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Trillion Dollar Bailouts Will Likely Cripple US Budget and Imperil the Dollar

Interest-Rates / Credit Crisis 2008 Jul 14, 2008 - 06:08 AM GMT

By: Mark_OByrne

Interest-Rates Gold finished trading in New York on Friday at $959.10, up $18.90 and silver was up to $18.72, up 48 cents. Gold rose in trading in Asia before selling off in early European trading on profit taking due to falling oil prices and a rising dollar this morning. Both gold and silver were up nearly 3% last week on inflation hedging and safe haven buying and profit taking is to be expected.

Gold and silver were up nearly 3% for the week and yet the dollar was only down some 1% and oil was essentially flat after a very volatile week. Thus, gold and silver or beginning to outperform oil as predicted and this can clearly be seen in the monthly performance in the performance table.  This is especially the case due the severity of the current financial market meltdown. Systemic risk is real and growing and the very U.S. financial system itself is now at risk of collapse and this has ramifications for the global financial and monetary system.

Despite constant reassurances by many on Wall Street, by vested interests in the financial services community internationally and by government officials that the worst of the credit crisis was over, the credit crisis has deteriorated as graphically illustrated with Fannie Mae and Freddie Mac and with the collapse of Indymac Corporation, the second largest bank failure in US history. Unfortunately, the credit crisis remains in its early stages and after one year we are still near the beginning of this crisis rather than the end. The subprime crisis will now be followed by the alt-A and prime mortgage crisis, the car loan crisis and even more serious will be the credit card crisis.

All these mini crises will likely lead to a dollar crisis and a global monetary crisis and could lead to a serious and prolonged recession and there is even now the possibility of an inflationary depression in the U.S.

Trillion Dollar Bailouts Will Likely Cripple U.S. Budget and Imperil the Dollar
Fannie Mae and Freddie Mac's rapid slide into the centre of the global financial crisis has Wall Street frantically talking about a possible government takeover of the government-sponsored mortgage agencies. The situation is so dire that according to a report in the New York Times, senior Bush administration officials are considering a full-on government takeover or nationalisation.

There is a real risk that a bailout of the GSEs would be so costly that it would cripple the U.S. budget and threaten an already badly bruised U.S. currency.

Of importance on Friday was the fact that the safe haven bid was into gold and not into government bonds and U.S. treasurys. Rather the dollar sold off aggressively as did U.S. bonds and treasurys .

The U.S. dollar has fallen sharply in recent years and it's safe haven status is now already in jeopardy.  Should the U.S.' already reluctant creditors in China, Japan, Russia and the Middle East balk at buying U.S. debt than there could be a fall in bond prices, sharply higher interest rates, a run on the dollar and an unprecedented dollar crisis.

On Friday the dollar neared record lows versus the euro and gold surged in value. A sharp fall in US stocks sent the euro to an 11-week high of $1.5970 over the weekend, less than a cent away its record peak of $1.6020 seen on April 22.

The U.S. government cannot bail out the entire financial system. The FDIC deposit fund only has $53 billion of assets and yet more realistic appraisals of coming global writedowns and losses from the credit crisis are of some US$1.3 trillion . Fannie Mae and Freddie Mac are holding or ‘guaranteeing' about $5 trillion worth of mortgages . Any attempt to bailout the financial system would involve money printing and money creation on a scale of that of the Weimar Republic - which led to the brutal hyperinflation seen in Germany in the early 1920's.

Today's Data and Influences
Today is relatively quiet on the US data front, with market participants looking for further news from the financial sector and moves in equity markets to give direction to the precious metals again.

Key events to watch this week are producer prices and consumer prices for June, as well as the retail sales report for the same month. More significant may be Fed Chairman Bernanke's testimony to Congress on Tuesday and Wednesday in which he will discuss the current financial crisis.

Silver is trading at $18.78/18.82 per ounce (1145 GMT).

Platinum is trading at $2007/2012 per ounce (1145 GMT).
Palladium is trading at $447/451 per ounce (1145  GMT).

By Mark O'Byrne, Executive Director

Gold Investments
63 Fitzwilliam Square
Dublin 2
Ph +353 1 6325010
Fax  +353 1 6619664
Gold and Silver Investments Limited
No. 1 Cornhill
United Kingdom
Ph +44 (0) 207 0604653
Fax +44 (0) 207 8770708

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

Mission Statement
Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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14 Jul 08, 21:38
US Economy

I have a sleeping bag and a good tent.

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