The decision of the
US Federal Reserve to raise its key interest rate was
definitely not a sign of confidence in the US economic recovery or a signal
that Fed policy is slowly returning to normal as claimed. It was rather a
signal of panic over the weakness in US Government bond markets, the heart
of the dollar financial system.
Discount Rate is the interest rate charged for banks to borrow from the
central bank. At the same time the Fed left its more important short-term
Fed Funds rate unchanged and historically low - between 0.0% and 0.25%. In
its official statement the Board of Governors said the rate move was
intended to push private banks back into the private inter-bank borrowing
market and away from reliance on Federal Reserve subsidized money which had
been provided since the financial crisis began in August 2007.
At the same time, financial players like George Soros continue to speak openly about the fundamental weakness of the Euro. This has the effect of taking speculative pressure away from fundamentally worse economic and financial fundamentals within the dollar zone at the expense of the Euro.
The reality is that the dollar world is
anything but returning to ‘normal.’
In a recent speech Hoenig noted,
Translated into laymen’s language, that means savage cuts in Government
spending at a time when real unemployment is running in the range of an
unofficial 23% of the workforce, and the states are struggling to cut their
own spending, as Federal dollars disappear.
But if it continues to
print money and sell debt, buyers of US Treasury debt will at a certain
point refuse to buy, meaning US interest rates could be forced severely high
in the midst of depression conditions - equally catastrophic to the economy.
On February 11, the US Treasury held an auction of $16 billion worth of 30-year bonds and securities to finance its exploding deficits. In a little-reported feature of a sale which did not go well in terms of demand, foreign central banks reduced their share of purchases from a recent average of 43% of the total to a mere 28%.
The largest foreign central bank buyers
of US debt in recent years have been China and Japan. Secondly, it appears
that the Federal Reserve itself was forced to buy the slack demand, some 24%
of the total of bonds sold versus 5% only a month before.
That deprives the
Federal Government of their Social Security tax revenues, which will now go
from an asset in the Federal budget to a liability, as the Government must
pay out their monthly retirement pensions. This will hugely aggravate the
size of the deficits over the next decade and longer.
inflow has now begun to turn into what will be a huge outflow over the next
Genuine concern for the well-being of Tibetan monks was not likely the reason. It was to signal heightened US pressure on China.
Officially, to date, Beijing has reacted calmly, if firmly.
Its real response, however, might be coming in a financial arena,
not a political one, something that the ancient Chinese military
Sun Tzu, would have no doubt suggested.
Given its huge annual trade surplus from
its export earnings, the National Bank of China currently holds reserves of
foreign currencies and other assets, including gold, worth $ 2.4 trillion.
At least 60% of that is believed to be in US Treasury and other
Government-guaranteed debt, perhaps some $1.4 trillion. If China continues
to dump US debt onto international financial markets, the dollar will plunge
and a full panic will ensue in Wall Street and beyond.
As my latest book (forthcoming book), "Gods of Money: Wall Street and the Death of the American Century" explains, US global power since 1945 has depended on having the dollar as undisputed world reserve currency and the US military as the world’s dominant power.
If the dollar falls away, the over-extended military becomes vulnerable as well.
We talk about the geopolitical ramifications of this theory and find out details about his forthcoming book,
"The Gods of Money - Wall Street and the Death of the American Century"
This is why it raised one rate while leaving the more important Fed Funds
rate at zero. It’s a desperate bluff. So far the lemmings in the financial
markets appear to have bought the trick. How long that will last is unclear.
That, in turn, could serve China far
better than buying more US debt, and serve as a basis to establish a future
role of its currency in regional trade and international business
independent of the dollar or the Euro.
Official Chinese central bank gold reserves were 1,054 tons as of March 2009, worth about $37 billion at today's prices. That represents a mere 1.5% of its total reserves, and that is itself up by 76% since 2003. On average, international central banks hold about 10% of their reserves in gold.
The German Bundesbank holds some 3,400 tons of gold, the second largest after the US Federal Reserve.
To even get to that 10% level,
China would have to buy more than $200 billion worth - about two years'
global mine output.
Since then, it has stopped selling silver.
Last September 2009, the Chinese government
passed a decree encouraging Chinese savers to buy silver, explaining that
buying silver was a good deal since the gold/silver price ratio at 70-to-1
was historically very high, offering them convenient small-value ingots with
which to buy it, and prohibiting the export of silver from China.
Thus, a sell-off in People's Bank of China holdings of US Treasuries could be offset by purchases of gold for its own account and of silver to supply to the Chinese public.