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Comments on: The Case for a Rising Dollar

Posted on July 10, 2006
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Please see the articles - The Case for a Rising Dollar, Part I: Japan, and

The Case for a Rising Dollar, Part II: Theory

Your comments welcome below.

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69 Comments so far
  1. Tursk July 10, 2006 5:30 pm

    There is a case for a rise in the dollar. The dollar may have one last hurrah as you say. But I hope not. How long will the hurrah last before the next down turn is anyones guess. The thing is that if the dollar does rise, substantially, the next fall promises to be extremely hard.

    I think it more likely that the Administration and the Fed will struggle to maintain the dollar in its current range. I think the safe haven will be gold and silver. I don’t care if they are currently ‘controlled’ as commodities. The world in general views them both as money before commodities. The world without a doubt views gold and silver as money during very hard times. We live in a time when these things are becoming more transparent to the masses. Thousands of years of history will win over a few decades of paper money. I take the view that the dollar needs to be maintained in a soft decline to a new low. A substantial rise in the dollar will complicate the future more than it already is. If the world is slow to view gold as the safe haven, then the Euro and the Yuan will do.

  2. Michael Von Brah July 10, 2006 6:43 pm

    I was very surprised when I heard about the recent developments in Japan but I have doubts that it will develop into anything serious. I believe North Korea will have to do a little more than fire some rockets into the ocean to push Japan over the edge. The international community will not support an attack on North Korea unless more serious threats were made to Japans safety.

    Your comments on World War III made me think how easily the current world tensions could blow at any moment. We have North Korea demonstrating its military might and Japan feeling threatened. We have US threatening Iran. We have China continue to claim that Taiwan and Hong Kong belong to them while both claim sovereignty with US support. China continues to hold enough US debts to bring the US economy to its knees at any points. Israel and Palestine continue to fight and terrorist groups keep growing in the Middle East. Any of these events could spark into something large. Seems that globalization has many serious drawbacks and challenges that we will have to overcome.

  3. JDR July 10, 2006 6:54 pm

    International turmoil will send the dollar up because, as you mentioned, it is the world’s reserve currency for the time being. Japan’s announcement was probably coordinated and planned to light a fire under other Asian countries to put presure on North Korea. Believe me when I say the last thing any of them want to see is a rearmed Japan with an “outward looking” foreign policy.

  4. David Kennedy July 10, 2006 7:04 pm

    Shadow government statistics, Marc Faber, and Jay Taylor say that the real inflation rate is 3% higher than acknowledged by the U.S. government. I say amen to that, because I go to the store and buy things and actually remember the price I paid last time and even last year. So even if you invest in Treasuries at 5 1/2% you are still losing value through the loss of purchasing power (real inflation is above 6 1/2%).

    Your technical chart for the dollar does not show the big picture. The broken down trend over a brief period does not invalidate the big down trend set in concrete. Some people think gold is a gamble but I say investing in the dollar is reckless abandonment of sound fincial acumen and technical analysis. Gold is asset money and the dollar is created through a liability of debt and has no intrinsic value. The dollar is dead and the U.S. population will be the last to acknowledge it. They have too much to lose. Enjoy the little blip up if you can.

    David

  5. Bud July 10, 2006 7:54 pm

    Some months ago I was intrigued by the comment of market historian, Bob Hoye, to the effect the senior currency (USD) would begin to inexorably rise even though all the usual suspects would desire that it fall. Bob didn’t elaborate on his basis for this forecast, but he usually bases them on past historical macro sequences. For what it’s worth.

    Regards,

    Bud

  6. Max July 10, 2006 7:59 pm

    I think you are correct in that it is very probable the dollar will have a last hurrah, but not due to Japan’s posturing over the N. Korea missle episode. Possibly that would eventually transpire but it could take some time for Japan’s politicians to debate the issue.

    Meanwhile in the homeland the Fed has been incessantly raising interest rates as though they know what they are doing. It is as if the Fed is believing the government lies. GDP is less than reported and much of the strength is due to increased spending for oil: the employment picture is weaker than stated: and the rise in fuel and energy is like an added tax. Debt is high, savings are weak, and income is at best flat. So it seems the Fed is raising interest rates into what is really a mirage of economic strength and may already have gone too far. So should the economy (housing) weaken from the effects already baked in given the level of debt, we could have a deep recession. Everything would be sold to try to survive and for a little while the dollar would strengthen.

    So we do need to have some cash on hand to ride out the storm. But surely panic would force the Fed to reinflate and I would expect the dollar to drop hard and the precious metals to take off. It is just possible that given the extreme distortions in the US that should the recession take hold and deepen the citizens of the homeland might not have enough dollars while the rest of the world finds they have too many. So I could easily see two flights to safety: One in the US for dollars and the world at large for gold and both would rise but gold certainly winning out once the reinflation of the dollar started in earnest. I would think we need to have a good supply of both gold and dollars because either or both might be very valuable in the near future. Then we can just sit back and watch the show and hopefully get out of our dollar position at the appropiate time.

  7. Dank DeSoto July 10, 2006 8:17 pm

    We have a Congress that is considering such dire issues as flag burning, a President who says we are at war and never uses the word ’sacrifice’, and a Supreme Court that has made sure the average American no longer has the sense of security and invulnerability that home ownership implied (Kelo). Our economy is “managed” by unelected bureaucrats who tell us that things cost only a little bit more than they did yesterday. Out of this cocoon emerges an American electorate that will not accept any pain. Our priviliged lives will be brought up short sooner rather than later, whether we want to admit it or not. Get some money out of the country.

    P.S. There were almost 80 Congressional committees that had oversight of our intelligence agencies before 9-11.

  8. Pinatubo July 10, 2006 10:00 pm

    Most currencies have artificial value depending on their trade status with the United States. A huge drop in the dollar is unlikely, especially against the currencies of countries that have large trade surpluses with the United States. Japan is holding nearly a trillion in US Treasuries in addition to other US dollar based assets. If the yen were to climb dramatically against the dollar, it not only makes their exports more expensive and therefore less attractive, it would also reduce the value of their dollar assets in the United States and abroad. The same can be said of China who also has hundreds of billions in US Treasury bonds. Both of these countries use excess trade dollars to stablize their currencies against the dollar so that their products are attractive to US consumers.

    The reason it is so difficult to predict the direction of currencies and stock markets is because there are so many forces acting simultaneously on the economy. Unlike Argentina, the United States will not default on debt because we can simply print the money to pay back lenders; Argentina’s debt was also mostly in dollars but their central bank could not print those dollars.

    Many people, including myself, are worried about the huge trade and fiscal deficits in the United States, but the reality is that even more debt might be required to soak up all the excess dollars made available because of our huge trade imbalances. Given the export of manufacturing jobs to Asia, the trade debt will only grow larger. It should be noted that without those trade imbalances, our inflation would be higher than it is today…cheap Chinese labor gives us cheap shoes, cameras and soon, cars. But over the long haul, I expect an increase in protectionism since there is a theoretical limit to how much of our manufacturing base can be exported. If I had to make a bet on a currency collapse, let me suggest that Europeans are also losing millions of manufacturing jobs and some of those countries may repudiate the Euro and their GATT obligations to try to shore up their economy. That would be a formula for a dollar rally. I am surprised it hasn’t happened yet. The next recession may set the stage for that.

    That being said, our total debt in the US as a percentage of GDP is greater now than it was just prior to the Great Depression. It is possible that “donor” countries could make a determination that further lending to the United States would be throwing good money after bad. They might decide to limit further lending since they receive mere paper in return for their Toyotas, textiles and everything else they manufacture and export. Not a particularly good deal for them. But the United States sits in the economic sweet spot and we will probably be able to borrow as much as it needs for a long time. The US has a gun to the head of every central bank we do business with. No central bank wants to find out what would happen if the dollar collapses against most currencies. So far that has not happened and it probably won’t in the foreseeable future. Economic Armageddon is not an attractive prospect.

    Jeff Kassel
    Manchester, NH

  9. lee obrien July 11, 2006 2:03 am

    Yup, still the world’s financial repository, the U.S. Dollar becomes the safe haven the Pound Sterling was so long ago.

  10. WalltoWall July 11, 2006 3:07 am

    Michael Von Brah - Hong Kong does belong to China. The British handed it back some years ago and the US has nothing to do with it.

  11. leapfrog July 11, 2006 5:26 am

    There is too much agreement in the safety of gold, long term. In one scenario, the mining of gold will stop because of high energy costs and environmental degradation. This will remove a minor but conspicuous price reference. Governments will step in to attempt to set pricing and ownership standards. There may be better options.

  12. Brian Farmer July 11, 2006 6:14 am

    The biggest factor affecting exchange rates is the interest rate differential between currencies. Hence, an intermediate term dollar rally is not out of the question.

    Since virtually all currencies are essentially fiat money, the only real money is gold, silver, or some other commodity that cannot be infinitely produced out of what amounts to nothing.

  13. Anthony Cherniawski July 11, 2006 6:33 am

    There may be fundamental reasons for a dollar rally and Mike and the bloggers seem to have covered the waterfront. Let’s talk technical analysis for a moment.

    The decline from January 02 to December 04 covered a 3-year span. A one year rally might be construed to be enough time to retrace but did the retracement do its job?

    From a Fibonacci view, it certainly has not, since the rally in 2005 did not even complete a minimum 38.2% retracement.

    From an Elliott Wave analysis, it did not, because the rally consisted of five waves, which is impulsive. A corrective wave may have two five-wave impulses, but not one.

    My conclusion, using fibonacci targets and the Elliott Wave is that the dollar may rally to a minimum 95.7 (a 38.2% retracement) or much higher.

    Mike has the right insight on this. There will be many very large investors “trapped” in their bearish positions. Once the short covering begins, the move may develop legs, much like the rally in stocks until May. The reason is that it will take a long time to extinguish the bearish sentiment and it will be the bears providing the liquidity for the rally, not the fundamentals.

    Having said all that, I am still a long-term bear on the dollar, but I am wary of the path that it will take before the dollar meets its final destiny.

    Tony

  14. cornhusker July 11, 2006 6:37 am

    I’ve always been a contrarian by nature and I must say, this line of thinking has served me well.

    When everyone says one thing, I say bet the opposite way. My views for the future based on my contrarian view of the world:

    1. Value of the U.S. Dollar will rise substantially in the years to come.

    2. Gold plummets (under $200/ounce)

    3. Housing prices stagnate, but don’t crash on a macro scale.

    4. Employment, Stock Market indexes, & inflation gradually drop for the next few years and then level out for a decade or more.

    Basically, we muddle through, and then eventually we see hyperinflation. So, when gold does get down into the $200/ounce range, I’m a buyer…in a big way. Farmland too.

  15. khill July 11, 2006 7:35 am

    $200 gold!LOL!Not a chance…………

  16. Chachicat July 11, 2006 8:06 am

    Although I am bearish on the US dollar, I am not of the opinion that a collapse is near and a short rise is more than possible.

    Some facts to consider are:

    Every country needs liquidity and so they are matching Bernanke in running their printing presses.

    Asian countries are happy to have a stronger dollar so they can sell us more and obviously they want to keep their reserves at a high value. However, a major geo political event could change this over night.

    As long as foreigners are willing and able to buy US assets, which is the only way they can truly preserve the value of their US debts, they will have a strong need for dollars.

    Gold and silver are the ultimate currencies, but volatility remains high as they are also pawns in the economic games of large hedge funds and central banks and because of their very small markets they are easily “manipulated”.

    I also think silver will win out over the long run in the currency battle as it is more useful as currency. Taking your $5,000 ounce of gold to buy a loaf of bread at the local super market will not work in the long run.

  17. newager July 11, 2006 8:15 am

    There are some bright people making comments here, yet no one mentions oil. The 4 largest fields (Ghawar, Canterell, Burgan, Quing) are all on the precipice of major declines. Very soon the oil decline rate (already around 3%) is going to exceed the new oil production rate (and then total production will decline). Before the end of this decade we are faced with extremely high prices. For this reason, it won’t be long before oil is priced in Euros and the Dollar is no longer the defacto reserve currency.

    A previous comment expects the dollar to rise and gold to go down to $200/oz. The dollar could rise in the short term as Bernanke raises rates, but gold will never go below $400 again. The more likely outcome is gold at $2000/oz. by the end of the decade and the dollar in the dumper.

  18. Sparrowlink July 11, 2006 8:48 am

    This may be the catalyst to have Japan work, (Cuba did against the U.S., in the Kennedy Administration.) only Japan has all the technical skill to manufacture and deliver much more sophisticated weapons than Cuba & the USSR had. It will be like a dagger held at the Chinese and Korean throat also.

    Remember just one missile that hits a boat or lands in Japan and a war could be immediate with a first strike by Japan. Also it would have to be a Nucular Strike because of the 2 million man North Korean Army.

    The whole World would run to the last super power for safety.

  19. ronandreas July 11, 2006 10:06 am

    Newager,
    Peak oil has been laid to rest. Check the front page of Monday’s WSJ.
    The secular bear markets for both stocks and the dollar creates an ideal environment to swing trade between BEARX and PSAFX. Prudent funds allows telephone transfers. In the short duration flight from stocks to dollars lock in gains from BEARX. As the fundamentals drive the dolar back down, dollar cost average back to PSAFX. It’s that easy.

  20. ronandreas July 11, 2006 10:09 am

    Correction, dollar cost average back to BEARX>

  21. RA July 11, 2006 10:20 am

    I just wanted to thank you for your article on future possibility of a rising dollar. I have been thinking since I read it of all the possibilities that could arise from a Japanese attack on Korea. The United States could definately benefit in many different ways. I am sure they would take full advantage. Not only getting a rise from the dollar but could potentially play both sides of the fence and balance out our huge trade deficit with China.

    It is awfully coincidental that Japan made the statement after Bush met with Koizumi in the US. I think you may be onto something. At this point I think nothing is out of the question. They have to do something to keep the economy from collapsing. Anyway, Thanks again. Looking forward to the next article.

    RA
    Denver, CO

  22. Dirk Davies July 11, 2006 10:21 am

    ronandreas - as much as I’d like to believe it, nothing is “that easy.”

    - Dirk

  23. Anthony Hendriks July 11, 2006 10:58 am

    Hi,
    Thanks for your article. Comment re gold: I agree in most cases, funds are not as safe as the physical. However, a possible exception is the Millennium Bullion fund available in Canada. It has fully allocated gold stored in the Bank of Nova Scotia…not paper like some of the EFT’s. Check web site at http://www.bullionfund.com
    Cheers,
    Anthony

  24. booki July 11, 2006 6:20 pm

    In this hour, we rasta know these times are dread. Get with it mon.

    (prepare)

  25. Donald Dross July 11, 2006 6:39 pm

    Japan said that if any piece of any North Korean missile fell on Japanese territory, it would be considered an act of aggression and hence Japan could retaliate in self-defense as provided in its constitution. I assume the same thing would be true if a North Korean missile violated Japanese airspace.

  26. barter this July 11, 2006 6:40 pm

    I think it strange that the leader of Japan was here for a visit just last week and now they are blustering about North Korea.

    China is enemies with Japan and on somewhat friendly terms with North Korea. Now if North Korea looks at Japan with malice for China, then things will take a real turn for the worse.

    I believe we will stand back and wait, burning both ends against the middle as usual. And, yes we will be supplying Japan so they will fight this war FOR US to elliminate this “axis of evil”.

    This will be a new start up of the War Machine around the world and the US will supply most of the gearing to keep it going.

    WAG THE DOG…Make it happen, no matter who falls by the wayside.
    The Dollar will be used and we will be in a good ecomomy once again.
    World War II all over again? I think not, but I belive we have control of the levers of this large war machine, squirt a little oil every now and then and all is well.

  27. khill July 11, 2006 6:55 pm

    A short time ago I had this thought that while the U.S. was barking at Iran it was going to bite N. Korea. The article on N. Korea’s bio weapons program got me to thinking that way. Maybe N. Korea is panicking and beating it’s chest. Maybe the bio weapons issue has the powers that be panicking.Interesting times……………

  28. Fred July 11, 2006 7:03 pm

    A comment regarding your reference to $1 million USD equaling 1,600 ounces or 100 Lbs., a lot of weight to carry around. Gold is traditionally measured by the Troy ounce, not the Avoirdupois ounce in common usage. A Troy ounce weighs 480 grains, an Avp. ounce weighs 437 1/2 grains. A Troy Lb. weighs 12 Troy Ozs. or 5,760 grains. An Avp. Lb. (which is in common usage) weighs 16 Avp. Ozs. or 7,000 grains.
    If 1,600 Troy ozs. equals $1 million USD that would weigh about 109 Avp. Lbs., 11 Avp. ozs., 192 1/2 grains. Your figure of 100 Lbs. would leave shorted by more than 9 1/2 Lbs.(Avp.), a considerable loss.

  29. CuriousGeorge July 11, 2006 7:48 pm

    The Ten Year Note will be the telling signature in relation to gold. Expect to see the yield lower as support increases. This will be bearish for gold in the short term heading towards the November elections. Short term rate hikes are currently inverting the yield curve at this time in steering key support into long term debt.

    In doing so, this spares the domestic mortgage industry and corresponding housing market and of course, allows the relative cash register effect due to increased home equity to continue. In the process it certainly doesn’t hurt the dollar either. Gold on the other hand, mustn’t be allowed to draw headline attention and support away from the beloved 10 Year Note. Oil too, will correct soon enough. Possibly within the next 30 to 60 days after the G8 summit results in some kind of Iran resolution. If this actually materializes, the dollar benefits and gold drops with oil. My copper two cents.

    Over & out,
    George

  30. JDR July 11, 2006 9:48 pm

    RE: Part II “You can’t print dollars the way the Fed does. So to raise dollars what do you do? To raise dollars you’ve got to borrow more or you’ve got to sell something, and by something I mean “anything” of value. So I believe what we’re seeing now is the very beginning of a LIQUIDATION of assets.”

    I disagree because this business of selling off assets goes against human nature. The easy path for everyone concerned is to simply borrow more. Vote-grubbing politicians and strapped minivan moms will both happily take on whatever debt is needed to keep the wheels turning. Ben Bernanke specifically said that the Fed will NEVER allow a deflationary spiral to start in this country. That means we will see continuing growth in the money supply (inflation) as evidenced by the price trends for gold and oil.

  31. Inspired July 11, 2006 9:53 pm

    1st let me say i enjoyed your view on the dollar (”USD”).

    I believe many of us are aware of the G-7 Agreement to support the USD just below 80.00 or so. This area has proved time and again that the central bankster titanic forces (all their fiatness) are hinged against level.

    Therefore, it makes perfect sense to expect a (C) wave rally in wave {2} when this (B) concludes above this artificial support. Per Cherinanowski’s excellent comments. As for a 38% retracement, I think it is more likely that a greater bounce well above 99 should occur. Why? 1) Japan just blinked (failed to raise rates, acknowledging what we all know deep in our hearts their banks are bankrupt. 2) Billions of dollars have found their way into thin and overvalued hi-yield (JUNK) & equity markets from India, Egypt, Moscow to China. Heck is there a country today that doesn’t have its own bourse? 3) But the larger reason is despite our (USA) economic slowdown that will “collapse” the debt bubble (it finally implodes) as our consumer defaults will send the rest of this globe’s economy into the 21 century ice age.

    So not only will the (”we all know the dollars worthless crowd” scramble to get out) but the USD is “liquidity” and only partially rigged markets as well as a history of staying open and trading. Unlike these other despots around the world.

    Another case for the advancing dollar as the debts blow-up on the banksters, (REFCO anyone?) is the expected hard declines in the US stock markets. Global investors around the world will SELL, SELL, SELL US stock as they watch our stocks decline and then note that their EURO’s etc. are getting crushed, after sitting in our equity markets for 8 years without a return, the perception of risk will be “Up close and personnal, as they lose their jobs, cars, and / or homes” .

    Despite the FED’s attempt to prop up M3 daily by 10-50 billion it won’t be enough, as the fractional (12×1) headed monster works in reverse. This scenerio is a classic, unprecedented credit squeeze! I need liquidity and those damn margin calls keep coming every three days. Trillions of payments are due in USD!

  32. Alan McCaig July 12, 2006 5:32 am

    Boy, there is some good stuff to ‘think’ about in the letters from your readers. #26 was a ‘keeper’ and #31 I did not understand at all but it sounded like an excellent technical response.

    5 years ago (2001) I read a Bill Bonner report citing that all could sleep soundly in our beds as the printing presses at the ‘Fed’ were running 24 hrs a day x 365, printing paper money..? Mmm? Gold was depressed because the world’s other Central Banks were exchanging it for USD, thus overloading the market’s need. The price was therefore depressed. Too much supply. So how long could that go on?

    Being a simple soul, a comment in that letter that did help me understand back then what was happenning, and what would happen over the next 10 years went something like this:

    “With hyper inflation in some African economies, there came a time where it was cheaper to wipe your backside with the ‘paper currency, than to buy a roll of toilet paper!!” Oh? Now I get the picture..!! So I bought into Gold stocks and that has worked out well. The World Gold Council in London England just put a new item on it’s web site that poses now another reason to ‘think’ again. 70% of the world’s reserves of gold are in the vaults of the US Fed, the other 30% is scattered around in the vaults of the rest of the countries. Mmm? What does that mean?

    I think I have the picture on this revalation. Let’s back up a bit and pose a few questions based on what I remember of that time between 1992 - 2003:-

    a)I do not recall the USA offering ‘it’s’ gold reserves for sale, so were they the buyers? Paper for your gold. Not a bad deal when you think about it?
    b) I never heard that the USA was a seller.
    c) 70% of the world’s ‘reserves’ of gold bullion is already in Fort Knox.

    If you think it through it ultimentaly could mean that the USD could survive very nicely BUT it will take a currency crisis; mayhem in the price of gold; then the ‘cash call’, ie “Well how much Gold do you have?

    My own conclusion is that the demand for that precious, unprintable commodity, will drive it’s price to great heights to ensure the stability of it still being the time honoured reserve of all Nations International Banks. And the US Dollar will survive. But it will be rough ride while it plays out.

    Alan in Nova Scotia.

  33. cornhusker July 12, 2006 6:26 am

    Guys, the answer is right here. The raising of interest rates is just a smokescreen. The ONLY way the FED can suck-up liquidity is by increasing the reserve requirements of banks relative to the loans they issue. Read this article (takes a while to load), THINK, and then comment:

    http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B1A9026E9%2DFD5F%2D4B32%2D920E%2DEB278BA24B1A%7D&siteid=mktw&dist=

  34. cornhusker July 12, 2006 6:30 am

    “Basel II Banking Agreement”

    We’ll be hearing much more about this “Agreement” in the future…a recession IS coming, and this “Agreement” WILL BE the cause.

    $190/ounce gold by 2012.
    $20,000/ounce gold by 2025.

  35. Rich July 12, 2006 8:42 am

    Hey Michael.

    Very thought provoking blog, I’m glad you are back from vaca!

    Some comments I’d offer:

    Richard Russell has also consistently stated that gold will go well over $1,000. He is long gold for sure.

    Prechter has been calling for a deflationary event now since the mid 90’s and is still wrong, inflation is running above 5%, probably more like 8%.

    Gold did drop precipitously there for a while, but it was one of the hottest commoditities at the time and was due a correction. It has already recovered a good chunk of the dip from its peak.

    When many of us speak about priming the printing presses in relation to the dollar, it doesn’t mean physically printing more dollars, but issuing more credit. The new definition of “printing money” encompasses the physical act of printing currency and issuing credit. Bernanke is an expert in managing the system through a potential crisis because he is an expert on how to manage credit, not dollar bills.

    Pinatubo, comment #8, has some great insight. We’re in the grip of a massively complex, global financial system of management that is not transparent. Clearly the major central banks of the world work together and generally in the context of furthering Pax Americana, call this the spoils of WW II. The lack of transparency leaves us grasping at straws because only a tiny minority of insiders really understands how one central bank reacts to another, and therefore drives the world economy.

    Pinatubo suggests the collusion is so deep and the control so perfect that collapse can and probably will be avoided. With the years that the likes of us on this forum have been debating this issue I would suggest that the absolute control of the system is a reality and that we will experience more of the same in terms of dollar hegemony for many years to come.

    Of course I also believe that precious metals will continue to rise even as we witness virtual stability in the dollar.

    The housing bubble popping could cause a massive deflationary depression, but I believe Bernanke will open the floodgates, turn on the helicopters and reliquify before allowing that to happen. Interest rates will go down before we see serious deflationary pressure. Once they bottom out and can’t go any further then we may discover if our masters can truly control their own destiny, and ours!

    Cheers Rich

  36. Administrator July 12, 2006 10:48 am

    Friends,

    I just received the following, excellent question. Since all of you are smarter than just the one of me, would anyone like to respond? Thanks! Michael


    Thank you for your articles on this fascinating subject. I believe Bernanke has threatened that, in extremis, the Fed would “monetize all markets” i. e. start purchasing assets as a means to maintain prices and at the same time to distribute currency. Could you discuss how you think this might play out?

    KW, M.D.

  37. Administrator July 12, 2006 11:04 am

    If financial markets got wind of the Fed monetizing debts en mass, I think the value of the dollar would plummet immediately, and we would surely see hyperinflation. Most everyone suspects /assumes that the Fed is already intervening in the stock market, but the Fed’s power relies on the elaborate illusion that they are prudent bankers working to “fight inflation” and that they would never simply monetize debt. (This is why Bernanke’s comments before becoming Fedhead (about the printing press) were so shocking (at least to me)

    Also, I think financial conditions would have to be *extremely* bad for the Fed to do such a thing. Not just your run of the mill decline triple digit decline in the Dow (like today), but *terrible*. Like down to Dow 1,000. But by that point the world would already be in pandemonium and chaos.

    So yes, it would mean hyperinflation of the currency. The Fed might end up owning everything (like banks do) but the currency would be worthless.

    Here is a pretty good article to help you think about it:

    http://www.financialsense.com/fsu/editorials/2006/0206.html

    Prechter talks about it in that essay that I quoted in Part II. You can read the whole essay in full during the Free Week, which I highly recommend. Sign up from the banner at the top of the website.

  38. Vangel Vesovski July 12, 2006 6:56 pm

    I am sorry to say this but the deflationists seem to suffer from some sort of delusion that has no valid theoretical support. While the arguments for deflation and a stronger dollar can seem to make sense history shows that we have not had deflation since the 1930s and that only happened because a gold backed currency is much harder to inflate than one that is backed by government debt.

    I think that the short squeeze argument can be dispensed with in short order. For one, why would anyone scramble to get FRNs when they will ultimately go bankrupt anyway? A man who has trouble making a $2,000 mortgage payment isn’t going to sell everything when it resets to $3,500 to raise dollars; instead of servicing it he will simply walk away from his debt. For another, how does the banking system survive a contraction in credit and money? The assets (loans) will have to be written down and given the lack of reserves in the banking system we are looking at collapse. But the FRN’s purchasing power depends on confidence in its issuer and without a solvent banking system the confidence in the Fed is more likely to recede than to advance.

    Then there are the practical implications. If there is a credit contraction and the purchasing power of the FRN increases substantially the winners will be those that have access to FRNs while the losers are those that have to sell assets because they need them. In this case the losers are American voters while the winners are foreign holders of FRNs and foreign holders of bonds that are coming due in the near term. Please note that most US government bonds are now in the hands of foreigners and have a very short duration. To get FRNs foreigners don’t need to sell their bonds and take a lower price but simply wait a few weeks and get the cash in full from the US Treasury. If the US government defaults on its bonds then the FRN becomes worthless and the arguments for its strengthening are nullified. But if it pays off foreigners who refuse to roll over their holdings those foreigners can step into the market and buy American stocks, real estate, gold and other commodities at fire sale prices. Given the fact that foreign lenders do not vote and that American debtors do I would argue that the incentive for the Fed, which seems to care more about public affection than protecting the currency, is to monetize bad debts by resorting to the printing press.

    The argument about flight to safety can also be dismissed fairly quickly. For one, many have pointed out that what we have is a huge multi-player Game Theory scenario in which holders of FRNs and US treasuries seek to find a way to reduce their risks and have sought a way to diversify away from US paper without taking a huge hit. I suggest that any strengthening of the FRN would allow those players to start dumping their holdings and reducing their risks by purchasing oil for their strategic reserves and bullion for their reserves. Any such actions would limit the increase in the strength of the currency. But such actions would also strengthen the former holders of American paper who can weaken the FRNs position as a reserve currency and America’s power by allowing them to dump the small portion of their former holdings publicly and create a crash of American paper.

    The incentives to create a crash of the FRN and US treasuries are also obvious. Some countries resent American interference around the globe and understand that after a crash the ability to project power will be greatly diminished. They also understand that we are running into a major commodity supply problem that will require rationing via rising prices. One way to minimize the impact on their own use is to make the purchase of commodities by the US, which is the biggest per-capita user only because its currency is used as a global reserve.

    I can go on but I doubt that the arguments can sway those that find folks like Prechter credible after all of the years of being wrong. During my short lifetime I have lived through a number of currency crises in several countries. I expect one such crisis to come in the next few years and to push the FRN over the abyss. The long term future of the fiat dollar is bleak; the short term bounce is a necessary prelude to suck as many people onto the bus just as it is about to hurtle over the cliff. Good luck to you but I think that I’ll keep walking.

  39. Inspired July 12, 2006 7:01 pm

    Cornhusker - I like your read on gold. Buying now and waiting to do a Cramer MOmback at below your $200.

    SO my comment last night in short are thus:

    The Fiat central bankers (all of them) after noting that the world had awakened to their deception of monetization of every little financial crisis, decided that in ORDER to Preserve their PERFECT debt is money is debt world….have collectively agreed that ‘inflation’ and money growth must now END.

    Therefore debts must collapse, causing huge defaults and a credit crunch…for which they believe they now have “plausible deniablility” (commodity inflation) and cajoling corporations into restrictive credit terms…i.e. the new preferreds issued @ 1.1% cost of funds…Executives buy in their falling stock and have in time a large DEBT obligation. (both deflationary positive for USD)

    Consumers stretched beyond weekly paychecks are forced to make cuts in consumption and ultimately DEFAULT >> turn over the keys…that the banksters get to sell and resell over and over again. People lose their jobs causing more domino DEFAULTS to slam into other weak credits etc (who wil buy stocks for their 401k’s when they just lost their auto production job for instance?)

    All of this credit default and higher interest payments REDUCES M3 (+ for USD). In the fractional banking system (one dollar deposited can be lent 8 to 12 times). It is this 12 headed monster that grew the economy effortlessly in the 1990’s but not so well since 1996, whose multiplier effect of collapsing credit that defaults most likely spins out of control no matter how much the FED pumps into the system (i.e. $10 or 50 billion a day), when NO one borrows the FED’s reserves it (M3) can’t be expanded even at ZERO interest rates for 6 years — aka Japan!

    The USD is the world’s current “reserve currency” and the fiat banksters aren’t ready to give this control up JUST YET.

    So its 1 more college try for the “fiat” banksters…We get a recession, commodities plummet, and HEDGE funds get the blame….The banksters who caused BOTH the bubble and the deflation go to their collaborators (the new governments) with the solution to all our ills…..and they start fresh again…….WELL that is the script..Now lets see if the public stays docile enough to keep the banksters in business…!

  40. Administrator July 12, 2006 8:08 pm

    Dear Michael,

    I always enjoy your columns (good food for thought) and since you requested the Devil’s advocate position here goes:

    First, Bernanke has made a career out of saying he would do things differently had he been in charge in 1929. We should believe him! But like all those generals fighting the last war, the battle is not lack of folding currency among the populace, it is (as you point out) maintaining the value of credit instruments as balance sheet/medium of exchange during a panic sale. To maintain this value all that is
    required is a buyer, one with deep pockets that really doesn’t mind a loss.

    That someone describes the Fed.

    So if I were running the Fed and knew a panic would arrive one day and had the complete support of the Prez to “fix it”, here is the plan I would have in place:

    As the panic starts, the Fed puts out the word to the Goldman Sachs’, JPM’s, and Fed banks to buy the “junk debt”. Buy enough to stem the panic and maintain the general collateral value. Buy anything and everything that needs support. The Fed then takes it off the minions
    books, maybe by laundering it though some hedge funds in the Carribean. Most likely it is just “investors”, unnamed, that step up, believing in America that get the credit. The less said the better here. Just like gold and silver sales, the buyers are never identified.

    Now the Fed holds all this worthless stuff. But so what?

    The Fed has never been and never will be audited. The original reason for being of the Fed was to stem panics. And what was actually lost? From the Fed’s viewpoint is they traded something of theirs, that costs them nothing to
    produce, for some things of no value. That is the fairest exchange the Fed will ever make.

    Now some of the sticking points. Does everyone get bailed out? No. Only those that are too big to fail plus some of the medium size players if their downfall will jeopardize the system.

    Won’t this destroy confidence in the Federal Reserve Note? If the pensions, retirement funds and individual stock investments have about the same number on the monthly statements before and after the crash then the vast majority of Americans will not demand answers. In fact, the PTB can tout the success of derivatives in maintaining the value of things. A few thinking Americans will smell a rat, but without access to the records how will they prove it?

    Outside the US is another problem. Does the Fed let the other markets implode, perhaps triggering a flight to quality in the FRN or do they clue some of the other big central banks into plan? Probably it is a case of sink or swim together so it becomes a coordinated effort (the IMF will be useful here), again with the large players kept mostly whole and the “emerging markets” taking it on the chin.

    Won’t the addition of so much liquidity through the cashing out of worthless debt trigger the hyperinflation some are predicting? Maybe not. Remember, not everyone is going to be made whole. Those that are made mostly whole may be required to park some funds in long term investments (government bonds). Bank reserve requirements can be changed to drain excess liquidity and increase investor confidence in the soundness of banks generally (especially in the “hard currencies”).

    The above plan, or whatever plan the Fed might have, should, from their viewpoint, have several objectives:

    1. Manage inflation expectations. Actual inflation will continue as evidenced by a gradual lowering of the standard of living but that can be blamed on one time events (hurricanes for example), terrorists or greedy companies/foreigners. Stretch the change out long enough and the vast majority will think it “normal”, rather like temporarily suspending more and more liberties until the old geezers die off. Everyone left will only know it has always been that way.

    2. Maintain confidence in the fiat (and government). Banks staying open and those monthly statements having a similar number at the bottom will go a long way in this regard. For the short term part of the plan.

    Will it fool all the people? No. In a democracy you only need to fool most of the people, 50% plus one to be exact.

    Will the price of gold and silver explode? Probably yes, but so what? A very few become newly rich. Trade that off against the system surviving. The debt that wasn’t worth anything is gone and after a few years of “prudence” the game can be restarted.

    Will it work? In essence the question is will a con job on most of the world’s people succeed? Will producers still send real goods, the output of farms, mines and factories, in exchange for fiat? Some will. Others may need to be liberated until they see the light.

    What could stop it from working? Enough people knowing how the system actually works would do it. But they won’t learn it from the schools and universities. They won’t learn it unless they put some effort into independent studies and thinking.

    What are the chances of that happening?

  41. Frank July 12, 2006 9:02 pm

    I try not to believe Prechter, but I’ve read his books and listened to his interviews, he just makes so damn much sense; I just can’t figure out how not to believe him.

    My comment on the stronger dollar/deflation argument is that runaway prices in oil, copper, zinc, nickel, gold, (heck even molybdenum), have obscured the deflation that lurks in the background.

    It is difficult for the markets to take deflation seriously when they’ve maybe got $100 a barrel oil out there.

    I am not a conspiricist, but it almost looks like the central banks have engineered the threat of $100 oil in order to prevent the deflation of which Prechter writes.

    Frank

  42. JDR July 12, 2006 9:21 pm

    Administrator - I think your description of how central bankers could react to a debt crisis is a likely scenario. When governments and large financial institutions are faced with a sink or swim proposition, they will always choose the latter. Bernanke has made it clear that as Fed chairman he will never allow a deflationary spiral to take hold. He also advocates coordination between central banks to achieve “price stability” in world-wide markets.

    One fly in the ointment is the finite resources available to the Fed for off-the-record manipulations. The size of the slush fund is rumored to be $20B to $50B USD, but like the gold reserves in Ft. Knox, no one really knows the exact figure. If they needed more money, they would have to get it from other central banks through some kind of secret deal. The fact that Treasury Secretary Snow was replaced by a Wall Street insider, and that good ol’ Robert Rubin of Citi is no stranger in DC makes for some interesting speculation. I suspect we are on the verge of history’s largest financial bailout, and these guys know exactly who to call when the time comes for action.

  43. khill July 13, 2006 12:50 am

    I say “just say no to the buck”. Short term speculation is all the buck good is for. The U.S. is debt addicted and oil addicted and the bull markets are in hard assets. To me the buck has achieved “junkie status” in a world drowning in paper. Call me crazy but I think the Looney is the currency of choice. Investors should shun the buck at this time in history as the U.S. is transitioning from global stud to pathetic dud. Junkies shouldn’t be trusted with driving a car or child care so why should we trust the U.S. with our wealth? If you are a sophisticated speculator then go for it. Most investors should simply ride the hard asset wave and aviod the pitfalls of short term trading. To make a public case for a bull move in the buck can be very misleading to the not so sophisticated among us. The buck is for paying bills and checking accounts only, imo. I have no interest in trading garbage futures and the buck is trash. Got gold?

  44. Vincent July 13, 2006 5:14 am

    I too agree we may have a short covering rally in the U.S. buck, however I believe it will be quite short lived with a lot of selling into it. profits will be made by the very nimble, and lower lows will be the outcome. A lot of noise in this market…yes there is…focus on the fundamentals, and back your positions accordingly.

  45. David Kennedy July 13, 2006 5:26 am

    For a good insight into what to expect from the dollar please review Dr. Robert McHugh’s article at the “Financial Sense” website. This is the article address.

    http://www.financialsense.com/fsu/editorials/mchugh/2006/0709.html

    Note: This comment website does not allow the excellant charts include with this article to be copied and posted. The picture of the charts are worth a thousand words.

    THE SINKING DOLLAR AND RISING PRECIOUS METALS
    by Robert McHugh, Ph.D.
    July 9, 2006

    A look at the next chart shows the U.S. Dollar has started its descent into wave 5 of iii down, breaking decisively below the lower boundary of the wave 4 Rising Bearish Wedge. It should nestle around the 82 area +/-, then bounce in wave iv. All this is the start of a protracted move into the 60’s, one that will no doubt be stair-step rather than freefall as Central Banks around the world work in orderly fashion to devalue the Dollar.

    There was just simply too much M-3 created over the past several years. China, Russia, and several Oil exporting nations, the most publicized being Iran, are not happy about the Dollar as the world’s reserve currency. They will be working against the Dollar. Bernanke cannot afford to support the Dollar given the tenuous Housing market and all those adjustable rate mortgages that Greenbackspan encouraged the flock to use, now a noose around the consumer’s neck. This is all very good for precious metals of course.

    Gold finished the Micro degree wave 1 up within an extending Minuette v of 5 of 3 up on May 12th at $730.40. The correction since is a Submicro degree zigzag {a}-down, {b}-up, {c}-down, with all waves looking complete. If so, Gold is rallying into its Micro 3 up of v. An alternate labeling is we just completed minor wave a down, and b up is close to topping. Next would be a final wave c down to wave intermediate 2 down. Unless Gold drops below $450, the top wave count labeling holds up. Where it breaks down is if the correction underway drops below the Minor degree wave 3 top from December 2004. In that case, the labeling would change to consider the May 12th top as the top of Intermediate degree wave 1 that started back in August of 1999, and the correction underway as Intermediate 2 down, a large degree correction. We do not see that happening in this monetary inflating environment.

    Silver finished its Minor degree wave 1 up, and all three legs of 2 down, wave “a” down, b up, and “c” down are complete. Silver’s wave 2 correction was a little more than .618 of 1 up. The move up from June 14th’s 9.47 should be the start of wave 3 up. An alternate labeling considers June 14th’s bottom a Micro degree wave 3 bottom, the rally since as micro wave 4, with wave 5 down to a wave c of 2 bottom next. In that case, a possible target for a bottom would be a Fibonacci .786 retrace of 1 up, taking Silver back down to $8.45. The problem with this alternate count is waves 2 and 4 are out of proportion with each other, which is allowed, but unusual. As a second alternate (not shown), it is possible to consider that all waves since last July are a degree higher than labeled, suggesting primary degree wave (1) up has completed, and a powerful correction, primary wave (2) is underway. We find this scenario implausible as there is just too much monetary inflation going on right now. We are comfortable with our top labeling as it is consistent with wave counts in other inflation assets such as Gold, Oil, and the HUI.

    On the next page, we see Oil (West Texas Intermediate Crude) has completed its Minor degree wave 2 down correction, with 3 up underway. Wave 2 was a 3-3-3-3-3 Symmetrical Triangle. Normally triangles are wave fours or b’s. Symmetrical Triangles mean the trend that occurred before the triangle will be the trend that occurs after it completes — in this case up. We got a break up above the upper boundary of the triangle Friday, June 30th, an indication 3 up is underway. Get ready for $4.00 a gallon gasoline.

    “For I am God, and there is no other;
    I am God, and there is no one like Me,
    Declaring the end from the beginning,
    And from ancient times things which have not been done,
    Saying, “My purpose will be established,
    And I will accomplish all My good pleasure.”
    Isaiah 46:9,10

    © 2006 Robert McHugh, Ph.D.
    Editorial Archive and Bio

    CONTACT INFORMATION
    Robert McHugh, Ph.D.
    Main Line Investors, Inc.
    TechnicalIndicatorIndex.com
    Kimberton, PA USA

  46. A1 July 13, 2006 5:41 am

    The dollar rally that you forsee may not be short term.
    If we are in a situation where people start to sell assets to pay off debt we will have deflation big time. If this deflation comes the way of the housting market in a significant way, currency liquidity will dry up. Cash will be king for a long time again (as it usually is in depressions). A major housing crash will result in currency destruction at a level that not even the Fed can float.

  47. Ron July 13, 2006 5:45 am

    The loonie is not what you think it is. I have some Canadian coins. I placed a magnet near it by mistake one day and every one of those coins stuck to the magnet.

    I avoid Canadian money unless it is silver or copper.

    I am not a gold bug, but I do look for old items such as bulova watches, antique light fixtures, books, etc.

    Old items are well worth buying at low cost. Your dollar is worth much more than you would think when you do. Wal-Mart has junk and only junk. Don’t shop there, it’s a waste of hard earned dollars.

    The dollar is worth more than you think. It’s only money until you don’t have any.

    Buy silver, it’s at bargain prices.

  48. Dave Stratman July 13, 2006 5:56 am

    Hi, Michael–

    Thanks for this really stimulating series of articles. There is one element of this situation, however, that I would like to see you address. A strong dollar is not really in the interest of US rulers, is it? The US government and corporations have huge debts that they want to pay off in debased currency. Every downtick in the value of the dollar lightens the load of corporate pension liability, Social Security, etc., and thrusts it onto the backs of American workers and foreign dollar holders.

    That suggests to me that a strong dollar would be the last thing that the Goldman Sachs folks and the government would want.

  49. Rich July 13, 2006 6:27 am

    Also, what is the relationship between the US Dollars hegemony and the US military’s global, single superpower status?

    In past historic eras we would shrug at the notion that the largest military force was the one to dominate on the economic front, simple plunder.

    But we live in a more “sophisticated” time. If we were to collapse in to a deflationary depression, putting the fate of Western Civilization at risk, then what role would the US military play?

    Do we take from the rest of the world at gun point?

    I can’t see Japan, Europe, Russia, even China, turning up with a big stick and demanding repayment. So from a military perspective these creditor nations have to find an accomodation with the US.

    Cheers Rich

  50. Tom Nacey July 13, 2006 9:25 am

    Think about the FED. They are in the paper business. If they allow the paper dollar to collapse, then they are out of business. If the FED forces people to relearn the lesson of gold and silver, then people may not regain their faith in paper for a very long time. Many assume the politicians will not allow deflation because it will cost them votes. This thinking assumes that the politicians are in control. But the FED is a for profit, privately owned cartel. They have bought public opinion and politicians before and can certainly afford to buy the next generation of politicians. Besides, what better time for the crooked casino to spin 00 than when every mark is fully invested on the table of debt?
    Anyone who thinks deflation is impossible, should read The Creature from Jekyll Island by Ed Griffen. In fact, ever American who hasn’t read it should do so.

  51. Administrator July 13, 2006 8:27 pm

    Hi Dave,

    I thought about your question for a day, and to me the answer comes in thinking about the nature of the Powers That Be (PTB) and who their constituency is.

    Paulson is a man who’s individual net worth is in excess of 700 million dollars. This puts him in a leauge completely outside of the reality of ordinary working people. We can bet that most of his friends are in the same boat, and certainly the higher level government players are in the same neighborhood. So who is he going to serve?

    As Jay Talor put in, in reference to Rubin:

    Led by Bob Rubin, an investment banker who understood how a strong dollar would help his friends on Wall Street dominate and control world markets, the Clinton Administration seemed to care little that our overvalued US dollar was resulting in a major loss of American mining and manufacturing jobs that were being exported in no small part because of the strong dollar. In effect, a rigged dollar resulted in an unfair disadvantage for American manufacturing.

    We have maintained that a major means of manipulating the dollar to unrealistic levels was through the rigging of the gold price by way of encouraging the gold carry trade whereby the investment banking friends of Bob Rubin profited greatly by way of the gold carry trade.

    http://www.gold-eagle.com/gold_digest_01/taylor022001.html

    The current administration has always pushed the envelope in taking power when and where it could. They are blatant about it, and have been quite successful at it. The standard logic is what you have cited - we need a weak dollar so the government and corps and workers can pay off their debts and keep the economy afloat, etc.

    But what if their aim is different? This is not just speculation, but based on the pattern of power grabbing that has gone on in the past.

    A deflationary depression may be bad for the government, bad for the corporations and bad for the people. But it will benefit those with high net worths who are holding dollars - i.e. those in power.

    Coming out of the deflationary first depression, the big winner - the entity that gained the most power — was the US government. A deflationary catastrophe would leave the ruling class with a tremendously strengthened hand for remaking society as they see fit.

    It may not be well thought out but was Iraq? Was the preparation for Katrina? When was the last time that this government did something that was in the best interests of the nation as a whole?

    A strong dollar would aid in the power grab, at least temporarily…

    Just a thought. But, if this government is really as sinister as some would believe, I wouldn’t put anything past them.

    Michael

  52. David C July 14, 2006 4:31 am

    If the fed loans me a million dollars, and I spend it - and then I default. Then that is inflationary, not deflationary. Well, at least interms of costs. That money is out there somewhere, and it’s not going back to the fed, and so it is still chasing limited supply of something in the real world. On the other hand, if I posess a million dollars and the economy goes to hell - will I buy bonds? no. will I buy stocks, no. Will I loan it out? no. will I buy into a crashing housing market? no. Will I sit on it? maybe, if I believe the fed will never increase the money supply (since the dollar was backed by gold, that happened in 1930, but only a fool would believe that today) So what will I do? I would buy gold and any other usefull commodity I can think of. (hmmmm, which is exactly what’s happening)

    People seem to forget that the fed is not a financial institution, it is a political institution (politically independent? yeah right) Also, the US finalcial system is driven by the us commerce system not the other way around. If things go to hell, the powers that be will not be clammering to “save the dollar” they will be clammering to “restore business and commerce”. And the only way to restore business and commerce will be to clear the debts out of the system, and have a currency people can trust. Wait! that sure the heck sounds like a gold based system to me?

  53. Wiz July 14, 2006 5:11 am

    Just a fact that you are probably not aware of. One million dollars in mixed bills (100s, 20s) weighs about 70lbs. This I learned first hand by dragging around millions of dollars that had been siezed in my previous job at the DEA. So possessing 100 lbs in gold doesn’t seem that unreasonable, since it will occupy much less physical space.

  54. Carol July 14, 2006 6:01 am

    Michael,

    I have to agree with your perspective. I have been in the deflation camp for 6 years now (unwaivering).

    Being a contrarian, I think that ol heliocopter Ben who is an “expert” in the 1st depression was intentionally choosen for the very reason that no one expects a deflation to occure under his “watch”. When no one is expection something that is usually when it happens.

    Look at the “New Deal” that was ushered in during the 1st depression. A masterpeice of socialism and goverment control of the people. The new world order desires and needs those final elements of control in place that are near now but not yet in place. What better way to get the people “begging” for the solution the PTB want to put into place!

    My bet is clearly on the deflationary depression that as Michael clearly shows benefits those in power. Then they have all the resources to scoop in and take “everything” they want at bargain basement prices.

    We will see!

  55. JDR July 14, 2006 9:40 am

    Bernanke has stated many times that the Fed will not allow deflation in the US economy. Conspiracy theories that posit a deflation:

    “benefits those in power. Then they have all the resources to scoop in and take ‘everything’ they want at bargain basement prices.”

    are misguided because “those in power” loose leverage and control in that type of environment. The New Deal was instituted to head off a populist/communist revolt that many in the FDR administration felt was imminent.

    I tend to agree more with the scenario presented by Marc Faber:

    http://tinyurl.com/qakje

    where the governments and central banks inflate away or “fix” the bad debts through monetary policy. Since all currencies float and everything is electronic, they can consider this approach as the least disruptive solution. Politicians love expediency, and they won’t complain about the votes it buys them either.

  56. DavidS July 14, 2006 2:11 pm

    Random thoughts, but something else to consider:

    Don’t rely on current or recent one-party democracies to act any more rationally than the two-party one(s). (Democracy: “a form of government in which the supreme power is vested in the people collectively.” My old Chambers dictionary leaves the reader to decide how to implement it. GWB’s Newspeak dictionary probably defines it as, “It’s what I say it is.”)

    When the UK (and France, as I recall), in the twilight of Empire, “intervened” in Nasser’s nationalisation of the Suez Canal, way back in ‘fifty something, the US forced a British withdrawal by threatening a run on the pound (sterling) and a collapse of that ailing currency. Someday, China and Russia may have sufficient US debt and military strength to do something similar, come some future US imperial adventure… The way things are going, their populations may regard any consequent economic hardship as a reasonable price to pay. Unfortunately, the outcome could also be a silent world.

    Still, what goes around, comes around, as they say.

    As to someone’s comment re: the ruling class having a vested interest in a strong dollar. That’s only true if there is not an elite cadre able to protect their wealth whilst destroying the wealth of that ruling class along with everyone else’s. A financial background could be useful…

  57. Lawrence Seow July 14, 2006 6:52 pm

    You are basically talking about debt trap, economic hitman etc. There is nothing new under the sun except for one. The most important one the Bernanke Helicopter Electronic Printing Press Money Drop as discribed by Sinclair. This is the major mistake in monetary management. It will be categorized as two central banks working in concert to produce prosperity that ended up devouring just what it was intended to produce.

    “This plan was adopted when the Federal Reserve in the Bush Administration observed the US economic situation as negative and anticipated an impending recession.

    The unique nature of this non-traditional method of monetary stimulation and international money creation is that there is NO practical means of draining the liquidity. This is because the transaction cannot be reversed. It is this reality that has the world’s central banks scared to death. For this reason all their powers of persuasion (market manipulation and media influence) are now being utilized in a multilateral and concerted effort. It is a futile attempt to avoid having to drain out what was put into the international monetary system by reversing the transaction.

    In the end the bond market will reverse it for them and gold will exceed $1650.

    The reason this transaction cannot be unwound is because the method would be selling all those bonds that have been accumulated for the Japanese Float Account at the Federal Reserve Bank of New York into the open market. That is a practical impossibility as even the huge international market in US Treasury items cannot absorb such a supply.

    This transaction is totally different in its manner and impact than subscribing to an issue of US Treasuries at auction on behalf of a non US buyer, which is customary.

    This is the non-traditional method Professor Bernanke utilized that liquefied the world in a short period of time. This attempt to support an international economic recovery is now hitting home with its inflationary impact. This is beyond huge and happened over a short period of time compared to traditional methods. The results cannot be stopped because the liquidity cannot be drained. Regardless of the games played to break the psychology of inflation, real inflation will be delivered in an unprecedented proportion and non traditional manner.

    Everything else you heard this week on financial TV and by media commentary is pure bunk. It is designed to be in accord with the prime directive, which is never upset the social order.”

    We have to learn to escape from the dollar fast. But at the same time we also realise that all currencies are proxy of the dollar and no currency can survive if the dollar is weak.

  58. Marc Authier July 14, 2006 8:30 pm

    “In the end paper always goes to its intrinsic value. ZERO.” (Voltaire)

  59. Bernard July 15, 2006 12:39 am

    For longer than I can recall, the talk about the US$ headed for the dustbin has become a bit stale. The US$ is so entrenched in our world that no holder of US$ denominated assets will even consider its demise. Yes all fiat currencies will come to their inevitable end, but we will all be long dead before that day. Yes it is generally agreed that much is wrong with the macro policies of the US government. However what sensible and workable alternative is there, the Euro with its dodgy political union, that only after 50 years is beginning to be so cumbersome and loose that none of the members keep the rules, or are able to, it is one great political event or rather experiment that has enabled the politicos to see their day in the sun. A possible Asian currency or a combination of petro producers may be able to further subdivide the attack on the US$ but it will end up in an abortive challenge. Let the discussion regarding the US $ be realistic , all the terminal talk is just wasting good time that could be devoted to making the most of the imperfect system called capitalism to enjoy our labours and enjoy tea on the porch.

  60. Samhos.T July 15, 2006 4:18 am

    The dollar is a toast. I agree with you. Having persuaded all Central Banks to liquidate the greater part of their gold reserves, the US government is sitting on the largest gold reserve in the world.When one considers that these gold reserves are still valued at $28.00 per ounce, the current gold reserves of the US government and the World Bank, revalued at present market prices make the US dollar several times stronger than what it is today.

    Why then, you may ask, has the suggestion of the likes of Tony Blair, that part of these reserves be sold at current market prices to write off the debts of third world countries been rejected? Not because it is a bad idea but because the timing is not right. This may happen only when the POG reaches $2000.00 an ounce. Reverting to a gold standard at that point in time will make the US dollar the strongest currency in the world. All other currencies will pale into nearly worthless paper currencies.

  61. Rich July 15, 2006 9:55 am

    Hey Samhos.

    That is an interesting theory, and I like it!

    However, can you find proof anywhere that there is ANY gold in Fort Knox?

    I know this sounds absurd, but my attempts over the years to discover exactly what gold holdings the US has left have not found any evidence that there is anything in Fort Knox.

    There is a suspicion in the gold bug community that the Fed sold off that gold a long time ago, possibly to its own major shareholders (now that would be one heck of a gold heist if true!).

    In a nutshell you are saying that gold runs to $2,000 and then the US government announces a return to the gold standard?! That would be incredible.

    Cheers Rich

  62. Lawrence seow July 15, 2006 6:13 pm

    Dear Samhos.T for the record

    US gold reserves are still valued at 42.22 /oz.

    When gold reserves are sold, they are used to suppress the POG.

    IMF gold rightfully belong to members. Members are hoping to get their gold back if at all possible. The gold support the $IMS and it is good for the USA.

    When the USA if ever sells its physical gold, the pog shall go to the roof. So in the end they will be sold in a way to extract the max benefit for her as the pog goes up gradually.

    The dollar can only be devalued by gold.2000 POG will make the dollar weak in gold and so in FX. The Euro is 15% backed and with MTM make a rising POG benefitual. The dollar will bid for the Euro as $s are like the stars in the sky and the euro starts as “nothing”.

    At present the USA is collecting taxes from the world like the Romans did. They are slaves. But one day another Spactacus will rise.

    The $ cannot lose the backing from oil. A rising POG which keep the $ strong together with pog is a new ballgame. Looks like its about a done deal.

  63. Rich July 17, 2006 12:19 pm

    Hey Lawrence.

    Where is the proof the gold exists at Fort Knox? Physical gold has been securitized, manipulation and obfuscation has been the order of the day for the past 30 years. Where is the proof?

    Also, where is the proof, in writing, that the Euro is backed by 15% gold? I’ve seen this said many times, but no proof has been provided.

    Cheers Rich

  64. A. Magnus July 17, 2006 12:35 pm

    I think many well intentioned folks here are overlooking the obvious: that people of the world are voting with their pocketbooks. Nobody ever talks about how much of the trade deficit arises from the disapproval of U.S. foreign policy by international consumers. All we hear is that somehow the communist central planners in Beijing are whipping the pants off American capitalists using something ‘other’ than slave labor arbitage.

    My prediction is that the longer the U.S. government claims exemption from international law and basic morality when prosecuting its foreign objectives, the people of the world will continue quietly dropping the dollar and anything that is seen to buttress its power structure. It’s not just the Zogby polls that are showing how the P.R. consequences; the econmomy dependent on foreign largesse is also showing the same signs that spell weakness for the dollar.

  65. Jason M July 17, 2006 11:05 pm

    Michael:

    Your argument that the dollar could be set to rise again is based on a deflationary scenario. The U.S. Government has something like 11 trillion in debt, not to mention all the Social Security payments that will begin to balloon in the coming years.

    Do you really think that the U.S. Government would ever allow a deflationary cycle to play out?

  66. Lawrence seow July 18, 2006 4:00 am

    Hello Rich

    There is no proof that gold exists at Fort Knox but this I can say:

    The derivative markets are to prolong the $IMS. Paper Gold controls Gold for the time being. The Ants(sheeples) are the ones able to purchase physical gold although they are not wide awake. The USA nation gold is not with the Central Bank for a reason. If it is, the gold will be claimed by BIS for example and there is nothing you can do about it. The amount will be small change for BIS like cooling water for thirst throat.

  67. AK, One who cares... July 23, 2006 10:38 am

    All,

    First, I would like to thank for providing this platform to share our thoughts and opinin. Especially, at this time where hypocracy is the policy of the day — On one hand , the current administration does not want to allow stem cell research to protect life and on the other hand allows hundreds to die in Iraq, Afghanistan and now Lebonon.

    anyway, my thoughts on the dollar –

    I think the time has come to allow dollar to appreciate.

    Last 5 years most of the productive capacity has moved to China and India. Intensive capital has been invested to generate huge capacity to produce goods and services to meet the US concumer demand.

    All US assets have inflated to the point that they cannot go up any further. US property prices and stock prices have gone up that they cannot anywhere but down.

    So, here is the FEDs (or US) strategy –

    Allow a slow down in consumer demand. This is dangerous to China and India since they will have to keep producing at lower price to utilise thier production capacity to avoid deflation on massive scale. US companies will feel the pain but at lot lower scale since most do have the burden of manufacturing and labor.

    US debt will be paid off by selling inflated US property and stocks to foreigners and immigrants. This has already begun since last year.

    To manage all this the follwoing needs to be done:

    1. raise interest rates to slow down future borrowing resulting in slow consumer demand.

    2. keep printing money to keep housing price and stocks inflated. This means housing and Dow may not crash!

    Some may ask how can you have both ways — higher interest rate and increase in dollar supply. Remember, it is not the absolute that matters but the rate at which both are increased. If the rate of interest rate increase is slower (25 bp every few months or so) than the rate at which money is printed (10% per year), FED could achieve both.

    Any thoughts..

  68. Tursk July 26, 2006 4:46 pm

    The dollar may rally within a band that the fed and the current administration will try to control, temporarily for political gain but, ultimately the dollar is headed down. Very possibly, it is headed down and out sooner than anyone could comprehend based on history. Monetary history gives no basis for what the future now holds. There has been an ongoing, years long, push toward a new ‘North American Union’ (much like the European Union). This push has recently been put on a faster track by the Bushites, with all of the ensuing agreements (not treaties), to be ready to implement by the year 2010. The new North American Union will involve the merging of all the essentials between Canada, USA,Mexico. This includes a new currency. The dollar will not die choking on its own but it will be killed off outright by the globalists, (for whom the Bushes have always been ‘hatchet men’), who subscribe to the geo-political necessities of merging nations. A truly weakened dollar is the only way to set up the American public for the move to the new ‘Amero’, (one possible name for the new currency).
    Disbelieve it at risk to your future well being.

  69. ronandreas August 2, 2006 1:10 pm

    Confronting the Violence of Dollar Hegemony
    by Greg Moses
    http://www.dissidentvoice.org
    August 2, 2006

    As Islamic states and communities caucus over the crisis in Lebanon, non-Islamic populations in the West also desire some quick way to peacefully deter the hyper-violence of the reigning Washington-London-Jerusalem machine. Ahmed Amr calls our attention to currency activism, a grassroots dollar boycott, suggested by former Malaysian Prime Minister Mahathir Mohamad. By withdrawing economic activity as much as possible from the production and circulation of USA dollars, billions of people all over the world might collectively compel substantial and lasting concessions from our steel-tipped oligarchs, if not turn them out naked overnight.

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