Political Metals

When the magnitude 9.0 earthquake hit Japan on March 11, it triggered an automatic shut down of reactors in the Fukushima nuclear plant. The quake also damaged and cut off external power from the national electricity grid. There was no power left to run the essential water pumps for the cooling system. As designed, the generators automatically kicked in to provide backup supply, but they were soon damaged by the Tsunami. Finally, the backup batteries kicked in to keep the pumps running, but after several hours, it ran out of power. The nuclear reactor core temperature rose, pressure built up, explosions followed, and finally the dreaded meltdown.

While the engineers and physicists are figuring out how best to contain the situation to prevent a potentially disastrous planet-wide contamination of air and water from a radioactive fallout, a meltdown of another kind is brewing….

Not unlike the nuclear fission chain reactions taking place at the core of a nuclear reactor, the world’s governments, central banks, and mega banks have been creating their own nuclear reactions (Governments issuing exponentially- accelerating piles of debt, central banks increasing money supply along the same exponential curve to match and mega banks creating financial derivatives in the quadrillions of dollars). Just as the continuously circulating water keeps the nuclear reactor’s core from overheating, so does the constant flow of these funny money keep the financial reactors under control.

But this flow is about to be disrupted again. The first disruption began in 2008, when the subprime mortgage crisis broke out. The financial power plant tripped, just as Fukushima did. Liquidity vaporised. The global financial system was at the brink of meltdown.

As “designed”, the printing presses at the Fed and ECB kicked in, just like the generators did. QE1 started to pump freshly created funny money into the system to prevent a meltdown. And it worked, temporarily.  You can see this effect by looking at an inverted chart of the Dow taken from this earlier post. As fresh liquidity from QE1 was flowing through, the Dow rose, causing the financial core temperature (inverse of Dow) to drop.

When the generators quit around March 2010, the core temperature started to rise. As designed, the backup batteries automatically kicked in, and the QE2 new money flow brought the temperature down again.

Now, note this. When the battery runs out, there are no more power sources left to keep the pumps running this time around. The QE2 backup battery power was designed to last till June, but we’re beginning to see signs of the battery wearing down (oval area). Here’s why.

Japan is the second largest foreign holder of US treasury debt, after China. Faced with the worst crisis since World War 2 and massive reconstruction cost ahead, Japan is not expected to be buying any more US treasury debt. They will instead be selling. China has already been reducing their holdings.  The US budget deficit is rising and the Fed is now not only the largest holder of treasury debt (above China & Japan), it will be the only major buyer left.

The U.S. debt situation is at a “tipping point,” Dallas Federal Reserve Bank President Richard Fisher said on Tuesday, and urged the U.S. central bank to refrain from any further stimulus measures. Source [Reuters]

If the Fed stops “further stimulus” (nice way of saying printing money), with China and Japan off the table and Europe on the verge of raising interest rates, the US Treasury market goes into meltdown and the dollar is history. On the other hand……

“If we continue down on the path on which the fiscal authorities put us, we will become insolvent. The question is when,” Fisher said in a speech at the University of Frankfurt (emphasis mine). Source [Reuters]

Either way, the dollar is dead, but they still have a choice over how it will die.

While you still have time, consider exchanging your paper money for some hard assets.

Incidently, silver hit a new 31-year nominal high today.

-