Jim Rickards: This Is The Only Russia Story That Matters

Authord by James Rickards via The Daily Reckoning,

The World Gold Council has reported that the Central Bank of Russia has more than doubled the pace of its gold purchases, bringing its reserves to the highest level since Putin took power 17 years ago.

Russia’s desire to break away from the hegemony of the U.S. dollar and the dollar payment system is well-known. Over 60% of global reserves and 80% of global payments are in dollars. The U.S. is the only country with veto power at the International Monetary Fund, the global lender of last resort.

Perhaps Russia’s most aggressive weapon in its war on dollars is gold. The first line of defense is to acquire physical gold, which cannot be frozen out of the international payments system or hacked.

With gold, you can always pay another country just by putting the gold on an airplane and shipping it to the counterparty. This is the 21st-century equivalent of how J.P. Morgan settled payments in gold by ship or railroad in the early 20th century.

Russia has now tripled its gold reserves from around 600 tonnes to 1,800 tonnes over the past 10 years and shows no signs of slowing down. Even when oil prices and Russian reserves were collapsing in 2015, Russia continued to acquire gold.

But Russia is pursuing other dollar alternatives besides gold.

For one, it’s been building nondollar payments systems with regional trading partners and China.

The U.S. uses its influence at SWIFT, the central nervous system of global money transfer message traffic, to cut off nations it considers to be threats.

From a financial perspective, this is like cutting off oxygen to a patient in the intensive care unit. Russia understands its vulnerability to U.S. domination and wants to reduce that vulnerability.

Now Russia has created an alternative to SWIFT.

The head of Russia’s central bank, Elvira Nabiullina, has reported to Vladimir Putin that “There was the threat of being shut out of SWIFT. We updated our transaction system, and if anything happens, all SWIFT-format operations will continue to work. We created an analogous system.”

Russia is also part of a reported Chinese plan to install a new international monetary order that excludes U.S. dollars.

Under that plan, China could buy Russian oil with yuan and Russia could then exchange that yuan for gold on the Shanghai exchange.

Now it appears Russia has another weapon in its anti-dollar arsenal.

Russia’s development bank, VEB, and several Russian state ministries are reportedly teaming up to develop blockchain technology. They want to create a fully encrypted, distributed, inexpensive payments system that does not rely on Western banks, SWIFT or the U.S. to move money around.

This has nothing to do with bitcoin, which is just another digital token. The blockchain technology (now often referred to as distributed ledger technology, or DLT) is a platform that can facilitate a wide variety of transfers — possibly including a new Russian-state cryptocurrency backed by gold.

“Putin coins,” anyone?

The ultimate loser here will be the dollar. That’s one more reason for investors to allocate part of their portfolios to assets such as gold.

The Truth About Nuclear Proliferation And North Korea

The U.S. is communicating with North Korea about its nuclear program and testing Pyongyang’s appetite for negotiations, Secretary of State Rex Tillerson said in the first public acknowledgment by a senior administration official of direct contact on the matter. As Bloomberg reports,Tillerson, speaking to reporters on Saturday after meeting Chinese officials in Beijing, insisted that the U.S. would never accept a nuclear-armed North Korea.

His remarks offered the clearest glimpse so far into U.S. strategy, and suggested a willingness to get to the negotiating table with Kim Jong Un’s regime -- even after President Donald Trump tweeted in August that “talking is not the answer!”

“We are probing, so stay tuned,” Tillerson said.

“We can talk to them, we do talk to them directly, through our own channels,” adding that the U.S. has “a couple, three channels open to Pyongyang.”

All of which was "good" news in a time when we need some. However, a few hours later, the State Department commented that...

"North Korean officials have shown no indication that they are interested in or are ready for talks regarding denuclearization."

And that, as Jim Rickards warns below, is why war is coming...

Authored by James Rickards via The Daily Reckoning,

I’ve been arguing for months that we are headed for war with North Korea because of its nuclear program.

This brings us to the topic of nuclear proliferation.

Nuclear proliferation of the kind we are seeing in North Korea is nothing new. The U.S., Soviet Union (now Russia), U.K. and France all had nuclear weapons by 1960. China joined the club in the mid-1960s.

India and Pakistan started becoming nuclear powers in the 1970s. Israel has never officially announced it has nuclear weapons, but it is well-known that Israel possesses them. At various times, South Africa, Brazil, Iran, Syria, Iraq and Libya have pursued nuclear weapons development.

The Iranian program is the only one of those that is still active.

Critics of any effort to attack North Korea to stop its nuclear weapons program point to this extensive proliferation over 60 years as a reason not to risk war.

According to these critics, the world has learned to live with eight nuclear powers. One more won’t matter. Deterrence works.

North Korea knows that if it uses nuclear weapons, it will be subject to a nuclear attack by the U.S., and therefore it won’t use them.

But this analysis is wrong on a number of levels.

The U.S. began its nuclear program to end World War II. The U.K., French, Russian and Chinese nuclear programs were part of a Great Power dynamic in the Cold War that does not apply to lesser powers like North Korea.

For the Great Powers, deterrence does work.

Israel’s program is a response to an existential threat from the Arabs (four large wars and many smaller ones in less than 70 years) and Israel’s lack of strategic depth. India and Pakistan are mutually hostile and their weapons are aimed at each other, not at the west.

North Korea is different because it continually threatens to use nuclear weapons on the U.S. and its allies, like Japan.

Deterrence does not work on Kim Jong Un. The North Korean leader will be safe in his nuclear bombproof bunker. He does not care about his people.

Kim’s threats involve actual nuclear missiles striking cities and a potential electromagnetic pulse weapon (EMP) detonated in the high atmosphere that produces a power surge that would destroy the U.S. power grid.

All communications, cellphones, computers, bank ATMs, debit and credit cards, gas station pumps and lights would be disabled. U.S. civilization would last about three days before food and water were depleted and society descended into rival gangs of looters and vigilantes.

That may sound paranoid or alarmist, but it’s not. It’s a legitimate possibility.

This is why North Korea will not be allowed to have nuclear weapons.

This is why war is coming.

Jim Rickards' "Golden Solution" To America's Debt Crisis

Authored by Jim Rickards via DailyReckoning.com,

Right now, the United States is officially $20 trillion in debt. Over half of that $20 trillion was added over the past decade.

And it looks like annual deficits will be at the trillion dollar level sooner than later when projected spending is factored in.

Basically, the United States is going broke.

I don’t say that to be hyperbolic. I’m not looking to scare people or attract attention to myself. It’s just an honest assessment, based on the numbers.

Now, a $20 trillion debt would be fine if we had a $50 trillion economy.

The debt-to-GDP ratio in that example would be 40%. But we don’t have a $50 trillion economy. We have about a $19 trillion economy, which means our debt is bigger than our economy.

When is the debt-to-GDP ratio too high? When does a country reach the point that it either turns things around or ends up like Greece?

Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.

They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, they found, a turning point arrives…

At that point, a dollar of debt yields less than a dollar of output. Debt becomes an actual drag on growth.

What is the current U.S. debt-to-GDP ratio?

105%.

We are deep into the red zone, that is. And we’re only going deeper.

The U.S. has a 105% debt to GDP ratio, trillion dollar deficits on the way, more spending on the way.

We’re getting more and more like Greece. We’re heading for a sovereign debt crisis. That’s not an opinion; it’s based on the numbers.

How do we get out of it?

For elites, there is really only one way out at this point is, and that’s inflation.

And they’re right on one point. Tax cuts won’t do it, structural changes to the economy wouldn’t do it. Both would help if done properly, but the problem is simply far too large.

There’s only one solution left, inflation.

Now, the Fed printed about $4 trillion over the past several years and we barely have had any inflation at all.

But most of the new money was given by the Fed to the banks, who turned around and parked it on deposit at the Fed to gain interest. The money never made it out into the economy, where it would produce inflation.

The bottom line is that not even money printing has worked to get inflation moving.

Is there anything left in the bag of tricks?

There is actually. The Fed could actually cause inflation in about 15 minutes if it used it.

How?

The Fed can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce.

They could make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct “open market operations” in gold.

They will be a buyer if the price hits $4,950 per ounce or less and a seller if the price hits $5,050 per ounce or higher. They will print money when they buy and reduce the money supply when they sell via the banks.

The Fed would target the gold price rather than interest rates.

The point is to cause a generalized increase in the price level. A rise in the price of gold from $1,350 per ounce to $5,000 per ounce is a massive devaluation of the dollar when measured in the quantity of gold that one dollar can buy.

There it is — massive inflation in 15 minutes: the time it takes to vote on the new policy.

Don’t think this is possible? It’s happened in the U.S. twice in the past 80 years.

The first time was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75% rise in the dollar price of gold.

He did this to break the deflation of the Great Depression, and it worked. The economy grew strongly from 1934-36.

The second time was in the 1970s when Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it.

Gold went from $35 per ounce to $800 per ounce in less than nine years, a 2,200% increase. U.S. dollar inflation was over 50% from 1977-1981. The value of the dollar was cut in half in those five years.

History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time.

But what people don’t realize is that there’s a way gold can be used to work around a debt ceiling crisis if an agreement isn’t reached in the months ahead.

I call it the weird gold trick, and it’s never seen discussed anywhere outside of some very technical academic circles.

It may sound weird, but it actually works. Here’s how…

When the Treasury took control of all the nation’s gold during the Depression under the Gold Reserve Act of 1934, it also took control of the Federal Reserve’s gold.

But we have a Fifth Amendment in this country which says the government can’t seize private property without just compensation. And despite its name, the Federal Reserve is not technically a government institution.

So the Treasury gave the Federal Reserve a gold certificate as compensation under the Fifth Amendment (to this day, that gold certificate is still on the Fed’s balance sheet).

Now come forward to 1953.

The Eisenhower administration actually had the same debt ceiling problem we have today. And Congress didn’t raise the debt ceiling in time. Eisenhower and his Treasury secretary realized they couldn’t pay the bills.

What happened?

They turned to the weird gold trick to get the money. It turned out that the gold certificate the Treasury gave the Fed in 1934 did not account for all the gold the Treasury had. It did not account for all the gold in the Treasury’s possession.

The Treasury calculated the difference, sent the Fed a new certificate for the difference and said, “Fed, give me the money.” It did. So the government got the money it needed from the Treasury gold until Congress increased the debt ceiling.

That ability exists today. In fact, it is exists in much a much larger form, and here’s why…

Right now, the Fed’s gold certificate values gold at $42.22 an ounce. That’s not anywhere near the market price of gold, which is about $1,330 an ounce.

Now, the Treasury could issue the Fed a new gold certificate valuing the 8,000 tons of Treasury gold at $1,330 an ounce. They could take today’s market price of $1,330, subtract the official $42.22 price, and multiply the difference by 8,000 tons.

I’ve done the math, and that number comes fairly close to $400 billion.

In other words, tomorrow morning the Treasury could issue the Fed a gold certificate for the 8,000 tons in Fort Knox at $1,330 an ounce and tell the Fed, “Give us the difference over $42 an ounce.”

The Treasury would have close to $400 billion out of thin air with no debt. It would not add to the debt because the Treasury already has the gold. It’s just taking an asset and marking it to market.

If the debt ceiling isn’t raised, this gold certificate trick could finance the government for almost an entire year, because we have about a $400 billion deficit.

It’s not a fantasy. It was done twice. It was done in 1934 and it was done again in 1953 by the Eisenhower administration. It could be done again. It doesn’t require legislation.

Is the government working on this gold trick I just described? I don’t know.

But it’s suspicious that Treasury Secretary Mnuchin recently went to inspect the Fort Knox gold. He was only the third Treasury secretary in history to visit Fort Knox, and the first since 1948. The visit was highly, highly unusual.

I’ll be keeping an eye on this space, but the real message is that the solutions to current debt levels are inflationary.

They involve a dollar reset, or a dollar reboot. That means revaluing the dollar either through a higher gold price or marking the gold to market and giving the government money.

There’s a lot of moving parts here, but they all point in one direction, which is higher inflation. It’s the only way to keep America from going broke. Unfortunately, it will also make your money worth less.

America's Weapons: "The Dollar And The Drone"

Authored by Brian Maher via DailyReckoning.com,

It was said that “the guinea and the gallows” were the true instruments of British imperial power.

The guinea represented the coined wealth of Great Britain.

The gallows represented its… constabulary zeal in policing restless natives.

This is the 21st century of course… a time of enlightenment.

Today’s instruments of imperial power are no longer the guinea and the gallows.

No. Today’s instruments of imperial power are “the dollar and the drone.”

The dollar and the drone are America’s weapons.

Like the 19th-century pound (which replaced the guinea), today’s dollar is the world’s reserve currency.

Like the 19th-century pound, the dollar finances some two-thirds of global trade.

And the gallows?

Britain hanged its foreign trouble. America explodes its own in drone attacks.

Here is civilization; here is progress.

The sun eventually sank on the British Empire… the gallows came down… and the pound lost its global reserve status.

The U.S. will have its drones. But is its other weapon, the dollar, close to losing global reserve status?

Recent developments may tell…

The global oil trade has centered on the dollar since 1974, when Saudi Arabia agreed to enthrone the dollar as currency of the oil market.

If it was oil you wanted… it was dollars you needed.

But now China — world’s top oil importer — is preparing to create an oil market that bypasses the dollar entirely.

The plan would let China buy oil from Russia and Iran with its own currency, the yuan.

But the yuan is not a major reserve currency like the dollar.

Under this plan, Russia and Iran would be able to swap yuan for an asset far more desirable than Chinese scraps of paper — gold itself.

Perhaps that explains why China’s been hoarding so much gold in recent years?

Jim Rickards says this system marks the beginning of the end for the petrodollar:

China, Russia and Iran are coordinating a new international monetary order that does not involve U.S. dollars. It has several parts, which together spell dollar doom. The first part is that China will buy oil from Russia and Iran in exchange for yuan.

 

The yuan is not a major reserve currency, so it’s not an especially attractive asset for Russia or Iran to hold. China solves that problem by offering to convert yuan into gold on a spot basis on the Shanghai Gold Exchange…

 

This marks the beginning of the end of the petrodollar system that Henry Kissinger worked out with Saudi Arabia in 1974, after Nixon abandoned gold.

But it’s not only China, Russia and Iran that are out to dethrone King Dollar.

They’re joined by the rest of the “BRICS” nations — Brazil, India, South Africa.

Together they represent 25% of global economic output.

At last week’s annual BRICS summit in China, members announced full-throated support for China’s plan.

The message, clear as gin: The dollar’s days of “exorbitant privilege” must end.

And yesterday brought news that could further accelerate China’s de-dollarization plans…

Treasury Secretary Steve Mnuchin announced the U.S. would consider locking China out of the international dollar system if Beijing doesn’t cooperate with new sanctions against North Korea:

If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system. And that’s quite meaningful.

“Meaningful” might be one word for it. “Menacing” would be another.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a network that facilitates trillions of dollars in international money transfers each year.

It is the oil that lubricates the machinery of the international financial system — or as Jim Rickards styles it, “the oxygen supply that keeps the global financial system alive.”

And to cut off China’s oxygen?

“That is why China buys gold,” Jim Rickards tweeted this morning from London.

Our colleague Dave Gonigam of The 5 Min. Forecast half-jestingly wonders, “Is the Trump administration trying to kill off the U.S. dollar’s status as the globe’s reserve currency?”

Of course, the dollar will not lose reserve status tomorrow, next week, next year.

But the direction of travel seems clear enough.

Jim:

In 2000, dollar assets were about 70% of global reserves. Today, the comparable figure is about 62%. If this trend continues, one could easily see the dollar fall below 50% in the not-too-distant future.

How does one go bankrupt?

Slowly at first, said Hemingway — then all at once.

That’s how the dollar will likely lose its reserve status… slowly at first… then all at once…

Jim Rickards: The North Korean Endgame is Playing Out Now

Via Daily Reckoning,

As mounting tensions rise from the latest round of nuclear testing out of North Korea, Jim Rickards believes a considerable window is closing by the United States. The threat of a nuclear armed and capable North Korea is a line that the currency wars expert and macro analyst believes the United States will now allow to be crossed. Speaking on CNBC’s Capital Connection Rickards offered his latest critique of the restrictions and response by the international community on North Korea.

The interview began with a question what an oil embargo would mean for North Korea and how it would impact that country. Rickards blasts,

“North Korea has already beaten the world to the punch. They’ve been building up their strategic oil reserves. What that means is they have an estimated year’s worth of held in reserve and China has played a role in these things in the past.”

Jim Rickards is the editor of Strategic Intelligence and a best-selling author featured in the New York Times for his latest work, The Road to Ruin. Rickards’ worked on Wall Street for over three decades and has advised the U.S intelligence community on international finance, trade and financial warfare tactics.

“The area that would be effective for a reactionary measure would be for the United States to exclude the People’s Bank of China, the Industrial and Commercial Bank of China and some of the other major Chinese banks from within the U.S dollar payment systems. The U.S could completely shut down the U.S operations.”

On the keys to a successful response, Rickards notes that China plays a pivotal role. The macro analyst relays, “Ultimately, the Chinese are facilitating the North Korean finance. The move would be a kind of sanction with bite behind it. My expectation would be that China wouldn’t necessarily put pressure on North Korea. In reaction we could see escalation of further sanctions from the Chinese against the United States leaving for a trade and financial war without solving the North Korean situation.”

Speaking on the impact of nuclear development in the country the intelligence community advisor warns, “Currently, North Korea is in what is classified as a ‘break out.’ Under typical nuclear development phases, we’ve normally seen countries that are cheating on nuclear development programs complete their operations in baby steps.  In the process they proceed gradually and when they do draw attention will stall programs until beginning again at a later date. North Korea has put that pattern aside and is in complete breakout.”

“To give a U.S football comparison, they’re in the red zone and the quarterback is simply about to throw a pass into the end zone. The leader of North Korea is going for it and not hiding anything.

 The leadership in North Korea is hoping that the United States is bluffing and that they will be able to get a serviceable intercontinental ballistic missile (ICBM) with a hydrogen bomb that could threaten or destroy Los Angeles before the U.S could do anything. The United States is facing a six month window to act and I believe they will.”

When asked about the preemptive strike threat by the United States and what it means for China the currency wars expert narrowed in, “China will be looking out for its own interest. They will have great concern over a U.S ground invasion in North Korea and as was the case in 1951 they would be highly concerned over any proximity of forces to the border. There would also be concerns that the U.S is attempting to reunify the Korean Peninsula under U.S strategic interests.”

“The way I expect that the U.S government will approach the situation is to approach China in outlining that it will be functioning toward strategical means. What that would signal is that they are not going to get anywhere near the Yalu River and that special operations and cyber warfare will be a key role.”

“My expectation is that the first steps will see the country going dark by shutting down the power grid and cutting off the command and control operations. From there they will use psychological warfare tactics. The objective will be to disrupt all North Korean operations before the heavy bombers move in. North Korea will be limited and reduced in its artillery response.”

“All of that will be relatively close to the demilitarized zone (DMZ) region. By indicating to China that when the U.S military operation is over, they will be looking to open up communications and negotiations to reunify stability on mutually acceptable terms.”

As Rickards noted previously, North Korea detonated a nuclear weapon early on Sunday, Sept. 3. This was the sixth time they had done so, but the first time since their ICBM missile tests and the first time under President Trump’s administration.

This test was different in another important way. It is estimated to be a hydrogen bomb instead of an atomic bomb. The difference is significant.

Both types of nuclear weapons work by releasing neutrons in critical-state radioactive material, either highly enriched uranium or plutonium. The difference is that the atomic bomb works by fission, literally “splitting” an atom, so that a neutron is emitted, collides with other atoms and causes a chain reaction with an enormous release of energy.

The hydrogen bomb works by fusion. Atomic particles are “fused,” or pushed together, in a way that destabilizes the atom and also releases a neutron.

Both methods start a chain reaction. But the fusion method in a hydrogen bomb is orders of magnitude more powerful. The destructive force can be 100 or even 1,000 times greater than that of an atomic bomb.

This gives North Korea many more options in their attack scenarios.

They can put more destructive force in a smaller space, thereby achieving the warhead miniaturization needed to fit on an ICBM.

They do not have to worry as much about accuracy. An atomic weapon has to hit the target to destroy it. A hydrogen bomb just has to come close. This means that North Korea can pose an existential threat to U.S. cities even if its missile guidance systems are not quite perfected. Close is good enough.

Finally, a hydrogen bomb gives North Korea the ability to unleash an electromagnetic pulse (EMP). In this scenario, the hydrogen bomb does not even strike the Earth; it is detonated near the edge of space. The resulting electromagnetic wave from the release of energy could knock out the entire U.S. power grid. Good luck with your bitcoins in that scenario.

Got gold?

These threats are existential from a U.S. perspective. Deterrence does not work when the opponent has so little to lose.

Is This China's Next Step To Destroy The Dollar?

Authored by Byron King via DailyReckoning.com,

China is currently modifying the terms of its oil trade with Saudi Arabia. Specifically, China is working on a deal to pay for Saudi oil using Chinese yuan. This effort poses a direct threat to the security of the dollar.

If this China-Saudi deal happens — yuan for oil — it’s another step closer to the grave for the petrodollar, which has dominated global finance since 1974. You can revisit Jim Rickards article about the Assault on the Dollar, here.

To recap, the petrodollar is weakening because the dollar is losing power as the world’s reserve currency. This is similar to the way pounds sterling gradually fell out of favor during the decline of the British Empire. The decline may take a long time, but what we’re seeing today is another step in the death march of the dollar.

Since 1974, Saudi has accepted payment for almost all of its oil exports — to all countries — in dollars. This is due to an agreement between Saudi and the U.S., dating back to the days of President Nixon.

Beginning about 15 years ago, China ceased being self-sufficient in oil, and began buying Saudi oil. As per all Saudi customers, China had to pay in dollars. Even today, China still pays for Saudi oil in U.S. dollars and not yuan, which perturbs China’s leaders.

Since 2010, China’s total oil imports have nearly doubled. According to Bloomberg News, China has surpassed the U.S. as the world’s largest oil importing nation. Here’s a chart, showing the trend.

As China imports more and more oil, the idea of paying for that oil in yuan instead of dollars becomes more critical. China does not want to use dollars to buy oil. So, China is beginning to squeeze Saudi over the form of currency in which their oil trade is conducted. China is doing this by steadily lowering its oil purchases from Saudi.

Presently, China’s three top oil suppliers are Russia, Saudi and the West African nation of Angola. Backing-up these three key suppliers are a combination of sources in Iran, Iraq and Oman, which help to diversify China’s oil-supply chain.

In the past few years, China has shifted oil purchases away from Saudi, and Russia’s oil exports have risen from 5% to 15% of the Chinese total.

China imports more oil from Russia, Iran, Iraq and Oman; less from Saudi.

Saudi’s share of Chinese imports has dropped from over 25% in 2008, to under 15% now. Meanwhile, Saudi competitors Russia, Iran, Iraq and Oman are selling more oil to China.

Saudi would like to reverse this declining trend of oil-trade with China. However, these kind of major oil flows don’t just happen in a vacuum.

There’s a good reason why Russian oil sales to China are increasing. As you’ll see in Nomi’s article, trade and financial services are often closely linked. Over the past few years, China has deepened its trading roots with Russia — now, China pays for Russian oil in yuan. Russia, in turn, uses yuan to buy goods from China.

Beyond trade in goods, within the past six months Russia has set up a branch of the Bank of Russia in Beijing. From there, Russia can use its Chinese yuan to buy gold on the Shanghai Exchange. In a sense, Chinese-Russian oil trade is now backed-up by a “gold standard.”

Looking ahead, Saudi Arabia will find itself more and more locked-out of the Chinese oil market if it won’t sell oil for yuan. But to do this, the Saudis must move away from U.S. dollars— and from petrodollars — if Saudi wants to maintain and increase access to China’s oil market.

We’ll know more about the likelihood of this after Donald Trump’s tour of the Middle East.

If Saudi begins accepting yuan for oil, all bets are off on the petrodollar. Yuan-for-oil will entirely change the monetary dynamics of global energy flows. I expect the U.S. dollar to weaken severely when that news breaks.

Much of this oil-for-yuan news is public information. Yet, for some strange reason, there’s a form of blindness within western policymaking and media circles concerning the implications of yuan-for-oil. The idea is so “off-the-wall” that many policy leaders simply ignore it.

Ignore away. But we could wake up one morning in the midst of a massive currency crisis, in which dollar values are falling and oil prices in dollars are soaring.

'10,000,000 people will march on Washington if they Impeach Trump. They will be armed. No kidding.' - Banker

via Soren K Group and Marketslant

Because He"s TNT

Sometime contributor Bon Scott who happens to be not only a Trump supporter but more importantly a Constitutional expert and Big  "L" Libertarian had this to say in response the "Impeach Trump" escalation.

10,000,000 people will march on Washington if they try to impeach Trump... they will be heavily armed. I will be one of them. No kidding

While our colleague seems given to hyperbole consider this. Last year as early as February he said:

"Trump can win. Ignore the polls. Polls are meaningless in an election with so many “shock events”. The truth is Donald Trump can win the election in a landslide. 

That was true. We quoted him in our October 2016 post HERE

SKG contributor Vince Lanci echoed Bon"s words in this Aug post:

On the flip side Trump fans should be happy.  If past calls are any indication Trump will indeed win in  landslide..

Bon also said in our July Post

Trump will spend like a drunken sailor

That Story HERE

This is also true in Trumps"s attempts if not in execution yet. 

Can you argue With Bon?

The truth is, while our pseudonymous contributor is given to outrageously couched statements, he  has picked up  on something that is close to our hearts.  You can  see it in how polls are just wrong consistently. And to us that is explainable. The statistical world relies to heavily on  polls. Polls are merely "snapshots" of moments.

What is not revealed in polls is the subjectivity of the person being polled!. We know the bias of pollsters. But what has been ignored for years is subjective probability. That concept relates to trends when humans are involved.

Do you think people are going to be honest with pollsters anymore? No, they say what you want to hear so they can move on. Voting is very private. And people  are taking back that privacy. On a broader scale, subjective or conditional probability includes drifts or trends.  Nassim Taleb is a key proponent of this, and we count him  as a genius in  taking his options  knowledge and applying it to many fields in need of improvement. We also  enjoy his lambasting those dogmatists that do not get it.  Jim Rickards is another subscriber to Bayesian  theorems. 

What Is  Bayesian  Probability?

Simply put, is it a 50/50 chance the sun rises tomorrow? Statistically the answer is yes to an uneducated caveman seeing it for the first time. But how many times can that caveman stick with those stats when 5 years later the sun continues to rise?

Personal example: If it is 50/50 that a coin  lands on heads or tails, then how come I could at one time flip a coin and make it land on heads 10x in a row? Statisticians will say " Luck, law of large numbers will fix that". Sorry guys that is just not true.

Here is why. I practiced coin flipping at one point in my trading career to make it a skill. I measured how high it had to go, what side the coin had  to start on, and how hard I had to flip it. Was I cheating? No. What people see as randomness is actually a skill based event via intense practice. Had I let the coin land on the ground it would have been randomized. But I did not.

 

Pollsters Do Not Get it

This is the essence of the core ignorance of pollsters and statisticians. They ignore the human factor. And with that, they miss grass roots macro  trends like the populism that triggered Brexit. They do not see what our friend Bon does, that people are not numbers, and the more we rely on  models dogmatically,  the more likely we are to be surprised. Or as he would say : Dont be stupid! Trump is going to win in a landslide.

So while numbers are counted by Nate Silver, conditional/ subjectivity of the person polled is not factored in. This is the problem in modern  polling and stats. 

In trading we used to Fade brokers to protect ourselves from this. We were taught statistically that it is 50/50 every order is buy/sell. But when  a  broker came in everyday at the same time for 2 months straight and bought from us, that concept meant shit. We used to say:  Crap, how high do I have to make this price so he would not buy from us? And the answer was essentially NONE. That broker was a buyer and would continue to be one until he began unwinding  his position.

 

Option Traders Don"t Get it

At the time I understood this as Bayesian probability and explained the rationale for "fading" markets to my boss and mentor. He disagreed. He did not get it. He was an extremely hard working savant who in the end became a bitter detractor despite my idol worship and his own immense  success. When you quit working for him, with only a couple exceptions, you were the enemy.  All this because the man, like the modern pollster could not grasp that whenever human behaviour is involved, probability has a subjective factor.

What are the Odds of a DC March if a Populist President is Impeached?

Can we afford to ignore "Bon", our colleague who is quite sane, does not represent the lunatic fringe, and is intimately aware that while Trump may not be a beltway darling, he has governed through populism.

Witness how Trump castrated the media with his "Fake News" press conference. He literally made people reject the MSM info as false and further likely turned people off to even looking at it. 

He effectively put them in a box where they could not sell their wares anymore.

This is no easy task. Winning elections via populism is easy game. But actually governing that way is not easy. We"d dare say,  it has not been done ever in a Republic.

So here we are. A populist-ly elected President who has thus far governed through populism. A president with a loyal following that is likely to not take an unconstitutional impeachment sitting down. Trump will not go quietly into the night. He will appeal to the public. He is a narcissist. And to his credit, narcissists are  all about winning popularity contests.

And against him are now the legal types who will use the Constitution to undermine it.

To Bon we joked:

"To get you and your pals to disburse, all we have to do is kill the wifi."

To which he responded:

That isn"t enough. You may get some to go home with Beer bribes, but the core people mean business. They will not stand for this.

 

People vs. Elites

Do you want to bet against a DC march  if Trump is impeached? Do you want to be short Gold or long stocks if that happens?

A march would be an exponential increase in uncertainty. The people vs the Elites. And in the end with Elitist power at their disposal including manipulating the press, social media, revoking freedom of speech and rights to assemble and restricting gun ownership; it wont be enough. There will be the fallback to the use of force. People in power always lean on that when  needed. And while they may have learned marketing and manipulation tricks, at bottom, there is always metal hammer inside that velvet wrapper you see.  

 

People are fed up. Impeach  at Your Own Risk

We personally own 2 guns. A Benelli shotgun for skeet, and a 357 magnum for target range shooting. As believers in gun control laws for non law abiding citizens, we will not be inclined to subscribe to giving up what protects us from  a deep state that does what it wants and when it loses, changes the rules. This is the potential beginning of  the libertarian left and right People aligning against the authoritarian left and right Elitists. 

 

Impeachment Adds Uncertainty, Not Closure

So this will not end with impeachment. It will only stir more problems at grass roots levels. To tell 50% of the country that already distrusts its institutions that those  same institutions are collaborating to kill off their president may be a spark of revolt unlike anything seen  since the 1960s.

This is the cause that would unite libertarians, rednecks, NRA types, uneducated (but no less human and entitled to constitutional rights) and the silently suffering suburban middle class under one banner. People evolve at their own pace. Stop telling us what is best for us. That is not working out so well for you in the world. Don"t do it here

2016 Debt Binge Produces (Surprise!) 2017 Inflation; Guess What That Means For 2018?

Authored by John Rubino via DollarCollapse.com,

Just as everyone was finally accepting the idea of deflation and negative interest rates, inflation decides to pay a return visit. In the past week, articles with the following headlines appeared in major publications around the world:

Swiss inflation rises at highest monthly rate in 5 years

China February producer inflation fastest in nearly nine years

Year-over-year import prices at highest level in five years

ECB keeps bond-buying, rates unchanged amid inflation flare-up

Food inflation doubles in a month as UK shoppers start to feel the pinch

What happened? Well, towards the end of 2015 most of the world’s major governments apparently got spooked by deflation and decided to ramp up their borrowing and money creation. China, for instance, generated the following stats in 2016:

• New loans totaling 12.65 trillion yuan, or $1.8 trillion.


• M2 money supply growth of 11%.


• Debt-to-GDP ratio jump from 254% to 277%.

In Europe, the European Central Bank ramped up its bond buying program, pumping about a trillion newly-created euros into the Continental economy:

And the US increased its federal government debt by over $1 trillion, presumably spending the proceeds on things that raise wages or increase the demand for commodities.

Since there’s no way for the growth of global production to match this blistering pace of new money creation, the result is higher prices for just about everything. Oil and most other industrial materials are more expensive, wages are rising, long-term interest rates (the cost of money) are up; you name it, it went up in the past year.

What comes after a debt-driven spike in inflation? History is pretty clear on this one: instability, as rising interest rates spook the fixed income markets and rising business costs spook stock speculators. Toss in global political upheaval as populism (the inevitable result of previous bad policies) sweeps the globe, and the “Great Moderation” of the past year – which was as it turns out just a bunch of clueless people borrowing a ton of money – will give way to something a lot more interesting.

The only amusing part of what’s coming will be the disarray among the economists and politicians who have been advocating a higher inflation target, as if a modern economy is a thermostat that can be dialed up and then back down by an omniscient homeowner. As Jim Rickards likes to say, it’s not a thermostat, but a nuclear reactor that can, if allowed to get too far out of balance, go critical.

What Form Will The Great Confiscation Take - And How Can We Prepare?

Submitted by John Rubino via DollarCollapse.com,

For what seems like decades, people have been warning that the next time some over-leveraged corner of the financial system implodes, bank and brokerage accounts will be either confiscated by desperate governments or lost during the resulting chaos.

Here, from 2012, is a representative warning from gold mining eminence grise Jim Sinclair:

My Dear Extended Family,

In bankruptcy of your bank, broker or fund, you can find your assets in the majority of cases are backing the liabilities of the entity in front of yourselves. This is why you must act to protect yourself.

No one in this financial world is going to do it for you, and few will have the courage to recommend you escape Street Name. You can wake up one day and find out that your investments are gone.

The insurance programs will function as long as the incidents of bankruptcy are isolated events.

In a systemic collapse the insurance funds are not capitalized to meet the potential obligations. The guarantor you are relying on will have to be bailed out.

For securities there are only three ways to hold them:

1. Street name.
2. Direct registration.
3. Certificate form.

Anyone advising you to stay with the Street Name option is a babbling idiot not interested at all in your welfare.

In street name the inferred ownership is the broker or bank, not you. In Direct Registrationand Certificate form, the distinct ownership is you.

In 99.9% of the cases of retirement accounts the answer is you are in Street Name.

How are your securities held? Do you even know? I dare you to ask!

Do you know what your broker’s capital ratio is? Find out as that number is the order of magnitude at which your broker is gambling on with primarily your money. I dare you to ask.

This time around those investors that are too lazy to consider protecting themselves will be demolished.

How would you like your gold shares at $3500 gold, outperforming gold, and one morning you wake up to having nothing anymore? You now are behind the back burner in a bankruptcy situation with any fiduciary.

The system and their minions will do everything to keep you trapped in Street Name. Articles will be published trying to put you back to sleep on this issue.

Wake up, please.

The fact that this mass confiscation hasn’t yet happened doesn’t mean it won’t, says Jim Rickards, whose previous bestsellers Currency Wars and The Death of Money were already pretty apocalyptic. He believes that a coordinated closure/restructuring/confiscation of the banking/brokerage industry is imminent. Here’s an excerpt from a recent column:

In that interim period between the crisis and the time the IMF can react, central banks will be paralyzed. They’re likely going to lock down the system.

When I say lock down, they’ll start with money market funds. I can’t think of a greater misnomer than the money market funds. People think that money market funds are money. They’re not money; they’re mutual funds regulated by the SEC. People think they can just call up their broker, sell to the money market fund and the money’s in my bank the next day.

That will not be true in this crisis because everyone will be doing the same thing. That is what happened in 2008 when Ben Bernanke and Hank Paulson went to the White House and said to the President that the system’s melting down and he must act.

That was such a shock then, that when it happens again they’re not going to give you your money. They’re going to lock it down. The problem is that when it is spreading you can’t just lock down part of the system.

If you lock down money market funds, people are just going to take their money out of the banks. Then you’re going to have to close the banks. Then people are going to sell their stocks, then you’re going to have to close the stock market. Every time you shut one path to liquidity, people are going to turn to another path.

It happened in part in 1914, 1931, 1933 and to gold in 1971. There’s no precedent for a total freeze but we’re getting closer to that point.

The question is, how do you protect yourself against that? There’s only so much you can do.

I don’t recommend running down and pulling all your money out of the bank. I would not have more than the insured amount, which in the U.S. is $250,000. You can spread it between your selected banks so that each is backed and insured up to the limit.

Rickard’s solution is right out of the stacker playbook:

In the world described, the dollar price of gold will approach the $10,000-level if not much higher. But when all of this begins to play out, you’re not going to be able to get gold.

Because of this, gold and silver need to be in physical form, in safe storage, and a non-bank. Putting it in a safety deposit box in a bank is troublesome because by the time you want it the most, that will be when the banks are going to be closed.

Charles Hugh Smith offers some other possible responses:

So what’s difficult to expropriate? It’s impossible to expropriate one’s skills, experience and social capital. These are intangible forms of capital and so they cannot be confiscated like gold, currency, land, etc.

Land and homes are difficult to expropriate for two reasons: private property is the backbone of capitalism and democracy, and the state confiscating private property would very likely spark a political insurrection that would diminish or threaten the power and wealth of the privileged Elites.

Secondly, it’s very costly for the state to maintain the productive output of real property it has confiscated. Guards must be posted, sabotage repaired, and the immense difficulties of coercing a rebellious populace to continue working what they once owned for the benefit of the state and its privileged Elites must be solved and paid for.

The state can expropriate farms, orchards and workshops for back taxes (or some similar extra-legal methodology), but how do you force people to work these properties productively?

As a general rule, whatever the super-wealthy own will be protected from expropriation. Private real property is the foundation of the Elites’ wealth, and while the land of debt-serfs may well be confiscated for back taxes (the wealthy will buy exemptions from rising taxes), those who own land and buildings free and clear constitute a political force to be reckoned with.

The state will also have difficulty confiscating assets that are outside its reach.This explains the popularity of owning assets in other nations, and the debate over cryptocurrencies: will states be able to confiscate all cryptocurrencies at will, or is that technically unfeasible?

The main takeaway is this: your skills, knowledge and social capital will emerge unscathed on the other side of the re-set wormhole. Land and real property you own free and clear (no debt) is likely to remain in your possession, as long as you can pay soaring taxes/junk fees during the crisis phase. Your financial assets held in centrally controlled institutions will not make it through unscathed; they are simply too easy for central authorities to expropriate.

It’s easy, as the world’s zombie economies just keep shuffling along, to start assuming that the current system will endure forever. That would be wrong, and almost certainly the above warnings will someday seem prescient. All the more reason to forget about timing, and keep buying real assets.