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Guest Post: The Tailwinds Pushing The U.S. Dollar Higher

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If we shed our fixation with the Fed and look at global supply and demand, we get a clearer understanding of the tailwinds driving the U.S. dollar higher.

 
I know this is as welcome in many circles as a flashbang tossed on the table in a swank dinner party, but the U.S. dollar is going a lot higher over the next few years. For a variety of reasons, many observers expect the dollar to decline against other currencies and gold, the one apples-to-apples measure of a currency's international purchasing power.
 
The tailwinds pushing the dollar higher are less intuitively appealing than the reasons given for its coming decline:
 
1. The Federal Reserve printing another trillion dollars (expanding its balance sheet) will devalue the dollar because money supply is expanding faster than the real economy.
 
2. The Fed is printing money with the intent of devaluing the dollar to make U.S. exports more competitive globally and thereby boost the domestic economy.
 
Let's examine each point.
 
1A. If much of the Fed's new money ends up as bank reserves, it is "dead money" and not a factor in the real economy. Fact: money velocity is tanking:
 
 
1B. Money is being destroyed by deleveraging and writedowns. This is taking money out of the real economy while the Fed's new money flows to banks.
 
1C. The purchasing power of the dollar is set by international supply and demand, not the Fed's balance sheet or the domestic money supply.
 
As for point 2:
 
2A. Exports are 13% of the economy. A stronger dollar would reduce the cost of oil, helping 100% of the economy, including exporters. Why would the Fed damage the entire economy to boost exports from 13% to 14% of the domestic economy? It makes no sense.
 
2B. Most U.S. exports are either must-have's (soybeans, grain, etc.) that buyers will buy at any price because they need to feed their people (and recall that agricultural commodities often fluctuate in a wide price band due to supply-demand issues, so if they rise 50% due to a rising dollar, it's no different than price increases due to droughts) or they are products that are counted as exports but largely made with non-U.S. parts.
 
How much of the iPad is actually made in the U.S.? Basically zero. Is it counted as an export? Yes. How much of a Boeing 787 airliner is actually manufactured in the U.S.? Perhaps a third. Sorting out what is actually made in the U.S. within complex corporate supply chains is not easy, and the results are often misleading.
 
2C. Many exports are made and sold in other countries by U.S. corporations, and so the sales are booked in the local currency. The dollar could rise or fall by 50% and most of the U.S. corporate supply chain and sales would not be affected because many of the goods and services are sourced and sold in other nations' currencies. The only time the dollar makes an appearance is in the profit-loss statement at home.
 
Americans tend not to know that up to 75% of U.S. corporations' revenues are generated overseas, in currencies other than the dollar. This may be part of Americans' famously domestic-centric perspective.
 
2D. Most importantly, the American Empire needs to control and issue the global reserve currency. The Fed is a handmaiden to the Empire; the Fed's claims of independence and its "dual mandate" are useful misdirections.
 
Some analysts mistakenly believe that Fed policies are aimed at boosting the relatively modest export sector (which we have already seen is a convoluted mess of globally supplied parts, sales in other currencies, etc.) from 13% to 14% of the domestic economy.
 
This overlooks the fact that the most important export of the U.S. is U.S. dollars for international use. I explained some of the dynamics in Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012) and What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012).
 

Which is easier to export: manufactured goods that require shipping ore and oil halfway around the world, smelting the ore into steel and turning the oil into plastics, laboriously fabricating real products and then shipping the finished manufactured goods to the U.S. where fierce pricing competition strips away much of the premium/profit? 

Or electronically printing money and exchanging it for real products, steel, oil, etc.?
I think we can safely say that creating money out of thin air and "exporting" that is much easier than actually mining, extracting or manufacturing real goods. This astonishing exchange of conjured money for real goods is the heart of the "exorbitant privilege" that accrues to the issuer of the global reserve currency (U.S. dollar).

It's important to put the Fed's $3 trillion balance sheet in a foreign-exchange (FX) and global perspective:
 
- The FX market trades $3 trillion a day in currencies.
 
- Global financial assets are estimated at around $210 trillion. The Fed's balance sheet is 1.5% of global assets.
 
 
The key to understanding the dollar and Triffin's Paradox is that as the global reserve currency, the dollar serves both domestic and international markets. Of the two, the more important market is the international one.
 
To act as the global reserve currency, a currency must be exported in sufficient size to facilitate the gargantuan trade in a $60 trillion global GDP/ $210 trillion global economy. There are only two ways to export enough currency to be remotely useful:
 
1. Run massive trade deficits, i.e. import goods and export dollars.
 
2. Loan massive quantities of dollars to nations that will place the dollars in international circulation.
 
The famous Marshall Plan that helped Western Europe rebuild its economies was just that: a series of large loans of dollars to dollar-starved economies. This was necessary because the U.S. was running trade surpluses in the postwar era and was therefore not exporting dollars.
 
This leads to a startling but inescapable conclusion: no exporting nation can issue the global reserve currency. That eliminates the European Union, China, Japan, Russia and every other nation running surpluses or modest deficits.
 
Many commentators are drawing incorrect conclusions from various attempts to bypass the dollar in settling trade accounts. For example, China is setting up direct exchanges where buyers and sellers can exchange their own currencies for renminbi, eliminating the need for intermediary dollars.
 
This is widely interpreted as the death knell for the dollar. But this misses the entire point of the reserve currency, which is that it must be available in quantity for everyone to use, not just those doing business with the domestic economy of the issuing nation.
 
Here's a practical example. The $100 bill is "money" everywhere in the world, recognizable as both a medium of exchange for gold, other currencies, goods and services, and as a store of value that is priced transparently (often on the black market). For the Chinese renminbi/yuan to replace the dollar as the global reserve currency, China would need to "export" enough currency to grease trade large and small worldwide, and enough electronic money to act as reserves that support domestic lending in nations holding the reserve currency.
 
This is yet another poorly understood function of the reserve currency: it acts as foreign exchange reserves, backing up the holder's currency, and as reserves in its central bank that act as collateral for its domestic issuance of credit.
 
In other words, the U.S. has issued and exported trillions of dollars because this is the necessary grease for global trade, currency stability and issuance of credit by nations holding dollars. The U.S. didn't run massive trade deficits by accident: it needed to "export" more dollars as the volume of global trade expanded.
 
Issuing credit and loans in dollars wasn't enough, so the U.S. exported dollars in exchange for commodities and goods.
 
For China to issue the global reserve currency, it would have to decouple the yuan from the U.S. dollar and start running deficits on the order of $500 billion a year.
 
Many observers think China is preparing to back its currency with gold, and they mistakenly conclude (yet again) this would be the death knell for the dollar. But they haven't thought through how currencies work: their value is ultimately set like everything else, by supply and demand.
 
In an export-dependent country like China, a gold-backed currency would not be exported in quantity--it wouldn't be "exported" at all, because China "imports" others' currencies in exchange for goods.
 
Assuming some of the gold-backed currency was exported, it would quickly end up in savings accounts or bank vaults, being a proxy for gold. There will be none available for facilitating trade in the $210 trillion global economy.
 
This dual nature of money trips up many analysts. Establishing a currency that is "as good as gold" but not exporting it in quantity means it will be hoarded as a store of value and be unavailable to facilitate trade. Money has to act both as a store of value and as a means of exchange.
 
This is why U.S. $100 bills are carefully stored in plastic in distant entrepots of the world, safeguarded as real money, available as a store of value and as a means of exchange.
 
Currencies can be exchanged in a Forex (FX) marketplace, but the reserve currency is the "winner take all" in the real world. If you hold out an equivalent sum in various currencies around the world, the trader in the stall will likely choose the $100 bill because he is not sure of the value of the other funny-money in his home currency and he knows he can easily exchange the $100 everywhere.
 
The other currencies might trade on the FX market at some percentage of the dollar, but in the real world they are effectively worthless because there isn't enough of them available to establish a transparent, truly global market. To do that, a nation has to export monumental quantities of their currency and operate their domestic economy in such a fashion that the currency is recognized as being a store of value.
 
In a very real sense, every currency is a claim not on the issuing central bank's balance sheet but on the entire economy of the issuing nation.
 
All this leads to two powerful tailwinds to the value of the dollar. One is simply supply and demand: as the global economy slides into recession, trade volumes decline, and the U.S. deficit shrinks. (It's already $250 billion less than was "exported" in 2006.) That will leave fewer dollars available on the global market.
 
In the case of the U.S., which exports large quantities of what the world needs (grain, soy beans, etc.) while buying mostly stuff that is falling in price in recession (oil, surplus manufactured goods, etc.), the trade deficit could decline significantly. (It is currently around $40 billion a month.)
 
And what does a declining trade deficit mean? It means fewer dollars are being exported. The global GDP is about $60 trillion, of which about 25% is the U.S. economy. Into this vast sea of trade, the U.S. "exports" about $500 billion in U.S. dollars via the trade deficit. Put in perspective, it isn't that big compared to the machine it is lubricating.
 
So what happens when there are fewer dollars being exported? Demand for existing dollars goes up, pushing the "price/cost" of dollars up--basic supply and demand.
 
The second tailwind is the demand for dollars from those exiting the euro and yen.The abandonment of the euro is already visible in these charts, courtesy of Market Daily BriefingPeak Euros.
 
We can anticipate this desire to transfer euros and yen into dollars will only increase as those currencies depreciate. Let's say, just as an example, $5 trillion in euros starts chasing $1 trillion in available U.S. dollars. What will that do to the value of the dollar?
 
Some ask why those selling euros won't buy Chinese yuan. Where are you going to find $1 trillion in yuan? It isn't even convertible on an open market, and since China is an importer of currency, there isn't 1 trillion yuan floating around the global marketplace to buy even if you wanted to.
 
Many people scoff when I suggest the dollar could rise 50% (i.e. the DXY dollar index could climb from its current level around 80 to 120) or even 100% (DXY = 160) in the years ahead. I know it's the highest order of sacrilege to even murmur this, but if global demand for dollars picks up, the Fed isn't printing nearly enough to dent the rise in the dollar.
 
As a lagniappe outrage, consider the domestic fallout from a decline in U.S. stocks and the U.S. economy. The Fed's precious horde of political capital will leak away, and its ability to print more money will be proscribed by political resistance and a loss of faith in the Fed's claimed omnipotence.
 
Any reduction in Fed printing would only limit the quantity of dollars available to global buyers, further pushing up its price on the open market.
 

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Wed, 03/27/2013 - 11:23 | 3381410 Stuck on Zero
Stuck on Zero's picture

The dollar is going higher all right.  It is moving to the stern of the Titannic as it rises higher out of the water.

 

Wed, 03/27/2013 - 11:35 | 3381443 GOSPLAN HERO
GOSPLAN HERO's picture

Toilet paper dollar has become more expensive. 

Wed, 03/27/2013 - 11:52 | 3381462 Stackers
Stackers's picture

People should also look up Jim Rickards words and vids on explaining the USD/Euro/Yuan love triangle.

I see the FX market remaining insanely choppy with USD gaining traction more from us being last in line of the shit storm about to hit global finance and governments more than anything.

Wed, 03/27/2013 - 11:58 | 3381543 Popo
Popo's picture

My problem with this theory -- and I respect the hell out of CHS -- is that every inch the dollar rises will be seen by the central planners as license to print more dollars.   We already know that they believe with religious fervor that "Moar" is better.   They believe that unemployment, productivity and entry into Nirvana come with "Moar".

The only thing holding them back (if anything) is the dollar weakening vis a vis oil and essential non-elastic imports.   But a stronger dollar?   That there's a trumpet in the distance calling for more QE.   

His argument about velocity is right on the money in terms of traditional QE, but it discounts the possibility of non-traditional stimulus like tax rebates and direct injections into the base of the monetary pyramid.  

Wed, 03/27/2013 - 12:07 | 3381592 strannick
strannick's picture

Idiocy.

""Less trade, less deficets'' therefore implies better economics? This is insanity. He forget about the debt? Or that less trade equals less employment?? Dumb dumb dumb dumb.

Wed, 03/27/2013 - 12:12 | 3381608 The Big Ching-aso
The Big Ching-aso's picture

I think 'tailwinds' here really means some big ass farts.

Wed, 03/27/2013 - 12:10 | 3381599 bank guy in Brussels
bank guy in Brussels's picture

And what Charles Hugh Smith is REALLY missing here is what is being so insistently described by Jim Sinclair, Jim Willie and many others

That half of the world is already setting up bilateral trade agreements to BYPASS the US dollar as a needed item for trade

The days of the US dollar as global 'reserve currency' for trade is ending but so many Westerners can't or won't see it

The stupid 'Iran sanctions' and locking Iran out of the SWIFT bank-transfer system was the turning point

China, Russia, Brazil, India and the whole non-Nato world saw that 'they could be next' ... Iran today, some other regime-change target tomorrow

Better to trade bilaterally, and set up banking, bartering and trading arrangements that need neither the US dollar, nor the US-Nato housed 'banking transfer' arrangements.

As we get close to half the world's trade ... like that between Brazil and China ... being done directly WITHOUT the US dollar, there will not be much of the ol' reserve currency left

USA and Nato-Europe can be swapping their deteriorating fiatscos with each other

Wed, 03/27/2013 - 12:36 | 3381694 negative rates
negative rates's picture

Trade war and coins bitches.

Wed, 03/27/2013 - 13:04 | 3381797 ConfederateH
ConfederateH's picture

He also misses the importance of the various Persian oil states accepting dollars for oil as being the primary reason the dollar ever made it to reserve currency in the first place.  Without the oil backing the dollar is toast, and Saudi Arabia could be very vulnerable.

Wed, 03/27/2013 - 16:20 | 3382839 teolawki
teolawki's picture

And you can guess what happens when, not if, all those excess dollars come flying back home to roost. Whether it is for this reason or some other.

Wed, 03/27/2013 - 11:40 | 3381469 Ayr Rand
Ayr Rand's picture

Speaking of toilet paper... it looks like Europe is determined to self-destruct and take all investors with it. The European governments are now expropriating bonds from bank bondholders -- which probably means they cannot even exchange them to get the insurance they paid for using CDS. Another template for future restructuring, from The Economist:

The most severe treatment of all was meted out to subordinated bondholders in SNS Reaal, a Dutch bank that was nationalised last month. The state expropriated the bonds outright, not only wiping out investors but also making it almost impossible for them to claim protection from credit-default swaps (CDSs), an insurance policy against default, because they no longer have any bonds to deliver.


Wed, 03/27/2013 - 11:53 | 3381524 Pure Evil
Pure Evil's picture

All I can say is ouch!

Wed, 03/27/2013 - 13:10 | 3381817 Edward Fiatski
Edward Fiatski's picture

HOLY SHIT.

Wed, 03/27/2013 - 11:46 | 3381491 NotApplicable
NotApplicable's picture

Interesting theories. Too bad they are only applicable to the current model which is wholly unsustainable (unless ZIRP can be fully implemented across the curve without triggering hyperinflation).

Personally, I see "valuations" of currencies as an exercise in moot, as they invalidate themselves before the ink is dry on the paper. Exactly where is the value to be obtained from measuring shit against shit again? Certainly not anywhere I can see within any real economy.

Then again, this is the "new normal," where economic activity consists of front-running the Fed on behalf of TPTB.

Someone please wake me up the instant my purchasing power increases in the real world.

Wed, 03/27/2013 - 12:06 | 3381587 defencev
defencev's picture

Interesting theories. Too bad they are only applicable to the current model which is wholly unsustainable (unless ZIRP can be fully implemented across the curve without triggering hyperinflation).

This is a very good point. I would like to call attention to the track record of "the author" who proved to be wrong in 100 percent cases of his predictions. His "theory" does not explain why the Dollar permanently loosing purchasing power and significantly depreciated versus surplus nations currencies over the years. Nobody arguing that China out of blue will announce that their currency is supported by the Gold. They may do it in case of real crisis to avoid the total crash of financial system. That WILL

make renminbi instanteneous substitute of fallen Dollar as a major reserve currency. The scenario of Dollar crash is also pretty obvious:

Either we assume that the world economy will never recover or Fed sooner or later will be confronted with inevitability of rising interest rates. At that point the US government debt may become unsustainable and default will be accompanied by Dollar demise.

The idea that nothing can substitute Dollar because nobody else has printing machines is just plain stupid but what would you expect from this "author"?

Wed, 03/27/2013 - 19:04 | 3383481 socalbeach
socalbeach's picture

Article is complete rubbish, at least as much as I read; didn't make it all the way through.

Wed, 03/27/2013 - 12:40 | 3381704 JOYFUL
JOYFUL's picture

Without intending to do so. CHS has hit upon the problem and soution of the 'reserve currency' conundrum.

  1. In an export-dependent country like China, a gold-backed currency would not be exported in quantity,
  2. Assuming some of the gold-backed currency was exported, it would quickly end up in savings accounts or bank vaults, being a proxy for gold. There will be none available for facilitating trade in the $210 trillion global economy.
That "$210 trillion global economy"  is not a trade economy...it is an economy of the financialization of trade. Just as the dollar is a representation of 'value' (backed by the full faith and....;lol)the present world economy  is a representation of exchange of goods and services - not the actual  exchange! We do not need further 'representations' of  value...be they gold, clamshells, or fiat. We can take the measure of constant fluctuations in the relative values of goods in their respective economies by employing the same tools as were used to good effect for millenia by trading nations... silver and gold will not be proxies of the moneypower... their dynamic interaction will be arbitrators of  value for the basics of life. Grains of sterling..grams of gold. Barley wheat and rye, is where that comes from and where it will lead to. Without the usurers, life will come full circle. No woman no cry!
Wed, 03/27/2013 - 11:58 | 3381540 Passage
Passage's picture

No matter which offshore banking haven you hide your money, just remember to keep them in accounts denominated in USD.

Wed, 03/27/2013 - 11:35 | 3381458 Doubleguns
Doubleguns's picture

+1000

Wed, 03/27/2013 - 11:36 | 3381459 SheepDog-One
SheepDog-One's picture

Dollar going higher....FED's worst nightmare.

Wed, 03/27/2013 - 12:02 | 3381563 gjp
gjp's picture

Really?  Working out pretty well for them so far.  Dollar higher, the world still taking their toilet paper in exchange for real manufactured goods and energy, and feeding the biggest stock and bond bubbles in the world.  What's not to like?

Wed, 03/27/2013 - 13:14 | 3381835 syntaxterror
syntaxterror's picture

Overpriced US exports is what's not to like for Benny and the Inkjets. Higher US exports costs means less US jobs which means print more!

Wed, 03/27/2013 - 12:16 | 3381628 markettime
markettime's picture

Huh....I wonder why my gas bill and food costs keep going up then? If the dollar were really going higher wouldn't we see a drop in these things? I am thinking it is going higher because everyone else is printing money faster then Benny B. 

Wed, 03/27/2013 - 13:38 | 3381962 akak
akak's picture

Anyone, ANYONE who tries to speciously talk about a "rising dollar' is simply talking out of their ass, if they are not actively trying to deceive the listener or reader.

There is a HUGE difference between the actual, real-world value of a (depreciating) currency, meaning its purchasing power, and the exchange rate of that currency relative to another, simultaneously depreciating currency.  There is furthermore an even greater difference between the actual, real-world value of a currency and the value of some highly artificial, contrived and outdated index based on the exchange rates of that (depreciating) currency vs. other, simultaneously depreciating currencies (such as the idiotic US Dollar Index).

Simply put, there is NO SUCH THING as a "rising dollar", or a rising fiat currency in general --- their values invariably and always move in one direction only, which is downward.  Anyone trying to tell you otherwise is either a fool or a liar, or both.

Wed, 03/27/2013 - 13:46 | 3382009 espirit
espirit's picture

+1 for you, akak.  Unfortunately, the sheeples don't prefer to understand this very fact.

The weak minded have already lost the war.

Wed, 03/27/2013 - 17:13 | 3383078 thisandthat
thisandthat's picture

Aka, all currencies flush equally, but some currencies flush more equally than others.

Good times ahead for textile fibers manufacturers, though.

Wed, 03/27/2013 - 13:36 | 3381951 SilverDOG
SilverDOG's picture

ANY assumption that those who truly control the USD, WANT the dollar to continue; is extensively

foolhardy.

 

The globes current financial implosion, is merely a bloated version of any previous empire collapse.

Get banked; Get F&$^ed.

Stupid Empires.

 

"Keep stacking my friends"

Wed, 03/27/2013 - 14:19 | 3382218 DosZap
DosZap's picture

This leads to a startling but inescapable conclusion: no exporting nation can issue the global reserve currency. That eliminates the European Union, China, Japan, Russia and every other nation running surpluses or modest deficits.

Excuse my stupidity, I Call BS, but isn't this EXACTLY what grew us in a Global Powerhouse?,me thinks yes.

We became the most powerful nation on earth by doing exactly what he say's the other countries CANNOT do.

Splain this to me. As I am stupid.

 

Wed, 03/27/2013 - 11:24 | 3381411 malikai
malikai's picture

Those dollars aren't holding out so well in BTC.

We're inches away from 1BTC / 1BBL WTI.

Wed, 03/27/2013 - 15:53 | 3382730 aphlaque_duck
aphlaque_duck's picture

Bitcoin will trade at parity with gold in 2013.

Wed, 03/27/2013 - 11:27 | 3381418 insanelysane
insanelysane's picture

The US dollar and US government continue to be the most "honest" and "trusted" government around when it comes to governments.  People are beginning to see the Euro as a hippie commune with a lot of great thoughts but when it comes to getting anything accomplished...  As for China, they can say they are backed by gold but there is way too much shadow activity going on there for anyone to trust.

Wed, 03/27/2013 - 11:34 | 3381450 McMolotov
McMolotov's picture

For now, we're the least sickly-looking horse in the lasagna factory, nothing more.

Wed, 03/27/2013 - 11:43 | 3381482 Divine Wind
Divine Wind's picture

 

 

Too funny.

Wed, 03/27/2013 - 11:28 | 3381421 Fuh Querada
Fuh Querada's picture

Yeah welcome to the world of CHS from the "of 2 dicks" blog, where the electronic creation of trillions of new currency units increases the value of those already in existence.

Wed, 03/27/2013 - 11:29 | 3381428 Yen Cross
Yen Cross's picture

     Good luck devaluing the $ when all the money you print is causing global iinflation, and countries have to devalue their currencies against the $.

Wed, 03/27/2013 - 11:30 | 3381433 LawsofPhysics
LawsofPhysics's picture

Fiat is now being recognized as fiat, period.  What is the global stock of fiat?  Is it shrinking?  I think not.

Wed, 03/27/2013 - 11:32 | 3381441 kliguy38
kliguy38's picture

are you suggesting there could be "unintended consequences".....hehehhehehe........maybe that's the ultimate goal

Wed, 03/27/2013 - 11:29 | 3381431 LawsofPhysics
LawsofPhysics's picture

Insightful take.  Just one question, what happens if the dollar is not accepted, period?  If the population of people/nations that completely avoid the dollar is small, it probably won't matter, but should that number grow...

 

I am also wondering why you ignore that rather large military standing behind the dollar.  It's a blessing and a curse, but tell me, how does forceing people to do or accepting anything help the underlying faith in that currency?  I'd argue it doesn't.

Wed, 03/27/2013 - 11:32 | 3381436 Doubleguns
Doubleguns's picture

And when the tail winds end we will be a flying fuselage with no wings. Call it a yellow submarine....dive, dive, dive.

Wed, 03/27/2013 - 11:31 | 3381439 JustPrintMoreDuh
JustPrintMoreDuh's picture

Todays lesson : Fiat currecncies A-Y ... BAD.  Fiat currency Z ... GOOD.   Gold? .. bwahahahahaha  

Wed, 03/27/2013 - 11:32 | 3381442 Stuart
Stuart's picture

Euro to USD is like moving from bow to stern on the titanic.

Wed, 03/27/2013 - 11:35 | 3381451 Doubleguns
Doubleguns's picture

Nailed it!!!! +1000

Wed, 03/27/2013 - 11:34 | 3381452 NoWayJose
NoWayJose's picture

Fewer dollars and the Fed wanting to control the issuance of the global reserve currency?  Has this guy been in a coma for the past 10 years?  The Fed is pumping $85 billion a fresh dollars out every month.  If the global economy slows, that will only increase - at least until the bubble pops...

Wed, 03/27/2013 - 11:35 | 3381455 mdtrader
mdtrader's picture

It's like there was no bad news out of Europe at all today. Just incredible. I think I'm giving up on the US markets. They are proxy for nothing.

Wed, 03/27/2013 - 11:35 | 3381456 Stuck on Zero
Stuck on Zero's picture

Paul Krugman!  Is that you?

 

Wed, 03/27/2013 - 11:37 | 3381460 ATM
ATM's picture

How can the dollar be valued based on the supply/demand equation when supply has no upward bound?

Wed, 03/27/2013 - 11:37 | 3381464 SheepDog-One
SheepDog-One's picture

BLOW Bernank, BLOWWWWWW!!

Wed, 03/27/2013 - 11:40 | 3381472 Hedgetard55
Hedgetard55's picture

The dollar is going to rise against... what? Other fiat currencies? Purchasing power should be measured against gold or silver, not Euros and yen.

 

As for this bullshit about the FED QE money not getting into the economy, what? The net affect of the FED buying Treasuries is that the government has that new money to spend into the economy. Whether the entry is on the banks balance sheet for the value of the Treasuries it bought frontrunning Ben, or the FEDs balance sheet makes no difference, the freshly printed fiat is out there. Noticed the price of oil and food lately?

Wed, 03/27/2013 - 11:43 | 3381478 SheepDog-One
SheepDog-One's picture

1 quart of Mobil1...$10.

Wed, 03/27/2013 - 16:07 | 3382790 disabledvet
disabledvet's picture

So far it has been rising against gold and silver. "that's another word for God" in my book. While all us Commentarians can safely ignore this if i'm a (competent) money manager I cannot. Gold mining stocks have never partaken of "the juice" and to me this has BROAD and WHOLESALE implications "for the Western World" as you all think you know it. EPIC primer...and a starting point just to unravel this thing.

Wed, 03/27/2013 - 11:40 | 3381473 Jason T
Jason T's picture

you're on the same page as Armstrong.. who sees euro melting down and huge capital flows into the only place that can absorb .. the US$.

Wed, 03/27/2013 - 11:44 | 3381484 SheepDog-One
SheepDog-One's picture

Now...if we can only figure out a way to keep interest rates at 0%...forever....

Wed, 03/27/2013 - 11:59 | 3381553 Key-Rick
Key-Rick's picture

That money has to go somewhere and buying gold with it won't facilitate exchange.

Wed, 03/27/2013 - 11:44 | 3381485 Yellowhoard
Yellowhoard's picture

The dollar is the hottest chick in the severe burn unit.

The dollar is the least explosive of all the diarrhea.

The dollar is most tolerable fart in an elevator of farts.

Wed, 03/27/2013 - 12:15 | 3381624 Fuh Querada
Fuh Querada's picture

a popcorn fart in an elevator after a cheap pork fried rice takeaway

Wed, 03/27/2013 - 11:47 | 3381486 Belrev
Belrev's picture

So what happens when there are fewer dollars being exported? Demand for existing dollars goes up, pushing the "price/cost" of dollars up--basic supply and demand.

 

Why does demand go up? It may or may not, it is not related directly to amount of dollars in circulation. it is rather driven by economic need. So in global recession it may as well go down. 

 

We can anticipate this desire to transfer euros and yen into dollars will only increase as those currencies depreciate. Let's say, just as an example, $5 trillion in euros starts chasing $1 trillion in available U.S. dollars. What will that do to the value of the dollar?

Lets not make up fantasy examples. Why would EUR 5 Trilloin suddenly chase $1 T? May be it won't. Those EUR5 T may be credit that will simply evaporate in a deflationary default and nothing will chase anything.

Wed, 03/27/2013 - 11:50 | 3381511 MFLTucson
MFLTucson's picture

 A stronger dollar would reduce the cost of oil, helping 100% of the economy, including exporters. 

 

Can end the dicussion on this poiunt alone.  Whoever wrote this article has no idea what they are talking about or is dillusional.

Wed, 03/27/2013 - 11:51 | 3381519 brown_hornet
brown_hornet's picture

Won't the BRIC's trading amongst each other with their own currencies reduce demand for dollars? I can't believe they are stupid enough to keep taking digits for hard assets.

Thu, 03/28/2013 - 03:54 | 3384459 StychoKiller
StychoKiller's picture

More and more countries are inking bilateral trade agreements in their own currencies.  Sooner or later, the $$ WILL LOSE Reserve Currency status.

Wed, 03/27/2013 - 11:52 | 3381520 Life of Illusion
Life of Illusion's picture

 

 

If thats the case we better have EPA stop frack drilling for oil and gas and use dollars only to import.

last time I looked policy is use domestic oil and cut down oil imports.

Wed, 03/27/2013 - 11:55 | 3381541 Key-Rick
Key-Rick's picture

That's actually an insightful article.  All that money that will flow out of the Euro due to lack of trust should flow into dollar denominated assets (such as stocks, bonds, etc.)  At the very least, that bodes well for the ability of our government to continue grossly reckless deficit spending for a good while longer. 

So I'll stay long equities a bit longer.

Wed, 03/27/2013 - 11:56 | 3381542 Urban Redneck
Urban Redneck's picture

Ceteris Paribus.  Meanwhile the BRICS alone account for what rising % of global trade as they move to settle intra-BRICS trade in currencies other than the USD?  The key to the value of the USD isn't even held by King of KSA (or the US military standing behind the fragile petro dollar) it is held by Putin - with the pricing and settlement of currency of European energy.a  The Russia-China energy trade is moving away from the dollar.   The Chinese hold a lengthy lever with which to jawbone African governments when the time is right, and the US isn't ramping up any alternative FDI footprint.

(although if the paper-oil pushers commodities traders decide to get creative with their currency selection the net effect is the same)

Wed, 03/27/2013 - 11:58 | 3381555 dick cheneys ghost
dick cheneys ghost's picture

CHS writes.............''Money has to act both as a store of value and as a means of exchange''.

 

Isn't this the problem??.............. Saving in debt??

 

What happens to the system when enough people start saving their excess fiat in gold/silver instead of debt?

Wed, 03/27/2013 - 12:02 | 3381562 Belrev
Belrev's picture

Still waiting for them to start saving ....

Wed, 03/27/2013 - 12:11 | 3381605 espirit
espirit's picture

Understand that money is gold/silver as defined by the head of the Venetian Banking Cabal.

Wed, 03/27/2013 - 12:03 | 3381567 TrumpXVI
TrumpXVI's picture

In a very real sense, every currency is a claim not on the issuing central bank's balance sheet but on the entire economy of the issuing nation.

I agree with this, but this is a double-edged sword.  One of the reasons the Confederate dollar became worthless was not simply because the Confederacy printed gargantuan quantities, but because the Confederate dollar was not backed by any tangible asset AND because the Confederate economy ceased to generate any wealth.  The Confederate dollar then ceased to represent ANYTHING of value.

 

I would argue that the key is the U.S. economy’s ability to be recognized as a wealth generator.  I’m not so sure it will be such going forward.

Wed, 03/27/2013 - 12:41 | 3381715 Agent 440
Agent 440's picture

Read _The Ascent of Money_ by Nail Fergusson. The Confederates backed thier dollars with cotton. They were ok, until the Union blockaded the South... very bad for Britain at the time.

The problem with dismissing the original claim is this: you don't know who has promised what to whom... Kinda like Cypriots were surprised to discover they were on the hook... : (

Wed, 03/27/2013 - 13:02 | 3381795 TrumpXVI
TrumpXVI's picture

Right.

I was talking about gold and silver.

The problem with cotton is that cotton was wealth that was intrinsic to the Confederate economy.  Once the South's economy was crushed, no mo' cotton.

Thu, 03/28/2013 - 03:58 | 3384461 StychoKiller
StychoKiller's picture

How many US Corp's are earning moar munny in foreign currencies?  Answer:  Probably ALL of them. 

Wed, 03/27/2013 - 12:16 | 3381629 geewhiz190
geewhiz190's picture

notice how the news on cyprus is how everyone is scambling to get their hands on euros, not gold.  as with the dollar-unless the bet is a total global collapse, which is of course possible. in the meantime, without some currency to mark its value against, gold is worthless

Wed, 03/27/2013 - 12:43 | 3381724 Hedgetard55
Hedgetard55's picture

Dude, that is crazy talk. Gold worthless w/o fiat to measure it in? You must have a PhD in econ from Harvard.

Wed, 03/27/2013 - 12:56 | 3381770 geewhiz190
geewhiz190's picture

assuming there were no currencies-how much gold would you give for a loaf of bread? what is the gold worth? 

Wed, 03/27/2013 - 13:11 | 3381825 Hedgetard55
Hedgetard55's picture

Dude, you just made my point and answered your own question at the same time.

Thu, 03/28/2013 - 04:01 | 3384462 StychoKiller
StychoKiller's picture

More questions:  1. HOW hungry are you?  and

2. Does the baker have a use for your Au that's greater than the use of a spare loaf of bread?

Wed, 03/27/2013 - 12:25 | 3381666 Herdee
Herdee's picture

Put it another way,even the Japanese Empire and The Nazi German Empire combined during WW2 couldn't defeat the might of the U.S. monetary system.And that was even before it was the worlds' Reserve Currency.If Japan goes bust like some predict and the EU collapses under its' own stupidity,where do you think all the money is going to flow to?Would you send your money to Communist China or to Russia?I kind of doubt it,with the boneheads that run the shows over there.Think it's impossible that both the U.S. Dollar Index and Gold/Silver/platinum/palladium can't climb alongside the U.S. Dollar?My guess is that they will and when those big pipelines come down from Canada,it'll flood the U.S. with cheap oil from Western Canada stimulating the economy along with oversupplies of record amounts of natural gas.Those are all American companies in Calgary too.Don't forget one thing and I repeat myself with this,Alberta and Saskatchewan which are the closest Canadian Provinces to the U.S.(just north of Montana)have as much or more oil than all of Saudi Arabia.If you need a reason for oil to drop,both the U.S. Dollar and those pipelines are going to be a double whamy.No reason not to believe both precious metals and the U.S. Dollar can't climb to record levels together.Must be a strategy as to why Germany and others can't get their gold back?It's leased out for a reason.It's all going to return back off of lease at record profits.Maybe the FED will become richer than you think?

Wed, 03/27/2013 - 12:42 | 3381713 LawsofPhysics
LawsofPhysics's picture

"where do you think all the money is going to flow to?" -  What money?  There is no spoon Neo.

"when those big pipelines come down from Canada,it'll flood the U.S. with cheap oil from Western Canada stimulating the economy along with oversupplies of record amounts of natural gas." - why?  will the energy and capital inputs to deliver those resources be less?  If it isn't they sure as hell won't be "cheaper".    You are missing a few very real details in your "analysis".

Wed, 03/27/2013 - 12:27 | 3381674 Bicycle Repairman
Bicycle Repairman's picture

In the short term with the Euro melting down, where would you expect people to turn?  Don't conclude that Europeans are certifying the $.  It's just a life raft, and there icebergs are still out there.

Wed, 03/27/2013 - 12:38 | 3381696 roadlust
roadlust's picture

What's new???  We've known Japan has been the Walking Dead for years, and the Euro is now set for a lengthy period of devaluation, and diminished credibility.  Renminbi anyone??? 

Which leaves what single currency as vastly liquid and "stable?" (Hint: Not the Rupee.)

That's not even mentioning that it happens to be the denomination of virtually all international financial transactions, AND the only paper currency excepted on the street all over the world. 

People expecting the US Dollar go anywhere but up in the near or reasonably long term, have let their ideological problems with Bernanke and Obama ("Oh, the destruction of the Dollar!") cloud whatever exists of their logic.  It's simple physics.  The US Dollar is the GOOG of currencies.

Wed, 03/27/2013 - 12:50 | 3381745 TooBigToJail
TooBigToJail's picture

What about commodity backed currencies...Canada dollar, Swiss Franc, Australia, Norway, etc?

Wed, 03/27/2013 - 12:56 | 3381769 Edward Fiatski
Edward Fiatski's picture

Very limited, can't expand monetary supply past the notional value of the assets/commodities - same thing happened in 1920s with Gold-backed Standard. :)

Wed, 03/27/2013 - 12:53 | 3381755 kito
kito's picture

 

And what does a declining trade deficit mean? It means fewer dollars are being exported. The global GDP is about $60 trillion, of which about 25% is the U.S. economy. Into this vast sea of trade, the U.S. "exports" about $500 billion in U.S. dollars via the trade deficit. Put in perspective, it isn't that big compared to the machine it is lubricating.   So what happens when there are fewer dollars being exported? Demand for existing dollars goes up, pushing the "price/cost" of dollars up--basic supply and demand...................................      chuckie you make no sense........a declining trade deficit means there are less bennybucks being absorbed around the world which means ben is going to have a harder time printing without risking a dollar flood on the domestic market, thereby causing hyperinflation....................

 

Wed, 03/27/2013 - 12:54 | 3381756 Edward Fiatski
Edward Fiatski's picture

"Many observers think China is preparing to back its currency with gold, and they mistakenly conclude (yet again) this would be the death knell for the dollar. But they haven't thought through how currencies work: their value is ultimately set like everything else, by supply and demand.

In an export-dependent country like China, a gold-backed currency would not be exported in quantity--it wouldn't be "exported" at all, because China "imports" others' currencies in exchange for goods.

Assuming some of the gold-backed currency was exported, it would quickly end up in savings accounts or bank vaults, being a proxy for gold. There will be none available for facilitating trade in the $210 trillion global economy."

Bingo-Presto-Exactamundo.

I've been watching the M2 velocity multiplier for 4 years now - and for 4 years straight it's been declining, so short of a thermonuclear World War that will wipe out and rebalance (too light a word LOL) the current Modus Operandi, I don't see the USD fading into History any time soon.

U.S. & the Anglo-Saxon world has always been well-hedged & positioned, especially when it comes to the geographical aspect with Africa+Europe+MiddleEast+AreasUptoMoscow, plus the whole of N & S Americas, courtesy of George Washington. :)

China would have to bend forwards in a backward manner, with the left leg swinging over the left shoulder to cover efficiently the areas that I've mentioned.

Great article. +5

Wed, 03/27/2013 - 12:55 | 3381760 Lordflin
Lordflin's picture

Up is down, left is right, and a giant hole in the ground is really a mountain...

Wed, 03/27/2013 - 13:28 | 3381913 Ewtman
Ewtman's picture

Finally, somebody who gets it. This global economy is 'deflating', not inflating. I'll add another reason for the dollar to rise... when the bond vigilates eventually decide they have had enough (and that time is not far off) they will park their money in the most stable soverign currencies. While the Swiss franc and the yuan and the aussie dollar might be good places to lay low, there simply isn't enough to go around. The dollar is the most available currency and therefor will see the most demand, ergo its price will rise. No rocket science here. A lot of people don't want to believe it, but when the shit hits the fan, you won't be able to buy bread with a chunk of gold, but you will with a paper dollar.

Thu, 03/28/2013 - 00:06 | 3384280 ozzz169
ozzz169's picture

This is not really right, deflation is very tricky thing, there is massive leverage, that is deflationary, but... sovereign debt and bailouts of overleveraged banks is inflationary.  with no federal reserves there would be massive deflation.  but right now we have central banks buying up the bad assets of banks helping them deleverage. This is what they will not tell the public, and the public is too stupid to know better, basically you had huge amounts of malinvestment due to fed keeping rates too low, and banks levered up, now the bubble popped and the banks have all these bad assets that would make them insolvent. basically fed can print the shit out of money when really all it is doing is taking bad loans onto its balance sheet where it doesn't have to mark to market, and desperately trying to blow the housing bubble back up so all the loans on its balance sheet dont lose ass loads of money. so really there is not much inflation pressure because new money is only going to reducing the leverage of the banks, hence its just compensating for the reduction of leverage of the banks. I hate to say it makes sense what the fed is doing from a certain perspective but its rather narrow sighted. It might just be crazy enough to work, but what they are doing is not what they tell the public they are lying through there teeth about why they are doing what they are doing. This is also why you need growth, and inflation, to make the terrible assets on the fed balance sheet recoup their losses.   so

Wed, 03/27/2013 - 13:36 | 3381927 Mike in GA
Mike in GA's picture

I think it is a great article.  It is good to read cogent, thoughtful heresy to the accepted wisdom I have learned here at ZH and over the years from Jim Rogers, Marc Faber, Jim Grant, Bill Fleckenstein and others.  Rather than cast stones at the author, the points make me think further about the mechanisms of currency failure and the role currency plays in the day to day economies around the world.

I just wish I knew 2 things:  who to believe and when to believe 'em!

Wed, 03/27/2013 - 13:32 | 3381931 yrbmegr
yrbmegr's picture

If I had a dollar for every prediction of the demise of the dollar on this site, I could issue the world's reserve currency.

Wed, 03/27/2013 - 13:38 | 3381959 steve from virginia
steve from virginia's picture

 

 

 

Good article by Charles Hugh Smith!

 

@CHS:

 

"The purchasing power of the dollar is set by international supply and demand, not the Fed's balance sheet or the domestic money supply."

 

The purchasing power of the dollar is set by supply and demand of petroleum bought and sold around the world ... in all currencies. The worths of different currencies are determined by relative efficiencies of petroleum waste, that is the per capita consumption in all countries for fuel / time ... all of this relative to the dollar.

 

Since per-capital waste is a matter of thermodynamic efficiency of vehicles and most vehicles are similar the consumption of vehicles is also similar, the worth of various currencies is also relatively similar.

 

What matters thence is acceptability of foreign currency by fuel suppliers. The less acceptable, the greater the discount to dollars.

 

Another aspect of currency worth not mentioned here is what the currency is proxy for: whether the currency is proxy for fuel or proxy for fuel consumption. It's a biggie.

 

!

Wed, 03/27/2013 - 13:44 | 3381972 10mm
10mm's picture

Just today,China and Brazil signed a trade/currency deal ahead of BRIC summit.

Wed, 03/27/2013 - 14:07 | 3382159 DosZap
DosZap's picture

Yep and Russia and South Africa are coming together and signing an agreement to be the OPEC for Platinim and Palladium.

You think the prices will not go off the charts over this?.

Wed, 03/27/2013 - 14:23 | 3382242 Edward Fiatski
Edward Fiatski's picture

By off the charts, you surely meant to be headed lower due to an increase in supply & more efficient "dig-it-out-of-the-ground" ventures?

Wed, 03/27/2013 - 13:49 | 3382027 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

As we go higher up the food chain we now know which devil Goldman Sachs sold its soul to.

http://www.bloomberg.com/news/2013-03-26/berkshire-to-get-goldman-stock-...

Berkshire to Pay Nothing to Be Among Top Goldman Sachs Holders

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) is poised to become one of Goldman Sachs Group Inc. (GS)’s largest shareholders without paying anything after the companies agreed on a plan to settle warrants granted at the height of the 2008 financial crisis.

Berkshire had the right to buy 43.5 million Goldman Sachs common shares for $115 apiece until Oct. 1. Under a deal announced by the companies today, Buffett’s firm will get Goldman Sachs stock equal to the difference between the average closing price during the 10 trading days before Oct. 1 and the exercise price, multiplied by 43.5 million.

The new deal reduces some of the risk for Berkshire, which would have had to spend about $5 billion to exercise the warrants and then sell the shares -- about 9 percent of the bank’s outstanding stock -- to cement a profit. For Goldman Sachs, the fifth-biggest U.S. bank by assets, the plan seals Berkshire’s participation as a shareholder in the company and reduces the dilution for other investors.

“To buy the 43 million and sell them to reap the profit would have substantial transactional cost,” said Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Alabama, which oversees Berkshire shares. “Goldman has avoided the dilution.”

 

And the "hot money' tip

The new agreement also means Berkshire is depending on Goldman Sachs stock remaining above $115 in the final 10 trading days of September. The shares last fell below that level in November. Goldman Sachs gained 43 cents, or 0.3 percent, to $146.54 at 4 p.m. in New York. The bank has advanced 15 percent this year and rose 41 percent in 2012.

Goldman Sachs turned to Buffett, a cult figure in the investing world, to shore up its capital and restore market confidence after the firm’s stock tumbled and borrowing costs spiked following the Sept. 15, 2008, collapse of Lehman Brothers Holdings Inc. News of Berkshire’s investment also helped Goldman Sachs raise $5.75 billion from a stock offering in two days.

Wed, 03/27/2013 - 14:20 | 3382189 alfbell
alfbell's picture

 

 

In my opinion, an apt analogue for comparing currencies via the USD DXY or BUXX would be comparing the longevity rate of 6 Stage 4 cancer patients in a cancer ward. Each of them have been advised by their doctors to "get their affairs in order". Slowly but surely all of the patients' organs and systems will be shutting down. Their bodies will soon be non-functioning (worthless). None of the patients are going to survive more than 6 months longer (6 months in a human lifespan might be the equivalent of 6 or 10 or 15 years of a currency like the USD's lifespan).

Our government and The Fed have been debasing the USD for 100 years. Who cares if the USD spikes up in relation to the Yen or Euro? Who cares if the US economy becomes stronger? Who cares about the trade deficit? Isn't it all about purchasing power?

Economic history tells us that every fiat based currency has become worthless through "over-printing" and it is all about owning tangibles to enable one to somewhat survive the ravages of inflation (even those in tangibles get hurt badly and no one ever preserves all of their wealth... lucky to be left with 50%).

All very nice analysis and neo-academic figurings CHS, but... what about store of value and preservation of wealth? That is the only thing that should be focused upon.

Wed, 03/27/2013 - 14:24 | 3382251 epwpixieq-1
epwpixieq-1's picture

"Issuing credit and loans in dollars wasn't enough, so the U.S. exported dollars in exchange for commodities and goods."

How generous.

So lets get this straight.

If I export you some paper, that currently is used by others and YOU ASSUME that others would want in the future, that I have printed it out with regard of how much paper you need, are you going to give me you goods. Is a though question or a simple one?

And lets put this question to rest. The dollar has some backing, in the form of the petrodollar trades. Without such backing ( that by itself is a function, for now, of the US military power ), the dollar will collapse quite fast.

This is the elephant in the room, and it is not mentioned in the article at all! I am wondering. Did the author intentionally not mentioned even one line for it, or it is a mere ignorance.

As we all know, you can lie ( consume more than one deserves just because one can print ) to some people all of the time, and you can lie to all people/nations some of the time, but you CAN NOT lie to all of them all of the time. And if one is for sure, it is that the clock is ticking, for the financial empire build on the dollar backed by trust in the debt system.

 

Wed, 03/27/2013 - 14:25 | 3382261 dadichris
dadichris's picture

those crafty Europeans have found a way to devalue their currency faster than the US - Cyprus haircut.  only the Japanese are leading the race to the bottom.

Wed, 03/27/2013 - 14:39 | 3382330 Stu
Stu's picture
China, Brazil sign trade, currency deal ahead of BRICS summit

 

 

DURBAN: BRICS members China and Brazil agreed on Tuesday to trade in their own currencies the equivalent of up to $30 billion per year, moving to take almost half of their trade exchanges out of the US dollar zone.

The agreement, due to last three years and signed hours before the start of a BRICS summit in Durban, South Africa, marked a step by the two largest economies of the emerging powers group to make real changes to global trade flows long dominated by the United States and Europe.

 

http://articles.economictimes.indiatimes.com/2013-03-26/news/38040435_1_...

Wed, 03/27/2013 - 15:00 | 3382419 Enceladus
Enceladus's picture

At least I had the opportunity to learn lagniappe is creole by way of French cum Spanish and ancient quiecha for 'just a little something extra' kinda like the privilege of being a reserve currency.

Wed, 03/27/2013 - 15:10 | 3382504 polo007
polo007's picture

http://news.asiaone.com/News/AsiaOne%2BNews/Business/Story/A1Story20130320-410025.html

The rise of inflation, the overvaluation of bonds, the relative value of equities, especially in emerging markets, and Japan's turnaround were among the major themes of the Schroders Asia Media Conference held in Hanoi last week.

Perhaps Christopher Wyke, the firm's product manager for emerging market debt and commodities, summed up the investment thesis best.

Thirty countries in the world today are in zero or negative real interest rates environment. That's a record. Central banks are busy printing money.

The policy priority is higher inflation.

US Federal Reserve chairman Ben Bernanke has adopted a very tough employment target before he would consider turning off the tap of liquidity and start to raise interest rates.

And there is a long way for the US employment rate to go before that target is met.

Meanwhile, to tackle the government budget deficit, either taxes have to be raised significantly or spending cut sharply. The easier way is to inflate their way out. This strategy is being adopted in the EU and Japan as well.

Inflationary policies are popular: People will vote for inflation over recession. They like to see the price of their assets rise.

To Mr Wyke, there are three types of inflation: commodities inflation; wage inflation, as seen in China, the world's factory; and government inflation, through the debasing of their currencies. Emerging markets are particularly vulnerable to the former two.

He said: "The idea spread by the West, that there is no inflation, and so the right policy is to cut interest rate is simply not true! Particularly in many of the countries in the world where the bulk of the global population lives."

When inflation goes up, interest rates rise, bond prices fall and currencies rise.

Commodities and equities will benefit. According to Mr Wyke, some 50 per cent of the total global financial market assets are held in bonds.

In the last few years, a lot of money has poured into emerging-market bonds, their prices have gone up, and hence their yields at historical lows. "The upside of holding bonds is so limited, the downside is so huge that the opportunity cost of giving up bonds now is so small" is how he put it. "Fortunes are made of profits taken too soon."

There is a severe danger of a big sell-off in bonds across the markets. At the moment, people are taking more and more capital risk in order to get yields. "That's very dangerous. What matters is total return," he said.

Wed, 03/27/2013 - 23:53 | 3384255 ozzz169
ozzz169's picture

Good stuff, anyone short dollar or US Bonds is insane, when jap/euro goes dollar goes ballistic, yeilds go negative.  best of the worst baby, best of the worst! 

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