How Long Before the Dollar Fails? 43 comments
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"You cannot afford to wait for perfect conditions. Goal setting is often a matter of balancing timing against available resources. Opportunities are easily lost while waiting for perfect conditions."
-- Gary Ryan Blair
I have always made it a policy not to try to time markets, and while my outlook for the dollar is bleak, I don't feel comfortable making an exact prediction about its demise. Having said that, in December -- when the Fed implemented zero-interest-rate-policy and announced its intention to employ quantitative easing -- they galvanized my conviction that the dollar and Treasuries are doomed, and I started building a public case against the United States Government and its ability to sustain its decades-long policies of borrowing and printing. Nevertheless, when I predicted Treasuries would fall, I didn't expect the 30-year bond to gain more than 100 basis points in less than two months! But after that surprise, my time-horizon for the life of the dollar has shrunk considerably. I still think the Fed might try to defend the long end of the yield curve, but every single day, my faith in its ability to maintain low yields wanes, and I increasingly believe things are going to unwind sooner rather than later.
I am not an alarmist, and I used to roll my eyes at people who talked about burying guns, potable water, and canned food in the backyard. But if hyper-inflationary price increases are coming – and I certainly believe they are – buying durable goods now is not only smart, it's necessary. Anything that lasts and provides future utility is going to be a good investment, and if I have a choice of buying a can of beans now for 89 cents, or five years from now for $12, well, it doesn't exactly require a financial calculator to establish how good that rate of return is – even if the things I buy merely keep pace with rising prices as a whole.
A lot of people will call me an alarmist for my previous statement, but it really just boils down to the same questions I've been asking for weeks now: do you believe the United States can continue to borrow at the same pace it has for decades? Do you believe the number of dollars in the system, along with the unprecedented easy credit the Fed is creating, won't lead to runaway price increases? For me it's like Pascal's wager: If I'm wrong, I can always eat canned goods later -- laughing at my miscalculation a little harder with each subsequent forkful of tuna. But if I'm right, my family may be able to weather an extremely nasty storm in relative comfort.
Another thing to remember – something I pointed out in a recent article – is that it is far more important to look at the dollar versus commodities than it is to look at the dollar versus other currencies. Quarter-hour updates on financial news networks discuss the "strength" or "weakness" of the dollar, but this metric is misleading; it is a measure of the dollar against a basket of other currencies, not against commodities. And even the government's gauges of the dollar's efficacy – like CPI – are so misleading and vague that I just don't trust them. In any case, it may be that, as prices begin to rise against the dollar, they may also be rising against other major currencies, and the dollar could show relative strength against those currencies – if it is not falling as fast. Still, copious printing and easy credit will cause prices to rise, and any other assessment of dollar "strength" will be an illusion. In other words, when you're trying to ascertain the value of your currency, don't measure it against the yen, measure it against milk and eggs at your grocery store.
Every presidential administration in the 20th century conspired – wittingly or not -- to destroy our currency. It has been like a subtle cancer – not readily apparent on the outside, but slowly eating away at the body from within. Now, at the zenith of this crisis, just when the government should be tightening credit, strengthening the currency, encouraging saving, cutting taxes, and reducing spending, the Obama Administration is doing just the opposite: it is taxing precious capital, along with the most productive and innovative members of our economy – thereby redistributing wealth to the least productive and innovative members of our economy. It is increasing spending to the tune of $8.5 trillion over the next two years, while encouraging unprecedented printing and easy credit. Our government is relying on the continued generosity of our lenders, namely China and Japan, but I have made cogent arguments that those countries are not likely to continue to support our voracious and insatiable appetite for new capital at current yields – especially capital that will be allocated and invested poorly.
I have said this before, but it warrants repeating: we were a creditor nation in the 1930s, with a massive manufacturing base. Not that I think it was the correct solution, but we borrowed our way out of the Great Depression. Today we are the largest debtor nation on earth, with a relatively small manufacturing base. Jim Rogers claims to be the worst market-timer on earth, and I disagree with him only in that he can't be worse than me. As such, I can't tell you exactly what day the dollar will collapse – or if it will even be that sudden. But one thing is for sure: the cancer has metastasized, and there is no hope of recovery. But my instinct tells me that the sheer lack of vision and acumen in Washington is going to ensure that the failure comes sooner, rather than later.
Disclosures: Paco is long gold, UGL, DXO, and TBT.
Copyright 2009, Paco Ahlgren. All Rights Reserved.
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Philosophically, his view of the world is that consumerism is good, and consumerism is made better by inflation.
His thinking comes from within that box, with it's attendent shortcomings.
At 67 years of age and with being beat up pretty well for most of my mistakes in life, I do not believe that we will get out of this without inflation. That is idealistic.
Hegel's dialectic suggests that there will be an antithesis (inflation) to this thesis(deflation). We will not go to back to synthesis(stability with defl/infl) under control.
If you want to understand Mr. market from a systemic point of view, witrh all its interactions, understand General Systems Theory, by Bertelanfe.
Likely most understand market theory, fewer understand the philosophies that define and set boundaries on market theory.
I vote for an inflation that is as virulent as this deflation...not because I'm an alarmist, but because Bernanke lacks humility and Obama wants to help everyone. Bernanke gives him the supposed option to do that.
We should have let the Bear run in 2002-2003. We didn't because our last Fed Chairman thought like a child...the corporations are good citizens.
We should have let the Bear run in 2008-2008. But we didn't because the Fed Chairman has a thinks like an adolescent.
Long Gold, Silver, Trade Oil daily, Building positions in several mining companies, certain commodities, building positions in equities that will benefit from infrastructure build out and medical information build out. Building positions in Viet Nam. Will be short Treasuries when the time is right.
Don't worry about the tuna fish. Invest with your plan to buy the food you want, and hope for the best.
G
G
On Mar 07 07:03 PM storm999 wrote:
> We don't need the Japanese or the Chinese to buy our debt, the Fed
> can buy it. Monetizing the debt and quantitative easing are euphemisms
> for the same act: a central bank buying its country's sovereign or
> other debt and putting cash into the bank system. The Fed has already
> done this to some degree by taking repoing illiquid bank securities
> (MBS etc.) and Bernanke has said he will do more.
>
> I don't think the U.S. can easily fall into hyperinflation for two
> reasons. The Fed can use reserve requirments and other functions
> to prevent monetary velocity from creeping up. In fact, the Fed's
> balance sheet expanded a couple of trillion over the past six months
> and NY Fed chief Dudley was talking about deflationary pressure yesterday,
> which proves the point. Second, the dollar is the world reserve
> currency, so we have leeway to stabilize our economy no one else
> does. No central bank in the world wants its dollar reserves to
> crash to worthless as food and oil soar in price, so they will support
> the dollar. Add to this we are the world military superpower and
> it is our navies that secure the trade routes, so until some new
> military power emerges the dollar will remain almighty. I don't
> see oil running up to $140 anytime soon (although it would be good
> for my oil stock), so I don't see beans going through the roof.
> I'd like to see some inflation though. That is the goal of all this
> bail out and stimulus spending.
>
Mr. Bernanke needs to be replaced. His management of the Fed and his manipulation of our capital markets have made this downturn worse. Power to manipulate our capital markets in such degree must be addressed. Until we do this, our markets will not function efficiently. Bernanke truly believes in price fixing - not letting banks fail, not letting the housing market find a quick bottom and start to recover. The market should be left alone to settle supply and demand and adjust prices, and not be artificially manipulated by the Fed through damaging policies.
My suggestion for a replacement is John Taylor from Stanford. But in the long run I would like to see the Fed stripped of its powers and interest rates and the money supply become market driven.
Maybe the strength of the dollar has something to do with the military power of the US, as some posters seem to believe, but what does that mean, another war or two ?
If you consider 0% Fed-rate, huge trade-deficit and not forget the budget-deficit, the dollar should be worth much less. Germany for example has either trade surplus as well as a surplus in their budget (except for this year because of massive stimulus ) and the ECB ist still at 1.5%, so can someone explain why the Euro is falling ? What I am trying to say is, there is no common sense at all, I just don't get it.
I think this is where we are now. As the crisis has deepened, the Fed has intervened (interfered) in larger and larger domains. The Fed now literally sits astride the financial system, engaging not in monetary policy but rather in industrial and national fiscal policy. IMO, economically we are now "going for a ride" and we won't be able to get off until the ride stops and the seat restraints are unlocked.
What I am starting (late, I know) to urge people to do is to become politically active, as a means to try to ensure that the "new" system that is put into place to replace the old broken one isn't merely a newer version of corporatism. It is impossible to separate politics from economics. Politics determines who owns what, and how they can use it. The new economic system must be based on respect for private property, and the political system must embody and support that respect. Respect for private property ultimately means I own myself, and I therefore own the products of my labor. Citizens must take steps to return themselves to the status of citizen and not mere "subject".
I intend to make and carry banners reading thus:
Government serves citizens.
Subjects serve government.
On Mar 08 01:03 PM Whitehawk wrote:
> On inflation and the dollar: demand does not have to increase to
> produce inflation - if the offer of goods and services become limited
> and the gov't keeps on printing money then prices can rise.
>
> Mr. Bernanke needs to be replaced. His management of the Fed and
> his manipulation of our capital markets have made this downturn worse.
> Power to manipulate our capital markets in such degree must be addressed.
> Until we do this, our markets will not function efficiently. Bernanke
> truly believes in price fixing - not letting banks fail, not letting
> the housing market find a quick bottom and start to recover. The
> market should be left alone to settle supply and demand and adjust
> prices, and not be artificially manipulated by the Fed through damaging
> policies.
>
> My suggestion for a replacement is John Taylor from Stanford. But
> in the long run I would like to see the Fed stripped of its powers
> and interest rates and the money supply become market driven. <br/>
>
On Mar 07 07:07 PM storm999 wrote:
> Last summer I suddenly stopped getting credit card applications in
> the mail. Since January, I have gotten four or five offers from
> different companies. Also, two of my card companies are sending
> me checks I can write on my credit accounts. I am seeing more aggressive
> marketing in this area (LA, CA). Any of you seeing an uptick in
> credit card apps in the mail?
On Mar 08 02:10 PM petra wrote:
> First of all, ther is no deflation. Second off all there will be
> inflation very soon and as to food it is already there. A 12 pack
> of Coke was at my store 2.99 about 2 years ago, yetserday it was
> 4.49, case closed.
> Maybe the strength of the dollar has something to do with the military
> power of the US, as some posters seem to believe, but what does that
> mean, another war or two ?
> If you consider 0% Fed-rate, huge trade-deficit and not forget the
> budget-deficit, the dollar should be worth much less. Germany for
> example has either trade surplus as well as a surplus in their budget
> (except for this year because of massive stimulus ) and the ECB ist
> still at 1.5%, so can someone explain why the Euro is falling ? What
> I am trying to say is, there is no common sense at all, I just don't
> get it.
I think a looming issue for the future is going to be employment and if it starts to look worse and worse the govt may panic and print money to hire people - very inflationary. Look what they already done with Citibank & AIG - hundreds of billion of dollar, 100's ! Just to two companies.
Currencies these days are not backed by Gold (and never will be again!).They are backed by taxpayers.
The value of a currency is the size of the Government's tax base divided by the number of units on the Fed Balance Sheet.
The tax base is evaporating on a daily basis as Consumer pay less sales tax, Fewer Employees are paying less income tax and Corporate America is struggling to break even,let alone pay tax of profits. At the same time fiscal and monetary policy is expanding the number of dollars in circulation like never before.
Of course the picture is distorted by the fact that foreign investors hold so much. But frankly that can only go one way. Despite what Moody's may say, the risk of default on it loans or debasement of the currency by the US Government is very high. This means that its very strength could become its ultimate weakness. If all those foreigners start to dump dollars that means we are going to swimming in them, and in some case drowning in them!
Great. Thought you were gone for good.
You know how to stir up dissent. Go for it.
At some point in the future, the tide will shift and inflation will restart. Will Governments have the time or willpower to react to this change, if the economies are still anemic?
My own opinion is a resounding No!
What rate of inflation will prove to be acceptable? I do not have a clue, but I do know that the Fed is an Institution created by Congress. It can be dissolved by Congress if it gets in the way of the Future as envisioned by Obama and company.
A Central Bank is not in the Constitution.
What has bothered me the most is the Time Lines involved in getting to the conclusions.
For instance, If I buy cans of food now, at these low prices, what will it cost to store them waiting for hyperinflation to occur, will I be able to eat any of them if it takes 3 or more years for this scenario to occur?
I don't like flat beer.
If Paco and me read the same things than our guess would be to watch the period around the end of July and in October 2009 for some panic in the air causing the first definite signs of inflation.
I would not buy beer either, but canned food in that case could be an idea.....
I go the MRE or Survivalist Pack route. Some of the WW2 MREs are still edible, or so I'm told.
Some of the MREs have heating elements built in, just in case of Power outages.
And definitely buy a couple or more water purifiers, thermal clothing and have Solar Panels installed behind your windows.
Like I said, I have "what if" scenarios myself and have done some investigation into it. Sam's Club has MREs BTW.
Banks might fail to supply enough cash once there is panic in the air and everybody is trying to save as much of their own savings as possible...
Is that too pessimistic?
1. Can we define what "fail" means regarding the dollar. I believe that a dollar value that effectively renders US savings worthless is a good start.
2. Please remember--for your investment decisions--that the state will do everything to preserve the state. And, this is why a lot of Congress--like Barney Frank--are fully invested in government bonds. The state will--thru tax and confiscation--keep bonds alive. You many lose everything, but the order of priority for the state is directly related to what they need for state survival--and this includes keeping FDIC and government pensions alive (your pension/retirement is on its own--but the state will tax you to pay for its pension if you make enough to be taxed). DO NOT underestimate what the state will do to continue the state. No rights--property or civil--are off limits.
3. China oil reserves are now full. Completely full according to reports. Effectively they cannot add any more meaningful amounts of oil. Chinese billions cannot add more oil, don't want to add US treasuries, so what is left (easy answer)?
4. If you are buying guns, ammo and rice, start thinking about how your first (and only) target will most likely have to be the state (police/military). And as for that rice, ask your neighbors to stock up so you don't have to turn them away hungry.
5. The USA experiment has failed and we are now--or will be--socialist France--with a decidedly more aggressive military. This does not mean that capitalism or free markets failed any more than it means "peace" is a failed concept because we have war. The majority of Americans simply are not ready for that type of freedom and a democracy means they won't get it. We will serve as perfect bad examples for some generation in the future.
6. Make sure some of your gold accounts are real, secure, and convertible to whatever currency is in play at the time you need to convert and use funds to get the hell out of Dodge to begin your new life.
I would like some help on TBT. I am based in the UK and pretty bearish on USD and GBP, however I do think GBP will appreciate against USD this year. One particular trade I am interesting is shorting the UST bubble and like the leverage of TBT. The question I have is that to buy TBT, I have to fund in Sterling, therefore if GBP appreciates in the next year this will cause a loss on my TBT position. I could of course swap the FX risk out via a spreadbet or similar, but before I do this I wanted to see what other views / alternatives are available.
Many thanks in advance.