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Guest Post: What Will Benefit From Global Recession? The US Dollar

Tyler Durden's picture


Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Understanding the euro's failure and Triffin's Paradox helps us understand why the dollar will rise significantly in the years ahead.


Many times what "should" happen does not happen. For example, global stock markets "should" decline as the global economy free-falls into recession, as global recession is not exactly an ideal scenario for rising corporate sales and profits or demand for commodities.
Yet global markets are by and large rising significantly.
Sometimes what "should" happen is simply being delayed. In other cases, some other dynamic is at work. Stock market bulls, for example, say the "other dynamic" is global money-printing by central banks, and this "easing" will power stocks higher even as sales and profits sag.
Analysts who believe fundamentals eventually over-ride monetary manipulation believe the stock market decline has only been delayed, not banished.
A similar tug-of-war is playing out between those who feel the U.S. dollar "should" decline in the years ahead and those who see the dollar strengthening significantly.
Those who feel the dollar should decline look at the Federal Reserve's money-creation operations (buying $85 billion a month of mortgages and Treasury bonds) and see money expansion that devalues the existing base of dollars. Thus they feel the dollar "should" decline, and any rise in the dollar versus other currencies, oil and gold are temporary.
Those on the other side are dollar bulls, of which I am one; I have consistently been presenting the case for a stronger dollar since early 2011. We see other dynamics in play that "should" push the dollar much, much higher.
The technical case is encapsulated in this chart, courtesy of our Chartist Friend from Pittsburgh:
This is not to say that we don't believe expansion of base money is not dollar-negative; clearly, expanding money while the real economy of goods and services remains stagnant will gradually devalue the currency.
But there are other forces at work that complicate the simple case for a dollar decline based on Fed money-creation. For example, money is constantly being destroyed as paid-in capital vanishes in writedowns and write-offs. Many readers insist money is not being destroyed, but it has to work both ways: money can't just be created, it can also be destroyed.
To cite my previous example: if J.Q. Citizen bought a house in 2007 with $50,000 down payment in cash, and the house was sold in 2010 for less than its outstanding mortgage, that $50,000 is gone. It was real money, and it's gone. The fact that the purchase money went to the previous owner and mortgage-holder in 2007 does not mean the money is still floating around: a decline in asset valuations destroys money. Any loss booked by the bank is also real money, as the loss comes off the bank's cash reserve.
So if the Fed prints $1 trillion and $2 trillion in losses are booked in the same time period, base money has actually declined. In effect, the Fed is creating money to offset the deflationary effects of deleveraging.
There is another structural dynamic in play known as the Triffin dilemma or paradox. The basic idea is that when one nation's fiat currency is used as the world's reserve currency, the needs of the global trading community are different from the needs of domestic policy makers.
Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status. The gold standard inhibited both massive trade deficits and money creation, so it was jettisoned.

The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added) 

The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.

Here is an informed exploration of the relationship between Gold And Triffin's Dilemma (Zero Hedge).
A lively debate is taking place about how to "fix" the global currency so the U.S. doesn't have to run huge current-account deficits to provide liquidity and reserves for global trade. Some feel a return to the gold standard is the best solution, others favor a "basket of currencies" approach, while the International Monetary Fund (IMF) and other globalists unsurprisingly favor a supra-national new currency called the "bancor" overseen by (you guessed it) a global central bank.
In my view, the euro currency is a regional experiment in the "bancor" model, where a supra-national currency supposedly eliminates Triffin's paradox. It has failed, partly (in my view) because supra-national currencies don't resolve Triffin's dilemma, they simply obfuscate it with sovereign credit imbalances that eventually moot the currency's ability to function as intended.
What happens instead is the currency's central bank--in the case of the E.U., the European Central Bank (ECB)--attempts to square the circle by shifting surpluses from some nations (Germany) to those with structural imbalances via credit (debt). Correcting imbalances is the proper function of currencies, and the attempt to eliminate imbalances with a single currency has failed, for the simple reason you cannot eliminate imbalances between nation-states by brute force.
Now the ECB is attempting to paper over the imbalances with bank-issued credit.But the problem with credit is that it accrues interest, which must be paid in cash by somebody. Issuing credit does not resolve imbalances, it simply transfers the imbalance from the currency ledger to the credit/debt ledger. Eventually the imbalances destabilize the system. That is what Europe is experiencing but refusing to admit.
So where does the global recession leave the U.S. dollar? We know what happens in global recession: global trade declines as sales drop and "trade wars" arise to protect domestic economies from the ravages of global contraction.
The global demand for U.S. trade deficits to create dollar reserves will thus also decline. Domestically focused observers think that the Fed is the only creator of dollars, but in effect the U.S. creates dollars--and must create dollars--when it buys more from other nations (imports) than it exports. To expand their own credit base, trading nations need more reserve currency. This is the heart of Triffin's insight.
Another way of stating this is that the dollar will strengthen, buying more imports with fewer units of currency.
Those who believe the Fed's expansion of its balance sheet will weaken the dollar are forgetting that from the point of view of the outside world, the Fed's actions are not so much expanding the supply of dollars as offsetting the contraction caused by deleveraging.
Put another way, the global trading community and the domestic economy's interests align in a strengthening dollar. While many observers believe the Status Quo seeks a weaker dollar to boost exports, this overlooks the premium gained by the "exorbitant privileges" of the global reserve currency and petro-dollars. This premium is worth far more than marginal increases in exports.
I have long held that the demand for oil will plummet on the margins as the global economy contracts. As the dollar strengthens, the U.S. will pay less for imported energy and earn more for exported energy. This decline in energy costs will ripple through the real economy, offsetting any decline in exports. A strengthening dollar lowers the cost basis of all goods and services originating in the U.S.
A strengthening dollar also benefits trading nations, as the increasing value of their dollar reserves enlarges the base for their own credit. This is the irony of China's dumping of its dollar reserves: China only amassed such massive dollar reserves because it was running equally massive trade surpluses with the U.S. As the trade surplus shrinks, so too must China's dollar reserves contract.
From the point of view of the currency markets ($2-$3 trillion traded daily) and global trading nations, the Fed's expansion of base money is marginal: after all, the U.S. has some $60 trillion in household assets, a $15 trillion economy, an expanding base of energy production, a dynamic private sector, a dominant military, the petro-dollar and the global reserve currency.
As destructive as the Fed's policies are to the domestic U.S. economy, from this point of view the Fed's actions are stabilizing actions on the margin. The real action is in the global expansion/contraction of dollars from trade and in reserves. It boils down to supply and demand: the demand for dollars as reserves will remain high, while the supply will actually decline as global trade contracts. The dollar will rise in value for this reason alone.
There is also the question of alternatives: what other currency could act as a reserve currency and trade in size without disrupting markets? The renminbi? It's not even convertible/liquid yet, and recall Triffin's primary point: countries like China and Japan that run trade surpluses cannot host reserve currencies, as that requires running large structural trade deficits.
The euro? Good luck with a bet on papering over currency/trade imbalances with credit designed to drain the stronger economies of cash. The Swiss franc? It's now a proxy for the euro and it's simply too small to trade in size. Ditto all the other small currencies. Japan? With its history of trade surpluses and its demographic/fiscal cliff looming?

Not only are there no real-world alternatives to the dollar, its strengthening will benefit everyone holding dollars everywhere in the world. That is a positive development.


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Tue, 10/09/2012 - 12:12 | 2871388 slaughterer
slaughterer's picture

WTI + 3.38%

AAPL -.90%


Tue, 10/09/2012 - 12:30 | 2871426 TruthInSunshine
TruthInSunshine's picture

I've pointed out countless times the example of the yen, and how its current valuation makes anti-sense.

It's practically doubled in value vs the USD (and appreciated significantly against most other currencies) since the Nikkei came crashing down, coincciding with the decline in Japan's real economic output, and prompting Japan to go from the largest creditor nation to the biggest debtor nation (by official count, at least), since 1989.

CURRENCY MARKETS; Dollar at 1989 High vs. Yen
Published: May 02, 1989

"In late trading in New York, the dollar was at 134.11 yen, up from 133 Friday and the highest level since late September."


Currencies are the play thing of the world's central banks, usually acting in collusion, but sometimes not, whose values bear absolutely no relationship with the real world or with logic, for so long as those central banks are able to maintain some level of control in pre-planning their (typically concerted) actions (aka for so long as real economic forces don't humiliate the people in the "hallowed" halls of central fractional reserve banks).

Tue, 10/09/2012 - 12:30 | 2871459 odatruf
odatruf's picture

"Currencies... whose values bear absolutely no relationship with the real world or with logic"

So you are saying that currencies are the new equities? Got it.


Tue, 10/09/2012 - 12:42 | 2871497 mick68
mick68's picture

Nice sounding theory, but history proves otherwise. That is, if we are headed for more than just another recession.
If this is just a garden variety recession, I might agree, but alas, this is so much more.

Tue, 10/09/2012 - 12:53 | 2871541 strannick
strannick's picture

The author didnt mention vile and unbacked interest rate swaps as integral in sustaining the unsustainable dollar.

Tue, 10/09/2012 - 13:16 | 2871618 LawsofPhysics
LawsofPhysics's picture

Yes, all of it is simply bullshit paper promises.  They are only as valid as the rule of laws and contract behind them.  FAIL.  Where is John Corzine?

Tue, 10/09/2012 - 13:16 | 2871617 Popo
Popo's picture

History?  You're reading it subjectively.  

First off,  never bet against the side whose army is vastly bigger than everyone elses.

The dollar is oil.  Oil is the dollar.  That relationship is enforced (See Libya, Iraq and soon: Iran) by the world's biggest army.

The problem with drawing historic parallels to currency debasement is that economics doesn't exist in a vacuum, and to exclude energy and military force is to create a totally unrepresentative model which lacks predictive capacity.

Yes,  if the dollar wasn't the reserve currency, and if it wasn't the world's energy-trading medium, and it wasn't backed by the biggest force in history -- then yes,  the USD would hyperinflate.

One should also note however that gold will still go to the moon even if the dollar strengthens -- although not so much in dollar terms of course.  The Euro is toast.  And likely, so are the Yen, Rupee, Rial, Renminbi and a dozen other emerging market currencies.  The flight to gold will be massive and global.  

But the demise of the dollar will not happen.   Never bet against the house.

Tue, 10/09/2012 - 13:19 | 2871628 LawsofPhysics
LawsofPhysics's picture

Correct.  This has always been about power and control.  All that any fiat does is allow those in charge to continually change the rules and stay in charge until they no longer have willing participants in the monetary game.  Many great empires have fallen before and many more will.

Tue, 10/09/2012 - 15:07 | 2872097 Scalaris
Scalaris's picture


Old post, same words.


[..sole mandate of the USA Inc., as a separate entity of the nation of the United States of America, which is to preserve their military dominance through the presence of its numerous military forces, which is needed for the maintenance of the US navy global superiority, which is needed for ensuring the global oil shipping lanes, which is needed in order to maintain the hegemony of the US dollar and its export as the de-facto  denominated currency for the transaction of the world's main energy source, which is needed for the export of dollar denominated financial products from the only remaining American industry..]

Tue, 10/09/2012 - 19:44 | 2873014 thewhitelion
thewhitelion's picture

China and Russia may want to have a word about that "the house" thing.

Tue, 10/09/2012 - 12:23 | 2871431 Almost Solvent
Almost Solvent's picture

Any loss booked by the bank is also real money, as the loss comes off the bank's cash reserve.

It's all electronic digits on a server somewhere. The "real money" of a $ for that does not exist, only the electronic digits.


Like shadows on the cave wall, or something like that.

Tue, 10/09/2012 - 12:29 | 2871452 walküre
walküre's picture

WTI is the odd one out today. Rumors of war?

Tue, 10/09/2012 - 13:23 | 2871641 Johnny Utah
Johnny Utah's picture

Enough with this deflation nonsense!!! They are not making up for deleveraging. They are monetizing the debt and the deficit. The author is a buffoon!!! Next year $1 trillion gets monetized relieving pressure on the short term treasury market and creating a market for worthless 30 year paper. Comparing the monetary expansion to household wealth or GDP is idiotic. How about comparing M0-M3 to new money printing or currency in circulation to new money printing (see fed balance sheet). They claim they will keep printing until the unemployment rate goes down. If you believe that is the reason for the printing, I've got some tungsten, I mean gold to sell you.

Tue, 10/09/2012 - 12:15 | 2871391 Ahmeexnal
Ahmeexnal's picture

It's Bush's fault!

The beneficiaries will be Visa and MasterCard:


Sweden has seen a decrease of around 10 percent in cash usage nationwide over the past five years, a trend that has prompted more and more shops to accept only cards at the counter. 

 One of the latest companies to make the move to cards only was Swedish telecom operator Telia, which recently put a complete stop to cash in its 80 shops nationwide.

The most common arguments for switching from cash to card are that using hard currency can be a threat to staff safety, can be complicated, and can prove expensive.

Yep, you read that right. CASH IS A THREAT TO YOUR SAFETY. 

Sweden: the first slave colony of the banksters.

Tue, 10/09/2012 - 12:16 | 2871404 slaughterer
slaughterer's picture

Bought AAPL $625.00  iPad mini and iPotter must save me now.   I know hedge fund # 124 ain't.  

Tue, 10/09/2012 - 12:40 | 2871493 Skateboarder
Skateboarder's picture

Ouch. Come on slaughterer, you could've gotten like 18-20 ounces of silver for that. You can bet your ass Ag will at least double. AAPLs, once rotten, have nowhere to go but down. =\

Tue, 10/09/2012 - 12:17 | 2871410 francis_sawyer
francis_sawyer's picture

Tell it to granny... She's gonna be thrilled to know that her rations of catfood will now double...

Tue, 10/09/2012 - 12:31 | 2871462 LMAOLORI
LMAOLORI's picture



Well Francis the policies are actually working like a charm granny be damned the goal was to bring down the American middle class to the level of other third world shit holes. You know so it was more just and equitable and fair with the added benefit of the dear leaders having an easier time managing the people.

Tue, 10/09/2012 - 12:41 | 2871495 francis_sawyer
francis_sawyer's picture

It's too easy to just look at Japan over the past 20 years & say that's what's going to happen... Or ~ that the 'knee jerk' reaction to 2008 was a strengthening of the dollar... There are simply too many variables to make any accurate predictions at all...

The author may be right, but I wouldn't be putting all my eggs in a strong dollar basket...

Tue, 10/09/2012 - 13:28 | 2871658 LMAOLORI
LMAOLORI's picture



The U.S. Central Bank is undertaking policies that benefit the banks at the expense of it's own citizens that was the point I was trying to make. In any case I found these economic cold war articles interesting especially the video in the first one.


China v. the US: 'Free Trade Is Only for Friends'

Danger of currency wars with more quantitative easing by central banks

Tue, 10/09/2012 - 13:43 | 2871716 Element
Element's picture

Exactly, for every sound argument that predicts some factors causing USD to rise, there's another sound argument theme predicting it will surely fall.

All I know is I have a very hard time accepting that endless monetisation and zombie bank recapitalisation and asset quality dilution leads to a more stable, more attractive and more trustable dollar for trade reconciliations.

I think not.  What the NET effect is no one knows.  Theory is not going to get us an answer.

Tue, 10/09/2012 - 13:20 | 2871627 Alpo for Granny
Alpo for Granny's picture

Oh no!!!! I can barely afford these prime cuts in gravy as it is!

Tue, 10/09/2012 - 12:42 | 2871411 francis_sawyer
francis_sawyer's picture

duplicate post

Tue, 10/09/2012 - 12:19 | 2871412 slaughterer
slaughterer's picture

Soros fund is trying to start a short squeeze on WPRT right now. 

Someone else is algoing NFLX back up to $70.  

Tue, 10/09/2012 - 12:25 | 2871417 VonManstein
VonManstein's picture

good points but basing an argument on the premise "demand for dollars as reserves will remain high" is a little bit creative. ISnt it already declining?

Having said that it is in th eplanners interest and im sure theyve considered it. Print and manufacture "value" for your paper via crisis and FX market counter devaluations.

Think we are missing the small issue of the 16 tillion something or other...

Tue, 10/09/2012 - 12:32 | 2871467 Bay of Pigs
Bay of Pigs's picture

I'll say he misses something, like the Elephant in the Room. 

US debt has gone expotential. 

Tue, 10/09/2012 - 12:39 | 2871485 bank guy in Brussels
bank guy in Brussels's picture

Indeed, and the above article is missing the whole related area where the the Asian nations, very significantly China, Russia, Iran and India, along with Brazil and other non-Nato countries, have set up alternative payment schemes for oil and other goods, to avoid both the dollar and the SWIFT international bank payment system ... which the US stupidly convinced to get involved in the Iran sanctions, and now there is a whole non-dollar payment and banking system ready for the whole rest of the world.

Anyone trying to claim a bright future for the US dollar, needs to confront that already, a lot of the world is already configured to bypass the US dollar entirely. Asia sees what is coming and they are prepared.

Also, since the 1970s the US dollar has been partly propped up by the crooked 'petro-dollar' deal between the US and Saudi Arabia ... the US backed the brutal Saudi monarchy against their own people with full protection, and Saudis guaranteed to lead OPEC in pricing oil sales in dollars.

That era is now ending. Jim Willie suggests it is when Saudi Arabia's monarchy collapses - perhaps in months! - that will take down the 'petro-dollar' it ... and also the whole role of the US dollar as a 'reserve' currency for trade.

In his recent article, 'Death Knells for the US Dollar', Jim Willie speaks of how China is already offering to sell oil for renminbi (yuan) internationally, and this is fully backed by the world's largest oil producer, Russia:

« ... Russia has promised to meet all requests for crude oil made by China, with settlement in Yuan and Ruble currencies ... »

Tue, 10/09/2012 - 13:08 | 2871584 bahaar
bahaar's picture

China and India get their oil from Iran.  Which is why they have set up alternative payment scheme.  Not because they've lost their faith in US dollar.  Strength and stability of a currency depends on the economy.  But economy in turn depends on political stability.  China and Russia could hardly be called politically stable countries.  China is totally opaque.  In fact I hear smart money is leaving China.  Just look at SHCOMP.  Russia is a kelptocracy.    India is more transparent but poverty and wealth gap constantly nips at its ankle.  Brazil's economy is too small for Real to become reserve currency.   And anyways, in the Soviet era, all these countries (except perhaps Brazil) did trade with each other heavily and had their own payment schemes.  That didn't break the US dollar.

Tue, 10/09/2012 - 13:32 | 2871666 Bay of Pigs
Bay of Pigs's picture

Are you suggesting anything going on in the USA is stable and transparent?

LOL...yeah okay. Go long the doelarr.

Tue, 10/09/2012 - 21:03 | 2873152 Atlas Shrieked
Atlas Shrieked's picture

Your comments would be true--the problem is the Chinese and their trading partners have both explicitly expressed concern with USDollar hegemony, but more importantly, they have taken action to back up that sentiment by signing bilateral trade agreements, effectivly blocking out the USDollar as the international trade settlement currency.

Tue, 10/09/2012 - 13:14 | 2871607 Urban Redneck
Urban Redneck's picture

I agree, but forget the 70's, go and look at charts of non G8/G20 USD crosses since 1990.  Banana Republic currencies are only supposed to move in one direction, over any significant length of time.  What happened in 2003?

Tue, 10/09/2012 - 13:48 | 2871734 Element
Element's picture



That era is now ending. Jim Willie suggests it is when Saudi Arabia's monarchy collapses - perhaps in months! - that will take down the 'petro-dollar' it ... and also the whole role of the US dollar as a 'reserve' currency for trade.

In his recent article, 'Death Knells for the US Dollar', Jim Willie speaks of how China is already offering to sell oil for renminbi (yuan) internationally, and this is fully backed by the world's largest oil producer, Russia:

« ... Russia has promised to meet all requests for crude oil made by China, with settlement in Yuan and Ruble currencies ... »



yeah ... well ... that really is going to sit too well with all those aircraft carriers and Admirals in the kiddy pool.

Tue, 10/09/2012 - 15:13 | 2871952 Urban Redneck
Urban Redneck's picture

Jim Willie is actually a bit behind the times.

The Russia-China deal has been public for almost FOUR YEARS (it dates to the flaming-bag-of-poo Christmas gift from the Chinese December 25, 2008).

Depending on which petro-dollar one believe in, it either died April 29, 2003 or March 16, 2006.

Tue, 10/09/2012 - 12:19 | 2871418 SmittyinLA
SmittyinLA's picture

yes but......"we" don't own the dollar anymore 

Tue, 10/09/2012 - 12:21 | 2871420 TheCanadianAustrian
TheCanadianAustrian's picture


"This is not to say that we don't believe expansion of base money is not dollar-negative;"


Quadruple-negative FAIL.

Tue, 10/09/2012 - 12:24 | 2871437 VonManstein
VonManstein's picture

+1 good arrows

Tue, 10/09/2012 - 13:28 | 2871613 Muppet of the U...
Muppet of the Universe's picture

"thinks inflation = dollar ^"


Don't even bother reading this piece of shit.


doesn't know elites wanna wipe out population with economic collapse...

Guess what happens when ppl can't buy things anymore?  Great depression dipshits

Tue, 10/09/2012 - 12:25 | 2871441 walküre
walküre's picture

They could try and do a rerun of the Eighties. Romney's ammo is crash & burn and buy on the cheap. Basically. He and his buddies are sitting on massive Dollar cash holdings or cash equivalents. Diluting their loot would NOT be in their best interest.

Who cares what everyone thinks about the USD and gold and inflation. The moneychangers have the game under tight control and they're not just going to abandon the carefully crafted FIAT experiment that has everyone in shackles.

We will be amazed (again) to find out what superior military might, a reserve currency status and lots and lots of propaganda will do to PERCEPTION. The US has the best argument and unless there is a strong allegiance of anti-US sentiment, this game will not change.

Iran can't change it. China can't change it. We're doomed to live under the SHACKLES of SHYLOCK for ETERNITY.

No escape from the reality and perception they created. No hiding from it, no protesting against it. All useless.

Give me liberty or death. I guess I'm finally understanding what that truly means.

Tue, 10/09/2012 - 12:30 | 2871458 Winston Churchill
Winston Churchill's picture

But maybe China AND Russia can do it.

Don't be surprised by the gold backed ruan.

Tue, 10/09/2012 - 12:57 | 2871547 walküre
walküre's picture

I welcome ANY change to the current status quo.

Tue, 10/09/2012 - 13:17 | 2871620 realtick
realtick's picture

That's right.

Tue, 10/09/2012 - 12:28 | 2871449 odatruf
odatruf's picture

"This is not to say that we don't believe expansion of base money is not dollar-negative"

What the fuck, Charles? Can't you write a little more clearly? Haven't you ever heard the rule of avoiding double negatives? So what, you had to go for triple? Quadruple, even, if you count the final hyphenated term.

I often agree with what you have to say, but I just as often have to read it a few times to make sure.

Tue, 10/09/2012 - 12:31 | 2871461 PiratePawpaw
PiratePawpaw's picture

Interesting theory.

Unfortunately; the reality is that the historical track record shows that all fiat currnecies once debasement begins have and will revert to their intrinsic value. ZERO

Theory + Reality = FAIL

Tue, 10/09/2012 - 12:44 | 2871465 Dr. Engali
Dr. Engali's picture

The dollar may strengthen when you compare it to a basket of shit , but when measured against real money , gold, it will continue to lose purchasing power.

Tue, 10/09/2012 - 13:06 | 2871577 Tinky
Tinky's picture

Up arrow not only for the simple, yet important point, but also because, unlike a shocking number of posters (on this and other sites), you spelled "lose" correctly. (The wide misuse of "loose" underscores the basic lack of literacy shared by a big subset of the American public.)

Tue, 10/09/2012 - 14:56 | 2872043 Jake88
Jake88's picture

the subset being generally those under fifty

Tue, 10/09/2012 - 12:44 | 2871508 cranky-old-geezer
cranky-old-geezer's picture



When central banks print boatloads of currency and give it to other banks (for worthless securities) who put it right into the stock market, then yea, stocks are gonna rise.  It's a no-brainer.

Printing boatloads of currency.  That's what Weimar Germany did.  And Zimbabwe.  And it debased the currency rapidly, just like the US dollar is debasing rapidly, losing half it's value in the last 4 years.

50% loss of value in 4 years.  Is it inflation or hyperinflation? 

Weimar Germany and Zimbabwe eventually saw currency collapse.  It lost all value.

US dollar might last a bit longer being world reserve currency and all.  But it will collapse eventually, lose all value, and won't be WRC anymore.

So yea, we might see the Dow hit 30,000 while we're going thru severe hyperiflation. 

Your stock portfolio will look great, but gas will be $20 / gal too.

We might even see the Dow hit 50,000 ...right before USD collapses and loses all value.

All someone has to do is issue a gold-backed currency, and it's lights out for the US dollar.

Of course it would have to some someone militarily strong enough to thumb their nose at America's military.

A huge nuclear arsenal would be the ticket.  America won't send it's military up against some nation with a huge nuclear arsenal.

Tue, 10/09/2012 - 14:10 | 2871823 hawk nation
hawk nation's picture

It will be tough to wage war when the dollar is worthless and you cant buy gas and other materials needed to wage war


Besides who will fight when they are not getting paid

Tue, 10/09/2012 - 15:14 | 2872098 Element
Element's picture

State rationing, gold confiscation, National Service, forced labour, Libertee/Freedum/Truff and Justus Bonds, and a whole lot of propaganda, fear, spying, coersion, torture and execution.

"I'm doing my part"!

Would you like to know more?

Wed, 10/10/2012 - 07:37 | 2873991 awakening
awakening's picture

Missed one: "Papers, please."

Tue, 10/09/2012 - 12:45 | 2871509 Poofter Priest
Poofter Priest's picture

This article appears to assume that the dollar stays as the world reserve currency.

But the renminbi is entering the stage.

So then what?

Tue, 10/09/2012 - 12:48 | 2871514 falak pema
falak pema's picture

So finally somebody says Bancor is an obfuscation of the problem.

We have a man who sees the USD going up; after recession, but not deep depression, the USD will go up! 

Inspite of the broken trade balance model currently in vogue, the US does not have a business model which is sustainable.

Neither has the Eurozone.

So this discussion does not address the REAL issues ahead, ONCE we have resolved the strucural debt issue.

I think our poster of this view is not addressing the real issues; he is just papering over the currency problem that is an obsession for Pax Americana : losing its currrency reserve status is like losing its virility. 

It will be neither way; you can't defend a currency hegemony of a country that is chronically in deficit, you can't obtain currency hegemony of another country until it has a stable and dominant economy.

No country has the economic base to challenge the USD, but the US cannot sustain its current currency hegemony with its current model.

Its a lose-lose situation and thus tipping times requiring profound changes of economic models and THEN of currency models. 

We will be on a roller coaster, with flat growth and mediocre social climate, to put it mildly,  until a new paradigm based on technological innovation and debt deleveraging emerges.

Pax Americana does not have this model, as the current power structures are the global CAUSE of the problem.

It has to change from within and as nothing will change from within it will change alas, through strife of dimension unknown. 

Tue, 10/09/2012 - 12:48 | 2871520 fuu
fuu's picture


Tue, 10/09/2012 - 12:54 | 2871544 Shameful
Shameful's picture

I love dollar bulls!  They take the other side of the trade.

So let me get this straight, the US is hemorrhaging jobs and is drowning in debt.  So the global downturn largely because the US cannot afford it's grotesque trade imbalances will result in a stronger dollar and a continuation of those trade imbalances?  These nations will grab onto dollars are they are created from the ether because they are so valuable and a claim on the awesome industrial, economic, and technological might of the US?  I know I look at the US demographics, trade imbalances and long term finances and think "That's the raging inferno to put my savings into".

But by all means make all in bet on the dollar.  Help buy this guy more time to feather his own nest, your sacrifice is greatly appreciated.

Tue, 10/09/2012 - 13:57 | 2871772 moonstears
moonstears's picture

I think he's buying gold.

Tue, 10/09/2012 - 17:48 | 2872684 Herd Redirectio...
Herd Redirection Committee's picture

If there wasn't a convincing case for deflation/dollar strength, we would already have seen hyperinflation.   Doesn't mean we won't see huge inflation in the next couple years.


But here's a question for CHS.  So debt is being destroyed at 1 B per day (hypothetically), but unfunded liabilities increase by 2 B a day.  What is the net result?

Tue, 10/09/2012 - 12:55 | 2871545 glenlloyd
glenlloyd's picture

This is an issue that is never clear but I think his points are valid. In the short term I think demand for dollars will increase as the EU moves further toward an implosion.

And he is correct, there are no other options for reserve currency status at this point although there might be in the future. A global reserve managed by a global central bank is at present a pipe dream that will take an eternity to implement fully.

Tue, 10/09/2012 - 13:00 | 2871554 Poofter Priest
Poofter Priest's picture

I don't think it will take a 'global currency'.

It just requires other currencies to compete.

That is already happening.

The question is just 'what is the critical mass' that will knock out the props on the $ ?

Tue, 10/09/2012 - 13:01 | 2871555 Sixdeuce062
Sixdeuce062's picture

Oh i have no doubt the dollar will benifit from systemic currency colapse from around the globe for about a month or two till it colapses on itself like a domino in a row and everyone figures out that all "backed" currencies are backed by nothing but hopes, dreams, unicorns and pixie dust then the real fun happens

Tue, 10/09/2012 - 13:22 | 2871634 Fix It Again Timmy
Fix It Again Timmy's picture

Any confidence that can be garned by the dollar will just encourage more debasement and profligate spending - there is no rosy scenario out there....

Tue, 10/09/2012 - 13:30 | 2871661 squexx
squexx's picture

Gold plated tungsten!

Tue, 10/09/2012 - 13:35 | 2871683 Jack Sheet
Jack Sheet's picture

Bullshit. Another Euro-basher who hasn't read "Currency wars".


Tue, 10/09/2012 - 16:49 | 2871694 socalbeach
socalbeach's picture

From the article,

"To cite my previous example: if J.Q. Citizen bought a house in 2007 with $50,000 down payment in cash, and the house was sold in 2010 for less than its outstanding mortgage, that $50,000 is gone. It was real money, and it's gone. The fact that the purchase money went to the previous owner and mortgage-holder in 2007 does not mean the money is still floating around: a decline in asset valuations destroys money. Any loss booked by the bank is also real money, as the loss comes off the bank's cash reserve."

Take the case where a homeowner owns a home free and clear.  He sells it to an investor for $300K which is financed with a $250K mortgage and $50K down.  Money supply increases by $250K at that point, the amt of the loan, the $50K down went from the purchaser to the seller.  For simplicity ignore interest and principle payments. Now the original purchaser sells the home for $225K as a short sale to an all-cash investor.  Money supply decreases by $225K since the $225K sale price goes to the bank, and money held by the bank doesn't count towards the money supply. 

If for the sake of argument, you want to include money held by the bank as money, then you still get a $250K increase in money after the original transaction, but then the second transaction doesn't affect total money.  It's transferred by the all cash investor to the bank.

If you want to include bank capital as money as well, then after the 1st transaction total money still increases by $250K, and after the second it drops by $25K, the amt of the bank loss.

Regardless of which numbers you use, ($250K, -$225K), ($250K, 0), or ($250K, -$25K), you can't get a $50K decrease in money supply, money, or money-capital.  The asset declined in value by $75K, and there's no way you can get that figure from the above changes in money supply/money/money-capital either.

Tue, 10/09/2012 - 14:26 | 2871882 Dr. Gonzo
Dr. Gonzo's picture

"The dollar will strengthen buying more imports with fewer units of currency."

Whatever. I just paid $4 a gallon to fill up. I just paid $4.50 for rail mixed drinks at a bar and grill. I'm not worried about deflation. I'm not holding my breath for the dollar to hold it's value. I just DO NOT personally see it happening in my life.

Tue, 10/09/2012 - 14:47 | 2871989 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

Attack of Triffids- terrifying.

I remember that movie as a kid, whereby the plants came alive…..that terrified me, I won’t eat brussel sprouts even today, my brother told me they triffid eggs.


Tue, 10/09/2012 - 14:51 | 2872006 Ghordius
Ghordius's picture

"In my view, the euro currency is a regional experiment in the "bancor" model..." Uh, sound Much more than a fiat global reserve currency, of couse. What was the real difference between the two? Regionality vs globality? Yeah, sounds deadly for the euro...

Tue, 10/09/2012 - 15:09 | 2872112 fijisailor
fijisailor's picture

The US dollar is backed by a corporate serving military and a pretty extensive spy network.  Does that add to the dollar's strength?

Tue, 10/09/2012 - 15:40 | 2872265 AurorusBorealus
AurorusBorealus's picture

Just to put things in perspective, on the "blue-chip" market (semi-legal), for large transactions (several thousand dollars or more)  the dollar has gone from trading at 6.2 or 6.25 Argentine pesos to 6.05 Argentine pesos in the past 2 weeks.

Tue, 10/09/2012 - 19:02 | 2872907 snowlywhite
snowlywhite's picture

yeah, yeah, the author understands something; however, it's not that easy...


the key is obviously that most debt is usd denominated; and in deleverage periods... However, timing ain't trivial. Unless you want to play this unleveraged, case in which, really, there are better activities to do. Ok, actually almost any activity is better than forex, but... pays so well. Talk about fucked up world.

Wed, 10/10/2012 - 06:23 | 2872957 cranky-old-geezer
cranky-old-geezer's picture



For example, money is constantly being destroyed as paid-in capital vanishes in writedowns and write-offs.

To cite my previous example: if J.Q. Citizen bought a house in 2007 with $50,000 down payment in cash, and the house was sold in 2010 for less than its outstanding mortgage, that $50,000 is gone. It was real money, and it's gone. The fact that the purchase money went to the previous owner and mortgage-holder in 2007 does not mean the money is still floating around: a decline in asset valuations destroys money. Any loss booked by the bank is also real money, as the loss comes off the bank's cash reserve.

So if the Fed prints $1 trillion and $2 trillion in losses are booked in the same time period, base money has actually declined.


No that 50k down payment and the mortgage money from the bank hasn't disappeared dumbass, it's still in the bank account or under the mattress or wherever the hell the original seller put it.

If the fool buying that home in '07 sells in later in a short sale where the bank writes off part of the debt, or a regular sale where the fool takes the loss, NO money has disappeared from the money supply.

I told you on the last bullshit article you had on ZH you were wrong about about this, even giving the bank accounting entries showing debt writeoff does NOT reduce the money supply.

Now you're back here with the same bullshit again you stupid moron.

Stop trying to downplay the inflationary effect of central bank money printing with bullshit theories like this bullshit theory you've embarrassed yourself on ZH with twice now.  You sound like that dumbass Krugman and all his bullshit theories.

The ONLY time the money supply is reduced is when money is paid back to the bank creating the money, i.e. paying off the loan.  

It's a credit to the loan asset account and a debit to the borrower's checking account on the liability side.  Poof, that money just disappeared from the money supply, in the reverse process from when it was created when the loan was made, debit to the loan asset account and credit to the borrower's checking account.

If the borrower pays the loan off with cash rather than a check, it's a credit to the loan asset account and a debit to the bank's cash account.

How does the money disappear from the money supply in that case?

Simple.  Somewhere upstream somebody wrote a check to the guy, reducing their checking account balance.  He cashed their check and gave the cash to his bank to pay off the loan.

It's the reduction of a checking account balance with no corresponding increase in a checking acount somewhere else that reduces the overall M1 money supply.

How was the money created and added to the money supply originally when the loan was made? 

It was a credit to a checking account.  The borrower's checking account or the bank's checking account if the borrower was given a cashier's check.

How is it taken out of the money supply when the loan is paid off?

It comes out of a checking account.  The borrower's checking account if he gives the teller a check, or someone else's checking account if he hands the teller cash.

But if the bank writes off part or all of the loan, nobody's checking account is reduced, so the money supply is NOT reduced.

Writing it off as a loss does NOT reduce the money supply, you idiot.

Fed could write off every dollar owed them by the federal government and NO money would disappear from the money supply, because nobody's checking account is reduced.

It's a credit to their Treasuries asset account and a debit to Treasuries writeoff expense on the P&L.  No money changes hands, nobody's checking account is reduced.

No folks, debt does NOT = money in this crazy fiat system we have.

Want a simple proof?   Fed can create money and buy shit with it, like (worthless) securities from Wall Street banks.   See, money was created without any corresponding debt. 

Debt is one thing, money is another thing.  Money CAN be created with corresponding debt, and most often is, but it doesn't have to be created with corresponding debt, as the above example shows.

Ok, now I'll really blow your damn minds. 

Theoretically Bennie could create money and buy hookers and blow with it, even buy hookers and blow for all his crony ass friends.

But he'd have to figure out how to book hookers and blow as an asset on Fed's fucking balance sheet, because the money created to buy 'em is a credit to the Fed's checking account on the liability side, and the fucking balance sheet has to balance.  (That's WHY they call it a fucking balance sheet. Duh.)

Yea, he has to pay for all that shit with a damn check.  Or write a check for cash and cash it at the damn teller window, then take the cash and pay for all that shit.

But how does he book hookers and blow on the fucking balance sheet as an asset?  It's a damn expense, not an asset.  It goes on the damn P&L, not the fucking balance sheet.

So no, I guess he can't create money and buy hookers and blow with it, 'cause he can't put that shit on the fucking balance sheet as an asset.

And that's the damn point.  He can create money and buy any damn thing he wants with it, as long as he can put it on the fucking balance sheet as a damn asset.

And it doesn't have to actually be worth ANY damn thing.  It can be totally fucking WORTHLESS.  You know, like all those worthless shit "securities" he buys from all his crony ass Wall Street banker buds to keep their fucking balance sheets from turning red.

But his fucking balance never turns red regardless how much worthless shit he has on it, 'cause nobody is gonna audit it.  He can say that worthless shit is worth any damn amount he wants to say it's worth, and nobody is gonna say otherwise.

So yea, I guess he could create money and buy hookers and blow for all his damn crony ass friends, book it as an asset, and say it's worth any damn thing he wants to say it's worth.

Tue, 10/09/2012 - 22:30 | 2873328 constantine
constantine's picture

"To cite my previous example: if J.Q. Citizen bought a house in 2007 with $50,000 down payment in cash, and the house was sold in 2010 for less than its outstanding mortgage, that $50,000 is gone. It was real money, and it's gone. The fact that the purchase money went to the previous owner and mortgage-holder in 2007 does not mean the money is still floating around: a decline in asset valuations destroys money."

Wrong, the money is not gone.  The exchangeability of the house for an equivalent sum of that money is gone.  Nothing has happened to M1 because this house decreased in value.  

Tue, 10/09/2012 - 23:06 | 2873410 malek
malek's picture

Anything looking at the Dollar Index as reference is completely meaningless.

It reminds me of a Voting Adviser I had seen years ago, where you would select your preferences on 20 topics, and then it would show you which politician was closest to your preferences. My thought at the time: "Exact calculations based on empty promises and lies? Great!"

Wed, 10/10/2012 - 15:05 | 2875787 Dungeness
Dungeness's picture

What if the Triffin effect is phased out or significantly diminished? In other words, what if the petro dollar is no longer needed or used for the global trade of petroleum, and there is no longer a need for a global reserve currency.

Nations can trade goods amongst each other using the respective currencies of the trading countries. China is doing just that with most countries in the world today. This would promote balanced trade amongst countries.

China can buy goods from the US in dollars. The US can buy goods from China with yuan. The US would then have to earn and save a surplus of yuan.

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