The Skip Bureau

It is time for another analysis report on the status of the world in general. The analysts (really, there are more than one and that's not due to schizophrenia) here at the Skip Bureau have been slaving over a cold LCD for some time, digesting information from many divergent sources to try to determine what is up. As a disclaimer, some of this is pure speculation, and you should, of course, do your own research.

The first order of business is the odd behavior seen in the precious metals market. It seems from a cursory analysis that selloffs began in the LME, the London Metals Exchanged, and were timed to stagger through the day such that one of them coincided with the opening of the Nynex and Comex in New York. There, computer-based trading would continue to drive the price down further. In this fashion, a relatively small and cheap market, the LME, could be used to control a larger and more expensive market in order to suppress what was a roaring bull in silver. The alternate explanation is that it was just a case of profit taking.

There is the jagged selloff pattern, repeated over a week on four separate days, with selloffs at the same time each day. Such a pattern is expected when one is selling specifically to reduce the price of a metal; one dumps, triggers a selloff from computerized traders, waits until a rally starts from other computerized traders and method traders, dumps again to check the rally and trigger the selloff, and repeats it. In this manner, the greatest damage to the raging bull can be done with the least amount of physical silver, especially given that the Comex and Nynex inevitably opened much lower as a result, although, signally, they tended to rebound through the day after the LME closed. Since then, we have been in a much slower market, trading basically sideways. It has presented a great buy opportunity, which the analysts here at the Skip Bureau have taken advantage of, and are grateful for.

Now, that was enough for the decidedly non-aluminum-beanie-wearing analysts at the Skip Bureau to go, 'hmm, wonder what's up', but then the rumors began to fly that the English have increased their position in US T-bonds, and are now third overall in ownership of these bonds. This idea is, of course monumentally stupid of them were they not in a position to be mauled by a US Dollar collapse. The Dollar hegemony is fighting a rear-guard action to stay alive. One thing is for sure, and that is that there is blood in the water.

If (pure speculation alert) the Bank of London or whomever is responsible on that side of the puddle is swapping silver for T-Bonds, it has the effect of simultaneously putting downward pressure on the precious metals sector, including gold, and allowing savings by industry that uses silver. Further, such a large purchase of T-Bonds would go a long way to shoring up the US Treasury as a bond issuer and thus shore up the dollar, which would further erode support for gold. London apparently has a lot of silver that can be used for this purpose.

Previously, the Bureau promised expanded analysis on China, and the China desk has been hard at work preparing this analysis. Much of it is barely sketched out, as the Bureau prides itself in reading between the lines and the lines are getting harder to find as those who wish us to not know get more sophisticated, but the relationship between the US and China has changed in a way that will one day be looked upon as epochal, beyond merely historic. It is the kind of thing that looks like when Eisenhower went to Germany to take overall command in World War II, which most historians view as the point the US seized world leadership from the British.

See, China came for a 'dinner', not a state visit, and left with the US firmly under its control. I don't know what Mr. Hu Jintao said to Mr. Bush, but the esteemed POTUS issued a statement or two and then proceeded to change policy. First was the statement that the Chinese are going to the moon and that the US will help. China needs American engineering help to do it, but they are the primary partner, which is so staggering a reversal that it boggles the mind how this could have come about.

As if that sort of earth-shattering development was not enough, the US ordered the Taiwanese VEEP to refuel in Alaska rather than mainland US en route to somewhere else and refused any diplomatic contact during the event. This is quite an insult. What this signals is that the US is abandoning Bush's earlier policy of supporting Taiwan and the Neocon tendency to feel that China must be checked at all cost. This sort of policy change is very striking to the Bureau.

The administration has also reversed its policy about North Korea, accepting the Chinese position pretty much intact. Previously, Washington had pursued the same aggressive stance to Pyongyang as it had to Beijing, although the threats were substantially more credible. Military force against North Korea is no longer really on the table and the US has pulled back from harrassing Chinese boarders with intelligence planes, the sort of activity that led to the loss of a US P-3 Orion in the early days of the Bush presidency, when the Neocons were still certain they could stop the Chinese juggernaut, all 1.5 billion of them.

So, it is now the opinion of the Bureau that China is calling the shots on the world stage through the US. Also of interest is the fact that it appears that the South American countries are showing signs of getting out from under the shadow of the Eagle. They are working on developing a cross-national currency based on silver. The idea is not new; Mexico used to have a silver peso coin. This new coin will not have a denomination but will be linked to local currencies and allow anyone to exchange local currency for one of these coins and vice versa. The currency policy is very sound and will provide a floor for South American prosperity that may soon eclipse the US.

Many speak of the Brazil-Russia-India-China axis, but of these two, the only ones that really matter are Brazil and China. Brazil is leading the way in South America in becoming largely independant of the dollar-oil trade. China is becoming the world's banker and power broker. India is firmly in orbit around China and Russia is struggling to deal with the many many issues it faces to survive, although Putin has been doing a fairly good job of playing the game.

All over the globe talks of replacing the dollar are popping up. This sort of talk is bad for the dollar. Already Russia trades oil in Roubles, increasing the stability of the Rouble. I've mentioned South America. China and most Asian Rim countries are creating 'basket currencies' that contain a ratio of everyone's currencies that they use to back their own. Everyone knows about the Euro. What people haven't heard of is the noise coming out of the Middle East about a gold-backed exchange, either in physical gold or some sort of gold-backed currency. Turkey has gold settlement banks. That is one reason the administration wishes to go to war with them and continues to act to destabilize them. Further evidence is the discovery recently by one analyst that Beirut, Lebanon had been one such gold settlement center prior to its destabilization in the last dollar crisis in the seventies.

So, the decreasingly small group of major actors on the dollar stage now include the United States, Saudi Arabia, England and Japan. Japan has been distancing its economy from the US but continues the Yen carry trade that allows bankers to sequester large amounts of US debt and make money on what is essentially an exponential ponzi scheme. England appears to be working to hold down metals and absorb more bonds. Saudi Arabia is using what oil it has to prop up the US economy while at the same time funding the 'enemies of the US', which are necessary to justify the current wars against powers that have hit upon the idea they can operate in currencies other than the dollar, countries such as Iran, Venezuela and Turkey.

Because of the way these finances are handled, simply silly amounts of money can be stuffed all over the globe without actually being spent. Very intelligent people are at this moment bent to the task of making sure it stays sequestered and is not allowed on the market in waves, as that would destroy the dollar. However, the pressure builds, and the reserves diminish. The day will come when some event sparks the selloff of US assets, which will precipitate a dollar collapse and cause the US economy to discount. The question that currently worries the Bureau is exactly when this sort of thing may happen and what may cause it.

Due to the nature of the gold and silver swaps where metal is leased and sold to be invested in bonds and the Yen carry trade where bankers borrow yen at zero percent interest to invest in bonds, the bond market can keep inflated with little increase in interest rates, allowing a situation to thrive where the only viable investment for most people is the stock market, which will last as long as the inevitable mass retirement of the baby boomers can be put off. This puts a horizon of around ten to fifteen years, it seems. During that time, the requirements of funding the children and grandchildren will keep driving a modest economic boom, it is thought. This plays well with the estimate of the boom/bust cycle endemic to the US economy, as well as worldwide cycles. It also meshes with the boom/bust cycle in precious metals. Since those cycles are primarily driven by investor thinking, which takes a generation to change, it makes sense that it will last to the end of the current generation.

Essentially, people must eat and clothe themselves, so there will continue to be a consumer economy in the US, and Asia must sell stuff or face massive oversupply, so they continue to supply us with money to buy their stuff. This sort of thing can go on for a very long time.

However, at some point, the Asians will either see a reduction in supply or an increase in demand. Black clouds are on the horizon for China, who has a very difficult road ahead. However, it should be noted that conversion from production for external use to production for internal use is not that hard and has been done before in a few years after the World Wars. It is expected that China in particular, and most of the Asian Rim, including Japan, can survive a collapse of the US economy at this point, with major parts of the world seeing improvements in their macro outlook, such as Brazil, Argentina and Mexico.

As a matter of fact, one of the more interesting reasons to view China as running the world economic is the fact that the Asian countries appear to be specifically inflating their currency to avoid having it rise against the dollar and stop the production bulls they enjoy. No other explanation of their consumption of US bonds can be found. Even China's recent evaluation was weak, given that the currencies in the 'basket' are all ones with dollar ties, and the evaluation was not enough to curb Chinese exports to the US. This sort of thing can't last long, although the Bureau is split on that question. On the one hand, it is important to know that China, in particular, can and has suffered famine on a large scale and so does not have the same resistance to economic loss the US does. As long as food and medical needs are taken care of, they don't need quite the list of gadgets the US does to keep its citizens happy. Also, they are and have nearly always been a command economy, but they have greater decentralization than most nominally free countries do, realizing the sorts of efficiencies that decentralization can cause. In short, China is a totally different game, so macro economic analysis of China using Western methods is at most a curiosity. To insist that a Western-style recession would be considered horrific by the Chinese people is to mistake the mettle of the Chinese people. The same can be said of much of Asia proper, including most of the Rim.

India is another situation entirely. India is being goaded by Pakistan, possibly at the behest of the US. India has structural problems and societal problems that beggar imagination. India is trying to be classic Indian and modern Western at the same time, and the amalgamation has not gone well. India is also showing every sign of being in a bubble driven primarily by Western companies, so a dollar collapse would hit India particularly hard. India has only seen these good times for one generation, but, unlike China, is rapidly becoming consumeristic, so will have civil unrest in the case of a recession.

Given the above analysis, it is apparent that the status quo is on shaky ground indeed. The massive derivitive position hanging over the Western banking hegemony, coupled with the short position in precious metals, puts the US in danger of cross-locking failure of the banking industry at the slightest hiccup. This has nearly happened several times already, averted only by rapid response from the Federal Reserve Bank of the United States. If the Fed proves too slow or the forces too great, they will be overwhelmed.

It has been said that this is not possible due to the fact that the resources available to the Fed are vast, but the truth is that most of them are paper, which brings me to my last point. Currency is used primarily to settle accounts over transactions. For instance, I want to buy a car but I sell hot dogs. I can take a thousand boxes of hot dogs to the car dealership and trade them for a car, or I can sell the hot dogs for a receipt that entitles me to a thousandth of a car. Dollars allow me to do that without reference to the car, indeed, without reference to anything. However, over time, dollars came to be the way countries settled accounts, so, for instance, Indian Rupees were used to buy dollars to settle accounts denominated in Chinese Yuan. This mechanism has been in place for about thirty or forty years. Prior to that, settlement happened largely in gold.

Now, if you take the outstanding dollar transactions, which is the 'demand' for money for settlement purposes, and compare that to the value of gold currently, you find that gold would have to appreciate in value by 40 or 50 times to be used as a settlement currency. If the world goes off the dollar standard and back to the gold standard, gold will shoot up in price like nobody has ever seen in the history of mankind.

If that happens, all those dollars come home to roost, driving up prices in the US at the same time the dollar falls compared to gold, meaning that foreign stuff gets more expensive to get, too. If the US does not play that eventuality right, hyperinflation and the demise of the dollar are sure to follow. Oddly enough, things will get discounted even during hyperinflation, as gold demand is worldwide, not local, so, since currencies are valued in what they can do, gold will see a massive value as well as price increase.

For instance, in Weimar Germany, during the hyperinflationary period, gold went from buying 350 loaves of bread per ounce to buying over 450,000 loaves of bread per ounce.

In other words, as the dollar goes away, if gold replaces it, everyone will have to buy and hold gold, driving gold up. Gold will be 'in flight' in transactions, so not available for sale. People who bought gold at the current rate of $650 per ounce can buy roughly 130 $5 meals with it. If gold goes up by the minimum 40x that it has to to be a settlement replacement for the dollar, you can buy 5200 meals for the same ounce of gold. However, since the US economy will be severely discounted in a dollar collapse, as foreigners sell off US assets, the ratio will be much higher than that. A worst case discount of 90% means that everything is 10x cheaper, which means you can now buy 52,000 meals with an ounce of gold, present value $260,000. Essentially a man with four ounces of gold in his pocket may have as much money as a man with a million dollars does today. Just four ounces.

This is all a lot of speculation. The gold and silver investors are betting that the current group of goofballs can't pull their scheme off for much longer. It seems a safe bet because it has always been a safe bet, but readers of the Bureau know that this time it really is different (tm), although what that actually means is pretty much anyone's guess. The Bureau maintains that eventual collapse of the dollar through either hyperinflationary policy as a response to bankruptcy-driven deflationary pressures is the likely result, as, when the wheels come off the wagon, it has a long way to fall. The harder the nuts who run this nuthouse try to stop it from happening, the worse it will be when it happens. So, the Bureau will take every opportunity to buy gold and silver presented by the market and smile.

Note: this is not investment advice. Make up your own mind. The Bureau makes no promise about future returns or that this information is in any way accurate, or even written in good English and spelled correctly. Any results you may experience from acting on any thoughts that may have escaped your self control while reading this screed are yours to contemplate, whether for good or bad.

As usual, the Bureau seldom reveals its sources in the fervent hope that others will do their own research. Almost all the Bureau's sources are online and readily discoverable. Do your own work and you will be rewarded by being able to take ownership of your mistakes.

We here at the Bureau practice a form of futurology known as 'tilting at the wind', where we try to figure what the weather will do from changes in the eddies around us. We watch the miasma of mostly disinformation pouring out of all sorts of outlets for the occasional slip, such as when Condoleeza Rice told the entire world there were 'mistakes' in Iraq. Then we try to determine the actual significance of these and other events and form a picture of how the mass of power is actually moving. We tend to fixate on events nobody else cares about and ignore *anything* that is of popular interest, as it is almost certainly disinformative at best, fraudulent at worst, and mostly disinteresting to us personally.

This method has been mildly effective at predicting future changes, and, truth be told, the analysts involved have a reasonably good record amongst themselves at predicting the future. For instance, the analysts predicted the decrease in fuel prices following the immediate emergency after Katrina and Rita and continue to hold that fuel prices will go yet lower in the future, but that is another analysis, the conclusions of which are contrary to everything you have heard but logical and not really startling.

However, the method is just guessing so is not to be trusted as anything more than speculation. That is all.