The United States, the world's most developed country, is scrambling to answer the question "Who will 'feed' the US?" [Answer: “no one”] years after it had asked the most populous developing country a similar question: "Who will feed China?"

Is it sensational to ask the richest country the same question that China faced more than 10 years ago? The reply is "No." This time, it is not about "grain supply", but "capital supply" and "supply of order."

An unprecedented financial crisis that originated in the US is shattering the world, without exception to any region. In response, the US has announced massive rescue plans to revive the economy, and is ready to roll out more such plans, yet leaving a big question mark as to how it will get enough money to finance those plans.

The US Congress sanctioned a $787 billion stimulus plan submitted by the Obama administration last month, which media reports said is only a small fraction of the overall plan.

The US-based San Francisco Business Times reported on Nov 26 that the US government and the Federal Reserve is harboring a huge $8.5 trillion rescue plan, or about 60 percent of the country's GDP.

US President Barack Obama is expecting a record $1.75 trillion in federal fiscal deficit this year. The fiscal figure reached a high of $459 billion last year.

This year's deficit would account for 12.3 percent of the GDP, the highest since the World War II and far exceeding the recognized 3-percent alarm level.

In addition, Obama also foresaw an average $1 trillion in deficits each year for 2010 and 2011.

Many US experts said Obama's estimate was too optimistic [Agreed], and the actual deficit would be even bigger, as the president excluded the country's liabilities in his projection.

Where does the money come from? [Answer: “printing press”]

Who will be able to provide the financial support for the enormous fiscal deficit of the US government?

The US Treasury Department estimated the US government would issue up to $2.56 trillion of treasury bonds this year, and at least $1.14 trillion more next year. [It will be far more.]

By the end of last year, outstanding treasury bonds stood at $10.7 trillion. About 29 percent, or $2.862 trillion, is held by foreign governments or investors. That means the country's reliance on overseas investors holding treasury bonds has been raised by 10 percentage points from eight years ago.

"The world simply cannot buy any more new issuance of US treasury bonds," [Agreed] said Yu Zuyao, an honorary economist with the Chinese Academy of Social Sciences (CASS), who used to head the CASS Institute of Economics.

Many countries have their own hands full, like the US, using their capital to counter the financial crisis, consolidate their financial system, and fuel their own stimulus packages to revive the real economy, even though they have some foreign exchange reserves in US dollars.

Thanks to trade surpluses, emerging economies hold a combined $5.5 trillion in forex reserves [more when sovereign wealth funds are added in], but most of the reserves have already been used to buy US treasury bonds, said Yoko Kitazawa, an expert on international affairs, in a February issue of Sekai (The World), a Japanese monthly journal.

However, trade surpluses of these regions and countries are eroding because of a collapse in global trade.

As a result, forex reserves of these regions and countries are expanding at a slower pace, or even declining. The latest forecast from the World Trade Organization said global trade may shrink by 9 percent, or more, this year.

As the largest holder of US treasury bonds and the world's second largest exporter, China had seen exports decline since November last year, with its actual use of foreign capital falling since October.

Media reports said China's forex reserves may have decreased by more than $30 billion in the first two months. China's forex reserves stood at about $1.95 trillion at the end of last year, the largest in the world.

The Xinhua-run newspaper Economic Information Daily reported this month China had liquidity of only $300 billion to $500 billion in forex reserves, citing a report from an unidentified ministry-level research institute.

Crowding out effect of US capital pool

Yang Bin, also a CASS economist, said the US was luring capital scattered all over the world to pool in the US by floating excessive treasury bonds, which could be a threat to developing countries which are crying out for capital. [The US treasury market is sucking the life out of the world economy. Capital needed to fund economic growth in developing countries is being used to bail out doomed US financial institutions via treasury sales. The sooner the treasury market and the dollar collapse, the sooner the world can begin to heal.]

Economic development in many developing countries is, to a large extent, counting on such an influx of overseas capital.

The US-based Institute for International Finance warned in January that capital flows into emerging markets are in danger of collapsing this year as a result of the financial crisis.

The association of large banks estimates that net private sector capital flows to emerging markets will be no more than $165 billion this year, which is less than half of $466 billion in 2008 and only a fifth of $930 billion in 2007.

The crisis and a global economic recession are also aggravating the world poverty. The United Nations said in a report published this month that reduced growth this year would lead to a total income loss of around $18 billion ($46 per person) for 390 million people in Sub-Saharan Africa living in extreme poverty.

The projected loss represents 20 percent of the per capita income of the poor in Africa, far exceeding the losses of developed nations.

The majority of low-income nations, or 43 out of 48, are incapable of providing a government stimulus for the poor, according to the report.

In addition, the excessive US treasury bonds, its enormous fiscal deficit, and issuance of the dollar that far exceeds the demand of the economy would drive the world nearer to inflation and a depreciating US dollar. This could be another heavy blow to the world economy in a downturn and to developing countries in particular.

Worries over dollar-denominated assets

"The immense 'US treasury bonds bubble' has not only badly weakened new demand among investors, but also put foreign investors in danger of seeing their dollar-denominated assets shrink in value," [Agreed] said Yu.

The US Treasury Department said the US government bonds held by foreign countries were down by $4.7 billion at the end of January from a month ago.

This is the first time for other countries to sell US treasury bonds since March 2007.

China's purchase of US treasury bonds decelerated. The country purchased $12.2 billion in treasury bonds in January, the smallest monthly increase since the second half of last year.

Capital is fleeing the US in January, foreign investors sold $43 billion of long-term US bonds, compared with an inflow of $34.7 billion into the country.

The US is facing a capital account deficit of $148.9 billion, if short-term bonds are included, as foreign governments and institutions became reluctant to buy more US bonds. The deficit compares to $609.9 billion in surplus for the whole of 2008.

Returns on US government bonds will be down by 2.69 percent in 2009, according to the Caijing Magazine, citing a treasury bonds index of Lehman Brothers. In 2008, returns on US government bonds were almost 14 percent.

China held US treasury bonds worth $740 billion by the end of January, about 7 percent of the total of US government bonds. In all, the country holds $1.2 trillion of dollar-denominated assets, including institutional bonds and equity investment as well.

Chinese Premier Wen Jiabao on March 13 expressed worries over the safety of these assets and called on the US to keep to its commitments and ensure the safety of such assets.

More than a week ago, however, US Federal Reserve chairman Ben Bernanke, dubbed "Helicopter Ben" for his speech about using a "helicopter drop" of money into the economy to fight deflation, actualized his threat to print more greenbacks.

He said on March 18 the Fed would purchase up to $300 billion of longer-term Treasury securities over the next six months, along with an additional $750 billion in mortgage-backed securities.

It is the first time since World War II that the Fed has bought long-term government bonds.

The Fed's decision to print more money to finance the purchase immediately led the greenback to fall against all other major currencies.

The San Francisco Business Times reported the Fed's printing press is financing about two thirds, or $5.5 trillion, of the $8.5 trillion of the US rescue money. The Fed needs no approval from the Congress to start the printing press.

Analysts said the Fed is left with no other option but to print, with the key interest rate staying at a record low of zero to 0.25 percent.

"The US is indeed capable of paying off its government bonds, but, what is the real value of bunches of dollars by the time the bonds are due," said Yang.

In a move to dispel concerns over the US extravagance in spending, the Obama administration said it aimed to halve the country's fiscal deficit to $533 billion in 2013. The goal is based, however, on optimistic estimation of a strong rebound in the US economy.

"People have every reason to doubt whether this could be possible," Yang said.

Over the next 10 years, the federal fiscal deficit is bound to swell as the government will have to address the structural problems of the US social insurance and medical insurance plans.

US economists believe that a ballooning deficit would be inevitable, regardless of the status of the US economy.

Finding a way out

China's central bank governor Zhou Xiaochuan last week suggested the creation of a super-sovereign reserve currency that is disconnected from individual nations and is able to remain stable in the long run, to avoid inherent deficiencies caused by using credit-based national currencies.

The repeated and escalating financial crisis since the collapse in 1971 of the Bretton Woods system showed the whole world may be paying more than what it gained from the current currency system, he wrote in an article.

As the world's reserve currency, about two thirds of the international trade and financial transactions are priced and settled in the US dollar. [That is a disaster waiting to happen.]

At the core of the ongoing financial crisis that started in the US are the fundamental flaws of the US economic systems and the neo-liberal economic policies of US that led to tremendous trade deficit, fiscal deficit and personal credit deficit, Yu Zuyao said.

"It is not in the least a problem in US financial regulation," Yu said. "What is needed is to overhaul the US neo-liberalist system, reform the current international financial system and restore the world's economic order, otherwise, such crises will be repeated." [Agreed]

A currency is intended to serve the economy; however, Wall Street took the lead in creating a currency-focused economy that is parallel to the real economy.

The market value of US financial assets is $40 trillion to $50 trillion, but market capital has been indulged to operate in away that makes financial derivative products spiral up to more than $600 trillion in value, about 50 times the 2007 US GDP.

More than 97.5 percent of the world's capital in circulation is speculative capital and only 2.5 percent is enough to meet the demand of the real economy, said Yoko Kitazawa.

In the meantime, the US has long been a supreme power in the world.

The US-led developed countries are actually receiving $3.5 from developing countries for every dollar in aid that goes to the developing countries, Yoko Kitazawa said.

Paradoxically, as the world's largest debtor with more than 20 years of consecutive years of trade deficit, the US is witnessing, at the same time, a surplus in capital account and in capital inflows. This is a testimony to the unfairness in the international financial system and the global economic order.

"It's time to have the resolution to change it," Yang said. "It is what the financial and economic crisis has told us."

The production of real goods in the developed nations is plummeting. Even the mighty export driven economy of Japan appears to be heading lower.

Countries must begin to encourage consumption in their own economies. To do this, they ought not to be stimulating the old credit/speculation machine called the neo-liberal financial system.

Real economic growth is to be found in a broad employment and consumption, and an increase of the median wage.

This is the deep flaws in much of the third world economies, especially in Asia and Latin America. Economic health can be measured by the size and well being of the middle class in a relatively free society.

The reason is simple. Individuals can only borrow so much before they are unable to service the debt. And the greedy few can only spend so much on consumption using the wealth which the tax and financial system has delivered to them from the many.

Gaming the system so that it overtaxes the income of the many for theincreasing benefit of a few has natural limitations, unless one can enforce a type of involuntary servitude. This model has its roots far back in history, in empires like Rome, Egypt, and Sparta.

As the elite few accumulate real assets using their surplus, they will find that holding on to their wealth as the rest of society deteriorates in a downward spiral of privation can be a bit of a challenge.

Until the financial system is reformed and the economy is brought back into a balance, there will be no recovery, and the fabric of order will remain fragile.

If things continue on as they are, despite all the stimulus and fine rhetoric, the madness will once again be unleashed on the earth, and the people will wonder from whence it came, as they do each time it rises from the same sources and ravages civilization: unbridled greed, malinvestment, and corruption.

This is taken from Congressman Mcfadden’s 1934 speech. It explains why only the bankers get the money and all the bankers’ losses and debts are given to the people so as to impoverish all of us first off and then enslave us with higher taxes to pay off the debt incurred when the money was given to the bankers. It explains what Obama will do in the future. This is the blueprint that Bernanke, Geithner and Obama are following.


Roosevelt and the International Bankers

"Roosevelt did what the International Bankers ordered him to do!

"Do not deceive yourself, Mr. Chairman, or permit yourself to be deceived by others into the belief that Roosevelt's dictatorship is in any way intended to benefit the people of the United States: he is preparing to sign on the dotted line! "He is preparing to cancel the war debts by fraud!

"He is preparing to internationalize this Country and to destroy our Constitution itself in order to keep the Fed intact as a money institution for foreigners. "Mr. Chairman, I see no reason why citizens of the United States should be terrorized into surrendering their property to the International Bankers who own and control the Fed. The statement that gold would be taken from its lawful owners if they did not voluntarily surrender it, to private interests, show that there is an anarchist in our Government.

"The statement that it is necessary for the people to give their gold- the only real money- to the banks in order to protect the currency, is a statement of calculated dishonesty!

"By his unlawful usurpation of power on the night of March 5, 1933, and by his proclamation, which in my opinion was in violation of the Constitution of the United States, Roosevelt divorced the currency of the United States from gold, and the United States currency is no longer protected by gold. It is therefore sheer dishonesty to say that the people's gold is needed to protect the currency.

"Roosevelt ordered the people to give their gold to private interests- that is, to banks, and he took control of the banks so that all the gold and gold values in them, or given into them, might be handed over to the predatory International Bankers who own and control the Fed.

"Roosevelt cast his lot with the usurers. "He agreed to save the corrupt and dishonest at the expense of the people of the United States.

"He took advantage of the people's confusion and weariness and spread the dragnet over the United States to capture everything of value that was left in it. He made a great haul for the International Bankers.

"The Prime Minister of England came here for money! He came here to collect cash!

"He came here with Fed Currency and other claims against the Fed which England had bought up in all parts of the world. And he has presented them for redemption in gold.

"Mr. Chairman, I am in favor of compelling the Fed to pay their own debts. I see no reason why the general public should be forced to pay the gambling debts of the International Bankers.

Roosevelt Seizes the Gold

"By his action in closing the banks of the United States, Roosevelt seized the gold value of forty billions or more of bank deposits in the United States banks. Those deposits were deposits of gold values. By his action he has rendered them payable to the depositors in paper only, if payable at all, and the paper money he proposes to pay out to bank depositors and to the people generally in lieu of their hard earned gold values in itself, and being based on nothing into which the people can convert it the said paper money is of negligible value altogether.

"It is the money of slaves, not of free men. If the people of the United States permit it to be imposed upon them at the will of their credit masters, the next step in their downward progress will be their acceptance of orders on company stores for what they eat and wear. Their case will be similar to that of starving coal miners. They, too, will be paid with orders on Company stores for food and clothing, both of indifferent quality and be forced to live in Company-owned houses from which they may be evicted at the drop of a hat. More of them will be forced into conscript labor camps under supervision.

"At noon on the 4th of March, 1933, FDR with his hand on the Bible, took an oath to preserve, protect and defend the Constitution of the U.S. At midnight on the 5th of March, 1933, he confiscated the property of American citizens. He took the currency of the United States standard of value. He repudiated the internal debt of the Government to its own citizens. He destroyed the value of the American dollar. He released, or endeavored to release, the Fed from their contractual liability to redeem Fed currency in gold or lawful money on a parity with gold. He depreciated the value of the national currency.

"The people of the U.S. are now using unredeemable paper slips for money. The Treasury cannot redeem that paper in gold or silver. The gold and silver of the Treasury has unlawfully been given to the corrupt and dishonest Fed. And the Administration has since had the effrontery to raid the country for more gold for the private interests by telling our patriotic citizens that their gold is needed to protect the currency.

"It is not being used to protect the currency! It is being used to protect the corrupt and dishonest Fed. "The directors of these institutions have committed criminal offense against the United States Government, including the offense of making false entries on their books, and the still more serious offense of unlawfully abstracting funds from the United States Treasury! "Roosevelt's gold raid is intended to help them out of the pit they dug for themselves when they gambled away the wealth and savings of the American people.

Dictatorship

"The International Bankers set up a dictatorship here because they wanted a dictator who would protect them. They wanted a dictator who would protect them. They wanted a dictator who would issue a proclamation giving the Fed an absolute and unconditional release from their special currency in gold, or lawful money of any Fed Bank.

"Has Roosevelt relieved any other class of debtors in this country from the necessity of paying their debts? Has he made a proclamation telling the farmers that they need not pay their mortgages? Has he made a proclamation to the effect that mothers of starving children need not pay their milk bills? Has he made a proclamation relieving householders from the necessity of paying rent?

Roosevelt's Two Kinds of Laws

"Not he! He has issued one kind of proclamation only, and that is a proclamation to relieve international bankers and the foreign debtors of the United States Government.

"Mr. Chairman, the gold in the banks of this country belongs to the American people who have paper money contracts for it in the form of national currency. If the Fed cannot keep their contracts with United States citizens to redeem their paper money in gold, or lawful money, then the Fed must be taken over by the United States Government and their officers must be put on trial.

"There must be a day of reckoning. If the Fed have looted the Treasury so that the Treasury cannot redeem the United States currency for which it is liable in gold, then the Fed must be driven out of the Treasury.

"Mr. Chairman, a gold certificate is a warehouse receipt for gold in the Treasury, and the man who has a gold certificate is the actual owner of a corresponding amount of gold stacked in the Treasury subject to his order.

"Now comes Roosevelt who seeks to render the money of the United States worthless by unlawfully declaring that it may No Longer be converted into gold at the will of the holder.

"Roosevelt's next haul for the International Bankers was the reduction in the pay of all Federal employees.

"Next in order are the veterans of all wars, many of whom are aged and inform, and other sick and disabled. These men had their lives adjusted for them by acts of Congress determining the amounts of the pensions, and, while it is meant that every citizen should sacrifice himself for the good of the United States, I see no reason why those poor people, these aged Civil War Veterans and war widows and half-starved veterans of the World War, should be compelled to give up their pensions for the financial benefit of the International vultures who have looted the Treasury, bankrupted the country and traitorously delivered the United States to a foreign foe.

"Our fractional reserve financial system is just a gigantic Ponzi scheme. It can only survive as long as it expands, which is to say, as long as new debt is flushed through the system to finance old debt. But like all Ponzi schemes, the larger it grows the more unstable it becomes. Eventually, it collapses of its own weight." … James Sinclair.

By Kevin Phillips

Thirty to forty years ago, the early fruits of financialization in this country - the first credit cards, retirement accounts , money market funds and ATM machines - struck most Americans as a convenience and boon. The savings and loan implosion and junk bonds of the 1980s switched on some yellow warning lights, and the tech bubble and market mania of the nineties flashed some red ones. But neither Wall Street nor Washington stopped or even slowed down.

In August, 2007, the housing-linked crisis of the credit markets predicted the arriving disaster-stage, the Crash of September-November 2008 confirmed the debacle, and now an angry, fearful citizenry awaits a further unfolding. There is probably no need to fear a second coming of nineteen-thirties Depression economics. This is not the same thing; the day-to-day pain shouldn't be as severe.

Indeed, for all that the 1930s evoke national trauma, that decade was in fact a waiting room for national glory and wellbeing. World War Two ushered in American global ascendancy, the "Happy Days" of the 1950s and an unprecedented middle-class prosperity.

Today's disaster stage of American financialization - the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the U.S. economy by a rabid financial sector -- won't be nearly so kind. It is already ushering in the reverse: a global realignment in which the United States loses the global economic leadership won in World War Two. The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the U.S. financial sector and its political and regulatory allies deserve this time.

My 2002 book, Wealth and Democracy, in its section on the "Financialization of America" noted that the "finance, insurance and real estate (FIRE) sector overtook manufacturing during the 1990s, moving ahead in the national income and GDP charts by 1995. By the first years of the next decade, it had taken a clear lead in actual profits. Back in 1960, parenthetically, manufacturing profits had been four times as big, and in 1980, twice as big." Hardly anyone was paying attention.


By 2006, the FIRE sector, its components mixed together like linguine by the 1999 repeal of the old New Deal restraints against mergers of commercial banks, investment firms and insurance, had ballooned to 20.6% of U.S. GDP versus just 12% for manufacturing. The FIRE Sector, now calling itself the Financial Services Sector, lopsidedly dominated the private economy. A detailed chart appears on page 31 of Bad Money. Some New York publications and politicians try to insist that finance per se is only 8%, but the post-1999 commingling makes that absurd.

This represented a staggering transformation of the U.S. economy - doubly staggering now because of the crushing burden of its collapse. You would think that that opinion molders and the national media would have been probing its every aperture and orifice. Not at all.

Thus, it was pleasing to read MIT economics professor Simon Johnson's piece in the April Atlantic fingering financial "elites" who captured the government for the latterday financial debacle. This is broadly true, and judging from my e.mail, even some conservatives accept Johnson's analysis and indictment. After the furor over the AIG bonuses, the public and some politicians may be ready to start identifying and blaming culprits. This would be useful. Having an elite to blame is a often prerequisite of serious reform.

Nevertheless, the extremes of financialization, together with the havoc we now know it to have wrought, represent a much more complicated historical and economic genesis, one which U.S. leaders must be obliged to confront if not fully acknowledge. Elite avarice and culpability has multiple and longstanding dimensions. It has been fifteen years since Graef Crystal, a wellknown employment compensation expert, brought out his incendiary In Search of Excess: the Overcompensation of American Executives. The data was blistering. Over the last decade, New York Times reporter David Cay Johnston has published two books - Perfectly Legal and Free Lunch - describing how the U.S. tax code, in particular, has been turned into a feeding trough for the richest one percent of Americans (especially the richest one tenth of one percent).

The backstop to avarice provided by a wealth culture and market mania from the late 1980s through the Clinton years to the George W. Bush administration, prompted another set of indictments that still resonate: William Greider's Secrets of the Temple: How the Federal Reserve Runs The Country (1987), Robert Kuttner's Everything For Sale (1997), Thomas Frank's One Market Under God (2000) and John Gray's False Dawn (1998). More recently, Paul Krugman's books have been equalled or exceeded in timeliness by his New York Times columns blasting the perversity of the Obama-Geithner financial bail-out and the malfeasance of the financial sector.

James K. Galbraith, in his 2008 book The Predator State, has elaborated the valid point that too many conservatives over last few decades betrayed their free market rhetoric by supporting a relentless use of state power and government financial bail-outs to advance upper-income and corporate causes. On the other hand, some conservative economists of the Austrian school make related indictments of liberal bail-out penchants.

This could be a powerful framework. All of these critiques have merit, and ideally they might converge as earlier indictments of elite and governmental abuse did during the Progressive and New Deal eras. But I have to return to whether the public will ever be given full information on the fatal magnitude of financialization, who was responsible, and how it failed and crashed in 2007-2009. So far, political and media discussion has been so minimal that the early 21st century American electorate has much less readily available information on what took place than did the electorates of those earlier reform eras.

Towards this end, my initial emphasis in the new material included in the 2009 edition of Bad Money is on what techniques, practices and leverage the financial sector used between the mid-1980s and 2007 to metastasize early-stage financialization into an economic and governmental coup and, ultimately, a national disaster.

Perhaps not surprisingly, I found that the principal building blocks that the sector used to enlarge itself from 10-12% of Gross National Product around 1980 to a mind-boggling 20.6% of Gross Domestic Product in 2004 involved essentially the same combination of credit-mongering, massive sector borrowing, highly leveraged speculation, reckless, greedy pioneering of new experimental vehicles and securities (derivatives and securitization) and mega-trillion-dollar abuse of the mortgage and housing markets that became infamous as hallmarks of the 2007-2009 disaster. During Alan Greenspan's 1987-2006 tenure as Federal Reserve Chairman, financial bubble-blowing became a Washington art and total credit market debt in the U.S. quadrupled from $11 trillion to $46 trillion.

To try to put 20-30 pages into a nutshell, the financial sector hyped consumer demand - from teen-ager credit cards to mortgages for the unqualified - to make credit into one of the nation's biggest industries; nearly $15 trillion was borrowed over two decades to leverage de facto gambling at 20:1 and 30:1 ratios; banks, investment firms, mortgage lenders, insurers et al were all merged together to do almost anything they wanted; exotic securities and instruments that even investment chiefs couldn't understand were marketed by the trillions. To achieve fat financial-sector profits, the housing and mortgage markets might as well have been merged with Las Vegas.

The principal inventors, hustlers , borrowers and culprits were the nation's 15-20 largest and best known financial institutions - including the ones that keep making headlines by demanding more bail-out money from Washington and giving huge bonuses. These same institutions got much of the early bail-out money and as of December 2008 they accounted for over half of the bad assets written off.

The reason these needed so much money is that they government had let them merge, speculate, expand and experiment on dimensions beyond all logic. That is why the complicit politicians and regulators have to talk about $100 billion here and $1 trillion there even while they pretend that it's all under control and that the run-amok financial sector remains sound.

This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland (back when New York was New Amsterdam). I will return to these little-mentioned precedents in another post this week.

But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers.

Five major trading cities have got the nod from the central government to use the yuan in overseas trade settlement -- seen as one more step in China's recent moves to expand the use of its currency globally.

Shanghai and four cities in the Pearl River Delta -- Guangzhou, Shenzhen, Dongguan, and Zhuhai -- have been designated for the purpose, said a State Council meeting chaired by Premier Wen Jiabao yesterday. The Pearl River Delta boasts the country's largest cluster of export-oriented manufacturing operations.

The move is aimed at reducing the risk from exchange rate fluctuations and giving impetus to declining overseas trade, according to a statement posted on the government website.

Analysts said the experimental use of the yuan in trade settlement also reflects policymakers' rising concern over the shaky prospects of the US currency, of which China has large reserves from previous trade growth, and their willingness to gradually expand the yuan's use globally.

"The trial is the latest move toward making the yuan an international currency," Huang Weiping, professor of economics at Renmin University of China, said. "The prospect of a weaker US dollar is making the transition more imperative for China."

The mainland is trying to promote the use of the yuan among trade partners and, in the past four months, has signed 650 billion yuan ($95 billion) worth of swap agreements with Argentina, Indonesia, South Korea, Malaysia, Belarus, and the Hong Kong Special Administrative Region. The agreements allow them to use their yuan reserves to directly trade with the Chinese mainland within a set limit in volume.

Stephen Green, head of China Research of Standard Chartered Bank, said the swap deals would help encourage the use of the yuan as the currency of choice for international trade.

"In the longer term, if countries around the region and beyond start pricing their trade in yuan, this will also lead to increased internationalization and status for China's currency," Green said.

China now uses the US dollar to settle most of its international trade but the drastic swings in the greenback have become a risk for Chinese exporters in recent years.

Dong Xian'an, economist with China Southwest Securities, said: "For many exporters, the dollar's fluctuation is a serious concern. The ability to settle trade in the yuan would reduce such risk," he said.

Chen Xianbin, chairman of Guangxi Sanhuan Enterprise Group, told China Daily that his company lost more than 150 million yuan in the past three years from international trade due to the exchange rate changes between the yuan and the greenback. Chen's company, a ceramic tableware exporter, relies on Southeast Asian markets for 15 percent of total sales.

China's foreign trade has been on a continuous decline amid the current global financial crisis. Exports plunged 25.7 percent year on year in February, one of the sharpest falls ever, while imports dived 24.1 percent.

Analysts said the US Federal Reserve's decision to buy long-term Treasuries, which means printing new money, may also lead to a depreciation of the US dollar. That is also one reason for China to reduce the use of the dollar in trade so that the value of its $1.95 trillion foreign exchange reserves does not depreciate.

Zhou Xiaochuan, the central bank governor, said last month that in the long run it may be ideal to replace the dollar with a new international reserve currency under the mechanism of the International Monetary Fund

by: Avery Goodman

On Tuesday morning, gold derivatives dealers, who had sold short in the face of a fast rising gold price [evidence of either unbelievable stupidity or gold market manipulation], faced a serious predicament. Some 27,000 + contracts, representing about 15% of the April COMEX gold futures contracts remained open. Technically, short sellers are required to give “notice” of delivery to long buyers. However, in reality, buyers are the ones who control the amount of gold to be delivered. They “demand” delivery of physical gold by holding futures contracts past the expiration date. This time, long buyers were demanding in droves.

In normal times, very few people do this. Only about 1% or less of gold contracts must be delivered. The lack of delivery demand allows the casino-like world of paper gold futures contracts to operate. Very few short sellers actually expect or intend to deliver real gold. They are, mostly, merely playing with paper. It was amazing, therefore, when March 30, 2009 came and passed, and so many people stood for delivery, refusing to part with their long gold futures positions.

On Tuesday, March 31st, Deutsche Bank (DB) amazed everyone even more, by delivering a massive 850,000 ounces, or 850 contracts worth of the yellow metal. By the close of business, even after this massive delivery, about 15,050 April contracts, or 1.5 million ounces, still remained to be delivered. Most of these, of course, are unlikely to be the obligations of Deutsche Bank. But, the fact that this particular bank turned out to be one of the biggest short sellers of gold, is a surprise [if I was a German citizen, I would be furious. Deutsche Bank short selling of gold has helped the dollar at the expense of EU gold. For a nation that experienced hyperinflation eighty years ago, this should be ABSOLUTELY UNFORGIVABLE.]. Most people presumed that the big COMEX gold short sellers are HSBC (HBC) and/or JP Morgan Chase (JPM). That may be true [I expect the remaining positions are overwhelmingly US/UK banks (ie: JP Morgan Chase)]. However, it is abundantly clear that they are not the only game in town.

Closely connected institutions, it seems, do not have to worry about acting irresponsibly, in taking on more obligations than they can fulfill [evidence of this always irritates me]. Mysteriously, on the very same day that gold was due to be delivered to COMEX long buyers, at almost the very same moment that Deutsche Bank was giving notice of its deliveries, the ECB happened to have “sold” 35.5 tons, or a total of 1,141,351 ounces of gold, on March 31, 2009. Convenient, isn’t it? [yes, it is.] Deutsche Bank had to deliver 850,000 ounces of physical gold on that day, and miraculously, the gold appeared out of nowhere.

The announcement of the ECB sale was made, as usual, dryly, without further comment. There was little more than a notation of a sale, as if it were a meaningless blip in the daily activity of the central bank. But, it was anything but meaningless. It may have saved a major clearing member of the COMEX futures exchange from defaulting on a huge derivatives position. We don’t know who the buyer(s) was, but we don’t leave our common sense at home. The ECB simply states that 35.5 tons were sold, and doesn’t name any names. Common sense, logic and reason tells us that the buyer was Deutsche Bank, and that the European Central Bank probably saved the bank and COMEX from a huge problem [Agreed]. What about the balance, above 850,000 ounces? What will happen to that? I am willing to bet that Deutsche Bank will use it, in June, to close out remaining short positions [Agreed], or that it will be sold into the market, at an opportune time, if it hasn’t already been sold on Tuesday, to try to control the inevitable rise of the price of gold.

Circumstantial evidence has always been a powerful force in the law. It allows police, investigators, lawyers and judges to ferret out the truth. Circumstantial evidence is admissible in any court of law to prove a fact. It is used all the time, both when we initiate investigations, and once we seek indictments and convictions. We do this because we deal in a corrupt world, filled with suspicious actions and lies, and the circumstances are often suspicious enough to give rise to a strong inference that something is amiss. Most of the time, when the direct evidence is insufficient to prove a case beyond a reasonable doubt, or even by a preponderance of direct evidence, circumstantial evidence fills the void, and gives us the conviction. We even admit evidence of the circumstances to prove murder cases. In light of that, it certainly seems appropriate to use circumstantial evidence in evaluating possible regulatory violations. The size and timing of the delivery of Deutsche Bank’s COMEX obligation is suspicious, to say the least, when taken in conjunction with the size and timing of the ECB’s gold sale. It is circumstantial evidence that the gold used by Deutsche Bank to deliver and fulfill its COMEX obligations, came directly or indirectly, from the ECB.

I’d sure like to know what the ECB’s “alibi” is. If I were an investigator for the Commodities Futures Trading Commission (CFTC), assigned to determine whether or not gold short sellers are knowingly violating the 90% cover rule, I’d be questioning the hell out of the ECB staffers, as well as employees in the futures trading division of Deutsche Bank. There is certainly enough evidence to raise “reasonable suspicion”. Reasonable suspicion is all that one needs to start a criminal investigation. It should be more than sufficient to prompt the CFTC, as well as European market regulators, to start a commercial investigation of the potential violation of regulatory rules by both the ECB and one of the world’s major banking institutions. That is, of course, if and only if, the CFTC staff really wants to regulate, rather than simply position themselves for more lucrative jobs inside the industry they are supposed to be regulating, after they leave government service. [our regulatory system is filled with conflict of interests…]

It is quite important to determine whether or not Deutsche Bank was bailed out by the ECB because that will answer a lot of questions about allegations of naked short selling on the COMEX. If the ECB knew that its gold would be used as post ipso facto “cover” for uncovered shorting, staffers at the central bank might be co-conspirators. At any rate, the German bank did sell short on futures contracts without having enough vaulted gold it sold a naked short. It also means that the ECB has facilitated a major rule violation in a jurisdiction (the USA) with which Europe is supposed to have extensive joint regulatory agreements, any number of which may have been violated by this action of the ECB. At the very least, naked short selling is a blatant violation of CFTC regulations, which require 90% cover of all deliverable metals contracts. If the delivered gold came directly, or indirectly, from the ECB, it means that Deutsche Bank’s gold short contracts were “naked” at the time they were entered into [Unless the ECB, like the US, is in the business of selling call options on gold].

The 90% cover rule is very old rule, designed to prevent fraud on the futures markets. Its origin dates back into the 19th century. Farmers, in that simpler age, were complaining that big bank speculators were downwardly manipulating grain prices on the futures exchanges. Nowadays, the CFTC has a predilection toward categorizing banks as so-called “commercials” or “hedgers”, rather than as the speculators that they really are. Traditionally, only miners and gold dealers whose business involves a majority of PHYSICAL trade in gold should qualify as commercials. However, the CFTC has ignored this for a long time, and qualified numerous banks and other financial institutions, whose main gold business is derivatives, as “commercial” entities, immunizing them from position limits and other constraints. As a result, just like the farmers of the 19th century, today’s gold “cartel” conspiracy theorists revolve their theory around an allegation of downward manipulation, and heavy short selling concentration.

Manipulation can only take place when there is a disconnect between supply, demand, and trading activity on the futures exchanges. The 90% cover rule attempts to force a direct tie between the futures market and the availability of particular commodities, so that supply and demand become primary even on paper based futures markets, just as it is in trading the real commodity. Unfortunately, the modern CFTC has ignored or misinterpreted the purpose of the 90% cover rule for a very long time. This regulatory failure has allowed the current free-for-all “casino-like” atmosphere that now prevails at futures exchanges.

It would be helpful if some of my colleagues, within the public prosecutor and securities regulatory offices, in Europe, as well as the CFTC in America, filed complaints for discovery, to ferret out the truth. In the interest of transparent markets, the ECB should be forced to disclose who purchased the gold they sold in the morning of March 31, 2008 and why the sale was timed in a way that corresponded to the exact moment in time that Deutsche Bank had a desperate need for gold bullion.

Was it yet another bank bailout? Has another bank sucked up precious resources belonging, in this case, to the people of Europe? Gold is needed to bring confidence to the Euro currency, as often noted by Germany’s Bundesbank, which seems to be less kind to German banks than the ECB. Why should the ECB be permitted to sell gold to closely connected derivatives dealers, if the primary purpose is to save those dealers from the bad decisions they have made, and the end result is to reinforce moral hazard? Should banks like Deutsche Bank be allowed to take on more derivative risk than they can afford without involving publicly owned assets? Did Deutsche Bank issue naked short positions? Have innocent European citizens now had their currency placed at more risk, and some of their gold stolen from them, simply to enrich private hands? All of these questions are begging for answers. [If I was living in the EU zone, I would be complaining very loudly about this ECB gold sale.]

European regulators are quick to condemn the Federal Reserve for its incestuous relationship to client “primary dealer” banks, special treatment of favored institutions at the expense of other non-favored institutions, propensity toward injecting dollars to artificially stimulate the stock market, seemingly endless bailouts of closely connected banks, and, now, the seemingly unlimited printing of new dollars. I’ll not attempt to excuse the Fed for its failures. Indeed, I believe that it is in the best interest of the American people to close down that malevolent institution, permanently. However, if any of the questions I have posed are answered in the positive, people might begin to understand that special favors, nepotism, corruption, and a failure to properly regulate are not confined to America. The real estate bubble, for example, was allowed to become much bigger in the U.K., Ireland, Spain, and eastern Europe, than it ever was in the USA. The collapse of real estate, in those countries, is going to be more severe, even though it is more recent in origin than the pullback in the USA. America happened to be the first nation affected, but it did not cause the world economic collapse. That was caused by the joint irresponsible policies in almost every major nation in the world.

Those who rely on the good faith of Angela Merkel, to keep the Euro inviolate, certainly have a right to get answers from the ECB and from Deutsche Bank. The answers will tell us a lot about the real proclivities of the ECB. As the U.S. dollar is progressively debased, in coming years, will the Euro be any better? [good questions] Is the ECB merely a European copy of the Federal Reserve “slush fund”, utilized by well connected European banks, for the purpose of private financial gain, much as the Federal Reserve’s assets are utilized by its primary dealers? If the ECB is willing to bail out a major trading institution from the mismanagement of its derivatives operations, who could honestly claim that it would hesitate to competitively debase the Euro against the dollar? Having the answers to the questions I have posed would give everyone the knowledge needed to make important decisions. That is exactly the reason that, in all likelihood, we will never get these answers. Maybe, Europeans and others ought to be dumping Euros just as fast as they are now dumping dollars, and buy gold and silver, instead. [While I still believe the euro will hold up better than the dollar, gold will do much, MUCH better.]

Aside from the regulatory issues, if we did discover that Deutsche Bank got its gold from the ECB, one glaringly strong inference arises. When a major derivatives dealer goes begging for gold, to the ECB, it is very strong circumstantial evidence that not enough physical gold is available for purchase on the OTC wholesale market. Up until now, bearish gold commentators have steadfastly denied that wholesale gold shortages exist. Instead, they have insisted that all shortages are confined to retail forms of gold. Now, when combined with the circumstantial evidence, however, common sense tells us that they are wrong.

Decision: There is sufficient evidence for this case to go to a full scale investigation. The CFTC and similar securities regulators in Europe need to properly investigate the gold conspiracy allegations. That has never been done to date. They must determine who is buying central bank gold and whether or not it is simply being sold into the open market, or channeled into the hands of favored financial institutions who then use it to cover naked short selling. The investigation must include detailed vault audits and explore all paper trails.