Rumor has it that US Regulators have told the two largest US Banks, Citigroup and Bank of America, that the results of their “stress test” show that will require further capitalization.  What this means in simple terms is that the banks are not ok - they have so much debt, bad debt at that, and they are in need of more money to help them stay afloat.

We all knew that Citigroup was a zombie bank, a bank that is dead, bankrupt, kaput, but is being sustained by the generosity of the US taxpayer (with the help of the Chinese treasury Bill holders, of course).  But after the results of Treasury Secretary Tim Geithner’s test on bank stability - aka The Stress Test - we are witnessing the fact that the US has no intention of following through on their plan to fix the banking sector.  It was said that the results will determine the fate of the banks - if they show that they are in fact needy of further capitalization, the US would either systematically disassemble the banks in an orderly manner, or let them fail outright.

The problem is, when the plan was announced, if you remember, it was amidst much criticism that the US did not really have a plan - that they were being too soft on banks with severe problems for fear that their bankruptcy would cause a panic.  So Geithner came out with the stress test idea and said that banks that do not pass, will be reorganized (A nice way of saying taken over).  But now the outcome has changed - and it seems that the US banks that are at the heart of this whole credit mess will be getting more money to run their failing operations.  It looks like the whole plan was to get these results out AFTER President Obama’s first 100 days, the yardstick that sets the tone for the presidency.

Is it not ironic that these results were planned for Obama’s 101st day?

Wednesday looks like it is shaping up to be a tough one for the US Dollar as risk appetite returns for a bit.  I call it profit taking - it will be short lived.  

Finally, something to take our minds off of the economic crisis and all that goes with it, a health crisis - or pandemic as they are calling it.  Yesterday, the World Health Organization upgraded the threat to a 4 on a scale of 1-6, 6 being global - out of control - rampant infection.  But the crisis is affecting more than just border crossings - it is contributing to the downfall of some of the worlds most fragile economies, the emerging markets.

As news of the Swine Flu virus spread, the Mexican Peso, the currency at the heart of this epidemic, fell over 5% to the US Dollar and similarly to many other majors.  This is just another blow that the Mexican economy has endured and it threatens to collapse the country’s economic system.  Although it is a small market, online Forex traders should be keeping an eye out for this, as what happens south of the US will no doubt affect the US.

Meanwhile, traders in the Euro were given another treat of two Central Bank members holding arguments with each other through the media.  The disagreement came when Nout Wellink said the rate cut should go further than 25 basis points and Alex Weber said it should not - very exciting news.  But, as online Forex pros, you should know that it was all a staged event to distract from the real concerns, whether or not the stimulus that the ECB will unveil next week will be enough to please the street and help the economy.

With the Taliban about to take control over the nukes in Pakistan, the Flu set to overload the healthcare systems of the world and China calling for a new reserve - the EU should lighten up and not be so tightfisted with the money they spend.  You only live once they say.

China opened up the week with a bang that is sure to send the Forex markets in every unfavorable direction.  On Sunday, Li Yong, the Vice Finance Minister said “We should attach great importance to reform of the international monetary system…a flawed international monetary system is the root cause of the crisis and a major defect in the current international economic governance structure.”  Basically, Mr. Li was openly calling for the removal of the dollar as the primary reserve currency, a call that had been alluded to several times in the past but not directly said.  As Dylan once put it, “oh, the times they are a changin’. ”

This was bound to happen.  China and Russia have been on a mission – until now a subliminal mission – to overthrow the dollar as the main reserve currency.  While they will not admit it, the reason is clear, and I touched upon this last week.  Fact: The US Dollar is the most widely held currency by foreign government banks.  Fact: The US Dollar is used to set prices for most commodities including oil, gold, silver, wheat and even other currencies. Fact: The US of A has committed them to spending 12 Trillion Dollars even though there is only 820 Billion US Dollars in circulation as of 2007. This means that the debt role the US is planning on will take it close to 90% of the US GDP.  And one final fact: a country who has much of its resources invested in one thing, is forced to continue supporting that investment or risk having that investment devalued beyond acceptable levels.

Did you get that?  China and Russia and all the countries that hold tons of US money, in hard cash form or debt form, have been increasing their investments through the purchase of debt so as not to allow the Dollar to fall, because, if the dollar bottoms out, the world as a whole will lose Trillions of dollars. The situation will spiral into the worst global economic situation EVER seen.  Heard about the Depression?  Think ten times that and then square the number – this is the result of a worthless dollar.  Remember how the world came out of the depression?  They called World War I the “war to end all war’s” - they called World War II “The great war” – they will call this one “The final war.”

This is real, I am not an alarmist – but I am certainly alarmed and so should everyone be, because there is power to destroy out there that can wipe out cities with one blow – and there are thousands of them.  All it takes is enough desperation and despair.  History is there for us to learn from it and we have not.   There is a solution and it is to remove the Dollar as the reserve, but do so in an organized and equitable manner – that requires compliance – can our leaders be man enough to provide it?  Let us hope.