Make Your Capital As Safe As Gold

FORBES.com
By Bill Flax
Originally Published Mar. 3 2011 – 5:05 pm

On my daughter’s birthday, she received a crisp new $5 bill, which she promptly deposited in her piggy-bank. Never foregoing an opportunity to expound on free market principles, I warned about her susceptibility to a subtle means of theft even more devious than a burglar breaking in at night against whom you might get a clear shot.

Usually, when she asks why it’s, “Because I told you so!” But for inflation, because Washington wills it, that explanation hardly suffices. And as often as economic prognosticators prescribe currency debasement as some miraculous panacea, her question is a good one. Why do we suffer inflation?

I searched online for “benefits of inflation.”

Inflation Spurs Growth – The theory goes something like this: Since savers realize the value of their money will erode, they spend more quickly thus stimulating the economy. If we believe tomorrow brings higher prices, we buy today. Basically, we spend before the monetary authorities steal our money’s value. Hmm.

The proponents of consumption-based stimuli overlook the essentiality of saving. While burying your money in the ground wastes its talents, most save via bank accounts or through the purchase of capital assets. Thus saving makes investment capital available for new businesses hiring new workers and creating new products that sustain and beautify life. The accumulation of capital drives growth.

Inflation discourages saving. Inflation buries capital into the ground as people flee toward real estate as a protective hedge. Inflation stymies growth.

Inflation Decreases Debt Burdens – If we borrow say, $14 trillion and then cheapen our debt through dollar devaluation, the repaid lenders can’t buy as much thanks to diluted dollars being returned to them. Inflation essentially harms savers for the benefit of borrowers. Every dollar borrowed requires a dollar saved. The economy gains nothing by such mischief.

Generally, borrowers aren’t responsible for this debauchery so it’s not fair to label it theft. In government’s case, dilapidated debts at least rise to the level of fraud. Why does Washington willfully reward the profligate by cheating the prudent? Ah yes, because they exude profligacy.

Inflation Increases Asset Values – As the dollar falls, the price of our assets raises commensurately. Stocks, real estate, etc. surge. That sounds wonderful, but their value increases against what? Since the prices for everything else rise too all we’ve secured is a nominal gain for tax collectors to confiscate. We derive no real benefit.

A stock that cost $20 thirty years ago would need to fetch over $50 today just to match the CPI, understated as it remains. If it now costs $40, you pay the IRS on the $20 nominal gain even as your stock actually lost value. Washington thus rewards itself for its own reckless monetary policy. The more they inflate, the more they take.

A similar phenomenon nails your wages. As your salary increases, you pay more taxes even as you can afford less. A two percent raise increases your tax bill two percent, but if prices also rise only the IRS derives any benefit.

Inflation Offsets Unemployment – The Philips Curve, the illusion that increasing inflation decreases unemployment, remains a staple of macroeconomics even as few still publicly acknowledge its role. Bernanke, Geithner et al remain smitten by the Philips Curve.

To succeed, this essentially entails deceiving workers. Since the price of labor, your wage, is less elastic than many other costs, businesses can raise prices quicker than can employees increase their salary demands. As businesses raise prices to cope with inflation, the cost of labor proportionally lowers. Thus, in Keynesian theory, more workers can be hired as inflation dilutes your pay.

Remember this when you hear some self-proclaimed friend of the working man imploring that we accept inflation as a means to expand employment. They peddle pay cuts for workers in real terms versus free marketers who promote wealth generating growth. Growth affords higher living standards for all. Inflation silently erodes living standards.

Inflation Promotes Exports – While few non-economists still accept the Philips Curve, the crowd espousing inflation as a facilitator of exports proves more enduring. Exporters love dollar debasement.

In theory, if the dollar falls then anything priced in dollars becomes cheaper for someone holding say, euros. But the dollar and the euro are merely measuring sticks. The underlying transaction involves trading our goods. Currency is a tool; a ticket of exchange. Currency simplifies trading relative to bartering. You may not want my output, but you definitely want my dollar so that you can acquire what you do want.

For illustrative purposes only, ignoring taxes, regulatory burdens, and transportation costs or differing local tastes, if the dollar equals the euro and it takes a dollar to buy a dozen eggs then it too will take a euro to buy those eggs. Purchasing price parity.

But as the dollar plummets, a euro is now worth more. Thus it takes more dollars to buy eggs, but it still takes but one euro. Domestic eggs didn’t become cheaper in euros. This isn’t some mysterious or complicated economic theory or even subject to debate. It’s elementary school mathematics: the transitive property. If A equals B and B equals C then A too must equal C. Making A not equal B doesn’t change the value of C.

Markets are not perfect and as well as the arbitragers perform, timing differences remain. Gutting the dollar never makes eggs cheaper in euros other than timing discrepancies, which can make or break producers. Firms whose inputs are denominated in one currency and their outputs in another frequently get jilted.

As the dust settles, things must balance, but if you bought a dozen eggs yesterday in dollars to sell them tomorrow in Euros, the dollar’s lack of certainty promotes intrigue. Inflation wobbles the scale hindering international commerce.

When parties trade of their own volition, by mutual consent and to mutual advantage, both expect to gain and both should, assuming an honest scale. When Washington deliberately engineers a false balance, the likelihood that someone gets harmed rises dramatically. Cheating your trading partners can win the day, but isn’t a successful long term strategy.

Like the Philips Curve, promoting exports by debasing the currency effectively pokes the pendulum. The inflation driven exhilaration proves fleeting as the pendulum swings back like a wrecking ball. Some latch onto the pendulum as it soars higher, but others get whacked as it returns.

Inflation is deceitful and ineffective. It swindles savers, fleeces lenders, pumps taxes higher and triggers malinvestment. It doesn’t reduce unemployment; it whittles away your wage. Nor does inflation promote exports, but it does make international trade more frightening.

If inflation succeeded, it would be merely dishonest. But as history proves, it never works. Neither Bush, nor Obama’s weak dollar policies did anything to alleviate the overblown “trade deficit” and much to undermine growth. There is no evidence that inflation fosters exports or employment.

As Washington plunders the value of our property and expropriates the product of our labor, inflation reduces us to servitude. Debasement is a despicable ploy the government uses to rob you blind. Period.

So what do I tell my children?

March 2, 2011
By Barry Eichengreen
WallStreetJournal.com

For decades the dollar has served as the world’s main reserve currency, but, argues Barry Eichengreen, it will soon have to share that role. Here’s why—and what it will mean for international markets and companies.

The single most astonishing fact about foreign exchange is not the high volume of transactions, as incredible as that growth has been. Nor is it the volatility of currency rates, as wild as the markets are these days.

Instead, it’s the extent to which the market remains dollar-centric.

Consider this: When a South Korean wine wholesaler wants to import Chilean cabernet, the Korean importer buys U.S. dollars, not pesos, with which to pay the Chilean exporter. Indeed, the dollar is virtually the exclusive vehicle for foreign-exchange transactions between Chile and Korea, despite the fact that less than 20% of the merchandise trade of both countries is with the U.S.

Chile and Korea are hardly an anomaly: Fully 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars. What’s more, what is true of foreign-exchange transactions is true of other international business. The Organization of Petroleum Exporting Countries sets the price of oil in dollars. The dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of central banks and governments are in dollars.

The greenback, in other words, is not just America’s currency. It’s the world’s.

But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end.

I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar.

The Three Pillars

How could this be? How could the dollar’s longtime most-favored-currency status be in jeopardy?

To understand the dollar’s future, it’s important to understand the dollar’s past—why the dollar became so dominant in the first place. Let me offer three reasons.

First, its allure reflects the singular depth of markets in dollar-denominated debt securities. The sheer scale of those markets allows dealers to offer low bid-ask spreads. The availability of derivative instruments with which to hedge dollar exchange-rate risk is unsurpassed. This makes the dollar the most convenient currency in which to do business for corporations, central banks and governments alike.

Second, there is the fact that the dollar is the world’s safe haven. In crises, investors instinctively flock to it, as they did following the 2008 failure of Lehman Brothers. This tendency reflects the exceptional liquidity of markets in dollar instruments, liquidity being the most precious of all commodities in a crisis. It is a product of the fact that U.S. Treasury securities, the single most important asset bought and sold by international investors, have long had a reputation for stability.

Finally, the dollar benefits from a dearth of alternatives. Other countries that have long enjoyed a reputation for stability, such as Switzerland, or that have recently acquired one, like Australia, are too small for their currencies to account for more than a tiny fraction of international financial transactions.

What’s Changing

But just because this has been true in the past doesn’t guarantee that it will be true in the future. In fact, all three pillars supporting the dollar’s international dominance are eroding.

First, changes in technology are undermining the dollar’s monopoly. Not so long ago, there may have been room in the world for only one true international currency. Given the difficulty of comparing prices in different currencies, it made sense for exporters, importers and bond issuers all to quote their prices and invoice their transactions in dollars, if only to avoid confusing their customers.

Now, however, nearly everyone carries hand-held devices that can be used to compare prices in different currencies in real time. Just as we have learned that in a world of open networks there is room for more than one operating system for personal computers, there is room in the global economic and financial system for more than one international currency.

Second, the dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China’s yuan.

Americans especially tend to discount the staying power of the euro, but it isn’t going anywhere. Contrary to some predictions, European governments have not abandoned it. Nor will they. They will proceed with long-term deficit reduction, something about which they have shown more resolve than the U.S. And they will issue “e-bonds”—bonds backed by the full faith and credit of euro-area governments as a group—as a step in solving their crisis. This will lay the groundwork for the kind of integrated European bond market needed to create an alternative to U.S. Treasurys as a form in which to hold central-bank reserves.

China, meanwhile, is moving rapidly to internationalize the yuan, also known as the renminbi. The last year has seen a quadrupling of the share of bank deposits in Hong Kong denominated in yuan. Seventy thousand Chinese companies are now doing their cross-border settlements in yuan. Dozens of foreign companies have issued yuan-denominated “dim sum” bonds in Hong Kong. In January the Bank of China began offering yuan-deposit accounts in New York insured by the Federal Deposit Insurance Corp.

Allowing Chinese companies to do cross-border settlements in yuan will free them from having to undertake costly foreign-exchange transactions. They will no longer have to bear the exchange-rate risk created by the fact that their revenues are in dollars but many of their costs are in yuan. Allowing Chinese banks, for their part, to do international transactions in yuan will allow them to grab a bigger slice of the global financial pie.

Admittedly, China has a long way to go in building liquid markets and making its financial instruments attractive to international investors. But doing so is central to Beijing’s economic strategy. Chinese officials have set 2020 as the deadline for transforming Shanghai into a first-class international financial center. We Westerners have underestimated China before. We should not make the same mistake again.

Finally, there is the danger that the dollar’s safe-haven status will be lost. Foreign investors—private and official alike—hold dollars not simply because they are liquid but because they are secure. The U.S. government has a history of honoring its obligations, and it has always had the fiscal capacity to do so.

But now, mainly as a result of the financial crisis, federal debt is approaching 75% of U.S. gross domestic product. Trillion-dollar deficits stretch as far as the eye can see. And as the burden of debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its debts or might resort to inflating them away. Foreign investors will be reluctant to put all their eggs in the dollar basket. At a minimum, the dollar will have to share its safe-haven status with other currencies.

A World More Complicated

How much difference will all this make—to markets, to companies, to households, to governments?

One obvious change will be to the foreign-exchange markets. There will no longer be an automatic jump up in the value of the dollar, and corresponding decline in the value of other major currencies, when financial volatility surges. With the dollar, euro and yuan all trading in liquid markets and all seen as safe havens, there will be movement into all three of them in periods of financial distress. No one currency will rise as strongly as did the dollar following the failure of Lehman Bros. There will be no reason for the rates between them to move sharply, something that would potentially upend investors.

But the impact will extend well beyond the markets. Clearly, the change will make life more complicated for U.S. companies. Until now they have had the convenience of using the same currency—dollars—whether they are paying their workers, importing parts and components, or selling their products to foreign customers. They don’t have to incur the cost of changing foreign-currency earnings into dollars. They don’t have to purchase forward contracts and options to protect against financial losses due to changes in the exchange rate. This will all change in the brave new world that is coming. American companies will have to cope with some of the same exchange-rate risks and exposures as their foreign competitors.

Conversely, life will become easier for European and Chinese banks and companies, which will be able to do more of their international business in their own currencies. The same will be true of companies in other countries that do most of their business with China or Europe. It will be a considerable convenience—and competitive advantage—for them to be able to do that business in yuan or euros rather than having to go through the dollar.

U.S. Impact

In this new monetary world, moreover, the U.S. government will not be able to finance its budget deficits so cheaply, since there will no longer be as big an appetite for U.S. Treasury securities on the part of foreign central banks.

Nor will the U.S. be able to run such large trade and current-account deficits, since financing them will become more expensive. Narrowing the current-account deficit will require exporting more, which will mean making U.S. goods more competitive on foreign markets. That in turn means that the dollar will have to fall on foreign-exchange markets—helping U.S. exporters and hurting those companies that export to the U.S.

My calculations suggest that the dollar will have to fall by roughly 20%. Because the prices of imported goods will rise in the U.S., living standards will be reduced by about 1.5% of GDP—$225 billion in today’s dollars. That is the equivalent to a half-year of normal economic growth. While this is not an economic disaster, Americans will definitely feel it in the wallet.

On the other hand, the next time the U.S. has a real-estate bubble, we won’t have the Chinese helping us blow it.

Mainstreet.com
By Greg Bocquet
February 28, 2011

Foreign Treasures

Regardless of how much closer Obama’s budget brings our economy into a balance of payments not seen since 2001, we will continue to run deficits for the next decade, and the national debt will keep growing every year that happens.

While most of the country’s $14 trillion debt is held by private banks in the U.S., the Treasury Department and the Federal Reserve Board estimate that, as of December, about $4.4 trillion of it was held by foreign governments that purchase our treasury securities much as an investor buys shares in a company and comes to own his or her little chunk of the organization.

Looking at the list of our top international creditors, a few overall characteristics show some interesting trends: Three of the top 10 spots are held by China and its constituent parts, and while two of our biggest creditors are fellow English-speaking democracies, a considerable share of our debt is held by oil exporters that tend to be decidedly less friendly in other areas of international relations.

Here we break down the top 10 foreign holders of U.S. debt, comparing each creditor’s holdings with the equivalent chunk of the United States they “own”, represented by the latest (2009) state gross domestic product data released by the U.S. Bureau of Economic Analysis. Obviously, these creditors won’t actually take states from us as payment on our debts, but it’s fun to imagine what states and national monuments they could assert a claim to.

10th Largest Holder of U.S. Debt: Russia
Amount of U.S. debt: $106.2 billion
Share of total foreign debt: 2.4%

Starting off the list of our major foreign creditors is Russia, which holds about 2.4% of the U.S. debt pie that sits on the international dinner table. Its $106.2 billion in treasury securities is equivalent to the 2009 GDP of our sparsely populated North: The combined output of North Dakota ($31.9 billion), South Dakota ($38.3 billion) and Montana ($36 billion) matches up nicely with the Russian holdings, at $106.2 billion.

Let’s hope Russian president Dmitry Medvedev doesn’t come to collect.

9th Largest Holder of U.S. Debt: Taiwan
Amount of U.S. debt: $131.9 billion
Share of total foreign debt: 3.0%

Taiwan, an island barely 100 miles off the coast of China, is claimed by the People’s Republic of China, despite having its own government and economic relations with the outside world. Part of those economic relations includes the island’s holding of $131.9 billion of U.S. debt, roughly equivalent to the combined GDP of West Virginia ($63.3 billion) and Hawaii ($66.4 billion), which totals $129.7 billion.

Unless we get our spending in check, we risk losing some of our most visually stunning territory (West Virginia, obviously) to our friendly neighbors on the other side of the Pacific Ocean.

8th Largest Holder of U.S. Debt: Canada
Amount of U.S. debt: $134.6 billion
Share of total foreign debt: 3.1%

They say that a friend in need is a friend indeed, and our neighbor to the north has proven to be a kind and generous creditor in our time of financial need. Canada holds about 3.1% of our foreign debt, or $134.6 billion. If friend were to become enemy and Canada were looking to annex some U.S. land to cover the debt though, the country would have an easy time of it. The combined GDP of Maine ($51.3 billion), New Hampshire ($59.4 billion) and Vermont ($25.4 billion) comes close to Canada’s debt holdings at $136.1 billion.

Residents of the three states in our extreme northeast corner should start practicing their French: They might become Québécois one of these days.

7th Largest Holder of U.S. Debt: Hong Kong
Amount of U.S. debt: $138.2 billion
Share of total foreign debt: 3.2%

At number seven on the list of our foreign creditors is Hong Kong, a formerly British part of China that maintains a separate government and economic ties than the communist mainland. With $138.2 billion in U.S. treasury securities, the capitalist enclave could lay claim to Yellowstone Park and our nation’s capital: The combined GDP of Wyoming ($37.5 billion) and Washington D.C. ($99.1 billion) totaled $136.6 billion in 2009.

6th Largest Holder of U.S. Debt: Caribbean Banking Centers
Amount of U.S. debt: $155.6 billion
Share of total foreign debt: 3.6%

You have to have cash on hand to buy up U.S. government debt, and offshore banking has given six countries the combined capital needed to make the Caribbean Banking Centers our sixth-largest foreign creditor. The Treasury Department counts the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles, Panama and the British Virgin Islands in this designation, which as a group holds $155.6 billion in U.S. treasury securities. That’s equivalent to the GDP of landlocked Kentucky ($156.6 billion), whose residents may not actually mind if they were ever to become an extension of some Caribbean island paradise.

5th Largest Holder of U.S. Debt: Brazil
Amount of U.S. debt: $180.8 billion
Share of total foreign debt: 4.1%

Rounding out the top five is the largest economy in South America, Brazil. The country known for its beaches, Carnaval and the unbridled hedonism that goes along with both has made a big investment in the U.S., buying up $180.8 billion in American debt up to December. That’s almost equal to the $180.5 billion combined GDP of Idaho ($54 billion) and Nevada ($126.5 billion), a state that is no stranger to hedonism itself.

4th Largest Holder of U.S. Debt: Oil Exporters
Amount of U.S. debt: $218 billion
Share of total foreign debt: 5%

Another grouped entry, the oil exporters form another international bloc with money to burn. The group includes 15 countries as diverse as the regions they represent: Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. As a group they hold 5% of all American foreign debt, with a combined $218 billion of U.S. treasury securities in their own treasuries. That’s roughly equivalent to the combined 2009 GDP of Nebraska ($86.4 billion) and Kansas ($124.9 billion), which seems to be an equal trade: The two states produce a bunch of grain for export, which many of the arid oil producers tend to trade for oil.

3rd Largest Holder of U.S. Debt: United Kingdom
Amount of U.S. debt: $541.3 billion
Share of total foreign debt: 12.4%

At number three on the list is perhaps our closest ally on the world stage, the United Kingdom (which includes the British provinces of England, Scotland, Wales and Northern Ireland, as well as the Channel Islands and the Isle of Man). The U.K. holds $541.3 billion in U.S. foreign debt, which is 12.4% of our total external debt. That amount is equivalent to the combined GDP of two East Coast manufacturing hubs, Delaware ($60.6 billion) and New Jersey ($483 billion) – which was named, yes, after the island of Jersey in the English Channel. The two states’ combined output in 2009 came to $543.6 billion.

2nd Largest Holder of U.S. Debt: Japan
Amount of U.S. debt: $883.6 billion
Share of total foreign debt: 20.2%

The runner-up on the list of our most significant international creditors goes to Japan, which accounts for over a fifth of our foreign debt holdings with $883.6 billion in U.S. treasury securities. That astronomical number is just shy of the combined GDP of a significant chunk of the lower 48: Minnesota ($260.7 billion), Wisconsin ($244.4 billion), Iowa ($142.3 billion) and Missouri ($239.8 billion) produced a combined output of $887.2 billion in 2009.

Largest Holder of U.S. Debt: Mainland China
Amount of U.S. debt: $891.6 billion
Share of total foreign debt: 20.4%

Building on the holdings of its associated territories, China is undisputedly the largest holder of U.S. foreign debt in the world. Accounting for 20.4% of the total, mainland China’s $891.6 billion in U.S. treasury securities is almost equal to the combined 2009 GDP of Illinois ($630.4 billion) and Indiana ($262.6 billion) in 2009, a shade higher at a combined $893 billion. As President Obama – who is from Chicago – wrangles over his proposed budget with Congress he may be wise to remember that his home city may be at stake in the deal.

FinancialTimes.com
By David Oakley
Originally Published: February 9 2011

Portugal’s cost of borrowing hit a euro-era high on Wednesday amid growing concerns that Lisbon will have to turn to bail-out funds to revive its stagnating economy.

Hedge funds were selling Portuguese debt after purchasing bonds at a syndication of five-year bonds just 24 hours earlier, brokers said.

Investor worries are also rising that policymakers will fail to introduce the necessary reforms to beef up the eurozone bail-out fund.

Portuguese 10-year bond yields jumped to 7.35 per cent – the highest since the launch of the euro in January 1999 and a level regarded as unsustainable for Lisbon’s struggling economy.

Richard McGuire, rates strategist at Rabobank, said: “Once again we’re back into this lull where they [EU policymakers] have promised something and they haven’t given details. I think the market will become increasingly concerned about this, exactly as they did about packages for Greece and Ireland.”

A leading investor said: “Portuguese debt costs are in danger of rising further and further as there are no buyers of the country’s debt.”

Some European policymakers would like to see Portugal opt for bail-out loans, which offer rates of about 6 per cent and are considered the best way to deal with the country’s banking and economic problems. There are also hopes among some strategists that the rates offered on bail-out loans will be reduced to encourage Lisbon to accept financial help.

The country’s problems are highlighted by fund managers, such as Pimco, which are no longer prepared to buy the country’s bonds because of fears over high debt levels.

Pimco is switching out of eurozone debt and into emerging market bonds because of the higher yields and higher potential returns offered in these markets.

Lisbon needs to repay €9.5bn ($13bn) in maturing bonds by the end of June, which many strategists say the country will struggle to raise.

Significantly, the European Central Bank has been the only major buyer of Portuguese debt in recent months. However, the latest ECB figures show that the bank has not bought any government bonds in the past two weeks, which explains the drift higher in Portuguese yields.

Strategists say a summit of European leaders in March will determine whether Lisbon will have to follow Greece and Ireland in seeking emergency support. One fund manager said: “We are at a key moment in the eurozone crisis and Portugal is on the frontline. We will know soon whether Lisbon will have to accept a bail-out or not. That is the next test for the eurozone.”

CNNMoney.com
By Ben Rooney, staff reporter
Originally Published February 10, 2011

NEW YORK (CNNMoney) — The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world’s reserve currency.

The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.

SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs

While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar.

Dominique Strauss-Kahn, managing director of the IMF, acknowledged there are some “technical hurdles” involved with SDRs, but he believes they could help correct global imbalances and shore up the global financial system.

“Over time, there may also be a role for the SDR to contribute to a more stable international monetary system,” he said.

The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.

In addition to serving as a reserve currency, the IMF also proposed creating SDR-denominated bonds, which could reduce central banks’ dependence on U.S. Treasuries. The Fund also suggested that certain assets, such as oil and gold, which are traded in U.S. dollars, could be priced using SDRs.

Oil prices usually go up when the dollar depreciates. Supporters say using SDRs to price oil on the global market could help prevent spikes in energy prices that often occur when the dollar weakens significantly.

The Dollar Alternatives

Fred Bergsten, director of the Peterson Institute for International Economics, said at a conference in Washington that IMF member nations should agree to create $2 trillion worth of SDRs over the next few years.

SDRs, he said, “will further diversify the system.”

Dollar firms after starting 2011 weak

The dollar has been drifting lower so far this year as the global economy improves and investors regain their appetite for more risky assets such as stocks and commodities.

After rising above 81 in early January, the dollar index, which measures the U.S. currency against a basket of other international currencies, eased below 77 earlier this week.

However, the dollar was higher Thursday against the euro, pound and yen as disappointing corporate results weighed on stock prices following several days of gains on Wall Street. The rally in the commodities market also cooled, with the price of oil and metals backing off recent highs.

In addition, renewed concerns about the debt problems facing troubled European economies put pressure on the euro and supported the dollar. The yield on Portugal’s benchmark bond rose to a record high Wednesday, and borrowing costs for Ireland, Spain and Greece remain elevated.

“The market is shedding risk, with equities and commodities weakening and the U.S. dollar broadly stronger” said Camilla Sutton, currency strategist at Scotia Capital.

Traders were also digesting comments from Federal Reserve chairman Ben Bernanke, who told Congress Wednesday that despite a strengthening economic recovery, the unemployment rate remains high while inflation is “still quite low.”

Those remarks reaffirmed the view that “the Fed would be very slow to tighten policy given its dual mandate of price stability and employment,” analysts at Sucden Financial wrote in a research report.

Bernanke also urged lawmakers to come up with a “credible plan” to bring down “unsustainable” federal budget deficits.

“We expect that the outlook for the U.S. fiscal position will weigh heavily on the U.S. dollar in the quarters ahead,” said Sutton. In the near-term, however, she said “a strengthening growth profile” could help provide “a temporary period of dollar strength.”

KITCO News
By Timothy Wood
Originally Published Feb 10, 2011

CAPE TOWN (MineFund.com) — Speaking at Mining Indaba conference in Cape Town, James Turk forecast that gold could reach $8,000 per ounce by 2013-2015. He added that that may be too conservative.

Turk, the founder of digital gold currency GoldMoney, said individuals should own bullion not as an investment, but as a wealth preserver.

“Gold is not a commodity. It is not volatile. It is not an investment. Gold is money,” Turk told an audience of nearly 1,000 delegates.

He illustrated gold’s ability to retain its purchasing power by comparing the price of oil in British pounds, US dollars, German marks, euros and gold. Only gold had maintained its purchasing power since 1950, with massive losses for the currencies, especially the pound.

“Gold is a form of money that holds its value over time,” said Turk, adding, “capital is a precious resource that is best preserved with gold.”

He explained gold’s fundamentally different character as a tangible asset that was accumulated, or saved, rather than consumed. It’s value derives from its utility as a medium of exchange for things like food, shelter and communication.

“Gold as money is a mental tool that enables economic calculation unchanged through human history,” Turk told the audience of mining and investment professionals.

Turk bases his forecast on a long-range view of boom-bust cycles. He believes we are currently moving through a bust of epic proportions as individuals, companies and governments are forced to restore balance to their balance sheets.

“The bust has not yet peaked and you should own gold to preserve wealth until it has.”

He projected the cycle via a ratio of the Dow Jones Industrial Average to gold. He assets that the ratio will again revert to one, and that’s where his $8,000/oz prediction lands.

Turk said that a collapse of the dollar was inevitable because the United States, among other countries, was in a structural crisis that could not be avoided via interest rate increases.

“The US is not suffering from a cyclical deficit, but a structural one. It is a path to hyper-inflation.

“Japan’s credit rating has just been cut. It is probably the first slow fuse to be lit.”

Turk laid his thesis against the strong correlation of the Federal Reserve’s monetization of US debt with the S&P 500. Since the launch of quantitative easing, the correlation has been almost perfect.

Meanwhile, he pointed out that the US appears to have entered a “debt compounding” phase. As a result, the country is now extremely vulnerable to even moderate increases in interest rates which have begun to move up.

“We cannot replicate the previous [1980s] high interest rate cure for mismanagement of the economy,” Turk concluded. He believes the US currency will inevitably collapse as a consequence.

CNSNews.com
Originally Published Monday, February 14, 2011
By Matt Cover

(CNSNews.com) – If the federal budget released by President Barack Obama today is implemented, it will double the national debt over the next 10 years. The current national debt is $13.56 trillion (end of FY 2010). By the end of 2021, that debt would rise to $26.3 trillion under the White House budget.

The figures reflect the effects of Obama’s fiscal year 2012 budget priorities, particularly a federal deficit that never falls below $500 billion in any year between 2010 and 2021.

The national debt – both debt held by the public and debt held by “government accounts” (the Social Security trust fund chief among them) – was $13.56 trillion on Sept. 30. 2010, the end of fiscal year 2010. (The national debt today, Deb. 14, 2011, is $14.08 trillion.)

In 2021, the national debt will have risen to $26.3 trillion, increasing by $1 trillion every year until 2021. Obama’s budget does not contain any plans for balancing the federal budget or reducing the national debt.

Treasury Secretary Timothy Geithner today admitted under questioning from Sen. Sessions that the president’s own budget, submitted Monday, calls for interest payments and obligations that are “excessively high” and “unsustainable.” The president’s plan accumulates $13 trillion in new gross debt, with interest payments on the debt rising to $844 billion a year by 2021.

Additionally, the president’s budget ignores the recommendations of his own fiscal commission, causing the Democrat Co-Chair of the Commission, Erskin Bowles, to remark that the budget “goes nowhere near where they will have to go to resolve our fiscal nightmare.”

Under President Obama’s budget, total federal spending will increase another 65% by the end of the decade. In fact, accumulated deficits under the president’s budget are greater than those in the Congressional Budget Office baseline, which assumes we essentially do nothing.

The Street
By Alix Steel 02/14/11 – 03:04 PM EST

NEW YORK (TheStreet ) — Gold prices were looking for direction Monday while silver prices plowed higher.

Gold for April delivery settled $4.70 to $1,365.10 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has stayed confined to its tight range trading as high as $1,367.50 and as low as $1,354.40. The spot gold price was popping more than $5, according to Kitco’s gold index.

Gold prices were seeing mild safe haven buying as political unrest exploded in Bahrain on the back of a resolution in Egypt.

Scott Redler, chief strategic officer for T3Live.com, says that a close above $1,368 would provide a long entry point. Gold closed just shy of that level Monday.

Silver prices added 53 cents to $30.53, which makes four closes above $30 in the past week. The big story on silver Monday was that future contracts were in backwardation, a situation in which prices in front months were higher than those further out.

Silver’s March contract closed at $30.53 while December’s contract settled at $30.39. According to experts, backwardation rarely occurs in the metals market and points to a physical supply crunch in the short term.

“Right now we are near a breakout. It could take place,” says David Morgan, founder of Silver-Investor.com. “Silver is as tight as I have ever seen it, physically … As long as the holders of physical silver are unwilling to part with it at $30 … any new buying is going to take the price higher.”

If silver does break out past the $31.50 to $32 level, the metal could leave gold in the dust. Due to its volatility, silver can outpace gold to the upside and downside. Gold rallied 26% in 2010, while silver popped 80%. While gold must contend with a triple top, silver doesn’t have that technical headwind. Price estimates for silver range from $35 to $45 for the year.

“You could see silver really take off and gold not do a whole lot,” says Morgan.

The U.S. dollar index was adding 0.24% to $78.63, which was holding gold prices down a bit, while the euro slid 0.54% to $1.34 against the dollar.

This week will hopefully provide direction for gold, which has been undergoing an identity crisis this year. It’s not being purchased as much as a safe-haven asset, with today’s buying modest compared to double digit rallies, and it is not attracting big buyers as an inflation hedge.

The U.S. on Wednesday will release its Producer Price Index for January and its Consumer Price Index on Thursday. Both of these figures will provide inflation data for the U.S., one of the only countries not reporting substantially rising prices.

The U.S. only counts the core readings as inflation, excluding food and energy costs, which are deemed to be too volatile. But it’s those commodities that are hurting profit margins from companies like Ford, ConAgra and Pepsi, despite the fact consumers haven’t felt the rise in price.

China also reports its inflation number on Tuesday. Currently, inflation in the country is 4.6% compared to inflation in Brazil of 5.99% and 3.7% in the U.K.

Typically investors turn to gold when they are scared of inflation, but the problem is that gold’s 2010 rally priced in future inflation as investors panicked over rising deficits and stimulus. If inflation readings are high two things can happen — gold could rally, or gold could stay flat as those wanting to buy gold as a hedge have already done so.

If inflation in the U.S. is much higher than its current 0.8% reading, the pressure could mount for the Federal Reserve to cut its $600 billion bond buying program or raise key interest rates.

Gold “still has strong overhead resistance to conquer at the [50 day moving average] and … rising Treasury yields and the expectation of rate increases potentially drawing some investors away from gold as a safe haven,” says James Moore, analyst at FastMarkets.com.

A handful of the big gold miners including Barrick Gold, Agnico-Eagle and Kinross Gold will report earnings this week. Investors will be looking for not only how much gold these miners will produce but at what cash costs and how they are protecting themselves against a non-rising gold price.

Gold mining stocks, a risky but profitable way to buy gold, were higher. Kinross Gold was up 0.24% at $16.48 while Harmony Gold added 0.47% at $10.70.

Other gold stocks New Gold and Gold Fields were trading at $9.34 and $15.88, respectively.

Bloomberg
By Nicholas Larkin and Pham-Duy Nguyen – Feb 15, 2011 11:09 AM PT

Gold futures climbed to the highest in almost four weeks as rising consumer prices boosted demand for the precious metal as a hedge against inflation.

In January, China’s inflation accelerated as costs excluding food rose the most in at least six years, and U.K. consumer prices rose the most in more than two years. Billionaire investor George Soros increased his SPDR Gold Trust holdings by 0.5 percent in the fourth quarter, and John Paulson kept his investment unchanged.

“With inflation concerns heating up and the metals underpinned by a mix of physical and investment demand, it looks as if further gains are in the pipeline,” James Moore, an analyst at TheBullionDesk.com in London, said in a report.

Gold futures for April delivery rose $9, or 0.7 percent, to $1,374.10 an ounce at 1:42 p.m. on the Comex in New York. Earlier, the price reached $1,377.50, the highest since Jan. 19. The metal has climbed 26 percent in the past 12 months.

Surging food prices have spurred protests in North Africa and the Middle East, while Brent crude oil, a global benchmark, closed yesterday at the highest since September 2008.

“Currency debasement and higher food and energy prices are leading to an inflation surge in both developed and emerging markets,” Goldcore Ltd. in Dublin said in a report.

Silver futures for March delivery climbed 16.2 cents, or 0.5 percent, to $30.696 an ounce.

Palladium futures for March delivery rose $7.10, or 0.9 percent, to $839.90 an ounce on the New York Mercantile Exchange.

Silver and platinum have doubled in the past year.

Platinum futures for April delivery gained $4, or 0.2 percent, to $1,831.60 an ounce on the Nymex. The metal is up 21 percent in the past 12 months.