From IceCap Asset Management:
Before we go any further, we feel it is important to share our long-term view of the USD. In short, it’s going to stink. Just as Europe is facing an enormous debt problem, the US is also facing a difficult fiscal squeeze with no easy way out. However, unlike the Europeans the Americans do have a plan to get out of their debt crisis – after all, they didn’t develop into the World’s sole superpower without one. Forget about trying to be like the Europeans and creating some sort of confusing bailout fund – the Americans already have their bailout fund in the form of the US Federal Reserve. Plain and simple. While others often say the US will default on its debt at some point, we have a somewhat different view. Yes we believe a default will occur, however it won’t be the typical default whereby the US simply stops making interest & principal payments. The US Federal Reserve has the capacity to print unlimited amounts of USDs and they will use this capability to eventually make the USD considerably less than it is today. After all, a cheaper USD means America’s products are cheaper for foreigners to purchase, and these cheaper goods means more jobs in the long run – and who doesn’t want to work? The alternative is to watch (in horror) as long-term interest rates rise which is a sure economy killer if there ever was one. You can bet a box of Krispy Kremes that the Federal Reserve will do everything possible to prevent that from happening. In the end, the Federal Reserve has been very clear with their strategy – expect plenty more USD weakening policy moves. When you consider the American’s debt crisis (above Chart 1) and the condition of their banks (above Chart 2) the outlook for financial stability and economic growth is low. At the end of the day, we see the US Federal Reserve continuing with USD devaluing policies – in their eyes, it’s their only way out of this mess.