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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Financial Crisis is the Birth Pains of a New Currency

Currencies / Credit Crisis 2008 Oct 14, 2008 - 01:28 PM GMT

By: David_Vaughn


Best Financial Markets Analysis ArticleWhat can we say?

We are experiencing the most severe financial crisis since 1929. It hurts. There appears to be no relief in site. What began with mortgage defaults has now spread to the derivative markets.

You will hear the term “credit default swaps” by the hour as this mess deepens and worsens. What are credit default swaps?

A credit default swap (CDS) is the most common type of derivative. A credit default swap is similar to an insurance contract protecting the owner against certain financial risks. Are you confused? These types of derivative are very complicated and not even totally understood by those who create them and profit from them. Of course right now these derivatives are failing and no one is profiting. And because of the volume of these derivatives is the reason our banking system and financial institutions are falling apart.

“If Congress is actually going to take steps like freezing foreclosures (which it won't, but which it has no Constitutional authority to do in any case), it may as well take the step actually required here, - to declare all credit default swaps retroactively unenforceable. The CDS's are the real problem, and the only solution is to void them (they were all constructed in secret, without regulatory oversight of any kind, and apparently threaten the world economy.)”, 9-29-2008

For the past half a decade this type of poker has become very popular with folks wanting to “speculate” with the possibility of above average and high returns. And with every risky speculation there is a tremendous downside if the bet fails. We are definitely seeing failure. It is estimated there may be 530 plus trillion US dollars of these types of derivatives on the market. And with this quantity of money turning into losses can you understand now why the financial world as we know it is collapsing?

Do you really want to understand what the heck these 530 trillion plus “credit default swaps” are? Vanity Fair did a great on site interview asking financial types in New York just what these types of derivatives are. Go to the following link below and fill yourself with wisdom by hearing an audio presentation of what a credit default swap is. Good humor.

What our government is attempting to do now is to prop up insolvent institutions that have bet on these failing derivatives. Insufficient monetary reserves and zero regulations. Credit default swaps are an untamed and unregulated market.

“Don't understand credit default swaps? Don't worry—neither does Congress.” “No one loses—as long as no one tries to cash in on the insurance.”

The key to the problem seems to be in the following sentence below.

“No one loses—as long as no one tries to cash in…”

Evidently, everyone now is attempting to cash in.

“Uncle Sam, for all his righteous indignation, is, in fact, the father of all deceptive accounting. The government has arranged its budgeting to keep the great bulk of its liabilities off the books and out of sight. The real liability facing our government is $70 trillion.” Forbes, 9-29-2008

One of the major concerns now is whether the US government might find itself in a position soon where it will not be able to make payments on its large debt. This crisis began about a year ago as professional investors began to lose confidence in large financial institutions and began pulling their money out and calling in loans. Confidence has evaporated gradually and now stepped up to a climax. Many of these credit default swaps were written against mortgage defaults and the owners of these derivatives were therefore liable for the financial loss. To comprehend a number like 530 trillion worth of derivatives is staggering. And as more and more companies and bonds default the money to pay off these debts just isn't there.

What is happening today? Where are we going? Well, for sure we are witnessing the nationalization of the US banking system as one of the answers to this problem. How convenient that these circumstances are occurring now for those wanting to see greater governmental control over our nation.

We are going to witness the ultimate collapse of the US dollar as a result of this crisis expanding. And if I am wrong? Come on folks. The US government has just stated they are going to begin injecting government money into the US banking system and pump whatever money is necessary to sustain the US economy. Where do you think this money is going to come from? Already the US pays 4 billion dollars a day toward foreign debt. You know and I know that when personal debt reaches a certain level it just is not sustainable any more. Try running your household with half your income going to debt. It just doesn't work.

CNBC 2 years ago laughed at the speculation of a new currency called the amero, the New North American Union Currency. Two years ago CNBC laughed heartedly at this idea but now no one is laughing as the United States desperately looks for a solution to the present growing financial bust. The introduction of a new currency in times of a financial crisis is not a new idea, but has occurred before in history when an economic failure called for the elimination of massive accrued debt. Listen to the video below on CNBC. Listen to the laughter. I don't believe anyone is laughing now.

Already, the US dollar is becoming more and more unpopular with every passing day. As the text below states George Soros makes the statement that the dollar was losing its prominence even back in April this year.

“The U.S. Federal Reserve's efforts to encourage bank lending by cutting interest rates has been “impaired by the unwillingness of the rest of the world to accept dollars,” Soros said.” International Herald Tribune, 4-17-2008

What one simple solution is going to bring this disaster to an end? Any sensible person knows that the creation of more and more debt piled on top of itself as the US government is presently doing is only going to make the situation worse. And when the US dollar eventually crashes? What better time then will there be to introduce a new currency. The people will demand it. The laughter back at CNBC is still absent.

In a nutshell, what would be the advantage of creating a new American currency? When the dollar crashes that will be the best time for the introduction of a new currency. The people will demand it because the new currency will be a solution to dealing with and paying off all the huge amassed debt. Government debt and individual personal debt. The new currency will be weaker than the present US dollar and will be used to pay off US debt all around the world. When you think about it the national debt has got to be addressed soon because of its growing size. There is no way it can ever be paid off even partially without a major change in the US currency system. And what do you think will happen to your 401K and personal savings with the introduction of an even weaker currency than the dollar? Are these normal times? Of course not. Another major US institution right now is hanging in the balance. Who would have ever believed even five years ago that General Motors would be on the edge of extinction?

“…GM's spending $3b a year on interest payments, burning through a reported $1b per month…” “After six to nine months, GM as we know it will be dead.”

Even the International Monetary Fund is predicting the financial meltdown to persist.

“IMF Predicts Major Global Slowdown Amid Financial Crisis” “The world economy is decelerating quickly—buffeted by an extraordinary financial shock… the IMF says in its latest World Economic Outlook (WEO).”, 10-8-2008

And here is where the new US currency steps in. The American people will be demanding it in a few months after this financial crisis has grown to the point where it has wiped out 90% of US savings and 401K portfolios.

“The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s, according to the WEO…” “…financial conditions are expected to remain very difficult, even assuming that actions by the U.S. and European authorities succeed in stabilizing financial conditions and in avoiding further systemic events.” “…persistent financial stress and the credit constraints from deleveraging, which could be deeper and more protracted than in the baseline scenario; and the U.S. housing market deterioration, which could be deeper than forecast…”, 10-8-2008

When the powerful IMF starts predicting economic failure its time to start paying attention. Your response can begin by getting out of debt and buying gold. We are talking about asset preservation here. How many people know that many states are running out of money even as we speak and can no longer even borrow short term debt to keep their governments running? California is desperately in need of a cash infusion. If California were a country it would be the 7th largest country in the world. California needs 7 billion dollars ASAP. Another 7 billion dollars created out of thin air? This debt growth is quickly reaching its climax.

“California is running out of money” “Arnold Schwarzenegger, California governor, says the state may need to turn to US government for financing” “Arnold Schwarzenegger, the California governor, has told US Treasury Secretary Henry Paulson that the most populous state may need to turn to the federal government for short-term financing as a $7 billion sale of notes may be foiled by weak credit markets.” “Mr Schwarzenegger has warned that California might have to delay payments to teachers and other workers, and in the letter he added that California is not alone.”, 10-3-2008

On Sunday George Soros was interviewed on CNN for his opinion on the present financial crisis. George Soros said that the days of the United States borrowing from China were over. The position of the United States as financial leader of the world is now compromised. The US debt load is going to dramatically increase in the coming months. Just too much growing leverage. The middle class will be squeezed out and down. The era of the past 30 years are over. A new world order is now being established.

“U.S. May Take Ownership Stake in Banks” “Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials. “ “In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.”, 10-8-2008

The Bank of England has just nationalized the British banking system. Now it is time for the United States to nationalize its banks. How about that. A US government to guarantee all lending between US banks.

“America Is Not Too Big to Fail” "The earthquake will come via a collapse in the market for U.S. government bonds as domestic and foreign investors realize that the only way Uncle Sam can meet his future spending obligations is to print massive quantities of money…”

“Scared yet?” Fortune

It's important now to speak a little on the gold mining equities. As most of you know they cratered this past summer. But now may be a good time to start once again keeping an eye on this market. Because of our financial crisis I am seeing more commentators appear on Fox, CNN and NBC talking about gold. And in addition to recommending gold they are also stating that eventually dollars will begin to pour into this sector as this market will represent one of the very few promising equities left. And of course we are living in the last days of cheap resources and cheap commodities.

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And what about gold? Will we eventually see a reaction in the precious metals market as consumers rush to hard assets after their 401K disintegrates?

Alf Field - “The resulting massive creation of new liquidity would destroy or vastly reduce the purchasing power of currencies as we know them today.” “The assets in the most secure category at the tip of the inverted pyramid are gold and silver bullion, assets that have performed the function of protecting wealth throughout the ages. In the layer above the precious metals lie the companies that mine and hold large deposits of gold and silver.” Alf Field, 9-6-2007

It is said that every great civilization leaves behind a legacy. The ancient Greeks contributed to the world the refinement of the city. The Romans contributed the fine art of killing. The future legacy of the United States will be the refined and mastered art of financial leverage.

By David Vaughn
Gold Letter, Inc.

© Copyright 2008, Gold Letter Inc.

“The Worldwatch Institute, an organization that focuses on environmental, social and economic trends, says the current rate of global demand for resources is unsustainable.”  

The publisher and its affiliates, officers, directors and owner may actively trade in investments discussed in this newsletter. They may have positions in the securities recommended and may increase or decrease such positions without notice. The publisher is not a registered investment advisor. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment-related advice. The news and editorial viewpoints, and other information on the investments discussed herein are obtained from sources deemed reliable, but their accuracy is not guaranteed. © Copyright 2008, Gold Letter Inc.

David Vaughn Archive

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29 Oct 08, 20:27
Great article

Interesting article.

Thanks for posting it.

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