U.S. Economy, A summary for diaster

US economy at risk from `non-ally' bondholders

America's leading public finance watchdog has sounded a warning that the US economy is vulnerable to hostile financial actions by nations that are not its "allies".

David Walker, the US comptroller general, indicated that the huge holdings of American government debt by countries such as China, Saudi Arabia and Libya could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests.

Mr Walker told The Times that foreign investors have more control over the US economy than Americans, leaving the country in a state that was "financially imprudent".

He said: "More and more of our debt is held by foreign countries – some of which are our allies and some are not."

Mr Walker, who heads the Government agency that is responsible for auditing the national accounts and is also the arm of Congress that scrutinis-es spending by the Administration, said that the US has been forced to rely on foreign investors more because Americans are saving so little.

According to US Treasury Department statistics, Japan is the biggest foreign holder of US Treasury bonds, with almost $623 billion (£310 billion) of US government debt as of December last year. Mainland China is the second biggest investor, with about $397 billion, and oil exporters, which include Iran and Saudi Arabia, had $110 billion.

The UK, while the biggest foreign investor in US equities, is the fourth-biggest holder of US Treasuries.

While Mr Walker referred to Britain as "the best ally the US could hope for", he told The Times that "anybody who looks at that list will see that some of the countries there are not traditional US allies. You will see that China, Korea and a number of Opec nations are there. Not all the countries on the list share the same economic, national and foreign polices as the US."

The worry is that should any of these foreign nations choose to reduce their holdings significantly, it would trigger sharp falls in US government bond prices, driving up their yield, which would raise borrowing costs sharply for American consumers and companies. While most economists take the view that countries such as China are unlikely to reduce their US bond holdings because they would also suffer a fall in the value of their own investments, China could still be perceived as holding a powerful financial weapon.

Ian Shepherdson, an economist at High Frequency Economics, said: "The US has a symbiotic relationship with China. The US cannot afford for China to sell its US treasuries but, equally, China cannot afford to see the value [of its treasury bonds] slide. They are strategic enemies and are in a financially weird relationship. China's holdings represent about a third of Chinese GDP."

China has been buying US Treasury bonds faster than any other big country – it has increased its holdings sixfold in six years. Beijing has accumulated the bonds as a consquence of its extensive programme of intervention in the currency markets. To hold down the value of the yuan, China buys dollar assets and sells the yuan.

This month Mr Walker described the US as suffering from a "fiscal cancer'" because of the massive long-term healthcare liabilities that the nation faces. The financial burden caused by healthcare entitlements has increased from about $20 trillion to $50 trillion over the past six years, representing a $440,000 bill for every American household, he explained. He also added that in 2005 and 2006, Americans spent more money than they took home, the first such pattern since 1933.

In the midst of this housing mess, we often ask, "Who's next?" Longtime friend and former Strategic Investment editor Dan Denning wagered a guess yesterday in front of a packed house.

"I'm shocked at the lack of attention that has been given to Fannie Mae and Freddie Mac," Dan said. "The investment banks like Bear Stearns have undertaken very significant risk… that's true. But nothing compared with the risk Fannie and Freddie have on their books. Together, they own 45% of the residential mortgage market in the U.S. The government doesn't want to acknowledge this issue, because at the end of the day, it will be up to you, the taxpayer, to bail Fannie and Freddie out.

"Anyone that tells you that the subprime crisis is over is from another planet, or they work for CNBC."

"At some point, the fall in the dollar will translate into foreign investors no longer buying US assets and selling their existing holdings," said William Strazzullo, chief market strategist at BellCurve Trading.

"We expect euro/dollar to appreciate to $1.42 by the end of the quarter and sterling/dollar to to move to $2.10 as investors reduce their dollar-denominated exposure," said Hans Redeker at BNP Paribas.

Link: http://www.ft.com/cms/s/e3dd78ec-3872-11dc-bca9-0000779fd2ac,_i_rssPage=8672feb4-504a-11da-bbd7-0000779e2340.html

Why Investors Will Choose Gold and Silver
July 24th, 2007

With the US Dollar declining more and more everyday, investors at large are soon going to be looking to get out of the US Dollar and into "things" ie. hard assets that have real value, unlike fiat paper currencies, in order to protect themselves against a dollar collapse.

There has been some speculation that investors will buy other currencies such as the pound and euro to hedge against the dollar, but precious metals, in particular gold and silver, will be the number one choice as a dollar hedge.

The chart shows gold and silver against some of the major currencies. Clearly, gold and silver are outperforming the currencies. Now some may argue that this is to be expected, but currencies are a "better" hedge as they are "safer". It is true that major currencies such as the Euro and Pound are less volatile than the precious metals, but we would have to dispute any assumption that they are "safer".

We believe that the US and the world economy is in for some turbulent times in the near future as we slide into a recession and perhaps even an economic depression. In times like these, nothing is "safe" and in fact precious metals are the safest investment in these periods of history.

Another factor is that although other currencies are performing well at the moment, they are still built on the same shaky foundations that are cracking underneath the USD. The Euro, Pound and other currencies are still fiat paper "money" and therefore just as worthless as the US Dollar in theory. In practice, the US Dollar is being printed like there was no tomorrow (which in all fairness there might not be) and so it is becoming less and less valuable. Many investors realising this may decide to come out of currencies all together and get into "things".

By "things" we are referring to hard assets, true wealth, true money, representing true value, "things" that cannot be recklessly printed. At the top of the list is gold and silver but also included are other sectors such as energy with oil, gas and uranium companies in the spotlight. Money that cannot be forced into the metals will go into other hard assets and then after that, what ever is left over will, reluctantly, go into other currencies, preferably currencies in resource rich economies such as Canada and Australia.

Another factor which must be taken into consideration is that there are over 8000 hedge funds operating in the world today. When those hedge fun managers see their stocks under performing or getting devalued by the falling dollar they will be looking to get out. Due to the nature of hedge funds, they are more comfortable with risks and so we could see a lot of their money, fearlessly flocking into gold and silver as well and gold and silver stocks, which are even more volatile.

Fortunately, or perhaps unfortunately, we do not have billions or trillions of dollars to dispose of and so we will not be forced to diversify into currencies, we can go for the crème de la crème, gold stocks and silver stocks, and therefore make the most money out of the coming dollar collapse and economic downturn.


Dollar Value Drop Good for Bush, Economy
Tuesday, July 24, 2007 11:44 a.m. EDT

The continuing slide of the dollar to historic lows may have some consumers cringing, but in fact many experts say the Bush administration has good reason to cheer the dollar's decline.

Since January 2001, when President George W. Bush took office, the dollar has lost 13.2 percent, based on a Federal Reserve index that monitors the dollar against the currencies of 38 U.S. trading partners. That's the most under any president since at least Gerald Ford, observed Bloomberg.com.

Just today, the dollar, pressured by credit markets and a continuing weakness in the U.S. housing market, reportedly fell to a 15-year low against a basket of major currencies and a record low against the euro. The dollar index dropped to a low of 80.016, down around 0.5 percent.

Meanwhile the electronic platform EBS showed the euro jumped to an all-time high of $1.3853 before settling back down at $1.3835, up 0.2 percent from late Monday.

But a weaker dollar is helping the economy, stated Bloomberg.com, and may shore up voters' confidence in the Republican party as the U.S. heads into a presidential election year.

Why? The news source explained that rather than causing foreigners to flee U.S. securities, "the depreciating currency is making American goods less expensive abroad and helping offset the worst housing recession in 16 years."

In fact, government sources reported that exports reached an all-time high in May of $132 billion.
According to Bloomberg.com, Treasury data going back to 1978 show that every administration except President Bush's entered the foreign exchange market to buy dollars in an attempt to support the currency.

Even the Bush administration's strategy early on was for a strong dollar, Paul Samuelson, the 1970 recipient of the Nobel Prize in economics, told Bloomberg.com in an interview.

But over time, he added, "they began to want a depreciated dollar."

Even so, the Treasury has stuck to the strong-dollar position it's held for the past decade. Just three months ago, Treasury Secretary Henry Paulson stated that, "a strong dollar is in our nation's interest and that our currency rates, like all currency values, should be set in a competitive marketplace, based on economic fundamentals,"

Still, the chief U.S. economist at Goldman, Sachs & Co. told Bloomberg.com that, "AS weak dollar is in the interest of the United States and in fact the world economy" as a means of spurring demand for U.S. goods at home and from abroad.

Commerce Department statistics in fact support this argument: the economy grew 3.3 percent last year, after expanding by 3.2 percent in 2005, the news source offered. Housing subtracted 0.27 percent point from growth last year, after adding a half percentage point in 2005. Exports added 0.93 percentage point, up from 0.68 percentage point in 2005.

Moreover, the prospects for higher profits from exports helped push the Dow Jones Industrial Average to a record high last week.

There's another benefit that's been derived from the decline in the dollar — it's helped trim the U.S. trade deficit. The shortfall in the current account has declined to $192.6 billion in the first quarter, equivalent to about 5.7 percent of the economy, from a record 7 percent in 2005.

According to Bloomberg.com, "the 13.2 percent tumble under Bush compares with an 18.3 percent gain under Bill Clinton and declines of 0.2 percent under George H.W. Bush, 0.4 percent under Ronald Reagan, 3.0 percent under Carter, and 2.3 percent during Ford's tenure."

What's more, the dollar's decline hasn't diminished international investors' appetite for U.S. securities — Treasury data showed they added a record $126.1 billion in May.

Still, David Malpass, chief economist at Bear Stearns & Co., who worked in the Treasury Department under Secretary James Baker, told Bloomberg.com that, "The potential for an even weaker dollar may sour investors on the world's biggest economy. People want to invest into strengthening currencies."

"Foreign buying of U.S. securities is a result of overseas producers recycling export proceeds into dollar-denominated financial assets," he explained.

Another former assistant Treasury secretary under Bush told the news source that the dollar's "trend will be down over the next couple of years. A weaker dollar in conjunction with strong demand in the rest of the world is helping the U.S. rebound."

A Bloomberg News survey published earlier this month showed 36 analysts forecasted the dollar may end the year at $1.36 per euro.

Link: http://www.newsmax.com/money/archives/st/2007/7/24/114511.cfm?s=al&promo_code=378F-1


Paulson To Visit China This Week For Economic, Currency Talks

WASHINGTON (Dow Jones)--Treasury Secretary Henry Paulson will travel to China at the end of this week, where he plans to discuss trade and currency issues, among other economic topics.

"This trip is part of an ongoing process to strengthen our strategic economic relationship - to address long-term issues such as working with China to rebalance its growth and increase the flexibility of its currency," Paulson said in a statement.

He is also expected to talk about "issues of concern to the U.S. Congress" while in Beijing. U.S. lawmakers have threatened to impose penalties on China if Beijing doesn't allow its currency to appreciate.

U.S. lawmakers say China unfairly manipulates the value of its currency in order to cheapen the cost of China's export goods.

Commodities May hold a Key
"China's demand is insatiable," said William Hayden, president of Ivanhoe Philippines Inc. "I can't see any let up in demand, not in China, India, Pakistan and other areas, certainly not for base metals like copper and nickel in the next 10 years."