Dispelling Euro-Rumors & Disinformation about the Dollar, by Al Martin

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by Al Martin

Dispelling Euro-Rumors & Disinformation about the Dollar

(1-24-12) There have been different published reports about the drop dead date for the Greek financial crisis to be resolved. Otherwise we are told that a Greek debt default is inevitable. By January 26, 2012, the Greeks must show that they made a certain amount of progress in their debt negotiations in order to qualify for continuing IMF (International Monetary Fund) participation with the ECB (European Central Bank) in the next tranche, as it were, of Greek aid coming from the ECB.

Of course there are no real parameters regarding judging whether there is progress or not. However it’s just what Christine Lagarde, the newly minted director of the IMF and former French finance minister, says it is, and it’s all just a way to exert more pressure on Greece. Of course Greece is now engaged in intense round the clock negotiations with the ECB and the IMF and a committee which effectively represents all the other banks and brokerage firms that hold Greek debt.

The idea is to engineer what markets refer to as a “soft default” to avoid some sort of uncontrollable or cascading default that would simply cause Greece to unravel. A soft default would prevent the trillions in credit default swaps which have been written against Greek debt from having to be paid off effectively. That’s what everyone is trying to avoid.

As some point out, myself included, we are in uncharted waters, so to speak, since credit default swaps are essentially insurance instruments and they don’t include a lot of wiggle room. This is a whole new fantasy creation of Euro-politicians, this concept of hard vs. soft default. They’re attempting to coin a whole new definition in financial markets to allow those on the payment end of credit default swaps to avoid having to pay.

The definition that Euro-politicians have assigned to this newly created fantasy creature that no one ever heard of. You may have heard the Argentinean government say – we wish we had the soft default in the 1980s. The definition of the Euro-politicians are assigning to this newly created creature is that if a country can essentially refinance its existing bonds by paying so many pennies on the Euro. That’s what’s under discussion now, whether it will be 30 cents on the Euro or 40 cents on the Euro. After this payment, they would then reissue the bond holders a new series of very long term bonds at a very low interest rate. They wouldn’t have to be sold; they’re simply a new worthless substitute for the old worthless bonds. The new double worthless bonds will be repackaged as triple worthless bonds to replace the existing bonds.

People keep quoting these dates like January 26 or March 20 as some kind of drop dead date but it’s just for the headlines. There really are no dates or deadlines other than what the ECB and the IMF imposes – since they have the power to change all the deadlines. They’re bogus deadlines that the ECB and IMF keep saying are hard and fast deadlines in order to pressure the Greek government. And then they back down from these deadlines – every time Greece can’t meet one. They don’t have an alternative.

You can understand what the stakes are here by the absurdity of the machinations that the ECB, the IMF and the Euro finance council are going through to prevent Greece from defaulting. It’s not hard to understand what the stakes must be, when they’re trying to get Greece to refinance all of its outstanding treasury instruments and pay 32 cents on the Euro and that this money is going to come from a consolidated combined IMF-ECB loan. They will use that loan to pay off their bond holders 32 cents on the Euro. The Greek Treasury, then reissues new bonds to them at some discounted interest rate which could be any number – since the number doesn’t make any difference as the Greek bonds had a 32% yield since Greece would never be able to pay the coupon anyway.

Whether you say it’s 4% or 6% yield, it doesn’t make any difference, since the Greek economy can’t generate enough money to even service the interest on these new long-term bonds without ECB and IMF help. The new long term bonds triple worthless bonds are being used to substitute the old medium term double worthless bonds. Then whoever else will come into this “Let’s Save Greece” confab. The United States, China and Japan won’t. They’ve been all around the world begging for money which puts everything squarely on the shoulders of the French and German taxpayers.

Nevertheless what’s wrong about this and what they’re trying to hide is that they say that even in the face of an uncontrollable Greek default – they say it won’t be that bad and there won’t be a contagion effect and there won’t be a domino effect because the ECB could come in immediately to buy up Greek bonds in the market for whatever they’re worth and stabilize the situation. So even if there’s an uncontrollable default, we’re still talking about a relatively small amount of money so don’t worry about it.

Yet they are worried about it. The whole planet is worried about it. You can tell what the temerity of the situation really is by the angst they’re showing and absurdity of the proposed solutions, which do nothing but transfer the obligations to service Greek debt from the Greeks onto the backs of German and French taxpayers. Now, not only does the ECB have to lend them enough money to pay off the fractional settlement, but then they have to guarantee all the future interest payments. Because the bond holders aren’t going to accept bonds unless somebody guarantees the coupon payment – no matter how small that payment is.

Is this financial legerdemain? We are now in a whole new world of Absurd Euro Machinations, where solutions and new terminology in the financial marketplaces are being created, None of this has ever been done before so they are coming up with this whole absurd notion of new verbiage to try to describe what they are attempting to do – which has never been done before.

In other news, there have been reports that China and Japan and Russia are reverting to rubles, Yuan, rupees, and gold rather than US Dollars for financial and commodity transactions.

These stories are headlined like this: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement".

Or Russia and Iran moving to the ruble in their bilateral trade.

This is all internet nonsense. The amount of bilateral trade that Russia and Iran conduct is just nickels and dimes.

The only reason they moved away from the dollar is because the United States pressured Russia into doing so. Why? Because the United States doesn’t want Iran to have the dollars.

Bloomberg reports that Iran has replaced the dollar in its oil trade with India, China and Japan. But it’s not because Iran doesn’t trust the dollars. It’s because of the pressure that’s being exerted against the Iranian central bank by the United States, which has virtually eliminated Iran’s ability to do business outside of Iran in US Dollars.

This is just a way to pressure Iran. Then this story gets interpreted, when it gets filtered down to these numb-nut websites run by people who don’t know anything about economics, as some sort of anti-dollar conspiracy.

The story that China and Japan and other big dollar buyers are moving away from the dollar is also nonsense that comes out on the internet. There is no anti-dollar conspiracy and there is nobody plotting a substitution of the dollar since there is nobody that has the ability to produce such an item…

The actual data regarding this subject matter can be found in the monthly release of the US Treasury so-called Tic report. This is something we follow and something that can sometimes be a market mover. It’s called the US Treasury’s International Capital Inflows report. It comes out monthly and it just came out last week. In it we read that China did reduce its dollar holdings but to offset that, Japan increased its dollar holdings.

In other words, we are not seeing any move away from the dollar other than China has attempted to simply reduce its holdings because it was so concentrated. China got to the point where 80% of its currency reserves were in US dollars. It was only prudent that they attempt to diversify.

Bloomberg also reports that Japan and China are beginning to do more direct trade in yen and Yuan. This is a back door effort by the Peoples Bank of China to increase liquidity in the Yuan without making it free to float by making it convertible in the yen as some sort of a peg. People have to understand the reasons behind these machinations and what the countries’ motivations are. Otherwise you can be easily manipulated into believing that this is some anti-dollar conspiracy or countries want to move out of the dollars because they’ve lost confidence in the dollars.

Look at the problem China has had in reducing its dollar holdings. Even now it still holds 68% of its foreign currency reserves in US Dollars. Admittedly that’s down from 80% but China says it cannot reduce that number anymore because there is no currency to compare with the US Dollar.

This is simply a liquidity issue. You can’t replace the US Dollar for two reasons. First the US Dollar is THE reserve currency of the planet and there is no other currency that can touch the liquidity of the dollars.

These different side deals between countries are simply fodder for conspiracy theorists who don’t understand anything about economics.

China has made a lot of deals with other countries not only for a fixed Yuan peg. They’ve done the same thing with South Korea. This is all an effort to back door American pressure and make the Yuan free to float, which the Chinese absolutely refuse to do because if they did the Yuan would soar in value against the US Dollar reducing their competitive advantage with the United States.

Germany is in a parallel situation. The reason Germany is stuck with the Euro like it or not is because they have the opposite problem that Greece has, namely if they go back to the Deutschmark it would immediately soar in value against the Euro. Germany is a country that is 70% dependent on exports.

The only countries that benefit leaving the Euro are the peripheral nation-states who then have the ability to go back to their own currencies – the Drachma, the Escudo, the Peseta, the Irish Pound – which would immediately collapse in value against the Euro, thus allowing them to monetize their own currencies and pay it back for about 10 cents on the proverbial Euro.

People on the internet take economic information, misinterpret it, and then weave it into their own belief systems. The reason for the internet has been forgotten. It was meant to be a tool to make business more efficient, more productive and thus more profitable. It was meant to be an economic tool. This idea that every Joe Blow can have his own website who doesn’t know anything about anything and put up a lot of claptrap that doesn’t benefit anyone other than occupying the time of the BOVOB (Burned Out Victim of Bushonomics) or nerd in question. This isn’t what the internet was meant to be. There has to be a certain level of knowledge that can take information and analyze it to make it useful. Otherwise what’s the point?

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

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