fell to a record low when the Fed cut interest rates, which helped push gold up sharply. If the Fed continues lowering interest rates to ward off a slowing economy, this could cause gold to soar as the dollar falls further.

Lower rates this year could spur other world central banks to do the same and if so, it could also boost demand for gold as an alternative to all currencies.

Uncertainty & Crisis

Once again, an economic crisis caused gold to rise. An unsound financial system with monster deficits is good for gold. Easy money is good for gold. The world is slowly moving out of the dollar, which is another plus for gold. Tensions in the Middle East are good for gold. Basically, gold rises during times of uncertainty and crisis and that’s currently what’s happening.

Inflation fears have also pushed gold up. The record high in oil and other commodities is helping to fuel these fears, which are unlikely to end any time soon.

Growing Demand

Demand for gold is growing rapidly, which is also bullish. Gold buying in Asia and India is up sharply. Our good friend Brien Lundin says that India expects demand this year to be 50% above last year’s levels. That goes along with the idea that
India’s growth is following China’s.

Physical demand from the West is robust as well, based on the massive buying in the gold exchange traded fund (GLD). Plus, some central banks have been buying, and the Fall is a strong holiday demand season when the gold price tends to rise.

GOLD’S BULL MARKET

There are several ways we’ve been measuring gold’s bull market.

When gold first turned bullish in August 2001, we identified steps for the new bull market. The steps began to develop as the 1999 and 1990-96 prior peaks were surpassed.

The big moment for the bull market was when gold broke above the $500 level in December, 2005. This took gold into the fourth and final step, which is where it’s been trading since then. This reinforced that the bull market was solid.

With gold now at levels last seen in 1980, gold is on its way to completing this step. Once it rises above $850, the fourth step will be complete and that’ll be the next big milestone. Gold will be at a record high and it will then enter a new super strong bull market phase.

Gold has been a great investment. It’s up nearly 200% since 2001 and it’s up 20% so far this year. Even so, gold could still go much higher. Within gold’s big picture, the mega bull market is still young.

GOLD TIMING: On track

Over the past year, many investors worried that the bull market was about over. Six years, as the thinking went, was a long time for a bull market to last without a decent correction.

This could be a legitimate concern but all bull markets crawl a wall of worry. Most important, gold has stayed solidly above its 65-week moving average since August, 2001. This means gold’s trend is up and it will stay up above this average now at $653. This is a simple yet very effective way to stay invested with the major trend.

Within this uptrend gold has intermediate highs and lows, which is where our timing indicator comes in (see Chart 3B). This chart helps identify when gold in at an intermediate high or low level and what’s likely to occur next.

For now, gold’s been rising in what we call a C rise since June 27. Gold held firm in mid-August when most markets fell and it’s now at a new bull market high, reinforcing that this is a strong C rise, which is very important.

Remember, C rises in a bull market tend to be gold’s best intermediate rise when it moves up to a new bull market high, and that’s been the case since 2001. So the current C rise has essentially completed its purpose.

If gold now continues on to test or surpass its record high, then this C rise will become spectacular. But if it ends and stays below $850, that’s okay too. Keep an eye on $700 this month as gold will remain strong in a C rise above that level.

http://www.kitco.com/ind/Aden/oct182007.html

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by Gary Dorsch

For the past five years, the official mantra of the US Treasury has been a “strong dollar is in our nation’s interest,” while at the same time reminding traders that “currency values should be set in a competitive marketplace based on underlying economic fundamentals.” Most traders interpret that riddle to mean the US Treasury favors an “orderly devaluation” of the dollar, and won’t intervene to support the greenback as long as its descent doesn’t turn into a nasty rout.

The US dollar has lost more than a third of its value against the the Euro since 2002, and half its value against the Brazilian real. The latest blow to the “strong dollar mantra” occurred on Sept 18th, when the Bernanke Fed slashed the fed funds rate by a larger than expected 0.50% to 4.75%, knocking the US$ Index below the psychological level, and to its lowest level in 15-years.

US Treasury chief Henry Paulson is focusing on booming US exports, which rose to a record $138 billion in August, up 38% from five years ago. A weaker US dollar also inflates the earnings of S&P 500 companies, which earn roughly 44% of their revenue from overseas, mostly in Euros. And Mr. Paulson, the commander and chief of the “Plunge Protection Team,” aims to offset weaker US homes prices with an inflated stock market to keep the US economy from slipping into recession.

But the Bernanke Fed’s rate cut to 4.75% also ignited double-digit price increases for agricultural and energy commodities around the globe, and lifted gold 18% higher to $765 /oz, it’s highest in 28-years. The price of West Texas Sweet crude oil has increased by $19 per barrel since Mr. Bernanke began to flood the world with cheap US dollars. Soybeans have climbed 25% to $10 per bushel. Thus, Fed rate cuts, designed to bail out Wall Street brokers and bankers translates into sharply higher food and energy costs for the US and global consumers.

Foreign investors are rapidly losing faith in the Bernanke Fed and its cheap dollar policy, and dumped a net $163 billion of US securities in August, a record outflow. Net sales of long-term securities such as bonds, notes and equities hit an all-time high of $69.3 billion. Foreign central banks unloaded a net $29.7 billion of Treasury bonds in August compared with net sales of $6.9 billion in July.

Japan was a net seller of $24.8 of Treasuries, and China trimmed its holdings to $400.2 billion in August from $409 billion in July. Foreigners also sold $40.6 billion in US equities, a sharp reversal from net purchases of $21.2 billion the prior month. Foreigners are convinced that Mr. Bernanke has just begun a rate cutting campaign that can drive the dollar sharply lower, and are shifting their capital elsewhere.

While foreigners have nightmares about Mr. Bernanke’s control over the US money supply, which is expanding at an explosive 14.7% annual rate for M3, its fastest in history, the Bundesbank is warning that it’s too early to write off the chance of further tightening in Euro-zone interest rates. The European Central Bank has left its repo rate on hold for the past three months, but is now telegraphing a rate hike to 4.25% sometime in the fourth quarter.

“Risks to price stability are on the upside and, I would add, that they been have augmented in early September. We will do what is necessary to counter these risks. It is too early to dismiss the need for a future monetary policy response,” warned Bundesbank chief Axel Weber on Oct 18th. “Monetary policy has to do what is necessary to guarantee price stability. In a phase of robust growth around potential with little spare capacity, monetary policy no longer needs to support the economy, but instead should focus on risks to price stability,” Weber declared.

The US$’s interest rate advantage over the Euro has shrunk from +240 basis points a year ago to +37 basis points today, based on their respective six-month Libor rates. The shift in interest rates differentials in the Euro’s favor has lifted Europe’s currency from $1.260 in June 2006 to $1.430 today, a record high. The Bundesbank understands that higher food and energy prices are inflationary, and is ready to combat strong money supply growth in Europe with a tighter monetary policy, even at the expense of slowing down the local economy.

The US dollar fell to a seven year low of 1.785 Brazilian reals, after Brazil’s central bank kept its overnight Selic lending rate unchanged at 11.25% on Wednesday, pausing for the first time after 18 consecutive rate cuts. The Bank of Brazil has cut its Selic rate by 8.5% since August 2005, but has been unable to arrest the slide of the US dollar. The central bank intervenes regularly in the foreign exchange market to buy US dollars, boosting its FX reserves by $112 billion since January 2006.

The Bernanke Fed’s rate cut to 4.75% ignited a big increase in global commodity prices, which can boost Brazil’s exports and its currency. The local economy grew 5.4% in the second quarter from a year earlier, and exports in the first half of this year were $73.2 billion, up 20% from the year earlier period. The Bank of Brazil left its Selic rate unchanged at 11.25% due to higher inflation, which hit 4.15% in September, just below the bank’s 4.5% upper target.

The US dollar appears to be sliding in a bottomless pit in Brazil, and another round of Fed rate cuts would make Brazil’s high interest rates more attractive. Carry traders who borrow funds in Japanese yen to buy assets denominated in higher yielding currencies such as the real, have plowed money into the Bovespa Index, which is up 41% so far this year.

http://www.financialsense.com/Market/wrapup.htm

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Alex’s Notes: Been talking about this for a while now, looks like its starting to happen.

As more and more governments wake up to whats going on and come to the realization that we will never stop inflating until this thing is a smoking train wreck, they will bail out of dollar backed securities and head for safer ground, such as energy, basic materials, and yes, I am saying it again, Gold and Silver.

——————————–

US August net foreign long-term securities purchases -69.3 bln usd
Tue, Oct 16 2007, 13:44 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) – Foreign money invested in US securities fled the US in August when market volatility was high, led by foreign government sales of Treasury bonds and private investor equity sales, the Treasury Department reported.

Net foreign long-term securities purchases amounted to minus 69.3 bln usd in August, an outflow of foreign capital that followed three months of declining capital inflows.

Small foreign purchases of short-term securities were not enough to make up the difference, as total net foreign capital purchases were minus 163.0 bln usd in August. The large net outflow followed a net inflow of 94.3 bln usd in July.

Some economists were expecting around 60-70 bln usd in new capital inflows in August.

Net official long-term purchases were minus 24.2 bln usd in August, which mostly reflects net foreign government purchases of minus 29.7 bln.

Private foreign investor purchases of US equities were minus 39.0 bln usd for the month. However, private investors loaded up on Treasury bonds, creating a net inflow of 27.1 bln usd. Still, net private investment in long-term securities were minus 10.6 bln usd for the month.

Foreign holdings of short-term dollar securities rose 33.9 bln usd after a net gain of 56.2 in July. Net Treasury bill buying was 21.0 bln usd compared with net buying of 18.6 bln in July.

Most of the T-bill buying in August came from private investors, with foreign governments buying 3.8 bln usd worth of Treasuries in the month.

Chinese holdings of Treasuries fell sharply by 8.8 bln usd in August, and Japanese Treasury holdings fell by 24.8 bln usd.

The Treasury holdings of oil exporting countries remained unchanged, while Caribbean banking centers dramatically increased their holdings by 33.1 bln usd.

http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=22ec649c-cba0-42f2-878c-397b557c8582

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Alex’s Notes: This is just an excerpt, found the rest of the article a bit dry. There is a link at the bottom if you want the original. This clip has some good stuff in it though.

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Ludwig von Mises (1881-1973 ) was a notable and highly respected economist and a major influence on the modern libertarian movement. He has been called the “uncontested dean of the Austrian School of economics”. The Ludwig von Mises Institute is named after him. The Ludwig von Mises Institute is a libertarian academic organization engaged in research and scholarship in the fields of economics, philosophy and political economy. It generally advances a view of government and economics expressed by Ludwig von Mises. The Institute is funded entirely through private donations and does not consider itself a traditional think tank. While it has working relationships with individuals such as U.S. Representative Ron Paul and organizations, it does not seek to implement public policy and has no formal affiliation with any political party (including the Libertarian Party), nor does it receive funding from any. The Institute also has a formal policy of not accepting contract work from corporations or other organizations.

Von Mises believed that significant credit expansion created business cycles. He continually warned of the dangers in inflation which can lead to hyperinflation and of the importance of governments and central banks not resorting to massive credit creation and the printing presses in order to prolong an artificially induced economic boom.

“The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things that are used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It happened with the dollar in 1973. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”
–Ludwig von Mises, The Theory of Money and Credit

http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=2441

by Greg Silberman
October 12, 2007

The US Dollar has lost 65% of its value against the Euro over the last 7 years. It’s no coincidence that a massive Hedge Fund industry has risen in its wake.

There are around 8,000 hedge funds globally managing over 2.5 trillion Dollars. All of them placing bets on global markets. Betting the market will rise, will fall, will do nothing. The vast majority are long-only which means they benefit from a rising market.

The underlying trend behind this level of speculation – the likes of which the world has never seen – is the fear of the worlds reserve currency, the US Dollar, becoming worthless. The fear of an outbreak in hyperinflation and a repeat of The Nightmare German Inflation of the 1920s (exceptionally well documented in the linked article by Scientific Market Analysis, 1970).

During the German Hyperinflation, the entire economy switched from production to speculation. In an effort to protect against a collapsing paper currency, people put their energy into speculating in things as opposed to building or producing.

As we mentioned in Using Commodity Prices as an Inflation Calculator the fact that Corn prices are at 35-year highs is a sign that inflation is boiling up from beneath the surface and the proliferation of hedge funds indicates they are the speculative vehicle of choice.

The sole question on this analysts mind as to high the speculative frenzy will go is how low the US Dollar will fall?

Chart 1 – US Dollar vs Euro

This dramatic chart shows the US Dollar versus the Euro. The Dollar has only recently broken major support below 0.60 (60 Euro cents to a Dollar). This has caused a break below a humongous multi year head and shoulders pattern. The technical target is 40 cents or 33% lower. A HUGE destabilizing move for the US Dollar lies ahead.

As in the Weimar Republic, the speculative fever today will continue to build as the US Dollar falls. That is, money will flee from devaluing cash into anything that will hold or increase its value namely Stocks with Gold and Oil Stocks outperforming. Based on the above analysis this is still quite a way away. The level and magnitude of speculation will be simply breathtaking. In the interim, the already large amount of Hedge Funds and Asset Management companies will continue to grow as will their assets!

http://www.financialsense.com/fsu/editorials/silberman/2007/1012.html

Alex’s Notes: I find it interesting to note, that the history of the word inflation, and where it seems to be headed, dont add up.

No, inflation is not prices going up, although that is a symptom.

No, inflation is not interest rates changing, that again, is a symptom.

Inflation, has always been, and always will be, adding more money supply to the economy (not by earning it, but in our current economy by printing it and ‘creating it out of thin air’).

The current ‘definition creep’ that you can see by looking up the word,is, in my opinion, nothing more than another attempt to continue dumbing down America. A stupid and uneducated people, are an easily controlled people.

Wikipedia: Inflation is measured as the growth of the money supply in an economy, without a commensurate increase in the supply of goods and services. This results in a rise in the general price level, as measured against a standard level of purchasing power.

Dictionary.com: Inflation: Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.

Why is this important? Because it serves to distract people from the problem: the fact that the Government is completely out of control printing money till the presses smoke and destroying the buying power of our dollars.

Then people scratch their heads and wonder why the value of the dollar is plummeting?

Supposedly well versed analysts who are reporting on our financial markets do not know what it means either:

Real inflation, a sustained rise in the general price level, is due to an excess supply of money — too much money chasing too few goods. Responsibility for inflation, therefore, must rest with the People’s Bank of China, not with the price of pork.

While this writer is partially correct, he is still missing the point that inflation IS an excess supply of money, not the prices going up.

To the point of the entry, China and other seemingly well to do economies are also suffering massive inflation.

There are many who feel that a good strategy to hedge against this rapid devaluation of the US Dollar is to move it into other currencies. This brings an image to my mind that Simon Heapes of Anglo Far-East shared with me:

“There is a big ship in the middle of a bunch of other ships, they all have holes in them and they are all sinking, and the rats are jumping from ship to ship trying to figure out which one isnt going to sink.”

While this may make some profits if done as trades in the short term, in the long term, every major currency in the world continues to inflate and will ultimately fail as history has shown, over and over. Another argument for why Gold and Silver are the true hedge and investment right now.

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When the 17th National Congress of the Communist Party of China convenes Monday, President Hu Jintao will be confronted with some serious challenges. Foremost will be to ensure steady economic growth and price stability.

Inflation is now at a 10-year high, reaching 6.5% (year over year) in August as measured by the consumer price index. Actual inflation is probably much higher given the defects of the CPI, which does not accurately reflect the consumption pattern of the present market-oriented system.

Housing prices and other asset prices are increasing at double-digit rates, but housing is underweighted in constructing the CPI (it only accounts for 13% of the index, compared with more than 40% in the U.S.). Moreover, some consumer goods are still subject to price controls.

Full article on Investors dot com here.