The bottom line of the world US dollar situation is this: as soon as the US consumer cannot fulfill a real rate of return on the US dollar investments for all parties concerned, the end of the US dollar standard has come. That time is upon us now, but has yet to fully show itself.

Who are the parties concerned? Of course, central banks of the world with their trillions of US dollar reserves, Foreign industries, insurance companies, with annuities calculated on an historical 5 to 6 percent rate of return. Banks, if they keep loan portfolios, need an historical return of about 6 percent to maintain profitability. Retirement accounts need same 6 percent return. Individual savers want at least 6 percent or they don't save.

Really, friends its not too complicated when u look at historical interest rates. Its all about some real rate of return for all parties concerned.

Now then. The US ten year note runs in the range of 4 to 5 percent nowadays. Inflation is digging into that significantly. But, There is a game of asset appreciation for the MOMENT that keeps the game going, so people don't care they are not saving. So, the game keeps the game going now. Until, the rules of the game cannot be exploited further and the game ends and you have a winner and a loser. The present financial rule being exploited is the historical rate of 6 percent, and the speculation mentality has overcome it and created speculation mentalities in all sectors of the economy. The derivatives phenomena is the height of this abuse of the rules of interest return. This means that when people place money for 'investment' they are not seeking any historical rate of interest, but are fundamentally GREEDY and seeking speculative returns in excess of the historical 6 percent. When that happens, you get bubbles.

For the present, foreign central banks are hoarding dollars, until such a time that they don't get any kind of return on them. They are playing a game of devaluation visa vis the US dollar, and China has indicated recently it has no intention of removing the Yuan peg with the Dollar. The return they are getting is modernization, which is typically something nations are willing to subsidize. But in a sense they aren't subsidizing it too badly because they are willing to take a devaluation on their US dollar reserves for the trade off. This situation with China can continue AS LONG AS WE CAN BUY THEIR STUFF.

In principle, this could continue for many more years if it WERE NOT FOR the reality that the US consumer will become tapped out, and there will be no effective return on US dollar assets at that time, but losses. The only reason the foreigners are keeping the dollar assets is because we can keep purchasing stuff which is in fact based on debt to the foreign producing nations we have trade deficits with. Once the world market is saturated with all manifestations of US consumer debt the game will end, and then China will look for stage 2 of a multi decade PLAN. The Chinese have been rather forthright that they have a long term plan vis-à-vis the US dollar peg. Stage 2 will become implemented when stage 1 is interrupted by our simple inability to pay for home mortgages, due to rising interest rates for example, or due to a SIMPLE MAXING OUT of debt service ratios even if interest rates don't rise.

Now then, People are looking at China from the present perspective of the state of the trade game. They are not looking for stage 2.( I'm only using China as an exhibit ) We should be spending some time in our analysis, on thinking of what will happen after the present changes to the future.

The present state of affairs globally is that the real return of the US dollar has been removed from a standard rate of return of 6 percent, and counterweighted modernization in Asia with speculation in the US and the West, and all have simultaneous speculative bubbles, not only in real estate, but in the financial realm as well. But the Financial realm is suffering greatly because interest rates are so low, and so, they are doing things like making home mortgages and selling them off, and don't really care if the loan originations are all that worthy. And this process of speculative and irresponsible mortgage origination and reselling is simply amplifying the process of the modernization of Asia, at the cost of speculative debt on the west, and US in particular.

Additionally, the pathological phenomena of derivatives is nothing more than speculation at its highest order, that is run by the masters of money instruments, the banking industry, and taken to a ridiculous extreme, (and risk).

And then of course we have many organizations that have no business whatsoever holding derivatives as investments, and these things are off balance sheet, are not really reportable, are not accountable because central banks have decided for the present to let the entities holding them self regulate. (to the tune of much more than 200 trillion dollars!)

How did all these financial pathologies come to be? We have drifted from an economy based on a simple real return of interest, combined with excessive consumption based on debt and abuse of low interest rates. Low interest rates create bubbles and make normally responsible entities such as banks dependent on speculative returns and things like hedging of interest rates against what should be an historical 6 percent rate of return. These abuses have led to large asset bubbles word wide, and more necessary leveraging by the parties concerned, and more hedging of interest rates against the historical 6 percent rate expected to return.

The lack of return on basic savings, has led to speculation EXPECTATIONS. And has created a world wide trade of US debt to developing manufacturing nations, and is modernizing their economies, ie subsidizing them. But that process will end and the present state of affairs will end. So as soon as the US consumer is tapped out either by interest rate hikes or a simple debt service maxing out, the present speculative order ends. And I believe, this time it is going to be the end of the US dollar, come what may.

Part 2. No Investments

People like Warren Buffet and Bill Gross can't seem to find worthy investments these days. Buffet, who said recently that he doesn't see many places to put his money, is a value investor above all of them, i.e. a true investor and not a speculator. This guy can't really find places to put his billions. Or, take Bill Gross, bond king. He says he is having trouble placing bonds as usual, the MOST conservative investment in places that give a reliable return for a long term, Rather, Gross is suggesting buying short term maturing bonds.

Now if Gross, and Buffet can't find their favorite diet, then are you going to invest too? No you are not. There are no investments today there are only speculations. Therefore, my present premise: don't try to invest, and for sure don't speculate. We are in times of capital preservation, there are NO INVESTMENTS. There are only speculations.

Look, insurance companies are losing their butts now, for about 5 years. Why? There aren't any investments. General Motors and Ford make most of their money on auto finance, i.e. not in their core businesses. i.e. in a sense they are seeking income on a strata more risky than their core business because they don't see the benefit of investing in their core businesses, which is what their investments should really be if they had a future.

Now then, GM and Ford have massive retirement burdens to keep going, that are in fact under funded, and u know what? They are behind the curve just like Social Security is, but compounded not only by a demographic problem, but by their own declining competitiveness. Ford and GM are losing market share, just when they are finding they are under funded in retirement funds.

So, we have the following situation: insurance companies can't fund their annuities, usually calculated on 6 percent interest rate return historically, so their actuaries are using models that aren't working. Ford and GM can't fund their retirements because of same, and competition problems. The two key investors of our time, Buffet and Gross saying they can't do their usual investing. and all are complaining of speculative excesses.

Fekete says that the bond speculators are overthrowing the intent of the Fed to raise interest rates, and carrying out a massive Yen/Dollar bond carry trade that is more or less guaranteed by the misguided Fed that will just prolong and extract all wealth into massive leveraged speculations to the point that all excess world savings are conducted like electricity into international trade currency manipulations. etc etc etc.

My friends, we have seen NOTHING LIKE THIS, nor has Greenspan, nor any economist, nor any actuary, nor central bank. The electronic world and the world dollar standard has succeeded beyond the wildest imagination of the post WW2 Breton Woods agreement, and created a worldwide interlinked speculation monster that has all but eliminated any meaningful investment for the foreseeable future.

SO. Stop with the idea of getting your returns on investments and start thinking about capital PRESERVATION like Gross and Buffet.

TO US, that is metals and unhedged metal stocks.

Now some of my beloved readers have replied to me that the real estate bubble is going still.. And some who sold out are missing the action. That is a fools thinking, i.e. waiting for the last peak of a bubble. Look it's well known that insider stock selling is about 50 to 1 to purchases on the Dow. They know their core businesses, and they are not going well. The only thing keeping this party going is the massive borrowing of the average American on his home equity appreciation. Of course the average guy will be the last to hear the fat lady sing on the world economy and all the 'investments' out there that have had their values eviscerated by excessive speculation in the bond markets and real estate markets.

Now here I would like to comment on the housing bubble and debt bubble, and we have several charts that do a lot to show the PARABOLIC NATURE of these.

First, the prime characteristic of a bubble is a parabolic rise in a market. Both debt growth and housing prices in the US are clearly in the parabolic state now for several years. Now during such bubbles, until they turn, they appear to be sustainable due to the velocity of the increase as perceived by the average participant. Usually they think they will wait until it STARTS to turn down, and then they will sell out. In bubbles, there is a deceiving trend of faster and faster increasing market prices that hypnotizes the market participants until the point is reached that the market turns. At the turn, people obviously cannot all get out since market prices are decided at the upper margins of price activity.

Therefore, people who wait to exit a bubble until very near the top or at the top are GUARANTEED to have to sell well after the bubble breaks, because they all cannot sell at a top price at the upper margin of a market. But in THEIR MINDS they think while the bubble is rising that they really do have all that wealth because they are pricing their assets at the latest peak values. But once enough of them try to liquidate, of course the market prices decline rapidly because the market psychology has turned and now there are a lot of sellers appearing. So we get a double whammy at the end of a bubble that makes it turn down rapidly well before the majority can get liquidated. Hence the majority simply rides the values down. Therefore, in a bubble market, the ONLY WAY to liquidate is to PLAN on selling well before the market tops. How close you want to get is up to your own risk management style. If you are like most people you either have no risk management style, or are so hypnotized by the bubble that u never sell before the bubbles top.

When we compare these two charts it is clear that in the period between roughly 2000 and 2004 there is a direct correlation between the huge increase in debt in the US and the parabolic rise in US housing prices. Simply put, the jacked up US housing prices have enabled people to borrow money and lock it into a relatively illiquid asset such as real estate, thereby guaranteeing that they will not be able to exit and extract the imaginary equity they have. So then all the housing bubble has really done is to saddle the majority with huge loans on real estate they will not be able to liquidate. That is all the housing bubble has accomplished, ie, far higher indebtedness for families.

The increased real estate market values are not realizable for the vast majority and hence the perceived increases of household wealth is a chimera (a grotesque imagination). But the debts and mortgages are going to remain, regardless of the market prices falling. This is guaranteed.

Mathematically, markets exhibit parabolic rises only when there are increasing amounts of money going into a market over time. Once that increase is slowed or stopped, even a constant flow of money into the market will not allow the bubble to stay elevated, and hence a strong downturn ensues.

The US dollar is behaving exactly the same way, ie it is held up only by increases on US consumer spending, Once US consumer spending becomes either constant or declines then US dollar will face the consequences of all the debt overhang in the US.

Our trading partners will then have to disengage from supporting the US dollar or face destruction of their own currencies.

So we are looking at the following situation: When the US housing bubble turns downward, consumer spending will retract drastically for years and years. We will experience debt deflation in the US combined with an end of support of our trading partners levitation of the US dollar. We will be broke twice over.

All these trends come at a time when retirement investments are underfunded, at both the US, corporate, and state level. One major reason for this is because there is no reliable return of interest for financial instruments. Rather, there are only speculations built into every form of 'investment' in the US and now world financial landscape.

An interesting study is the dilemma the insurance industry found itself in post the tech bubble. Basically, what happened is this: during the US stock bubble of late, all investment sectors pushed money into the stock markets and then didn't have to fund their portfolios from operations. This created a situation where, in the case of the insurance industry, when the stock bubble broke, they incurred losses of capital and hence their annuities were underfunded. This type of thing led State Farm insurance to have large capital losses, so immediately afterward the only way they could recoup was to drastically raise insurance premiums.

Warren Buffet on the other hand, made a big bet on the insurance industry, and had his insurance entity exit the stock market before the bubble decline of 2000/2001. His insurance company is one of the few solvent ones now. Surprised?

All that was necessary to avoid this retirement and insurance annuity underfunding was for a nice historical 6 percent rate of return to be available widely for those who have such appetites. The emergence of the stock market bubble in the 90's changed the landscape and enticed many entities into a speculation expectation, and set the stage for the real estate bubble we now see.

The ensuing Fed actions of lowering interest rates has only magnified and spread the speculative pathologies endemic now to the entire economic world.

The present state of affairs is that now, the LAST BUBBLE has been created, an unprecedented US and global asset bubble in real estate that is merely going to leave the vast majority of the participants indebted for life.

The next significant downturn will spell the end of the US consumer for probably a decade, and the world will fall into debt deflation and depression.

March 6, 2005

Chris Laird
tec_10000@yahoo.com