Are we headed for a global fiat currency meltdown? That is what David Galland of The Casey Report argues in his latest post. While the article is notably tilted against the actions, recommendations, and claims made by the politicians and so called “experts” that have stated the economy is recovering, it is hard to argue with Galland on some key points:

From CaseyResearch.com:
In this fiscal year, the U.S. government will run its second trillion-dollar-plus deficit…

… deficits have consequences. And what might those consequences be?

For starters, rising interest rates. Because in order to finance its hyperactive spending, the government will have to sell a lot of debt – and because all the developed nations find themselves in the same boat, they’ll have to manage those sales in an increasingly competitive environment.

Of course, higher interest rates put yet more pressure on the many businesses that rely on access to capital to sustain themselves. And higher rates crush borrowing for houses and other large-ticket items… which means, they crush the economy. Especially one perched on a foundation of debt.

Inflation is another consequence, because when the prospective debt buyers begin to stay home or, more likely, agree to show up but only for a more attractive yield, the Fed will increasingly be forced to monetize the debt. Leading to the demand for even higher yields. Once the monetization begins in earnest, and in plain sight, Obama’s high-speed spending train will find itself on very wiggly tracks, leading in relatively short order to a debt-fueled currency crash.

The point is that the only real hope for the country starts with deep cuts in government spending. Now, I am not talking about talking about cutting spending – you know, where you stand in front of a warmed-up audience and talk about spending cuts. But honest-to-goodness, real spending cuts.
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Will the leaders of our nations realize the consequences of their free spending before their currencies become worthless? With no signs of letting up after the Greek bailout, it’s unfortunate that we must acknowledge the fact that currencies such as the Dollar are on the path to destruction.

Nic Lenoir from ICAP thinks nobody in Europe has any idea how to fix this growing problem–I concur.

From ZeroHedge.com:
As I have suggested a few days ago, there are not that many reasons to want to own German Bunds yielding 2.75%. The Euro currency is dropping faster than Britney Spears’ career, the yield is not exactly attractive, and the Bundesbank is one of the central banks that has been diluting its balance sheet in last week’s sovereign bonds buying in Europe. Overall Bunds are not exactly a winner for long term investors it seems at these levels. Then you have the confidence inspired by a market you cannot short… 60% of the time banning short selling works all the time. Except that it never works. Yesterday’s actions by Germany only highlight one thing: no one in Europe has a clue as to what do. Again we think the options are simple: dissolution of the Euro or currency debasement. But we can surely expect a lot of shenanigans before either conclusion materializes as politicians are trying to save the European dream. – Nic Lenoir
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The newest columnist on our favorites list, Ann Brenoff, released a great piece on WalletPop.com about the alleged recovery of the US economy. Using common sense that seems to be disavowed by government-sponsored politicians, bankers, economists, etc, Ms. Brenoff hits the nail on the head when it comes to the renewed interest in calling the recession over.

Brenoff in response to today’s NBER “official” release.

From WalletPop.com:
This high-falutin’ committee wasn’t ready to officially pronounce us out of the economic woods today. But unofficially, the answer to whether the recession is over resides a little closer to home. Simply put, if you’re still asking the question, it probably hasn’t ended for you personally — which frankly, is the only answer that really matters at the end of the unemployed day.
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Wall St. and Central Bank-types alike continue to be completely skewed in their view of if and when the recovery happens because it simply does not affect them like it would affect the every day person.

We can only speculate when the economy will truly recover, but using the most simple of indicators in employment growth (that is not generated by the government) to find the end of the recession is still the best and most sincere way of measuring strength and growth in US and global markets.

With the Volatility Index (VIX) posing an intriguing selling opportunity according to Nic Lenoir’s technical analysis on ZeroHedge.com, a large move down in JPY-quoted pairs could be seen over the next couple of weeks if the prediction comes to fruition.

From ZeroHedge.com:
There is one signal we have been pushing consistently when it comes to picking equity tops and that it buying (selling) on bearish (bullish) reversal candles in the Vix outside the upper (lower) Bollinger band. The Vix daily chart attached shows recent history and how any such signal has generated at least a 5% percent move in S&P. As the Bollinger bands for the Vix have been narrowing of late we have been beating that drum impatiently. Today marks the first day we have an outside candle below the lower bollinger. Ideally we would close today above this morning’s open at 15.67. If that is the case then no doubt it is time to sell equities without much hesitation. I have attached for confirmation the charts of the Dax using 3-hours and daily intervals. We see we have a potential 5-count on the Dax completed calling for reversal, and there is strong Stochastic and RSI divergence on the 3-hour chart. On the daily chart we see we should technically at least retest the 100-dma envelope, currently at 5,836, and the daily stochastic is showing a lot of saturation on the upside.
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Today, the committee in charge of declaring the beginning and end of recessions announced that it was too early to declare the current economic slump over.

In a statement on NBER.org, the Business Cycle Dating Committee said, “Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature.”

This comes as no surprise to us here as IntegrityFX Plus’ Joshua Habben wrote in August of 2009 about the NBER’s lagging approach and the Fed’s subsequent action:

So under Greenspan, the Fed averaged a delay of 33 months between the recession ending and raising rates. There was even an average delay of 12 months between the NBER announcing the recession and the Fed raising rates. The Fed, despite its need to anticipate and act quickly, was unexpectedly behind the ball. One might wonder if the NBER would do a better job of monetary policy, but I’ll keep the focus on the timing, not the competence, of the Fed.

This data can be used to make a projection of when Bernanke will raise rates, specifically the earliest he would do so. The earliest the recession could reasonably be declared to have ended would be Q2 2009. So, under the assumption that the end of the recession occurred in June 2009, that yields the following projection:

1) The NBER will announce June 2009 was the end of the recession in February or March 2011.

2) The Federal Reserve will begin raising rates in March 2012.

Read the Entire Article From August Here

We’ll have to wait to find out if Joshua’s projections hold true, but judging from the lack of interest from NBER up to this point and the Fed’s staunch dovish stance, it seems right on track and can be used as a great indicator for interest rate expectations and the strength of the Dollar.

Two sources inside the European Union have confirmed the EU’s rescue plan for Greece includes a 6% interest rate over the first 3 years and up to 7% if longer. To put that into perspective, the IMF charges 3.6% for loans over 300% in quota, which Greece is.

So, the question is: How does the EU expect Greece to cover a 6% bailout rate? Increasingly likely is they don’t and they are just trying to buy time.

ZeroHedge.com is reporting that the CFTC is seeing record shorts of Euro’s in non-commercial futures positions. Will this be a boon for the USD on Monday’s open in Australia?

Forex traders, be aware that your open EUR long positions may see a huge weekend gap over the weekend and a huge drop in EURUSD. More to come from us on Monday.

The CFTC’s latest weekly Commitment of Traders report shows that after a brief respite, potentially dictated by Goldman’s very temporary euro bullishness, the euro is back to having a record number of non-commercial futures-only positions at -74,917. This is a more than 50% increase from last week’s -46,341. As a reminder the prior euro net short record was -74,551 two weeks ago. Curiously, even as traders went bearish on the euro, this was not coupled by a carry offset with the JPY: net long spec yen positions dropped from 15,197 to 10,161. Another currency that saw an increase in bearish interest was the cable, which saw a 7,637 contract decrease to -71,624. On the bullish side, the AUD was the preferred contra-carry currency, as contracts increased by 10,161 to 74,339. In other commodities, both oil and gold saw speculative positions declines by -12,224 and -16,474, respectively, to 111,919 and 183,872. The number is relevant for gold as this represents 37% of the open interest.
Read the Full Article on ZeroHedge.com

The Commerce Department released a lower than expected revision of 5.6% for fourth-quarter Gross Domestic Product (GDP) today, but that number still does not come close to meeting the true growth in GDP according to Godlman-Sach’s Jan Hatzius.

Holding on to the skewed hope that the economy is growing and recession is over, the administration cannot afford to see this bubble-esque stock market plummet; which it would if the administration were to reveal a GDP number minus government intervention.

However, as noted by Hatzius, when absent the government’s inflation-bound free-spending, the real GDP number is much closer to 2.2%. And despite US officials spending more than twice than the rest of the population, the reality still remains that stimulus has affected a very small portion of the population. Unfortunately, that small percentage still does not increase employment broadly enough to lower an already underreported unemployment number and with it, a sagging economy.

And that reality could mean an ugly 2011 for the US Dollar if expectations remain unattainably high for growth in the 2nd half of this year. Advice to investors and traders: Stay ahead of the game; don’t rely on government math.

How Strong Was GDP Growth Really in Q4?
by Jan Hatzius

On Friday, the Commerce Department will release its first estimate of fourth-quarter GDP as measured from the “income side” of the national accounts. This will provide a useful crosscheck on the higher-profile “expenditure side” estimate that real GDP grew 5.9% (annualized) late last year, which itself might be revised slightly. Although the two measures are conceptually equivalent—that is, any differences must be due to statistical errors in one or the other—recent work at the Federal Reserve Board suggests that the income side is often more accurate than the expenditure side.

We expect the income side number to fall short of the 5.9% expenditure side estimate. A weaker number might dampen expectations of a strong labor market rebound in 2010, which are partly based on the strength of the expenditure side GDP data in late 2009. Our own view remains that employment growth will be insufficient to push down the unemployment rate on a sustainable basis in 2010, although we expect Census hiring to result in strong headline job growth in coming months (including a 275,000 gain in March).

The second revision to the Commerce Department’s quarterly GDP report rarely generates much excitement, as the changes to headline growth and inflation estimates are typically small. However, tomorrow’s report may be of more interest than usual. The reason is that it will contain the Commerce Department’s first estimate of the “income side” measure of gross domestic product in the fourth quarter, which according to recent research by the Fed staff may be a more reliable indicator of economic activity than the conventional “expenditure side” measure.

First, some background. In principle, there are three different ways to estimate gross domestic product, i.e. the value of all goods and services produced in a given period:

1. The expenditure side measure, defined as the value of all domestic expenditures on final product (e.g. personal consumption) plus the change in inventories plus the change in the trade balance. Following the recent study by Fed staff economist Jeremy Nalewaik, we call this measure GDP (E). (See Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity, available at http://www.brookings.edu/economics/bpea.aspx.) GDP (E) is the Commerce Department’s “featured” estimate of US GDP.

2. The income side, defined as the sum of all incomes received in the economy, which we call GDP (I). Conceptually, GDP (I) must equal GDP (E) because one person’s income is always another person’s expenditure. However, in practice there are significant differences between the two, as both are subject to potential measurement errors. The Commerce Department publishes an estimate of GDP (I) in nominal terms in the first revision to the Q1, Q2, and Q3 GDP report, and in the second revision to the Q4 report. We can convert this into an estimate of real GDP (I) using the implicit GDP (E) deflator.

3. The production side, defined as the sum of all value added produced in the economy, which we might call GDP (P). Again, true GDP (P) must equal true GDP (E) and GDP (I). We include this for completeness only; there is no independent GDP (P) figure in the United States, although it is actually the primary measure in a number of other countries.

The reason why we care about both GDP (E) and GDP (I) is that both are “noisy signals” of the unobservable true growth rate of GDP. If so, statistical inference suggests that we should put some weight on both measures in estimating true growth. Indeed, the study by Nalewaik referenced above argues—quite persuasively in our view—that GDP (I) has been a better measure of true activity than GDP (E) over the past few decades. This suggests that one might want to put more weight on GDP (I) than on GDP (E). But even if one disagrees with Nalewaik’s findings, it makes sense to at least put some weight on both.

The argument for putting weight on GDP (I) seems particularly strong at the moment. The reason is that it has been consistently weaker than GDP (E) over the past few years and is therefore better able to explain why employment fell so sharply during the recession and has continued to decline even after the trough in the GDP (E) data in the second quarter of 2009. In other words, if we use GDP (I) to measure output, the departure of the relationship between the unemployment rate and output from the historical “Okun’s law” relationship is less serious than if we use GDP (E). (Our own view has been that the departure is not all that large even if we use the GDP (E) data, but the use of GDP (I) data further reduces the gap.)

So what can we expect from the fourth-quarter GDP (I) number? The continued weakness in personal income—which is published more quickly than the other components of GDP (I)—suggests that GDP (I) growth is likely to come in below the 5.9% GDP (E) number. Indeed, the Federal Reserve’s flow of funds report contains a rough estimate of the “statistical discrepancy” that can be used to generate a preliminary estimate of GDP (I). This shows real GDP (I) growing just 2.2% (annualized) in the fourth quarter, far below the 5.9% number currently on record for GDP (E). The Fed emphasizes that the flow of funds figure is only a rough estimate, and we would frankly be surprised if Friday’s number turned out to be quite this weak. Nevertheless, we do expect GDP (I) to look weaker than GDP (E).

The main implication of a weaker number concerns the labor market. The strong rebound in employment growth predicted by many economists is at least partly based on the acceleration in the GDP (E) data late last year. If this acceleration overstates the economic reality, then the case for strong employment growth would weaken as well. Our own view remains that the March jobs report will show a headline gain of around 275,000 jobs and the next few months will benefit from Census hiring, but employment growth will be insufficient to push down the unemployment rate on a sustainable basis in 2010.

ZeroHedge.com posted an insightful article today claiming the collapse of the G-7 is imminent and the bail out of Greece is irrelevant. While the doomsday article may be argued as scare tactic journalism, it is hard to argue the point that G-7 countries have backed themselves in a corner. While investing in their recovery with trillions of taxpayer dollars with no way out but to hope for another market recovery like the 2004 real estate boom, the future of the G-7 is not in good shape.

Unfortunately, if the plan is for the EU to bail out Greece, the US bails out the EU, and Greece to bail out the US, the financial collapse is indeed inevitable. The following is an excerpt from the ZeroHedge article…

For Greece, with on and off balance sheet liabilities at over 800%, it’s game over. For the Eurozone, with the same ratio at about 500%, it is also game over. For the US, at 500%+, it is, you guessed it (sorry Joseph Stiglitz), game over, but since we have the printers, it will simply take a little longer. Following up on yesterday’s popular post on prevailing delusions as captured by Albert Edwards’ colleague Dylan Grice, we present Albert’s latest outlook. Please don’t read this if you want to keep believing there is any hope left for the (developed) world.

Read Entire Article at ZeroHedge.com

The Carry Trade is dead and alive all at the same time.

The Carry, which is the long-term strategy of “carrying” a high-yielding currency while borrowing another currency at a low interest rate, has been based for many years around borrowing the extremely weak JPY against commodities, emerging markets, and currencies such as the GBP, EUR, AUD, USD, etc.

After the global bubble popped, investors scrambled to sell back their assets and the JPY emerged as a breakout trade in itself. And with policy makers in Japan discussing the possibilities of raising the strength of their currency (inevitably meaning interest rates), the JPY-quoted carry trade is all but finished.

But, while one carry trade falls, another one rises. Much has been made on this website and many others about the unavoidable weakening of the USD. With government and Fed-influenced inflation right around the corner, the Dollar is losing ground to stronger currencies at a never-before seen pace–much like the Yen carry trade of old.

With interest rates near or at zero and no sign of a change in sight, expect to see a carry-like move in the AUD (3.0% interest rate) and NZD (2.5%) and other currencies for the foreseeable future. This also may become even more prominent if we see other central banks raise their already higher rates while the US Fed remains neutral.

Can there be exceptions? Of course. With risk aversion having the potential to build, another sell-off in equity markets could send assets back to the USD in a “flight to safety” or de-leveraging play.

However, long term, new lows in the Dollar seem unavoidable and the carry trade lives yet again.

Watch: Peter Schiff, Senate candidate and President of Euro Pacific Capital, and Brian Dolan of Forex.com joined Squawk on the Street on CNBC this morning to discuss the USD carry trade.