Putin Says The Petrodollar Must Die, "The Dollar Monopoly In Energy Trade Is Damaging Russia's Economy"

On one hand, despite initial weakness following Europe's triple-dip red alert, futures declined only to surge higher after some headline or another out of Russia was again spun to suggest imminent Ukraine de-escalation (something which Russia whose only interest is to keep crude prices high, hasabsolutely zero interest in), perpetuating a rumor which was set off by a Russian media outlet tweet last week that has sent S&P futures over 50 higher in less than a week on... nothing.

On the other, Putin just said the following, which no matter how one spins it, shows precisely how Russia is inclined vis-a-vis future (un-de-counter) escalations.

PUTIN SAYS RUSSIA SHOULD AIM TO SELL OIL AND GAS FOR ROUBLES GLOBALLY, AS DOLLAR MONOPOLY IN ENERGY TRADE IS DAMAGING ECONOMY

Reuters adds:

President Vladimir Putin said on Thursday Russia should aim to sell its oil and gas for roubles globally because the dollar monopoly in energy trade was damaging Russia's economy.

"We should act carefully. At the moment we are trying to agree with some countries to trade in national currencies," Putin said during a visit to the Crimea region, which Moscow annexed from Ukraine earlier this year.

Countries such as China, India, Iran, Brazil, and virtually every other non-insolvent, that is to say "developed, Western" country.

And now, bring on the Russian "isolation" (which is about to push Europe, not Russia, into a triple-dip recession) and further de-escalation.

http://www.zerohedge.com/news/2014-08-14/putin-says-petrodollar-must-die-dollar-monopoly-energy-trade-damaging-russias-econom

Fed Vice Chair Fischer On U.S. Bailin "Proposals"

Fed Vice Chair Fischer On U.S. Bailin "Proposals"

Federal Reserve Vice Chairman Stanley Fischer delivered his first speech on the U.S. and global economy in Stockholm, Sweden yesterday.

Fischer headed Israel’s central bank from 2005 through 2013 and is now number two at the Federal Reserve in the U.S. after Janet Yellen.

 [14]

Janet Yellen and Stanley Fischer

In a speech entitled, The Great Recession: Moving Ahead [15], given at an event sponsored by the Swedish Ministry of Finance, Fischer said that the economic recovery has been and remains “disappointing.”

“The recession that began in the United States in December 2007 ended in June 2009. But the Great Recession is a near-worldwide phenomenon, with the consequences of which many advanced economies--among them Sweden--continue to struggle. Its depth and breadth appear to have changed the economic environment in many ways and to have left the road ahead unclear.”

Speaking about the steps that have been taken internationally in order to “strengthen the financial system” and to reduce the “probability of future financial crisis,” Fischer said that the U.S. was preparing proposals for bank bail-ins for “systemically important banks.”

“Additional steps have been taken in some countries. For example, in the United States, capital ratios and liquidity buffers at the largest banks are up considerably, and their reliance on short-term wholesale funding has declined considerably. Work on the use of the resolution mechanisms set out in the Dodd-Frank Act, based on the principle of a single point of entry--though less advanced than the work on capital and liquidity ratios--holds the promise of making it possible to resolve banks in difficulty at no direct cost to the taxpayer.

As part of this approach, the United States is preparing a proposal to require systemically important banks to issue bail-inable long-term debt that will enable insolvent banks to recapitalize themselves in resolution without calling on government funding--this cushion is known as a "gone concern" buffer.”


See guide to coming bail-ins here [14]Protecting Your Savings in the Coming Bail-In Era [14]

Fischer’s comments that the U.S. is “preparing a proposal” for bail-ins is at odds with Federal Deposit Insurance Corporation (FDIC) and Bank of England officials who have said that bail-in legislation could be used today.

The U.S. already has in place plans for bail-ins in the event of banks failing. Indeed, the U.S. has conducted simulation exercises with the U.K. in 2013 and again this year.

On October 12 2013, Art Murton, the FDIC official in charge of planning for resolutions, and the Bank of England’s Deputy Governor Paul Tucker, both confirmed that the U.S. system is ready to handle a big-bank collapse.

The Bank of England’s Tucker, who has worked with U.S. regulators on the cross-border hurdles to taking down an international bank said that “U.S. authorities could do it today -- and I mean today.” 

There is speculation that were Yellen to retire early Fischer would be anointed as the new Federal Reserve Chairman. 

Fischer who previously was chief economist at the World Bank, also makes it clear that he expects ultra loose monetary policies to continue in the U.S. which will be bullish for gold and silver.

MARKET UPDATE
Today’s AM fix was USD 1,311.00, EUR 982.76 and GBP 781.75 per ounce.Yesterday’s AM fix was USD 1,308.25, EUR 977.33  and GBP 779.37 per ounce.

Gold fell $2.30 yesterday to $1,309.10/oz and silver rose $0.07 or 0.35% to $20.04/oz.

Gold popped higher today as equities fell on news that a Russian aid convoy is heading to Ukraine and on signs that the new deepening tensions and risk of conflict with Russia is hurting confidence in the euro zone economy.

 The Zew think tank in Germany reported a drop in investor confidence to its lowest level since 2012 due to the risk that economic sanctions pose to fragile economies. This helped push European shares and the euro lower, while boosting German bunds and gold.

Gold is marginally higher in London this morning after gold in Singapore [16] fell to test $1,305/oz overnight again. Futures trading volume was 36% below the average for the past 100 days this morning as Wall Street remains on vacation.

Gold in U.S. Dollars - 1 Year (Thomson Reuters)

Spot gold was up 0.3% at $1,312.70/oz at 1230 GMT, while U.S. gold futures for December delivery were up $1.80/oz at $1,312.30.

Silver for immediate delivery rose 0.1% to $20.18 an ounce. Spot platinum was flat at $1,473.63 an ounce, while palladium edged closer to multi year nominal highs and was 0.5% higher at $882 an ounce.

Russia said a convoy of 280 trucks had left for Ukraine today carrying humanitarian aid. U.S., EU and NATO officials warned that the help may be a pretext for a Russian invasion.

Gold has climbed about 9% this year, mostly on geopolitical tensions between the West and Russia over Ukraine, and violence in the Middle East. Gold is seen as a safe haven investment to hedge riskier assets such as equities.

Many market participants are surprised that gold has not seen greater gains and is flat since February. Given the degree of geopolitical uncertainty and the fact that this uncertainty is likely to disappear anytime soon, gold should have seen greater gains.

http://www.zerohedge.com/print/492807

"US Sanctions On Russia May Sink The Dollar," Ron Paul Fears "Grave Mistake"

Submitted by Ron Paul via The Ron Paul Institute [11],

The US government's decision to apply more sanctions on Russia is a grave mistake and will only escalate an already tense situation, ultimately harming the US economy itself. While the effect of sanctions on the dollar may not be appreciated in the short term, in the long run these sanctions are just another step toward the dollar's eventual demise as the world's reserve currency.

Not only is the US sanctioning Russian banks and companies, but it also is trying to strong-arm European banks into enacting harsh sanctions against Russia as well. Given the amount of business that European banks do with Russia, European sanctions could hurt Europe at least as much as Russia. At the same time the US expects cooperation from European banks, it is also prosecuting those same banks and fining them billions of dollars for violating existing US sanctions. It is not difficult to imagine that European banks will increasingly become fed up with having to act as the US government's unpaid policemen, while having to pay billions of dollars in fines every time they engage in business that Washington doesn't like.

European banks are already cutting ties with American citizens and businesses due to the stringent compliance required by recently-passed laws such as FATCA (Foreign Account Tax Compliance Act). In the IRS's quest to suck in as much tax dollars as possible from around the world, the agency has made Americans into the pariahs of the international financial system. As the burdens the US government places on European banks grow heavier, it should be expected that more and more European banks will reduce their exposure to the United States and to the dollar, eventually leaving the US isolated. Attempting to isolate Russia, the US actually isolates itself.

Another effect of sanctions is that Russia will grow closer to its BRICS (Brazil/Russia/India/China/South Africa) allies. These countries count over 40 percent of the world's population, have a combined economic output almost equal to the US and EU, and have significant natural resources at their disposal. Russia is one of the world's largest oil producers and supplies Europe with a large percent of its natural gas. Brazil has the second-largest industrial sector in the Americas and is the world's largest exporter of ethanol. China is rich in mineral resources and is the world's largest food producer. Already Russia and China are signing agreements to conduct their bilateral trade with their own national currencies rather than with the dollar, a trend which, if it spreads, will continue to erode the dollar's position in international trade. Perhaps more importantly, China, Russia, and South Africa together produce nearly 40 percent of the world's gold, which could play a role if the BRICS countries decide to establish a gold-backed currency to challenge the dollar.

US policymakers fail to realize that the United States is not the global hegemon it was after World War II. They fail to understand that their overbearing actions toward other countries, even those considered friends, have severely eroded any good will that might previously have existed. And they fail to appreciate that more than 70 years of devaluing the dollar has put the rest of the world on edge. There is a reason the euro was created, a reason that China is moving to internationalize its currency, and a reason that other countries around the world seek to negotiate monetary and trade compacts. The rest of the world is tired of subsidizing the United States government's enormous debts, and tired of producing and exporting trillions of dollars of goods to the US, only to receive increasingly worthless dollars in return.

The US government has always relied on the cooperation of other countries to maintain the dollar's preeminent position. But international patience is wearing thin, especially as the carrot-and-stick approach of recent decades has become all stick and no carrot. If President Obama and his successors continue with their heavy-handed approach of levying sanctions against every country that does something US policymakers don’t like, it will only lead to more countries shunning the dollar and accelerating the dollar's slide into irrelevance.

http://www.zerohedge.com/print/492807

Technology is finally disrupting financial services

Perhaps it is the stoic nature of the financial services industry that enabled it to resist disruption for so long, but there can be no doubt that technology has now burrowed into the heartland of the banking sector, leading to a wave of innovation in traditional markets like foreign exchange, stocks and shares, borrowing and saving.

Markets, such as betting, music and aviation, were disrupted by Betfair, Napster and budget airlines well over a decade ago, but financial services' own disruption has been fairly recent. This is surprising, when you consider that services like PayPal have been in existence for as long as Amazon and eBay, without sparking widespread disruption.

You may recognise the names of many of these new young players, but it's unlikely you will have seen them on the high street, as this revolution is taking place almost exclusively online, enabled by the low barriers to entry that modern technology affords.

Who is leading the revolution?

Young, social and not always from a financial services background, these 'disrupters' have lived through a lifetime where access to technology (and creating it) is second nature, and where consumers have choices, are transient and looking for value. By applying this ethos to their own products and services, they are winning new customers from a range of demographic groups.

The way companies like Transferwise, which is disrupting the foreign exchange transfer service, and Nutmeg, which offers low-cost investment portfolio management, are able to pass this value to their customers is by saving a fortune on technology. Unlike their larger competitors, they have been able to start from scratch in the age of cloud, big data and mobile, thereby avoiding expensive overheads like legacy IT systems, branch networks and people. They also have talent and an entrepreneurial spirit that appeals to people who are tired of the same old services.

A perfect storm?

Disruption would not be truly possible without the right environment. The recession, coupled with disillusionment towards traditional finance providers, has coincided with a surge in internet adoption and trust in online providers. According to the latest Ofcom Adults' Media Use and Attitudes Report 2014, over 83% of adults now go online, nearly all 16-35 year olds are online (98%) and use in the over 65s has increased by almost 10% over the last two years, with 42% now online. Additionally, six in 10 adults now own a smartphone and 55% send and receive emails using their devices.

The largest growth demographic is the over 65s, with 20% now owning a smartphone, and 17% owning a tablet – a figure which has trebled in just a year.

One third of all mobile users claim to buy things via their phone or use their phone to check their bank balance.

All of which points towards emerging financial service providers accessing an audience that is no longer constrained by the traditional barriers of entry and trust, which would have prevented disruption on this scale several years ago.

Sustainable disruption?

The darling of the alternative finance revolution in the UK is undoubtedly peer-to-peer lending. True disruption ensued when a new market was created by Zopa in the UK. It recognised the opportunity to undercut loan and savings providers in the consumer market, by acting as a low margin middleman from a purely online platform and taking a small fee for the service.

Since Zopa, the business loan market has been further disrupted by the likes of Funding Circle and rebuildingsociety, invoice discounter Market Invoice, and supply chain financier Crossflow Payments. All of these platforms operate a high volume, low margin service, which creates value for businesses and the individuals and institutions lending money through them. Assuming they can retain the trust of their users and avoid scandal, there is no limit on how much these businesses can grow.

What has been significant is the political backing that 'alternative finance' has received. By allowing innovation and not legislating against it, the government has permitted disruption. This comes back to the 'perfect storm', where politicians have been put under pressure to increase funding to SMEs and have been given the license to back disrupters. This might not have happened in a boom cycle.

Competition breeds sustainability in markets. Businesses and consumers now have an ever-increasing pool of resources to tap, and crucially, these funds are not all reliant on the capital markets, meaning that if alternative finance continues to grow, we should have a more sustainable system, which is less sensitive to market movements.

The low margin aspect means that providers should be able to flex with any interest rate rise and still offer value for all parties. As a result, a future recession shouldn't mean a complete withdrawal of business loan products because there are many more providers operating now that would thrive in that environment. Alternative providers have evolved from the last resort, to the first option for many SMEs in just a few years.

What's next?

To date, pensions and insurance are two markets that haven't seen disruption on the same scale as personal and business loans.

Pensions in particular might need political assistance to make self-invested personal pensions (SIPPs) more accessible to people, but the high administration charges, which are causing many people to lose value, are exactly the sort of motivating factor that disrupters favour. If people were able to invest their pension themselves in a wider range of investments and pay minimal fees, you could certainly have an appealing product. Looking at the rest of the financial services market, you can clearly see the hallmarks of evolution. Existing providers are bending to trends as we all become more social, faster and less loyal. They're also looking to collaborate with disrupters to boost relations with their own customers.

But where customer inertia and superior technology might have protected financial services from significant disruption in the past, this is no longer the case. Technology is cheaper and easier to access than ever before, and people have acquired a taste for new online-only services.

Beyond any doubt, the disruption of financial services is only just beginning.

Nick Moules is marketing and communications manager for rebuildingsociety

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.

http://www.theguardian.com/sustainable-business/technology-finally-disrupting-financial-services

De-Dollarization Accelerates - China/Russia Complete Currency Swap Agreement

The last 3 months have seen Russia's "de-dollarization" plans accelerate. First Gazprom clients shift to Euros and Renminbi, then the UK signs currency swap agreements with China, then NATO ally Turkey cuts ties and mulls de-dollarization, Switzerland jumps in the currency swap agreements, and BRICS create their own non-US-based funding vehicle, and then finally this week, Russia's oligarchs have shifted cash holdings to Hong Kong. But this week, as RT reports, Russian and Chinese central banks have agreed a draft currency swap agreement, which will allow them to increase trade in domestic currencies and cut the dependence on the US dollar in bilateral payments. “"The agreement will stimulate further development of direct trade in yuan and rubles on the domestic foreign exchange markets of Russia and China," the Russian regulator said.

As RT reports,

In early July, the Central Bank’s chairwoman Elvira Nabiullina said Moscow and Beijing were close to reaching an agreement on conducting swap operations in national currencies to boost trade. The deal was later discussed during her trip to China.

President Vladimir Putin, during his visit to Shanghai in May, said cooperation between Russian and Chinese banks was growing, and the two sides were set to continue developing the financial infrastructure.

“Work is underway to increase the amount of mutual payments in national currencies, and we intend to consider new financial instruments,” Putin said after talks with President Xi Jinping.

It appears the deal is done...

The Russian and Chinese central banks have agreed a draft currency swap agreement, which will allow them to increase trade in domestic currencies and cut the dependence on the US dollar in bilateral payments.

“The draft document between the Central Bank of Russia and the People’s Bank of China on national currency swaps has been agreed by the parties,” and is at the stage of formal approval procedures, ITAR-TASS quotes the Russian regulator’s office on Thursday.

The Russian Central Bank is not giving precise details on the size of the currency swaps, nor when it will be launched. It says this will depend on demand.

According to the bank, the agreement will serve as an additional instrument for ensuring international financial stability. Also, it will offer the possibility to obtain liquidity in critical situations.

“The agreement will stimulate further development of direct trade in yuan and rubles on the domestic foreign exchange markets of Russia and China,” the Russian regulator said.

Currently, over 75 percent of payments in Russia-China trade settlements are made in US dollars, according to Rossiyskaya Gazeta newspaper.

*  *  *

And as we have explained repeatedly in the past, the further the west antagonizes Russia, and the more economic sanctions it lobs at it, the more Russia will be forced away from a USD-denominated trading system and into one which faces China and India.

http://www.zerohedge.com/news/2014-08-09/de-dollarization-accelerates-chinarussia-complete-currency-swap-agreement

Draghi Outlook Menaced by Putin as Ukraine Crisis Bites

The crisis in eastern Europe is showing signs of disrupting Mario Draghi’s economic outlook.

Evidence is building that the conflict in Ukraine and European Union sanctions against Vladimir Putin’s Russia are undermining a euro-area recovery that the European Central Bank president already describes as weak. With the ECB expected to keep interest rates on hold near zero today and refrain from any new policy measures, Draghi is likely to face questions on how he plans to keep the economy on track.

The ECB may have few tools left to mitigate the impact of political turmoil that European companies from Anheuser-Busch InBev NV (ABI)to Siemens AG (SIE) say is hurting their business. A volley of measures introduced in June will take time to work, and policy makers have so far shied away from wheeling out a full-scale asset-purchase program.

“The euro-zone recovery is very fragile and the macro situation fluid,” said Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich. “Expect Draghi to elaborate on spillover risks from the Russia-Ukraine crisis.”

Waging Financial War

The ECB will announce its interest-rate decision at 1:45 p.m. in Frankfurt and Draghi will hold a press conference 45 minutes later. All 57 economists in a Bloomberg survey say officials will keep the benchmark rate at 0.15 percent.

The Bank of England’s Monetary Policy Committee is also predicted to leave its key interest rate unchanged, at a record-low 0.5 percent, when it meets at noon in London.

Invasion Risk

The meetings come against the backdrop of a mounting political crisis. Russia has massed troops along its border with Ukraine, prompting the U.S. to say there’s a risk of an invasion. President Putin retaliated yesterday against EU and U.S. sanctions by ordering restrictions on food imports from countries that seek to punish Russia.

The tension has hit investment and trade. European stocks closed yesterday at their lowest level in almost four months and the euro at one point dropped to its weakest against the dollar since November. The single currency traded at $1.3375 at 10:53 a.m. Frankfurt time today.

Belgium’s AB InBev, the world’s biggest brewer, said beer sales in Ukraine plunged more than 20 percent in the second quarter. At Germany’s Siemens, Europe’s largest engineering company, Chief Executive Officer Joe Kaeser said geopolitical strife poses a “serious risk for Europe’s growth in the second half.”

Italian Recession

Those headwinds aren’t making Draghi’s job any easier. Euro-area inflation is already running at less than a quarter of the ECB’s goal and recent data suggest that growth is struggling to gain momentum.

Italy, the currency bloc’s third-largest economy, unexpectedly slipped back into recession last quarter. Factory orders in Germany, the largest economy, dropped in June by the most since 2011, with the Economy Ministry citing geopolitical tensions as damping the outlook for coming months.

Euro-area consumer prices rose 0.4 percent last month from a year earlier, the slowest pace in almost five years. That compares with an ECB goal of just under 2 percent.

“Downside risks to growth and inflation appear to be on the rise,” said Anatoli Annenkov, an economist at Societe Generale SA in London. “The low inflation number for July and rising geopolitical tensions make this point clear, and highlights the severe risk of ‘lowflation’ in the euro area.”

No Action

One question Draghi will likely face today is what he can do in response. The ECB president has said that an external shock that derails the baseline scenario of a gradual recovery in prices would require broad-based asset purchases, or quantitative easing. Getting policy makers to agree on what constitutes a shock may not be easy.

Governing Council member Ewald Nowotny said in an interview on July 10 that he doesn’t see any need for further action in the near future. Fellow council member Ardo Hansson told Bloomberg News on July 16 that there’s no immediate need for large-scale bond purchases. He also said a smaller program to buy asset-backed securities won’t be ready any time soon.

“Unless something really unexpected happens that puts us on a different inflation projectory, then the idea of doing something more at this stage shouldn’t be part of our baseline assumption,” Hansson said.

Shock Absorber

One reason not to jump in with additional steps now is that the barrage of new measures announced in June will take time to feed through to the real economy. The tools include a new targeted lending plan for banks that only starts disbursing cash in September.

The euro area may also be better able to absorb shocks than during the depths of the financial crisis. The collapse and government bailout of Banco Espirito Santo SA, once Portugal’s biggest lender by market value, hasn’t prevented euro-area bond yields from holding near record lows. The yield on German two-year bonds fell below zero today for the first time since May 2013.

Manufacturing and services activity in the euro area measured by Markit Economics strengthened in July and the reading has been above 50, indicating expansion, for a year. A gauge of economic confidence for the region unexpectedly rose.

“It is undoubtedly true that downside risks going forward have been mounting recently due to geopolitical tensions,” said Andreas Rees, chief Germany economist at UniCredit MIB in Frankfurt. “Psychological burdens have increased recently. However, it is too early to call it a day.”

Tail Risk

The next clue on the region’s inflation outlook will come on Aug. 14, when the ECB publishes its quarterly Survey of Professional Forecasters. In September, the ECB will probably revise its own inflation forecasts lower, according to Marchel Alexandrovich, an economist at Jefferies International Ltd. in London.

Even then, the central bank “will likely take some time before it considers further policy moves,” he said. “The ECB is in a holding pattern -– watching the data and, increasingly, political developments surrounding Russia.”

The ECB predicted in June that inflation will average 0.7 percent this year, with the rate accelerating to 1.4 percent in 2016.

“Putin’s behavior over the next few weeks is the key tail risk to watch,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The biggest risk to the recovery is the confidence shock which an open Russian invasion of Ukraine could cause across core Europe and beyond.”

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Stefan Riecher in Frankfurt atsriecher@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Paul Gordon, Zoe Schneeweiss

http://www.bloomberg.com/news/print/2014-08-06/draghi-outlook-menaced-by-putin-as-ukraine-crisis-bites.html

Petrodollar Under Threat As Russia And Iran Sign Historic 500,000 Barrel A Day Oil Deal

Russia Delivers Blow To Petrodollar In Historic $20 Billion Iran Oil Deal
Russia signed a historic $20 billion oil deal with Iran to bypass both western sanctions and the dollar based western monetary system yesterday.

President Putin Admire Gold Bar (London Gold Delivery Bar)

Currency wars are set to escalate as the petro dollar’s decline continues.  

Russian Energy Minister Alexander Novak and his Iranian counterpart Bijan Zanganeh signed a five-year memorandum of understanding in Moscow, which included cooperation in the oil sector.

"Based on Iran's proposal, we will participate in arranging shipments of crude oil, including to the Russian market," Novak was quoted as saying.

The five year accord will see Russia help Iran “organise oil sales” as well as “cooperate in the oil-gas industry, construction of power plants, grids, supply of machinery, consumer goods and agriculture products”, according to a statement by the Energy Ministry in Moscow.

The deal could see Russia buying 500,000 barrels of Iranian oil a day, the Moscow-based Kommersant newspaper has previously reported. Under the proposed deal Russia would buy up to 500,000 barrels a day or a third of Iranian oil exports in exchange for Russian equipment and goods.

The Russian government withdrew the statement regarding the deal last night, but said it would issue a new statement today.

In January, Russia said that they were negotiating an oil-for-goods swap worth $1.5 billion a month that would enable Iran to lift oil exports substantially to Russia, undermining Western sanctions.

Yesterday, the Russian President told regional leaders that “the political tools of economic pressure are unacceptable and run counter to all norms and rules.” He  said in response to western sanctions he had given orders to boost domestic manufacturers at the expense of non-Russian ones.

The White House has previously said that reports of talks between Russia and Iran were a matter of "serious concern".

Reserve Currencies In History - Dollar's Demise Continues

"If the reports are true, such a deal would raise serious concerns as it would be inconsistent with the terms of the agreement with Iran," Caitlin Hayden, spokeswoman for the White House National Security Council, said in January.

U.S. and European Union sanctions against Russia threaten to hasten a move away from the petro dollar that’s been slowly occurring since the global financial crisis.

See important guide to Currency Wars here Currency Wars: Bye, Bye Petrodollar - Buy, Buy Gold

http://www.zerohedge.com/news/2014-08-06/petrodollar-under-threat-russia-and-iran-sign-historic-500000-barrel-day-oil-deal

"The US Is Bankrupt," Blasts Biderman, "We Now Await The Cramdown"

Submitted by Chris Hamilton via Charles Biderman TrimTabs' blog,

US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The Gap is Growing. We Now Await the Nature of the Cramdown.

There are many ways to look at the United States government debt, obligations, and assets.  Liabilities include Treasury debt held by the public or more broadly total Treasury debt outstanding.  There’s unfunded liabilities like Medicare and Social Security.  And then the assets of all the real estate, all the equities, all the bonds, all the deposits…all at today’s valuations.  But let’s cut straight to the bottom line and add it all up…$89.5 trillion in liabilities and $82 trillion in assets.  There.  It’s not a secret anymore…and although these are all government numbers, for some strange reason the government never adds them all together or explains them…but we will.

The $89.5 trillion in liabilities include:

• $20.69 trillion
  • $12.65 trillion public Treasury debt (interest rate sensitive bonds sold to finance government spending)
    • Fyi – $5.35 trillion of “intra-governmental” Treasury debt are not included as they are considered an asset of the particular programs (SS, etc.) and simultaneously a liability of the Treasury
• $6.54 trillion civilian and Military Pensions and Benefits payable
• $1.5 trillion in “other” liabilities http://www.fms.treas.gov/finrep13/note_finstmts/fr_notes_fin_stmts_note13.html.
• $69 trillion (present value terms what should be saved now to make up the present and future anticipated tax shortfalls vs. present and future payouts).
  • $3.7 trillion SMI (Supplemental Medical Insurance)
  • $39.5 trillion Medicare or HI (Hospital Insurance) Part B / D
  • $25.8 trillion Social Security or OASDI (Old Age Survivors Disability Insurance)
    • Fyi – $5+ trillion of additional unfunded state liabilities not included.

Source: 2013 OASDI and Medicare Trustees’ Reports. (pg. 183), http://www.gao.gov/assets/670/661234.p

These needs can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination.  But since 1969 Treasury debt has been sold with the intention of paying only the interest (but never repaying the principal) and also in ’69 LBJ instituted the “Unified Budget” putting all social spending into the general budget reaping the gains in the present year absent calculating for the future liabilities. If you don’t know the story of how unfunded liabilities came to be and want to understand how this took place, please stop and read as USA Ponzi explains nicely… http://usaponzi.com/cooking-the-books.html

$81.8 trillion in US Household “net worth”

According to the Federal’s Z.1 balance sheet http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf, the US has a net worth of $81.8 trillion – significantly up from the ’09 low of $55.5 trillion…a $23 trillion increase in five years.  Fascinatingly, “household” liabilities are still $500 billion lower now than the peak in ’08 but asset “valuations” are up $22.5 trillion.  All while wages have been declining.  A cursory glance at the Federal Reserve’s $4 trillion in balance sheet growth in the same time period shows how the lack of growth in “household” liabilities (currently @ $13.7 trillion) has been co-opted by the Fed.

I believe it’s clear when incomes no longer supported credit and debt growth in ’08, consumers tapped out and in stepped the Federal Reserve to bridge the slowdown.  But what the Fed may or may not have realized is once they stepped in, there was no stepping out.

(Charles, would be great if you could export this chart from FRED to be included…or if you have a better idea to show this relationship, would be great???)

http://research.stlouisfed.org/fred2/graph/?g=GVF

How We Got Here – Growth of Debt vs. GDP

45 years of ever increasing debt loads, social safety net growth, corporate welfare.  45 years of Rep’s and Dem’s in the White House and Congress bought by special interests and politicians buying citizens votes with laws enacted absent the revenue to pay for them.   We have a Treasury and Federal Reserve willing to “innovate” and wordsmith to avoid the national recognition of the true difficulties and implications of our present situation.  45 years of intentionally avoiding an honest accounting of our national obligations, mislabeling, and misdirecting to pretend these obligations can and will be honored.  45 years of cornice like debt and promise accumulation simply awaiting the avalanche of claimant redemptions and debt repayments.

First, an historical snapshot for perspective of the last time US Treasury debt was larger than our economy (debt/GDP in excess of 100% in 1946) and subsequent progress of debt vs. GDP…and why anyone suggesting there is a parallel from post WWII to now is simply ill informed.

Post-WWII:

• ’46-’59 (13yrs)
  • Debt grew 1.06x’s ($269 B to $285 B)
  • GDP grew 2.2x’s ($228 B to $525 B)
  • ’60-’75 (15yrs)
    • Debt grew 2x’s ($285 B to $533 B)
    • GDP grew 3.3x’s ($525 to $1.7 T) Income grew 3.3x’s ($403 B to $1.37 T)
      • ’65 Great Society initiated, ’69 unfunded liabilities begin under a “Unified Budget”

Post-Vietnam War:

• ’76 -’04 (28yrs)
  • Debt grew 15x’s ($533 B à $7.4 T) Unfunded liability 15x’s ($3 T to $45 T)
  • GDP grew 7.3x’s ($1.7 T à $12.4 T) Income grew 7.4x’s ($1.37 T to $10.1 T)
  • ’05 -’14 (9yrs)
    • Debt grew 2.4x’s or 240% ($7.4 T à $17.5 T) Unfunded liability 1.5x’s ($45 T to $69 T)
    • GDP grew 1.4x’s or 140% ($12.4 T à $17 T) Income grew 1.4x’s ($10.1 T to $14.2 T)
      • Z1 Household net worth grew 1.25x’s from $65 T to $82 T…

http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0614_hist.pdf

If the trends continue as they have since ’75, Treasury debt will grow 2x’s to 3x’s faster than GDP and income to service it…and the results would look as follows in 10 years:

• ’15 – ‘24
  • Treasury debt will grow est. ($17.5 T à $34 T to $44 T)
  • GDP* will grow est. ($17 T à $22 T to $24 T)…income growth likely similar to GDP.

* = I won’t even get into the overstatement of economic activity within the GDP #’s…just noting there is an overstatement of activity.

So, while the Treasury debt growth rate skyrocketed from ’05 onward and the GDP growth slumped to its lowest since WWII, the unfunded liabilities grew even faster.

Drumroll Please – Total Debt/Obligation growth vs. Debt

Let’s go back to our ’75-’14 numbers and recalculate based on total Federal Government debt and liabilities:

• ’75-’14
  • debt (total government obligations) grew 33x’s 168x’s ($533 B à $17.5 T $89.5 T*)
  • GDP grew 10x’s ($1.7 T to 17 T)
    • Household net worth grew 15x’s ($5.4 to $82 T) while median household income grew 3x’s (est. $17k to $51k) while Real median household income grew 1.13x’s ($45k to $51k)

*$89.5 T is the 2012 fiscal year end budget number, the 2013 fiscal year end # is likely to be approx. $5+ T higher, or debt grew 180x’s in 40 years vs. 10x’s for GDP / income….but seriously, does it really matter if debt grew at 10x’s, 16x’s, or 18x’s the pace of the underlying economy…all are uncollectable in taxes and unpayable except for QE or like programs.

Why Can’t We Pay Off the Debt or Even Pay it Down?

Take 2013 Federal Government tax revenue and spending as an illustration:

• $16.8 Trillion US economy (gross domestic product)
  • $2.8 Trillion Federal tax revenue (taxes in)
  • $3.5 Trillion Federal budget (spending out)
    • -$680 Billion budget deficit (bridged by sale of Treasury debt spent now and counted as a portion of GDP)
    • = $550 Billion economic growth?!?
      • PLEASE NOTE – The ’13 GDP “growth” is less than the new debt (although the new debt spent is counted as new GDP) and the interest on the debt will need be serviced indefinitely.

Why Cutting Benefits or Raising Taxes Lead to the Same Outcome

While many try to dismiss these liabilities assuming we will continue to only service the debt rather than repay principal and interest; assuming we turn down the SS benefits via means testing, delaying benefits, reducing benefits; assuming we will bend the curve regarding Medicaid, Medicare, and Welfare benefits; assuming we will avoid further far flung wars and military obligations and stop feeding the military industrial complex; assuming no future economic slowdowns or recessions or worse; assuming a cheap and plentiful energy source is found to transition away from oil.  But all these debts and liabilities are someone else’s future income they are now reliant upon; someone’s future addition to GDP.  If these debts or obligations are curtailed or cancelled to reduce the debt or future liability, the future GDP slows in kind and tax revenues lag and budget deficits grow.  Of course I do advocate these debts and liabilities cannot be maintained, but austerity (real austerity) is painful and would set the stage for a likely depression where the nation (world) proceeds with a bankruptcy determining what and how much of the promises made can be honored until wants, needs, and means are all brought back in alignment.

So What’s it All Mean?

Let’s get real, austerity is not going to happen and we aren’t going to balance the budget.  We’re never going to pay off our debt or even pay it down.  We’re rapidly moving from 4 taxpayers for every social program recipient to 2 per recipient.  And ultimately, now we aren’t even really paying the interest on the debt…the Federal Reserve is just printing money (QE1, 2, 3) to buy the bonds and push the interest payments ever lower masking the true cost of these programs.  Of course, interest rates (Federal Funds Rates) have edged lower since 1980’s 20% to todays 0% to make the massive increases in debt serviceable.

Politicians and central bankers have shown they are going to print money to fulfill the obligations despite the declining purchasing power of the money.  It’s not so much science as religion.  A belief that infinite growth will be reality through unknown technologies, innovations, and solutions that in four decades have gone unsolved but somehow in the next decade will not only be solved but implemented.  Because it is credit that is undertaken with a belief that the obligation will ultimately allow for future repayment of principal, interest, and a profit.  But without the growth, the debt cannot be repaid nor liabilities honored.  Without the ability to repay the principal, the debts just grow and must have ever lower rates to avoid interest Armageddon.  This knowledge creates moral hazard that ever more debt will be rewarded with ever lower rates and thus ever greater system leverage.  The politicians and central bankers will continue stepping in to avoid over indebted individuals, corporations, crony capitalists, cities, states, federal government from failing.  It is a fait accompli that a hyper-monetization has/is/will take place…and now it is simply a matter of time until the globe either becomes saturated with dollars and/or reject the currency (so much to discuss here on likely demotion or replacement of the Petro-dollar and more…).  Because the earthquake (unpayable debt and obligations) has already taken place, now we are simply waiting for the tsunami.  Forget debt repayment or debt reduction…forget means testing or “bending cost curves”…we’re approaching the moment where even at historically low rates we will not be able to pay the interest and maintain government spending…without printing currency as this generation of American’s have never seen.  Bad governance and bad policy coupled with disinterested citizens will demand it.

Epilogue – So Where Do you put your Money?

No one can really know what will have value in this politicized crony capitalistic system as the hyper-monetization ramps up…all I can suggest is to hedge your bets with some physical precious metals, some minimal leveraged real estate, but also stocks and bonds and even some cash…because although there are natural forces in favor of the tangible, finite goods…there are also equally determined forces bound to push bond yields down, real estate and particularly stock prices up.  Unfortunately, the more you know, the more you know you don’t know…invest and live accordingly.

http://www.zerohedge.com/news/2014-08-04/us-bankrupt-blasts-biderman-we-now-await-cramdown