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The Dollar Pegs are Next
Posted on January 18, 2015 by Martin Armstrong
Dollar-Peg

The next crisis will be the currency pegs against the dollar. Here we have pegs from Hong Kong to the Middle East. We will have the same problem for as the dollar is driven higher, thanks to the implosion in the Euroland, these nations will import DEFLATION from a rising dollar. This will break their backs and force pegs to collapse around the world. Keep in mind that this will unfold probably after September 2015 and help to spiral the world economy into the worst depression in centuries. Start preparing for a rainy day.

These idiots are raising taxes when they should be lowering them as even Keynes suggested. Unfortunately, we are in a major crisis because of their insane mismanagement of the economy. There is nothing they will not steal. They are the type of people who are pocketing soap on the cart of the maid as they leave the hotel room. This level of corruption is turning into a feeding frenzy, which is our doom.

The rise in the dollar, will be the key to breaking the post-war economy. It was the flight of capital from Euroland into the Swiss that broke that peg. We will see in the months ahead the same crisis unfold in the Middle East and in Asia. This will be accelerated by the emerging economies who have issued $6 trillion in dollar debt since 2007. As the dollar rises, they will be forced into the same position as Greece – unable to pay their debts because the debt keeps rising in cost.

a recent update from gains, pains and capital.

China Just Threatened a Currency War If the Fed Doesn’t Stop Printing

The tension between Central Banks that we noted yesterday continues to worsen. This time it was China and the EU, not just Germany, that fired warning shots at the US Fed.

A senior Chinese official said on Friday that the United States should cut back on printing money to stimulate its economy if the world is to have confidence in the dollar.

Asked whether he was worried about the dollar, the chairman of China’s sovereign wealth fund, the China Investment Corporation, Jin Liqun, told the World Economic Forum in Davos: “I am a little bit worried.”

“There will be no winners in currency wars. But it is important for a central bank that the money goes to the right place,” Li said.

Speaking at the same session, French Finance Minister Pierre Moscovici voiced concern that the euro was becoming overvalued as a result of quantitative easing and other stimulus actions taken by other nations’ central banks.

“Certainly, the level of the euro is high and creates some problem,” he said, attributing the single currency’s recent gains partly to the return of confidence created by the European Central Bank and euro zone governments in starting to overcome Europe’s debt crisis.

Source: Reuters.

So first Germany begins pulling its Gold reserves from the US, and now China and the EU are saying publicly that the Fed’s policies are damaging confidence in the US Dollar.

This does not bode well for the financial system. The primary role of Central Banks is to maintain confidence in the system. If the Central Banks begin to turn on one another it is only a matter of time before the system breaks down.

Remember, every time the Fed debases the US Dollar it forces the Euro and other currencies higher, hurting those countries’ exports. The Fed has recently announced it will be printing $85 billion every month until employment reaches 6.5% (obviously the Fed is ignoring the mountains of data that indicate QE doesn’t create jobs).

How long will the other Central Banks tolerate this before they initiate a currency war? Both Germany and China have fired warning shots at the Fed. And we all know that just beneath the veneer of goodwill, tensions are building between the primary players of the global financial system.

Great Post on zero hedge here from Brandon Smith from ALT Market

One of the most frustrating issues to haunt the halls of alternative economic analysis is the threat of misrepresentative terminology. For instance, when the U.S. government decided to back the private Federal Reserve in lowering the interest rates on lending windows to European banks last month, they did not call this a bailout, even though that’s exactly what it was. They did not call it quantitative easing, or fiat printing, or a hyperinflationary landmine; rarely does bureaucracy ever apply honest terminology to their subversive activities. False terminology is the bane of every honest analyst, because in order for them to educate and awaken those who are unaware of the truth, they must first battle through the daunting muck of the general public’s horrifically improper perceptions and vocabulary.

The chain of financial events taking place over the past decade in Asia have been correspondingly mislabeled and misunderstood. What some economists see as total collapse is actually a new and decidedly prophetic (or engineered) transition. What some naively see as the “natural” progression of globalism, is actually a distinctly deliberate program of centralization meant to further the goals of world economic and political totalitarianism. Asia, and most especially China, is a Petri dish for elitist psychopaths. What we see as suffocating collectivism in this region of the world today is the exact social schematic intended for the West tomorrow. Call it whatever you will, but on the other side of the Pacific, like the eerie smile of a sinister clown, sits fabricated fate.

The genius of globalization is not in how it “works”, but in how it DOESN’T work. Globalization chains mismatched cultures together through circumstance and throws us into the deep end of the pool. If one sinks, we all sink, enslaving us with interdependency. The question one must ask, then, is if all sovereign economies are currently tied together in the same way? The answer is no, not anymore. Certain countries have moved to insulate themselves from the domino effect of debt implosion, one of the primary examples being China.

Since at least 2005, China has been taking the exact steps required to counter the brunt of a global debt collapse; not enough to make it untouchable, but enough that its infrastructure will survive. One could even surmise that China’s actions indicate a foreknowledge of the events that would eventually escalate in 2008. How they knew is hard to say, but if the available evidence causes you to lean towards collapse as a Hegelian creation (and it should if you are paying any attention), then China’s activity begins to make perfect sense. If a globalist insider told you that in a few short years the two most powerful financial empires in the world were going to topple like bowling pins under the weight of their own liabilities, what would you do? Probably separate yourself as much as possible from the diseased dynamic and construct your own replacement system. This is what China has done…

China started with the circulation of Yuan denominated bonds, like T-Bonds, meant to securitize Chinese debt, creating an outlet for the currency to go global. China’s considerable forex and bond reserves make this move a rather suspicious one. With so much savings at their disposal, why bother to issue bonds at all? Why threaten the traditional export based economy and the uneven trade advantage that the country had been thriving on for decades? The success of Chinese bonds would mean the internationalization of the Yuan, a floating valuation of the currency, and the loss of the desirable trade deficit with the U.S. Back in 2005, this all would surely seem like a novelty that was going nowhere fast. Of course, today China’s actions suggest an unprecedented push to convert to a consumer hub at the center of a massive trading bloc. To put it simply; China knew ahead of schedule that the U.S. was no longer going to be a viable customer, and reliance on such a country would spell disaster. They have been preparing to break away from America’s consumer markets and the dollar for some time.

In 2008, after China announced the use of the Yuan in cross border trade on a limited basis, I began to write about the possibility that China was preparing to break from the Greenback. For the past few years my primary focus in terms of finance has been the East as a kind of warning bell for the state of the global economy. In 2009 and 2010, it became absolutely clear that China (with the help of global corporate entities) was developing the skeleton of a new system; a trade network that that had the capacity to supplant the U.S. and end the dollar’s world reserve status.

Since then, Yuan bonds have spread across the planet, China has dropped the dollar in bilateral trade with Russia, the ASEAN trading bloc has formed into a tight shell of export partners, and that is just the beginning. Two major announcements in 2011 have solidified my belief that a complete dump of the dollar by eastern interests is near…

First was the announcement that China was actively and openly pursuing the establishment of a central bank for the whole of ASEAN, with the Yuan utilized as the reserve currency instead of the dollar:

http://www.reuters.com/article/2011/10/27/us-china-asean-financial-idUST…

This news, of course, has barely been reported on in the mainstream. As I discussed at the beginning of this article, the terminology surrounding economic developments has been diluted and twisted. When China states that an ASEAN central bank is in the works, we need to point out what this really means; the ASEAN trading bloc is about to become the Asian Union. The only missing piece of the puzzle is something that I have been warning about for at least a couple years, ever since my days at Neithercorp (see “Migration Of The Black Swans” as a recent example). This key catalyst is the inclusion of Japan in ASEAN, something which many said would take five to ten years to unfold. News released this Christmas speaks otherwise:

http://www.bloomberg.com/news/2011-12-25/china-japan-to-promote-direct-trading-of-currencies-to-cut-company-costs.html

Japan has indeed entered into an agreement to drop the dollar in currency exchange with China and has expressed interest in melting into ASEAN. Japan has also struck somewhat similar though slightly more limited deals with India, South Korea, Indonesia, and the Philippines almost simultaneously:

http://www.bloomberg.com/news/2011-12-28/japan-india-seal-15-billion-currency-swap-arrangement-to-shore-up-rupee.html

This means that the two largest foreign holders of U.S. debt and Greenbacks will soon be in a position to tap into an export market far more profitable than that of America, and that all of this trade will be facilitated by currencies OTHER THAN THE DOLLAR. It means the end of the dollar as the world reserve and probably the end of the dollar as we know it.

Japan’s inclusion in this process was inevitable. With its economy already in steep deflationary decline, the Yen skyrocketing in value against the dollar making exports difficult, as well as the ongoing nuclear meltdown problem at Fukushima, the island nation has been on the edge of complete collapse. Its only option, therefore, is to sink into the chaotic sees, or float like a buoy tied to an Asian Union. There can be absolutely no doubt now that Japan will soon implement the latter solution.

The dilemma at this point becomes one of timing. Now that we are certain that two of the largest economies in the world are about the dump the Greenback, what signals can we watch when preparing for the event? My belief is that the trigger will come squarely from the U.S. and the Federal Reserve, either as legislation to heavily tax Asian imports, a renewed threat of further credit downgrades like that which S&P brought down in August, or the announcement of more open quantitative easing. Any and all of these issues could very well arise in the course of the next 6-12 months, QE3 being a basic no-brainer. ASEAN could, certainly, drop the dollar immediately after their central bank apparatus is put in place, resulting in a much more volatile trade war atmosphere (also useful for full global centralization later down the road). The point is, we are truly at a place in our economic life when ANYTHING is possible.

My hope is that as our predictions in the alternative economic community are proven correct with every passing quarter, more Americans will take note, and prepare. I can say quite confidently that we have entered the first stages of the catastrophic phase of the economic implosion. All the fantastic and terrible consequences many once considered theory or science fiction, are about to become reality. Practical solutions have been offered by myself and many others. The only thing left now is to take action, or ride the tidal wave of destruction like so much driftwood. We can help to determine the outcome, or we can be idle spectators. In everything, there is a choice…

IMF warns US, eurozone deficits a threat to stability

The International Monetary Fund warned that Washington and debt-ridden European countries are “playing with fire” unless they take drastic steps to reduce their budget deficits.

The warning came as the IMF cut its growth forecast for the US and said the risks facing the global economy have increased since April.

It said the euro area’s worsening crisis, signs of economic weakening in the US and overheating in the developing world all pose fresh threats to global stability.

“The global economy has turned the corner from the Great Recession. However, securing the transition from recovery to expansion will require a concerted effort at addressing diverse challenges,” the IMF said in its World Economic Outlook update.

World growth this year is expected to be 4.3pc, a downgrade from 4.4pc in April, prompted predominantly by a sharp reduction in America. US GDP is now forecast to grow at 2.5pc this year and 2.7pc in 2012, compared with its prediction in April of 2.8pc and 2.9pc respectively.

“For the US, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform,” it said.

Jose Vinals, director of the IMF’s monetary and capital markets department, added: “If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States.

“You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire.”

The IMF had already downgraded its forecasts for UK growth to 1.5pc from 1.7pc in April, which was itself a downgrade from 2pc in November.

It added: “Downside risks due to heightened potential for spillovers from further deterioration in market confidence in the euro area periphery have risen since April. Market concerns about possible setbacks to the US recovery have also surfaced.

If these risks materialize, they will reverberate across the rest of the world–possibly seriously impairing funding conditions for banks and corporations in advanced economies and undercutting capital flows to emerging economies.”

Prior to the BOJ intervention earlier this week, there had been very little public discussion of the fact that China has been purchasing JGBs and that this had contributed to the appreciation in the value of the ¥en.  In June China purchased ¥457Bln worth of JGBs and in July purchased a further ¥583Bln worth.  Assessing the impact of this intervention purely in terms of the effect of the Yen’s appreciation against the US Dollar is to miss the point. The more interesting story is what is going on between China and Japan.

Superficially, likely motives for China’s JGB purchases include diversification out of the USD, since the majority of China’s accumulated surplus is recycled through the purchase of US Treasury debt. Naturally this exposes China to the inevitable depreciation in the value of the USD.  However this is a cycle that cannot continue and the policy makers in China have probably worked this out and are thus seeking to engineer an outcome more to their liking than the gradual devaluation of their USD reserves.

Added to this, the recent public exchange of views between China and the US as to who would come off worse in a trade war takes on a new light. One interpretation would be that  China has decided that the indebtedness of the American economy has now reached levels which point to its decreasing usefulness as a trading partner and thus wishes to end its reliance on the US as a target for its exports.

It must then turn to its Asian neighbours as trading partners.

Japan is the world’s second largest economy but has a debt to GDP ratio of 225%. It has so far managed through its own population purchasing JGBs, but is now facing an aging demographic and would be devastated by an inability to issue bonds at current 1% interest rates. Households have already stopped adding to their stock of JGBs, and the threat that rates in Japan will need to rise must now be looming large in the minds of Japanese policy makers. Should yields approach levels seen on European Government bond debt, i.e. 4%, rising debt service costs will threaten huge damage on the Japanese economy, threatening the Japanese state with bankruptcy. This threat would in turn open the floodgates of further QE. The yen would fall out of bed in a hyperinflationary blowoff.

Without doubt this would utterly derail the Chinese economy and threaten an unmanageable crisis on the Chinese, even possibly threatening the political status quo. The threat to China posed by the Japanese economic situation is thus so potentially grave that Japan’s problem is actually China’s problem also.

Thus the buying of JGBs by China could in fact be seen as the actions of a supporting partner, which are the result of an entirely aligned mutual self interest between the two nations.

Beijing would now be expected to react by tightening monetary policy via a rate hike. In August Chinese CPI jumped to 3.5%, indicating that they have to slow the economy. Tightening in this way would also be seen to be addressing the US political pressure on the Yuan exchange rate. It is clear now that the BOJ is willing to offset the impact on the strength of the Yen, and how they are going to do so.

As for the Fed, it is now operating with both hands tied behind its back evaluating whether to announce a baby-step QE2 at next week’s FOMC meeting, or at the November FOMC, which coincides with the Mid-Term Election Day.

As an aside, it should be noted that if a Japan meltdown is not prevented, the Japanese would also have to dump their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling Gilts and Belgian bonds, precipitating other government bond market funding crises and triggering an international bond rout spiking interest rates higher and sending stock markets into meltdown.

The interconnectedness of the whole system renders it non-linear and chaotic. I don’t see a happy ending.