The Dollar's Point of No Return

The US dollar has several forces going against it.

Financial Bailout

In the last 5 months, the Federal Reserve has printed over $1 trillion to buy out soured mortgage assets from private enterprises.

(The cut off for the chart below is October 2008 at $1.5 trillion, today the figure stands at $1.8 trillion )

AMLF: Asset backed commercial paper (ABCP) Money market mutual fund (MMMF) Liquidity Facility

PDCF: Primary Dealer Credit Facility (Expanded Greatly)

AIG: AIG bailout

TAF: Term Auction Facility (Bail out for Banks, and GSE's with bad assets)

To legitimize the process , the Fed puts

• the toxic mortgage notes it bought as "assets", and
  
• the money it created out of thin air and deposited at Goldman's account as "liability."

I am not sure which of this qualifies as "assets". And we are not finished yet as the new banking rescue program from Treasury Secretary Geithner is to be unveiled shortly. I wish I was an institution so I could sell my penny stocks to the Fed for the thousands for which I originally bought them.

Fiscal Stimulus

President Obama's $838 billion stimulus package passed the Senate this week.

The money was not budgeted for the current fiscal year, and the government did not say where it would come from. The country will go on printing money if there is not enough for underfunded municipal projects and entitlement. The regime is surviving by printing money. At this stage there is no other way.

Precarious Treasury Position

Money is regulated by an independent Fed - surely the US government doesn't just print it. Or does it?

Deficit spending came from borrowing by the US treasury. As of February 5, 2009, the total U.S. federal debt was $10.71 trillion, or about $37,703 per capita.

So who is lending the trillions of dollars?

The chart above shows the Fed, its surrogates, and foreign governments now hold 80% of outstanding federal debts. Let's examine those giant category holdings.

Foreign Government Holding:

US banks relentlessly provided credit to US consumers (money out of thin air) and the consumers spent well over $1 trillion on Chinese goods since 2001. The Chinese exporters exchanged the dollars with the bank of China, which in turn bought US treasurys.

Fed and Government Holding:

While Mr. Bernanke and Ivory Tower academics call it "unconventional measures", the Fed's direct purchasing of US Treasurys to fund government spending is in fact no different from Zimbabwe's money printing to pay servants and armies.

Today, only 20% of the US treasury is owned by private enterprises, illustrating the extremely fragile position of US debts, which is the engine of America's growth .

The dollar: In God We Trust

Betting long term on the dollar is suicidal, and timing a short term rebound could be equally hazardous to your health. With the printing press going full force, I wouldn't for one second trust my savings in dollars under the influence of American politicians, much less Chinese technocrats!

The Bank of China doesn't believe in God and the trust in the US dollar may prove to be as misguided as Zimbabweans' trust in their dollar.

Comments

[bricki:]

I'd suggest that anyone reading this start with Edwin Tufte's "Envisioning Quantitative Information" before tackling this article so they can appreciate how this presentation is structured to exaggerate and distort the actual facts.

Feb 12 09:50 AM

[brain:]

I'd suggest that anyone reading this start - and end - with Gibbon's "The History of the Decline & Fall of the Roman Empire" to fully appreciate the "facts" of where the U.S. is ultimately headed.

Welcome to the New Rome.

Feb 12 10:05 AM

[User64738:]

When we're at suggestions, maybe people should watch the Money Masters video about money changers and central banks? www.themoneymasters.co.../

Feb 12 11:03 AM

[ScottyEcono...:]

A few things,

1) Has this guy been watching the news? Look at the charts, the dollar is up and the Pound/Euro are down.

2) Yes the US has been forking out tons of of bailout money and buying up toxic assets, but so has Asia and Europe.

Sorry John Lee, but you must not have been watching the news today on the BOE

Feb 12 11:08 AM

[bdubbu:]

Beam yourself up scotty! We are headed for a single global currency.

Feb 12 12:46 PM

[Even Walser:]

John,

It is important to keep in mind that the vast majority of all new currency issued, has been pushed out to the banks, through the federal reserve loan programs.This liquidity can and will be easily mopped up once the current financial crisis has waned.

Feb 12 12:57 PM

[abhtiw:]

guess what....in the last chart, dollar purchasing power, the dollar went up from 1929-32 by about 25%.


On Feb 12 11:08 AM ScottyEconomist wrote:

> A few things,
>
> 1) Has this guy been watching the news? Look at the charts, the dollar
> is up and the Pound/Euro are down.
>
> 2) Yes the US has been forking out tons of of bailout money and buying
> up toxic assets, but so has Asia and Europe.
>
> Sorry John Lee, but you must not have been watching the news today
> on the BOE

Feb 12 01:51 PM

[optionsgirl:]

good graphic!

Feb 13 09:19 AM

[know nothing:]

The reason for the current monetary policey, is popular demand. Greenspan said in one interview, " There are things we could have done to prevent some of current crisis we are in, but it would not have been very popular" Since when do policy makers care whether they are popular?
Is this how we choose to be goverened? Popular is not always whats best for the patient!

Feb 13 10:07 AM

[Asbytec:]

Is anyone surprised about the last graph? Of course not, it's inflation and reserve banking that gives the graph the downward spiral. Since all nations employ reserve banking and loans at interest, all currencies depreciate over the long term. All fiat currencies fail and all currencies are fiat.

There is much more to the Roman empire than currency issues. Though, I won't argue the point made. We may well be in decline due to economic, social, and political reasons. Hadrian's wall? Well, we were building it on the Mexican boarder.

I agree with Evan, the excess liquidity will be mopped up, hopefully as vigorous as it was injected. Anyway, a lot of money is disappearing into the same thin air whence it came. We may well look back and see another spike like the 1930's in the last graph.

Anyway, welcome back Keynes. Hey, if private sector won't or can't spend someone has to. The consumer, et al, are being pounded hard. So, let's fund the arts and refurbish some schools. (We've let out schools rot and dumbed down ourselves and our kids in them long enough. But, hey, who does science anymore...)

Feb 13 10:16 AM

[kelm:]

Good post with great information.

And what have we seen this week? Multiple communications from multiple Chinese officials all telegraphing growing alarm with our fiscal policies. Similar comments were made by the ECB about a growing lack of confidence in fiat currencies as most governments are running their printing presses full tilt.

I'll be discussing what China is really communicating on my site this weekend.

Feb 13 11:15 AM

[axelrod608:]

We need to change the slogan on our currency. In China we trust. If they ever dump their dollar holdings, the USA will become a great big Zimbabwe.

Feb 13 02:53 PM

[bricki:]

I agree. Anyone who actually knows anything about Roman history realizes that they went through and recovered from several economic crises during the life of the empire.

In fact if you read Gibbon you will find that he blamed the fall of Rome on prosperity of the citizens and their increasing use of foreign recruits and mercenaries in their army, along with an increasing adoption of Christianity that took their interest away from worldly affairs.

Hadrian's wall was constructed in 122, in England. It had nothing to do with the longevity of the Roman Empire.

One popular modern historical view is that the Roman Empire never really collapsed; it merely transformed as Germanic populations became the dominant groups within the Roman Empire and it gradually became the middle age cultures of Europe.

Other ideas include gradual ecological damage, running out of raw materials and deforestation, extinction of many animal species along with numerous and long lasting plagues and crop failures due to salinization of aquifers. Clearly the population of Europe declined greatly from the 2nd to 7th century; the Antonine Plague is estimated to have killed one-half the population of the empire over a 20 year period.

Roman was also completely missing a middle class. Either you were a wealthy citizen or a slave. This made society unstable.

The Roman Empire all-in all lasted 2000 years and withstood many challenges, many much more severe than anything the US has faced. It really is not a good model for predicting what might happen to the US. And a good thing too. It took the world a LONG time to reach the heights Rome did. In the fourth century Rome had a population of 1.3 million. No city on Earth reached that size again until 1850. The Hagria Sophia, Constantine's great church in Constantanople was the largest church on Earth for a thousand years. Trajan's bridge over the Danube was the longest bridge completed in the world for a similar 1000 years.

On Feb 13 10:16 AM Asbytec wrote:

> Is anyone surprised about the last graph? Of course not, it's inflation
> and reserve banking that gives the graph the downward spiral. Since
> all nations employ reserve banking and loans at interest, all currencies
> depreciate over the long term. All fiat currencies fail and all currencies
> are fiat.
>
> There is much more to the Roman empire than currency issues. Though,
> I won't argue the point made. We may well be in decline due to economic,
> social, and political reasons. Hadrian's wall? Well, we were building
> it on the Mexican boarder.
>
> I agree with Evan, the excess liquidity will be mopped up, hopefully
> as vigorous as it was injected. Anyway, a lot of money is disappearing
> into the same thin air whence it came. We may well look back and
> see another spike like the 1930's in the last graph.
>
> Anyway, welcome back Keynes. Hey, if private sector won't or can't
> spend someone has to. The consumer, et al, are being pounded hard.
> So, let's fund the arts and refurbish some schools. (We've let out
> schools rot and dumbed down ourselves and our kids in them long enough.
> But, hey, who does science anymore...)

Feb 16 02:07 PM