Nope, we're not waiting for a "storm", as the first part of the headline might imply. So far in 2005, not much of anything has happened. It's a long weekend in the US at the moment, Martin Luther King Day being on Monday, January 17 and the Comex not trading until Tuesday. But NEXT week, things DO start happening.
It all starts on January 20, when Mr Bush is inaugurated for his second term as President of the United States. The inauguration itself promises to be a zoo of gigantic proportions, resembling a cross between the annual reviewing of Soviet Military might on May 1 (in the late unlamented days of the Soviet Union), a superbowl halftime show in the middle of winter, and grotesquely inflated shriners convention. As amazing as the spectacle proves to be, it is nonetheless a fact that the second Bush Administration clanks back into full gear on that day.
Right after the inauguration, Mr Bush sends his budget for 2005 to the Congress. Right after that, he gives the first "state of the union" address of his new tenure. Wonder if he'll talk about the red states and the blue states. Then, on January 30, there are plans to hold an election in Iraq. It was recently reported that the election is "viable", because there are only four "zones" in that country where conditions are too dangerous to conduct a poll. The only problem is that those four zones hold about HALF the population of Iraq. The other problem is that many Iraqis are blandly saying to the US that once the election is held, the US has accomplished its "mission" and, having done so, should of course go home right away.
On the first two days of February, the FOMC meets for the first time in 2005 with "hints" now being dropped that the Fed might actually decide to speed up their rate rises. If they do, watch out for an 0.50% Fed Funds rate rise (to 2.75%) at that meeting.
After that, there is a G-7 meeting in Europe. This is the BIG one. Every (Continental) European member of the G-7 (both of them) has made it very clear that they want some kind of credible plan from the US as to how they are planning to address their trade and budget deficits. Asia - Japan (and China) - is staying ominously quiet, with some lapses. A large lapse has come in the form of an article which recently appeared in the Asian Times:
“Uncle Sam's power rests on two pillars only, the paper dollar and the Pentagon. Each supports the other, but the vulnerability of each is also an Achilles' heel that threatens the viability of the other. Since then, Iraq, not to mention Afghanistan, has shown confidence in the Pentagon not to be what it was cracked up to be; and with the in-part-consequent decline in the dollar, so has confidence in it and Uncle Sam's ability to use it to finance his Pentagon's foreign adventures”
"Why the Emperor has no Clothes” – Asia Times, Jan. 8, 2005
The other ominous news out of Asia is the shrinking of trade surpluses, notably in China, and the consequent shrinking of the amount of US Dollars being recyled back to the US, also notably by China. In 2001-02-03, about half of the reserves built up by China as a result of their trade surpluses was placed in US Dollars. Last year, China's reserves grew by the equvalent of $US 112 Billion. Only $US 25 Billion - less than a quarter of the total - was placed in US Dollars.
It is most "impolite", a term describing the airing of a fact that everybody knows but no one talks about, for the Asian Times to equate the military power of the US with the continuing viability of its currency. Historically, once the link to Gold was weakened or lost, the strength of all "key" currencies has been directly proportional to the strength of the military of the nation issuing the currency. In this regard, the problem facing the US is that the latest informed estimates are unanimous in stating that the "insurgents" in Iraq now comfortably outnumber the US troops there. There is a precedent for this. The same held true in Vietnam. If you remember the Tet offensive of January 1968, you know what a shock it was to Americans, both in Vietnam and even more back in the US. The Vietcong (not the NVA, who were not involved) were decimated in the course of the battles, but the shock of the attack in the US was such that the US Administration never recovered.
A similar situation is now brewing in Iraq, and a variation of another "Tet offensive" is by no means a far fetched possibility this year.
On US financial markets, the year so far has been singularly lacklustre, with the sole exception of a bounce back by the US Dollar. The danger at present is that the international situation of both the US Dollar and the US presence in Iraq are coming to a head and could be "resolved", one way or the other, at any time. The biggest test yet of the Iraq situation will come after the elections (assuming they are held) at the end of this month. The biggest test yet of the US Dollar situation will come with the Fed's decision on interest rates on February 2 and with the immediately following G-7 meeting.
Vietnam led, effectively, to the resignation of two Presidents - Mr Johnson and Mr Nixon. Both tried to preside over a guns AND butter policy, greatly expanding both military and domestic expenditure at the same time. Both won huge landslide victories, Mr Johnson in 1964 and Mr Nixon in 1972. Neither served out the four years that victory had "entitled" them to. The difference between then and now is that in the 1960s and early 1970s, the US Dollar was NOT under threat in its function as the world's reserve currency. Yes, Mr Nixon removed the last of the Gold backing from the Dollar in 1971, but nobody seriously contemplated ending the Dollar's status, if for no other reason than the REAL threat posed by the USSR.
Today, the situation is radically different. Despite all the blustering to the contrary, there is no credible global threat today of the magnitude of the USSR. In the 1960s and early 1970s, the US was still one of the biggest international net creditors the world has ever seen. Today, the US is a gigantic international net debtor and has been an international net debtor for two decades. In the 1960s and early 1970s, the US could "afford" to take the inevitable recession which came as a result of the profligacy of their guns AND butter policies. In fact, they took two recessions, the one in 1974 and the far deeper and prolonged one in 1979-82 when US interest rates climbed above 20% and stayed there for more than a year. The US cannot afford a repeat of that today, even though their fiscal, financial, economic, and (yes) military position is hugely worse now than it was then.
Gold, in its historical and economic function as the "medium of exchange" of CHOICE and as the sole financial asset which is NOT someone else's liability, has not changed one iota from what it was in 1968, or for that matter in 1068 or 568 BC. What HAS changed, drastically and beyond the worst nightmares of those who were wrestling with fiscal and monetary excesses during the Johnson and Nixon Administrations, is the global financial system based on a currency issued by what is in effect a "banana republic" with sharp teeth.
We can all be certain that the US political, economic, financial, and military establishment will not let go of the inestimable advantage which is the reserve currency status of the US Dollar without a "fight" - of some nature. Their power is dependent on that status, and they all know it. The current tragedy of the situation is that far too few Americans, or for that matter far too few in any nation, know it too.
The history of the past half century is one of repeated monetary and financial crises. At one time or another over that period, every nation in the world, major and minor alike, has gone through such a crisis. The US has too, but in comparison to the rest of the world, these have been mild and short lived indeed. The vast majority of the American people have absolute faith (and we use the term advisedly) in the ability of their government and Central Bank to overcome ANY financial crisis of ANY magnitude. It is hardly surprising, most of them have never known anything different. That is why they have no savings, continue to push money into the stock markets, continue to live beyond their means, and continue to be absolutely "sure" that - IT CAN'T HAPPEN HERE!
Unfortunately, not only "can it happen here" - here being the USA - it WILL happen "here". At best, the nations meeting at the G-7 in February can make some kind of "deal" to keep the "system" functioning for a while (but how much) longer. At worst, the financial straw will flatten the camel at any time from now onwards, with the danger becoming MUCH higher during or after that G-7 meeting.
If Gold resumes its falls from present levels ($US 423.00 spot future Comex close on January 14) as the month wears on, it will be another example of the time honoured method of debunking the alternative to the US Dollar as the threat to the US Dollar rises. That would be a most ominous sign. If Gold remains stable or begins to advance, it will actually be a sign that some prospect of an agreement might be on the cards. Either way, there has NEVER in your lifetime or mine been a greater need for the financial insurance which Gold represents.