This Week on "States in Crisis"

Ireland, Gold Futures , commodity speculation, and the rest of this week's news
- in advance...! THIS WEEK's episode of "The WelfareState in Crisis"
features a guest appearance by the Emerald Isle,currently seeking about $110
billion in bailout money from theEuropean Union, writes Dan Denning in his Daily
Reckoning Australia. Actually, Ireland is not seeking that money, and that
appears to be a part of the problem. The Irishgovernment is content that it's
managing its problems well,independent of European meddling. But with 10-year
Irish bond yieldsblowing out to a spread of 646 basis points over 10-year German
debtlast week, European officials are worried that problems in Irelandare
problems for the Euro. And if problems for the Euro get worse,that means
problems for Portugal and Spain too. No wonder the US Dollar quit fallinglast
week. And no wonder commodities fell like a stone. Friday was anugly day for
commodities speculators. The CRB Index in New York fell3.6%. Every single one of
its 19 components was down. Sugar contractsfell 12% in London and corn and
soybeans traded limit down. Part of the shocking action incommodities futures
markets is the raising of margin requirements byexchanges. It happened in silver
last week. And it happened for sugartoo, when the ICE futures boosted margins on
sugar contracts by 81%to shake out speculators. It will probably happen on Gold
Futurestoo, and that might explain the $40 thud last Friday, among otherthings.
No one is forced to speculate, ofcourse. But this is what the Bernanke Fed has
wrought. ItsQuantitative Easing action has put dollar owners in the position
ofdoing nothing and losing money to inflation, or speculating intangible assets
that go up in price relative to the dollar. And it's not just commodities.
It's currencies too. The G-20 summit in Seoul failed toproduce any result on
competitive currency devaluations. No onereally expected it to. But what's
next? Since there is no quick andeasy solution to replacing a broken world
currency system, the slow,difficult, and ugly scenario must take place. It will
probably beslow, difficult, and ugly. One thing you should expect more of isan
escalating level of capital controls. Ironically, the firstmanifestation of this
has been in export-oriented economies likeBrazil, where the government tripled a
tax on foreign investment inlocal bonds from 2% to 6%. It was designed to
prevent furtherappreciation in Brazil's currency, which yields over 10% and is
up35% in trade-weighted terms since last year. China, South Korea and other
countriesare taking similar measures. For big exporters, a stronger
currencytranslates into a loss of competitiveness. And when capital marketsare
wide open and you find yourself on the receiving end of hugeinflows, it can lead
to rapid asset price appreciation and otherforms of less desirable inflation. By
the way, this shows you how everyoneis complicit in trying to return to the
status quo ante GFC. Theexport-driven BRIICs want to pretend that the
credit-financed Welfarestates don't have real structural deficit and
demographic issuesthat prevent a return to "normal" rates of consumption.
They wantthe world be the way it was. Here in Australia, other than houseprices
being utterly unaffordable, it looks like things have neverbeen better. The
rising Aussie dollar (up 17% since the end of Junealone) helps "contain"
some of the inflation from booming coaland iron ore exports. That's why the
Reserve Bank of Australia isone of the only central banks in the world that does
not appear to beactively trying to weaken its currency. Maybe the RBA agrees
with Bloombergthat on a purchasing power parity basis, the Aussie is trading at
a30% premium to fair value. That makes it the most over-valuedcurrency in the
world at the moment. If it's a short-term trade(instead of long-term or
secular trend in which the Aussie surpassesthe USD), the currency will weaken
and not do any permanent damage toAustralia's own export competitiveness by
making Aussie exportsmore expensive than alternatives from Africa. For now, the
Aussie is the placeeveryone wants to be as well; a high-yield commodity currency
from acountry with comparatively low public sector debt (although highhousehold
debt), low unemployment, and economic growth correlated toAsia. What could
possible go wrong when things can't' get anybetter? Speaking of Asia, the
other non-Irishnews that rocked commodity markets last week was that China
againraised reserve requirements at key banks and may raise interest ratesto
ward off inflation being poured into China from the U.S. Stocksand commodities
fell hard. What do you make of all this mess? To us, it means that anxiety about
theAussie being too strong for too long may be short-lived. China couldbe doing
a dress-rehearsal for a much more dramatic fall in assetprices as the
authorities try to prevent inflation from surging. Thishas obvious and bearish
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