Is the U.S. Dollar Headed for a Mighty Crash? Part I 46 comments
-
Font Size:
-
Print
- TweetThis
Each month, the US Treasury publishes its International Capital account (TIC) which foreign currency traders and bond dealers use to gauge the flows of money from around the world, into and out of the US capital markets. The demand for a nation’s bonds and stocks, combined with international trade flows for goods and services, plus behind the scenes intervention by central banks, all act in concert to influence the foreign exchange market which handles $4 trillion per day.
The release of the TIC report often sparks a flurry of trading activity in the foreign exchange market, due to speculators seeking to earn a fast profit. However, the initial knee-jerk reaction to the news headlines, can be very misleading, and often isn’t long-lasting. For instance, the US Dollar Index, measured against a basket of six currencies, defied conventional logic in February, by climbing +2.7% higher, even in the face of a net outflow of $91 billion in the TIC account.
Instead, large off shore traders are influencing exchange rates, and their betting patterns are difficult to discern on the G-20’s radar screens. The finance ministers of the "Group-of-20" (G-20) recognize the growing threat to their control over the currency markets, and are calling for increased regulation of hedge funds and shadow bankers, insisting on full disclosure of their locations and other information to assess the risks they pose to the manipulations of the major central banks.
click to enlarge
The United States has become dangerously dependent upon the whims of foreign investors, to help finance its massive budget deficits, and prevent a surge in long-term interest rates, which would have a devastating impact on the US economy. If bond or currency traders detect that big investors in US government bonds, such as China, Japan, OPEC, Russia, and Brazil, have ceased to buy US Treasury debt, or worse yet, are becoming net sellers, it could spark a sharp slide in US Treasury notes, sending yields sharply higher, and ignite a free-fall in the US dollar.
Last week, the US Treasury tried to reassure bond and currency traders, that foreign investors haven’t abandoned the American debt markets, despite the avalanche of new debt that is swamping the market. The US Treasury claims that China and Japan were net buyers of a combined $48.5-billion of Treasuries in March, and that Moscow was a net buyer of $8.3-billion. Yet the reliability and accuracy of the TIC report should be viewed with a grain of salt, and a healthy dose of suspicion - perhaps the figures were conjured-up under the guise of "mark-to-make-believe" accounting.
President Barack Obama’s stimulus program could boomerang and destabilize on US-economy. No one is asking who will purchase the remaining $1 trillion of US Treasuries to be auctioned by September. Once that colossal amount of paper is bought, who will purchase another $5-trillion of Treasury paper over the next four years, as the US-government plunges deeper into insolvency? The Federal Reserve would be forced to print (monetize) vast quantities of US dollars to pay the principal and interest on the national debt that is not covered by tax revenue.
The US dollar’s surprising strength since last July was largely attributed to "de-leveraging" and "risk-aversion," which are references to the unwinding of "carry trades," in the foreign exchange market. On April 6th, famed hedge-fund trader George Soros remarked, "The US-dollar is not strong because people want to hold the dollar, but it’s strong because people have debt in dollars."
The enormous fortunes of Wall Street’s aristocracy were built-up on the leveraging of debt, including "carry-trades," in order to buy exotic securities built around sub-prime mortgages, and other instruments of financial speculation. But when the global commodity and stock markets began to meltdown following the collapse of Lehman Brothers, carry-traders began massive de-leveraging - the selling risky assets and buying US dollars and Japanese yen, to pay down margin loans.
There was also a stunning contraction in the US trade deficit, narrowing from $62.5-billion in August to $26-billion in February, its lowest level in nine-years, bolstering the greenback. The US current account deficit, which had increased for five straight years, fell to $673 billion in 2008 from $731 billion in 2007. The deficit equaled 4.7% of the overall US economy last year, down from 5.3% in 2007.
But the US dollar’s "risk-aversion" rally came to an abrupt end on March 18th, when the Federal Reserve shocked the markets by announcing that it would unleash its nuclear weapon, "Quantitative Easing" (QE), by printing $1.1-trillion US dollars off its electronic printing press, to monetize US T-Notes and mortgage backed securities, in an all-out effort to prevent a deflationary spiral in the US economy, which in turn, could lead to widespread defaults on debt and bankruptcies.
By pumping vast quantities of US dollars into the global money markets, easily outstripping the money printing operations in England, the Euro-zone, Japan, and Switzerland, the Fed has headed off the prospect of deflation. Instead, the Fed has reawakened the "Commodity Super Cycle," led by the kingpin crude-oil market, which is feeding off a weaker dollar and ultra-low interest rates worldwide. Crude oil rose above $62 per barrel today, from as low as $35 in January.
The Fed has pumped $1-trillion into the banking system since July, increasing the monetary base to a record $1.87 trillion, while pegging the fed funds rate near zero-percent. Super-easy money, beloved by Fed chief Ben "Bubbles" Bernanke, US Treasury chief Tim "Turbo-tax" Geithner, corrupt Washington politicians and Wall Street Oligarchs, is a traditional recipe for an asset bubble. While the rapid expansion of the US-monetary base is buoying the gold market above $900 /oz, other G-20 central banks are also letting the inflation-genie out of its bottle, providing the yellow metal with a huge advantage over government toilet paper.
"Our actions have succeeded in pulling the financial markets and the economy from the edge of the abyss, beating back deflationary pressures, and set the stage for a recovery," declared Dallas Fed chief Richard Fisher on April 15th. Fisher argues the US economy’s low capacity utilization rate, near 69%, would keep inflationary pressures under wraps. "It is doubtful that inflation will raise its ugly head until employment picks-up and capacity utilization tightens," he said.
Higher inflation down the road means the Fed must at some point, break its addiction to easy money, and dismantle the QE framework, which has flooded the money markets with hundreds of billions of dollars. "Nobody I know on the FOMC wants to maintain our current posture for any longer and to any greater degree than is minimally necessary to restore the efficacy of the credit markets and buttress economic recovery without inflationary consequences," Fisher said.
The FOMC "can ill afford to be perceived as monetizing that debt, lest we come to be viewed as an agent of inflation, rather than an independent guardian against future inflation," the Fed’s propaganda artist said. Typically however, Fed officials continue to keep the printing presses rolling at full-speed, long after inflation has already reared its ugly head, and hyper-inflationary psychology becomes deeply embedded within the minds of commodity traders and the public at large.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 46 comments:
However, suppose in a couple of years China, Russia ,some others after accumulating hundreds of billions of dollars in commodities(ores, industrial and precious metals, uranium, coal, oil , even soy beans and grain depending on the country involved) decide to start selling US debt, creating a a formidable bear market in Treasuries and agency debt. Would they not make the calculation that a bear market in US /Agencydebt would mean spiking yields and inflation, leading to a huge and almost frantic global flight to commodities. The resulting surge in commodity prices would result in spectacular inventory gains for these countries which would mitigate even if not completly offset the capital loss on their US govt debt. The relatively small net loss may be a price worth paying.
The truly dangerous time for the US, i think, is not 2009, but a couple of years out when China et. al have put in place the coomodity reserve basis for a strategic exit from US govt debt. This is just a scenario but one that should not be dismissed without some reflection.
Sadly ,even if we in the USA knew with high assurance that this "strategic switch" was being contemplated by China et. al there is nothing we would do to prevent it. Such is the tragedy of debt addiction and loss of national will. Instant gratification and denial have now become the walls and bars of self made prison.
Let us hope the Chinese, et. al lack the analytical sophistication and execution capacity to successfully engineer the strategic switch.
continual discredit to commodities- metals in specific- are thrown out after sifting through this piece. the USD is on its last leg even with the military "super power" status that the US thinks it enjoys. many people get lost in the minutia of the TIC but here there is a clear explanation to its relevance
much appreciated
Anyone paying attention sees the handwriting on the wall. It's not a matter of belief. It's a matter of looking at the facts.
However, when cash rich countries have accumulated enough gold they may not care what happens as their currency losses will be made up by an upward revaluation of gold. As the currency of last resort a good stockpile will see them through any currency crisis.
It makes good sense for the individual to own the hard stuff as well. With an ETF you may get repaid in paper.
On May 21 11:32 AM User 353732 wrote:
>
> Let us hope the Chinese, et. al lack the analytical sophistication
> and execution capacity to successfully engineer the strategic switch.
>
The Chinese plan in generational terms. In other words they want what will be good for their grandchildren, not as here in the West where long term planning is deciding what will be served for dinner Sunday! Also the Chinese practice patience, they have had thousands of years of practice at that!
On May 21 12:19 PM User 417846 wrote:
> The reason for short sightedness is something know as the short-sightedness
> effect. Since politicians are up for election every 2 or 4 or 6 years,
> they tend to look no further ahead than the next election. This form
> of government is detrimental to long term planning. The Chinese have
> an edge on us here.........
Convert the US from a prominent industrial economy into a team player with all of the loose cannons on the world stage. We are now in the latter stages of a dive to parity with such civilizations as the UK, France, Venezuela , Argentina and the UN OECD WTO socialist rules of equality. WOW is right Obama took us, but good.
Check out the latest consequence of their antics. Chinese counterfeit malaria drugs killing people and creating a "superbug" parasite.
www.bloomberg.com/apps...
Tell me where are the lawsuits? If a US company produced lead painted toys, they would be destroyed. Heck the EU grabbed serious money from MSFT and Intel for much less of an offense.
Timothy Geithner - "Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade."
Pimco's Bill Gross: "U.S. eventually will lose its AAA grade. "
Strength of currency is dependent on credibility of the US Govt. and its policies. US has abused its power as issuer of reserve currency - world feels deeply cheated. Japanese Yen has appreciated from 300 Yen/$ to now 100Y/$ over last 20/25 years, how do Japanese feel. Same with China now - Yuan had to appreciate 20% in last 2/3 years. So our trade partners keep losing money by holding $s. They would realize the folly and engineer an exit - will not happen overnight, but China definitely is taking definite steps towards that.
Creditor nation’s currency are sought – that is how Britain gained and then lost its position, and now US too will.
Which brings me to the next part, how can Geithner say he believes in a strong policy the same day he dumps another $7.5 billion dollars of our money to GMAC so that hey can unfairly offer lower interest rate loans to customers. Isn't this punishing the good guy, Ford, for not being under the Fed and Treasury's thumb? Absolutely. I believe that the past and current Fed and Treasury are nothing but two bit tyrrants. Their actions are those of power mongers who wish to control the economy rather than let it operate efficiently simply because it doesn't insure their political agenda of either staying in power or lining their own pockets.
This is the main reason the dollar will inetitably keep sliding. They would rather hold on to power as long as possible and see hyper inflation or stagflation than risk loosing their appointment and reighning in the printing presses and dealing with the here and now (a very nasty hangover from Greenspan, Bush Jr. and company).
Thanks for the article Gary Dorsch.
If that's your country, would you be smarter to survival ?
USA was like that from the beginning, fighting for survival.
As Ross Perot once said, not one Dynasty or Culture lasted over 200 years base on human history. Usually changed for the worse and down the hill or disappeared. Agree or not, that's the FACT.
arabianmoney.net/2009/.../
what are we going to hold on china yuan or the super strong euro,i know there are no problems with euro zone banks
And I dont mean create protectionist laws. Just don't buy Chinese goods!
Wishful thinking I guess!
Find a local barter group and start earning credit with you local business people. If your goods and services are not denominated in dollars then when the big slide happens you will still be able to afford an oil change. Google "local currencies".
You are right in a way.
Did you ever try to find out why there are less and less "Made in USA"
products at many stores ?
Just like GM, the Uions killed most of the Big American industries.
They are slowly killing Boeing now, can you see that ?
20 years from now Boeing maybe history. And you will have to fly in a jet made in China or France. Too bad, isn't it ?
And who would be the biggest losers in such an event? The same sovereign wealth funds that have stockpiled Treasuries. I don't think they are that eager to shoot themselves in the foot.
On May 21 11:32 AM User 353732 wrote:
> It is an article of faith amongst currency and govt. debt analysts
> that China , Russia , others, will not risk the loss of prinicipal
> by refusing to buy further US govt debt much less selling some existing
> holdings.
> However, suppose in a couple of years China, Russia ,some others
> after accumulating hundreds of billions of dollars in commodities(ores,
> industrial and precious metals, uranium, coal, oil , even soy beans
> and grain depending on the country involved) decide to start selling
> US debt, creating a a formidable bear market in Treasuries and agency
> debt. Would they not make the calculation that a bear market in US
> /Agencydebt would mean spiking yields and inflation, leading to a
> huge and almost frantic global flight to commodities. The resulting
> surge in commodity prices would result in spectacular inventory gains
> for these countries which would mitigate even if not completly offset
> the capital loss on their US govt debt. The relatively small net
> loss may be a price worth paying.
> The truly dangerous time for the US, i think, is not 2009, but a
> couple of years out when China et. al have put in place the coomodity
> reserve basis for a strategic exit from US govt debt. This is just
> a scenario but one that should not be dismissed without some reflection.
>
> Sadly ,even if we in the USA knew with high assurance that this "strategic
> switch" was being contemplated by China et. al there is nothing we
> would do to prevent it. Such is the tragedy of debt addiction and
> loss of national will. Instant gratification and denial have now
> become the walls and bars of self made prison.
>
> Let us hope the Chinese, et. al lack the analytical sophistication
> and execution capacity to successfully engineer the strategic switch.
>
On May 21 12:51 PM Donald Ingram wrote:
> You are correct.
>
> The Chinese plan in generational terms. In other words they want
> what will be good for their grandchildren, not as here in the West
> where long term planning is deciding what will be served for dinner
> Sunday! Also the Chinese practice patience, they have had thousands
> of years of practice at that!
>
> On May 21 12:19 PM User 417846 wrote:
Yes, union work rules are notoriously inefficient in UAW plants and were a contributing cause just like the others listed above. But there are so many, many factors that led to the demise of the Big Three that it is silly to try and claim that it was the Uions that killed the American auto industry.
BTW, FACT: the U.S. actually manufactures more goods today (measured in real dollar value of manufactured goods produced) than we did 30 years ago.
On May 22 03:21 AM PeteK wrote:
> Gold Barron;
> You are right in a way.
> Did you ever try to find out why there are less and less "Made in
> USA"
> products at many stores ?
> Just like GM, the Uions killed most of the Big American industries.
>
> They are slowly killing Boeing now, can you see that ?
> 20 years from now Boeing maybe history. And you will have to fly
> in a jet made in China or France. Too bad, isn't it ?
On the other hand the US has control over OIL, this commodity is consumed and can be easily manipulated by the US to price from $20 to $200. The world economy will be paying US$ for it (except for the US who gets it for cheap).
For every barrel of oil that comes out from the ground the US can print dollars without a sweat. As long as people around the world work hard to earn dollars the treasury can print dollars without a sweat. As long and most commodities are prices in US$ the treasury ……...it is a matter of faith, and faith is not easy to remove. You need to invent a new faith before you can change all of that, and presently the US has might to keep us worshiping the US$.
Don't under estimate the US economy or US might. China and all other countries need the US and not the other way around. Only the US can close its borders and survive, they have the best technology, the best brains, the hardest working people, best democracy and the rule of LAW, these are the fundamentals that will keep the US ahead of all other economies.
On May 21 11:38 AM GMiki1 wrote:
> The Chinese are much more sophisticated than we are. They think in
> terms of decades in the future. Long-term planning in Washington
> is said to be two weeks. The Chinese have been buying gold since
> 2003 and only a month or so ago revealed this truth--in order to
> warn the U.S. about its dollar policies.
>
> Anyone paying attention sees the handwriting on the wall. It's not
> a matter of belief. It's a matter of looking at the facts.
You don't even have to ask the Chinese who are one of the largest US bond holders. Everyone I talk to are asking how is the US paying for all the money they are spending. In fact the chinese do not want the dollar to fall as they will be one of the largest looser. Did you not read the speech from the chinese premier about a month ago and Obama had to reassure that the dollar is sound.
On May 21 11:32 AM User 353732 wrote:
> It is an article of faith amongst currency and govt. debt analysts
> that China , Russia , others, will not risk the loss of prinicipal
> by refusing to buy further US govt debt much less selling some existing
> holdings.
> However, suppose in a couple of years China, Russia ,some others
> after accumulating hundreds of billions of dollars in commodities(ores,
> industrial and precious metals, uranium, coal, oil , even soy beans
> and grain depending on the country involved) decide to start selling
> US debt, creating a a formidable bear market in Treasuries and agency
> debt. Would they not make the calculation that a bear market in US
> /Agencydebt would mean spiking yields and inflation, leading to a
> huge and almost frantic global flight to commodities. The resulting
> surge in commodity prices would result in spectacular inventory gains
> for these countries which would mitigate even if not completly offset
> the capital loss on their US govt debt. The relatively small net
> loss may be a price worth paying.
> The truly dangerous time for the US, i think, is not 2009, but a
> couple of years out when China et. al have put in place the coomodity
> reserve basis for a strategic exit from US govt debt. This is just
> a scenario but one that should not be dismissed without some reflection.
>
> Sadly ,even if we in the USA knew with high assurance that this "strategic
> switch" was being contemplated by China et. al there is nothing we
> would do to prevent it. Such is the tragedy of debt addiction and
> loss of national will. Instant gratification and denial have now
> become the walls and bars of self made prison.
>
> Let us hope the Chinese, et. al lack the analytical sophistication
> and execution capacity to successfully engineer the strategic switch.
>
On May 21 08:02 PM nmelendez wrote:
> BTW since the world has evolved to the same level as the US, where's
> other countries stealth technology? i mean China's stealth bomber/fighter.
On May 21 12:51 PM User 357705 wrote:
> Oops! Too late!
>
On May 21 03:37 PM nun wrote:
> Explain to me again why the US ever got into protected trade agreements
> with a totalitarian government like China. The US escorted them into
> the WTO with absolutely no conditions whatsoever. China has no qualms
> about stealing patented products, processes, intellectual property,
> pharmaceutical products, blocking US competition within China. What
> would the trade balance be like without this theft and fixed FX?
> Maybe "slightly" better?
>
> Check out the latest consequence of their antics. Chinese counterfeit
> malaria drugs killing people and creating a "superbug" parasite.
>
> www.bloomberg.com/apps...;sid=a8mn5QnniG9Y&...
>
>
> Tell me where are the lawsuits? If a US company produced lead painted
> toys, they would be destroyed. Heck the EU grabbed serious money
> from MSFT and Intel for much less of an offense.
Interent is universal, a martian can surf if it wants to.
Don't be silly.
That someone you are thinking could be a 90 year old Yankee.
A group did a survey months ago asking people 60-years old or older
concerning the fall of the automakers. The result was that over 80% blamed the unions ( sorry for uions, old age, you know) and the rest
blamed the management/gov. etc etc. The reason to ask older folks because young people may not heard of all the "STRIKES" carried out by the workers against the employers all the time until they got what they wanted. In fact, the workers are the BOSS .
A business can only give so much.
Try to ask some older folks yourself, and see how they response.
Hey Pete:
Surveys only reveal the prejudices of the surveyed.
My family is from Detroit and includes both UAW workers (my parents gen, long ago retired) and engineers (my gen, now being forced into retirement). I've heard the horror stories from both points of view my whole life. GM and Chrysler are two incredibly mismanaged companies. And having heard both sides for years, I know that there is plenty of blame to be shared by all of the parties involved.
Oh, BTW, while we are talking about old folks, maybe you should ask people who are in their 80s and 90s why there are unions in the first place.
On May 23 11:15 AM PeteK wrote:
> Skjellifetti;
> A group did a survey months ago asking people 60-years old or older
>
> concerning the fall of the automakers. The result was that over
> 80% blamed the unions ( sorry for uions, old age, you know) and the
> rest
> blamed the management/gov. etc etc. The reason to ask older folks
> because young people may not heard of all the "STRIKES" carried out
> by the workers against the employers all the time until they got
> what they wanted. In fact, the workers are the BOSS .
> A business can only give so much.
> Try to ask some older folks yourself, and see how they response.
>
On May 21 08:02 PM nmelendez wrote:
> BTW since the world has evolved to the same level as the US, where's
> other countries stealth technology? i mean China's stealth bomber/fighter.
The cause and consequence of the trade deficit (and need for its external funding) are interrelated. If China/nations with a net surplus did not fund the US, they would not run a surplus in the first place (at least until the US share of global trade drops dramatically and cross-trade between these nations and/or their domestic consumption increases) and secondly, the US will have to fund its fiscal deficits domestically. The question is: is there an alternative to the dollar for these nations?
It is likely that all fiat currencies may become weaker as nations race to the bottom to protect their share of global trade. In other words, a global inflationary environment. However, to look for the signs in rising commodities prices would be dangerous. Yes, China is stockpiling commodities. But unless it changes the export-oriented nature of its economy drastically, to whom will it sell its products (for which it is stockpiling the raw materials)? To the possesors of a devalued $, who will suddenly find themselves living a more frugal life and decide they can buying a lot fewer Chinese-made appliances and clothes funneled through the Walmart sales outlets?
The fiscal deficit run by the US is indeed concerning -- not so much for the impact on the value of the dollar, but for its potential to crowd out private investment. Public borrowing is taking up an increasing share of savings (domestic or foreign). It might be a band-aid to the current crisis but it is going to slow growth (or worse, if the financial lubricants to the economy get zombified) over the long run. Furthermore, these are promises that need to be paid back out of future consumption (which is constrained by this slower growth trajectory to begin with). That to me is the real danger.
Your response is well taken.
For the past many many years, GM almost could represent America.
GM was well known world-wide and was the "Pride" of USA.
It is sad to see it comes to this.
There are enough to blame all around.
But right now we all wish GM can stay and be famous again for the next 100 years or more. Thank You.
On the other hand, if the dollar crashes, there really won't be any need to prop up all that other crap.
More of the same coming this week ahead - looks inevitable.
theburningplatform.com...
Bert
On May 21 08:01 PM nmelendez wrote:
> So now the US dollar is at .3. Do you think we will be buying from
> China? Or do you think we will be selling to China? And here i thought
> China wanted their people to have jobs. What am i missing?