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Venezuela Devalues By 46%

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Venezuela was ahead of the rest when Chavez repatriated the country’s gold. Now it looks to have stolen a lead in the currency wars. If history has thought us anything it’s that those who devalue fair best. The question remains who will be next to devalue so openly or will nations continue to do so via stealth mode via money printing.

While the rest of the developed world is scrambling here and there, politely prodding its central bankers to destroy their relative currencies, all the while naming said devaluation assorted names, “quantitative easing” being the most popular, here comes Venezuela and shows the banana republics of the developed world what lobbing a nuclear bomb into a currency war knife fight looks like:

  • VENEZUELA DEVALUES FROM 4.30 TO 6.30 BOLIVARS
  • VENEZUELA NEW CURRENCY BODY TO MANAGE DOLLAR INFLOWS
  • CARACAS CONSUMER PRICES ROSE 3.3% IN JAN.

And that, ladies and gents of Caracas, is how you just lost 46% of your purchasing power, unless of course your fiat was in gold and silver, which just jumped by about 46%. And, in case there is confusion, this is in process, and coming soon to every “developed world” banana republic near you.

From Bloomberg

Venezuela devalued its currency for the fifth time in nine years as ailing President Hugo Chavez seeks to narrow a widening fiscal gap and reduce a shortage of dollars in the economy.

The government will weaken the exchange rate by 32 percent to 6.3 bolivars per dollar, Finance Minister Jorge Giordani told reporters today in Caracas. The government will keep the currency at 4.3 per dollar for some products, he said.

A spending spree that almost tripled the government’s fiscal deficit last year helped Chavez win his third term. Chavez ordered the devaluation from Cuba, where he is recovering from cancer surgery, Giordani said. Venezuela’s fiscal deficit widened to 11 percent of gross domestic product last year from 4 percent in 2011, according to Moody’s Investors Service.

The move can help narrow the budget deficit by increasing the amount of bolivars the government gets from taxes on oil exports. While a weaker currency may fuel annual inflation of 22 percent, it may ease shortages of goods ranging from toilet papers to cars.

In the black market, the bolivar is trading at 18.4 per dollar, according to Lechuga Verde, a website that tracks the rate. Venezuelans use the unregulated credit market because the central bank doesn’t supply enough dollar at the official rates to meet demand.

Source: ZeroHedge, Bloomberg

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Bill Gross: Fort Knox Gold A Fairy Tale

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Bill Gross (PIMCO) has penned an article entitled “Money for nothin’ writing checks for free”. In it he criticizes the Fed for creating money out of thin air using the fairy tale of gold in Fort Knox as a backup.

Long term creation of debt has serious consequences through inflation. In other words the Governments may have found a way of creating debt for free but ultimately the people pay the price.

It was Milton Friedman, not Ben Bernanke, who first made reference to dropping money from helicopters in order to prevent deflation. Bernanke’s now famous “helicopter speech” in 2002, however, was no less enthusiastically supportive of the concept. In it, he boldly previewed the almost unimaginable policy solutions that would follow the black swan financial meltdown in 2008: policy rates at zero for an extended period of time; expanding the menu of assets that the Fed buys beyond Treasuries; and of course quantitative easing purchases of an almost unlimited amount should they be needed. These weren’t Bernanke innovations – nor was the term QE. Many of them had been applied by policy authorities in the late 1930s and ‘40s as well as Japan in recent years. Yet the then Fed Governor’s rather blatant support of monetary policy to come should have been a signal to investors that he would be willing to pilot a helicopter should the takeoff be necessary. “Like gold,” he said, “U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

 
Mr. Bernanke never provided additional clarity as to what he meant by “no cost.” Perhaps he was referring to zero-bound interest rates, although at the time in 2002, 10-year Treasuries were at 4%. Or perhaps he knew something that American citizens, their political representatives, and almost all investors still don’t know: that quantitative easing – the purchase of Treasury and Agency mortgage obligations from the private sector – IS essentially costless in a number of ways. That might strike almost all of us as rather incredible – writing checks for free – but that in effect is what a central bank does. Yet if ordinary citizens and corporations can’t overdraft their accounts without criminal liability, how can the Fed or the European Central Bank or any central bank get away with printing “electronic money” and distributing it via helicopter flyovers in the trillions and trillions of dollars?
 
Well, the answer is sort of complicated but then it’s sort of simple: They just make it up. When the Fed now writes $85 billion of checks to buy Treasuries and mortgages every month, they really have nothing in the “bank” to back them. Supposedly they own a few billion dollars of “gold certificates” that represent a fairy-tale claim on Ft. Knox’s secret stash, but there’s essentially nothing there but trust. When a primary dealer such as J.P. Morgan or Bank of America sells its Treasuries to the Fed, it gets a “credit” in its account with the Fed, known as “reserves.” It can spend those reserves for something else, but then another bank gets a credit for its reserves and so on and so on. The Fed has told its member banks “Trust me, we will always honor your reserves,” and so the banks do, and corporations and ordinary citizens trust the banks, and “the beat goes on,” as Sonny and Cher sang. $54 trillion of credit in the U.S. financial system based upon trusting a central bank with nothing in the vault to back it up. Amazing!
Basically the Governments fund their debt for free.
But the story doesn’t end here. What I have just described is a rather routine textbook explanation of how central and fractional reserve banking works its productive yet potentially destructive magic. What Governor Bernanke may have been referring to with his “essentially free” comment was the fact that the Fed and other central banks such as the Bank of England (BOE) actually rebate the interest they earn on the Treasuries and Gilts that they buy. They give the interest back to the government, and in so doing, the Treasury issues debt for free. Theoretically it’s the profits of the Fed that are returned to the Treasury, but the profits are the interest on the $2.5 trillion worth of Treasuries and mortgages that they have purchased from the market. The current annual remit amounts to nearly $100 billion, an amount that permits the Treasury to reduce its deficit by a like amount. When the Fed buys $1 trillion worth of Treasuries and mortgages annually, as it is now doing, it effectively is financing 80% of the deficit for free.
 

The BOE and other central banks work in a similar fashion. British Chancellor of the Exchequer (equivalent to our Treasury Secretary) George Osborne wrote a letter to Mervyn King, Governor of the BOE (equivalent to our Fed Chairman) in November. “Transferring the net income from the APF [Asset Purchase Facility – Britain’s QE] will allow the Government to manage its cash more efficiently, and should lead to debt interest savings to central government in the short-term.” Savings indeed! The Exchequer issues gilts, the BOE’s QE program buys them and then remits the interest back to the Exchequer. As shown in Chart 1, the world’s six largest central banks have collectively issued six trillion dollars’ worth of checks since the beginning of 2009 in order to stem private sector delevering. Treasury credit is being backed with central bank credit with the interest then remitted to its issuer. Should interest rates rise and losses accrue to the Fed’s portfolio, they record it as an accounting liability owed to the Treasury, which need never be paid back. This is about as good as it can get folks. Money for nothing. Debt for free.

Investors and ordinary citizens might wonder then, why the fuss over the fiscal cliff and the increasing amount of debt/GDP that current deficits portend? Why the austerity push in the U.K., and why the possibly exaggerated concern by U.S. Republicans over spending and entitlements? If a country can issue debt, have its central bank buy it, and then return the interest, what’s to worry? Alfred E. Neuman for President (or House Speaker!).
So whats the problem of issuing debt for free?
The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold. To date, central banks have been willing to accept that cost – nay – have even encouraged it. The Fed is now comfortable with 2.5% inflation for at least 1–2 years and the Bank of Japan seems willing to up their targeted objective to something above as opposed to below ground zero. But in the process, zero-bound yields and their QE check writing may have distorted market prices, and in the process the flow as well as the existing stock of credit. Capital vs. labor; bonds/stocks vs. cash; lenders vs. borrowers; surplus vs. deficit nations; rich vs. the poor: these are the secular anomalies and mismatches perpetuated by unlimited check writing that now threaten future stability.

Ben Bernanke has publically acknowledged these growing disparities. “We are quite aware,” he said in November 2011, “that very low interest rates, particularly for a protracted period, do have costs for a lot of people… I think the response is, though, that there is a greater good here, which is the health and recovery of the U.S. economy… I mean, ultimately, if you want to earn money on your investments, you have to invest in an economy which is growing.”

That growth now is to be measured each and every employment Friday via an unemployment rate thermostat set at 6.5%. We at PIMCO would not argue with that objective. Yet we would caution, as Bernanke himself has cautioned, that there are negative consequences and that when central banks enter the cave of quantitative easing and “essentially costless” electronic printing of money, there may be dragons.

Investment conclusions
Investors should be alert to the longterm inflationary thrust of such check writing. While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the “out” years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies.

Source: PIMCO

UK: Bank of England Has New Money Printing Trick

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You can always count on bankers to find new ways of bending accounting rules but in this case the Bank of England is now able to supply the UK Government with £35bn via the back door at the same time it has announced a halt to QE.

 

 

 

So now we know why the Bank of England’s Monetary Policy Committee called a halt to more Quantitative Easing this week – it’s because the Chancellor and the Governor of the Bank of England have concocted a backdoor way of doing the same thing.

The latest little (actually quite big at a tidy £35bn) money printing wheeze comes about as close to outright monetising of government spending as it is possible for the Bank of England to go without simply creating the money and handing it by the lorry load to the Treasury, a la Weimar.

What the Treasury has decided to do is take the accumulated interest payments on the stock of government debt the Bank of England has bought under quantitative easing, and credit it to the Government’s books rather than the Bank of England’s. The total is £35bn, of which the government intends to take £11bn this financial year and £24bn next.

This obviously helps the deficit in these two years quite a lot, creating space, should the Chancellor wish to take it, to ease back a little on the fiscal squeeze. For instance, he might choose to take the shadow Chancellor’s advice and further delay a scheduled increase in fuel duties. It also makes it easier for Mr Osborne to meet his fiscal mandate of eliminating the structural deficit within five years. Even the supplementary target of falling debt as a percentage of GDP by the end of the parliament – the one which City forecasters now widely believe Osborne will miss without further austerity – is marginally benefited by the latest piece of sleight of hand. It’s as if Osborne has died and been reborn as Gordon Brown, who famously manipulated his own fiscal rules to destruction.

The Government excuses its actions by saying that it is only bringing itself into line with practice in Japan and the US, the other major economies to be practicing substantial QE right now. It might also be argued that to the extent the European Central Bank indulges in bond purchases, it practices something quite similar too.

In any case, you might reasonably think that it doesn’t really matter how the government accounts for the interest on the Bank’s stock of gilts. Since the Bank of England is 100pc owned by the Treasury, the government has in essence only been paying interest to itself, so why not just stop the charade and save the money?

Wrong, wrong, wrong. The justification for keeping the interest is that it creates a buffer to fund expected losses on the gilts when the Bank of England comes to unwind its quantitative easing programme. These losses are now going to have to be met by the government directly at some stage in the future. Alternatively, the government could simply ignore them or write-them off. The Government is transferring the losses from today until tomorrow. The thin line which separates monetary from fiscal policy is being crossed in a way which substantially undermines the Bank of England’s claim to independence.

Source: Telegraph

China Joins The Party And Turns On The Printing Press

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Amidst the story of Chinese city Dongguan (pop 10million) in the largest province is on the verge of bankruptcy, it has been reported that the Chineese Central Bank is going to join the party and get in on the “beggar thy neighbour” act. The injection of liquidity is to help foster a soft landing to an ever ailing economy. Over $57 billion to be added along with an investment of $1.6 trillion in infrastructure.

China´s Central Bank has decided to join the Fed and ECB in their ´pump in money´ move, injecting a record $57.9bln into the financial system. This is to help create a soft landing for the number two economy amidst the global turbulence.

Such injections can help cut lending rates, but full-fledged success shouldn’t be expected before 2013, Vedomosti daily quotes analysts from the Economist Intelligence Unit.

China’s Government is also trying to heat up its economy by investing $1.6trln in infrastructure.

Despite helping the Chinese economy out of the recession in 2009, such measures this time around could turn out to be inefficient, say HSBC analysts. Today the country faces problems of so-called artificial overheating: sky–high inflation is coupled with a “destructive bubble” in a housing market and growing debt, analysts specified.

As the global economic outlook becomes increasingly gloomy, export oriented China, sometimes referred to as the World Workshop, is set to grow at a much slower pace of around 7% over the next decade, Jim O’Neill, Chairman of Goldman Sachs Asset Management, told Reuters.

The profits of Chinese industrial giants fell 6.2% year on year in August to reach $60.4bln, following a 5.4% drop in July, says the National Bureau of Statistics of China.

 

Source: RT.com

Spain Is Printing Its Own Euros

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When the SHTF, central banks always resort to money printing. Thats all they know. Just before Ireland was forced into requested a bailout, the Irish Central Bank had to provide ELA to Irish banks to keep the system from collapsing. Reports from WSJ are that the Spanish Central Bank has had to resort to printing money ELA because of the dire situation in Spain. Meanwhile the bank jog/run continues.

As we described in detail yesterday, things are going from worse to worserer as the problems in Spain – more specifically in its banking sector – are deepening as deposit flight accelerates. As the WSJ notes PIMCOs’ comment: “A bank ‘jog’ is happening in Spain – the private sector is leaving the banking system.” But the Bank of Spain isn’t leaving anything to chance. The WSJ disconcertingly highlights that last month the central bank appears for the first time to have activated an emergency lending program that will enable its banks to borrow from the Bank of Spain directly, bypassing the ECB’s relatively tough collateral demands.

The so-called Emergency Liquidity Assistance program is shrouded in secrecy, and the Bank of Spain won’t confirm that it has been used. The Bank of Spain appears to have doled out about EUR400mm under the program, based on publicly available data. That would make Spain at least the fourth euro-zone country – following Greece, Ireland and Portugal – to use the ELA, which generally is reserved for situations when banks have exhausted all other financing options.

As we pointed out yesterday, this would appear to confirm a “full-blown bailout” is imminent, as the collateral problems mount.

 and The Bank of Spain was quick to respond to this reality (with a denial):

Bank of Spain comments in e-mailed statement on WSJ report that central bank provided ELA to lenders:

Sept. 5 (Bloomberg) — Bank of Spain says “liquidity provision to banks other than ordinary monetary policy operations represents an insignificant fraction of total lending by the Bank of Spain to financial system.”

Measures adopted to lift restrictions on interest rates on deposits is not aimed at helping banks attract deposits, central bank says

 

Source: ZeroHedge

Greece Is Printing Its Own Euros And Everyone Turns A Blind Eye

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Nobody is brave enough to finally pull the plug on Greece and force it to exit the euro so the game continues. The Troika are due to release their report in September but in the meantime on 20 August a €3.2 billion bond is due to be paid. The ECB has stopped accepting Greek collateral. So where does Greece get its funding from? And here lies the fragility of the monetary system because Greek is printing its own money and everyone is turning  a blind eye.

A lot of politicians in Germany, but also in other countries, issue zingers about a Greek exit from the Eurozone and the end of their patience. Yet those with decision-making power play for time. They want someone else to do the job. Suddenly Greece is out of money again. It would default on everything, from bonds held by central banks to internal obligations. On August 20. The day a €3.2 billion bond that had landed on the balance sheet of the European Central Bank would mature. Europe would be on vacation. It would be mayhem. And somebody would get blamed.

So who the heck had turned off the dang spigot? At first, it was the Troika—the austerity and bailout gang from the ECB, the EU, and the IMF. It was supposed to send Greece €31.2 billion in June. But during the election chaos, Greek politicians threatened to abandon structural reforms, reverse austerity measures already implemented, rehire laid-off workers….

The Troika got cold feet. Instead of sending the payment, it promised to send its inspectors. It would drag its feet and write reports. It would take till September—knowing that Greece wouldn’t make it past August 20. Then it let the firebrand politicians stew in their own juices.

 

In late July, the inspectors returned to Athens yet again and left on Sunday. After another visit at the end of August, they’ll release their final report in September. A big faceless document on which people of different nationalities labored for months; a lot of politicians can hide behind it. Even Merkel. And the Bundestag, which gets to have a say each time the EFSF disburses bailout funds.

Alas, August 20 is the out-of-money date. September is irrelevant. Because someone else turned off the spigot. Um, the ECB. Two weeks ago, it stopped accepting Greek government bonds as collateral for its repurchase operations, thus cutting Greek banks off their lifeline. Greece asked for a bridge loan to get through the summer, which the ECB rejected. Greece asked for a delay in repaying the €3.2 billion bond maturing on August 20, which the ECB also rejected though the bond was decomposing on its balance sheet. It would kick Greece into default. And the ECB would be blamed.

But the ECB has a public face, President Mario Draghi. He didn’t want history books pointing at him. So the ECB switched gears. It allowed Greece to sell worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks. Under the Emergency Liquidity Assistance (ELA), the banks would hand these T-bills to the Bank of Greece (central bank) as collateral in exchange for real euros, which the banks would then pass to the government. Thus, the Bank of Greece would fund the Greek government.

Its against the governing treaties but when has that stopped the elites in the EU who can break the rules whenever it suits them. As Eddie Van Halen once said, “To hell with the rules. If it sounds right, then it is.”

Precisely what is prohibited under the treaties that govern the ECB and the Eurosystem of central banks. But voila. Out-of-money Greece now prints its own euros! The ECB approved it. The ever so vigilant Bundesbank acquiesced. No one wanted to get blamed for Greece’s default.

If Greece defaults in September, these T-bills in the hands of the Bank of Greece will remain in the Eurosystem, and all remaining Eurozone countries will get to eat the loss. €3.5 billion or more may be printed in this manner. The cost of keeping Greece in the Eurozone a few more weeks. And on Tuesday, Greece “sold” the first batch, €812.5 million of 6-month T-bills with a yield of 4.68%. Hallelujah.

“We don’t have any time to lose,” said Eurogroup President Jean-Claude Juncker. The euro must be saved “by all available means.” And clearly, his strategy is being implemented by hook or crook. Then he gave a stunning interview. At first, he was just jabbering about Greece, whose exit wouldn’t happen “before the end of autumn.” But suddenly the floodgates opened, and deeply chilling existential pessimism not only about the euro but about the future of the continent poured out. Read….. Top Honcho Jean-Claude Juncker: “Europeans are dwarfs”

Source: Testosteronepit.com

ESFS & ESM To Get Banking License

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It looks to be a matter of weeks before the ESFS and ESM get a banking license and then its just a matter of Ctrl+P for the eurozone as Michael Pento gives his views to KingWorldNews and what this means for gold prices.

“In my estimation, the ECB is about three or four weeks away from giving a banking license to the EFSF and the ESM.  This will lead to unlimited purchases of European debt, and an unlimited dilution to their currency.” 

Pento also warned, “I am telling my clients, I am gearing them towards the inevitable inflation,” because “you will see the most salient moves in precious metals, base metals, energy and agricultural stocks and commodities.”

Pento also discussed what will happen in other key markets, but first, here is what Pento had to say about the Fed and ECB decisions:  “My first impression was that the reports we had from the Wall Street Journal that the Fed was imminently going to interfere with the markets (with more QE), once again proved to be untrue.  Bernanke is waiting for Jackson Hole.  He’ll make some kind of announcement, like he did back in 2010, and then he will start to put his plan to destroy the currency in effect, probably in September.”

“Mario Draghi doesn’t understand the commitment he has pledged to undertake.  If he is actually going to purport to the market that he will control the interest rates of the seventeen countries within the euro, my question for him would be, how long will you monetize European debt?

 How much euro dilution will occur?  The ECB will become the entire market for European debt….

“There will be no private market for these bonds.  This is a recipe for severe stagflation which will destroy the middle-class and European savings.

 However, he seems to be very confused because Draghi wouldn’t commit to these purchases being unsterilized.  This means he could be buying short-term European debt, and selling mid and longer-term European debt, which would further drive up yields.  For instance, the Spanish 10-Year right now is 7.17%, up 6.5% in one day.

 It tells me that he doesn’t really know what he’s doing.  Draghi had to take one side or the other.  He either had to say the PIIG countries borrowed so much debt that they can no longer pay them back and they must default explicitly, or we are going to stupidly try to monopolize the entire bond market, and monetize all of this debt.

 We have an unlimited bazooka, with unlimited ammunition, and here we go, we’re starting today.  But by doing what he did, he promised the world, and delivered nothing.  That is the reason why we are down today on the Dow.  That is the reason why Spanish and Italian yields are blowing out today.

 In my estimation, the ECB is about three or four weeks away from giving a banking license to the EFSF and the ESM.  This will lead to unlimited purchases of European debt, and an unlimited dilution to their currency.”

 When asked what investors should be doing in this environment, Pento responded, “I am telling my clients, I am gearing them towards the inevitable inflation.  But I think it’s silly to go ‘all-in’ right now.  We have significant holdings in precious metals and we have written covered calls against that strategy.  Then, we are ready to go all-in once we have a firm commitment on the part of these two central bankers to massively monetize the debt.”

 Pento also spoke about what he expects to unfold as central planners add more liquidity:  “I think, temporarily, the euro will rise.  Bond yields will fall for a very truncated period of time.  You will see the major averages scream higher, but you will see the most salient moves in precious metals, base metals, energy and agricultural stocks and commodities.”

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