On Wednesday, November 17, the Senate passed it by a vote of 52 - 44
On Thursday, November 18, the House passed it by a vote of 208 - 204
On Friday, November 19, President Bush signed it into law.
The "it" in question is the "measure" raising the debt ceiling of the US Treasury by $US 800 Billion to a new level of $US 8.184 TRILLION. It will be interesting to see what the official Treasury debt "subject to limit" (which has been frozen $US 25 million below the old $US 7.384 TRILLION ceiling since October 14) will be once it starts ticking upwards again in the coming week. The last increase in the debt ceiling was, at $US 984 Billion, bigger than the current one. That increase was passed on May 27, 2003 and lasted two weeks short of eighteen months. This increase is expected to get the Treasury through fiscal 2005 - which ends less than eleven months from now on September 30, 2005.
Meanwhile, all of the world's major financial and political potentates are meeting this weekend. In Santiago, Chile, the APEC (Asia Pacific Economic Cooperation) meeting is going on, complete with the August presence of President Bush himself. According to the press release put out by the White House, Mr Bush is attending the meeting to: "promote free trade, economic growth, and deepen our security cooperation to ensure our continued prosperity." This is the usual catalogue of banalities, and will undoubtedly be reflected in the (already written) final communique.
The meeting which is attracting more attention in financial and investment circles takes place this weekend in Berlin, Germany as Treasurers and Central Bankers get together at a G-20 meeting.
In the leadup to this meeting, here are a couple of somewhat disparate quotes from the two top financial officials in the US government:
"Everybody knows what our position is. ...a strong Dollar and currency values set in open markets".
Treasurer John Snow - in Warsaw en route to the G20 meeting.
"It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to Dollar balances must occur at some point. This situation suggests that international investors will eventually adjust their accumulation of Dollar assets ...or seek higher Dollar returns to offset concentration risk."
Fed Chief Alan Greenspan - in Frankfurt en route to the G20 meeting.
If this were a poker game, Mr Snow would be embarrasingly tabling a very busted flush in the face of his opponent's four aces. Sadly, in many respects, the simile is apt. The US in general and the Treasury in particular have been "bluffing" with a busted hand for decades. They have only been "called" three times. In the late 1960s, France's Charles de Gaulle began to demand Gold for the Dollars the US was exporting to pay for imports from France. The US changed the rules by severing all remaining ties between the Dollar and Gold. In the late 1970s, new Fed Chief Volcker was told at a meeting in Europe to either let US interest rates rise to a market level or watch the Europeans, who had been the main players supporting the Dollar, get rid of their Dollar positions. Mr Volcker did let US rates rise - and they topped out above the 20% level from late 1980 until early 1982. That eventually lured the world back into Dollars, where they have remained ever since.
The third time the US bluff was called was the successful drive by a newly united Europe to introduce their own reserve currency, the Euro. That drive began with the introduction of the Euro in the financial world in 1999 and was consummated at the beginning of 2002 with the introduction of the Euro as a circulating CASH currency. It is not a co-incidence that the beginning of the US Dollar's bear market coincided almost exactly with this consummation of the Euro.
Now, we have the first signs of a fourth instance of calling the US bluff. But THIS time, the call has not come from overseas. This time it has come from the head of the US Federal Reserve. What Mr Greenspan is harking back to in his remarks quoted above is the late 1970s, when the rest of the world did indeed begin to flee from the US Dollar and were only lured back by interest rates at TEN TIMES the level of present official US rates.
Since there is absolutely NO indication from the new Bush Administration that they will be changing ANY of the policies which have led to the present out of control trade deficit, Mr Greenspan's foreseeing of a "diminished appetite for adding to Dollar balances" is a certainty. Indeed, it is already taking place and has been accelerating ever since the November 2 election.
Mr Greenspan's other warning, the one that international Dollar holders may - "seek higher Dollar returns to offset concentration risk" - has shocked US financial and investment circles. Translated from Fed speak into English, this is a warning that foreign Dollar holders are going to demand either higher US interest rates and, if they don't get them, are going to start getting rid of the Dollar holdings which make up most of their "reserves".
It has taken these utterances from Mr Greenspan to get Wall Street to begin to "concentrate" on the "risk" ("concentration risk" - get it?) to US markets inherent in US monetary, fiscal, and financial policy. For Mr Greenspan to take the risk of waking up Wall Street to these dangers, as he most certainly has, indicates that his private assessment of the state of US finances are dire indeed.
Gold, of course, continues to reflect the risk to the US Dollar. Last week, Gold was closing in on the $US 440 level. This week, the spot future Gold price closed above $US 440 for the first time since 1988 on Monday, November 15 and then went on to close in on the $US 450 level, trading as high as $US 448.50 intraday on Friday, November 19.
What Gold is not - YET - reflecting is the risk to the GLOBAL financial system presented by the falling US Dollar. To give you an example of this, consider a quote from a Canadian media source on November 19, as Gold was rising $4.10 to new bull market highs of $447.00 in US Dollar terms. The headline read as follows: "Gold is trading at 16-year highs, but holds limited appeal as investment"
"For Canadian investors, however, the rise in the price of gold is offset by the soaring loonie, also in reaction to the dropping greenback. In fact, since early 2004, gold has fallen by about two per cent in Canadian dollars.
This is indeed true, and the same comment could be made about Gold in terms of almost any major currency in the world which is not still pegged or otherwise aligned with the US Dollar. To this point in the second leg of Gold's post 2001 bull market, it is still going up only in terms of US Dollars and currencies tied to the US Dollar. In terms of the other currencies we chart against Gold ($A, Euro, Yen), Gold is still languishing.
Consider this: Between the beginning of 2003 and mid March 2004, the Japanese spent almost 32 TRILLION Yen on US Dollars in an attempt to hold the Dollar up against the Yen. The rest of Asia has also absorbed GIGANTIC amounts of US Dollar both through their trade surpluses and through direct currency intervention trying to keep their currencies down against the Dollar and their exports to the US competitive. The value of this entire pile of Dollars and Dollar "assets" has been losing value on a steady basis and losing value faster over the period since the US election.
On top of that, US Dollars are the reserves behind almost all (the exception being the Euro) other currencies in the world. ALL of the existing US Dollar assets (notably Treasury debt) is losing value against the currencies which they "underpin" on a regular basis. Should US interest rates start to rise to reflect the REAL risk of holding Dollars, the exisiting reserves of the rest of the world will lose value even faster in the secondary markets. All of this, as Mr Greenspan has just alluded to, is a certainty. Yet Gold does not yet reflect the present risk to the global financial system. Thus far, it merely reflects the fall in value of the US Dollar in international currency markets.
As stated at the top of this article - "reality is catching up". It is still lagging FAR behind the REAL state of affairs however. As we have stated in several recent commentaries, the last two months of both 2003 and 2002 were marked with big rises in the $US Gold price. In the latter stages of these runs, Gold was gaining ground rapidly against ALL world currencies, even those which were rising against the Dollar along with Gold.
We have seen Gold confirm the next upleg of its US Dollar bull market. We have not yet seen Gold do so against other world currencies. That is the next step, and if Mr Greenspan's comments quoted above are anything to go by, it is not going to be delayed much longer.