The employment report of April 2 did its job. This week, the $US index hit a new 2004 high of 89.58 on Monday April 5 and the Dow recovered from just above the 10000 level in late March to close as high as 10558 on the same day. Gold took a $US 12.40 header from the 2004 high it had set on April 1, falling as low as a close of $US 415.50 - again on April 5. The Dollar was rescued, the stock markets were rescued, and the financial system was "rescued" by Gold failing to decisively breach its January 2004 highs. On the financial front anyway, all could breathe a little easier as they went off to enjoy the Easter break.
On the financial front maybe. On the other "fronts", things are not so sanguine. As comparisons with Vietnam escalate, Iraq is slipping dangerously closer to utter chaos with every passing day, some would say with every passing hour. Outbreaks of violence are proliferating both in their intensity and their frequency. To attacks on coalition forces and Iraqi "sympathisers" have been added kidnappings, the Japanese being the latest victims. The US overseer in Iraq, Mr Bremer, was due to return to Washington for another "briefing". He has elected (or more likely been told) to stay in Iraq.
With the first anniversary of the US attack on Iraq having come and gone, the US is supposedly in the midst of a "troop rotation". Increasingly concerned relatives and friends of the troops serving there have been repeatedly "reassured" by the Pentagon that Iraq duty would be no longer than a year. It seems the Pentagon is changing its mind. On April 5, a (unnamed) senior official with the US central command let it be known that 24,000 troops who were scheduled to leave would remain in Iraq - "as their replacements arrive".. Note that the official did not say UNTIL their replacements arrive.
US central command is said to be planning for the "possibility" of spreading anti-US violence. No need to plan for it, it's happening. As the "quagmire" becomes quicksand and the similarities to Vietnam become ever more obvious, and as the "popularity rating" of Mr Bush continues to drop, the situation becomes ever more volatile, and because this is a Presidential election year, ever more dangerous.
This has its effects in all areas all over the world. Here's just one example. The IMF has just admitted to having "made mistakes" in dealing with Argentina's 2001 economic crisis in which that nation defaulted on its sovereign debt with the result that half of all Argentinians were impoverished.
The IMF has admitted that for the decade leading up to 2001, despite evidence that mounted throughout the period, they did nothing to dissuade or deter western banks from pouring an avalanche of new loans into Argentina. By the mid 1990s, a coming default was obvious to many Argentinians in the private sector, but neither the Western banks nor the IMF did anything to stem the flow.
When the crunch did come in 2001, the IMF demanded the usual austerity measures so that the collapse of Argentina did not drag the Western (mainly US) banks with them. Those "tough measures" lasted until September 2003, when Argentina almost went under again. This time, the IMF was firmly told to back off by none other than the US Bush Administration. They have backed off, to the point where now the leaders of Argentina and Brazil have got together to "negotiate" jointly with the IMF. The first object of this negotiation is to have government projects to "revive infrastructure" (a very wide grab bag) exempted from being included in calculations of budget deficits.
The Bush Administration told the IMF to back off for one very simple reason. They cannot risk a confrontation between the IMF and "third world" debtors now. Nor, mired in Iraq as they are, can they afford the prospect of a renewal of civil unrest in Latin America. They are stretched too thin. They cannot take any more onboard.
So, in stark contrast to the history of the IMF stretching back to the end of WWII and up to and including the "Asian Crisis" of 1997-99, the "new" policy is to back off. If you understand that throughout its history, the IMF has been no more or less than a "front" for the Bretton Woods era of the $US as the world's reserve currency, you will understand the significance of this about face. IMF policy has always been to maintain, at all costs, the global domination of the US Dollar. Those costs have been felt all over the world - EXCEPT in the United States itself.
But it is now obvious that the IMF can no longer enforce its policies. This is one more pointer to the overstretch of the US under the Bush Administration. By pretending to make the world "safe from terrorism", the US has unravelled itself to the point where it can no longer make the world "safe" for the US Dollar.
In place of financial clout, the US has fallen back on increasingly dodgy economic "data" which "measures" its own economy and hope that the rest of the financial world will "muddle through" if only nobody rocks the boat. So far, it is "working". People sitting in a lifeboat being circled by hungry sharks seldom rock the boat. They know what is waiting for them in the water.
The financial situation is on hold, for as long as it can be kept on hold. As long as Gold is contained, as long as the stock markets hover at "safe" levels, and as long as the US Dollar remains above its recent lows, especially against the Euro, for that long the facade of business as usual can be maintained.
The problem is that the Bush Administration is caught in a trap of its own making in the sands of Iraq and that the harder they fight to escape, the tigher the jaws shut. The drain on resources has been immense for over a year. Now, the drain on the US status in the world is becoming just as big, and this one is far more serious.
On the surface, the global financial situation is in hand. Under the surface, the procedures, institutions, and attitudes which have kept it in hand for decades are eroding by the day. The calm is still with us, but the stotm is building.
For many years, The Privateer has pointed to what we call the "reverse Gold barometer" to measure the seriousness of the financial situation by the fall of the Gold price. For more than two decades, the bigger the crisis, and the more that Gold would have been expected to rise in reaction to the crisis, the more it fell. The days of that "reverse Gold barometer" are numbered. We are nearing the point where Gold reverts to its TRUE historical nature and the extent of its RISE measures the severity of the crisis.
EVERY effort on EVERY front will be expended to prevent that from happening between now and the November US elections. Even if those efforts are successful (and we don't think they will be), the elections are less than seven months away. With the situation poised to go off the rails at any time, waiting seven months in comparative financial safety (by owning Gold) is not a difficult prospect at all. We could do it standing on our heads.