My Dear Friends,
It is 6:45pm my time, and all emails received so far have been answered. If you did not get your answer by this time please resend your question.
What happens here will determine if $3500 or $12,400 is the next most important level of the gold price.
The near miss of 2009 is not behind us. It exists in 6 to 9 months after any candidate or new Fed Chairman screws with QE to infinity.
This is the predictable result of firing Bernanke and putting an end to QE to infinity either by cessation or by walking it down. To stop QE to infinity would put in the last Pillar of gold and now that means $3500 or $12,400. Romney advisors were bonkers to even get on this subject before they had the full picture. If the candidate did what he suggests he will do, there will be a total collapse of the Western world economies in 6 to 9 month. QE cannot be reduced or stopped because the horse is already out of the barn. Once starting QE you cannot retreat. It is victory or death of the economic process.
When something like this is published by our friends at the Council on Foreign Relations you know that it is a confirmation of what I have been telling you concerning the drop off in the US dollar as the currency of settlement choice. This is the key element to an explosion in currency induced cost push inflation, which is a form of hyperinflation. The Council on Foreign Relation calls this by another name so I anticipate no credit for having discussed this with you for ten years.
"Was Triffin’s endgame—sudden reserve diversification, or the act of foreign governments abruptly shifting their funds from dollars to other currencies—about to become a reality? If so, the likeliest benefactor was the eurozone. Prominent economists opined that the euro would become the world’s reserve currency by as early as 2015.3 Through the first half of 2009 global investors seemed to agree: net inflows into eurozone debt instruments—that is, the rest of the world’s purchases of eurozone bonds less euro-area purchases of foreign bonds—surged to record levels. The related plummeting of the dollar relative to the euro added to the fear that global investors were abandoning the center country."
How Dangerous Is U.S. Government Debt?
The Risk of a Sudden Spike in U.S. Interest Rates
Author: Francis E. Warnock
Publisher Council on Foreign Relations Press
Release Date June 2010
The dollar’s status as the world’s reserve currency has become a facet of U.S. power, allowing the United States to borrow effortlessly and sustain an assertive foreign policy. But the capital inflows associated with the dollar’s reserve-currency status have created a vulnerability, too, opening the door to a foreign sell-off of U.S. securities that could drive up U.S. interest rates. In this Center for Geoeconomic Studies Capital Flows Quarterly, Francis E. Warnock argues that a sell-off came close to happening in 2009. How the United States uses this reprieve will affect the nation’s ability to borrow for years to come, with broad implications for the sustainability of an active U.S. foreign policy.
In 1961, the Belgian economist Robert Triffin described the dilemma faced by the country at the center of the international monetary system.1 To supply the world’s risk-free asset, the center country must run a current account deficit and in doing so become ever more indebted to foreigners, until the risk-free asset that it issues ceases to be risk free. Precisely because the world is happy to have a dependable asset to hold as a store of value, it will buy so much of that asset that its issuer will become unsustainably burdened. The endgame to Triffin’s paradox is a global, wholesale dumping of the hcenter country’s securities. No one knows in advance when the tipping point will be reached, but the damage brought about by higher interest rates and slower economic growth will be readily apparent afterward.
For a long time now, the United States has seemed vulnerable to the fate that Triffin predicted. Since 1982 it has run a current account deficit every year but one, steadily piling up obligations to foreigners. Because foreigners have been eager to hold dollar assets, they have willingly enabled this pattern, pouring capital into the United States and financing the nation’s surplus of spending over savings. The dollar’s status as the world’s reserve currency has become a facet of U.S. power, allowing the United States to borrow effortlessly and sustain large debt-financed military commitments. Capital has tended to flood into the United States especially readily during moments of geopolitical stress, ensuring that the nation has had the financial wherewithal to conduct an assertive foreign policy precisely at moments when crises demanded it. But the capital inflows associated with the dollar’s reserve-currency status have created a vulnerability, too, opening the door to a foreign sell-off of U.S. securities that could drive up U.S. interest rates and render the nation’s formidable stock of debt far more expensive to service.
Late last year, this potential danger came close to becoming reality. Largely thanks to homegrown pressures, unrelated to Triffin’s dilemma, the world’s risk-free asset, the ten-year U.S. Treasury bond, was sagging. With sizeable budget deficits, the prospects of an ever-increasing amount of government debt, the end of the Federal Reserve’s crisis-driven program of accumulating Treasury bonds, and an uptick in inflation expectations, the ten-year Treasury yield increased by fifty basis points from 3.25 percent to 3.75 percent. And further increases were likely. Such increases would not only substantially raise the cost of future government borrowing, but would also threaten any recovery in housing and other interest-rate-sensitive sectors.
At the same time, moreover, foreigners seemed poised to drive U.S. borrowing costs higher. The dollar was falling sharply. Early in 2009 it fetched almost eighty euro cents in Frankfurt or Athens; by autumn it was worth sixty-seven euro cents. Foreign investors, who held more than half of the U.S. Treasury market, were getting nervous. Luo Ping, a director-general at the China Banking Regulatory Commission, summed up the angst:
"Except for U.S. Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option . . . . We know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do."2
Was Triffin’s endgame—sudden reserve diversification, or the act of foreign governments abruptly shifting their funds from dollars to other currencies—about to become a reality? If so, the likeliest benefactor was the eurozone. Prominent economists opined that the euro would become the world’s reserve currency by as early as 2015.3 Through the first half of 2009 global investors seemed to agree: net inflows into eurozone debt instruments—that is, the rest of the world’s purchases of eurozone bonds less euro-area purchases of foreign bonds—surged to record levels. The related plummeting of the dollar relative to the euro added to the fear that global investors were abandoning the center country.
But then began the eurozone phase of the global financial crisis. This has provided the U.S. government with a timely respite from both domestic forces and Triffin’s endgame. U.S. policymakers need to understand that this is not a reset, not a new beginning; it is a lucky break. How the United States uses this reprieve will affect the nation’s ability to borrow for years to come, with broad implications for the sustainability of an active U.S. foreign policy.
In what follows we will walk through the domestic pressures on U.S. long-term interest rates, the role of global investors, the respite provided by the eurozone crisis, and policy implications. The story will be told primarily through pictures. For those interested in the methodology used to measure foreign official flows and a more detailed perspective on U.S. capital flows, a box and appendix are also provided.
Domestic Pressures on Long-Term Rates
In the autumn of 2009 at least three factors were weighing heavily on U.S. Treasury bond prices, driving interest rates (or "yields") upward. Significantly, none of the three factors has diminished.
The first factor is the hangover from the financial crisis. On top of tax cuts and spending increases over the past decade, the stimulus spending and the decline in tax revenues resulting from the recession worsened the U.S. fiscal situation. The budget deficit reached 10 percent of potential GDP in 2008, and even the baseline Congressional Budget Office forecast, which implausibly assumes that Congress will allow various "temporary" tax relief measures to expire, has U.S. public debt skyrocketing toward 100 percent of GDP (Figure 1, left panels).4 Various economic theories provide a link from increases in either government debt (a stock figure) or budget deficits (a flow) and increases in interest rates, be it through the crowding out of private investment or through Keynesian increases in demand. Whatever theory one prefers, Thomas Laubach showed that for each percentage point rise in the projected deficit-to-GDP ratio, longer-term interest rates increase by about twenty-five basis points (or 0.25 percent); alternatively, each percentage point rise in the public debt-to-GDP ratio increases long rates by three to four basis points.5 Combining deficit (or debt) projections with the Laubach analysis, one might expect the fiscal situation to lead to a full percentage point (or even much greater) increase in long rates.
The second domestic factor exerting upward pressure on long rates is that demand from one source—the Federal Reserve—is likely to be scaled back. In 2009, the Fed purchased $300 billion in long-dated treasuries (Figure 1, right top panel). To the extent this put downward pressure on rates, the cessation of the Fed’s credit-easing policy might be expected to lead to higher long rates.
A third factor on the radar screen is inflation expectations. An increase in inflation expectations can have a one-for-one impact on long-term nominal interest rates. Longer-term inflation expectations (Figure 1, right bottom panel) have been on a post-crisis upward march, putting yet more upward pressure on long rates.
In the autumn of 2009, the one domestic factor that was pulling rates lower was anything but comforting: concerns about a potential double-dip recession. As the U.S. recovery has strengthened, this factor has grown less significant. The result is that the balance of domestic forces in the United States now points to higher borrowing costs for the U.S. government. Adding together the pressure from large deficits, the cessation of the Fed’s crisis-response policies, and rising inflation expectations, one might expect the ten-year Treasury rate to be at least one hundred basis points higher than it was a year ago. Oddly, and perhaps ominously, the actual ten-year Treasury rate at the start of June 2010 languishes at 3.4 percent, roughly unchanged from a year ago, implying plenty of room for an upward spike.
Jim Sinclair’s Commentary
John Williams tells the truth of statistics. Pay him his modest fee.
-October Jobs and Unemployment Numbers Were Not Credible, Artifacts of a Broken Reporting System and/or Direct Manipulation
-With Consistent Seasonal
Adjustments, October Jobs Gain Would Have Been About 117,000 Instead of 171,000
– October Unemployment: 7.9% (U.3), 14.6% (U.6), 22.9% (ShadowStats.com)
-M3 Annual Growth Picks Up Again"
Jim Sinclair’s Commentary
Tuesday one wins and the other loses. No matter who it is, we all lose.
No dog was hurt filming this video, just embarrassed.