Wednesday, August 08, 2007

Apocalypse Now for the US$

The truth happens to an idea. William James

"Apocalypse" is but one of many words whose meaning in the minds of many
, due to oft repeated misuse, has drifted from its origins.

A literal translation of the Greek is "lifting of the veil" or simply, the revealing. It does not refer to the end of life or the end of the world, but rather to the end of deception and the unveiling of the truth- noticing and discussing the once ignored elephant in the room...perhaps those barbarians will over-run Rome, perhaps that volcano will get the picture.

Of course, if you have bet on a deception being true, or at least being able to be maintained and milked, then apocalyptic times when deceptions are revealed as such might well seem like the end of the world.

How fittingly ironic (for those with a hint of schandefreude) to think that the many fundamentalist sects who have been praying for the "end of the world" as prophesied in the Book of Revelations, i.e. The Apocalypse, in hopes of being swept out of the mess of the earth, leaving the rest of us behind, may well have their apocalypse, the truth- that we are all going to have to make due with this little planet.

Who knew ancient Greek would come in handy?

But it is not with the broader sense of the apocalypse in mind that I write, rather it is with a narrower sense of an economic apocalypse
in mind that I write today - an unveiling of the inherent risks of the current dollar based international exchange rate system.

In today's UK Telegraph, Ambrose Evans-Pritchard writes, China threatens 'nuclear option' of dollar sales.


And what is the 'nuclear option'?

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

Remember the Frank Capra movie, Mr. Smith goes to Washington? I think we're seeing the first act of Mr. De Gaulle goes to Beijing.

Former Federal Reserve Chairman Alan Greenspan recently tried to assuage fears of Chinese sales (and we know how prescient Mr. "variable rate mortgages are a great deal" is) of US bonds because, China would not have anyone to sell the securities to.

When the London Gold Pool collapsed in 1968 and the US began quiet negotiations with European $ holders to stop them from trying to convert their $s to gold, De Gaulle, in a sense, didn't have any one to sell his US$s to either...but that didn't keep their value up.

The reason being that prices aren't set in the market, but in market participants' minds. The market is merely a medium in which such changes become manifest. To wit, as many a suburban home owner is becoming painfully aware, your house doesn't need to be "on the market" for its value to fall. Nor does China have to sell bonds for people to realize that they aren't worth as much as previously thought.

When I think of the opening quote from William James, the truth happens to an idea, I think of an apocalypse. The quality of "truth" or "reality", if you prefer, is applied, in the minds of many, to an idea to which it previously was not. Even though the idea may have always been, from some perspective, "true" it is only when "truth" is applied to the idea in each individual mind that change occurs.

And so, I believe, it will.

When De Gaulle asked for his Gold in the late 60s he pointed to the elephant in the room of the Bretton Woods system- that US$s are worth only what you can get in trade for them. Even though Nixon denied his request Pandora's Box had been opened and inflation accelerated out of control.

China, in my view, just pointed to the elephant in the room again- the value of the US$ is by statute "elastic" and only retains value to extinguish US$ based debts, public and private. It has no guaranteed exchange value with anything real. This is printed on every $ bill, of every denomination, which is why these $ apocalypses are so nasty. Once you get it, you do a Homer Simpson.... Doh!

Let the mad rush for value in the great game of financial musical chairs commence.

ps These things take time...first the apocalypse then the period of upset (or tribulation in the vernacular) then action...but once the apocalypse happens the action becomes inevitable


STS said...

So long EUR, JPY; short USD.

Any idea why gold is so uncorrelated with the dollar lately? Everybody too puzzled about the inflation vs. deflation debate to decide which way to jump?

Anonymous said...

Thanks, Dude for the correct definition of apocalypse.

The apocalypse is always within each one of us. It stands between our personal perceptions of Life and what Life really is.

Our personal perceptions are mainly dictated by our culture through its inherent and apparent authorities.

At this point, the authorities' survival as authorities has been supported by our own passive acceptance their version of reality. But as their version of reality becomes increasingly fantastic, our inbred inkling of what Life really is, begins to doubt the authorities' version of reality.

When a tie-and-suit authority virtually gives you a house asking nothing but a scribble on a few pieces of paper, then gives you whatever you need to furnish, landscape and fill the garage, there is a subtle awareness of what G.Gurdjieff calls "organic shame" -- that is, the Life pumping through your veins and transmitting through your neurons stops as if slapped and actually rejects the excess stuff.

Too many toys get broken... then no one wants them.

Congress and China are living in the past. Congress still believes that it has the power to affect the economy and China still believes that it has the power to affect Congress.

Both are using excess to try to maintain their excess but all their toys are broken.

The current authoritive structures were established for the past. They have been rendered archaic by technology and unregulated, structured finance.

Sooner or later all the talk must walk. We are all being called by Life to put into action that which has heretofore been promised.

That is what the apocalypse is all about.


"Cassandra" said...

As much as I agree with yur central thesis, deleveraging - whether officially induced, forced by markets or behaviourally driven - will be rather beneficial for the USD since leveraged specs are, in aggregate, hugely short, and the PBoC will stand pat visa-vis USD holdings. I won't quibble further for I am a financial calvinist of sorts, but the major damage vs. Euro has been done. And lest you become more despondent, do not forget: Redemption always remains possible, even from the current hole are in. It won;t be pretty macro-wise, but it will be a wake-up call to midlessly slothful and wasteful.