WHO DARES DOWNGRADE US DEBT? CERTAINLY NOT FITCH, MOODY´S OR STANDARD & POORS

The history of Western society is a long register of the struggle between the individual longing to be free and the political lord insisting on sovereignty and order. Where people seek liberty, self-determination and self-government, they seek to regain their freedom of money or, at least, to force government to be honest in monetary matters.

~ Hans Sennholz, Money and Freedom

Dear Mountaineers,

It´s all about the money! This ‘common wisdom´ is obviously true, by definition, when it comes to financial markets. These days it´s even more true than usual. What we face today is a global monetary crisis. When the sovereign debts and fiat currencies of leading nations are in question, the entire system of global finance is in question. And that is exactly where we are today.

If you did not yet read the Mountain Vision Update of May 12th titled "US RATING AGENCIES: A FORMIDABLE WEAPON OF MASS DESTRUCTION", I recommend you read it now. I think it is crucial to understanding the currency power games developing before our eyes these days.

Defending that AAA by denigration

What´s going on? In brief, we have America defending the Greenback´s position as the number one world reserve currency. And, America is playing smart and tough. When you are not able to fix your own problems and clean up your finances, then what needs to be done is denigrate and weaken your closest contender, in this case the Euro.

America has been piling up debt at an incredible rate, more so than most other countries. The solution to any problem in America has been more QE (quantitative easing). The total debt of America has passed the US$ 13 trillion mark now, without including unfunded liabilities like Medicare, Medicaid, and Social Security.

America has been able to run this QE model for decades because it has been the ‘owner´ of the world´s number one reserve currency. Based on the market´s trust, and the trust of international governments, America has been able to sell its government paper (Treasury Bonds) and finance its growing deficits and debt successfully.

Over the past 6 months, the placement of debt paper in the markets -- in other words, the selling of Treasury bonds at the Treasury auctions -- has become increasing difficult. The US dollar has been questioned and trust was crumbling. The AAA-rating of America was in question. That is a situation that Mr. Geithner and his friends could not stand by and accept. Something needed to be done.

Forcing Europe fully onto the path of Quantitative Easing

My recent comments and concerns over the gyrations and power games surrounding international currencies have been confirmed starkly over the past few weeks. After Greece´s debt downgrading by US rating agencies, the downgrading of Spain has now followed suit. In this context, it is interesting to review the sequence of recent events, with the travel schedule of the US Treasury´s Timothy Geithner being of particular interest.

He has been touring the world at an incredible pace -- from China, to London, to Germany, to Spain. Everywhere he stopped, he pushed for quantitative easing. Europe, according to Mr. Geithner, is expected to "chip in and support the global economic recovery", or in other words, run deficits like America.

Europe is being forced to take the QE path to the end!

Almost six months after the global sovereign debt crisis erupted with the Greek ratings downgrade by Fitch in December, the European Central Bank bowed to political pressure -- both foreign and domestic -- and introduced a Euro 750 billion plan to support Eurozone nations deemed to be "in need". Basically, Europe´s own version of ‘quantitative easing´.

Interestingly, it was widely concluded that after issuing the plan, Europe and its Central Bank, the ECB, had taken a blow to its credibility from which it will not recover. However, the fact is that the ECB really just joined the ranks of several other central banks, most notably the Federal Reserve and the Bank of England. The Euro´s days are said to be numbered after caving in to market "pressure". Mountaineers understand that this pressure was selective and focussed on Europe by the US ratings agencies.

Spain had the nerve to announce stark saving plans a few weeks ago, contrary to the ‘recommendations´ Geithner offered during his prominent visit. Now, Spain has been downgraded. These days, tightening your belt and reducing spending, apparently, leads to a rating downgrade.

Who would dare to downgrade US Debt?

Here is an interesting comment that I found last week on Forbes.com, in an article about Martin Weiss and his "open letter" to US rating agencies: "By continuing to confirm America´s triple-A rating, you help create a false sense of security overall - the recipe for a possible meltdown in the market for US sovereign debt."

In his letter, Mr Weiss takes the position that in order to get the US government to actually tighten its belt and do something about the real underlying issues and get their household in order, their debt should be downgraded. He wants the US administration to start practising what they have been preaching to the rest of the world, even at the cost of a spike in US interest rates and a likely meltdown on US stock markets.

Everyone knows that the US rating agencies would not dare to downgrade US debt. Yes, everyone seems comfortable in their notion that American debt paper at this point is ‘safe´. German General Nagel, in 1942, once said that "What matters is not what is true or false, but exclusively what is believed."

That is unfortunately true, at least for financial markets. They are moved by what investors believe, whether it is true or not.

Therefore, as investors, even though we may not agree ideologically, we need to accept that currently the cards are stacked in the dollar´s favour. And America has Europe in a corner. Over the next few weeks and months, betting against the dollar may be a bad choice.

Sincerely,

Your "Swiss Mountain Guide"

Frank R. Suess

UPDATE ON FBAR RULES FOR US PERSONS

On February 23rd, the US Treasury Department´s Financial Crimes Enforcement Network (FinCEN) released a Notice of Proposed Rulemaking designed to clarify certain aspects of the Report of Foreign Bank and Financial Account (FBAR) rules. In particular, these rules should clarify the definition of the terms "financial account" and "signature authority over accounts".

FinCEN has indicated their intent to make the proposed changes effective for filings due on or after June 30, 2010, though the rules are currently only proposed and cannot go into effect until properly formalized and adopted.

For a more detailed and legally accurate review of the proposed rules, we recommend visiting an article by Duane Morris LLP posted at Martindale.com. For our purposes here, we would like to summarize the most essential points for you.

For decades, the FBAR rules have been in place and have required all US persons who have signatory authority over, or financial interests in, a foreign financial account to make filings no later than June 30th of each year. However, the rules and the FBAR forms have always been ambiguous with regard to some types of transactions and foreign investments. Furthermore, some types of investments have not been legally reportable. Until now, for instance, foreign real estate, physical precious metals or insurance policies have been (and currently still are) excluded from reporting requirements.

This has, in the past, allowed US taxpayers to compliantly hold assets overseas without reporting - i.e. compliant privacy, a situation that is highly recommended for wealthy investors.

In the aforementioned new rules, FinCEN has proposed making certain types of foreign accounts reportable that historically had not been reported in the US. Given the significant penalties for FBAR non-compliance, serious consideration should be given to these proposals.

Noteworthy Changes Proposed

Below you can find a summary list of the most noteworthy changes found in the proposal. From our perspective, the change that is most notable is the one with regard to reporting requirements on insurance. Until now, insurance was not reportable on an annual basis as long as an insurance policy was structured according to US tax law so as to defer taxation, i.e. so that gains were not taxable until withdrawn from the policy in some way. It appears that this rule may no longer hold up.

Most noteworthy changes: 

- Definition of "United States Person": FinCEN proposes to define a United States person as a citizen or resident of the United States even if not a US person for tax purposes. 

- Definition of bank, securities, and other financial accounts in a foreign country: The proposed rules define as an account any formal relationship with a person or entity that provides services or dealings connected to a financial transaction. 

- "Other Financial Account": The proposal would define "other financial account" to mean:

› An account with a person that is in the business of accepting deposits as a financial agency; 

› An account that is an insurance policy with a cash value or an annuity policy; 

› An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or 

› An account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net-asset-value determination and regular redemptions.

In conclusion, although these proposals have not been confirmed yet, it does appear as though privacy for Americans is becoming a thing of the past, even privacy of the compliant kind. There are a few compliant privacy strategies left. For instance, physical precious metals stored abroad are, at this point, non-reportable. However, it is foreseeable that the IRS will want to know about that too at some point. Big Brother wants to know it all!

Is allocated gold reportable on the FBAR?

For an active and up-to-date discussion on this topic, we recommend you visit Vernon Jacobs´ website or his blog on this very topic. One question on his blog, which you´ll read here, pertained to the Perth Mint Certificate Program. The same answer would apply to Global Gold as well:

QUESTION: "I would like to confirm that Section 4.26.16.3.2 of the IRS Internal Revenue Manual does not apply to ´allocated´ gold within the Perth Mint and therefore is not reportable."

REPLY: "First of all, I have to point out that this free Q&A service is not intended to provide the equivalent of a legal opinion that can be used to avoid any potential penalties that the IRS may impose based on an allegation of a reckless disregard of their rules and regulations. And I frankly doubt if ANY lawyer or tax accountant would be willing to prepare a covered opinion on any aspect of the FBAR rules, which are very ambiguous.

"Thus far, neither the IRS or FINCEN have provided any written guidance with respect to how they will interpret the FBAR law with respect to either allocated gold or unallocated gold, or e-gold or e-bullion or even with respect to numismatic gold coins or silver or palladium or platinum or any of the hundreds of diverse variations that creative taxpayers, lawyers and tax accountants can devise.

"Therefore no confirmation can be provided. All I can say is that if I am preparing an FBAR form for a client who has an allocated gold bullion storage arrangement I would construe that to be beyond the reasonable meaning of a financial account. However, I would also warn the taxpayer that I cannot offer ANY assurances regarding how the IRS would treat the same arrangement. Nor can I speak for the opinions of any other tax professionals on this subject."

RON´S PANORAMA - THE GREEK TRAGEDY IS JUST A SNEAK PREVIEW OF WHAT´S COMING TO WASHINGTON

"The current European debt crisis likely will not end until the euro collapses as a currency and takes the entire European Union with it."

~ Dennis Gartman, The Gartman Letter

I was just in Greece, where the stupidity and venality of the political class are in full view.

The coming repudiation of Greek debt and the credit contagion that will spread among the weaker members of the European Union, including the UK, will ultimately slop over onto the U.S. But while we wait, the process will bring us the answer to a long-simmering question: will the European Union be a supra-state ruling the formerly independent nations of Europe or will it be a confederation of quasi-independent sovereign nations?

The Eurocrat elites want a union of European nations with one central bank, one currency and just one flag that really matters, all molded to fit the American model. I believe Europe would be far better off as a confederation of sovereign states that allows competition among individual national currencies. Some countries might even revert to backing their national currency with gold. It´s amazing how responsible institutions become when they´re forced to compete.

Even with national currencies, there still would be room for the euro, which the European Central Bank might make convertible into gold. Remember, Germany knows more about the catastrophe of runaway sovereign debt and currency collapse than any other nation in the West, and today they lead Europe and the European Union.

Although the euro has lost 16% of its value in the last 120 days, I expect it to survive the sovereign debt crisis. But the eurozone may shrink as Greece and the other fiscally weak governments replace the euro with national currencies that they can inflate whenever convenient. That would leave the euro as the currency of choice for a few strong, wealthy and fiscally conservative nations like Germany - the countries most likely to welcome a gold-backed currency.

We are now living through the violent end of the age of fiat paper money and thoughtless government debt. In the future, the desire for a secure store of value and medium of exchange is going to force currency competition. Even the U.S. dollar, following hyperinflation and a run on our American national debt, could be reborn as a gold-backed currency.

But the transition will be full of hazards that could touch you in a very painful way. Where will bankrupt Washington get the gold to provide a credible cushion for a new currency following a hyperinflationary collapse? The special hazard for American citizens is that the government will get the gold it needs by taking it from them.

But between now and then, prepare for some tough times, and expect periods of US dollar strength vs. the euro and even the Swiss franc. There is no official link between the franc and the euro, but the euro tugs on the decisions of the Swiss National Bank, since Switzerland trades predominately with the EU countries. The Swiss franc won´t move as violently down and up as the euro´s big swings, but it will track the general direction.

Americans should use their recently stronger dollars to add to holdings of Swiss francs, of securely stored offshore gold and of mining shares, along with some Asian investments. With trillions in unfunded liabilities for Social Security and Medicare, Washington´s debt load is far greater than the burden that is now crushing the governments of Greece and the other PIIGS countries. The dollar´s current strength will prove transient.

Eventually the sovereign debt crisis will also come to the U.K. and then to the U.S., with disastrous results. The tragedy in Greece today is just a glimpse of what will happen to the sovereign debt of the United States. It will come to America, and it will come on its own schedule, so be prepared.

(This article by Ron Holland originally appeared in the "Swiss Confidential.")

Ron´s Panorama is contributed by Ron Holland and offers economic, financial and social considerations for Americans, from an American - with a somewhat Swiss perspective. Ron is a retirement expert and consultant, who works out of Zurich and is a contributing editor to the Mountain Vision Newsletter.

Also by Ron Holland and much noted: The 10 Step Final Countdown to Retirement Plan Nationalization. For a collection of Ron Holland´s past articles, go to Ron Holland´s Best at Lew Rockwell.{/website}

NEWS BRIEFS

Major Emergency: US Debt Has Passed US$ 13 TRILLION!!

America´s 14-figure IOU is reaching dangerous heights. Last week, the US national debt passed the US$ 13 Trillion mark, a figure which equals almost 90 percent of the nation´s gross domestic product.

That rising number had Secretary of State Hillary Clinton connecting two political dots: U.S. debt and world influence. In reference to the Obama administration´s Thursday unveiling of its national security doctrine, Clinton stressed that the nation has to shore up its issues at home to compete with powers abroad. "We cannot sustain this level of deficit financing and debt without losing our influence, without being constrained in the tough decisions we have to make," Clinton said.

While the focus is in Europe, diverting attention from the US debt which is spiralling out of control, the US Treasury master-of-disaster, Tim Geithner, is on a global road show pushing US Treasury paper and denigrating Euroland.

The big elephant ready to topple over on top of us all -- the true emergency -- is in America. Any and all means are being used to avoid that elephant from tipping.

Go to Story

Gold Relative to the S&P500 (1928 to 2010) - This Bull Market Is Just Starting

An interesting chart is provided by WJB Capital Group´s John Roque, which portrays the past 4 cycles in gold relative to the valuation of the S&P500. If you consider the ratio of the stock market relative to gold price of any relevance, this chart clearly indicates that this Great Gold Bull Market has a long and steep way to go.

Is it too late to buy gold? Not at all. On the contrary, it´s HIGH NOON!

Go to Story

Bond Spreads Widen on Bank Credit Risk Concerns

As the euro recouped losses but remained on its back foot after a cut in Spain´s credit rating, and China warned that the global economy remained vulnerable to sovereign debt risks, Spain assured investors it would reform its rigid labor market even if employers and trade unions cannot agree.

The ECB said eurozone banks would need to make provisions for further losses this year of 90 billion euro´s -- EUR 105 billion in 2011 -- on top of some 238 billion euros in bad debts written off by the end of 2009. That was the first time it has given an estimate for next year.

Meanwhile, fears about the creditworthiness of US and European banks have pushed the interest rate premiums on bank bonds sharply higher over government bonds, hitting other corporate bond markets and raising borrowing costs for many companies. Banks and companies that use the bond markets may need to look for alternative funding should credit concerns intensify and investors demand much higher rates of interest from new bond issues.

Go to Story

Swiss Financial Services Growing Stronger Amidst the Crisis

The Swiss financial services industry, and in particular Swiss banks, has recently come under increasing pressure from neighboring states over bank secrecy rules. Now, however, Swiss banks and insurance companies, across the board, are reporting strong asset inflows.

While a considerable outflow of funds -- particularly from American, German, French and Italian investors with undeclared funds -- was a concern for the Swiss financial center over the past months, the tide has turned...and forcefully. In the midst of the European / American debt crisis, there is now a huge surplus of so-called ‘onshore´ funds (in other words, taxed and declared) flowing into Swiss banks, insurance companies and into the hands of Swiss asset managers. These funds are coming from the aforementioned countries, as well as from worldwide investors seeking a safe and reliable haven for their assets.

Swiss private banks like Julius Baer had already reported strong money inflows for the first quarter of 2010. In May, this trend continued. This is not about banking secrecy. These funds are deposited in Switzerland because of its jurisdictional and institutional safety, its professional services, and its political stability.

Go to Story

Swiss Banking Secrecy Today

In Switzerland, banking secrecy protects the financial privacy of citizens from the unauthorized access of third parties or by the State. Important financial centers such as Switzerland are exposed to the risk of abuse for criminal purposes, and therefore require high-quality regulation and supervision.

At the international level, Switzerland participates at the front lines in the fight against cross-border financial crime. It uses internationally recognized standards for ensuring integrity. By adopting Article 26 of the OECD Model Convention on international administrative assistance in tax matters in its bilateral double taxation agreements, Switzerland will now exchange information for tax purposes with other countries in individual cases and upon specific request.

Go to Story

UBS Deal Takes Center Stage in Swiss Parliament

On August 19, 2009, Switzerland and the United States reached a deal in a tax case that lifted the threat of crippling legal action against UBS but forced the bank to hand over confidential client data.

In trying to save UBS from further conflicts with the US, the government stepped in and upgraded the deal to a state contract subject to parliamentary approval afterward. Switzerland has until August 20th to process the US request for administrative help concerning 4,450 client accounts held by US citizens at UBS. The Internal Revenue Service (IRS) originally wanted information on 52,000 clients.

With the ink on the settlement still wet, the government and those in charge at UBS breathed a sigh of relief - but prematurely: in January, a Swiss court ruled that the handing over of confidential UBS bank details to US investigators by the Swiss authorities would be illegal.

Now, Swiss politicians have launched a bazaar-type negotiation over an issue, which in the opinion of the Mountain Vision Team, leaves no room for negotiation whatsoever. The handing over of this client data is ILLEGAL, period! We shall see whether the Swiss Parliament holds up the rule of law, or whether the Swiss people may need to have the final word on this in a national referendum.

Go to Story

Faber: "The Western World is Going Bust!"

The leading Austrian economic think tank, the Ludwig von Mises Institute, held a conference at the University Club in Manhattan in which Marc Faber, famed contrarian investor and publisher of the "Gloom, Boom and Doom Report", gave his perspective on the financial crisis and his outlook for the future.

As usual, Mr. Faber takes no prisoners...

He warned that "central banks will never tighten monetary policy again, merely print, print, print. Bubbles used to be concentrated in 1 sector or region in the 19th century, but off of the gold standard this concentration has ended."

Go to Story

Wall Street Roller Coaster -- Hard on Nerves and Nails...