Sjeltur

The US government continues to bailout financial institutions. This time the government throws a lifeline to Citigroup, after its stock fell 60% last week. The government will guarantee troubled mortgages and toxic assets worth $306 billion and Citigroup also gets a $20 billion boost in cash, despite the $25 billion the bank received only a month ago.

The US auto industry is in desperate need of cash as well. General Motors, Ford and Chrysler are on the brink of bankruptcy and they want money from the government too. Next week chief executives of the ´Big Three´ will present a plan in Washington with details how they think the auto industry can be saved if the government throws money at it. An amount of $25 billion will be provided, if they convince Congress. Many economists expect it will cost a lot more in the end, the companies are burning through billions of dollars every month and it´s not likely they can turn things around in a short period of time, after years of losing money. The ´Big Three´ are probably back in Washington asking for more money just a few months from now.

President-elect Obama outlined the framework of a plan to create or save 2.5 million jobs by the end of 2010. Given the current economic situation no one knows if it will work, but we know for sure it will cost a lot of money. An amount of at least $600 – $700 billion is likely.

The US government is on a spending spree, it needs to borrow already a record high of $2 trillion in 2009 and doesn’t include the plan of Obama. With his plan included, it will be close to $3 trillion.

All eyes are on Washington these days where the money will be spend, not so much on the capitals where the US government asks for the money, like Beijing and Riyadh. The Chinese and Saudis are sitting on large amounts of US dollars and other US Treasury paper, but it seems their willingness to borrow money to the US government is declining rapidly.

The governments of China and Saudi Arabia want to use it to buy gold. Recently Saudi Arabia already bought gold worth almost $3.5 billion in just two weeks time. There are reports the Chinese central bank is considering to expand their gold reserve to 4,000 metric tons, up from 600 tons now.

Some economists fear the US is already in danger of debt default, Obama’s spending will increase the risk even more. For sure the governments of China and Saudi Arabia know this too, they are aware of the fact there is a high chance the dollar will collapse. Buying gold with US dollars and other US Treasury paper is clearly a sign they are preparing for a world without the US dollar as its reserve currency. They get rid of dollars before the money is entirely worthless, and at the same time they accumulate enough gold to make the transition to a new, at least partially gold-backed, world reserve currency easy for them. It’s not hard to imagine what this will do with the US, just watch what is happening right now in Iceland where the financial chaos already resulted in riots.