The Demise of the US Empire – The run on the FED (I)
Over the past weeks I have been predicting a renewed shock to the financial system. It became clear that bad economic news will move market participients out of their positions. Some will just realize their gains and wait along the sidelines. But sitting on cash they would have to think on how to reinvest their money, which is the largest challenge in the face of missing alternatives. What the market face right now can be described indeed as a run on the FED.Mistrust took over and monetary policy has lost its magic. The best case for the US could be a Japan like deflation and lost decade like scenario. We explained at earlier, why this is not likely. There are no productive capacities in the US. Dr. Doom Mark Faber has a very matching metaphor to describe the US economy. Loosely quoted: "It’s basically personal-attention-services and beer." With high wheat prices, even beer-brewers might face issues.Let’s make an excercise to describe the current situation without emotions: How would one describe the state of the US economy, looking back ten years from now? We saw a record number of 40 million food stamp recipients. There was an expected drop in house prices and commercial real estate which the government tried to cover up with Fanny Mae and Freddy Mac. The FED hat to buy-up all their failing assets. Unfortunately houses deterioated when they were foreclosed on; so there was no real asset left after a couple of years, at all. The rate of bank failures was still higher than in 2009, despite zero interest rates. The FED has printed tons of money and distributed it. The government received much of this freshly printed money and spent it. Where it actually remained stayed unknown until, today. The US debt burden was higher than that of Greece and its ability to serve interest was depleting rapidly with each new Dollar spent on expanding debt. Investors seemed to ignore that fact. The high tech industry, which is mostly based in California, was facing the issue that they could invent whatever they wanted. It proofed useless without getting price stability on Lithium, Tantalum and all the other important special metals on which China declared an export ban. The state of California soon could not support the security requirements for all the foreign academics and employees, working in those high tech companies. Firefighters and policemen safeguarding the streets during the good times were now laid-off leading to a dramatic increase in crime rate. Governor Schwarzenegger saw those developments in time and announced already a year before the end of his term that he plans a come-back as actor. Many argued so that he never stopped acting. Finally there was the day when investors and the public woke up and what has been the American dream had turned into a real American nightmare. That was, when stock markets and bond markets collapsed and along with this collapse came the collapse of the US Dollar, finally ending the Dollar currency regime some 40 years after Nixon closed the gold window.Of course, there is always the chance for a prolonged cover up! Said so, one has to recognize that foreign investors started to sell Dollar denoted assets. China, once the largest holder of securities, has now lowered them to only ca. $840 billion. The demise of the empire is linked to the demise of its currency. The Dollar, once a signal of strength and trust, has become a weakening currency. When investors will start to get concerned over the Dollar, then it means they are concerned with the FED. That is when the run on the FED will occur.
Created by:
http://feeds.feedburner.com/TheFinancialCrisisBlog-AnalysisPredictionsAndNewsSince2007
