The Crack-Up Boom series is exploring the unfolding �Indirect Exchange� (as detailed by Ludvig von Mises), that dollar holders will be using now to exit their holdings and eventually will be followed by all holders of fiat currency holdings, no matter which country is perpetrating the �fraud� of confiscation of wealth through the printing and credit creation process that all such monetary schemes evolve into. The �Crack-up Boom� will drive an inflationary global expansion to inconceivable heights over the coming years. Asset prices will skyrocket as people do what they always do when threatened; they will modify their behavior and do the things necessary for �SELF PRESERVATION� of their families, countries, economies and their wealth. Let's take a look at von Mises� description of the CRACK-UP BOOM once again:
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 which were 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 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. Thanks again, Ludvig.
Unfortunately, for us all this is now NOT an isolated currency policy as detailed in the last paragraph, because globally virtually �ALL� governments are pursuing this policy at this point in time. So first we will see the biggest offenders suffer from their hubris, AKA the �UNITED STATES�, and then it will rotate to all countries which follow such monetary policies. Public Servants always and every time have become Public Serpents, robbing their constituents to further their personal ambitions and collection of power and wealth.
Escape from the dollar
Over the last year and a half we have witnessed several attempts by the foreign holders of dollars stymied in their attempt to spend them as they wish. Distant in our memories but key to my observations are the �Dubai Ports World� and �Unocal� demagoguery by the Mandarins in Washington DC. In those instances Foreign dollar holders were �STIFFED� in their attempts to �SPEND� the dollars they had accepted in exchange for exports they had sent to the US. The �CRACK-UP BOOM� is one of the unintended consequences of that idiocy. These rascals in Washington really are economically challenged.
In the Dubai Ports World debacle, Middle East oil producers were looking to diversify their businesses into the ports business (managing and operating shipping ports). They were purchasing these business interests from a British port operator, who was an international port operator. The purchase had already been approved by �CFIUS� the US government agency which studies and approves such purchases in terms of national security. The acquirer of the US ports management operations was a company called Dubai Ports World, and was partially owned by the government of Dubai, a staunch supporter of the United States in the Middle East and a large purchaser of the US Treasuries that support the budget and trade deficits of the United States. Then the press got a hold of it, splashed it on the headlines and the Mandarins decided to show us their patriotism, the unintended consequences of which are a detriment to their future money printing plans. They painted the government of Dubai as �TERRORISTS� to the press. It couldn't be further from the truth, as anyone who has visited Dubai knows. It is an emerging, modern, western-oriented financial capital. NOWHERE in the Middle East is it safer and friendlier than Dubai for western businesses and people. They were prevented from spending their dollars.
The second incident was when CNOOC (Chinese national oil company) was attempting to purchase UNOCAL Oil Company in the United States. UNOCAL was a minor oil company with its principal reserves situated in �ASIA�. The demagogues roared once again, shouting how we couldn't surrender this national treasure to a foreign oil company which is partially owned by the government of CHINA. So CNOOC said OK, we will split the company up and only buy the ASIAN part of UNOCAL. This was not enough for the Mandarins. The company was sold to another domestic US oil company at a price that was far less than what had been previously offered. Once again, the government of China is a large purchaser of US treasuries and accepts those things called dollars for the things they produce. They were prevented from spending their dollars.
The common thing in both stories is that these foreign dollar holding entities had accepted dollars which they are fully aware are being printed like toilet paper, for their exports to the United States. They exchanged hard goods which could not be printed for �PAPER� ones, which could be and are. They then recycled these dollars into treasury bonds of which they are fully aware they will be paid back in dollars that are worth far less then the ones they were originally paid in. They even accepted the guaranteed confiscation inherent in them.
Then the United States Public servants decided to �CHANGE THE RULES�, from �Accept the paper and spend it how you wish�, to �Accept the paper and spend it only on treasury bonds.� OUCH! How could anybody in Washington expect this to be accepted? Don't they think? The answer is �No�. They only think about the next election; nothing else matters. But this stupidity has now come full circle and the �CRACK-UP BOOM� is the result.
The term �SMART MONEY� is not exclusive to the United States. It resides in the financial capitals around the world, in their central banks and in their financial communities. These counterparties to US trade sat up and said �Hummm, what are we going to do now?� Quietly, they rolled over. When you get into a fight it is important to do it at a time of your own choosing, with the battle plans firmly in place. Rather than dust it up then, they continued to accept dollars for their wares. Support the Mandarins in thinking they still had the power. Every day they had a little less power as they exported their wealth in ever-increasing amounts ($800 billion annually), and decided to push the envelope of irresponsibility by starting a war in IRAQ. A war that was supposed to cost 60 billion dollars has now morphed into a Trillion-dollar black hole of Capital. The printing presses were pushed into high gear and the deficits were moved off the books to hide the hideous nature of the monetary debasement. New entitlements were added in the prescription drug benefits, spending plans, earmarks and the federal budget began a trajectory that can only be described as VERTICAL. Remember the definition above? I quote: �They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs�.
But the �SMART MONEY� isn't called that by accident. These people are smart!!! So they devised the plans we are now seeing and recognizing in Asset markets globally. It is the �INDIRECT EXCHANGE� von Mises spoke about. They now have come to the conclusion that inflation is now moved into a higher gear. Foreign dollar holders don't vote, so the US government is DELIBERATELY pursuing a policy of higher inflation; fuduciarily sound monetary policy has been abandoned by the US treasury and the Federal Reserve. This irresponsibility is a result of the absence of spending restraint and sound fiscal responsibility of the public servants.
Private equity has also recognized this new reality (why do you think they can buy assets that return 4.5% and finance it at the same rate? It's because they are banking on government behavior in the face of the impossible bills the US government and consumer have incurred. They will print the money, the assets will reprice upwards and the borrowers will just pay back dollars which have been deflated by the printing presses) while the fruits of the companies they have purchased are just repriced higher. If you think asset prices of stocks (units of production), real estate, raw materials, precious metals, and energy are high now, just wait. Understand this: it’s only the first innings in the coming �MELT UP� in these asset prices. The coming �CRACK-UP BOOM�, combined with the excellent fundamentals of 3 billion people exiting from poverty and becoming middle classes, are the recipe for an orgy of higher prices. The biggest and smartest money in the world is just getting into position. When the dumb money realizes what's unfolding it’s the top of the process. We are not even close to that. It doesn't have a clue.
The acceleration in asset markets curiously accelerated right after those two above-mentioned episodes, and it is no coincidence. It is the smart money modifying their behavior in the face of the implied reneging on the dollar as a unit of exchange and store of value. It is indirect repatriation of dollars. Government investment corporations have been formed in every corner of the globe, gearing up for the coming exit through the �CRACK-UP BOOM�. And they haven't been proved wrong as the Hiding of M3 is the wolf attempting to cover its tracks; reconstructed M3 is reported at 14% growth, it is probably more!
The task of exiting is enormous. China, Japan and other Asian nations hold over $4.5 trillion dollars of foreign exchange reserves, and that doesn't count the money in private hands. The Middle East and Russia represent at least another 2.5 Trillion dollars: Central Europe and Switzerland have got to be at least another 5+ Trillion dollars. The definition of a Billion dollars is enormous and inconceivable; the definition of a Trillion is indefinable. This is a process that will take years or a decade, barring a debacle which is always possible when you are dealing with the irresponsible rascals that control the US government. Just think of all the �MATTRESS� money sitting in homes and small bank accounts around the globe, as these people held dollars as if they were a true store of value. That generational assumption is now false and this idea will die a very slow death.
NO ONE will yell �FIRE� in this process, so the Mandarins in Washington will always rest assured in their ignorance as no one challenges them publicly, but privately work as busy as beavers to effect the rescue of the wealth they have stored in dollars for as long as they can remember. One by one nations de-peg their currencies from the dollar and make them convertible. Currency controls are disintegrating - Russia has opened their currency to the world and no longer wishes to be paid in dollars for its exports; the Chinese Yuan is not far behind, I promise you. The flows into and out of China have to be �let go� by the Chinese authorities; they are uncontrollable. The law of unintended consequences says there might be more money wanting to get out of China than wants in at this point. What if the Yuan GOES DOWN? LOL. Central banks worldwide are de-pegging from the dollar: Syria and Kuwait are just the latest to do so.
Recently we have seen an all-out assault on the US and global bond markets; yields have backed up over 50 basis points in 4 weeks and peaked over 5.32% last week. A close look at the commercial and primary dealers� positions showed they were about to be �FRIED� by the marketplace. So the government did the predictable thing and bought the market to �SAVE� their handmaidens and the US financial system. They are sitting in front of a wave �SO LARGE� as to be almost comical in their belief they can control it. The US needs over 3 billion dollars of capital to arrive EVERY DAY just to stay even with respect to the budget and trade deficits. It is a classic �man versus nature� situation. My bet is on NATURE! Please explain to me how stocks can be on their highs and bonds on their lows? Stocks which had about 8% year over year profit growth in the 1st quarter, and are expected to have 5% growth in the 2nd quarter are on their highs! How can stocks be on their highs when earnings are crumbling?
The answer is provided by a recent missive by Greg Weldon�s money monitor (www.weldononline.com - this is an excellent effort and a must read for big money managers. Go there and subscribe; it will pay for itself in no time). Here's an excerpt:
"Between Agencies, Corporate Bonds, and Equities, foreigners made net cumulative purchases of $97.07 billion during the month of April. With that figure in mind, nearly $100 billion, we note:
"Total Net Foreign Purchases of US Treasuries ... $ 0.376 billion Yes, less than $400 million, or, less than HALF A BILLION. Out of $97.4 billion in "Net Domestic Securities Purchased", US Treasury paper constituted ONLY four-tenths of one percent of the total.
"There is NO fear. There is only excess USD liquidity that is flowing into everything EXCEPT the "low risk, flight-to-safety' sector ... the US Treasury market. Moreover, "Official Foreign Institutions" (ie: global central banks) were net BUYERS ... meaning ... private foreign institutions and investors were actually DUMPING US BONDS, and reallocating more heavily into equity purchases."
problematic ... and something NO ONE seems to be talking about, China
REDUCED their holdings of US Treasuries. Again ... the Chinese Central
Bank DUMPED US Bonds in April. Note:
"Chinese Holdings of US Treasury Bonds ... $414.0 billion, DOWN (-) $5.9 billion in the month, falling from $419.8 billion.
My take on these numbers is the �CRACK-UP BOOM� is unfolding as we speak and this is its fingerprints. Foreign dollar recipients are NO LONGER going to prop up the US fixed income markets by buying them endlessly. They are sending the US Congress an important message. Will they listen? They understand where the game is headed as the United States economy is faced with dealing with 70 trillion dollars worth of future obligations and must pay for it with an economy that is 13 trillion dollars in size but makes barely 3 percent growth if you believe the phony inflation numbers, and no growth if you believe the headline CPI (Consumer price index) and PPI (producer price index).
Anyone who invests based on the core numbers is insane, so you can call most of Wall Street insane, as this week's TERRIBLE CPI and PPI reports were heralded as demonstrating receding inflation based on the core numbers. Take a look at the latest CPI report:
Headline was reported at 7 tenths of 1 percent, an 8.4 percent annual rate. Notice the increase in prices of everyday items? The decreases are in seldom purchased categories, I know I don't regularly buy a computer, a new or used car, information technologies; hardware and services while used are used and purchased once, then set up and used for years. This is how they paint the numbers to FOOL YOU! I am definitely in the Dark blue regular purchase categories. How about you?
Analyst after analyst from the money center banks and big brokerages stepped forward on the financial news networks and pointed to the core numbers as evidence of receding inflation. These core numbers were put forth as the thought to why the market rallied explosively this week; inflation is tame so paper can go up. Keep the �PAPER GAME� going for their benefit at any price. It couldn't be further from the truth. Self preservation is beginning to emerge as these foreign central banks and private investors� plans are unfolding in the emerging �CRACK-UP BOOM�. They are buying stocks! Instead of buying UNOCAL or ports they are buying stocks, one share at a time; they are buying into private equity firms to avoid direct ownership of these productive assets. The CRACK-UP BOOM is being born!
Let's do some math: 13 trillion dollars making 3% a year is generating approximately 390 billion dollars a year in income. The Federal Debt that is officially recognized at about 9.5 trillion dollars at 5% interest requires 475 billion dollars of interest a year. This debt number does not include state, municipal and private debt obligations, which push the total owed to over 30 trillion dollars, so now the required debt service is 1.475 trillion dollars of interest owed. An economy making 390 billion dollars a year will take �HUNDREDS OF YEARS TO PAY OFF THIS AMOUNT OF DEBT�, even if the compounded interest payments are not added in. Anyone who really knows the extent of the unfunded liabilities knows the numbers above are very conservative.
There is no way you can make this math work; add in the unfunded entitlements and theft of Social Security and Medicare trust funds by the �PUBLIC SERVANTS� and there is only one conclusion you can come to! GET OUT. Why is the dollar not cratering? Because no one is going to yell �FIRE� in the theatre. They are not going to immediately try to exchange dollars for another currency; they can't! The dollar dwarfs the float in them all. They have to buy something that will just reprice in the disintegrating dollar. Stocks, real estate, fine art, anything that can’tbe printed by the public servant PIRATES.
The smartest of them (dollar holders) are going to quietly get out of their seats and head for the exits as quietly as they can and without confrontation with those brilliant boys and girls in Washington DC (mental pygmies, lawyers are economically illiterate). They are going to exchange all that �soon to be worthless� paper with someone who doesn't yet realize what the game is. They are going to seed their economies and buy exports from the US and send them home to themselves. Just as they exchanged paper for wealth during the US import and deficit spending boom, the process is just now going into reverse. Slipping the dollars back to the ultimate fools who elected the rascals. They are going to acquire raw materials, units of production called �STOCKS�, real estate, fine art, precious metals (who do you think is taking down the enormous G7 gold sales? Gold didn't go down, the game just went around a corner), energy holdings, �you name it� - assets of any stripe from anybody in the world who will still take a dollar for them.
They are going to do it as quietly as possible, and let the press shout the �GOOD NEWS� that the asset markets are �SKYROCKETING� higher to the public. Tell them the good news as their dollars are disintegrating in their bank accounts at the same rate. And let the sellers of the assets and the recipient of those things we call dollars worry about collecting from the US government.
The indirect exchange called the �CRACK-UP BOOM� von Mises talks about is unfolding before our very eyes. See it and turn it into an opportunity. It will take many years to reach its endgame. And if you people who hold your wealth in other currencies think you are safe? Think again, your central banks and financial authorities are just a step behind as they have embraced the American recipe in their own economies and monetary systems. There are dollar denominated debt bubbles now, but there will be debt bubbles in every country in the world before this is over. Only it’s much earlier in the game�.
In conclusion, the world's economies are going to explode with activity; 10 trillion dollars stands on the bid, new exports of dollars (800 billion of them every year, more than twice the total growth in GDP of 390 billion dollars) will be recycled just enough to hold up the American financial system. These recycled dollars will be supplemented by the buyer of last resort, �the Federal Reserve�, and the bills will be sent to the children of America in the form of Debt obligations to the �Federal Reserve� (Oh, what a surprise the US electorate is in for when they learn the Federal Reserve of the US is owned by foreign bankers and that they have been ENSLAVED in debt). Who brought them this wonderful banker? Their very own elected representatives and PUBLIC SERVANTS.
While the rest of the exported dollars are directed into assets and investments that can create and stand as a storehouse to wealth. The seed-corn of Globalization and capitalism. Those factories, assets, investments and their outputs will just reside in things that can be repriced as the inevitable printing presses eat away at the value of what we used to store our wealth in, called paper money and currencies. That is where wealth will be stored for the foreseeable future, jobs will be born, roads built, factories started, technology deployed and it will be purchased from the providers with dollars that reside around the world. �FINGERS OF INSTABILITY� will rise and fall with regularity. The only thing you must AVOID at any cost is the BOMB, er BOND market. How do we know its going to happen? Just look at history�s lessons. These themes are opportunities or pitfalls to you. You get to decide.
© 2007 Ty Andros