The Dollar Collapse: Is it Coming?

Posted by Ray on October 12, 2009 under Main | Be the First to Comment

The internet is riddled with rumors of the imminent collapse of the US dollar with time frames ranging from hours to months away. Now, there are legitimate concerns over the value of our currency and clearly the only thing that has buoyed its value is the entire globe has printed money on a colossal scale. However, we have certainly done more than most when it comes to printing currency with our super bailouts and mammoth stimulus projects.

The question is when will the dollar collapse? There is no real answer to this question and that is the beauty of free market capitalism. The one thing I can say is this, on the short-term I am probably more bullish than I am bearish on the US dollar simply because everyone and their grandmother is short the USD and if/when US equities head south people will run to the dollar for safety. Proof of this was last year when the markets crashed and we saw the DXY climb to the high 80’s. However, I don’t think we will see that type of rally again if we see the markets tank this time around because the fundamentals are far worse than they were last year and the dollar is far more diluted.

On a longer term basis I am very bearish on the dollar and I believe when we see the Chinese Yuan or RMB float or if we see the IMF SDR issued in greater quantities we could see the US dollar lose its reserve currency status. Those who think that this cannot happen need to learn their history as it happened to the British and many other nations in the past and the US is no different. Given our debt load and the current administration’s willingness to spend money like it’s going out of style, on top of our staggering existing liabilities, we are in serious trouble. Not only has that, but the rebalancing of central banks as of right now proved that they are not comfortable holding vast quantities of US dollars.

The question that remains is whether there will be an orderly or disorderly exit out of the dollar. This is a tough question for anyone to answer and there are a ton of variables to calculate in. For example, we have 2 wars that could escalate and possibly a third with, pick your axis of evil country, we could have another trillion dollar stimulus package, heath care reform could get passed and it could end up adding a trillion a year to the deficit, programmed trading could cause a precipitous drop in the currency and the list goes on. At this point in time I would say it is 51 to 49% in favor of a disorderly drop in the currency versus an orderly drop in the currency. Mainly because Ben thinks he can actually control the devaluation process, which no government in history has ever been able to do.

There is no doubt that this is a scary topic and that we should al be concerned about this issue on a longer term basis. Do I think we need to worry about this happening this month or year? No. However, this could happen within a 12 month period of time very easily, but again, I think it is unlikely. We know that the name of the game is supposed to be a slow devaluation of the currency, but, as I just said, no country has ever been able to actually control the devaluation process and with computerized trading this is more dangerous than ever. A few things need to happen before we see a total failure of the currency and as of right now these events are not happening.

For example, I often talk about the treasury bubble of the late 1970’s when the US suffered from inflation and dollar devaluation. There was a buying spree and a bubble in long-term treasuries and when Volker became the Fed Chairman he was charged with stomping out inflation. He did not know there was a bubble and let the market raise rates for him, which was odd, but it worked. Unfortunately, it basically almost put out of business most of the primary government bond dealers and led to credit controls. What it did was save the currency and stopped inflation cold, along with economic growth.

Many people familiar with that story seem to think we are close to that scenario today, effectively failed treasury auctions, which is not true. We have a long way to go and many more steps to go before that happens, but those steps could come fast and furious. Unlike the late 1970’s the dollar is falling a lot faster now than it did then, but the buying in the treasury market is a lot more fierce now and on the shorter end of the yield curve, unlike then when we saw it on the longer end of the curve. So, we will see what happens, but things move so fast in today’s market anything is possible and this boom bust economy cyclical period is getting shorter and much more severe. The signs are coming for a currency crisis, but not in the immediate future.

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The Fed’s not so Secret Plan

Posted by Ray on October 7, 2009 under Main | Be the First to Comment

A lot is made of the dollar’s value lately, even I make a big deal over it, and we should be concerned, but I believe it is an ego thing more than a reality thing. It is tough to see the most powerful nation in the world currency lose its value, but I actually believe this may be the goal of the Federal Reserve and the current administration. Now bear with my before you tune me out as a lunatic.

We owe a lot of money, mostly in unfunded liabilities, and that number varies wildly between $55T and $77T. Those numbers include Social Security, Medicare and, of course, our National Debt. No matter how we cut it we cannot pay that amount off, even if we raised taxes to the moon, which would stifle growth, and we certainly cannot grow our way out of this mess. The logical way out is to devalue our currency which makes perfect sense, albeit severely painful and extremely unfair to the population.

By devaluing the currency we are essentially inflating our way out of debt which is dishonest at best, but is considered “legitimate” from a political prospective because they are not officially raising taxes. Of course, those Americans who do not prepare by buying things that react to dollar devaluation, i.e. precious metals, will get hurt badly as their savings will be devastated it is probably the only feasible way to save face long-term. Worst of all, we know it is coming as the Fed as all but admitted that this is the plan, as in Ben’s recent Congressional testimony he stated that the declining dollar is not an immediate problem, but a long-term issue.

I am not advocating this method, just saying that it makes logical sense since our political structure lacks a backbone to make tough decisions or face the facts of our situation. Some potential benefits would be improved manufacturing as countries like China, after they freely float their currency, would likely become net importers instead of exporters given their size and growing wealth. The same goes for other BRIC countries as well as they continue to grow. This is all hypothetical at this point in time, but it does look like a reality as the Fed has no real plan on defending the dollar.

One of the major problems with this plan is if the devaluation process goes out of control of the powers that be. Meaning the markets take control and take action prematurely or over devalue the currency. If that were to happen, then the consequences could be severe, but whether it is controlled or uncontrolled it is sure to be ugly for those who are unprepared as we will see actions taken that will be unusual. Such as price controls, which never work, merchants forced to accept dollars and things of that nature. This may be a bit tin foil hat, but there are several people much smarter than I that suggest that the dollar will depreciate by 50% over the next 14 years because, they say, we cannot afford the liabilities we have. They state we can afford some $30T, but not the $55T or so we have to pay for or made promises on.

Based on what the experts have said and what the Chairman has said it is safe to draw your own conclusions, but I believe I am on the right path of dollar devaluation as an official, yet unofficial, policy. It will be ugly, but it may be necessary for America to dig itself out of the hole that we are in. The question you have to ask yourself is how did we get here? The answer is, the politicians you keep electing cycle after cycle is the reason. Until you are willing to face reality and break the cycle of electing the people who got us here we will be doomed to face a future of financial uncertainty.

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