In the latest issue of The Privateer (December 9 - #439), we discuss the "second phase" in the increasingly desperate attempts by the U.S. government to re-start the U.S. economy. The first phase is, of course, the Fed's rampant rate cutting and "liquidity generating" spree which has been going on all year.
As you know, the Fed cut U.S. rates for the ELEVENTH time this year on December 11. This cut was 0.25% and it brought the Fed Funds rate down to 1.75%. To find rates appreciably lower than that, you have to go back to the Depression of the 1930s and World War II.
The obvious problem is that the Fed is running out of room for further rate cuts. Yes, we know that Japan cut their rates to zero, but the Yen is NOT a "reserve currency", nor is it a reserve currency which is coming under threat from a competitor. The U.S. Dollar is both these things. The competitor is, of course, the Euro, which is introduced in CASH form in two weeks time. There are already lines in front of European banks as people are eager to get their hands on some Euro cash NOW.
The entire global structure underpinning the U.S. Dollar and its supremacy is starting to wobble badly. U.S. Treasury debt is having a very bad time indeed. Yields, except at the shortest end, are inexorably rising and have been doing so for a month. Right now, the T-Bill (3 month paper) yields 1.72%. The Fed Funds rate is 1.75%. Treasury debt is at the bottom of the gigantic inverted pyramid of "derivatives" which choke the markets. It is also at the bottom of the inverted pyramid which foreign central banks have constructed. Treasuries are the "reserves" on which depend the financial structure of almost every other currency regime in the world.
We say "almost" because there is an exception - the European Union and the Euro. Very soon, the Europeans will literally not "need" Dollars or Treasury debt paper, except for trading purposes. The Europeans have almost completed the construction of their OWN reserve currency, the Euro. Next year, Treasuries and cash U.S. Dollars will be superfluous as reserves. That does NOT mean that Europe will turn around and dump them, but it does mean that Europe will, at the very least, not be buying any more.
Privateer subscribers will have noted the emphasis we have placed on recent moves by the U.S. to "urge" Japan to act drastically to rescue their economy from yet another potential death spiral. The method the U.S. is now advocating is for Japan to "devalue" the Yen - by buying even more Treasury debt paper. Japan is complying, the Yen is weakening. But Japan is not complying with sufficient force. Treasury yields are rising, and the U.S. Dollar may be rising against the Yen, but it is FALLING against almost everything else
WHY is the U.S. "urging" Japan to buy Treasuries? Because they can't get the Europeans to do so. Can Japan buy enough Treasuries to stave off a dive in the Dollar, and keep U.S. longer-term rates comparatively under control? They might be able to, for a while, in "normal" circumstances. But circumstances today are NOT "normal" - they are anything but.
This is where we come to: "the 'second phase' in the increasingly desperate attempts by the U.S. government to re-start the U.S. economy" - see above. Just over a week ago, the U.S. Administration let it be known that they would like an increase in the U.S. debt ceiling - THIS MONTH. They said that if they didn't get it, the Treasury would hit the debt ceiling by March 2002 - at the latest. When the original "request" surfaced, there was no hint from the Administration about how much they wanted the ceiling raised.
This week, the U.S. Treasury formally requested that the U.S. Congress raise the debt ceiling (presently $US 5.95 TRILLION) by $US 750 Billion to $US 6.7 TRILLION, this month. Such a raise, according to the Treasury request, would be enough to see their "borrowing requirements" through to 2003.
As stated in the latest Privateer, nine months ago, the Bush Administration was claiming that the present debt ceiling would serve the Treasury's borrowing needs until - 2009.
From the events of the past two weeks, it should be obvious that the U.S. is now embarking on the second of the failed measures taken by the Japanese to revive their economy over the past decade and a bit. When lower rates don't work, introduce "stimulus packages".
Besides the obvious fact that this "two phase" approach has NOT worked for Japan, we cannot conceive of a more dangerous time for the U.S. to be trying it than the present. Their official debt paper and currency are already under increasing strain. And they face the imminent debut of a SERIOUS condender for their role as supplying the world's reserve currency.
THIS is the situation in which Gold has abruptly re-awakened, rising $US 4.10 on December 21. The technical aspects of Gold's present position are discussed in our other analyses this week. As we hope this analysis has shown, fundamentally, Gold (and Silver) are poised to LEAP upwards. The only remaining questions are when? And how much? Stay tuned.