Guest Post: In A Currency Tug Of War The US Dollar Loses

From Brandon Smith of Alt Market

In A Currency Tug Of War The US Dollar Loses

I imagine sometimes in my most optimistic moments that one day I will live in the midst of a true free market economy, where the tides of trade and investment, the ebb and flow of commerce, are a rather beautiful thing. A marketplace without centralized manipulation, were legitimate supply and demand are elevated instead of obscured, and toxic financial instruments, crooked corporate institutions, and even faulty currencies, are allowed to finally meet their long deserved demise because they no longer serve the needs of our nation and our culture. I imagine an economy that is not only continuously shedding off old skins and renewing itself as our society grows, but one whose primary purpose is to nurture and expedite that growth. I imagine an economy that works FOR the people, not against them. Like I said, “optimistic”.

In today’s economy, we have something quite different. We are imprisoned in a labyrinthian deathtrap of a mainstream system, one that feeds endless fiat formaldehyde into the crusted veins of a long since corpsified infrastructure; a financial golem, a wraith, a thing that creeps across the dark horizon of our country’s future waiting to unleash a special kind of hell. A thing that should not exist.

We live in an unnatural and monstrous economy. A Frankenstein creation…

This creation owes its wretched life to the efforts of a relatively small number of international bankers, corporate financiers, and of course, the private Federal Reserve; the mad scientists of our age, consumed with a lust for power over everything. One day, in the distant future, we will finally understand and appreciate their “brilliance”, or so they tell themselves. The “plan” is simply too complex and wondrous for we nearsighted and frightened villagers to comprehend.

In fact, the plan is very easy to comprehend, and not driven by brilliance, but hubris (one does not necessarily lead to the other). The key to grasping the mangled workings of our economy lay in the lifeblood of our commerce; the dollar itself. If you know the dollar, you’ll know just about everything else. Ignore the dollar, or assume comprehension without ample study, and you will find yourself completely lost in the fog and chaos of the markets.

This brand of confusion is very evident amongst a majority of investors, who seem bewildered by the seesaw activities in global indexes, Treasury Bonds and currency exchanges, and more specifically, the tug-of-war between the dollar and the euro. Why does debt instability keep cycling in the EU like a tornado? How could commodities decouple from currencies and act independently of “normal” market indicators? How could the U.S. economy still be on the verge of complete meltdown after three years of bailouts and quantitative easing measures? Where is all this headed?

Many of these questions can be answered by examining the battle going on between major developed and developing nations, including their currency policies, which appear to be at odds. However, there is indeed a concerted and focused effort in play underneath all the supposed “bumblings” and catastrophes around us, and this effort is not being implemented for our benefit…

The U.S. / EU Game Of Hot Potato

About every three months, give or take a week, the news is lambasted with yet another negative development in the EU, usually linked to Greece. This quarter was no exception, as S&P announced it was cutting Greece’s debt rating by three levels to CCC, and warned that the country was dangerously close to default:

http://finance.yahoo.com/news/Greece-falls-to-SPs-lowest-rb-4175011898.html?x=0

Greece now has a lower rating than even Ecuador, which defaulted in 2009. The EU warns of a “systemic spread” of the debt crisis if the Greece situation is not contained. Whether this is true or not is of secondary relevance. The most important issue is the relationship between EU instability and the U.S. dollar.

One can’t help but notice (if they’ve been following currency and commodity markets) that every time inflationary pressures break through another level in the U.S., or the dollar index edges dangerously close to dropping below the 72 point support level, the mainstream financial media and numerous establishment analysts suddenly turn their attentions back to Greece, Ireland, Portugal, Spain, etc. The truth is that the problems in the EU never went away. They were never solved, nor was there ever any intention to solve them. The coverage and the transparency of those problems was the only thing squelched. The result is a brief but effective change in market psychology.

The Euro falls. The dollar index gains back a portion of its losses, because the assumption among uninformed investors is that the dollar will become a “safe haven” in the wake of Euro destabilization. Gold and silver take a hit, usually dropping between 5%-10%. Oil takes a much smaller loss, but its steady rise is impeded for at least a few weeks. And, stocks around the globe falter. What is important to recognize here, however, is that each time this game of passing the “hot potato” is played the dollar tends to fall even further afterwards, followed by a new explosion in commodities and inflation. What we are witnessing, is an attempt by global central banks to create a controlled decline of both the Dollar and the Euro; bouncing one off the other, which skews index measurements in order to hide the true extent of the damage being inflicted on each currency.

The most recent market seesaw is complicated even further by the debt ceiling debate going on in the U.S. Congress. That is to say, as the circumstances grow worse here in America, and the dollar continues to devolve into primordial jelly, global central banks need an even greater firestorm in Europe to drive investors temporarily into the arms of the Greenback to slow its decline. They certainly have a firestorm on their hands in the EU now, as a resurgence of protests overrun Greece in response to extreme austerity measures and social welfare cuts demanded by the IMF:

http://www.reuters.com/article/2011/06/15/us-eurozone-idUSTRE75D6JK20110615

One might ask, how will this tug-of-war end between the dollar and the euro? It can’t possibly go on forever, especially as each continues to degrade. Which one will come out on top in terms of market trust?

It is undeniable, the dollar will lose…

There is one primary factor that makes this inevitable, and that is the level of fiat creation going on in the U.S. We are out-printing every country on the planet, not to mention out-spending. But here’s the kicker; the dollar is not only being weakened to prop up our own failing system, it is also being weakened to prop up the EU!

After the Federal Reserve was finally forced through lawsuit to reveal the recipients of a large portion of bailout funds distributed in 2008, it became clear that a considerable amount of fiat (which becomes a debt burden for American taxpayers) was not going into American pockets, or American banks, but banks in Europe:

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fren.html

Another important issue to consider is that the U.S. supports almost 20% of the IMF’s funding apparatus. This means that every time the IMF issues another bailout to a European nation, WE are footing at least 20% of the bill, on top of any capital we send directly overseas. The IMF is currently putting together a brand new bailout for Greece, barely a year after the last debacle costing around $150 billion. And, again, Barack Obama is pledging U.S. “help” (i.e. lots of your money) to aid in slowing the crisis in Europe:

http://www.cnbc.com/id/43321461

This is why, in the end, America will hit the ground hardest. We are essentially covering the overhead for collapses on both sides of the Atlantic. Therefore, we are devaluing our currency at a far faster rate than the EU ever could. If the EU was forced to print to bailout its own economic members, the story might be a little different, but as the situation stands, the dollar is being gutted to sustain foreign nations, so that they do not have to gut the Euro.

Why would the Obama Administration, the Federal Reserve, and the IMF pursue such a policy? Well, it makes little sense unless your goal is to deliberately implode the dollar, destroy its world reserve status, and replace it with something else (that something else being the IMF’s “Special Drawing Rights”). It also makes sense if you wish to draw Europe into a state of uncertainty, but not total anarchy.

If the Euro is allowed to collapse, then the idea of a centralized union of nations, and especially a global union of nations, becomes a financial joke. But, if the EU is merely wounded, and the Euro slightly hobbled, global banks can claim that the system “could still work”, if only it was “centralized more”. That is to say, globalists will demand that EU nations erase all political, not just economic, divisions, and accept the rule of a single guiding governmental body. They will claim that the weakness of the EU was caused because participating nations were “clinging to their sovereignty”, instead of working together as one unit. In fact, the suggestion to dissolve European sovereignty and giving more power to a single ruling body is being pressed right now:

http://www.marketwatch.com/story/eu-must-move-toward-economic-federalism-2011-06-03

“…Barnier said the E.U. should try and unify its economic and finance policy functions in much the same way it has for foreign policy. The making of policy should be combined with the political ability to carry those decisions out, he said. He also said he can envision a day when member countries agree to merge the heads of key E.U. bodies, "so we'd have a real president of the European Union."”

“…he suggested that E.U. members must eventually allow more government authority to be centralized in order to better implement economic policies for the region.”

This process of centralization is already underway in Europe, and AMERICANS are paying for it. In the very near future, there will come a point at which the U.S. will no longer be able to print from thin air without also provoking a loss of world reserve status. The result will be a much faster implosion of the dollar compared to the Euro. Then, the roles will reverse, and it will be the U.S. asking for help from the IMF, and even Europe, to avoid complete default.

The Dollar’s Prominence Is Its Weakness

I often hear that because the dollar is so prolific, and its use so global, there will never be any chance that it will fall out of fashion. I’m not sure why so many consider that a logical position, but hey, if you parrot a mainstream talking point enough times, you might begin to believe it yourself. I would say, to the contrary, that the prominence of the dollar around the world is actually its primary weakness. The fact that we have accrued so much debt, and the fact that there are now trillions in U.S. Treasury Bonds floating around overseas, should not be a comforting thought to anyone. The reality that hundreds of countries and millions of investors blindly expect that we will be able to pay off said liabilities should be terrifying to even the most steeled economist.

All this “demand” for U.S. Treasuries and dollars is predicated on the delusion that such instruments will continue to hold significant value despite erosion in American marketplaces, and that eventually, a recovery will wash away all risk. But what happens when the Dow breaks into a downward spiral at the slightest mention that the Fed will no longer continue QE? Markets are already wobbling under the threat. The theory of recovery will certainly be dashed. What happens if the Federal Reserve announces QE3 to "ease concerns", only to cause fear for the health of the dollar? What happens if the debt ceiling is raised yet again? What happens if it is not raised?

It’s a Catch-22. Regardless of which direction we turn, the “popularity” of the greenback is an expectation we cannot fulfill.

Imagine that you are a loan-shark (for some this might be fun). Now, imagine that you have lent considerable sums of cash to a chronic gambler who claims to be a millionaire. You figure, hey, he’s rich, he’ll be good for it. Suddenly, you discover he’s NOT rich. He’s in debt up to his eyeballs. His luxurious home, expensive cars, extravagant yacht; its all an illusion, a fantasy built upon borrowed money and borrowed time. His IOU’s aren’t worth the paper they are printed on.

You realize with fury, that this guy may never pay you back. So, what do you do? Well, you break his legs, of course! And, perhaps with a bit more gusto than some schmuck you had suspicions about from the beginning.

The analogy is simplistic, but I think you see my point. The U.S. is the fake millionaire, the rest of the world, the loan-shark (believe me, Treasury investors can be just as ruthless when they discover they might never be able to cash in their bonds). Very soon, buyers of U.S. debt will wake up and accept that America will not be able to honor all the loans it has compiled, and that the only foundation we have left to stand is the endless printing of our central bank. At that time, they will “cripple” our economic structure by flooding our system with those same bonds as well as dollars held in Forex Reserves that we allowed to become so prominent. Hyperstagflation, here we come…

For now, we have been saved by the distractions of European debt default, and the simultaneous devaluation of the Euro, among others. The guillotine comes down, though, when the illicit money creation of the U.S. for itself and Europe eclipses the debt instability of the EU, and markets the world over see which way the winds are really blowing. Obviously, you cannot win a tug-of-war when you are pulling for the other team…