Will Pres Obama continue the 'Peso-fication' of the Dollar? by JaynezTown

REAL WORLD EVENT DISCUSSIONS

Will Pres Obama continue the 'Peso-fication' of the Dollar?

POSTED BY: JAYNEZTOWN
UPDATED: Saturday, February 7, 2009 15:13
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Tuesday, December 23, 2008 2:00 PM

We the people want something different, different to the job losses
different to the iraq and wall st scandals
crime and unemployment will rise while the world also faces an economic crisis

this political take financial crisis if done wrong could possibly lead to an economic armageddon!

so why would he, Pres elect Obama support the socialistic neocon agendas of the George Bush economic bailouts?

'Peso-fication' of the Dollar Continues
http://seekingalpha.com/article/110518-peso-fication-of-the-dollar-con
tinues
The plethora of bank and corporate bailouts, stimulus plans and interest-rate cuts that the U.S. government has produced over the last three months can only lead to one outcome: The U.S. dollar has to decline.

During the crisis so far, the dollar in general, and U.S. Treasury bonds in particular, have been regarded as a “safe haven,” making the dollar strong and pushing long-term U.S. Treasury rates downward. In the New Year, however, this is likely to change – the weight of the added supply of dollars in circulation will be too great for the greenback to shrug off.

Back in November 2007, when I wrote about the U.S. dollar becoming the “Bernanke peso,” I suggested that the dollar – then trading at $1.50 to the euro – would get weaker. Alas, I was wrong: It is currently trading at $1.29 to the euro, although it did reach $1.60 in May. However, I recommended buying not euros, but yen. The chaos of 2008 has reversed the decline in the dollar against the euro, but not against the yen, which has reached Yen 92.8 = $1 - compared to a rate of Yen 114.8 = $1 when I wrote the piece. A gain of 24% against the dollar is not bad, and indeed I defy you to find a stock market that has done as well over that period.

The fundamentals tending to weaken the dollar remain. The U.S. trade deficit was $57.2 billion in October, which annualizes to $700.3 billion – down but a little from the 2006 peak of $758 billion. Although the recession and recent sharp decline in the value of U.S. oil imports will reduce the U.S. trade deficit further – perhaps to $500 billion annually – there is still no reason why foreigners should continue to so highly rate the currency of a country that is running a $500 billion balance-of-payments deficit, and a $1 trillion budget deficit.

After a pause during the summer, the U.S. money supply has begun rising again rapidly. The excess money has flowed into Treasury bonds, sending the yield on the 10-year bond down to a recent 2.71%. The distortion in the market can be shown by the yield on the 10-year Treasury Inflated Protected Securities (TIPS), which was 2.44%; that combination of prices said that investors expect U.S. inflation to average a mere 0.27% annually over the next 10 years.

Clearly that’s nonsense; the explanation is that yields on long-term Treasury bonds have been driven far below their economically appropriate level. In other words, U.S. Treasury bonds are currently benefiting from a bubble, and like the bubbles that we’ve seen in Japanese stocks, real estate, U.S. tech stocks, and the American housing market and global commodities, this bubble too will ultimately burst.

The budget deficit in the 12 months through to September was $455 billion, but that’s expected to expand to close to $1 trillion in the year to September 2009 – and that’s even before President-elect Barack Obama’s stimulus plan, which is expected to cost at least $500 billion, and could possibly cost that much a year over several years.

If that’s surprising, consider this: The U.S. budget deficit was $237.2 billion in October 2008, a record monthly figure. That puts a huge strain on the U.S. Treasury Department’s financing capacity, and will probably result in the U.S. Federal Reserve printing yet more money, since the alternative would be for the huge amounts going into Treasuries to choke off demand for private investment – not the desired objective. With more money being printed, inflation is likely to soar and the dollar to weaken.

Net foreign purchases of long-term U.S. securities declined to $793 billion in the 12 months to September 2008, from $1.03 trillion in the previous year. Of those purchases, Treasury bonds and notes represented $385 billion, up from $192 billion in the previous year, while purchased corporate bonds shrank from $447 billion to $168 billion. Thus, the “flight to quality” has so far been enormously helpful in enabling the U.S. Treasury to finance its growing budget deficit; in October and November it will doubtless have been even more so.

Once the inflow into U.S. Treasuries slows, or the huge volume of Treasuries issued simply overwhelms it, the dollar will weaken and Treasury yields will rise. At that point, there is likely to be a stampede for the exits from the Treasury bond market, which will be self-reinforcing. As a wise investor, you could prepare for this stampede in four ways:

* First, you could have a modest holding of the Rydex Juno Fund (RYJCX), the price of which is inversely linked to T-bond prices (the fund shorts Treasury bond futures). The fund has had a poor record since its inception in 2001, and it probably makes little sense to put too much money in it. However, given the scenario we’ve sketched out here, the fund will do a lot better in 2009.

* Second, you should have bond, cash and stock holdings in foreign currencies, particularly the euro and the yen (but not British pounds sterling; with a housing bubble and a bloated financial sector, Britain has many of the same problems as the United States). Aside from foreign-currency-denominated stocks and bonds, you may want to consider a foreign-currency-deposit account.

* Third, you should hold some gold, which is likely to profit from a dollar collapse – for example through the SPDR Gold Trust fund (GLD), which has ample liquidity, with $17.6 billion outstanding, and which tracks the gold price directly.

* Fourth, you may make a modest (no more than 1% to 2% of your portfolio) speculation in currency options, which are traded on the Philadelphia Stock Exchange. Since the yen has already enjoyed a considerable run against the dollar, the best speculation might be to purchase out-of-the-money euro call options, which will rise in price once the dollar starts falling against the euro. Personally, I prefer to buy the longest possible options available, to give the market time to move in my direction. So, I would go for the September 140s [PHLX: XDEIH], giving nine months to maturity at a strike price about 8% out of the money (the euro being currently at $1.29). Currently these are trading at $4.55 offered, so you would have to pay $455 for each 10,000 euros on which you purchased an option. Your break-even would thus be $1.4450. If the euro is trading above that level next September, you would gain, so if it matched its May peak of $1.60, you would make $2,000 per contract. If it was below $1.40, you would lose your investment of $455 per contract.

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Tuesday, December 23, 2008 8:35 PM

OUT2THEBLACK

YES !

He cain't hep it...

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Tuesday, December 23, 2008 8:49 PM

OUT2THEBLACK

First ,

Let's just review the Peso-fication of the Peso , and the History of how it was
de-Metallized ( moved away from SILVER content ):

'...John Maynard Keynes: "Lenin was certainly right, there is no more positive, or subtle means of destroying the existing basis of society than to debauch the currency. By a continuing process of inflation, governments can confiscate secretly and unobserved an important part of the wealth of the citizens. The process engages all the hidden forces of economics on the side of destruction, and does it in a manner that not one man in a million can diagnose" (Economic Consequences of the Peace)

From 1572 (perhaps even earlier) and up to 1914, the silver content of the Mexican Peso (which during the Spanish Colonial era was known as the "Piece of Eight Reales") was held to a remarkably stable standard: 24.44 grams of pure silver. (At some times during the early Colonial period it was minted with a slightly higher content; during one period of twenty years, with a very slightly lower silver content.)

For 342 years, the Mint at Mexico City produced the world's most stable currency. Only the Byzantine Empire holds a superior record.

In 1910, a "Régime Change" was ordered by William Howard Taft, 27th President of the United States 1909-1913, and consequently a revolution broke out in Mexico on November 20, 1910.

In 1918 the revolutionary president of Mexico, Carranza, minted a new Peso. The Peso's silver content was reduced from 24.44 grams, where it had been for 342 years, to 14.5 grams.

In 1925, with U.S. coaching, a Mexican Central Bank was formed and named Banco de México. This organization was granted the monopoly of issuing banknotes; up to that time each private bank issued its own banknotes under its own name and responsibility and redeemable in precious metal at sight to the bearer.

As a final consequence of the creation of the Central Bank, the Mexican nation gave up real silver money. Through a series of accommodations to political circumstances we have arrived today at a simulated Peso, which circulates together with junk metallic coins and banking computer digits.

In cultural and human terms the use of simulated money has cost Mexico the disintegration of the institutions which have given shape to our nationality. The cultural and human stature of each Mexican has been severely reduced; we have all with no exceptions fallen into an endless race for survival. Simulated money is a merciless master who grants neither peace nor tranquility, and who imperiously and ceaselessly orders: "Work! Work! Work!" One hundred million Mexicans are submissive slaves of the system of simulated money.

Faced with a history of destruction of our culture, of our institutions and of the human dimensions of Mexicans, not to mention the impoverishment which has resulted from the devaluation of our currency, all attributable to the simulated Peso, the Central Bank remains supremely unconcerned; however, the consequences of abandoning real money in favor of simulated money are inevitable, not only for Mexico, but for the rest of the world as well, which is suffering the same destructive process.'

http://www.321gold.com/editorials/price/price110706.html

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Thursday, December 25, 2008 6:28 PM

OUT2THEBLACK

Got this in my email today , and I concur :

"...There is no question that we are currently experiencing asset price deflation and economic slowing.

In our analysis, the truly extraordinary and historic levels of government spending and bailouts being deployed to keep the economy afloat are certain to lead to inflation in the not-too-distant future.

The Bailout Time Bomb

Our faithful central bank is busier than ever. It’s feverishly working to nationalize as much as it can and destroy our currency in the process.

While our long-term view remains solidly in the inflation camp, over the past four months, the U.S.’s financial problems have caused deflation in many important asset classes. Put another way, a reduction in asset prices amounting to about $14 trillion (in housing, equities, etc.) is bigger than the government’s countervailing actions of around $3 trillion — the total, so far, arrived at by combining the measures taken by the Fed with the federal government bailouts.

But there are important differences between a sharp collapse in asset prices and the potentially leveraged stimulus packages.

The Fed’s actions, if taken in normal times, would be multiplied throughout the banking system as banks used the new money to increase their lending and, in so doing, leveraged the funds throughout the entire economy. This time around, however, while the Fed has been extremely accommodating to the banks, even going so far as to make direct loans to them, the effect is moderated. That’s because of tighter lending standards, the need to replenish capital, and the demise of many complex structures, which were previously available for securitizing and selling loans on to others.

As a result, the banking system as a whole is not responding to the stimulus. It can be thought of as pushing on a string. Simply, as large as the stimulus has been to date, it has not yet been enough to offset the effects of the economic collapse. The resulting deflationary pressure increases concern over a downward spiral in the economy.

Another way to view this is that consumers and businesses alike are now anticipating deflation, which makes saving and survival the primary goal (in an inflation, spending becomes the primary goal, unloading the money before it can lose value). Of course, a cutback in spending and demand drives down the price of things, at least temporarily.

But the longer-term expectation is that Bernanke’s assertion — an assertion now backed up by action — that the government can and will print new money to any extent needed is the more important force.

As long as there is evidence of serious economic collapse, it can be expected that the bailout programs will be ratcheted up. And, to the extent that the public expects deflation — and so businesses reduce prices to raise cash and reduce inventories — the wave of price inflation experienced in the spring of 2008 will be moderated. But within the seeds of that positive are the very big negatives that the government, seeing that its extraordinary money creation is not being evidenced in rising prices, will be emboldened to go even further.

This is of great importance because, unlike in the 1930s, there is no limitation on what the government can do, because there is no gold standard to enforce monetary discipline. Instead, the world is afloat on a sea of massive new government spending and credit facilities. After a lag, the stimulus will perform the expected actions of reinstating credit and debasing the currency. But never lose sight of the fact that the government is creating money out of thin air. Some call it bailouts, we would call it legal counterfeiting on an epic scale.

In the New Deal, FDR created the FDIC and guaranteed bank deposits, set minimum bank deposit rates, and brought the discount rate to almost 0%. He cut the dollar/gold exchange rate from $20.67 to $35 and confiscated gold; i.e., devalued the dollar by 40%.

While the beginning of the collapse from too much credit was parallel to the previous experience of the depression, the response today is different. The size of the monetary stimulus and the risk to the dollar from foreign holders — who can also see the implications of the out-of-control deficits — strongly argue for a return to inflation much sooner.

How much sooner? Impossible to say, but remember: deflationary or inflationary fears are not the independent agent that will determine whether or not we will see inflation (though, in the intervening phase, they will certainly be an important economic driver). The Federal Reserve is throwing everything it can at the financial markets to fight deflation.

Easy credit results in artificial booms. These booms go bust and when they do everyone stops spending out of stark fear and in anticipation of lower prices. Things get cheaper, but jobs are disappearing and most people can’t afford even the lower prices. (How to survive a deflationary depression? Start out richer than everyone else!) So folks grow their own tomatoes and mend what they already have instead of buying new. Everyone is depressed (hence the titular terminology).

The central bank tries to get the good times rolling again and replaces credit with cash. If the cash was tied to gold, that tie is severed. If it’s already floating free of gold, then that’s one less thing to do before the printing presses are set to “infinite.”

Stimulation is the goal, but hyperinflationary chaos is the result.

Hmmm….A central bank was formed in the U.S. in 1913 and right after that came a rapid expansion in credit that led to an unsustainable run up in the price of financial asset prices. A credit bust inevitably ensued…then the culprits who caused the problem with easy credit “solved” the problem by inflating the currency supply and devaluing it against gold ."

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Thursday, December 25, 2008 7:45 PM

DREAMTROVE

Yes,

There are essentially two options for any US president:

1. To undergo a radical overhaul of the financial system (choose your model). This would undoubtedly, if not get you shot, cause a rapid short term economic collapse, at a trade off of long term economic benefit to the US.

2. To continue the spiral of debt through the credit based economy, thus live in an accelerating implosion of an economic black hole, but if you can bring other currencies of the world down with you, you can make it appear to stand still.

Since option 1) would be altruistic but make the president look terrible, and option 2) would be self serving but make the president look good, and because presidents are professional politicians serving a core of self serving elite advisors, it's a shoe in for any American president to go with option 2).

Ah well.

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Saturday, February 7, 2009 9:10 AM

JAYNEZTOWN

The amount of U.S. dollars in circulation is skyrocketing. What does it mean for you? Watch then share this video!

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Saturday, February 7, 2009 3:13 PM

DREAMTROVE

Yeah, it means me buy chinese :)

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