Wikileaks Discloses The Reason(s) Behind China's Shadow Gold Buying Spree

Wondering why gold at $1850 is cheap, or why gold at double that price will also be cheap, or frankly at any price? Because, as the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar's reserve status. Putting that into dollar terms is, therefore, impractical at best, and illogical at worst. We have a suspicion that the following cable from the US embassy in China is about to go not viral but very much global, and prompt all those mutual fund managers who are on the golden sidelines to dip a toe in the 24 karat pool. The only thing that matters from China's perspective is that "suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB." Now, what would happen if mutual and pension funds finally comprehend they are massively underinvested in the one asset which China is without a trace of doubt massively accumulating behind the scenes is nothing short of a worldwide scramble, not so much for paper, but every last ounce of physical gold...

Sol Sanders | Follow the money No. 82 -- India: a perfect storm

Posted by : rcwhalen

Post date: 09/03/2011 - 07:54

But largely ignored -- what with the dramatic Euro crisis and a threat of double-dip American recession – is the more important emerging economy, India, now slipping back into its...

Bloody September

Posted by: ilene

Post date: 09/02/2011 - 17:05

Evidence suggests that the conomy has already been in recession, mainstream conomist pundits continue to argue about whether the conomy will have a double dip or not. While they are trying to figure...

The Imminent Failure Of The Eurozone

Submitted by Econophile on 09/02/2011 15:31 -0400

This article originally appeared on the Daily Capitalist.

You know those movies with the bomb set to a timer ticking down to øø.øø where the sweaty hero nervously cuts one wire at a time while holding his breath and then at øø.ø1 he stops the bomb? Well Europe is like that except that the bomb goes off and kills everyone.

Our planet has a problem. Its leading economies, the U.S., Japan, and the E.U. are declining. That is, about one-sixth of the world's population is losing ground. These big economies are the ones that lead the rest of the world, including China. Countries like China, India, and Brazil, depend on the health of the big economies to keep buying their products and commodities so they can grow and generate wealth for their citizens.

What is especially concerning is the blow-up that is about to happen in Europe. It is not something that is happening "over there." In a world that is so interconnected financially and by trade, a sinking Europe is everyone's concern.

Their problems are much the same as ours with a twist. Their governments and central banks have also pursued reckless monetary and fiscal policies and now, effect is following cause. They have more or less followed the same policies as has the U.S., much to the same end. They spent large, engaged in Keynesian fiscal stimulus in a bailout attempt, ran up huge debts and deficits, and their economies are in decline.

The twist is the European Monetary Union (EMU), known as the eurozone. It is as if here in the U.S. there was no federal government and each state was truly sovereign, but there was a Federal Reserve Bank. Some states spend more than others, funding deficits by borrowing huge sums to support programs their citizens wanted. The profligate states want the Fed to buy their debt and float them loans created out of thin air, or otherwise they will go belly up and they will take down many states' banks. The responsible states know they will be stuck with the bill.

The EMU started on the idea that it would bind the EU closer. In essence it was a political decision rather than an economic decision. They passed a stern rule that said no state could run of deficits of more than 3% of their GDP. Except for Estonia, Finland, and Luxembourg, all countries, including Germany, now exceed the limit. Thus their politicians sacrificed fiscal probity for political gains.

They have hit the wall: Greece will soon default on their sovereign debt. On Tuesday, yields on one year Greek bills reached 60%. It is a sign that investors have no faith in the Greek government's ability to repay their debt.

The EU, ECB, and the IMF are trying to establish a European Financial Stability Facility (EFSB) in order to further bail Greece out. They have already pledged €110 billion and they are trying to put another package together of €109 billion. But Finland insists that Greece puts up additional collateral, which is not possible. Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland's contribution.

Greece has missed every fiscal target it or its saviors has had. They are trying to get their deficit down to 7.6% of GDP through more austerity measures, but it looks like they will miss again (est. 8.5+%). Basically they are asking the Greeks to do something they don't want to do, and they will no doubt take to the streets again in protest.

If they default, then that opens a can of worms. European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium's Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany's Commerzbank, it's about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks.

The International Accounting Standards Board (IASB) haswarned banks they need to write down, or mark-to-market, the Greek debt they hold. Whether they do or don't doesn't matter. The fact is that these banks are undercapitalized and in trouble. Their "stress tests" are a fiction. Liquidity is starting to shrink in their banking system because of these jitters. Rabobank, for example, said it is growing cautious about interbank lending – now limited to overnight loans. More banks are stepping up to the ECB window for funds. Overall, credit is starting to tighten. Nervous Greek depositors are withdrawing funds from their banks. Rich Greeks never trusted their banks.

In other words the Europeans have created a problem that they can't solve, easily at least.

Here are their alternatives:

1. Keep bailing out Greece, with the specter of Italy and Spain being the next target of market forces as EU economies cool off. This is not appealing to Germany and France who know their taxpayers will have to put up most of the money.

2. Have the ECB buy as much Greek debt as necessary to keep Greece afloat. The problem with that is inflation and the prospect that they may be setting a bad precedent for other countries.

3. Have the EU issue bonds guaranteed by individual countries, which again is mainly Germany and France. Same problem as No. 1. As Sarkozy said they don't wish to guarantee debt they don't control – the spenders have no incentive to curtail spending.

4. Opt for a fiscal union whereby Brussels controls spending and taxation. Or, at least, as Sarkozy and Merkel propose, coordinate their fiscal and tax policies and pass a balanced budget amendment in each country. Good luck with that. Chances: zero.

Which one of those policies will best satisfy these three necessary goals required to ameliorate the worst damage:

Remove the need for the ECB to buy bonds continually on secondary markets;

Ensure that troubled countries have access to financing;

Prevent the strong countries from being dragged down by the weak.

Which one of the above policies will prevent Greece from defaulting, will let the rich countries off the hook, will create enormous liquidity in the eurozone, and will bail out the banks?

The answer is the obvious one, the one that won't hit the taxpayers of the EU's powerful economies, that reduces the net effect of debt to sovereigns, that bolsters the reserves of nearly insolvent banks (at least on paper), and puts the problem off for another day. That would be solution No. 2— quantitative easing, or monetization of Greek debt.

It also lets the taxpayers of Germany, France, and Belgium, whose banks hold lots of Greek public and private debt, off the hook because Greece will be able to repay their obligations in devalued euros. That is, the taxpayers in those countries won't have to pay the tab to refloat their banks. Or, at least as big of a tab as if Greece defaulted.

This plan solves nothing except in the very short-term. The day after tomorrow, inflation will melt away much of the eurozone's sovereign debt as well as private debt, and savers will be robbed of their capital. Capital will be destroyed and consumed by price inflation. Their economies will continue to stagnate, unemployment will remain high, tax revenues will eventually decline in real terms, and they will again be facing the same problems they face today. There is no way to avoid it.

The EU faces an insolvable problem, but it is one they created. You can't have a monetary union without a fiscal union. At least when no nation is obligated to play fair. They either terminate the EMU or paper it over. There is no other practical fix, at least when economies of member states are declining. They are the poster child for the failure of Keynesian-Monetarist economics.

end

Deja Vu All Over Again: Total US Debt Passes Debt Ceiling... In Under One Month Since Extension

Submitted by Tyler Durden on 09/02/2011 16:27 -0400

Debt Ceiling

Remember when one month ago the US, to much pomp and circumstance, not to mention one downgrade, announced a grand bargain raising the debt ceiling from $14.294 trillion to something much higher, with a stop gap intermediate ceiling of $14.694 trillion, or $400 billion more. Well, as of today, or less than a month since the expansion, total US debt is at $14.697 trillion. Yep - the total debt is again over the ceiling, which means the US debt increased by $400 billion in one month. Score one for fiscal prudence. And while the total debt subject to the limit is still slightly less, at $14.652, one week of Treasury auctions and will be time for Moody's to justify again why the US is a quadruple A credit.

Awful August, Get Set for September

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Making privacy a crime: U.S. aims to track 'untraceable' prepaid cash cards.

Forget Irene: The Drought in Texas Is the Catastrophe That Could Really Hurt.

Consumer Confidence Lowest in Two Years

How the Economy Quietly Entered a Recession on Friday, and Why the GDP Predicts a Sub-Zero Nonfarm Payroll Number

Financial Crisis is Too Big For Developed World to Cope

Gold Rises, Shrinking Weekly Loss as Bernanke Offers No Fed Plan