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Thread: FX: The final front in the war on terror - Dave Lewis

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  1. #1
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    Default FX: The final front in the war on terror - Dave Lewis

    FX: The final front in the war on terror

    by Dave Lewis - Dude, Where's the Dharma?
    They [the US] get our oil and give us a worthless piece of paper. Iranian President Mahmoud Ahmadinejad

    God willing, with the fall of the dollar, the deviant U.S. imperialism will fall as soon as possible too
    . Venezuelan President Hugo Chavez


    If people would look at the strength of our economy, they'd realize why, you know, I believe that the dollar will be stronger
    . US President George W. Bush
    The photo is of a friend of mine currently stationed in Iraq kindly sent me this picture. I wish him a safe return.

    During my absence from posting (for which I apologize, I've been putting the finishing touches on my new house before the snow flies) Gold finally managed to break over $800, initially without much comment. "Whew," I said to myself as the $800 level was breached, "so long as Gold can stay under the media radar, its price can really fly."

    But, my relief was short-lived. As $800 quickly led to almost $850 US Treasury Secretary, Henry "The Hammer" Paulson and President Bush began to talk up the US$. This was followed by the twins of terror, Iranian President, Mahmoud Ahmadinejad and Venezuelan President, Hugo Chavez, gleefully cheering the death of the US$. "Damn," I said to myself, "so much for being under the radar. Now we have a new front in the war on terror- the US$."

    This got me a bit nervous as I'd hate to discover that betting against the US$ was considered an act of treason. Fortunately, or so I hope, the fact that a good number of senior US officials, including one former Fed Governor (who shall remain nameless) have heavily bet against the US$ using Gold, should keep such anti-anti-US$ trading sentiments from becoming law.

    Further reflection led me to speculate that FX was not just a new front in the war on terror, but its final front.

    President Chavez is, I believe, correct, in part, when he links the stability of the US$ with my country's ability to project its military might as it does. It is by virtue of the US$ being the world's reserve currency that the current wars in Iraq and Afghanistan can be financed on such good terms. If the US$ loses its status as the reserve currency financing future military endeavors will not be cheap and will likely require cutbacks in domestic spending- a difficult trick given our looming demographic problems.

    If the decline of the US$ was solely a function of the comments from the twins of terror I wouldn't expect further declines. But the US$'s decline has little to do with their views. Rather, as I have been commenting for years, its decline is a function of an over leveraged US economy and our external imbalances.

    If I was in President Bush's or Hank Paulson's shoes this is not a fight I would choose, as it is a losing battle. But (thankfully) I am not in their shoes. My sense is that these comments from the twins of terror has and will continue to invigorate the defense of the US$- via intervention, mind you, not via policy changes that might change the underlying fundamentals.

    The twins of terror are not, as you might suspect, the only heads of state to link the US$'s status as world reserve currency and the US' ability to project military might. Former Malaysian Prime Minister Tun Dr Mahathir Mohamad said, last year, "When the demand for the dollar falls, America will be weakened and it will lack the ability to act as a bully in the global stage." This suggests to me that $ supportive intervention might be met with $ negative intervention- and the battle at the final front in the war on terror will begin.

    To the extent my analysis is more or less accurate, defending the US$ by intervening in the markets sets the stage for: 1) much greater volatility 2) a significant decline (and surge in the price of Gold) when the battle is lost in somewhat similar fashion to the decline of the GBP or ITL when the ERM came apart in 1992.

    See also:
    Captive bidding at the auction: How bond vigilantism was swamped - Dave Lewis

    Dave Lewis studied Philosophy and Physics at Cornell; started trading at a small "black box" CTA in 1987; traded FX and FX Options at Chase; traded FX, FX Options and futures at Moore Capital (more execution than trade origination); designed the first FX Options on-line (Reuters/Telerate) commentary service for Thomson Financial in 1993; designed a similar service for IDEA. Managed IDEA Singapore which included consultation services for most of the Asian CBs and Treasury Departments. He started his own on-line consulting company in Singapore which was purchased by 4CAST. He retired in 1999 and since then has managed his own account and home schools his son. You can read his blog at http://dharmajoint.blogspot.com


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    Last edited by FRED; 11-30-07 at 06:22 PM.
    Ed.

  2. #2
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    Default Re: FX: The final front in the war on terror - Dave Lewis

    Dave,

    I am sure I speak for all of us when I also wish your friend a safe return from Iraq.

    This alternative viewpoint to the war on the dollar turned up in The Times, London.

    December 3, 2007

    Sub-prime debacle is not the big story
    Anatole Kaletsky: Economic view

    http://www.timesonline.co.uk/tol/com...MC-Bltn=LOF6I4

    "What has been this year’s most important economic and financial story? Most people seem to agree that it has been the global credit crunch and the US housing crisis. However, in fact, this has been a sideshow compared with the far more important shift in the structure of global growth in favour of America, largely at the expense of Europe, including Britain. This shift was confirmed by the remarkably strong US GDP figures published last Thursday and is likely to trigger a substantial rebound in the dollar – just when cover stories in business magazines around the world are announcing the American currency’s permanent decline. "

    Food for thought?

  3. #3
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    Default Re: FX: The final front in the war on terror - Dave Lewis

    Quote Originally Posted by FRED View Post
    This got me a bit nervous as I'd hate to discover that betting against the US$ was considered an act of treason. Fortunately, or so I hope, the fact that a good number of senior US officials, including one former Fed Governor (who shall remain nameless) have heavily bet against the US$ using Gold, should keep such anti-anti-US$ trading sentiments from becoming law.
    It is interesting that you mention this.

    I've heard more than a number of times on the Financial Sense News Hour radio show speculation that once the dollar really gets hammered that various government control mechanisms will be put in place to prevent a run on the dollar (e.g. capital controls, bank transfer limits, etc).

    One mechanism FSN mentioned is banning gold under the excuse that gold is supporting terrorism. This fits nicely with your concept that dollar alternative investments will be considered treasonous. Heck, its happening now. When Peter Schiff is interviewed on Fox and CNBC, the discussion participants and the hosts say that Peter is anti-patriotic to invest in foreign stocks, currency, and gold.

    As the dollar drops even further and gold hits record highs, I expect this rhetoric to continue, worsen, and ultimately result in some type of government control (outright ban, punitive taxation on certain investments, etc).

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    Default Re: FX: The final front in the war on terror - Dave Lewis

    Quote Originally Posted by dbarberic View Post
    It is interesting that you mention this.

    I've heard more than a number of times on the Financial Sense News Hour radio show speculation that once the dollar really gets hammered that various government control mechanisms will be put in place to prevent a run on the dollar (e.g. capital controls, bank transfer limits, etc).

    One mechanism FSN mentioned is banning gold under the excuse that gold is supporting terrorism. This fits nicely with your concept that dollar alternative investments will be considered treasonous. Heck, its happening now. When Peter Schiff is interviewed on Fox and CNBC, the discussion participants and the hosts say that Peter is anti-patriotic to invest in foreign stocks, currency, and gold.

    As the dollar drops even further and gold hits record highs, I expect this rhetoric to continue, worsen, and ultimately result in some type of government control (outright ban, punitive taxation on certain investments, etc).
    After all, it would not be the first time the United states has done that.

  5. #5

    Default Re: FX: The final front in the war on terror - Dave Lewis

    I do not think Gold will be banned. I have several reasons:
    - What do you think the big guys are invested in? Not the banks, but the real owners of the banks. GOLD. I think they bough it up cheap.

    - Banning Gold means that any country who is buying Gold is subsidized by the USA. Bad idea. Even now Russia and China (etc.) must be very happy that the West is subsidizing their gold buying. I am happy too.

    No, I think they have bigger problems and other goals than to suppress the gold price or buy gold. It is not a big issue. The demise of the FIRE economy and the inflation in price of anything tangible are the big issues.

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    Default Re: FX: The final front in the war on terror - Dave Lewis

    I agree. It's a non-issue, unless Ron Paul gets in.

    Even then, I bet James Turk becomes a very, very rich man (I don't know when his patents expire, though) ... because no one will be actually handling Gold.

    The original anti-gold actions were taken when Gold and Silver were common for everyone.

    It will NOT occur to anyone in power now. When was the last time, do you think, Cheney or Bush or Paulson or Bernanke or any Senator or Congressman held a gold coin?

    Or even thought about Gold unless asked by Ron Paul?

    Quote Originally Posted by BlackVoid View Post
    I do not think Gold will be banned. I have several reasons:
    - What do you think the big guys are invested in? Not the banks, but the real owners of the banks. GOLD. I think they bough it up cheap.
    This is a bit iffy as a reason the gov won't ban. The author of the recent book on the Liberty dollar (the $2million coin) claims that a lot of the richest people on Wall St bought Gold and moved it offshore in the weeks leading up to the original "turn in your gold for US dollars" presidential order.

    This author is not, apparently, a sound money guy or a GATA member. He got interested in that coin in his work at an auction house and did his own historical research on the coin's history.

    Quote Originally Posted by BlackVoid View Post
    - Banning Gold means that any country who is buying Gold is subsidized by the USA. Bad idea. Even now Russia and China (etc.) must be very happy that the West is subsidizing their gold buying. I am happy too.

    No, I think they have bigger problems and other goals than to suppress the gold price or buy gold. It is not a big issue. The demise of the FIRE economy and the inflation in price of anything tangible are the big issues.
    Last edited by Spartacus; 12-05-07 at 05:03 PM.

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