Financial Sense

In Fraud We Trust

by Rob Kirby | January 9, 2009
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Amazing, isn’t it, how times have changed? Just [Wed.] this morning, President elect Barack Obama stood before microphones and television cameras and told the world that his administration was set to inherit an annual deficit of 1.2 TRILLION dollars. He went on to add that the fiscal 2009 amount did not even include “his” stimulus plan, rumored to be as much as an additional TRILLION dollars, reportedly geared toward infrastructure spending, would be required to “jump start” the U.S. economy.

If that wasn’t a big enough belly full – Mr. President elect stated that “Trillion Dollar Deficits” – for years to come – would be the norm.

Also on the 7th of Jan. 2009, the venerable FT reported the “failure” of a sovereign German bond auction:

German bond sale’s fate signals trouble ahead
By David Oakley in London
Published: January 7 2009 13:30 | Last updated: January 7 2009 20:45
A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.
The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.

So, can anyone tell me how Mr. President Elect, Obama, is going to raise some 2 TRILLION over the next year?

In a recent Bloomberg interview, former FOMC member and Fed St. Louis chief, William Poole, answered that question by suggesting that the Fed – itself in a state of internal conflict - will resort to outright PRINTING of money.

And that’s just the back-drop on the debt front.

How We Got Here?

The outline above is an abbreviated macro snapshot of where we are. Now let’s take a look at how we got here.

The most widely espoused view[s] of how we arrived at this juncture points to fraudulently conceived sub-prime mortgages. While I share the view that the whole sub-prime mortgage debacle was / is laced with fraud – I now question whether or not the importance of the whole sub-prime issue – as reported - might have been a canard, brought into the limelight to obscure other more insidious, mounting, geopolitical considerations. Let me explain:

Much of America’s economic woes in recent years have been rightfully or wrongly blamed on unfair and unbalanced trade, resulting from “currency manipulation” on the part of China. With their ‘cheap’ labor undercutting and dismantling American manufacturing capability, Chinese demand for finite natural resources – oil in particular – was creating bottlenecks and deep seated demand-push inflationary pressures. For the past 10 or so years, up until approximately the spring of 2008, the bleats for China to allow their currency to appreciate vs. the dollar - emanating from U.S. politicos - were deafening. It had long been argued that if China allowed their currency to appreciate it would a] - dampen China’s competitiveness in export markets allowing America’s balance of trade to correct, and b] – foster domestic Chinese demand by giving Chinese consumers the financial ability to consume foreign goods. At least this was – more or less – the official American position.

On July 21, 2005 – amid growing calls from American law-makers for punitive trade sanctions – China de-pegged their currency, the yuan-renmimbi, from its decade-old peg to the U.S. Dollar. What followed was a gradual appreciation of the Chinese currency:

The 20 % currency re-alignment which occurred from July 2005 – Spring 2008 had little effect and was obviously deemed “insufficient” in appreciably narrowing America’s burdensome Trade Deficit because Congress, on April 3, 2008 was prompted to and did take the following legislative action:

China Currency Manipulation Act of 2008
A bill to require the Secretary of the Treasury to take action with respect to currency manipulation by the People's Republic of China, and for other purposes. 4/3/2008—Introduced:
China Currency Manipulation Act of 2008 - Directs the Secretary of the Treasury to:
(1) make an affirmative determination that the People's Republic of China (PRC) is manipulating the rate of exchange between its currency and the U.S. dollar
(2) establish and report to Congress on a plan of action to remedy such currency manipulation
(3) initiate expeditiously bilateral negotiations with the PRC to ensure that it regularly adjusts the rate of exchange between its currency and the U.S. dollar in order to permit effective balance of payment adjustments and eliminate unfair competitive advantage in trade
(4) instruct the Executive Director to the International Monetary Fund (IMF) to use the U.S. vote to ensure that the PRC takes such action to achieve such goals.

Interestingly [or amazingly, perhaps?] introduction of this game changing legislation received zero coverage in the mainstream financial press. Just Google china currency manipulation act of 2008 for yourself and you’ll see.

Clearly, by introduction of this legislation, we can deduce that America’s crippling balance of trade deficit was being blamed squarely on China and the U.S. Secretary of the Treasury – Paulson – was instructed to put a stop to it.

China had clearly demonstrated that they were unwilling to make the necessary [large] and desired currency adjustment[s] to the yuan to level the balance of trade playing field so other measures needed to be taken.

Understand folks; from an American perspective, overwhelming Chinese export-led-growth was proving to be TOXIC to the maintenance of Global U.S. Dollar hegemony. From an American nationalist centric perspective – something [or perhaps anything?] had to be done to slow Chinese export led growth.

Has the Price of Oil Been Used as a Weapon?

Folks also need to understand that Russia’s economic resurgence in recent years has been virtually ALL energy led. With that in mind, everyone should remember that Russia’s current dispute with the Ukraine regarding Natural Gas involves the price the Ukraine pays Russia for its Nat. Gas. As reported in BusinessWeek:

Plans to Bypass Ukraine
The Czech Republic, which took over the rotating EU presidency on Jan. 1 and has its own tense relationship with Russia, called an extraordinary session of EU envoys on Jan. 5 to address the crisis. But few analysts expect the dispute to be resolved quickly. No talks between Gazprom and Naftogaz are scheduled. And Gazprom has increased the price it wants Ukraine to pay from $250 per thousand cubic meter to $450, compared to the $179.50 [or 5.08 per thousand cu. Ft. on the graph below] it paid in 2008. Ukraine says it can pay as much as $235, but only if Russia agrees to pay more in transit fees for sending gas to Europe. Gazprom argues that Ukraine's leadership has failed to forge a unified position so that it can approach the negotiating table with one voice.

So, now I ask you, is it unreasonable that Russia is asking one of its major customers – who rebuffed their historical Soviet relationship in favor of closer NATO ties - to pay ‘free market – DEMOCRATIC - rates’ for energy?

Looking at an historical price chart of Nat. Gas, we can clearly see that the wholesale price of Nat. Gas throughout 2008 fluctuated between 212.00 and 485.00 per thousand cubic meters:

On the other hand, it is the United States of America that has a well documented history of interfering with the free market prices of strategic commodities to suit their own imperialistic agenda:

1] - The United States engineered the fall of the Soviet Union in the 1980s by “rigging” the price of both crude oil and gold – strategic goods which the former Soviet Union “had to sell” to the West to feed their people:
“…Remember the 2nd prong in bankrupting the Soviets, reducing their Foreign Exchange income? The first step on that was to determine where the Soviets income mostly came from. It turned out to be Oil and Gold. Then Browne said that this is where the CIA came in, they in a very sophisticated manner went around the world and manipulated markets to drive down the price of both Oil and Gold. Remember where Oil and Gold were when Reagan took over? They were in the neighborhood of $30 a barrel and $500 an ounce. Both fell dramatically under Reagan. As Browne made this and other points I would look across the patio and look at Mrs. Casey and Al Haig and both would be nodding in agreement with Browne's points….”
2] - The London Gold Pool during the 1960s:
The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return. Under the terms of the Bretton Woods Agreement signed in 1944, France was legally entitled to do this. The drain on U.S. Gold became acute, and the London Gold Pool folded in April 1968. But the demand for U.S. Gold did not abate.
By the end of the 1960s, the U.S. faced the stark choice of eliminating their trade deficits or revaluing the Dollar downwards against Gold to reflect the actual situation. President Nixon decided to do neither. Instead, he repudiated the international obligation of the U.S. to redeem its Dollar in Gold just as President Roosevelt had repudiated the domestic obligation in 1933. On August 15, 1971, Mr Nixon closed the "Gold Window". The last link between Gold and the Dollar was gone. The result was inevitable. In February 1973, the world's currencies "floated". By the end of 1974, Gold had soared from $35 to $195 an ounce.

The United States of America continues their self-serving, fraudulent and surreptitious interventions in the global energy and precious metals markets today. It’s economic warfare. Maintenance of global U.S. Dollar hegemony requires this:

Was the price of oil purposely raised, buying “paper barrels” on NYMEX, along with an accompanying Fed Reserve orchestrated credit contraction to impair China’s global customers and hence their export growth? Empirically and factually, once this occurred, the price of crude oil then dropped precipitously [or was cut ruthlessly, perhaps?] – robbing posturing American un-friendly states [Russia, Venezuela and Iran] of required income when push came to shove?

Impending Whip-saw In Commodities

With commodities prices having fallen from their perches [actually, they were pushed] in recent months, a great deal of future and current output capacity of the extractive industries has been shuttered. One must wonder how well these industries will be able to respond to the upcoming deluge of dollars to be spent on infrastructure – which by nature is extremely demand intensive of the very things whose supplies are being curtailed?

Anticipate shortages and dramatically higher prices of key base-industrial-commodities going forward – likely to materialize in the second half of 2009.

Physical Metal – Fraud’s Achilles Heel

Some central banks (those of China, Russia, Iran and Venezuela) are actually buying physical gold to bolster their reserves. Perhaps you will take notice that countries that have a penchant for gold coincidentally are not viewed as America’s best friends. Ever wonder why?

Fondness for gold makes the dollar look bad. If you are America and are in the business of printing dollars to buy whatever you want, folks buying gold are raining on your parade, and if they do too much buying of gold, dollars can become worthless and not welcome in exchange for goods and services. (I would suggest that this is happening right now.)

JPMorgan Chase is the Federal Reserve in drag. It is Morgan Chase’s job to make sure that gold remains viewed as an unworthy means of wealth preservation, so that the biggest Ponzi scheme in the world stays viable — the U.S. government bond market.

Plunges of $200 in the gold market require FUEL.

JPMorgan Chase’s swelling of its gold derivatives book by $15 billion in three months [Q3 / 08] was undoubtedly the fuel. The implication here is that the Morgan Chase gold trader in the Comex pit “fireballed” the price of gold by selling dizzying amounts of paper gold [futures] over the period in question.

An incredible feat, in a world that is supposedly starved for capital, this institution somehow saw fit to take $15 billion in notional risk to short the living bleep out of gold.

Unless you live in a vacuum, you can only conclude that the Morgan Chase gold trader was INSTRUCTED to beat gold with a stick.

The instructors were Messrs. Paulson and Bernanke.

But in the end, just as physical shortages of staple goods – in the face of limitless money creation - will push prices higher; it will be the same where gold is concerned. This process is now underway with the fraudulent futures [paper] price of gold already decoupled from the cost of buying physical ounces. Continued fraudulent interventions only ensure that this sordid perversion ends sooner rather than later.

Copyright © 2009 Rob Kirby

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Rob Kirby | Kirby Analytics | Toronto, Ontario, Canada | Email

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