Alan Greenspan Talks Deficit Financing

We’ve had a day where the currencies gained versus the dollar, and then held their ground, for the most part… No profit taking, no debt crisis fears trading, just held their ground versus the dollar. Now, some would say… “That’s a sign that they’ve hit resistance and can’t overtake it, which is not good for a rising asset”… But, me? Well, I would say, and will say… “I find this to be refreshing. The last thing you want to see is an asset, which in this case is a currency like the euro, run up too much, too fast, for that WILL give the markets reason to sell. I prefer the slow gradual, stealth-like moves in currencies, so that they don’t gain any attention, until the rally is well established.”

The euro (EUR) did stall out at 1.24 yesterday… But the ground given up after failing to go beyond 1.24 was small… Either way… It looks like the euro will enjoy its best weekly performance versus the dollar in a year!

So… Choose your sword… For there will be some saber rattling going on regarding the euro’s climb… Is the euro out of the woods? Hardly! (I hope the guy that told me that I was wrong to say “not hardly” noticed!) In fact, now the rumors are spreading that the pensions in Europe are under-funded… Heck! That’s no big deal! They’ve been under-funded here in the US for at least the last seven years! I remember writing about this back in 2003!

OK… So I said the currencies had held their ground for the most part… One currency that has given back some gains is the Canadian dollar/loonie (CAD)… Oil prices dropped about a buck overnight, and gold has not been able to add to yesterday’s very nice $16 gain… So… There’s no wind for the loonie’s sails, right now… But the currency is hanging on to 97-cents, so it’s not all bad!

The Swiss franc (CHF) continues to run free and to higher ground since the Swiss National Bank (SNB) left the words out of their statement regarding the need to stem currency appreciation. The franc, which was trading just below 86-cents 11 days ago, is now at 90-cents… And rising with a bullet… Really, I liked the beat, but the words were mumbled.

So… Back to gold… I saw a great chart yesterday, which I shared with everyone on the desk… I’ll explain what it showed… Gold versus Japanese yen (JPY), going back to gold’s wild days of 1982. Right now, gold is trading versus yen at about the same place it was in 1982… The data points on the chart make a great big smile! Now, I’m not a “chartist,” but that’s not ever stopped me before… So… To me, it looks like gold is either going to start the next downward slope of another smile, or… That it’s about to take off… I’m thinking that it’s the latter, because something has to give, here.

A guy over at Standard Bank Plc, Bruce Ikemizu, agrees that it’s the latter thought, as he gave an interview yesterday, and said, “Gold may climb to a record $1,300 an ounce this year.” He believes that investors are going to move away from the fiat, debt-ridden currencies to gold… Can’t say I disagree…

Here’s the thing that Ikemizu says that makes a ton of sense… “Gold is drawing attention as it will take a long time for the dollar to be replaced by another currency in trade and investment.”

That’s right! Recall that about a month ago, I wrote how I believed the euro was going to lose its title of “offset currency to the dollar”… And long before that, I had written about how the dollar was going to lose its title of “reserve currency”… But that it would take China about 20-25 years to be ready to take over the reserve currency title, so what steps in to help fill the gap? Gold!

I saw a screen yesterday that charted gold for the last 10 years versus the major currencies of the world… Gold hasn’t just been gaining versus the dollar… Gold has gained 77% versus the dollar in the last 10 years… The euro? It has lost 70%… The winner was a surprise to me… It was the New Zealand dollar (NZD) at 66%, with the Swiss franc coming in second. And the Big Losers were a surprise to me too… South African rand (ZAR) and Mexican pesos (MXN)… Hmmm…

OK… Enough of that! Russian President, Dmitry Medvedev, isn’t going to be invited to any euro Christmas parties this year… Medvedev offered up his thoughts on the euro yesterday saying that he, “cannot rule out a collapse of the euro.” Hmmm… Didn’t know that “currency specialist” was on his résumé!

Tearing a page out the US’s book on making the public feel good… Japan’s Cabinet upgraded its assessment of the economy and now sees a self-sustaining recovery as being underway. Yeah, right… And my first wife was a…. Young Elizabeth Taylor, yeah, that’s right…

Yesterday, I totally forgot to talk about the Big New from the previous day, regarding the delisting of Fannie and Freddie stocks… Talk about a slap in the face! Those are two entities owned by the government… Makes you wonder, right? I mean, come on, noodle it…

My old nemesis, the former Fed Chairman, Big Al Greenspan, was in the news yesterday… Big Al wrote an article for The Wall Street Journal on the US debt… I think “he’s seen the light” for the things we wrote about sounded like he’s been reading the Pfennig!

Here are a couple of snippets…

“An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large US borrowing capacity are misleading.

“Despite the surge in federal debt to the public during the past 18 months – to $8.6 trillion from $5.5 trillion – inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

“Beneath the calm, there are market signals that do not bode well for the future. How much borrowing leeway at current interest rates remains for US Treasury financing is highly uncertain.

“The US government can create dollars at will to meet any obligation, and it will doubtless continue to do so. US Treasuries are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.”

Thanks Big Al… I’ve been pretty tough on the former Fed Chairman, and rightly so, but at least he’s talking sense now…

Yesterday, the stupid CPI printed and said that inflation had fallen 0.2% last month, and that inflation year on year was only 2%… Stupid! The Initial Jobless Claims were not good, folks… The weekly jobless claims added 12,000 claims from last week, to total 472,000, and something that I watch – as I’ve explained before – is the Continuing Claims, which continues to grow in numbers… Last week it was 4,483,000… This week it’s 4,571,000… Not good, folks…

Then there was this… This is going to make you want to go yell at the walls, or go outside and yell at the trees… Are you ready? A dire report circulating in the Kremlin today that was prepared for Prime Minister Putin by Anatoly Sagalevich of Russia’s Shirshov Institute of Oceanology warns that the Gulf of Mexico sea floor has been fractured “beyond all repair” and our World should begin preparing for an ecological disaster “beyond comprehension” unless “extraordinary measures” are undertaken to stop the massive flow of oil into our Planet’s eleventh largest body of water.

Interesting to note in this report is Sagalevich stating that he and the other Russian scientists were required by the United States to sign documents forbidding them to report their findings to either the American public or media, and which they had to do in order to legally operate in US territorial waters.

However, Sagalevich says that he and the other scientists gave nearly hourly updates to both US government and BP officials about what they were seeing on the sea floor.

Why did we have to hear about this from the Russians?

To recap… The currency rally yesterday didn’t dissolve overnight like recent rallies, as most currencies held on to gained ground versus the dollar. Oil prices fell $1 and that caused some slippage in the Canadian dollar/loonie. Data was not good for the US economy yesterday as the Weekly Jobless Claims gained to 472,000… And Big Al Greenspan talks US deficit and financing for us today.

Chuck Butler
for The Daily Reckoning