Quotable

“A year ago, at the height of the financial panic, the world yearned for a profitable and confident financial sector. It now has what it wants, but hates it. As joblessness soars and the hopes of hundreds of millions of people are blighted, the financial sector’s survivors are thriving. Even bonuses are back. Policymakers have made a Faustian bargain. Success feels like failure.” – Martin Wolf

……read more HERE.

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The next war will be fought in the global economy and on the foreign exchanges…

THE CLAIMS IN UK newspaper The Independent that “China, Russia, Japan & France are working with oil producers in the Middle East to permit currencies other than the US Dollar to be used to pay for oil,” has been strongly denied, writes Julian Phillips at the Gold Forecaster.

The newspaper reported that a range of currencies – to include the Japanese Yen, the Chinese Yuan, and the Euro, as well as the new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar – would form part of this ‘basket’, and The Independent’s report also mentioned Gold in this respect.

With the Chinese Yuan heading for one of the component parts of the Special Drawing Right in its next review by the International Monetary Fund, any such pricing basket for oil would also incorporate the US Dollar, but break the direct link between oil and the Dollar, a feature of the monetary world that has persisted for around 40 years now.

Russia and Saudi Arabia have denied this news already and it is likely that if there is any truth to the story it will not be publicized this way. However, it remains expected by the market eventually and because of this the Gold Price is moving through overhead resistance! The market may be discounting this development now. But if proved true – or if true now – the era of uncertainty and monetary instability will be exacerbated by this break, taking the Dollar’s prime support away from it and exposing it to the criteria that measures all other global currencies.

This accounting change would be bad for the Dollar and very, very positive for gold, we believe.

The weight of China’s growing power demands that the Yuan come onto the world monetary stage. The weight of its Dollar reserves (some $2 trillion) demands that the Dollar retain its buying power while being slowly eased to one side. The weight of China’s economic power (which still has a huge way to grow) demands that it issue the Yuan internationally and allow exchange rate forces to impact upon its exchange rate value.

With China’s Balance of Payments strength, the Yuan should rise, but if the Yuan were issued freely abroad, the market would not let it appreciate so much. So why are producers and consumers concerned about the Dollar oil price?

It is rapidly being accepted that the future points to the waning economic power of the US and the rising economic power of the East. For over 40 years, the oil price has been made in the US Dollar almost exclusively. With the US sitting with major economic problems and yet providing the globe with its reserve currency, the world is coming to realize that the global reserve currency should be independent of any single currency, particularly under one nation’s exclusive influence. But it is also true that any transition must be done slowly to allow the ‘departing’ currency to retain its buying power on the way down. This is the dilemma facing the world.

With the world running on oil, the world must run on the Dollar so long as it provides the sole price of oil. If there is to be an eventual new basket of currencies (whether under the umbrella of the IMF as an SDR or not), a lessening dependence on the Dollar has to follow.

Likewise, trade between two nations outside of the USA should be permitted in the currencies of those two countries, or perhaps via the ‘new’ global currency and not reliant on the Dollar. This would of course include oil, too.

The world cannot use the Dollar as the only oil currency if oil producers are to receive a well priced amount for a barrel of oil. The international power that the currency of oil brings is enormous! Should that power lie with a nation who is experiencing monetary problems? What is certain is that further global monetary changes must come. The story from The Independent, whether true or false, is saying what we are all thinking.

The longer the changes take, the greater the future currency uncertainty and greater the international frictions.

As to present realities? Russia is ready to consider using the Russian and Chinese national currencies instead of the Dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said last week. On Tuesday Russia and China agreed terms for Russian gas deliveries at a level of up to 70 billion cubic meters a year. China also imports oil from Russia.

“Energy companies, in particular Gazprom, have raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for the Yuan,” Putin said. The Russian prime minister said the issue would be addressed among others at a meeting of Shanghai Cooperation Organization finance ministers, who are to convene before the end of the year in Kazakhstan.

The real issue, however, if oil is not priced in the Dollar, is that the Dollar’s exchange rate value will drop like a stone. This is because a large proportion of US Dollars is used in oil transactions by all countries. Oil producers need a strong Dollar to get the largest amount of income for their oil. If the Euro climbs 20% against the Dollar, oil becomes 20% cheaper in Europe. If oil were priced in a ‘basket’ of the world’s most used currencies, oil producers would find protection against one of those currencies weakness. So it makes sense to oil producers to receive other currencies on top of the Dollar.

As to an importing country whose currency is rising against the Dollar, the oil price they get charged drops, so reducing petrol’s cost. In many countries the local oil/petrol price is a very newsworthy item. Hence the exchange rate complication enters the world of commodities.

Yes, market forces will shove the Dollar price of an item higher if the Dollar falls, but many feel that the Dollar has no business in the formula at all. If the US Dollar is sidelined in global matters, international trade would be easier and the rest of the world not burdened with the ailments of the US currency. But it is also a power play. For a change of oil currency to take place, without monetary disturbance, it must take a long time together with a willingness, on the part of the US, to relinquish such power.

The concept of a world without one dominant superpower has always been a temporary situation, and one preceded or followed by war. In a world where economics and money dominate, the same principle applies. Whatever happens, uncertainty reigns until Pax Romana or Pax Americana, or any other Pax persists. The difference this time is that the war will be fought in the global economy and on the foreign exchanges.

In such a world, national monetary certainty is illusive. It is in this type of world that gold reigns supreme because it is trusted all the world over as being untied to any government. It is the currency that enemies can pay each other in.

So whether rumors are true or not, the environment in which they are taken, seriously defines their relevance. The concept of oil priced in currencies other than the Dollar will happen; it is simply a case of when. Meanwhile, it is time to get ready for that day – and possibly to an eventual five figure price for Gold – so long as governments will allow its individuals and institutions to buy and sell it freely.

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JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the “Gold World” over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

While all the talk at present is about economic corners turned and markets charging ahead, no one is paying much notice to an American economy deteriorating before our eyes. These myopic commentators seem to be simply moving past the now almost-universally held conclusion that before the crash of 2008, our economy was on an unsustainable course. If these imbalances had been corrected, then perhaps I too would be joining in the euphoria. But evidence abounds that we have not veered at all from that dangerous path.

Last week, the Bureau of Economic Analysis reported that consumer spending as a percentage of U.S. GDP has risen to 71%, a post-World War II record. This level is notably higher than other wealthy industrialized countries, and vastly higher than the levels sustained by China and other emerging economies. At the same time, our industrial output is contracting, our trade deficit is expanding once again (after contracting earlier in the year), and our savings rate is plummeting (after an early year surge).

The data confirms that government stimuli are worsening the structural imbalances underlying our economy. The recent ‘rebound’ in GDP is not resulting from increased economic output, but merely from the fact that we are borrowing more than ever. That is precisely how we got ourselves into this mess. An economy cannot grow indefinitely by borrowing more than it produces. Not only is such a course untenable, but the added debt ensures a deeper recession when the bills come due.

This soon-to-be-called depression will not end until the pendulum of consumer spending habits swings violently in the other direction. This will be a jarring change, but it is the splash of cold water that we need to return our economy to viability. I believe that consumer spending as a share of GDP will need to temporarily contract to roughly 50% of GDP, before eventually moving toward its historic mean of 65%. Such a move would indicate a restoration of our personal savings, a decline in borrowing and trade deficits, and an increased industrial output. That would be a real recovery.

In the meantime, the higher the spending percentage climbs, the more painful the ultimate decline becomes.

Consumers and governments must spend less so their savings can be made available to businesses for capital investments. Businesses, in turn, will produce more products and employ more people – increasing domestic prosperity. However, rather than allowing a painful cure to return our economy to health, the government prefers to numb the voting public with a toxic saline-drip of deficit spending and cheap money.

The primary factor that enables our government to peddle economic snake oil is the dollar’s unique role as the world’s reserve currency, and our creditors’ willingness to preserve its status. By buying up dollars and loaning them back to us through Treasury debt, productive countries give American politicians carte blanche to play Santa Claus.

Ironically, as foreign governments finance our spending spree, they are simultaneously scolding us for our low savings rate. At the recent G20 meeting in Pittsburgh, all agreed – including President Obama – that resolving the global economic imbalances was a top priority. By definition, this would require Americans to spend less and save more. However, with foreign central banks continuing to buy our debt, the President has shown no political will to encourage this change.

Normally, if politicians run up the government deficit, voters soon suffer the unpleasant consequences of higher inflation and rising interest rates. Yet, if foreign central banks keep supplying the funds, these consequences are indefinitely postponed. As a result, there is no need for American politicians to ever make the tough choices required to solve our problems.

Instead, the burden may fall squarely on the citizens of those governments doing all the lending. The conflict is that within the creditor states, a vocal minority actually benefits from this subsidy (owners of Chinese exporters, for example) while the overwhelming majority fails to make the connection. Thus, foreign politicians have the same incentives as ours to keep playing the game.

The bottom line is that foreign governments can lecture us all they want about the need for prudence but if they keep lending, we’ll keep spending. Any parent knows that if you give your child a curfew yet never impose any penalties when it’s violated, it will not be respected. My gut feeling is that foreign governments are tiring of our conduct and on the verge of finally imposing some discipline. That means the dollar’s days as the world’s reserve currency are numbered, and the days of American austerity are about to begin.

Peter Schiff

Peter Schiff, is Euro Pacific Capital’s president, and a renowned pioneer in the field of international investing for individual investors, leads a team of investment professionals and support staff dedicated to the highest levels of customer service, a team literally searching the world over for valuable investment opportunities.

Founded in 1980 and headquartered in Westport, Connecticut, Euro Pacific is a full service, FINRA-registered broker/dealer that has historically been recognized for its expertise in foreign markets and securities. Through its direct relationships with countless foreign trading desks, the firm’s clients are able to avoid the large spreads often imposed by domestic market makers of foreign securities, thereby substantially reducing overall transaction costs. See The Euro Pacific Advantage

“I’m buried monitoring the markets virtually 24/7 … checking every piece of news I can get my hands on … watching almost every tick up and down in the markets.

I’m running my cycle studies daily, studying the rhythms in each major market, and plotting them almost hourly to monitor them for any changes.

Having said that, here’s a quick update on what I’m seeing …”

….full article HERE.