Who’s responsible for the meltdown? The Federal Reserve

Gold has spiked over $950, a new high, while oil futures passed the $100 per barrel mark. The battered greenback has taken a beating, and yet, Fed chairman Bernanke is signaling that there are more rate cuts to come. The prospect of a global run on the dollar has never been greater.

The problem far exceeds the Federal Reserve's paltry increases to the money supply or Bush's projected $168 billion “surplus package”. Capital is being sucked out of the system faster than it can be replaced which is apparent by the sudden cramping in the financial system and a more generalized slowdown in consumer spending.

An article which appeared on the front page of The Financial Times [but not in the US media] illustrates how hard-pressed the banks really are: “US banks have been quietly borrowing massive amounts of money from the Federal Reserve...$50 billion in one month”.

The present troubles originated at the Federal Reserve and, ultimately, they are the ones who are responsible for the meltdown. The Fed refused to perform its oversight duties because its friends in the banking industry were raking in obscene profits selling sketchy, subprime junk to gullible investors around the world. They knew about the “massive off balance-sheet positions” which allowed the banks' to create mortgage-backed securities and CDOs without sufficient capital reserves. They knew it all; every last bit of it, which simply proves that the Federal Reserve is an organization which serves the exclusive interests of the banking establishment and their corporate brethren in the financial industry.

[Excerpt of an article by Mike Whitney, Counterpunch]

300 Days to Create a Trillion Dollars

Last August, the near meltdown of the Sub-Prime Mortgage Markets led to a panic sell-off of stocks which quickly became a worldwide liquidity crisis. In response, an unprecedented $400 billion dollars was created at the press of a few computer keys to save the entire financial system from a wipe-out, followed by the Federal Reserve lowering interest rates by one-half a percent.

What is the root cause of the dollar crisis? The single leading factor destroying the value of the U.S. dollar is the law of supply and demand. The world has become flooded with paper dollars.

It took the U.S. government 354 years (1620 – 1974) to create the first $1 trillion dollars in circulation. It only took 300 days to create the last trillion dollars of paper money.

Somewhere there's a point of equilibrium where the demand for dollars by foreigners can no longer absorb the flood of the money supply. On that day, our country will no longer be able to pay its bills.

At the same time, everyone holding U.S. Treasury bonds, U.S. debt, or U.S. stocks may create a mad rush for the exits. In a panic sell-off, every single dollar outstanding could fall in value suddenly and dramatically. If you believe the U.S. dollar cannot fail, you'll be very surprised to learn that currency failures are not rare events. In fact, history is loaded with failed currencies around the world.

[Excerpt of an article by Michael Byrd, Austin Report]

The Decline of the American Empire

The notion that Washington had entered a "New American Century" -- a phrase used by the nationalist and neo-conservative unilateralists who championed the Iraq war -- seems largely to have gone the way of the dodo bird.

Yale Professor Paul Kennedy argued that the U.S. was falling into a familiar historical pattern where the combination of huge military budgets and ever-larger deficits led inevitably to the kind of "imperial overstretch" that transformed once-mighty empires into shadows of their former selves.

Washington Post neo-conservative columnist Charles Krauthammer exulted on [the American empire], "The fact is no country has been as dominant culturally, economically, technologically, and militarily in the history of the world since the Roman Empire."

What a difference five years and an invasion and bungled occupation of Iraq make! References to the Roman Empire at this point are more likely to refer to its decline than to its power.

"I’ve argued that not since the Roman Empire has anyone had such extraordinary power as the United States after the Cold War," says Donald Kagan, a dean of neo-conservatism. "But all of the elements of our strength are now being challenged, and it’s perfectly possible that we are seeing a relative decline in U.S. power that will prove lasting."

[Inter Press Services]

Iran forcing more Dollar Doldrums

Japanese investors are selling their dollars on the Tokyo Financial Exchange with worries about a recession in the U.S. economy.

The dollar also recently had its biggest weekly loss this year against the euro after Federal Reserve Chairman Ben S. Bernanke signaled he may cut interest rates further amid mounting concern that the economy is headed for a recession.

Iran, OPEC's second largest exporter, has already cut all of its ties with the greenback with respect to oil transactions.

And on Sunday, Iran established its first oil products bourse in a free trade zone on the Persian Gulf Island of Kish. Oil and petrochemical products will be traded in Iranian Rials, as well as all other hard currencies, the statement quoted Iranian Oil Minister Gholam Hossein Nozari as saying. About 20 brokers are already active in the market, it added.

As the fourth-largest oil producer in the world, Iran has a measure of influence over international oil markets. The country ranks second for output among OPEC Countries, and controls about 5 percent of the global oil supply. Tehran also partially controls the Persian Gulf's Strait of Hormuz, through which much of the world's oil supply must pass.

Now, the Organization of Petroleum Exporting Countries (OPEC), which supplies 40 percent of the global crude demand, plans to discuss a proposal by Iran and Venezuela to price oil in non-dollar currencies.

US subprime crisis costs global 7.7 trillion dollars

The meltdown in the US subprime real-estate market has led to a global loss of 7.7 trillion dollars in stock-market value [over the last 4+ months], a report by Bank of America showed Thursday.

The crisis, which has spread beyond US shores to banks and other sectors worldwide, is "one of the most vicious in financial history," according to Bank of America chief market strategist Joseph Quinlan.

Quinlan said in the report that the losses are worse than any in the past few decades, including Wall Street's Black Monday of 1987, the 1999 Brazilian real currency crisis and the collapse of hedge fund Long Term Capital Management in 1998.

"The current financial crisis is one for the record books and one, more ominously, not over yet."

[AFP]

Expensive Oil is far from being the Only Problem

"The greatest challenge to the world is not US$100/barrel oil. It's getting enough food so that the new middle class can eat the way our middle class does," says Donald Coxe, global portfolio strategist at BMO Financial Group, at the Empire Club's 14th annual investment outlook in Toronto.

The credit crunch and the reverberations of soaring oil prices around the world will pale in comparison to what is about to transpire. "It's not a matter of if, but when," he warned investors. "It's going to hit … hard."

The impact of tighter food supply is already evident in raw food prices, which have risen 22% in the past year. Wheat prices alone have risen 92% in the past year.

Mr. Coxe said the sharp rise in raw food prices in the past year will intensify in the next few years amid increased demand for meat and dairy products from the growing middle classes of countries such as China and India, as well as heavy demand from the biofuels industry.

With 54% of the world's corn supply grown in America's mid-west, the U.S. is one of those countries with an edge. But Mr. Coxe warned U.S. corn exports were in danger of seizing up in about three years if the country continues to subsidize ethanol production. Biofuels are expected to eat up about a third of America's grain harvest in 2007.

[Excerpt of article by Alia McMullen, Financial Post]

The Unexplained Broken Undersea Communications Cables

As the dollar plummets, the Gulf Oil producers’ dollar holdings are worth less and less.

Iran intends to open its own Oil Bourse this month that will trade in “non-dollar currencies”. An operational Iranian Oil Bourse, actively trading supertankers full of petroleum in non-dollar currencies, poses a great threat to the American dollar's continued dominance as the international reserve currency.

Oil-rich Gulf Cooperation Council (GCC) member states Bahrain, Kuwait, Qatar, Saudi Arabia and the UAE have set 2010 as the target date for adopting a monetary union and single currency.

The past week has seen a spate of unexplained, cut, undersea communications cables that has severely disrupted communications in many countries in the Middle East, North Africa and South Asia. According to CNN the first two cut cables “account for as much as three-quarters of the international communications between Europe and the Middle East.“

The news media initially advanced the explanation that the cables had been cut by ships' anchors. But on 3 February the Egyptian Ministry of Communications and Information Technology said that a review of video footage of the coastal waters where the two cables passed revealed that the area had been devoid of ship traffic for the 12 hours preceding and the 12 hours following the time of the cable cuts. So the cable cuts cannot have been caused by ship anchors, in view of the fact that there were no ships there.

Three things stand out about these incidents, several cables cut over a period of days:

All of them, save one, have occurred in waters near predominantly Muslim nations, causing disruption in those countries;

All but two of the cut/damaged cables are in Middle Eastern waters;

So many like incidents in such a short period of time suggests that they are not accidents, but are in fact deliberate acts, i.e., sabotage.

The evidence therefore suggests that we are looking at a coordinated program of undersea cable sabotage by an actor, or actors, … who have the technical capability to carry out clandestine sabotage operations on the sea floor, and who have exhibited a pattern of violently destructive policies towards Muslim peoples and nations, especially in the Middle East region?

Read full article by Richard Sauder

The Economy 101

During the final two decades of the twentieth century, the U.S. economy was the envy of the world. The dollar was the world’s dominant currency. Foreign central banks accumulated dollars as their main reserve asset. Commodities like oil were denominated in dollars, and emerging countries like Argentina and China linked their currencies to the dollar in the hope of achieving U.S.-like stability.

But as the century ended, so did this extraordinary run. Tech stocks crashed, the Twin Towers fell, and Americans’ sense of omnipotence went the way of their nest eggs.

The dollar is falling in value versus other major currencies and plunging versus gold. The whole world is watching, scratching its collective head, and wondering what has changed. The answer is that everything has changed, and nothing has. The spectacular growth of the past two decades, it now turns out, was a mirage generated by the smoke and mirrors of rising debt and the willingness of the rest of the world to accept a flood of new dollars. Like a family that has maintained its lifestyle by maxing out a series of credit cards, America is at the point where new debt goes to pay off the old rather than to create new wealth.

A quick scan of world history reveals them to be depressingly familiar. All great societies pass this way eventually, running up unsustainable debts and printing (or minting) currency in an increasingly desperate attempt to maintain the illusion of prosperity. And all, eventually, find themselves between the proverbial devil and deep blue sea: Either collapse under the weight of their accumulated debt, or keep running the printing presses until their currencies become worthless and their economies fall into chaos.

[Excerpt of book by James Turk and John Rubino]

Gold, the Shadow Currency

All great debt-ridden societies either collapse under the weight of their accumulated debt, as did the U.S. and Europe in the 1930s, or they keep running the printing presses until their currencies become worthless and their economies fall into chaos. This time around, governments the world over have clearly chosen the second option.

Now, what does a collapse in the value of the dollar mean for your finances? First, it hurts people on a fixed income, because the value of each dollar they receive plunges. Ditto for those who are owed money, because they’ll be paid back in less-valuable dollars (hence the disaster hitting many banks). Bonds, which are basically loans to businesses or governments that promise to make fixed monthly payments and then return the principal, will be terrible investments, since they’ll be repaid in always-depreciating dollars.

The only unambiguous winner is gold. For the first 3,000 or so years of human history, gold was, for a variety of still-valid reasons, humanity’s money of choice.

As recently as 1970, it was the anchor of the global financial system. And since the world’s economies severed their links to the metal in 1971, it has acted as a kind of shadow currency, rising when the dollar is weak and falling when the dollar is strong.

Not surprisingly, gold languished during the 1980s and ’90s, drifting lower as the dollar soared, and being supplanted by the greenback as the standard against which all things financial are measured. But now those roles are reversing. As the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system, and its value, relative to most of today’s national currencies, will soar.

[Excerpt of book by James Turk and John Rubino]