I.M.F. Planning to Sell Bonds to Finance New Loans

WASHINGTON — Hoping to raise money quickly for a new $500 billion emergency loan program, the International Monetary Fund is in the advanced stages of a plan to sell bonds for the first time in its history, officials for the group said Saturday.

The bonds’ buyers are expected to be the governments of fast-growing emerging economic powers like China, Russia, Brazil and India.

Though the fund has been authorized for decades to raise cash by selling bonds, officials have never done so because they wanted to avoid what amounts to short-term borrowing.

But the new plan is a response to the growing political clout of countries like China and Brazil, which have become important economic powers and potentially major contributors to the fund, but which are frustrated by their small share of voting power.

As the United States and the European Union have pushed to raise money for the $500 billion lending program to help countries weather the global financial crisis, the big emerging-market countries have demanded that they obtain a bigger voting stake in the fund in exchange for big new financial contributions.

The United States has generally supported an overhaul of the organization’s voting structure, but many European countries oppose a dramatic shift, because it would dilute their own voting power.

To get around the roadblock, fund officials said they are close to agreeing on a plan to sell bonds to countries including China, Russia, Brazil and India. The bonds would have to be repaid after one or two years, so they would not increase the fund’s permanent resources.

But they would provide the fund with a way to raise the entire $500 billion quickly enough to help countries trapped in cash squeezes because of the frozen credit markets.

“There was a lot of discussion that the fund would use the possibility to issue notes that could be bought by central banks, which could be a vehicle for some countries to provide resources to the fund,” said Dominique Strauss-Kahn, the I.M.F.’s managing director, after a meeting with officials from member countries here on Saturday.

Other officials said the plans were serious and in an advanced stage, though they stopped short of saying that a bond offering was ready to be started.

“What this signifies is that the emerging markets are drawing a line in the sand,” said Eswar Prasad, a professor of economics at Cornell University and a former senior economist for the I.M.F. “From the perspective of the key emerging countries, they are being asked to contribute a very substantial amount of resources in exchange for a very uncertain promise of reform.”

China, for example, has only 3.78 percent of the voting power at the I.M.F. But the United States and other wealthy nations are hoping that it contributes $40 billion, or 8 percent, of the new emergency fund.

American officials said they supported the proposed bond issue, adding that the most important priority was to raise the necessary money as quickly as possible. The United States, Europe and Japan have each pledged to contribute $100 billion to the new lending facility.

Though finance ministers attending the I.M.F.’s annual meeting here have expressed increased optimism that the global financial crisis is easing, American officials and fund officials have also warned that a recovery is still months away and that it will be even longer before unemployment stops climbing and begins to recede.

The idea for the new lending program is to provide flexible credit lines to poorer countries that found themselves blindsided by the sudden inability to borrow in global capital markets.

Poland, Mexico and Colombia have signed up to borrow from the program, and more countries are expected to do so as well.

By EDMUND L. ANDREWS
Published: April 25, 2009

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The Tide is Turning

Slowly but surely, the flow of funds out of assets and into cash that defined the vicious bear market of 2008 seems to be reversing. Certainly some investors who never dreamed that the Dow could fall below 10,000 in the first place are convinced that a bottom in stocks has been reached. But that's not the whole story.

Wiser investors, seeing a tidal wave of new money rolling off printing presses around the world, have lost enthusiasm for all the paper they had previously stuffed into their piggy banks. It is beginning to dawn on those fleeing to safety that they are heading in the wrong direction. After all, how much safety can there be in an asset where supply is exploding and demand is based solely on the false perception of safety? When perception catches up with reality, supply will overwhelm demand, and the price will collapse. In this case, price refers to the exchange rate of the dollar verses other currencies, or its value in terms of gold.

In addition, it is slowly becoming more evident that the global economy can function without American consumption. In March, auto sales in China surged another 10% to over 1 million units for the first time ever. In contrast, sales in the U.S. slid to just over 850,000 in March, 37% below last year's level. This marks the third consecutive month that Chinese car sales exceeded those in the U.S. As I have long forecast, the world is still producing cars, it's just that fewer of them are being purchased by overly indebted Americans, while more are being bought by an emerging class of Chinese car buyers.

Meanwhile, the February U.S. trade deficit narrowed to "only" $26 billion, a nine year low. Significantly, the improvement is not due to a surge in exports, but a collapse in imports. At first blush, one might conclude that a smaller trade deficit is bullish for the dollar, but the move is hardly sufficient to create any additional buoyancy for the greenback. A reduced trade deficit is welcome, but our account balance must actually move strongly into surplus if we have any chance of actually resolving the imbalances that brought our economy into crisis.

While a $26 billion trade deficit may seem small when compared to the $60 billion level that had become routine during the height of the bubble, the number is still large in absolute terms. A trade deficit of any size means that we are still injecting dollars into a global economy that is already saturated with an excess supply. Once our foreign creditors come to their senses, not only will they be unwilling to finance our somewhat smaller monthly deficits, but they will be unwilling to continue warehousing the trillions of dollars already in their possession as a result of funding our past deficits.

Ironically, just as the United States government ramps up its issuance of debt, smaller U.S. trade deficits mean that our trading partners now have fewer dollars to recycle into our bond markets. As the budget deficit explodes to nearly $2 trillion annually, slackening demand for Treasuries from abroad could be devastating. With smaller trade surpluses to recycle, nations like China will have diminished need to buy our debt. The argument supporting the "vendor financing" system that had developed between the United States and China always rested on their need to lend us money so we can keep buying their products. But if we are now using their money to finance government stimulus programs (including spending on education, health care, green energy, and corporate bailouts), this dog no longer hunts.

With these negatives building for the dollar, alternatives are emerging. Now that stock and commodity prices have stabilized investors are looking to other assets that offer higher yields and better long-term prospects. While most of the attention has been focused on the recent rally in U.S. stocks, few have noticed that foreign stocks are doing even better. The 20% rise in the S&P from its March low merely returns the index to its Oct 2008 low. In contrast, Hong Kong's Hang Seng index is now 40% above its October 2008 lows. In short, while U.S. stocks have merely treaded water, Hong Kong shares have surged 40%. Far from being dead, de-coupling is clearly alive and well. My advice is to take your seat on this train before most investors realize that it's left the station.

By Peter Schiff, President and Chief Global Strategist of Euro Pacific Capital

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Dubai Emerges as Big Export Market for Indian Gold

DUBAI: There is a new-found golden love between India, the world’s largest gold consuming country and Dubai, a top global gold trading city. Dubai which generally exports gold to India is these days importing the yellow metal from India.

In the last three months-January, February and March-of 2009, India exported nearly 10 tons of gold coins to Dubai, the City of Gold, which has several large India-based gold jewellery show rooms.

According to figures from the Bombay Bullion Association, while gold imports by India, one of the top importers of the yellow metals in the world, dipped to virtually zero levels in February and March, gold exports from India have gone up. And, thus, Dubai has emerged as the largest export market for Indian gold coins and jewellery items.

”High prices of gold has forced several gold business houses in India to export scrap gold to Dubai. In fact, turning old gold into gold coins and then selling to the Dubai market is a big business with several large gold dealers in India,” bullion analyst Mark Robinson told Commodity Online.

He says Dubai has emerged as a large export market for gold coins and gold jewellery from India. "It is a reversal of the export-import market. All these months, Dubai used to export gold to India. Now India exports gold to Dubai," Robinson added.

Global gold consultancy GFMS says rising gold prices in the last six months has turned India from a large importer of gold to an exporter.

According to Gargi Shah, metals analyst at GFMS, the significance of India’s changed role as a major importer to exporter of gold is very interesting.

Check Shah’s description of gold usage patterns here: “For instance, my recent trip to Ahmedabad revealed that the buy:sell ratio of jewellery at the retail level has dramatically switched. In 2008, for example, a retailer would typically sell 10 kilogrammes and repurchase around one kilogramme of old jewellery over say a week (i.e. he would need to buy additional metal in the open market).”

”By contrast, in 2009, the same retailer is now purchasing 8 kilogrammes of old gold jewellery per day whilst only selling around 200 grammes of new jewellery. This has led to a significant amount of metal surplus from scrap vis-à-vis the demand in the market. Usually the capacity of the trade to hold the metal (whether a retailer, bullion dealer or any other entity) is at best one week. But the flow of scrap has remained very strong, forcing the market into a substantial discount and making the export of metal profitable.”

”My colleagues who look after the Middle Eastern markets have confirmed the fact that the flow of the metal has changed between the two markets – Dubai and Switzerland, both of which are major exporters of bullion to India, are now receiving considerable quantities of Indian origin scrap.”

Analysts like Robison and Shah point out that the trade partnership between India and Dubai is increasingly being written in gold.

In fact, India was the top gold trading partner of Dubai for 2008. While gold trade through Dubai rose 53 per cent to $29 billion in 2008 against $19bn in the previous year, the country that carried out the largest gold trade with the Emirates city was India.

Traders say gold trading between India and Dubai has boomed thanks to the fact that there are a large number of jewellery shops owned by Indian businessmen in Dubai, and across other Gulf countries.

Joy Alukkas, Managing Director of Joyalukkas Group, one of the largest gold business houses in India and the Middle East says India is the largest gold trading partner with Dubai because Indians are the largest expatriates working in Dubai and other Middle East countries.

Dubai has several major Indian jewellery chains like Joy Alukkas, Atlas Jewellery, Sky Jewellery and Malabar Gold.

According to statistics released by Dubai Multi Commodities Centre (DMCC). gold exports from Dubai reached 371 tonnes in 2008, an increase of 29 per cent compared to 287 tonnes in the previous year.

For the 12 months ending December 31, 2008, about 674 tonnes of gold was imported into Dubai, up 21 per cent compared to 559 tonnes in 2007. More than 100 countries served as gold import partners to Dubai in 2008, led by the UK and India. During the same period, Dubai exported gold to a record 64 nations, with India and Switzerland topping the list of export partners.

Here are some interesting facts on the gold trade in Dubai:

**The total value of the gold traded through Dubai in the second half of 2008 reached $15.99bn, up 57 per cent compared to $10.16bn during the corresponding period in 2007 and up 22 per cent compared to $13.07bn in the first six months of 2008.

**Gold imports in Dubai rose 21 per cent to reach 674 tonnes in 2008 compared to 559 tonnes in 2007 while exports rose 29 per cent to 371 tonnes compared to 287 tonnes in the previous year.

**Gold jewellery demand in the UAE dropped from 99.8 tonnes in 2007 to 93.3 tones last year although there had been a 32 per cent increase in investment demand of gold —from 7.5 tonnes in 2007 to 9.9 tonnes.

**Dubai imported gold from more than 100 countries in 2008 and exported to 64 nations.

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Roundabout Bailout: Fed To Pump Foreign Currency Into U.S. Banks

The Fed is already printing trillions of U.S. dollars and pumping them into the global economy in an effort to stave off a financial collapse. Now it plans to start injecting foreign currency, too, according to minutes recently released from its March meeting.

How the hell can the U.S. Fed do that? Glad you asked.

The Federal Reserve engages in so-called swaps with foreign countries, which we first reported here. It uses these swaps to pump hundreds of billions of dollars into foreign central banks while taking foreign currency in exchange.

The foreign central banks pass their new U.S. dollars to their foreign financial institutions, while the Fed has kept the foreign currency on its balance sheet and not injected it into the money supply.

Now, however, the Fed will be able to take the foreign currency it acquires in these swaps, and rather than hold it on its balance sheet, pass it on to U.S. banks, according to minutes from the Federal Open Market Committee's March meeting. These U.S. banks can then use that foreign currency to cover their foreign debts.

The Fed governors said, according to the meeting notes, that the measure was only precautionary: "There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the future."

The expanded effort is part of a Fed project that has been injecting hundreds of billions of dollars into foreign central banks over the last several months.

The committee notes say that the new program will "augment the existing network of central bank liquidity swap lines."

The Fed also announced in its minutes that it was approving "additional temporary reciprocal currency arrangements (swap lines) with the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank." Extending additional swaps to these central banks raises the question of whether those banks are facing difficulties repaying previous swaps. The European and Japanese economies have been collapsing at a faster rate than the United States' has.

"It is basically either an extension or increase of the existing lines, and raises suspicion that massive losses have been incurred in the previous round of supposedly 'temporary' swaps, as the return to dollar-supply-normalcy that these geniuses pretended to expect would have happened by now, did not," ventures economist James Galbraith.

Rep. Alan Grayson (D-Fla.), after reading the minutes, describes the Fed plan as "a massive transfer of wealth from the American people to who knows where," calling it a "round-about bailout."

Beyond that, he notes, it's hard to know what to make of the Fed action because of the obscurity of the institution. "The Fed is out of control. If the president tried to do this, Republicans would be calling for his impeachment. But because it's done by the man behind the curtain they call the Chairman of the Federal Reserve, it's supposedly okay," he says, arguing that the founding fathers never intended one man to have so much unchecked power. The obscurity has led economists to wonder about the Fed's true motives.

The expansion of Fed power comes amid increasing calls for transparency into the workings of the organization. If the Fed does send foreign currency to U.S. banks, it will be under no requirement to disclose which banks or how much.

On Wednesday, Financial Services Committee Chairman Barney Frank (D-Mass.) called for the GAO to have more authority to investigate the Fed. Grayson says Frank has told him on numerous occasions that Congress needs a better idea of what it is that the Fed is doing.

On Wednesday night, House Speaker Nancy Pelosi (D-Calif.) called on the Fed to post its financial transactions online during a conversation with the Daily Show's John Stewart. She plans to address "Fed authority" when Congress returns.

From the minutes:
The Committee also took up a proposal to augment the existing network of central bank liquidity swap lines by adding several temporary swap lines that could provide foreign currency liquidity to U.S. institutions, analogous to the arrangements that currently provide U.S. dollar liquidity abroad. There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the future. The Committee unanimously approved the following resolution:

"The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to enter into additional temporary reciprocal currency arrangements (swap lines) with the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank to support the provision of liquidity in British pounds, euros, Japanese yen, and Swiss francs. The swap arrangements with each foreign central bank shall be subject to the following limits: an aggregate amount of up to £30 billion with the Bank of England; an aggregate amount of up to €80 billion with the ECB; an aggregate amount of up to ¥10 trillion with the Bank of Japan; and an aggregate amount of up to SwF 40 billion with the Swiss National Bank. These arrangements shall terminate no later than October 30, 2009, unless extended by mutual agreement of the Committee and the respective foreign central banks. The Committee also authorizes the Federal Reserve Bank of New York to provide the foreign currencies obtained under the arrangements to U.S. financial institutions by means of swap transactions to assist such institutions in meeting short-term liquidity needs in their foreign operations. Requests for drawings on the central bank swap lines and distribution of the foreign currency proceeds to U.S. financial institutions shall be initiated by the appropriate Reserve Bank and approved by the Foreign Currency Subcommittee."

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A Simple Decision

One thing you can say about the recent sharp sell-off in silver, at the very least, is that it forces you to think. In fact, my friend and mentor, Izzy Friedman, wrote an article with that title a couple of years ago. http://www.investmentrarities.com/07-03-07.html Nothing focuses an investor’s attention more than a sudden decline in price, especially in an item one thought was undervalued to begin with. This is as it should be.

I’m not going to completely rehash the premise of the original article, but instead try to simplify the lesson of this most recent sell-off in silver. Why did it occur? And what should you learn from it?

Was there any obvious real world developments in actual silver supply and demand fundamentals that caused the price to decline? Not from anything I‘ve observed. Investor demand for real metal remained strong for every measurable category from strong ETF flows and record coin production and sales, to dramatic COMEX warehouse withdrawals, to continued disruptions in silver production and refining. Industrial consumption, admittedly weak, didn’t suddenly plunge anew in the last few weeks.

The explanation for the sell-off was the same as it ever was - price rigging on the COMEX. The big commercial shorts engineered the market lower to force leveraged longs on margin to sell, in order for the big shorts to buy back futures and other derivatives. Once again, the derivatives market tail wagged the real world price of silver dog. The good news is that the concentrated short position, while still large and manipulative, appears to be just about as low as it’s going to get, after this recent sell-off and the engineered decline over the past 8 months.

OK, if that’s the answer to why silver sold off, what’s the lesson? The lesson is that you must approach silver in such a way that you are not a victim of the manipulators. Buy for cash, don’t borrow or go on margin. You can’t prevent silver from dropping due to these rigged sell-offs, but you can prevent your silver from being taken away from you by forced margin call selling.

There’s a simple decision that every silver investor must make. You must decide whether you believe that the price of silver is manipulated or if it is functioning as a free market. This may sound weird at first, but if you decide that silver is not manipulated in price, but is trading free from control, you shouldn’t buy it or continue to hold it as an investment, in my opinion.

That’s because if you believe that the price of silver is free from an active downward manipulation, you must believe it is priced in accordance with everything you see around you. You must believe that consistent record demand for an item should result in sharply lower prices. You must be comfortable with delays and rising premiums being compatible with lower prices. You must be able to disregard documented proof of an unprecedented concentrated short position as unconvincing, and regulator stalling and double-talk as reassuring. You must see something I don’t see.

Instead, if you do see manipulation permeating the silver market, that is the best reason for buying. If you see manipulation, you see an artificially depressed price, a price screaming to be bought. If you see manipulation, you see a condition that can’t last, that must end. If you see manipulation, then everything makes sense about silver’s price history and circumstances. If you see manipulation, you know the usual commentary about silver is nonsense. If you see manipulation, you can understand the sharp sell-offs. If you see manipulation, you know it will end explosively to the upside.

While deciding for yourself whether silver is manipulated or not, here are some additional reasons to consider silver at this time.

TEN REASONS TO BUY SILVER NOW

Amid all the recent attention I’ve placed on the continued manipulation in silver, some may mistakenly assume that diminishes the case for silver. Nothing could be further from the truth. I’m convinced that silver is a better buy than ever before. Here are detailed reasons why I believe that is the case.

One, the near-term emotional temperature of the market is low. There is no bullish "fever" where uniformed investors are driven to buy silver because of a sharply rising price. That will happen, but it’s not true now. While silver is still above the price lows of last fall and higher than year-end prices, the recent price action is nothing to write home about. The price has been below most of the important moving averages, causing silver to be "oversold." This is a much better time to buy than when prices have already climbed and many are buying just because prices are rising. At those times the risk of a sharp sell-off is high. Now the risk of a prolonged price decline is much lower. Now is the time to buy low.

Two, leveraged speculators who normally buy COMEX futures contracts and Over The Counter (OTC) derivatives do not hold a historically significant number of long contracts. The big dealers have been so successful at forcing long speculators out of the market, that the speculative long position is at important low levels. This means that long speculators have already been forced to sell and no big selling from them appears probable. On any rise in price, they are likely to buy, adding a force to rising prices. Buy before they turn buyers.

Three, available wholesale silver inventories appear to be tight. These physical silver inventories are falling into stronger hands. For decades the world’s largest stockpiles of silver were the COMEX warehouse inventories. These COMEX inventories were considered mostly commercial in nature with some portion being held for investment purposes. The COMEX inventories peaked at around 280 million ounces in the early 1990’s, and accounted for 90% of all visible silver inventories. After the introduction of silver Exchange Traded Funds (ETFs), there was a profound shift in the location and structure of world visible silver inventories.

Now, the combined inventories in the ETFs and other investment vehicles tower over the holdings in the COMEX by almost 4 to 1. (Over 400 million ounces in the ETFs compared to 120 million oz in COMEX inventories). Given the long-term nature of ETF investment holdings, this massive and historic shift in inventory composition means much less silver is now available to the market. This will exert a strong upward influence on price.

Four, all signs indicate that physical investment demand for silver on both a retail and wholesale basis is strong and could surge further. Until a few years ago, there was no net silver investment buying for decades. That pattern has changed with a vengeance. Clearly, the introduction of the ETFs has played a major role in this investment transformation.

The strong buying that we have seen does not appear to be "hot" money, but sober and determined accumulation. It wasn’t surging prices prompting buyers over the last six months. It’s due to a growing awareness and conviction about silver’s real supply and demand fundamentals. Importantly, there has been practically no buying of silver on a leveraged or margin basis. It’s mostly been cash on the barrel. These strong silver buyers will wait for significantly higher prices before selling. With higher prices inevitable at some point, the hot-money crowd should come in and blow the doors off the price.

Five, silver production is tightening, given the byproduct-nature of silver mining. As I have written recently, base metals production like copper, lead and zinc appears to have fallen significantly, also reducing the production of silver as a byproduct.

Six, world economic and financial conditions appear lined up to favor higher silver prices, no matter what occurs. If financial conditions remain unsettled, flight to quality buying in silver appears likely. If the world does return to better economic growth patterns, silver will benefit as a result of increased industrial consumption. Heads silver benefits, tails it also benefits.

Seven, more investors than ever have come to realize that the silver market has been manipulated and the government regulators and exchange officials are unable to persuasively address the growing evidence of a silver manipulation. The manipulation debate has become widespread in metal circles. It isn’t going away. The best the regulators have been able to do is to stall and pretend to be investigating. Fewer people are being fooled by such actions. A scam like the silver manipulation can’t continue when so many know about it. This scam will end suddenly and sharply in a price jump to the upside.

Eight, industrial demand for silver will continue to grow in the years ahead. New uses for silver appear regularly. A robust worldwide economy will initiate a new phase of silver demand. Higher prices will not diminish this demand because small amounts of silver are used in each industrial application.

Reasons nine and ten, silver prices are cheap on several important objective measurements. Silver is cheap compared to its own recent price. It is down more than 40% from its highs of one year ago, in spite of the strongest physical demand in history. More investment silver has been purchased over the past year than at any other period in history. At precisely the same time that prices have declined so sharply, more ETF-type buying has occurred than ever before and more Silver Eagles have been sold by the US Mint than ever before. We have witnessed the highest premiums on all retail forms of silver in history. This isn’t just me saying silver is cheap, this is the investment world voting with its collective wallet. Clearly, there is something wrong with this picture that can only be explained by manipulation on the COMEX and the OTC market by a few giant financial institutions, led by JPMorgan.

Silver is cheap on a cost of production basis. Never have the net operating results of so many different silver miners been so poor. The common denominator is too low a price for their main product. Silver is up three-fold from the lows of a few years ago, yet the silver mining industry still suffers. That’s because the cost of production has risen faster than the price of silver. That must be rectified.

Silver is dirt cheap relative to gold. While there is less above ground silver than gold, silver’s price has rarely been this low compared to gold.

The manipulation that explains why silver is so cheap cannot exist in a bona fide physical shortage. If the price stays low, growing numbers of investors buy real silver. That makes it harder for the manipulators to keep the price contained with paper derivatives. Some fret the scam can be continued indefinitely. If it were just a question of printing more money or more paper derivatives, perhaps that might be true. But it’s not about an unlimited supply of paper silver, it’s about a limited supply of physical silver that guarantees the manipulation will end soon. The termination of controls on the price of silver will be something we look back upon and marvel over how long it existed. Just make sure you are looking back while holding as much real silver as you can.

By: Theodore Butler
Posted on 7 April, 2009

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IMF "Paper Gold" vs. a Real Gold Standard

If there is one thing governments love to do, it is to spend money. If they cannot tax it away from their citizen/subjects, or borrow it from financial markets, then governments turn to that third method of funding their expendtiures: they "create" the desired sums of money.

The G-20 in London last week agreed to expand the quantity of IMF Special Drawing Rights (SDRs) by $250 billion, a 10-fold increase from the amount originally created back in the 1970s.

I discuss the "return" to IMF "paper gold," as SDRs were nicknamed almost from the start, in a new piece of mine, "IMF Special Drawing Right 'Paper Gold' vs. a Real Gold Standard."

China, Russia and a U.N. committee headed by Nobel Prize-winning economist, Joseph Stiglitz, have called for the dollar to be replaced with a new international reserve currency --the IMF's Special Drawing Rights (SDRs), or "Paper Gold" as it was nicknamed after coming into existence in 1969.

While it as remained for the most part an imaginary unit of account on the books of the International Monetary Fund, there is now a call for it to eventually become a "real currency" managed and controlled by the IMF. It would create SDRs "out of thin air" to serve as reserves to expand member countries' national currencies, or to use to maintain artificial foreign exchange rates or cover the costs of imports or debt a country really can't afford.

But why have a new "paper gold" international currency, when there is an historical international money -- gold -- that served this purpose very well before the era of government fiat monies beginning in 1914. Of course, a real gold standard would limit what governments around the world love to do -- spend money on special interest groups and ideologically-motivated projects.

Which is why governments prefer "paper gold" to a real gold standard that would limit their ability to turn the handle of the monetary printing press.

Of course, the most desirable "policy" would be to "denationalize" money, that is, separate money from the state completely, and leave the choice of a medium of exchange, its supply and value to the market forces of supply and demand.

Alas, governments are determined to maintain their control over the printing of money. And now they will jointly internationalize the process of fiat money creation through the use of this IMF "paper gold," to do what they love to do most: spend, spend, spend through the debasement of the hard earned wealth and income of the those who peacefully work and produce in the private sector.

by Richard Ebeling
April 8, 2009 10:38 AM

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Bernanke's Deflation Preventing Scorecard

Today I've added an excellent rant on Ben Bernanke by Mike Shedlock. I'm following Mike for quite some time now, and he's got very good analysis about current economic policies. If you like to read more about 'Mish' and his Global Economic Analysis blogsite, please visit the link below this article. Now, its time for a proper rant;


In case no one is keeping track, Bernanke has now fired every bullet from his 2002 “helicopter drop” speech Deflation: Making Sure "It" Doesn't Happen Here.

Bernanke's Scorecard

Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work...

2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work...

3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work...

4. Make low-interest-rate loans to banks. Check. That didn’t work...

5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work...

6. Lower rates further out along the Treasury term structure. Check. That didn’t work...

7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work...

8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work...

9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work...

10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work...

11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work...

12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work...

13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work...

Bernanke has failed. "It" has happened. The proof is irrefutable as detailed in Humpty Dumpty On Inflation and Fiat World Mathematical Model.

What now Ben? More of the same stuff that failed miserably before, only on a grander scale?

By Mike "Mish" Shedlock
Global Economic Analysis

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Know all about IMF gold reserves

In the recent past, there is a lot of talk about the International Monetary Fund’s gold holdings because the G20 leaders have allowed the IMF to sell part of its gold reserves to raise funds to fight recession. So, there is an increased enthusiasm to know how much gold the IMF has and how it will impact the international bullion markets if IMF sells around 400 tonnes of the yellow metal now.

Here are some facts about the IMF’s golden chest. The IMF holds 103.4 million ounces (3,217 metric tonnes) of gold at designated depositories. The IMF’s total gold holdings are valued on its balance sheet at $9.3 billion on the basis of historical cost. As of August 31, 2008, the IMF’s holdings amounted to $86.2 billion (at the market prices then). A portion of these holdings were acquired since the Second Amendment of the IMF’s Articles of Agreement in April 1978, amounting to 12.97 million ounces (403.3 metric tonnes), with a market value of $10.8 billion as of August 31, 2008. This part of the fund’s gold holdings is not subject to restitution to members.

IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions. First, it was then prescribed that 25 per cent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represented the largest source of the IMF’s gold. Second, all payments of charges (i.e., interest on members’ use of IMF credit) were normally made in gold. Third, a member wishing to purchase the currency of another member could acquire it by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970-71. And finally, members could use gold to repay the IMF for credit previously extended.

IMF policy on gold
The Second Amendment to the Articles of Agreement in April 1978 eliminated the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Right (SDR). It also abolished the official price of gold and brought to an end the obligatory use of gold in transactions between the IMF and its members. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.

The Articles of Agreement now limit the use of gold in the IMF’s operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member’s obligations at an agreed price, based on market prices at the time of acceptance. These transactions in gold require an 85 per cent majority of total voting power. The IMF does not have the authority to engage in any other gold transactions — such as loans, leases, swaps, or use of gold as collateral — nor does it have the authority to buy gold.

The Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment to members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of members at the former official price of SDR 35 per ounce, with such sales made to those members who agree to buy it in proportion to their quotas on the date of the Second Amendment. A decision to restitute gold requires support from an 85 per cent majority of the total voting power. The Articles do not provide for the restitution of gold the Fund has acquired after the date of the Second Amendment.

The IMF’s policy on gold is governed by the following principles
As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position. The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies. The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market. Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.

How and when IMF used gold
Outflows of gold from the IMF’s holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. As noted, since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales.

Key gold transactions included
Sales for replenishment (1957-70): The IMF sold gold on several occasions to replenish its holdings of currencies.

South African gold (1970-71): The IMF sold gold to members in amounts roughly corresponding to those purchased from South Africa during this period.

Investment in US government securities (1956-72): In order to generate income to offset operational deficits, some IMF gold was sold to the United States and the proceeds invested in US government securities. Subsequently, a significant buildup of IMF reserves prompted the IMF to reacquire this gold from the US government.

Auctions and restitution sales (1976-80): The IMF sold approximately one third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.

Off-market transactions in gold (1999-2000): In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance the IMF's participation in the Heavily Indebted Poor Countries (HIPC) Initiative. Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF.

In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative. In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations. In the end, these transactions left balance of the IMF’s holdings of physical gold unchanged.

By Geena Paul
Posted on April 7th, 2009

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The 20 Biggest Holders of U.S. Debt

The U.S. National Public Debt is now over $11.2 trillion. And it's climbing at a rate of $2.7 million per minute! By the time you are done reading this article, the U.S. National Public Debt will have climbed over $20 million. And Uncle Sam is running up this tab with ever-increasing speed. In the past five months alone, the U.S. government has increased National Public Debt by $1 trillion. It has been the fastest jump in U.S. history.

It took the American government a full 191 years (from 1791 until 1982) to rack up its first trillion dollars in national debt. The second and third trillions got on the scoreboard much more quickly, each within just four years. By the time George W. Bush was inaugurated as President in 2001, the National Public Debt stood at $5.7 trillion. The Bush Administration increased Public Debt by almost $4.9 trillion. Under his authority, Bush increased National Public Debt faster than nearly all of his predecessors combined.

But I'm not just picking on Bush and the Republicans. . .
National Debt stood at $10.6 trillion on the day Barrack Obama took office. But if his budget projections are accurate, President Obama's administration will run up nearly as much national debt in four years as Bush did in eight. In fact, during the eleven weeks since Obama took office, the National Public Debt has increased almost $600 billion. And the federal budget he unveiled in February projects even faster increases in the National Public Debt. It is estimated that Public Debt will rise to almost $13 trillion by the end of the fiscal year on September 30th.

The hundreds of billions of dollars being spent as part of the federal bailout of the financial markets is a leading factor in the rapid increase in government debt. And as the U.S. government spends an unprecedented amount of money to fix the nation's economy, there is a need to raise the cash to pay for it. This can only be accomplished by raising taxes, which is an very unpopular option, or through borrowing whereby America sells U.S. Treasury securities of varying maturity.

For investors, U.S. government bills, notes, and bonds are considered a safe financial product with AAA ratings from agencies such as Moody's, Standard & Poor's, and Fitch. These credit rating agencies assume a guaranteed rate of return based on the "full faith and credit of the United States." The federal government has been partially funding operations via Treasury debt securities for decades. This borrowing adds to the National Public Debt. Much of that debt is held by private sector, but about 40% is held by public entities, including parts of the government.

What is U.S. National Pubic Debt?
U.S. National Public Debt comprises Debt Held by the Public and Intragovernmental Holdings. The Debt Held by the Public is all federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government less Federal Financing Bank securities. Types of securities held by the public include Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds, and State and Local Government Series securities.Intragovernmental Holdings are Government Account Series securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities. A small amount of marketable securities are held by government accounts.

Here are the 20 biggest holders of U.S. government debt;

#20. Republic of Ireland — $50 Billion
As a country with just 4.2 million citizens, Ireland currently holds $50 billion in U.S. government debt. Between January 2008 and January 2009, Ireland increased its holding of American debt by 221%.

#19. Germany — $56 Billion
Germany is a member of the United Nations (UN), North Atlantic Treaty Organization (NATO), Group of Eight (G8), and Organization for Economic Co-operation and Development (OECD). It is a major economic power with the world's third largest economy by nominal GDP and the fifth largest in purchasing power parity. Germany is the world's largest exporter and second largest importer of goods. The central European country controls $56 billion in U.S. Treasuries.

#18. Switzerland — $62 Billion
The neutral, landlocked, alpine country, which hosts many international organizations including the Red Cross and World Trade Organization (WTO), owns just over $62 billion in U.S. debt.

#17. Hong Kong — $72 Billion
Renowned for its expansive skyline and natural setting, Hong Kong holds about $72 billion in U.S. government debt. Hong Kong is one of the world's leading financial capitals, a major business and cultural hub, and maintains a highly-developed capitalist economy.

#16. Taiwan — $73 Billion
As another advanced, high-income Southeast Asian economy, Taiwan owns about $73 billion in U.S. Treasuries. The country's technology industry plays a key role in the global economy, as Taiwanese companies manufacture a giant portion of the world's consumer electronics.

#15. Luxembourg — $87 Billion
With a population of less than 500,000, Luxembourg owns over $87 billion in American debt. The tiny country is a founding member of the European Union (EU), NATO, UN, Benelux, and the Western European Union, reflecting a political consensus in favor of economic, political, and military integration.

#14. Depository Institutions — $107 Billion
According to the Federal Reserve Board of Governors, depository institutions, such as commercial banks, savings banks, and credit unions, hold over $107 billion in government debt.

#13. Russia — $120 Billion
Russia is the largest country in the world, covering more than an eighth of the Earth's land area. With 142 million people, it is the ninth largest by population. The transcontinental country currently holds about $120 billion in U.S. debt. This figure increased 240% between January 2008 and January 2009.

#12. United Kingdom — $124 Billion
Britain was the world's first industrialized country and the world's foremost power during the 19th and early 20th centuries. Today, the United Kingdom currently holds $124 billion in U.S. debt securities and has the fifth largest economy in the world by nominal GDP.

#11. Insurance Companies — $126 Billion
The Federal Reserve Board of Governors lists insurance companies as holding $126 billion in Treasury securities. This group includes property-casualty and life insurance firms.

#10. Brazil — $134 Billion
Brazil is the fifth largest country in the world by geographical area, occupying nearly half of South America, and the fifth most populous country. The South American economic giant holds $134 billion in U.S. debt.

#9. Caribbean Banking Centers — $177 Billion
The U.S. Treasury identifies the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles, Panama, and the British Virgin Islands as holding $177 billion in American debt.

#8. Oil Exporters — $186 Billion
Included in the group of oil exporters are Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. The group combines for a total of approximately $187 billion held in U.S. government debt.

#7. Other Investors — $413 Billion
This diverse group includes individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts, estates, and both corporate and non-corporate businesses for a total of $413 billion held in U.S. national debt.

#6. Pension Funds — $456 Billion
Pension funds control large amounts of cash, which is reserved for personal retirements, and are therefore obligated to make relatively safe investments, such as U.S. Treasury securities. This group includes both private and local government pension funds, totaling over $456 billion.

#5. State and Local Governments — $523 Billion
State and local governments hold over a half-trillion dollars in U.S. Treasuries. The level of investment has remained very stable over the past three years, moving within the range of $517 billion and $550 billion from 2006 to 2009.

#4. Japan — $635 Billion
As another major U.S. trade partner, the archipelago country of Japan holds a huge amount of America's debt with a stunning $635 billion. Japan has the world's second largest economy by nominal GDP and the third largest in purchasing power parity.

#3. Mainland China — $740 Billion
The economy of Mainland China is the second largest in the world after that of the United States with a GDP of almost $8 trillion by purchasing power parity. China has been the fastest-growing major nation for the past quarter of a century with an average annual GDP growth rate above 10%. As one of the world's continuous civilizations, consisting of states and cultures dating back more than six millennia, China now controls approximately $740 billion in U.S. debt.

#2. Mutual Funds — $769 Billion
Mutual funds hold the second largest amount of American debt compared to any other group. Including money market funds, mutual funds, and closed-end funds, this group of investments manages approximately $769 billion of U.S. Treasury securities.

#1. The Federal Reserve and U.S. Intragovernmental Holdings — $4,806 Billion
This probably comes to you as no surprise. The largest holder of U.S. government debt is the privately-owned Federal Reserve. The Federal Reserve system of banks and other U.S. intragovernmental holdings accounts for a stunning $4.8 trillion in U.S. Treasury debt. And with recent announcements from the Fed, another potential $1 trillion may be added to its balance sheet.

All this debt has put the United States economy and the U.S. dollar in a perilous situation, especially with the global economic recession right now. Historically, currencies were backed by precious metals. But in the current scheme of fiat money, the U.S. government is free to print all the money it wants. Consequently, the government cannot technically go bankrupt as any debtor nation can just issue more money through a practice known as seigniorage.However, a gross imbalance between the amount of new money being brought into circulation and the amount of economic goods represented by an economy is an unstable situation that can lead to hyperinflation.

By Luke Burgess
Posted on Tuesday, April 7th, 2009

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Stick Tight to Your Gold

Unwarranted post G20 euphoria drives gold downwards, but perhaps not for long. The plethora of misleading positive spin coming out of the G20 has misled the investment community into believing the worst may be over, but there could be some more mega shocks yet to come.

LONDON -

When one looks behind the G20 spin, there would seem to be little substance for the euphoria which appears to have pushed markets up with the hope that the bottom has been reached and that now the only way is up! This total change in perception by investors has reduced the safe haven appeal of the precious metals and both gold and silver have been marked down over the past few trading days - gold by around 6% or more and the more volatile silver by around 10%.

But general market reaction, with indices rising on the G20 announcements, has already become muted and the feeling that the G20 hype was more of a PR exercise to try and convince a sceptical world that the authorities have got matters under control is taking hold. There may well be some green shoots of recovery around, but not yet sufficient to be able to withstand further wintry adverse market reactions as more failures are announced, more people become unemployed and the likelihood that there are still some major institutions out there that are yet to go to the wall - even some countries still look very vulnerable to default despite all the promised new money for the IMF which, on a second look is mostly nothing of the sort. So don't bail out of gold yet. There are still some very stormy waters out there where safe haven protection will continue to be a wise move.

The initial downturn in the gold price came alongside some very misleading - or perhaps downright dishonest - statements from various politicians with axes to grind against gold suggesting that a lot more of the IMF's metal than the already announced 403.3 tonnes would be sold for the benefit of poor countries. Of course nothing of the sort was agreed and the IMF has since been forced to clarify the matter with a statement that no talks were held regarding the sale of any more of the fund's gold, and even the sale of the amount agreed upon last April has still to be ratified.

Indeed most of the vast sums of Monopoly money bandied about in the post G20 statements as being forthcoming to ‘save the world' is not new money either. But in terms of generating sufficient hot air to turn the markets the G20 has to be deemed a one-week wonder. One suspects that once the week is past we will be back to roughly where we were before the event took place.

There are still some horrendous pitfalls out there. What was described to me today as the world's biggest ponzi scheme, which makes Bernie Madoff's activities just appear as small change, has yet to implode, although it looks as though it may be beginning to do so. In one word that is Dubai where feverish attempts are apparently being made by the sheikhs to ward off total economic collapse.
Expatriates are deserting the Gulf state almost as quickly as they can find seats on airplanes out. Huge swathes of apartment blocks lie empty and, my source tells me that those wanting to sell out are being pushed into time-controlled sales, supported by the government, not that there are any buyers, as too much coming on the market at once would lead to the equivalent of a run on a bank. And given the trillions of dollars in investment that have gone into the state a run on Dubai would be disastrous for the global economy and the banks that are involved. It is effectively another subprime mortgage fiasco waiting to happen. You might want to question your bank's exposure to Dubai. Undoubtedly the risk is spread globally just like the subprime markets.

Add to Dubai serious problems still in Eastern Europe and even in some Western European countries and things may yet get worse for the bankers before they really start to get better - so don't get rid of your safe haven gold yet. It remains the best, and perhaps only, insurance against further financial collapses, and should eventually perform well when inflation strikes, which it inevitably will given the huge volumes of fiat money being pumped into the global economy.

And as for base metals - they seem to have benefited from the G20 just as gold looked less strong, but the industrial upturn hasn't even started to happen yet thus there is the likelihood that the recent price gains could well be shortlived and reversed. In the long term base metals are a good bet with all the cutbacks and deferrals out there leading to supply shortages down the road, but long term is probably a year or two, or more away still.

Author: Lawrence Williams
Posted: Tuesday , 07 Apr 2009

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The Last European: Why the G-20 Was a Success

Simon Johnson, a professor of entrepreneurship at M.I.T.’s Sloan School of Management, is the former chief economist at the International Monetary Fund.

What did Thursday’s G-20 summit meeting really achieve?

On the highest-profile issues of financial regulation, fiscal stimulus and monetary policy, there was little progress. But on the International Monetary Fund, the American side engineered a breakthrough — not just in terms of how much money the fund can lend to countries, but also in terms of rebuilding its legitimacy and making it more effective as the world’s only global crisis-fighting organization.

The Europeans are claiming progress at the summit meeting in terms of promises to regulate hedge funds and create more cooperation between bank supervisors across countries. These are sensible steps in principle, but do nothing to rein in the political power of huge banks and their ability to evade regulation. No one at the meeting said anything as simple and — these days — as obvious as, “Any bank that is too big to fail is also too big to exist.”

The Obama administration pushed for more government spending as a way to provide fiscal stimulus around the world, but they were completely rebuffed by the Europeans. And not even the United States was willing to push other countries aggressively for the most important stimulus when wages and prices are entering a downward deflationary spiral — further easing of monetary policy to help borrowers around the world.

The only real news is the support shown by the G-20 for the I.M.F. The headline is obviously the extra money that the I.M.F. will have — up from $250 billion to around $1 trillion in effective lendable resources; finally, enough to begin to make a global difference. Most of the press coverage stops with this point, but all this extra money is helpful only if it gets lent out.
Lots of countries are in trouble or under pressure, yet many are reluctant to borrow from the fund because this comes with “stigma” — such loans are interpreted as a sign that you are doing badly. Many countries also feel that the conditions attached to I.M.F. loans are onerous and mostly there at the behest of the rich countries that founded the fund and still control it.

The best way to enhance the I.M.F.’s legitimacy would be to give middle- and lower-income countries a greater role in its governance (more votes or more seats on the board or both), but progress on this front remains glacial; European countries in particular are unwilling to give up their long-standing over-representation.

In this difficult context, the Obama administration produced a rabbit out of the hat.

The managing director of the I.M.F. is very powerful, with a great deal of authority and discretion, and has always been a European — in effect, appointed by European governments to represent their interests. The G-20 made it clear that this will stop — the communiqué says the selection process will be open, transparent and competitive. But really this is code for saying they will pick someone from an emerging-market country, such as India or Brazil (and there are some excellent candidates). The right person in this job could have a huge positive effect on the I.M.F.’s legitimacy.

To make things matters more interesting, the I.M.F.’s managing director is expected by insiders to resign within a year, to resume his (promising) pursuit of the French presidency. The leadership race for the next managing director effectively starts today; the stakes are high, and competition will be intense.

How did the Obama administration pull this off? In a brilliant move, they took the lead by volunteering to open up the selection process for the World Bank, the I.M.F.’s sister organization, which has always been run by an American. The next president of the World Bank is very likely to be Chinese.

By Simon Johnson

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