first majestic silver

The Greek Dollar Swap Window

October 20, 2010

The Chinese are clever people. Their leaders play a good game of chess in the global scramble for commodity supply and financial dominance. Their patient strategy has tied the arms & legs of the USGovt, using their own debt securities as the binding rope. The accumulate almost reached a staggering $1000 billion, the bitter fruit of the Low Cost Solution to invest in China from a decade ago. While much attention has come to saber rattling over currency manipulation and tiny 25 basis point interest rate hikes, even battles over rare earth metals, something has been happening in Europe of importance that involve a Chinese back door to dump USTreasurys. To be sure, the USGovt deficits and monetary policy have invited a selloff in the USDollar. In the latter months of 2009 and early months of 2010, the Jackass wrote frequently about the absurd notion of an Exit Strategy from 0% and Quantitative Easing. The USFed lost heavy credibility and looked just rather obtuse. The Japanese ZIRP and QE twin diseases were not the monogrammed cufflinks the USFed would choose for sartorial splendor. My forecast was for no Exit from 0%, but rather an embrace of QE2, the exact opposite. We have it. Only the details remain on the QE2 initiative. Bernanke looks scared, haggard, and a little desperate, like a captain on a ship listing to port and taking on significant water in the lower chambers. At least the water is at zero cost.

The Jackass forecast of QE2 was correct and quite easy, since fundamentals drove the call, not wishful thinking or the errant but popular notion that time heals all financial wounds. Not this time, since almost no effort to reform or to restructure debt have occurred. The Financial Regulation Bill handed the USFed more power, not less, another correct Jackass forecast. That too was an easy call, since the banker lobby would obviously write the legislation. The Exit Strategy was shown to be a ruse, pure hope laced next to the Green Shoots nonsense. My expectation of a Plaza-2 Accord is that it too will never happen, since it requires significant cooperation among the major and some minor nation central banks. To be sure, an orderly decline in the USDollar is urgently needed. It will not happen since the USGovt and USFed policies are utterly hostile and destructive toward the monetary system and in particular toward the USTreasury Bond holders. They are the USGovt creditors, and the USGovt is showing disrespect, while making wild accusations at them. The Competing Currency War will continue, accelerate, jump tracks, turn more hostile, and even pit former allies against each other. The spirit of cooperation between Japan and China has been totally de-railed. Europe has grown angry over a higher Euro exchange rate, one certain to slow the EU Economy. The upcoming G-20 Meeting in South Korea already has one member planning to shun the gathering, Brazil, the new Latin American partner to China.


The mortgage world is topsy turvy. The big US banks are facing additional credit losses again. My expectation is for a grand TARP-2 initiative to bail out the big banks, soon to come, already introduced as a topic of discussion. The USFed will do its usual denial, then in a few months mention its urgency. This second chapter program will cause much more problems and generate extreme anger even with the divided USCongress. The first TARP was caused by market declines. This TARP will be motivated to aid the big banks when accused of criminal behavior, very different. The same old arguments will be trotted out about Too Big To Fail Banks, systemic failure, depression, and an end to the American great society. Insolvent if not bankrupt entities control the USGovt finance, including its Printing Pre$$. The TARP-2 will pass but not before at least three or four months of haggling. The focal point will be Bank of America and JPMorgan Chase, two important banks. Part of the political cover will be that Bank of America did the USGovt a favor by taking on the Merrill Lynch and Countrywide toxic load of debt, and is weighed down by its burden. Part of the political cover will be that JPMorgan Chase is weighed down by the burden of size and broken businesses. The USFed will come out with research on why the TARP-2 is necessary and how the world will end without it, written by JPM analysts. So the USGovt will come to their rescue with TARP-2, perhaps a $1 trillion package of bank aid. One must wonder if Treasury Secy Geithner is being set up for a fall. The put-backs of large blocks of credit portfolios have been demanded by PIMCO, Blackrock, and the Federal Reserve of New York (owned by the Wall Street firms). Geithner led the FRB of New York during the entire mortgage bubble episode, its sumo regulator. The bank mostly on the damaged receiving end is Bank of America.

In the end TARP-2 will pass with at least $500 billion in new big bank rescue aid, which will require the big banks to provide strong meaningful home loan balance reduction. The package will contain a provision to kick in, which will deliver another $500 billion upon other contingencies. The total $1 trillion bank aid package would cause a firestorm. A key provision to win over public support will be promises by the big banks to finally give home loan balance reductions, what the people demand. That will enable the American public to agree to the package, except one year later they will be shown more revolving doors and dead end corridors. The major challenge for the USGovt and Wall Street firms will be to handle the court challenges. The legal actions have taken center stage, a development that has raised the stakes considerably. Look for Fannie Mae to play a key role in the TARP-2 package. They will likely be the Bad Bank for wrecked home loans to a much greater degree, even the benefactor to court settlements where concessions are given to the victims. They will portray themselves as the New Resolution Trust Corp, from soup to nuts.

Then by the end of 2011, the nation will embark on QE3, since nothing will be fixed and the USEconomy will by then be caught in a nightmarish whirlwind of price inflation, recession, and declining wages. It was called Stagflation, and it is coming in fierce style. The USFed overlooks the high cost of Quantitative Easing, namely higher price inflation without the benefit of higher wages. In fact, a quantum jump up in the entire cost structure is in the works, with its attendant profit margin pressures and discretionary spending pressures. So higher costs but lower wages, a monstrous squeeze on corporations and households, invites more crisis. The nation has no capacity for solution. Such is the utterly obvious outcome of QE2. Behind closed doors in conference rooms laden with polished marble or hardwood, the banking leaders realize the squeeze coming to the USEconomy from QE2. The movement to have Fannie Mae serve as the Politburo property owner for a sizeable slice of Americana will be in full swing.


China is dumping USTreasurys by way of the Europe, using a back door whose design was handed to them. Their support of the Greek Govt debt jammed that door wide open. Thus the rising Euro currency without justification, one of a few factors. Usage of the window has led to an indirect Chinese forced devaluation of the USDollar, an extremely clever action. China has never appreciated being repeatedly called a currency manipulator. From 1999 to 2005, the USGovt gave full support to the Chinese Govt, as the Yuan currency was pegged to the USDollar. The USGovt saw the policy as providing stability to the USDollar at a time when foreign investment by US firms in the Middle Kingdom was brisk and strong. In a three-year period, the US multi-national firms invested $23 billion in Chinese industrial plants, like the 160 Wal-Mart plants. The misguided USGovt and hapless US economists eagerly awaited the great bounty from Low Cost solutions that exploited cheaper Chinese labor, lower tax structure, even absent regulations. A decade wave of corporate profits evaporated, amidst growing debt and the housing bust. Meanwhile, the Chinese Govt would accumulate $2.5 trillion in savings, held as USTreasurys for over $800 billion. Suddenly, China is a currency manipulator.However, the vast monetization initiatives enacted by the USGovt and its partner USFed with $1.5 trillion in freshly printed money to support the US$-based bonds which few foreign creditors wanted, that action is highly manipulative to currencies!!

The missing piece is that the Wall Street helm has ignited the currency bonfire by not pursuing a multi-lateral agreement by USGovt creditors. They have never been consulted on monetary inflation, debt monetization, and austerity measures. The United States acts unilaterally with great privilege, as they claim some of sort of glorified mission, a Manifest Destiny ridden atop bond wagons. The Chinese apparently have a plan to swap their USDollars for Euros, using the Greek back door.

A well placed banker source in Europe passed an opinion along. The Jackass was aware of the Chinese nibbling with purchases of Greek debt. However, the initiative had a clever motive for an expanded role. The German Euro supporters have been caught flat-footed, inattentive to guard the door. By refusing to permit a default in Southern Europe of sovereign debt, the Euro Central Bank and EU leaders have exposed a vulnerable pathway soon possibly to turn into a highway. The banker source wrote, "After having de-facto bought Greece, the Chinese are now members of the Euro system or Greece is now a member of two currency systems, to be used at will. So China will now use its USTreasury Bonds to buy Euros, which will be used to buy Greek Govt bonds. These bonds will be guaranteed by Germany. This is very clever and no one saw the dual usage of the system, except a few very clever people. The politicians in Berlin and bankers in Frankfurt were sleeping at the wheel as usual and now will pay a heavy price." It goes deeper. Greece has agreed to support EU recognition of full market economy status for China, while China has agreed to support the call by Greece for UN mediation over Cyprus.

The Chinese have essentially created a Dollar Swap Window, a small one admittedly. It will grow over time. Attempts to rein it in will be difficult. Imagine runaway traffic at the window, the galloping process of the Greek Dollar Swap Window. The Europeans eagerly opened the window for China to invest money in Greek Govt debt, which European nations did not want to commit to. So China has a small pipeline in which to shove USTreasurys, to convert them to Euros will full blessing and approval of the Euro Central Bank, and to buy a stake in Greece. Beijing could not give a dragon's big toe of concern for Greece. They wanted a window to dump USDollars. Next look ahead, and remain objective. The Chinese might be motivated to invest in Spanish Govt debt, some Portuguese Govt debt, and later some Italian Govt debt and even some French Govt debt. Leave Ireland alone, a lost cause, after a foolish decision to adopt the suicidal IMF austerity plan. They are headed toward systemic failure.

So China has found a clever back door Dollar Swap Window. So far it only has a Greek label on the glass with Greek trucks on the dock, with Chinese standing in line. Soon the Latin debt will open up adjoining windows in an expanded Dollar Swap Window facility. The USFed and USDept Treasury were not invited to this planned project. The key point upcoming is not the volume of European sovereign debt to be covered by China, even at discount in implied writedowns. The key point is other broader usage of the window. Watch and observe how the Chinese will eventually be accused of swapping far more USTreasurys through the window than purchased Greek Govt debt, or any other sovereign debt. The Chinese will attempt to dump as much USTreasurys as they can before the window closes, shut under pressure by the USGovt. In the meantime, the Euro currency rose to touch 141 per greenback unit two weeks ago. That is a rather impressive run from 127 in early September. The European fundamentals do not justify such a big 11% move. At 140 the exchange rate is still lofty. If the Chinese expand the usage of their clever new Dollar Swap Window, the Euro could rise to 150. Such is the heavy price paid by the EuroCB and EU leadership for refusing to permit a Greek Govt debt default. The Open Door Policy to China found a back door !!!


China is dumping USDollars on a relatively substantial scale. They are buying resource properties. The volume is large in absolute standards, but minor when considering the Chinese rack up monthly trade surpluses with the United States over $20 billion. China has agreed to pour another $7 billion into Brazil's oil industry. A recent deal with Repsol of Spain to buy a 40% of its Brazilian business gave China access to the estimated reserves of 1.2 billion barrels of oil & gas in Brazil. The price premium paid to Repsol Brasil, which values the company at nearly twice previous estimates, is a sign of two factors. China is willing to pay up in order to lock in its future energy supplies. China might regard its USTreasurys as over-valued, and therefore discount them. This year alone, Chinese companies have laid out $billions buying up stakes in Canadian oil sands, a Guinean iron ore mine, oil fields in Angola and Uganda, an Argentinian oil company, and a major Australian coal-bed methane gas company.

To be sure, some bids have been interrupted, like with Canada's Potash Corp and Australian giant mining firms. The aluminium giant Chinalco failed in their attempt to buy Anglo-Australian Rio Tinto in 2009. China must keep itself supplied, and feed its growth. China has grown to become the second largest oil consumer in the world, far outstripping its domestic supplies. The Neptune consultancy estimates that it will need to buy two companies the size of British Petroleum each year for the next 12 years to meet its growing domestic energy demand. Furthermore, its demand for electricity is growing each year equivalent to Britain's entire output. The volumes in such deals seem big, but compared to USTreasury holdings and monthly trade surpluses, they are small. On the margin, China must find a destination for its new surplus while it dumps some of its bloated US$-based assets. Watch for quiet hidden expansion of their new handy European Dollar Swap Window. It explains in part the Euro currency rise, beyond what many analysts expected, including the Jackass.

The USGovt and USBanking leaders have other USDollar problems. Arab states have launched secret moves with China, Russia, and France to stop using the US currency for oil purchase. The demise of the USDollar is clearly an exaggerated claim, but the path toward its long drawn out demise is fast becoming laid out. These nations are planning to move instead to a basket of currencies. It might include the Japanese Yen and Chinese Yuan, the Euro, even Gold and possibly a future unified currency designed by the Persian Gulf states. Confirmation of the talks came to the UK Independent by both Gulf Arab and Chinese banking sources in Hong Kong. Meanwhile, oil revenues to OPEC states have been reduced in value by the USDollar devaluation. OPEC members seek a $100 crude oil price in order to counter US$ exchange rate weakness. The US$ DX index has fallen 13% since June. OPEC member nations are paying little attention to compliance quotas, and much more attention to reduced purchase power of their income. The nominal value of OPEC oil export revenue will be $818 billion in 2011, a nice 10% rise from last year, according to USDept Energy forecasts. However, the entire rise will be eaten up by the US$ devaluation, which no OPEC nation agreed to. They do not vote at Fed Open Market Committee meetings on US monetary policy. That makes them angry, motivated, and defiant. The consensus is growing for a $100 crude oil price, which is considered a reasonable target. Witness the upcoming rise in the entire USEconomy cost structure, led by a rising crude oil price. The only potential detour on the path to $100 oil is the platforms for financial markets eroding, sinking, and possibly collapsing.


Motive should no longer be to capture the cheap artificial price like in 2008 and 2009 under $1000 or $1200 for gold or in the teens for silver. Now the motive is to get out of the USDollar, avoid its declines, and stay clear of dangerous monetary downdrafts and whipsaws. The present day objective should be to preserve money as in avoid the harmful effects of currency debasement. One should prepare potentially for the US$ to lose 30% to 50% more purchase power before end 2013. Gold & Silver are much more than hedges against the lost US$ purchase power, a breakdown in the monetary system, or an insolvent dysfunctional corrupt banking system. They are investments in real money finding true value in fair markets. The true equilibrium price for Gold & Silver in my view is at least double the current price. Paradoxically, the same loss of purchase power for all major currencies is in the works. The media anchors and pundits are starting to comprehend the risk. They say a rising stock market is required to keep even with the falling USDollar. Exactly!!

One thing for sure, the Western Govts plus the Japanese Govt will go to extraordinary lengths to invest good money after bad in supporting the broken system until it becomes a ruined system. It was clear to the Jackass in September 2008 that the US banks suffered a death experience. In the last couple months, an increasing number of people among the system control team are realizing the moribund condition without remedy. They recognize the insolvency as growing worse, even for the US Federal Reserve balance sheet. The $1.4 trillion in mortgage related securities held by the USFed, including leveraged mortgage bonds (see Collateralized Debt Obligations) might actually be worth between 60% and 80% less than book value. My rough calculation shows the USFed to be a cool $1 trillion in the hole, an oversized vat of red ink. The role of bond buyer of last resort is very costly. The most insolvent banking institution is not Bank of America, but the USFed itself. The Powerz believes their free money output can bring the big US banks back to life. Each major initiative like QE2 guarantees another $1000 lift to gold and $40 to silver, all in time, as the potential true target. Next up is TARP2, a guarantee, to save the banks whose transgressions are being laid out in a grand spectacle.

The MERS property title database has no legal standing. The REMIC mortgage fund vehicle does not achieve assignment and perfection of title. The entire mortgage foundation in the US banking system appears to be faulty and defective. Short cuts to enable fast bond trades, short cuts to avoid income taxes, have left the big banks vulnerable to the extreme. When the states imposed moratoriums on home foreclosures, one might safely conclude that the mortgage securitization industry is dead too. The best protection is Gold & Silver, since sovereign debt paper and mortgage debt paper might soon be recycled into kleenix tissues.

The gold price will consolidate here, enough to enable the powerful buyers in The Dirty Dozen to continue their huge relentless purchases. The group permitted a small pullback in order to grab a much greater volume in the next round of purchases. The $1300 target was met and surpassed. Support can be found at the juncture of the upper rail to the trend channel, meeting the new aggressive trendline from the breakout. Never in 30 years has a breakout occurred with gradual stairstep pattern exhibited in my knowledge for any major price item over a full two month period. A message was made and heard, to break the market. Absolutely nothing has been remedied or repaired, no reform whatsoever. In fact, every resistance to reform has been evident, from bankers dug in. The TARP-2 package is being discussed behind closed doors. Instead of liquidating the big banks, they will continue to ruin the USDollar so as to prop the insolvent banks. They do not lend because of their profound insolvency, as they lack equity. They do not lend because their Loan Loss Reserves were indirectly confiscated by the USFed, with interest paid.


Unlimited USDollars will be devoted to support a broken system, rather than liquidate credit portfolios. They will not be plowed under, to make the soil fertile again. The USGovt needs the public 401k and IRA funds, and using tax law benefits as inroads, they will someday soon clutch them. They must feed the USTreasury Bond bubble. After that seizure, they will pursue the bank savings. The USGovt needs the public certificates of deposit, and using tax law benefits as inroads, they will someday soon clutch them. The accusations of a Gold bubble are as ludicrous, baseless, and distracting. They wish to deflect attention from the approved USTreasury bubble.

Given the heavy risk loaded in the mortgage bond arena with all the controversy over home foreclosures, the USAgency Mortgage Bonds are looking highly problematic, possibly worthless bonds. The nationalization of Fannie Mae stretched an umbilical cord from Fannie to Uncle Sam in a marriage made in a Banana Republic. The risk to the USDollar is total and absolute. The USDollar will fall hard, but so will all the major currencies in a round robin of destroyed value. The winner in the Competing Currency War in progress is Gold & Silver. The billboard reads $2000 gold and $50 silver, directly ahead, just a matter of time.


From subscribers and readers:
At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization deals such as for Fannie Mae and the grand Mortgage Rescue.

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Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

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The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.
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