By Tom Hals, Reuters

WILMINGTON, Delaware — The U.S. government has provided more than $1 trillion of support to financial companies in a bid to keep credit flowing to the U.S. economy. But a new law may give billions of dollars to bankrupt financial companies that will never make another loan. Instead of allowing lenders to keep credit flowing, these subsidies could mainly help hedge funds that buy distressed debt and equity.

This past week, for instance, Washington Mutual Inc. and subprime lender Downey Financial Corp., both bankrupt, said the new law will allow them to apply for an estimated $2.75 billion combined in tax refunds.

It is not clear if the companies will get that refund, but investors are betting there is a good chance they will.

The tax benefit was tucked into legislation late last year that broadened unemployment insurance and extended tax credits for homeowners. The provision allows companies of all sizes to apply losses in 2008 or 2009 to prior income over five years to receive tax refunds. The previous standard allowed them to apply losses back two years.

Chief executives and industry groups representing manufacturers, homebuilders, and retailers pressed for that tax benefit, although economists expect businesses from across the economy to reap some gain.

Part of the money paid out as 2010 refunds is expected to be recouped in the next few years when businesses turn a profit and begin paying taxes again.

But some of the companies that plan to seek a refund will never pay tax, because they have no future.

The professionals who are liquidating bankrupt companies including Circuit City Stores Inc and Linens ‘n’ Things are going through the corporate books in anticipation of getting cash back from Washington. The refund money will be used to pay off creditors.

“What’s a genuinely targeted stimulus to one person is a windfall to another,” said Jack Butler, a partner in the corporate restructuring practice at Skadden, Arps, Slate, Meagher & Flom. He emphasized the law will provide capital and liquidity to many companies that are struggling to avoid bankruptcy.

“Where it becomes a potential windfall is in liquidating situations,” said Butler.

Arguably, helping creditors of bankrupt retailers, such as clothing suppliers, has some social benefit.

But for bankrupt financial companies, their suppliers are mainly investors that gave capital to the company. And at this stage, most of the original investors have sold their claims to hedge funds that specialize in navigating complicated bankruptcies.

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The Daily Reckoning

The finance ministers of the Eurozone met yesterday and they’ve tried to stem the euro’s (EUR) rise… But they’ll need more than words to get the job done! And so we begin a new day…

Front and center this morning, the currencies – which had given background overnight to the dollar – are back in rally mode, and are taking liberties with the dollar once more. For most of the night, that was not the case, though. The dollar had rallied back and sent the euro, for instance, to the 1.48 handle, after the single unit spent yesterday at 1.49 and change… There seemed to be a move to the dollar, but that didn’t last long, and the currencies are once again rallying versus the dollar this morning, and the euro has pushed to 1.4970 as I write.

Daily noise, eh? Yes, you have to wade through it most days, and keep your eyes fixed on the horizon…

OK, I mentioned above that the finance ministers of the Eurozone met yesterday, and tried to stem the dollar’s decline by backing the US administration’s stated preference for a strong dollar… Of course we all know that the US administration’s stated preference for a strong dollar is a bunch of horse dookie! So… What was it that the Eurozone FMs were backing? A false statement by the US? Now, that’s something to hang your hat on, eh? The dolts just continue to mount daily don’t they?

But, you can’t be too hard on the beaver (Eurozone FMs) for they have to sound like they don’t want their euro to get too strong, for if they really said what they wanted to say, the euro would be back to 1.60 with a bullet in a heartbeat! So… In the end, I don’t think currency traders were swayed by the Eurozone FMs, at least not for too long!

Yesterday, I talked about Canada and the Bank of Canada (BOC) and how I thought that the BOC would remove their statement about interest rates remaining on hold until the second half of 2010… I had a few readers question me on this, saying that Canada’s economy is in no shape to withstand a rate hike… OK… Hear me out on this… I’m not saying that the BOC will hike rates now, or even in 2009… But, if Canadian energy prices of oil, natural gas, and coal continue to get stronger, I’m afraid the BOC will have to entertain thoughts of raising rates to fight inflation… But not now… So… I hope you get what I’m saying here.

So… The US fiscal deficit for 2009 was $1.42 trillion… Remember how I used to take the previous administration to the woodshed for posting $450 billion fiscal deficits? How did we go from $450 billion to $1.42 trillion (if that’s really the number)? Well… That’s not a question to really answer, folks, we all know how we got here… But now that we’re here, what happens next?

I came across this when putting the two monthly newsletters together on Sunday; I think it would be appropriate to share it with you here…

Peter Bernholz (Professor Economics in Basel) studied the world’s 12 most important periods of hyperinflation and discovered that the tipping point occurs when deficits amounted to 40% of the expenditures.

For the United States we have arrived at exactly that point. The deficit of $1.5 trillion amounts to 41.7% of the $3.6 trillion in expenses.

You see, that Peter Bernholz rounds some numbers, but for those of you keeping score at home, the real point is that the US deficits are greater than 40% of expenditures… And you know me, I truly believe in this history repeating itself.

The point I’m trying to make here is that according to Mr. Bernholz, we can soon expect a bout of hyperinflation! OH BOY! Where do I sign up for that? Not only do we have a falling dollar causing us to lose purchasing power, but what purchasing power we have left is going to be eaten away with inflation! Like I said, OH BOY! Gee Willikers, that sounds like the cat’s meow! NOT!

So… Here we go again, with me getting on the soapbox and telling you that the only way to protect yourself from a falling dollar and hyperinflation is to diversify with non-dollar currencies and precious metals.

OK… I get emails all the time from readers that say, “OK Chuck, you tell us to diversify, but you don’t tell us what to buy”… Well… To the untrained eye, that would be true… But to long time readers they know better… So, keep reading, and it will hit you right between the eyes one day, and you’ll slap your forehead and say, “I could have had a V-8”!

The boys and girls over at Citigroup have written a letter to their clients telling them “the dollar is weakening because foreign central banks are diversifying their reserves and US investors are buying high-yielding emerging market assets.” They went on to say, “The Australian and Canadian dollars are likely to rise to parity against the US currency.”

So, there’s one more on the roster that believe Aussie dollars (AUD) and loonies (CAD) will go to parity against the dollar… The loonie isn’t exactly the same stretch of a forecast as the Aussie dollar, as loonies are almost 97-cents right now, with Aussie dollars trading near 93-cents…

Doesn’t that make sense given the talk we just had about hyperinflation? What currencies are going to help protect you against hyperinflation? The commodity currencies! Aussie, kiwi (NZD), Canada, Norway (NOK), Brazil (BRL) and you can even throw in the S. African rand (ZAR), for those who like Mr. Toad’s wild ride!

The folks at Citigroup also had this to say about the euro, which I found to be quite interesting… “The euro will extend gains against the US dollar and the British pound, and may reach parity against the UK currency in 6 to 12 months.”

I would think that for the euro to reach parity with the pound, it would involve the pound falling quite a bit from current levels… And that makes sense to me… Did you see the report the other day from the UK where they reported bad bank debt to be twice the forecast amount? YIKES!

You know… The Asian currencies – which never really participated in the first bout of dollar weakness – are still stuck in the mud… Well, they are being manipulated to be stuck in the mud, for the most part… But, something’s got to give here sooner or later. Why do I say that? Well, as I’ve told you for months now, the Chinese economy was the first to exit their slowdown/recession… Shoot Rudy, even Japan is showing signs of economic growth! And then we have India going strong too… And of course you have the “kind of Asian countries” of Australia and New Zealand… Where we already know that Australia has raised rates and New Zealand would love to raise rates… So, this region is leading the world out of the recession… Hmmm… I thought only the US economy was allowed to do that! Uh-Oh… Looks like we have a shift in how the world works!

Hey! Even Big Ben Bernanke sees the Asian countries as leading the world out of the global recession! Big Ben said… “Asia appears to be leading the global economic recovery.” Hmmm… See, even a blind squirrel can find an acorn! HA!

I had to laugh when I read this headline this morning… “Yen rises as Fujii repeats reluctance to stem currency’s rise”… I laugh because the last time Japan’s new finance minister talked about not intervening to stop the yen’s rise, he back-pedaled and said that traders mistook him to say that he was not going to intervene… So this on again/off again love affair with Fujii and intervention, just makes me laugh! I would think that after getting burned on Fujii comments a couple of weeks ago, that Traders would not get too lathered up when he talks about not intervening.

OK… Here in the US while we are still a sovereign nation, the Fed Reserve, is doing some testing of reverse repos as a means of drawing the excess liquidity/stimulus out of the markets… I don’t think we have to put too much into these tests right now. But it will be a method that the Fed uses at some point in the future… The IMF is against removing any stimulus now… So, that may carry some weight.

Gold prices rose yesterday for the first time in a couple of days, pushing back above $1,060… I would think that until we know for sure that the Fed is removing stimulus, that gold would remain well bid… When we do know that stimulus is being removed… Gold might take a step or two back… But then we’ll have to wait-n-see what happens with inflation.

I read where ETF holdings of gold are sluggish… Well, that certainly makes sense to me! With what we’re seeing these days from our government pushing us toward who-knows-what, physical gold is the thing people want right now… And you can’t get physical gold out of an ETF! So… All those people that have long said that the ETF was just as good as holding gold either in your buried coffee cans in the back yard, or in pooled accounts, are wrong, when it comes to physical gold demands.

And I don’t know about you, but I filled my gas tank the other day, and the price of gas has really shot up recently, eh? And a quick look at oil prices tells it all… Oil prices have risen to $79, while trading at $69 just a month ago! Is oil the proxy for rising inflation?

OK… To recap… The dollar rebounded a bit overnight, but has given back to a currency rally this morning. Citigroup believes Aussie and Canadian dollars will reach parity to the US dollar. The Bank of Canada meets today. Our fiscal deficit reached 40% of our expenditures, which historically is a harbinger to hyperinflation, and gold is back above $1,060 this morning…

US Hyperinflation? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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“It was at Rome, on the 15th of October, 1764, as I sat musing amidst the ruins of the Capitol, while the barefooted friars were singing vespers in the Temple of Jupiter, that the idea of writing the decline and fall of the city first started to my mind.”
– Edward Gibbon

Warren Buffett famously says that people do not make money by betting against the US economy. But two years ago we decided to take a chance.

“We are short the United States of America,” we announced from the comfort and safety of our headquarters in London. “Sell its stocks. Sell its bonds. Sell its money. Sell its real estate. Sell the equity. Sell the debt. Sell everything.”

What we saw was an over-stretched empire getting ready to snap. But we were also allowing ourselves to be lazy. Rather than deconstruct the capital structure of the world’s largest economy, we decided to sell the whole damned thing.

All Hell broke loose in September 2008. Since then, US stocks have gone down about a third. Real estate too. Unemployment has doubled. Consumer prices are going down at the fastest rate since the ’50s. And the economy is in the worse recession since WWII.

Meanwhile, Americans’ per capita wealth has fallen from $172,000 in September from $212,000 two years earlier. And the UN reports that the quality of life in America has gone down too…from #5 on its list in 2000, it fell to #13 in 2007. No doubt it is below #20 now.

Buffett has lost billions betting on the US economy while our gold positions are handily up; gold was the most profitable major asset over the last ten years.

So you see, we were right; America was a sell two years ago.

And now it is the dollar that is falling. It’s gone down 12% in the last six months – a huge move for a major currency.

“Asia tries to slow dollar fall,” is the lead story in today’s Financial Times.

Today, a buck and forty-seven cents will buy you only 1 euro. Ten years ago, you could have gotten a euro for less than a single dollar. A falling dollar makes imports more expensive, say analysts…raising the cost of living in the homeland. But you wouldn’t know it from walking around on the streets of Miami or Las Vegas. You can get a house at 50% off its price three years ago. As for the breakfast special – for less than 3 euros you can get enough food to kill a Pakistani.

By European standards, America is cheap.

“Europeans again interested in Florida houses,” says a headline in The New York Times.

House prices are down 30% to 50%. The dollar is down about a third too. That makes the United States a bargain.

But is the United States of America about to become even cheaper?

One thing we were wrong about when we issued our ‘sell America’ call two years ago was US debt. Treasury bonds have resisted the general downward trend of things with the stars and stripes on them. Bonds have not gone down; they’ve gone up.

Private households are buying them for their retirements. Banks are buying them for risk-free profits. Speculators are buying them in anticipation of deflation.

David Rosenberg:

“The big story yesterday was the further massive $12 billion decline in outstanding consumer debt in August – the consensus was looking for an $8 billion contraction. This was the seventh month of debt retrenchment in a row. In other words, the tidal wave of the credit collapse continues unabated, and this is the primary reason why bond yields are still in a fundamental downtrend.

“Over the past year, consumers have run down their debt by a record $113 billion (and this does not include mortgages). This is an absolutely epic shift in household attitudes towards credit and discretionary spending.”

Americans are saving. And they’re buying US Treasury bonds. (More below…) But how safe is their money? Is it a good idea to buy US debt now?

On Wednesday, Latvia tried to raise a trivial amount of money. It offered $17 million worth of 6-month bonds. How likely is it that Latvia will default before Easter? We don’t know, but investors judged it not worth the risk. Not only did the bond auction failed, it failed with no bids.

That’s what happens when lenders lose faith in a government. They refuse to lend it money – except at high rates of interest. But the high rates of interest work like a noose on the neck of a cattle rustler. They block the vital flow of oxygen – not to mention breaking his neck.

Note that the US federal government is still functioning like an empire at the peak of its power. The Pentagon is still rustling up trouble all over the world – at a cost of trillions. US government employees are growing more numerous and richer – with twice the annual incomes of the private sector. And the Obama Administration – apparently unaware that the total unfunded debts and obligations of the federal government have soared to nearly $120 trillion – is considering new ways to get rid of cash.

Remarkably, investors still lend the US government money – asking only 4% annual yield on a 30-year loan. As for 91-day money, they practically give that to the feds for free; it sports only a yield of 0.066%.

This will surely be a point of puzzlement for the financial historian of the next century. It is certainly a point of puzzlement for us.

Yesterday, gold hit a new record at $1057. Doesn’t gold go up when inflation rates rise? And don’t bonds go down when inflation goes up?

So why are people buying bonds with such puny yields?

There is a lot of whispering in this market. Gold is trying to tell us something. Bonds are trying to tell us something. The dollar seems to have something on its mind too. Stocks are just babbling.

If gold is trying to signal that inflation is coming, the bond market is not paying attention. Bonds seem to be saying that it is deflation we should be worried about; but the stock market doesn’t seem to hear.

And there’s the dollar. The greenback is in the same choir with stocks and gold, as near as we can tell. They all seem to be chanting about inflation coming back.

But what if they’re all wrong?

Just look at what is going on in Washington, if you can bear it.

The feds have a budget that anticipates inflation and growth. Spending is supposed to remain flat until 2013. Tax receipts, which are no higher today than they were 10 years ago, are supposed to rise, gradually filling in the Grand Canyon of deficits. The number crunchers think we’re headed back to the Reagan years – when the tough-love policies of the Volcker Fed squeezed out inflation and created a real boom. Then, tax revenues rose 9% per year between 1984 and 1989.

How likely is that today? Not very. Instead, what is likely to unfold is a deflation story. Instead of staying flat, federal expenses are likely to rise as one failed stimulus gives way to another failed stimulus. Then, instead of going up, tax revenues will go down…digging an even grander canyon between out-go and income.

Then, or long before, there will be a panic out of bonds, the dollar, stocks – practically everything. Everything goes down!

At this point, the US will be in about the same situation as the Roman Empire as it approached retirement. Expenses kept rising. Rome had to pay the Blackwater-type military contractors of the era…in addition to keeping Roman mobs supplied with food stamps and unemployment benefits…while its tax base fell. Gradually, the empire lost the ability to defend itself.

When Edward Gibbon began his history of Rome’s decline and fall, Roman real estate had probably been in a bear market for at least 1300 years. Rome’s population fell from over a million to under 20,000. Politically, Italy had broken apart more than 1,000 years before Gibbon was born, and it wouldn’t be put back together again until nearly 100 years after he was dead.

It’s far too early to write the story of America’s decline and fall. That job will fall to some future historian, perhaps seated on the ruins of the Lincoln Memorial, wondering how people made such a mess of things.

Our guess is that he will come to the same conclusion we have: Stocks? Bonds? The dollar? Investors should have sold them all!

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

A Deflation Story

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As predicted, both the European Central Bank and the Bank of England kept their benchmark interest rates at record lows in an effort to keep stimulating their economies. Trichet signaled that the ECB has no plans to raise rates in the near future, stating that the current level is ‘appropriate’ for the current economic environment. “The recovery is expected to be rather uneven,” Trichet said. “It will be supported in the short term by temporary factors but will be hampered in the medium term by balance sheet issues at financial and non-financial institutions.”

When asked about the recent fall of the US dollar, and the possibility of currency intervention, Trichet repeated the standard line saying, “excess volatility and disorderly movements” hurt growth; and policy makers “will continue to monitor the exchange markets closely and cooperate as appropriate”. Trichet also stated that he trusts his US counterparts (big mistake!) as to their statement on the strong-dollar policy. “When the Secretary of the Treasury and our friend Ben Bernanke say that a strong dollar is in the interests of the US economy and that they are pushing a strong dollar policy, this is a judgment that is obviously very important for us and the global economy.” NOTE TO TRICHET: YOU CAN’T TRUST A CHEATER!!

The current administration may say they support a strong dollar, but their actions sure don’t show it. Quantitative easing efforts have pumped a record amount of liquidity into the markets, and Washington has the printing presses working overtime. Unless the laws of supply and demand have changed, all of these US dollars that have been created will cause the value of the dollar to drop. We have seen a 15% drop in the value of the dollar index in the past six months. The current administration has no reason to support a strong dollar, and realize there is no way they are going to be able to protect the value of the dollar while pursuing their ‘quantitative easing’ policies. In order to protect the dollar, Geithner and Bernanke would need to shut off the printing presses, and actually put them in reverse, pulling liquidity out of the markets. There is absolutely no way this will occur anytime soon.

The Bank of England also left rates unchanged and announced that they would continue to push money directly into the economy through purchases of government and corporate bonds. At least one of the policy makers in England seems to understand what is going on. Conservative leader David Cameron stated today that the policy will lead to inflation, signaling to his party’s annual conference that it would stop the government’s main economic stimulus program if it wins the next election. “Sometime soon that will have to stop because in the end printing money leads to inflation”, Cameron said. But others remain trapped in their own twisted reality with former BOE officials calling Cameron’s remarks ‘dangerous’.

The dollar moved up a bit versus the euro (EUR) and pound (GBP) after the announcement, but fell again overnight. Overall, the greenback is up compared with yesterday morning, with the biggest moves coming against the New Zealand dollar (NZD) and Japanese yen (JPY). Asian central banks intervened heavily in the currency markets on Thursday to help support the US dollar. With China keeping the renminbi (CNY) stable versus the US dollar, other Asian currencies not pegged to the falling dollar have risen. Governments in Japan, Thailand, Hong Kong, and Singapore were big buyers of US dollar yesterday and continued with their purchases overnight. And while their efforts may work to slow the dollar’s decent, it won’t change the direction. These central banks just don’t have the financial power to change the inevitable fall of the US dollar.

Data released yesterday showed that initial jobless claims in the US fell slightly to 521K, and that continuing claims also drifted lower. Both are still near historic levels, and don’t support the claims that the US economy is pulling itself out of the recession/depression.

In other news, chain store sales managed to eke out a small increase in September. While the news caused a rally on Wall Street, the YOY increase was mainly because the stores had absolutely abysmal sales one year ago. The largest industry group is cautioning against reading too much into the increase, and to continue to predict a decline in sales for November and December.

In another report, the Commerce Department said wholesale inventories fell 1.3% in August, worse than the 1% drop economists had expected. This follows a 1.6% drop in July, as businesses continue to reduce inventories.

Today we only have one piece of data, the trade balance, which is expected to show a deficit of $33 billion for August. This deficit comes in spite of a falling US dollar, which should eventually make our exports more competitive, and force a narrowing of this balance. The continued deficit forces the US to have to attract foreign capital as imports continue to outpace exports.

Canada got a good piece of news yesterday as Canadian employers added jobs for the second straight month in September. The unemployment rate fell to 8.4% as employment rose by 30,600. The report will increase pressure on the Bank of Canada to raise interest rates from record lows, and could lead to strength in the Canadian dollar (CAD). We have been supporters of commodity based currencies, and Canada certainly has an abundance of raw materials. Their proximity to the US has caused some concern, as the US is still their largest trading partner, but Canada has worked to strengthen ties to China and is now enjoying an increase in exports to Asia as the recovery takes hold in the Far East.

An associate from headquarters down in Jacksonville emailed me last night to ask my opinion on recent events in Latvia. Now I certainly try to stay informed on all of the countries around the globe, but had to be honest and tell him I haven’t really ever looked at what is going on in Latvia. But after doing a bit of research, I realized what had sparked the question. Economic troubles in the Baltic state led to concern over the future health of Swedish banks. Plunging property values in Latvia have left borrowers ‘upside down’ on their mortgage loans, which are mainly provided by Swedish banks. The Latvian government had announced a plan to protect homeowners from foreclosure, angering Sweden. But overnight, Latvia has announced it is pulling away from its earlier plan, and would come to an agreement with its international lenders. It looks as if the ‘Latvian’ crisis will be resolved, and Swedish banks will avoid the possible losses that could have occurred. The Swedish krona (SEK) is unchanged on the month, and has increased over 12% in the past three months. With the Latvian crisis avoided, the krona will likely resume its move higher versus the US dollar.

After hitting an all-time high yesterday, gold slipped back slightly overnight. This was the first drop in the gold price this week, after the biggest weekly advance since April. We had expected a pause in the rapid ascent for gold, and a small move higher by the US dollar has pushed gold lower. Many traders are now calling for a near-term correction in the price as investors take profits from the rapid move. According to an analyst at HSBC: “The likelihood that long-term dollar weakness will support gold does not obviate the fact that the near-relentless increase in bullion prices recently has raised the possibility that gold is due for a pullback,” HSBC Securities analyst James Steel said in a report emailed today. “A dollar rally, even if only temporary, could provide a reason for gold longs to take profits.”

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

Don’t Trust the Dollar Strength

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OK, front and center this morning, gold has soared to another all-time high! When I turned on the screen this morning, gold was flashing a great big $1,055 figure… WOW! But wait! Gold – and silver for that matter – aren’t the only risk assets moving higher… All 16 of the countries that are deemed to be the biggest US trading partners have currencies that are taking liberties versus the dollar, this morning.

It’s like this, folks… We keep seeing signs that a global recovery is taking place, I mean, the Reserve Bank of Australia (RBA) even hiked rates this week, for crying out loud! And… With those signs of recovery come the feelings that global rates will be rising, as witnessed by the RBA this week, and with global rates rising, the yield differential to the dollar becomes even greater in favor of the non-dollar currencies.

This is quite evident, when you look out on the currency landscape and see that Aussie dollars (AUD) are trading with a 90-cent handle… Brazilian reals (BRL) are trading 36% higher versus the dollar since March 1st!

Why did I highlight those two currencies? Well, as it has been well documented, the RBA already hiked rates and increased their rate differential to the dollar this week, with the thought that they would come back again in November for another rate hike… And Brazil? Yesterday, I saw a story flash across the screen that the Brazilian central bank Governor is mentioning at least 200 BPS of rate hikes before he leaves office next year! Talk about increasing the rate/yield differential!

Yesterday, I talked to you about the euro (EUR), and explained why it had not participated with the other currencies’ assault on the dollar… Well, the Big Dog/euro got off the porch to stretch its legs and chased the dollar down the street a bit, last night… It’s now trading with an eye toward 1.48…

Well, in keeping with the theme that a global recovery is taking place, German Industrial Production rose in August 1.7% from a decline in July. As reported here about a month ago, Germany exited their recession in the second quarter, posting a positive, albeit negligible, GDP… I expect their third quarter to be a bit stronger, as they build on this nascent recovery.

The European Central Bank (ECB) meets this morning, and I don’t expect them to move rates, announce any quantitative easing, or anything like that… What I’m half expecting though is for ECB President, Trichet, to attempt to put a tourniquet around the dollar, to stop the bleeding… Hey! Nobody in the US is fighting to keep the dollar strong, so somebody has to!

The ECB and Trichet know all too well that the US has painted itself into a corner, and the dollar is getting punished for their actions… They also understand that all they’d have to do would be to talk glowingly about the euro, and it would deep six the dollar in a heartbeat! But what good would that do? It’s far better to just keep the lips zipped shut, and watch a general, slow, depreciation of the dollar… So… The euro’s run to the high 1.47 handle this morning could be at risk to what Trichet has to say… But remember, folks, he’s just wrapping a tourniquet around the dollar; it’s not like he’s in love with the dollar and the fundamentals behind it!

Last night, I was doing some research and came across a story that really piqued my interest… Here’s a snippet from the Bloomberg…

“Central banks are diversifying away from the dollar ‘more aggressively,’ according to Barclays Plc, the world’s third-largest currency trader.

“The dollar accounted for 37 percent of the $115 billion foreign reserves central banks amassed in the second quarter, after adjustment for exchange-rate changes during the period, compared with 52 percent in the euro, according to a Barclays analysis of data that the International Monetary Fund released on Sept. 30. That was the first time that the dollar’s share fell below 40 percent in the new accumulated foreign reserves of $100 billion or more since the euro’s 1999 debut.”

Remember, about a week or so ago, when I told you that the IMF’s currency report basically showed a move away from the dollar, too…

HEY! IF CENTRAL BANKS ARE DIVERSIFYING, SHOULDN’T YOU BE DOING IT TOO?

OH! And then there was this quote from Canada’s Finance Minister, Flaherty… “We are all concerned about the US dollar”.

And then there was US Treasury Secretary, Tim Geithner… The man who was in charge of the NY Fed, and who oversaw the banks in that region – of which, most of them needed TARP money… Anyway… The thing I want to talk about is his latest statement about the dollar… “Officials recognize that the dollar’s important role in the system conveys special burdens and responsibilities on us, and we are going to do everything necessary to make sure we sustain confidence.”

Yeah, sure you are… How many Treasuries have you auctioned off this year? Something like $1.6 trillion? Now, that will give everyone in the world a warm and fuzzy about the dollar’s future, won’t it? NOT!

OK, I had better go on to something else before I get too wound up!

The Bank of England (BOE) is also meeting this morning… And after an awful set of economic reports in the past month, the BOE members are scratching their heads and wondering what to do next. They cut rates to the bone; they bought toxic assets from financial institutions; they nationalized a few companies that were about to go under; they spent money on stimulus packages… And they implemented quantitative easing…

Sounds like the US, doesn’t it? I’ll tell you whom else it sounds like… It sounds like Japan in the last decade… I hate to be the one to have to tell these dolts that none of this works! It just makes a laughing stock out of your central bank, and puts your currency on the slippery slope downward…

Oh, but not to worry, Tim Geithner is maintaining the confidence in the dollar… (I guess no one told Canada’s Finance Minister, eh?)

Well… Earlier in the Pfennig this morning, I told you about the rise in the Aussie dollar… I didn’t tell you that it was trading at a 14-month high, as it was reported that Australian employment surged 40,600 in September! With a print like this, I think that it’s almost a given now that the RBA comes back in November and hikes rates again!

Another currency at a 14-month high is the New Zealand dollar/kiwi (NZD)… Remember how I’ve told you about the Reserve Bank of New Zealand (RBNZ) Governor Bollard, and his penchant for jawboning kiwi lower? I despise him for these things… As a central banker, your job is to protect the value of your currency, not to diss it!

Well, now Bollard has company… New Zealand Finance Minister, Bill English, has this to say… “We’re uncomfortable with it [kiwi] at this stage in the economic cycle.” You see… Mr. English is concerned that the economic recovery will be stamped out with a strong kiwi. Well, I’ve got a cure for you Mr. English… Tell Bollard and the boys over at the RBNZ not to raise interest rates, and that will do the trick! It’ll stop the speculation in its tracks! However, if the RBNZ does raise rates next month, then you have no one to blame but yourselves!

OK… Let’s get back to gold before we head to the recap!

I did a video yesterday on gold, and I talked about how you can go about your life without an inflation hedge in your back pocket and suffer the consequences of not only having your purchasing power reduced by the falling dollar, but having what dollars you have left eaten away by inflation… OR… you can get that inflation hedge… And put it away for a rainy day… Or pull out to play it like a “Get Out of Jail Free Card” when inflation hits…

To recap… Gold has soared to another all-time high of $1,055 overnight. And the non-dollar currencies are all gaining versus the dollar on the thoughts that a global recovery will result in wider yield differentials in those currencies versus the dollar. Aussie dollar and kiwi have both traded at 14-month highs overnight… And… We could see some downside risk to the euro if ECB President Trichet decides to defend the dollar today after the ECB meeting, this morning.

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

US Dollar in Need of a Tourniquet

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Gold eased from record highs on Wednesday as investors took profits, but sentiment remained bullish and a fresh record was within sight as the dollar’s weakness and inflation concerns reinforced bullion’s appeal as a hedge.

Both spot gold and US gold futures have benefited from factors including technical buying, growing talk of countries diversifying foreign reserves or settlement currencies away from the dollar, and inflation concerns fuelled by current massive fiscal stimulus measures and aggressive monetary easing.

Read more….

Just when Wall Street wanted you to think it was okay to wade back into the stock market, some all too familiar sharks continued to muddy the water for investors.

The Fall of 2008 marked the beginning of the biggest financial down slide in the U.S. since the Great Depression. Unfortunately, not much has changed in the big picture. This week, hopes of financial healing took another hit as the Labor Department released new unemployment data showing a 26-year high at 9.8 percent. The month of September saw 263,000 jobs added to the casualty list, bringing the total to 15.1 million Americans out of work.

Older Americans are particularly being affected by job market losses according to the Social Security Administration, resulting in a 23 percent increase in retirement benefits applications.

This news leaves many asking what goals the stimulus package has achieved, as it has not yielded positive effects on consumer spending, one of the primary factors in shoring up any economy. Meanwhile, the threat of massive inflation weighs heavy on investors’ minds.

Most self-directed investors have quietly been amassing silver and gold over the past year to protect their assets. Many gold and silver investors have been predicting these events for some time and have been stockpiling precious metals throughout the year.

Investors across the nation took full advantage of APMEX’s One Million Ounces of Surplus Silver Sale during the last week of September. At the end of the month, APMEX had just over one hundred thousand ounces remaining from the sale, proving that the flight to precious metals is not over – it is just beginning as people continue to realize the true value of preserving wealth with hard assets.

Gold:
Spot Gold prices opened this week at $992.40. The high during the week was on Wednesday, September 30th at $1,009.00, while the low for the week was on Tuesday, September 29th at $984.70. Gold ended the week with a modest gain of $11.00 at $1,003.40. This week, 2009 1 oz. Gold Eagles, 2009 1 oz. Gold Maple Leafs, Gold Sovereigns and 1 oz. Gold Krugerrands were the most popular items investors purchased.

Silver:
Spot Silver prices opened this week at $16.06. Silver reached a high of $16.63 on Wednesday, September 30th and repeated the high on Thursday, October 1st. The low for silver occurred on Monday, September 28th at $15.80. Silver ended the week up $0.15 at $16.21. This week 2009 1 oz. Silver American Eagles, 1 oz. APMEX Silver Rounds, ½ oz. APMEX Silver Rounds and 2009 1 oz. Silver Philharmonics were steady movers on the APMEX website.

Platinum:
Spot Platinum prices opened this week at $1,279.70, and ended the week up $6.30 at $1,286.00. Many investors continue to be genuinely interested in platinum. Popular platinum products for this week included 1 oz. Pamp Suisse Platinum Bars, 2009 1 oz. Platinum Canadian Maple Leafs and 1/10 oz. Platinum American Eagles.

Palladium:
Spot Palladium prices opened this week at $294.00, and ended the week up $6.50 at $300.50. 2009 1 oz. Palladium Maple Leafs, 1 oz. Pamp Suisse Palladium Bars and 1 oz. Palladium Lewis & Clark Rounds were popular with investors.

Numismatics:
Unquestionably, the most collected coin in the world is the Morgan Silver Dollar. This coin was named after its designer, George T. Morgan, and minting began in 1878. The series culminated in 1921 after a 16-year absence, between the years of 1905 and 1920. Beginning this week, APMEX will highlight a particular date and mintmark of silver dollar and share this information with you. These reports may unlock some of the reasons why this particular series of coins has become so popular. Is it the beautiful design? Is it because each coin contains .77344 ounces of pure silver? Whatever the reason, these coins are the most popular in the world. This week we will look at the 1889-CC.

It is not lost on any coin collector or investor that coins from the Carson City (Nevada) Mint command a premium. The 1889-CC is no exception. With a total mintage of only 350,000 business strikes, this is one of the rarest coins in the series. Frankly, this is a difficult coin in virtually every grade from Almost Good to Mint State-64. It is virtually impossible to find in any grades higher than that. These coins often exhibit a less than average strike, but they are often found with a satin-like to frosty luster. Many higher-grade examples display semi-proof like fields that are designated in the industry as ‘DMPL,’ which stands for Deep Mirror Proof Like. However, as one would rightfully assume, many of these coins have been well circulated, as these coins were spent throughout the remainder of the 19th century and into the 20th century. Consequently, there are a large number of circulated examples. Though 10 obverse dies and 7 reverse dies were used to strike these coins, there are no major die varieties within the date. As more collectors and investors learn about Morgan Silver Dollars every year, these coins may likely increase in value!

The Daily Reckoning

On one hand, the deflationists are claiming that given the extremely high debt levels in the West, further inflation is impossible. On the other side of the argument, many proponents of inflation are calling for Zimbabwe style hyperinflation. In this business, everyone is entitled to their opinion; however it is my contention that we will get neither deflation nor hyperinflation. If my assessment is correct, once business activity picks up, our world will have to deal with high inflation.

Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely.

For sure, in this post-bubble environment, American consumer debt continues to contract, but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency.

In fact, the recent weakness in the US dollar is a sign that central-bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US dollars!

Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008.

So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn’s panic, it was the only asset, (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset that is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven.

Now, unlike some of the die-hard gold bugs, I don’t believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation who grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic.

However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own.

If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio.

You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiraling out of control. Up until now, this ‘stimulus’ money hasn’t permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals.

Long-term clients and subscribers will recall that about two years ago, I highlighted gold’s tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold’s bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year.

Figure 1: Is gold about to shine?

So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes.

Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring.

As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold’s bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.

Regards,

Puru Saxena
for The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

Inflation is Our Future

More articles from The Daily Reckoning….

The Gold Report submits:

A highly regarded resource sector expert who discusses his field fervently whenever possible and whose writings include the top-ranking Outstanding Investments, Byron King brings his views direct to The Gold Report audience in this exclusive interview. Unconvinced that the recession is behind us, he is equally sure that the "bottomless pit" mentality of stimulus spending will wreck the dollar. Those are among the reasons he sees $2,000-per-ounce gold on the not-too-distant horizon.

The Gold Report: We’ve seen quite a rebound in the markets since we spoke in May, and governments across the world have begun releasing some positive economic news. Are we out of the recession as Bernanke has told us?

Read more »

By Gabi Thesing and Christian Vits

Sept. 28 (Bloomberg) — European Central Bank President
Jean-Claude Trichet said a strong dollar is “extremely
important” for the world economy and it’s too early for the ECB
to unwind emergency stimulus measures.

“In the present situation it is extremely important that
we can have in the framework at the level of global finance and
the global economy a strong dollar, as the authorities in the
U.S. are saying,” Trichet told lawmakers in Brussels today.
“The solidity of the dollar is very important.”

Trichet’s comments come after a 15 percent slide in the
dollar against the euro since February that’s threatening to
hamper Europe’s recovery from the worst recession since World
War II. With the Group of 20 nations pledging to rebalance the
global economy away from a trade deficit in the U.S., the risk
for the ECB is that its economy feels the pain of further dollar
adjustment.

The euro fell from $1.4661 to as low as 1.4627 after
Trichet’s remarks.

“It would be premature to declare the crisis over,”
Trichet said. “Now is not the time” for the ECB to unwind its
stimulus measures. “However, at some point in time an exit
strategy will have to be implemented. The ECB has an exit
strategy and stands ready to put it into action when the time
comes.”

Non-Standard Measures

The Frankfurt-based central bank has lowered its benchmark
lending rate to a record low of 1 percent to fight Europe’s
worst recession since World War II. It is also employing “non-
standard measures” to get credit flowing through the economy
again, lending banks as much money as they need at the benchmark
rate and buying covered bonds.

“The euro-area economy shows signs of stabilization,”
Trichet said. “In the period ahead we expect to see a very
gradual recovery.”

The ECB this month predicted economic growth in the 16-
nation euro region of about 0.2 percent in 2010, revising a June
forecast for a 0.3 percent contraction. In 2009, the economy
will shrink about 4.1 percent, less than the 4.6 percent
contraction predicted three months earlier.

G-20 leaders concluded a summit in Pittsburgh on Sept. 25
promising to pursue policies that bring the world economy into
greater balance. That initiative may require the dollar to fall
further so as to narrow the U.S. trade deficit, according to
economists at Morgan Stanley.

Dollar’s Dominance

Trichet’s comments came the same day that World Bank
President Robert Zoellick said the U.S. dollar’s dominance as
the world’s main reserve currency will be challenged as the
financial crisis reshapes the global economy.

“There is every reason to believe that the euro’s
acceptability could grow,” Zoellick said. “Of course, the U.S.
dollar is and will remain a major currency. But the greenback’s
fortunes will depend heavily on U.S. choices” on inflation, the
budget deficit and financial oversight, he said.

U.S. Treasury Secretary Timothy Geithner last week defended
the dollar’s role as the world’s reserve currency. The U.S. has
a “special responsibility” to preserve confidence in its
financial system and “sustain the dollar’s role as the
principal reserve currency in the international financial
system,” he said Sept. 24 in Pittsburgh.

Trichet also urged banks to accelerate lending to their
economies. The global recession has made banks reluctant to lend
and also eroded demand for debt. In Europe, loans to the private
sector rose 0.1 percent in August from a year earlier, the
slowest growth since records began in 1991, the ECB said last
week.

There’s a “gradual improvement in financing conditions
which is expected to support demand for credit in the period
ahead,” Trichet said. “It is for this reason that the
Governing Council continues to regard ECB interest rates as
appropriate.”

“Our message to banks is clear: do your job,” he added.

Read more….