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The Case for Depression: Dollar Collapse
The history of the dollar is one marked by a dominance unrivaled in history. Following the Bretton Woods Agreement of 1944, which established the dollar as the global reserve currency, Americans have enjoyed an era of unprecedented wealth and prominence.
The impressive growth in America could not have occurred without a stable dollar. Stable currencies are the unheralded but undeniable foundation of any vibrant economy. Stable currencies allow for longer term transactions and help instill confidence in the public, which is critical, since the value of any fiat currency is ultimately a function of public confidence.
That being said, there are several factors that lead me to believe the dollar is headed for a precipitous decline, and that this decline will exacerbate what I perceive currently as a Depression in our country.
The value of a currency is determined by a number of variables. In this article, I will focus on the dynamics of demand, supply, current account deficits, and aggregate government debt.
Demand for Dollars
The dollar has enjoyed a boost in demand and an exchange rate premium due to its privileged role as the world's reserve currency. As a function of this status, world trade is, for the most part, transacted in dollars. However, recent developments on the periphery have slowly undermined the dollar's dominant position in global trade.
World trade in dollars has been declining since the start of the decade. Recent currency swap agreements between countries, mostly involving China, have been used to bypass the dollar in global trade. Arrangements such as these threaten the dollar's role as global reserve currency, removing any support to the dollar's value such an arrangement provided. This decreased demand is clearly reflected by a falling percentage of foreign reserves held in dollars.
Further, in a low interest rate environment, the dollar has become the carry trade currency of choice. Investors have long been waiting for a powerful countertrend rally in the dollar, but as the example in the yen shows, prolonged weakness in carry trade currencies can and do occur. Also keep in mind that alternative assets, such as gold, become much more attractive in an environment where yields are essentially 0%.
Massive Supply
It's been well-documented that the Fed has embarked on a campaign of massive monetary stimulus. Unfortunately, it's hard to quantify the extent of money supply growth, since the government has stopped reporting M3 money supply figures.
The real problem brewing under the surface are accumulating bank reserves, which can be thought of as a proxy for risk aversion. Once these reserves are deployed, expect inflation to increase significantly. Sooner or later, banks will have to focus on their core business, which is lending to consumers. Here is a chart of the quickly accumulating bank reserves. Is there any question there will eventually be a flood of dollars hitting the system?
Current Account Deficits
Current account deficits are the quantifiable measure of a country's profligacy and overconsumption. Current account deficits are historically a short-term solution to a nation's underproductivity, which must eventually be settled through the balancing of capital and current accounts. As a nation continually funds consumption via debt, its currency naturally becomes less and less valuable as a medium of exchange.
Current account deficits as a percent of GDP in the U.S. have exploded to troubling levels, especially since President Nixon removed the last vestiges of our link to gold in 1971. Over the long run, the value of a currency is inversely correlated to the level of current account deficits. Persistent imbalances in current account deficits will weaken a currency without exception. The downward trend over the last decade in the dollar evidences the detrimental effect of long-term current account deficits. Notice how gold, as an alternative to the dollar, has risen in response to rising current account deficits.
U.S. Government Debt and the Treasury Market
Moving forward, the Treasury market will inordinately dictate major moves in the dollar. But before I explain why, I want to briefly overview the relationship between treasury debt, inflation, and the value of the dollar under the Maestro, Alan Greenspan.
The "great moderation" in the Greenspan years was facilitated by the recycling of dollars into our capital accounts- such as stocks, treasury debt, and agency debt. This meant that inflation was temporarily stifled as dollars were sterilized in debt instruments, while asset prices received a jolt from the attendant low interest rates. Furthermore, the tremendous demand for U.S. capital products proved to be supportive of the dollar. If there ever were a period of getting "something for nothing" in America, it was during this era of massively inflated asset prices, and moderate consumer price inflation.
Now what happens when our debt grows to a level that forces the government to become a major player in the bond market? Foreign actors will start unloading their treasury debt, especially on the long end of the yield curve, to an increasingly overburdened government. As demand for Treasuries falls, yields will rise, which makes the burdens of servicing debt greater.
Due to collapsing tax receipts and excessive stimulus measures to stave off the effects of this crisis, our budget deficit has exploded in 2009. This phenomenon is what forces our government to "monetize" debt.
The monumental and ever-increasing level of debt the government has directly taken on through its program of quantitative easing is troubling. The reason is simple: in an inflationary environment, the Fed will be inhibited from containing inflation by selling bonds in the open market, and thereby, soaking liquidity from the system. Due to the sheer size of our program of monetization, any move to sell treasury instruments will likely be met with panic from foreign investors. This is something to keep in mind moving forward.
Total Debt Including Unfunded Liabilities
And now we come to the elephant in the room: aggregate government debt, including unfunded liabilities. Decades of kicking the debt can down the road in Ponzi scheme entitlement programs, like Social Security, has created a behemoth of debt that is quite literally unpayable. Absent a growth miracle, and a bigger miracle of fiscal austerity by our government, there is no way we can fund these accruing liabilities through our dwindling tax base.
According to the Dallas Fed, current unfunded liabilities are about $100 trillion dollars. While a restructuring of entitlement programs is absolutely necessary, it is not politically viable. If recent government actions are any indication, our government will attempt to mask insolvency through the printing press.
Conclusion: Implications of a Weaker Dollar
A weaker dollar poses tremendous complications for Americans. For one, it makes imports more expensive, which is effectively inflation. Ultimately, this means a standard of living lower than what we have come to expect. If confidence in the dollar totally erodes, then things will really get ugly.
While we could possibly stave off an inflationary spiral if we enacted the correct policy right now, the reappointment of "Helicopter" Ben Bernanke all but destroyed any hopes of a stable currency. The inflationary spiral of the late 70's and early 80's was brought to a halt through the politically unpopular actions of Paul Volcker. It's counterintuitive, but central bankers that are denigrated politically are doing their job correctly. Celebrated central bankers like Ben Bernanke are succumbing to political pressure, making decisions based on expedience rather than prudence. The inherent deficiencies in our system virtually guarantee that long-term implications of massive debt will be ignored. Unfortunately, the "long-term" may finally be upon us, and a dollar collapse of shocking proportions is increasingly likely. This Depression is just getting started.
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I think your post is a good attempt to predict the future trajectory of the dollar. At the same time, however, I think it is deeply flawed for at least two reasons:
1) You largely ignore the fact that currency movements are based on relative, not absolute conditions. To your credit, you address the issue of the current account deficit which is a quintessential reflection of relative conditions. There are, however, other relative conditions to consider: for instance, public debt to GDP in most large EU countries as well as Japan is significantly higher than that of the US. These other countries are in a greater fiscal jam than the US, which has the effect of threatening their future economic well-being and depressing the relative attractiveness of assets in these countries. This is a net positive for the dollar. The relative external debt position does however work against the USD since the external debt to GDP of the US is greater than many these countries. But the external debt of the US - contrary to popular belief - largely consists of private sector assets which are attractive to foreigners precisely because these assets are relatively attractive to assets in their own countries (Japan, Germany for instance).
2) You ignore the self-stabilizing mechanisms inherent in currency markets. Two obvious examples of this can be found in the current account: first, trade is a stabilizing mechanism in that a depreciating currency tends to improve the balance of trade over time. A significantly depressed US dollar will dramatically improve the US trade balance and shift trade flows in the dollar's favor. Second, as central banks accumulate less USD reserves, USD interest payments on the reserves will fall and further act to stabilize the dollar.
3) Finally, I believe you overstate the inflationary potential of quantitative easing. The Fed's greatest fear is an exogenous commodity price shock. If, for instance, crude price spike up dramatically, the Fed will have its hands tied because inflation will rise while the economy is still on its knees. Barring an exogenous commodity price shock, however, inflation will be correlated with economic strength, and economic strength will attract foreign capital. If the US shows economic strength, the Fed will be in a much better position to unload treasuries because there will be increased foreign demand for US assets. When the Fed unloads its Treasury holdings, the Fed will certainly bear some losses, but it won't be as much as many people think. Furthermore, if actual inflation picks up, the Treasury will benefit because its tax receipts will rise while it's debt burden remains the same.
So in the final analysis I disagree with your assertion that the dollar will collapse. All bets are off, however, if there is a major exogenous commodity price shock prior to US economic recovery. The chances of this happening are slim at the moment.
I think your post is a good attempt to predict the future trajectory of the dollar. At the same time, however, I think it is deeply flawed for at least two reasons:
1) You largely ignore the fact that currency movements are based on relative, not absolute conditions. To your credit, you address the issue of the current account deficit which is a quintessential reflection of relative conditions. There are, however, other relative conditions to consider: for instance, public debt to GDP in most large EU countries as well as Japan is significantly higher than that of the US. These other countries are in a greater fiscal jam than the US, which has the effect of threatening their future economic well-being and depressing the relative attractiveness of assets in these countries. This is a net positive for the dollar. The relative external debt position does however work against the USD since the external debt to GDP of the US is greater than many these countries. But the external debt of the US - contrary to popular belief - largely consists of private sector assets which are attractive to foreigners precisely because these assets are relatively attractive to assets in their own countries (Japan, Germany for instance).
2) You ignore the self-stabilizing mechanisms inherent in currency markets. Two obvious examples of this can be found in the current account: first, trade is a stabilizing mechanism in that a depreciating currency tends to improve the balance of trade over time. A significantly depressed US dollar will dramatically improve the US trade balance and shift trade flows in the dollar's favor. Second, as central banks accumulate less USD reserves, USD interest payments on the reserves will fall and further act to stabilize the dollar.
3) Finally, I believe you overstate the inflationary potential of quantitative easing. The Fed's greatest fear is an exogenous commodity price shock. If, for instance, crude price spike up dramatically, the Fed will have its hands tied because inflation will rise while the economy is still on its knees. Barring an exogenous commodity price shock, however, inflation will be correlated with economic strength, and economic strength will attract foreign capital. If the US shows economic strength, the Fed will be in a much better position to unload treasuries because there will be increased foreign demand for US assets. When the Fed unloads its Treasury holdings, the Fed will certainly bear some losses, but it won't be as much as many people think. Furthermore, if actual inflation picks up, the Treasury will benefit because its tax receipts will rise while it's debt burden remains the same.
So in the final analysis I disagree with your assertion that the dollar will collapse. All bets are off, however, if there is a major exogenous commodity price shock prior to US economic recovery. The chances of this happening are slim at the moment.
"The inflationary spiral of the late 70's and early 80's was brought to a halt through the politically unpopular actions of Paul Volcker. It's counterintuitive, but central bankers that are denigrated politically are doing their job correctly. Celebrated central bankers like Ben Bernanke are succumbing to political pressure..."
When you start talking about good central bankers and bad central bankers, you might as well talk about which one is the "good cop" working on the poor stiff in the slammer. Jefferson did not have such a difficult time when he said that the nation would be jerked from pillar to post by central bankers once gold and silver stopped being money.
Ask yourself: What government, determined to keep its spending in line with income, as it urges all its citizens to do, has any need for a "Central Bank"- the greatest period of this nation's prosperity, betweeen 1800 and WWI was accomplished with a functioning Treasury Department (and no IRS, yet) and NO Fed.
It is amazing how little press has been given to Germany's passing what amounts to a balanced budget amendment this year. But then again, they went through lugging suitcases full of money to buy a loaf of bread within the past 100 years- don't look to that great "expert" Ben Bernanke to take the first step and see the light
I think the problem, which explains the paradox of declining yields, is originated in a symptom typical of late-stage economic activity during a cycle and that is diminishing profitability.
An analog is water cut or decreasing EROI in a mature oil field. Profitability in the aggregate of economic activity has become very low. The only way to generate a "return" is now to leveraged evermore and try to eke out a scarce return but on massive transactional volume.
Consequently, the demand for credit feeds into this. The interest claims on debtmoney mandate exponential growth in debt, and into a climate of diminishing real returns, we should expect to see declining yields even in the face of inarguable bankruptcy.
Think about an oil prospector. Now, you must drill under miles of ocean and rock just to get a minor supply. The profitability of this type of activity is FAR lower at this stage of the economic cycle than it was at the outset, astoundingly so. Financial entities realize this and therefore demand more credit in order to multiply these smaller profits by a larger leverage ratio.
The endgame state will not be seen until marginal profitability of debt/GDP or profit goes to 1:1 at that point a mass stampede must ensue into wealth preservation, and this represents the collapse phase of the entire monetary regime based upon expectations of future income. Literally, the growth mandate of the money will be impossible to achieve, like an EROI <1 makes reserves irrecoverable. Compound interest has driven the world into a need of growth and we're at the epoch where this isn't able to be satisfied. Everywhere we look, we see ponzis. Well, we ran out of the doubling input needed to maintain them.
Save a bullet to shooot yourself.
Is it true OBummer is trying to get James Hansen from NASA GISS to join treasuy. That way the figures can be 'warmed up' when the depression really bites next year.
regards
Or move to Canada, Austrailia, or New Zealand.
Devaluations of currencies matter when the process of devlaution goes totally out of control. Like it or not, there's still a whole lot of underlying leverage in fx and interest rate derivatives, and maintaining underlying stability in currency realtionships matter significantly.
The problem of letting gold go stratospheric is that currency and interest rate relationships would quite possibly desabilize big time-- pretty much assuring most of the living world a depression unseen in our lifetimes, due to the derivatives unwind.
If it were to be successful, the process to your gold nirvana would take many years to unfold-- and may not succeed anyway.
But you make some damn fine points, though.
OK, here are my thoughts:
All this talk of the dollar strengthening or weakening is wasted energy. The dollar and all other fiat currencies will weaken in the long term, currencies with responsible central banks will weaken less and these might be countries to consider for asset investment (but not just their paper currency). Imagine all fiat currencies in a toilet after the flush, and some of the notes move up or down but the general trend and future is undeniably down.
Over 100 years of history for the fed indicate that the dollar has lost 95% of its value since inception, are you going to go against 100 years of history when the economic backdrop is worse than any other time. I would agree that other countries are worse off than the US, but why invest in currency when it is all interdependent on the actions of the central bankers as they all race to flush the toilet. Timing currency movements is for insiders so go with long term direction. Don't use options - look at DXY ICE trades.
What is the solution, and what is the largest reserve for most of the governments/CBs around the world? It is simple, just let the value of gold go stratospheric so that it can more than cover the value of debt to prevent a currency crisis and hyper-inflation.
Buy gold now, the central banks are and the central banks primarily influence the value of every other asset class through the expansion and contraction of the money supply. Do you understand the argument I just laid out? The central banks control the value of every asset class through the expansion/contraction of the money supply - booms and busts are created through monetary policy execution. These same central banks are buying gold. I don't understand the individuals that are investing in country fiat paper when it is all interdependent based upon the actions of central banks.
Make sure you hedge your own cash flow like most corporations - borrowings typically offset cash inflows. Oil exposure in your portfolio should at least hedge your own annual gasoline purchases. There is danger in borrowing in USD and buying into assets in another country like China or Dubai - their securities markets could go up in local currency value while their currency goes down relative to the dollar and your mortgage/rent payments are in USD.
Buy some silver and gold, there may or may not be a temporary pull back but over the long term it has done better than paper. If investing outside of gold, have some oil exposure, convertible bonds in solid companies, solid utilities with solid dividends, and some of the major S&P companies with solid dividend histories at ~3% or higher with major names, low debt, low cost leader, with high cash flow.
SMALL BUSINESSES -- THE LIFEBLOOD of the economy and employers of 70% of the nation's workers -- are asking one key question. It isn't, "When will we be hiring again," but rather, "Will we even exist a year from now?"
Two-thirds of small-business owners surveyed last month by Toluna Research at the behest of Angrisani Turnarounds (which specializes in what its name implies) said that they are concerned or extremely concerned about their firms' surviving for two years. Their fears aren't unfounded, considering that small-business bankruptcies rose 44% in the third quarter of this year, from the same quarter in 2008, according to Equifax, a credit-reporting agency.
"Our survey data over the last three months concludes that we're going to be looking at an acceleration of the failure rate," says Al Angrisani, head of the turnaround firm, who was chief employment advisor to President Ronald Reagan during the last Great Recession, in the early 1980s. Angrisani worries that small businesses not only haven't seen much benefit from the $787 billion stimulus plan, but will be further squeezed by rising state and federal taxes, particularly if health-care reform passes.
Another survey, by Employers Holdings, a workers' compensation provider, found that 50% of small business decision makers won't start hiring again for another six months.
Instead of the top-down solution to the recession favored by what Angrisani calls the "unholy alliance" of big business and big government, he wants stimulus from the bottom up: tax cuts for small companies. (emphasis added)
Thanks for the feedback JR. In addition to the assistance to firms vital for national security (which was in part necessary from a world financial & structural perspective), the stimulus should have been used from a policy perspective to stimulate jobs creation (in small, big, and large companies).
In a way, the administration must save these big firms from themselves, and all of us in the process - that is what systematic risk is all about, and NAFTA is a failure (those that voted for it sold out) because when every corporation short sightedly outsources jobs (CEOs follow their competitors cost savings or risk being replaced), a 70% consumer economy can't support the same companies that are trying to get ahead by shipping jobs overseas. Those companies even have tax incentives to move the jobs overseas, and this is either ignorance, lack of control, or a globalist agenda.
The structure of the gifts to the banks (bailouts) should have taken the form of England's which provided more ownership and on terms beneficial to the citizens and encouraging job creation. Even if this economy is too far gone to save, they need to at least give the people hope by creating an environment where hard work is rewarded and savings are rewarded. Handing money to unions and acorn to buy votes is all about politics, and we should no longer be campaigning - we should be leading not campaigning at this stage. With the wrong policies, the whole thing rots from the inside.
Like outsourcing leading to a jobless consumer that is relied on for 70% spending, there is a tipping point on handouts taken from one group and given to another, since it is demotivating and beyond taxes steals from the productive through inflation (deficit spending). Cost of government days (COGD) was August 12th this year, this is not moral or right as it weakens the entire group, and encourages capital flight to a land where return is greater than inflation and taxes.
Check out this excellent article on a little known fact about the original pilgrim settlements - some were set up as free markets and some were set up as socialist communes, the first thrived while the second starved. It was all due to the structure and human motivation (survival self interest), and we are now presented with the same situation. America could succeed if it had the right policies in place, but the focus unfortunately appears to be on politically connected self serving (both major parties).
http://www.silverbearcafe.com/private/11.09/hoax.html
A few relevant Abraham Lincoln (Obama's political inspiration) quotes:
With public sentiment, nothing can fail. Without it, nothing can succeed.
You cannot build character and courage by taking away a man's initiative and independence.
You cannot escape the responsibility of tomorrow by evading it today.
You cannot help men permanently by doing for them what they could and should do for themselves.
Mr. Hun, free market pilgrims? Give yourself a pinch, 16 families came to Stratford Ct. in the 1620's fill me in on "markets" in that setting!
Great discussion but have to concur with Kowalski. Wish these guys were that bright. TG and company are doing all they can just to keep their heads above water. Time for the US to pay the piper. This will end when the labor arbitrage that India and China are enjoying ends and the US gets back to work. Of course US deflation is an inevitable outcome. Forest fires are good and a natural phenomenon. Fires clear the way for new growth. All generations must endure their share of pain- we've had none. Lyrics from Les Mis seem befitting:
But there are dreams that cannot be
And there are storms
We cannot weather…
I had a dream my life would be
So different form this hell I’m living
so different now from what it seemed
Now life has killed
The dream I dreamed.
I agree with your take to a great extent. At some time in the past, I had thought that the authorities here in the U.S. stood a chance of cycling between money printing and de-levering/liquidating as a way of working through our structural issues in a responsible manner.
That doesn't seem to be the case, as credit expansion (money printing) appears to be taking a front seat to everything else. In most prior economic contractions, it appears that a degree of liquidation was a healthy pre-requisite to a economic expansion on a sound foundation.
Then we had the 2000-02 recession... hardly any real liquidation at all, but a good reset of equity values. Fast forward to 2009, we've had a much greater degree of "extend and pretend' than real liquidation.
While I'm sure that Bernanke the Academic has learned many a lesson from the 1930's experience, in practical terms, it seems like clearing the fires and making sacrificies make more sense and transferring bad debt to make the case of creating even more debt.
Little wonder Americans have lost confidence in their so called "leaders".
I'm sorry.. I just dont see conspiracy. Greed, incompetance and cheating yes. But for the life of me I refuse to believe that the world's bankers put on satan robes and plan to enslave the masses as they worship satan and slaughter lambs.
As for what happens from here, I'll wager a guess for 2010 anyways.. the Fed will extend MBS purchases & they'll extend Bond purchases as well, and crude will go over $110 and gold $1,400/oz. Unemployment will be at least 11%, perhaps 12%. The FDIC will need more money as the commercial r/e bomb begins to explode. But there will be no crash. Japan will begin another round of QE, and we will also have a "jobs" bill this winter.
Bernanke will do anything to prevent higher rates and deflation. But the price of this policy is that we serfs will be paying ever more for the basics of life and as we do, our ability and/or willingness to pay credit card and other debts sinks. Foreclosures & bankruptcies will soar; retail sales will slowly but surely tank.
If there is to be a collapse somewhere in the future, I'd wager it'd be Japan. If rates on their Govt bonds went up 3-4%, their Govt's financial situation would become critical.
http://themeanoldinvestor.blogspot.com/2009/11/sum-of-all-fears.html
Very logical. Except the P/E ratios are out of alignment. Perhaps not a crash, but a 27% correction in equities, led by, of all things, the financial sector. By mid 2010, after Q2 financials + 1 month.
But, as I have said before on this site, that these nice cyclic type of corrections are now the best case scenarios. The real injustice to the American people is through misguided fiscal and monetary policies, the US economy is now hyper-sensitive to outside (world) events. We are no longer sole masters of our fate. Witness the destruction of the US economy, devastated by greed, impoverished by debt, answered with ignorance, and in the end, completely unnecessary.
Mark Beck
No fiat currency has ever served as reserve currency. This alone should provide pause before jumping to any conclusions.
None of us have any doubt what China would be doing now, if the dollar were backed by gold. Do we? But it can't ask for gold, it can only ask for US denominated assets - and the only asset it can get are US debt obligations - paper IOUs.
But, even this assumes the Chinese are concerned to accumulate US assets however dubious the quality of those assets. Is this true? Or, is it more likely that the Chinese have a deeply pressing need for outlets for their industrial product - itself a result of a policy which directs massive proportions of their GDP growth toward fixed asset investment. If you are trying to leap from the 19th Century to the 21st Century in 40 or 50 years, it may be far more important that you have a market for your goods than useless dead gold.
With 30 to 40 percent of GDP growth taking the form of investment, I believe the argument can be made that a stable market for its surplus goods is far more important than treasuries, or even gold.
I would like to hear your thoughts on this.
china has told its people to buy silver and gold. Therefore there will be assets in their communities. The usa on the other hand is stripping the people of all assets. So who will be able to restart their economy better?
in the 90s china put our rare earth minerals mines out of business .
Since then the avalanche of products from china, with our help, has put us out of business. As fiat currencies fall ,China is best dressed for the next act and may have planned this long ago, playing chess to our poker.
further insight may be gained from chinas recent purchases. They bought hard goods while we plowed ours dollars into the black hole of debt. Ergo they are prepared post collapse. My question is who will win...china or the IMF/fed/goldman cabal ?
China is just an example to show how a fiat regime might have surprises in store.
My argument is that China is set on development, not the accumulation of American assets. To accomplish this they need stable markets into which to sell their goods. This is more important to the purpose than US debt or even commodities. If the dollar collapses, no is safe - not even those who buy gold or other hard currencies - modern economies run on fiat, not gold dust. Absent the US market, China would be unable to maximize their development, and millions would be unemployed. (Some say this has already happened.)
The peg that China maintains is key to maintaining the macro stability its companies need to maximize their growth rates. The central government is absorbing the currency risk so that its export sector can continue to grow. This is what sterilization means.
It would help if you ignored the currency issue for a moment and focused on the actual process of industrializing a country.
Once you strip out the currency issue you can see the problem of realizing profits which make it possible for China to maintain a high rate of growth. Later, you can add it back in to see how the currency issue complicates the matter. When you do this I think you will find that the problem is not China's willingness or ability to absorb fiat dollars, but the US ability to absorb China's exports.
The conclusion you will come to is this: The dollar system was doomed the moment China adopted the neo-liberal export-led development strategy. There is no way to absorb the inexpensive exports of a nation of 1.3 billion people, most of whom have not even left the farm yet.
It is very simple: The more dollars the Fed prints, the less all of our dollars will be worth!
The Fed needs to stop printing and the government needs to stop spending!
admin
http://invetrics.com
Pretty much that sums it up. The fed won't stop printing and gov't won't stop spending until citizens get violent about the matter.
Hey Bravo, value is subjective, not objective, i.e. value has temporal and geographic properties and so it is with gold. Those who bought gold at say 600 in 1980 or there abouts not only saw a nominal loss in exchange value but they also lost exchange value due to inflation. The myth that one can buy a suit of clothes for the same amount of gold year over year can be true or not true depending on where and when the transaction is made.
The dollar's demise will come after a collapse in the debt markets, starting with municipal bonds. Not until then.
Good insight. However, death of the dollar has different meanings to different people. If you are looking at flow of capital relative to gains in dollar denominated investments, then the "collapse" has already started.
Also, if you look at long term trends, like Peter Schiff for example, relative to gold (stable worth), the act of FED QE has set in motion unprecedented monetary inflation, which I would have to agree, will be near impossible for the FED to control (tighten), when the time comes. The FED knows that if it is able to effectively de-leverage debt, prevent deflation. Then there will be potentially an uncontrolled transition towards inflation.
If the FED does not adequately de-leverage debt then we could have protracted deflation. Which would essentially mean the only real GDP growth for the nation would be through stimulus and FED actions. The danger here is that, intrinsically the US would not be a viable economy. There would be no growth. It would probably be wise to move your net worth out of the US before this happens.
I guess the bottom line here is, a strategy that waits for a collapse in the bond market, is too late.
At this time, inaction is a losing proposition.
Mark Beck
"..out of the US...?
To Europe, Asia, Australia, S. America, Canada?
I think he means mars, where the enhabitants actually eat gold so it has some real value
At Anon 144582:
"Military pensions are entitlements, yes, but that's not the same as Social Security savings accounts. "
Military pensions are not entitlements. They are obligations by all Americans to those that serve. They are paid for with the blood, sweat and tears of servicemen and women who go in harms way and do tough jobs for little pay which enable people (like many readers here) to pursue other more profitable activities in a relatively safe environment.
You want to see social unrest and violence -- perhaps even civil war?
Renege on pensions owed to veterans and people in the other occupations that keep the peace and try to keep the streets safe. Betray them and you will be truly on your own.
Rome had an inheritance tax to pay military pensions. But in the USA, the same "conservatives" who always want wars also want no inheritance tax. Please direct your anger at them.
"Renege on pensions owed to veterans and people in the other occupations that keep the peace and try to keep the streets safe. Betray them and you will be truly on your own."
Based on what we saw after Katrina, that isn't always such a bad thing. Honore stopped the bull* and started the shoveling, but we saw other punks with badges crapping on the Constitution and declaring martial law on their own authority. It's a double edged sword.
"The real problem brewing under the surface are accumulating bank reserves, which can be thought of as a proxy for risk aversion. Once these reserves are deployed, expect inflation to increase significantly. Sooner or later, banks will have to focus on their core business, which is lending to consumers. Here is a chart of the quickly accumulating bank reserves. Is there any question there will eventually be a flood of dollars hitting the system?"
You blew your entire thesis right from the outset. It takes two to tango; just who are these "consumers" that will, one, want to borrow, and two, qualify for borrowing? The 25-30% unemployed or underemployed? Businesses, who want to expand their enterprise, because demand is so high? CRE, because there is such a shortage of malls, hotels, restaurants?
The American consumer has bought forward all their wants ( not needs, unfortunately ) for decades, it's so over dude. Consumereism in the US is dead for decades, and that is why money velocity is on the mat and down for the count, period. http://research.stlouisfed.org/publications/mt/page12.pdf
Credit card companies have pulled back credit lines, rates are 20%+. Cash for clunkers programs are quick cotton candy highs, lasting nanoseconds, and have zero lasting affect.
At the heart of the problem, a huge percentage of the job losses are never coming back. It isn't just a USA problem, China, Japan, all the other mercantile exporting countries have huge overcapacity issues, and no buyers anymore.
This will take decades to unwind, with one caveat. The future truly is unknowable; no one forsaw how much the automobile, the internet, etc. would change the world. With 3 billion people now interconnected, and information instantaneous, what inventions, technology, could be a future game changer?
cowbells on ebay...$18.95 plus s&h ...made with clunker steal and tested for tungston
the other elephant in the room is over population. Every government's fiat currency depends, just like the churches do, on an increasing population to feed the coffers. So, will we over populate ourselves out of the mess and thus asorbe the new money. Or, run out of quality resources and kill each other off in a government promoted war effort to restore the GDP.
nothing is new, just the names are new.
True dat. Since most western economies (thrown in Japan too) have fewer and fewer children to support the old guys we need massive immigration to keep the game up. However, the law of large numbers catches up eventually. 10% growth on a small # is easy, but 10% growth on a very large # is much harder. This reduction in the # of children is happening at the same time that all our Ponzi liabilities for social programs are coming due. Makes sense...we want to hold onto our high standard of living but kids cost money and through inflation theft we work harder just to tread water. Now mom and dad both work and don't have time to raise junior.
Then if you want to combine those thoughts with the correlation between parental IQ and # of children they have and how OFTEN people have children and you see that we are building a huge base of less intelligent people. We expand geometrically at the bottom end while the top shrinks (2 rich parents pass on wealth to one child). Then we wonder why the gap between rich and poor continues to grow so much. Serious trouble ahead...
Demography is destiny.
This is first-order thinking. You need to think through some of the ramifications.
What you are saying is not going to happen for quite some time... years. We still have a whole lot of destruction to get through first.
Nice piece. I worry about the unfunded stuff as well. Did not know the Dallas Fed put a number on it of $100t. I would have thought it closer to $20 trillion. Do you have a link for that??
I post on ZH also. Suggestion: When you post go back to the graphs and "click" on them. This allows you to stretch them to a larger size. Don't make them too big, they will extend outside the margins.
bk
We will make new equity lows according to my charts and my USD indicator has been giving BULLISH warnings for some time and I'm still expecting a dollar rally.
The primary trend for equities remains down.
Technical analysis can also assist us as to the direction of the economy.
My indicators can identify trend changes before they occur.
They warned me of an impending market crash back in early *2007*
http://www.zerohedge.com/forum/market-outlook-0
That’s what makes a horse race: even if it’s fixed. You and Jim Rogers have your bets on the same horse. But it looks as if Rogers is hedging his bets; but, then again, who can trust a riverboat gambler? From:
Jim Rogers on Why Gold Is Glittering So Brightly | BusinessWeek | Nov. 25, 2009
JIM ROGERS
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade – I didn't say the next month, I didn't say the next year, I said the next decade – because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
What's behind the runup? Has buying by the central banks changed the equation here? Or is this still a demand story?
Certainly a demand story because, as I said, everybody's printing so much money and people around the world are worried about that. But you also have central banks, which five years ago were selling gold, now buying. So that's a huge shift in the marketplace. Central banks are like lots of other people – they just follow the crowd. There are probably better commodities to buy than gold, but you can't tell that to central banks because they've got gold on the brain.
How much of the runup is being driven by U.S. deficits and the weakening dollar?
A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.
http://www.businessweek.com/magazine/content/09_49/b4158011706814.htm
"Sooner or later, banks will have to focus on their core business, which is lending to consumers"
This used to be true.
Americans have not "enjoyed an era of unprecedented wealth and prominence" on the back of a stable currency, but on the back of one of the most massive frauds in human history (since at least 1970).
An ignorant question with respect to existing levels of US debt in relation to the extension of longer "term" maturity instruments backing them....
Has there been a rise or increase (longer terms) in the existing levels of these debts instruments (via MBSs, CDOs, etc) as a quantified percentage of current day's money supply (M1,M2, etc) that can be extrapolated back 30-50 years to a similarly stated percentage?
2) which when assuming an offset percentage of any current or assumed appreciation levels of gold prices (albeit having officially separated gold as the international currency benchmark, the market still attempts to steer the association), are the rumors/meanderings of $11,000 gold unfounded if we are now in the international process of increasing the length of international debt instruments when considering relative CPI of each government/country now assuming/underwriting this new found currency over the same period....
Would the extrapolated yield curve of the dollar and price of gold show any similar decoupling/separation when comparing every world governments level/percentage of IMF commitments during the same 30-50 year cycle?
I knew when I heard about the Amero and the NAU/SPP that they would collapse the dollar through hyperinflation to get rid of it, change it out for the more stable 'Amero'.
It's all so goddamn obvious.
Wake up already and realize the extent of the conspiracy.
The war goes on; the currency goes down. Thus it has been always.
Private debt, insurance, and derivatives dwarfs public debt and guarantees in the US.
Public debt is only growing as private debt is shifted to government books.
Banks will not be lending as they have so many toxic assets on their books, and their loan to asset ratio was so far above (20:1-30:1) the historical mean (~10:1) for so long that they will ultimately spend a great deal of time with loan to asset ratios below the historical mean, ie 5 or even 3:1).
In addition, because of widespread worldwide conditions of overcapacity very few businesses are interested in taking out loans to expand their capacity.
Your entire thesis is predicated on banks growing their lending; thus your conclusion is not relevant in a reasonable time period.
Sure there will ultimately be inflation, but it will be coming from a very very low base, after there has been a long bout of deflation and several fronts of civil wars and international wars that destroy productive capacities.
Forgive my simplistic view, but the more I look at how banks work, especially through the crisis, the more I find very simplistic strategies. Here goes:
The large reserves at the FED are there to shore up bank capital requirements, when the banks "gross up" their balance sheets due to FASB changes in Jan 2010. "Gross up" is just another way to say consolidate the balance sheets of any Qualified special purpose entities (QSPE). Consolidation is done using either Unpaid Principle Balance (UPB) or Fair value (Mark-to-market).
Thus, large FED bank reserves are an indication of the real exposure to bad debt facing the banks. The only way for the bad debt not to be recognized is to sell it at PAR value. So the play for time was to re-inflate the real estate pricing bubble in order to elevate prices, and unload the majority of the huge losses through the GSEs to the FED. But, we know that even after all of the FEDs efforts, the real estate discount at best, is about 20%. So my guess is the banks have not completed their "de-leverage" strategy, and time is running out.
I really think the FEDs GSE MBS CDO and agency paper is of the worse tranches, and probably near worthless upon purchase, and growing more worthless as delinquencies increase. This may be the biggest crime, in that QE through MBS and agency paper purchases, may be worth pennies on the dollar paid. This is clearly abuse of FED powers. Meaning they will never be able to tighten properly with these assets, I mean losses.
So will FED reserves be used for loans, perhaps. But, only after successful de-leveraging of bank debt.
Mark Beck
Superb. Complete. Spoken with authority.
I’ve thought all along the financial implosion is so deep the Fed banking cabal can’t cover it. It’s a black hole. Bernanke has chartered a course financed with unimaginable levels of monetary inflation--covering, covering, covering with cheap liquidity—playing for time to save Wall Street while at the same time he has the typical central planner’s lack of knowledge of how to pull the economy out.
It’s like Dubai. “We just need 6 months.” And everybody knows they’re lying. The Wall Street bankers are in so deep and so fraudulent they can only replace a Paulson in the U.S. Treasury with a Geithner, a Geithner with a Dimon, an insider. If they brought in an outsider, an executive who was an honest man, he would go straight to the public with the fraud.
These Wall Street bankers are the most incestuous group in the history of America; they trust no one else to look into their books; secrecy is imperative. The credibility, reputation and public image of the Federal Reserve and the leading financial institutions have been diving for more than a year now, down to the point of putting the Fed in danger of being eventually terminated. IMO, there’s only one reason why the Fed would allow measures to go to these extremes. And that is that the crisis; the amount of debt and worthless paper being held by institutions all over the world, is multiples greater than most people would ever imagine.
As Bill Fleckenstein said back in March, “If there were any doubts of the inflationary determination of the Federal Reserve, the minutes of its Federal Open Market Committee meeting on March 17-18 should have put them to rest.
“Not only did certain Federal Reserve heads think that inflation was ‘below desirable levels,’ they also had this to say: ‘Even without a continuation of outright price declines, falling expectations of inflation would raise the real rate of interest and thus increase the burden of debt and further restrain the economy.’”
Said Fleck: “That is really mind-boggling: the idea that even if prices don't decline, people's expectations that they might will somehow actually increase real interest rates. It is just nonsense on the part of the money printers who created all this carnage in the first place.”
A consistently reliable RGE Monitor blogger, ptm, posted the following information he personally compiled regarding inflation, with this comment, on April 4, 2009:
As you know, I agree with (John) Williams (Shadow Stats) that money velocity cannot be accurately gauged and that M3 can be a practical substitute for estimating inflation.
I have dug up seasonally adjusted M3 values from 1959. (Note that the Fed stopped reporting M3 in 2006, but continues to report components that allow M3 to be computed if one wants to take the trouble.) The table below shows the money supply in $trillions followed by the percent increase from the previous year, followed by the cumulative percent increase from 1959. The last column is the inflation for that year using the non-gimmicked 1980 BLS method (retained by Shadow Stats).
Year - M3 money supply in $trillions
1959 $00.299 % Increase ========== Doubling Interval
1960 $00.315 05.35% % Cumulative
1961 $00.341 08.25% 013.61%
1962 $00.371 08.80% 022.40%
1963 $00.406 09.43% 031.84%
1964 $00.422 03.94% 035.78%
1965 $00.482 14.22% 050.00%
1966 $00.505 04.77% 054.77%
1967 $00.558 10.50% 065.26%
1968 $00.607 08.78% 074.04% ====== 9 Year Doubling
1969 $00.616 01.48% 075.53% 1980 BLS Inflation Measure
1970 $00.677 09.90% 085.43% 05.84%
1971 $00.776 14.62% 100.05% 04.29%
1972 $00.886 14.18% 114.23% 03.27%
1973 $00.985 11.17% 125.40% 06.18%
1974 $01.069 08.53% 133.93% 11.05%
1975 $01.170 09.45% 143.38% 09.14% 7 Year Doubling
1976 $01.310 11.97% 155.34% 05.74%
1977 $01.470 12.21% 167.56% 06.50%
1978 $01.645 11.90% 179.46% 07.63%
1979 $01.809 09.97% 189.43% 11.25%
1980 $01.996 10.34% 199.77% 13.55%
1981 $02.255 12.98% 212.74% 10.33%
1982 $02.461 09.14% 221.88% 06.13% 7 Year Doubling
1983 $02.697 09.59% 231.47% 03.83%
1984 $02.991 10.90% 242.37% 05.30%
1985 $03.208 07.26% 249.63% 04.58%
1986 $03.499 09.07% 258.70% 02.92%
1987 $03.687 05.37% 264.07% 04.99%
1988 $03.929 06.56% 270.63% 05.94%
1989 $04.077 03.77% 274.40% 06.71%
1990 $04.155 01.91% 276.31% 07.69%
1991 $04.210 01.32% 277.64% 06.53%
1992 $04.223 00.31% 277.95% 05.33%
1993 $04.286 01.49% 279.44% 05.42%
1994 $04.370 01.96% 281.40% 05.98%
1995 $04.636 06.09% 287.48% 06.52%
1996 $04.986 07.55% 295.03% 07.74% 14 Year Doubling
1997 $05.461 09.53% 304.56% 08.03%
1998 $06.052 10.82% 315.38% 07.79%
1999 $06.552 08.26% 323.64% 08.47%
2000 $07.117 08.62% 332.27% 09.74%
2001 $08.035 12.90% 345.17% 09.12%
2002 $08.568 06.63% 351.80% 07.85%
2003 $08.872 03.55% 355.35% 08.55% 7 Year Doubling
2004 $09.433 06.32% 361.67% 09.09%
2005 $10.154 07.64% 369.31% 10.05%
2006 $11.206 10.36% 379.68% 10.18%
2007 $12.917 15.27% 394.94% 10.51%
2008 $14.395 11.44% 406.39% 09.26%
2009 $14.629 01.63% 408.01% (For Jan & Feb)
20?? $17.000 ? year Doubling
… M3 has been doubling approximately every seven years (except during the 1980s) and has grown by 10%/year since 2005.
Comparing year-to-year change in inflation (in the last column) to year-to-year change in M3 growth (in the second column), I do not see a long-term consistent relationship. In the early 1970s, growth in M3 far exceeded increases in inflation, while in recent years inflation and M3 appear to be roughly matched.
http://www.rgemonitor.com/financemarkets-monitor/256235/inflation_expectations_and_failed_debt_auctions
http://en.wikipedia.org/wiki/Money_Supply
http://www.federalreserve.gov/releases/h6/hist/h6hista.txt
http://www.shadowstats.com/alternate_data
The data is excellent infromation JR, thanks.
What is truly disheartening is that between inflation and any short term or long term capital gains taxes, investing in all asset classes is a losing proposition. Cash at 0% interest is also a losing proposition due to inflation and increasing taxes.
The numbers themselves will force investors of every investment time horizon to chase riskier assets for a return that at least keeps pace with inflation and the taxes on the capital put at risk. Even if you do acheive a return for risking capital, the government will take out taxes on the gain so that should be considered in addition to the inflation % to look at the real hurdle rate.
The projections for Medicare in particular are based upon the Congress doing nothing.That is impossible for a simple mathematical fact. Healthcare costs can not continue to increase 3 times as fast as GDp increases.( if GDP increases at %2 for the next 50 years gdp will increase from 14 trillion to 38 trillion.If healthcare costs increase at a rate of 3 times that in 50 years total healthcare spending will increase from 2.4 trillion to 44 trillion.By definition total healthcare costs can not be larger than total GDP.Under Reagan Social security benefits were changed .Even though Congress can be counted on to act irresponsibly, changes will occur in both of these programs.
Even given that the projections for Social security and Medicare are fairy tale silliness,goverment spending for these and other programs are disastrously out of control.The only brake on government spending will occur when we can no longer sell our debt.This event is coming much sooner than most people expect.The average duration of government debt is 4.9 years.12 trillion of current divided by 4.9=2.45 trillion of old debt needs to be refinanced each year.Add in debt incurred due to new budget deficits,total new debt will probably average almost 70 billion/per week for the forseeable fuure.If the US were the only country with large future debt needs,that would be bad enough;however many other countries are finding themselves in the same boat .Supply is going to overwhelm demand and bond prices have to decline even in a depressed economic enviroment.If things get out of control and there is a panic in the debt market and or the dollar's decline speeds up ,then the conclusions of Expected Returns are candy coated.
I think that this is history in the making and there is no precedent. This will become more clear as time wears on. It is time for forward thinking and ask yourself how does the world start over?