Willem Buiter warns of massive dollar collapse

Willem Buiter warns of massive dollar collapse

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

By Edmund Conway, Economics Editor, Telegraph
Last Updated: 3:05PM GMT 06 Jan 2009

The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.

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Russians Buy Jewelry, Hoard Dollars as Ruble Plunges - USA next?

Austrian Theory Economists call this the "beginning of the crack-up boom". Russia now, U.S. later? Don't bet against it...

Russians Buy Jewelry, Hoard Dollars as Ruble Plunges (Update1)

By Emma O’Brien and William Mauldin

Dec. 11 (Bloomberg) -- Moscow resident Tima Kulikov banked on the full faith and credit of the U.S. government, not the Kremlin, when he sold his biggest asset for cash.

The 31-year-old director of a social networking Web site initially agreed to sell his apartment for rubles, then cringed at the thought of the currency weakening as it sat in a lockbox pending settlement of the contract. It wasn’t until the buyer showed up with $250,000 stacked in old mobile-phone boxes and stuffed in his pockets that Kulikov closed the deal.

“The exchange rate we agreed on wasn’t great, but I did it because the money’s going to lie there for a month,” Kulikov said. “Put it this way, the ruble’s more likely to have problems than the dollar.”

Russians are shifting their cash into foreign currencies and buying things they don’t need as the economy stalls and the central bank weakens its defense of the ruble, signaling a larger devaluation may be on the way. The currency has fallen 16 percent against the dollar since August, when Russia’s invasion of neighboring Georgia helped spur investors to pull almost $200 billion out of the country, according to BNP Paribas SA.

The central bank today expanded the ruble’s trading band against a basket of dollars and euros, allowing it to drop 0.8 percent, said a spokesman who declined to be identified on bank policy.

With the specter of the 1998 debt default and devaluation in mind, Russians withdrew 355 billion rubles ($13 billion), or 6 percent of all savings, from their accounts in October, the most since the central bank started posting the data two years ago. Foreign-currency deposits rose 11 percent.

Oligarchs Pinched

Those withdrawals are increasing pressure for the ruble’s devaluation, according to Basil Issa, an emerging- markets analyst at BNP Paribas in London.

Property is now a protective investment, not just a status symbol, said Sergei Polonsky, founder of real estate developer Mirax Group, which is building Moscow’s tallest skyscraper.

“Lately our clients are mostly those who buy real estate not to live in but to secure their investments,” Polonsky said. “No one wants to be left with pieces of paper.”

The 25 wealthiest Russians on Forbes magazine’s list of billionaires, including Oleg Deripaska and Roman Abramovich, lost a combined $230 billion from May to October as asset values plummeted, according to Bloomberg calculations.

‘Feel Happy’

For the burgeoning middle class, investments of choice range from electronics to gold jewelry. Evroset, Russia’s largest mobile-phone chain, is telling people to buy anything they can.

“It’s better to feel happy that you own something than to fear losing the money you have earned,” Chairman Yevgeny Chichvarkin says in a letter posted at 5,200 Evroset stores. “If you need a car, buy a car! If you need an apartment, buy an apartment! If you need a fur coat, buy a fur coat!”

Sales at Technosila, the third-biggest consumer electronics chain, have doubled since September as customers rush to swap rubles for flat-screen TVs and laptops, spokeswoman Nadezhda Senyuk said by phone from Moscow, where the company is based.

Jewelry sales are also accelerating, particularly items made of gold and diamonds, said Vladimir Stankevich, advertising director at Adamas, Russia’s third-largest jewelry retailer.

“More cash appeared on the market and there’s an opinion among shoppers that gold is a good investment in times of crisis,” Stankevich said.

Natalya Kulikova has a different approach. The 31-year-old sales manager said she’s opened accounts in rubles, euros and dollars at three different banks -- one foreign and two domestic -- to guard her savings.

“My main goal is to save money,” she said.

Putin Pledge

Those who don’t want to spend are keeping more money at home or in safe-deposit boxes because the government guarantee on bank accounts is limited to 700,000 rubles, said Yulia Tsepliaeva, chief economist in Moscow at Merrill Lynch & Co.

Alfa Bank, Russia’s biggest non-state lender, said demand for boxes has increased about 40 percent since October, and there are few available.

“The Russian experience with saving is not that good and people prefer to consume and enjoy rather than save in pre-crisis situations,” Tsepliaeva said. “Buy cash dollars and put them in mattresses or safe deposit boxes but not in accounts because most crises are accompanied by banking crises.”

A decade ago, many lost their life savings after the ruble plunged 71 percent against the dollar. Those fears prompted Prime Minister Vladimir Putin to pledge not to allow “sharp jumps” in the exchange rate, during a call-in television show Dec. 4.

‘Ideal Time’

Troika Dialog, Russia’s oldest investment bank, is betting the central bank will allow a one-time devaluation of the ruble of about 20 percent in January, following New Year’s and Orthodox Christmas celebrations.

“With the holidays at the beginning of January, companies won’t be fully working and people will be spending more money,” said Evgeny Gavrilenkov, Troika’s chief economist and a former acting head of the government’s Bureau of Economic Analysis. “That means demand for rubles will increase and that means it’s an ideal time to allow a devaluation.”

Russia has drained almost a quarter of its foreign-currency reserves, the world’s third-largest, since August as it tries to slow the ruble’s decline. The central bank has widened the trading band five times in the past month, effectively reducing its defense of the currency amid plunging oil prices.

Devaluation Skeptic

Urals crude, Russia’s main export earner, has slumped 72 percent since reaching a record $142.94 a barrel July 4. It fell below $40 for the first time in three years last week, compared with the $70 needed to balance the country’s budget.

The government will avoid a large, one-step devaluation because it wants to prevent a run on the banks and lure back foreign investors, said Chris Weafer, chief strategist in Moscow at UralSib Financial Corp.

“I’m skeptical a 10 to 15 percent devaluation will provide a significant boost for the economy because the sector that it will most benefit, manufacturing, is just too small,” he said.

The ruble will probably be allowed to drop in small steps to as low as 33 per dollar by the middle of 2009, from about 28 now, Weafer estimates. It will end next year at 26.8 because of a recovery in oil prices and a weaker U.S. currency, he said.

Svetlana Guseva isn’t taking any chances.

The 32-year-old mother of two from the southern city of Sochi plans to take her 8-year-old daughter, Dasha, to Moscow for the New Year’s holiday, a trip that will cost twice her family’s monthly income of about 30,000 rubles.

“This way at least we’ll have some memories,” she said.

To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net; William Mauldin in Moscow at wmauldin1@bloomberg.net.
Last Updated: December 11, 2008 03:51 EST

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Gold rallies, surpasses platinum as dollar drops

Gold rallies, surpasses platinum as dollar drops

* Reuters, Thursday December 11 2008

* Gold trades above platinum for the first time since 1996
* Bullion hits record in sterling terms, says Reuters data
* Platinum, palladium markets eye automaker bailout debate

By Frank Tang and Jan Harvey
NEW YORK/LONDON, Dec 11 (Reuters)

- Gold rose to its highest level in nearly two months on Thursday, surpassing platinum for the first time in 12 years as investors bought it as a safe haven while the dollar tumbled and oil rallied.

Spot gold hit a high of $833.80 an ounce, the highest since Oct 16. It was last at $823.30 at 2:03 p.m. EST (1903 GMT), up 1.7 percent from Wednesday's close.

In New York morning trade, spot platinum traded around $824-825 an ounce, falling below gold, which traded around $828 an ounce.

"It means that platinum is a great buy. Gold is starting to move as a monetary asset," said Frank Holmes, CEO of U.S. Global Investors, which manages $2.3 billion of fund assets.
"As the economy starts to get traction, I think you will see platinum prices take off. As South Africa continues to have problems supplying platinum, I think that platinum is undervalued," Holmes said.

Spot platinum was last at $827.50 an ounce, up 0.7 percent from its previous finish of $822.

"There's going to be people playing this ratio between the two from a trading point of view," precious metals strategist Tom Kendall at Mitsubishi said.

"But in the big scheme of things I don't think there is much overlap between the two in terms of their actual use and physical demand," he said.

The dollar hit a six-week low against the euro, as improving credit conditions eased fears about the global credit crisis and investors sought higher-yielding currencies.

"With all the printing of money taking place in the U.S., the dollar, which has gone parabolic on the upside, is due for a correction, and gold is now responding to that," Holmes said.

INFLATION HEDGE

In sterling terms, gold rose to an all-time high of 559.18 pounds an ounce from 546.51 pounds an ounce late on Wednesday, according to Reuters data. The euro hit a record high against sterling.

Investors also bought gold as a hedge against oil-led inflation as OPEC sought more output cuts. U.S. crude futures ended more than 10 percent higher at $47.98 per barrel.

In the COMEX futures market, traders dismissed talk that gold rallied partly because tight physical supplies may have prompted the cash or near delivery price for bullion to rise above the price for forward delivery -- a situation known in the market as backwardation.

George Gero, vice president of RBC Capital Markets Global Futures, said physical deliveries out of the COMEX warehouses remained normal, indicating that gold's strength was driven by dollar weakness and inflation concerns.

Still, Jon Najarian, co-founder of optionMONSTER.com, said in a commentary that delivery of physical gold in futures could drive the gold market into backwardation, and traders could profit from the resulting spike in gold price.

U.S. gold futures for February delivery settled up $17.80, or 2.2 percent, to $826.60 an ounce on the COMEX division of the New York Mercantile Exchange.

Platinum and palladium traders awaited the outcome of the proposed U.S. automaker bailout. Carmakers account for more than half of annual global consumption of these metals.

Until more definite news on the bailout package emerges, the metals are likely to remain rangebound, analysts said.

Spot palladium was at $178.00, which was up 0.3 percent from Wednesday's late quote of $177.50. Spot silver was at $10.37, which was 1.6 percent higher than its Wednesday close if $10.21.

(With additional reporting by Doris Frankel and Humeyra Pamuk; Editing by David Gregorio)

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Jim Rogers using rally to exit dollar assets

Thu Dec 11, 2008 12:08pm EST

By Vivianne Rodrigues

NEW YORK (Reuters) - Investor Jim Rogers said on Thursday he has been using the sharp rally in the U.S. dollar as an opportunity to exit assets denominated in the U.S. currency.

Rogers told the Reuters Investment Outlook Summit 2009 in New York that the rally -- which has pushed the greenback up about 20 percent since July -- is a reversal of a "gigantic short position" accumulated over several years and not a result of a fundamental bet. He added the U.S. currency is likely to weaken sharply again.

"I plan to get out of all of my U.S. dollars at some time throughout this rally," he said. "The dollar is a terribly flawed currency, and perhaps a doomed currency."

"I've driven around the world looking for a sound currency. There aren't any.... but the yen is the only thing that's going to go up for a while," he added.

Rogers, who spoke via a conference call from Miami, also noted that economies and currencies in regions such as Central Europe and Russia are particularly vulnerable.

On Thursday, the Russian central bank allowed the fifth one percent devaluation in the rouble against the dollar/euro basket in a month as data showed a $17.9 billion drop in gold and foreign exchange reserves last week.

"Russia is a disaster that is spiraling down to a catastrophe. I wouldn't put a penny of my money into Russia right now," he said.

Rogers said he expects the economic situation to deteriorate not only in Russia but in Central Europe, which in turn may weigh further on the euro zone.

"Central Europe is a giant fiasco -- hundreds of billions of dollars were floated using the Swiss franc and Japanese yen because rates were so low -- You've got some huge huge problems coming out," he said. "Banks there aren't writing them down yet."

(Reporting by Vivianne Rodrigues; Editing by Chizu Nomiyama)

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Dollar set for a fall

From the Financial Times:

UN team warns of hard landing for dollar

By Harvey Morris in New York

Published: December 1 2008 08:48 | Last updated: December 1 2008 08:48

The current strength of the dollar is temporary and the US currency risks a hard landing in 2009, according to a team of United Nations economists who foresaw a year ago that a US downturn would bring the global economy to a near standstill.

In their annual report on the world economy published on Monday, the economists said the dollar’s sharp rebound this autumn had been driven mainly by a flight to the safety of the international reserve currency as the financial crisis spread beyond the US.

The overall trend remained a downward one, however, reflecting perceptions that the US debt position was approaching unsustainable levels. An accelerated fall of the dollar could bring new turmoil to financial markets.

“Investors might renew their flight to safety, though this time away from dollar-denominated assets, thereby forcing the US economy into a hard landing and pulling the global economy into a deeper recession,” the report said.

Publication of the annual survey by the UN’s Department of Economic and Social Affairs, its trade organisation Unctad and UN regional bodies, was brought forward by a month in the light of the financial crisis. It was launched in Doha to coincide with the UN-sponsored development financing conference in the Qatari capital.

The UN team said that, as the financial crisis spread beyond the US, there had been a massive shift of global financial assets into US Treasury bills, driving their yields almost to zero and pushing the dollar sharply higher. At the same time, however, the US’s external debt had risen to new heights that could provoke a dollar collapse.

The report recommends reform of the international reserve system away from almost exclusive reliance on the dollar and towards a globally backed multi-currency system.

Rob Vos, a Dutch economist who heads the UN’s policy and analysis division and who is responsible for the annual economic review, said the global economic pain could be eased if governments co-ordinated a spate of stimulus packages that were already under way.

“There has been a sea change in attitudes in favour of intervention and concerted action,” he told the Financial Times. He welcomed statements from US president-elect Barack Obama’s transition team in support of spending on infrastructure.

Copyright The Financial Times Limited 2008

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The Man Who Called The Collapse

Like the Laws of Physics, you cannot alter Economic Law. Peter Schiff, a student of the Austrian School of Economic Theory, nailed it here:


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Chinese Gold Rush could tip the scales

This could move the gold market in a big way.

Gold rush

The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.

Benjamin Scent
The Standard

Friday, November 14, 2008

The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.

Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves "in a big way," the source said.

China's fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson's US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing's reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

Until now, the United States has had little choice but to issue massive amounts of debt to fund its deficits, and China has had little choice but to purchase it, as there are not many markets deep enough to absorb the mainland's US$30 billion to US$40 billion in monthly capital inflows.

Government officials involved in the management of China's reserves are beginning to see gold as an attractive place to park some of these funds. They see it as a real, tangible asset that will not lose its value over time - in stark contrast to the greenback, which is becoming more disconnected from economic realities as more bills are printed.

"It's the right time to increase the gold reserves, as the price is about US$710 to US$720 per ounce," said Wan Guoli, vice secretary general of the China Gold Association.

The International Monetary Fund has made reducing global payment imbalances one of its priorities in the aftermath of the financial tsunami.

"I think China probably will expand its strategic reserves into commodities during this downturn," said a Hong Kong-based strategist.

"China will continue to buy treasuries ... otherwise the system would get distorted," he said.

"But I think China will diversify its reserves."

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Cash or Gold?

From Eric Sprott:

For the above reasons, we believe the current flight to US dollars is a knee jerk reaction that won’t have staying power. When asset prices fall, people take comfort in the fact that one US dollar will always be worth one US dollar. But this stability is only illusory. The real question should be, what will one US dollar be able to buy in the future? Is a sub-4% yield sufficient to preserve wealth over the next 10 years? Much less, is a 2.7% yield likely to preserve wealth over the next five? We find it highly unlikely, especially in this environment where the Federal Reserve is throwing everything it’s got at the crisis. We believe the next leg of the crisis will see people becoming fearful of cash and bonds. Although, to date, the US dollar has fared relatively well versus other currencies, in the long run we believe it’ll fare relatively poorly versus gold.

In other countries, people would have done well, as this crisis was unfolding, to be fearful of cash. In Iceland for example, where the krona has been devalued by 80%, people are probably wishing they had owned gold. All over the world, countries are experiencing violent currency movements. The Brazilian real and the Mexican peso have lost a third of their value in the past three months. Even in relatively developed countries, like South Korea, the won has lost a third of its value. There is a currency crisis unfolding in Eastern Europe right now, with many currencies down 20% versus the Euro in a single month. This is causing considerable hardship in countries like Hungary, where people took out loans and mortgages in foreign currencies in
order to avoid high interest rates. 2 The cost of repaying those loans is now significantly higher than what they anticipated. There are huge swaths of the world where cash has proven to be anything but safe. They are all wishing they bought gold. We believe that holders of US dollars will soon be wishing the same thing.

With gold coins in a physical shortage and selling at a premium to spot, there is evidence that investors are starting to flock towards gold. It won’t take much buying to catalyze the price of gold. At today’s price, the total amount of gold ever produced is worth only $3.5 trillion, a mere drop in the bucket compared to the world’s financial assets which, financial crisis notwithstanding, still total somewhere in the neighbourhood of $100-$150 trillion. If some of these paper assets were to be redistributed to gold – nothing would be more prudent – then the recent drop in the price of gold presents a tremendous buying opportunity for the astute investor.

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Stunning Recap of the Dollar Death Spiral

A picture paints a thousand words...

National Debt Clock

For an excellent overview in words read the following article:
US Dollar Doomed as Credit Crisis Tuning into a Currency Crisis