The Great Dollar Pump of 2008: A Doomed Central Bank Intervention

If you are a holder of Powershares dollar bearish fund (UDN), gold (GLD) or silver (SLV), you’ve been taking a beating since late July/early August, as the dollar has powered forward, against all odds, in a bewildering climb against virtually all other currencies. In the past few weeks, after having been on a downward trajectory for years, the dollar suddenly appreciated against the euro, pound sterling, yen, ruble, rupee and almost every other world currency. On September 4, 2008, the U.S. dollar index rose an incredible 48 cents, while the DOW fell by 344 points!

How can the dollar be rising, in the face of overwhelmingly negative fundamentals? Big bank “analysts” are telling us the dollar is going up because Europe is following the U.S.A. into recession. But, this proposition is ridiculous. No other nation has been as adversely affected by the credit crisis than America, where the mess began. Ok, maybe the U.K. also. It shares our language, and most of the big Wall Street players are deeply enmeshed with players on High Street. The Bank of England does somersaults for High Street just as the Federal Reserve does for Wall Street. Both nations have essentially followed an identical path to economic implosion. This is not true of continental Europe, however.

Europe’s economy is weaker, yes. The rise in the euro’s value has hurt exports. However, the vast majority of economists agree that the ECB will not reduce interest rates until the second half of 2009. That’s a long time from now. A lot can happen between then and now. The US economy, in contrast, continues to worsen, day after day, even after the Fed dramatically lowered rates. The cuts have not worked. The U.S. overnight loan rate is less than half that of the ECB – fully 225 basis points lower. The USA has a $750 billion per year current account deficit, and it continues to rise. It has huge federal and state budget deficits. Americans save less and spend more than any other people on earth. The US economy has been hollowed out, after years of transferring vital industries to Asia. Europe, by contrast, has just begun the process of outsourcing its industry. The rising dollar has renewed the habit of importing excessive quantities of goods, because it makes foreign products cheaper for Americans. It is now very likely that the one bright spot in the U.S. economy, manufacturing for export, has been torpedoed.

The American banking system is under more stress than any other. U.S. banks are tottering, and several could fail at any moment. The Federal Reserve is favoring certain financial institutions and individuals over others, and committing taxpayer money to bailing out incompetent managements. The Fed has already polluted its balance sheets with $450 billion dollars worth of highly default prone mortgage backed trash given to it by favored institutions. This trash now amounts to almost half of the Fed’s balance sheet. The Fed’s balance sheet is the one that is supposed to back the U.S. dollar.

Remember, the real name of the dollar is “U.S. Federal Reserve Note.” That is printed across the top of every one of them. Legislation has been passed in Congress that will make things much worse. The American taxpayer is now on the hook to absorb hundreds of billions of dollars worth of likely defaults in Fannie Mae and Freddie Mac mortgages. Meanwhile, extremely overpaid executives have either already absorbed or frittered away prior profits. In short, America is riddled with a system of crony capitalism.

In the face of these fundamentals, the U.S. dollar has paradoxically appreciated against the euro, ruble, rupee, yen, real, Singapore dollar and almost all other currencies. How can this happen? Look past the double-speak, and the answer will be staring you in the face. First, we should note that the U.S. government has given its blessing to China when it enacted new currency controls, “forcing its commercial banks to build up large dollar reserves, using them as arms-length proxies in a renewed campaign of exchange rate intervention” [see here].

Previously, the Bush Administration screamed about such things, but, not now. We haven’t heard one sound, coming from the Bushies, about China’s renewed currency interventions. There’s an election happening, and the Republican candidate needs a highly valued dollars. They are financial morphine, allowing the import of cheaper goods, including clothing, toys and gasoline. While China has been forcing its commercial banks to hold more dollars, there has also been huge buying, by foreign central banks, of American treasury bills. In August, the increase in Treasury bill buying far exceeded that which is needed, to offset the huge U.S. trade deficit. The Treasury bill buying happened right before the value of the U.S. dollar started surging. See here [PDF file]. Aside from China’s currency interventions, and the heavy sale of new treasury bills helped. But, far more powerful forces have now come into play.

In March, a group of central banks planned a huge and coordinated currency intervention to buy dollars, in the world currency markets, to support the U.S. dollar [see here]. They have now started to act on their plans. To kick off the dollar intervention, the U.S. Exchange rate stabilization fund [ESF] sold about 6 billion euros in late June (see here). Where did the euros go? In my opinion, they were placed with three primary dealer banks, for the purpose of buying dollar derivatives.

Ah, you protest? 6 billion euros? A “drop in the bucket”? Worldwide currency markets involve the trading of trillions of dollars, not billions? The Europeans could print enough euros to absorb trillions of U.S. dollars, but not the U.S.A.? You are right on all counts. However, you are still wrong. It is true that the U.S. Treasury doesn’t control the euro printing press. It is also true that, if the ECB printed enough euros to soak up trillions of dollars, worldwide inflation would run wild. It is also true that 6 billion euros, when viewed alone, are nothing but a drop in the bucket. However, you’ve missed one thing.

One of the primary reasons so many “trillions” of dollars are floating about, in the so-called “currency markets” is because a lot of those dollars are “nominal” dollars. They are electronic, not real, and they are created by banks, not directly by the Federal Reserve. Trillions of “nominal” dollars are created, every day, in the form of agreements between banks. This is the nature of fractional banking, and, particular, it is the nature of derivative writing.

By using derivatives, a few billion euros, can be multiplied to exercise temporary control over trillions of dollars. If you remove a trillion dollars or so, from trader control, and take them out of the mix, the value of the U.S. dollar can be pumped up very easily. The most important first step is to take out the dollar short sellers by attacking their stop loss positions.

Prior to the intervention, most major American, European and Asian institutions held short positions in the dollar. In order to kick off the dollar intervention, they needed a substantial initial pump. Later, it becomes easier. The first pump will be used to massively drain dollars from the world system, in order to forcibly raise its cross-currency value, above the first big stop loss point. These stop loss points are well known to the Fed’s primary dealers, because they are fully enmeshed in the fabric of the worldwide trading system. Once the value was forced to the first major stop loss point, a massive covering of shorts positions began. Short after short scrambled for cover in the biggest short squeeze in history. The short position in the dollar was so enormous, up until mid-July, that, after that first stop loss point was taken down, only minimal additional effort was needed to attack the next ones. With a little added pressure, stop loss after stop loss can be demolished, and short sellers will run scared, desperately buying dollars, wherever they can, trying their best to cover what appear to be impending catastrophic losses.

At some point, the dollar gained a momentum of its own. People who were previously short, and “stopped out”, decided that the wind was blowing in favor of the dollar. These opportunistic fellows converted their funds to go long on the dollar and short on euros, yen, and whatever. We are in the midst of this reversal right now, after the major part of the intervention has run its course. The powers-that-be are still intervening, to some extent, but they don’t need to use as much force, and have probably unloaded a lot of the long contracts already, at either a profit, or, at worst, a very small loss. The rest of the money will be returned to the ESF, and, probably, to the ECB, which probably participated.

In my article, published September 4, 2008 titled Precious Metals Manipulation: Lawyers Prepare for Battle, I noted that 3 banks seem responsible for torpedoing the precious metals market, by writing a huge short position in gold and silver, immediately prior to the surge in the U.S. dollar. Some or, probably, all of those banks may have worked with the U.S. government in issuing dollar devouring derivatives.

The CME and NYMEX are huge derivatives markets, but they do not compare in size to the unregulated “dark pools” which are inter-institutional OTC forwards markets. Derivatives purchased by the ESF were probably obtained on the OTC derivatives market, rather than any regulated exchange. This insured that the entire process was secret, and few or no public records were kept, except the fact that the ESF sold 6 billion euros.

Using derivatives to temporarily remove large amounts of currency from circulation, temporarily, will manifest itself as a false reading on the M3 money supply, and that is exactly what we’ve seen, in some surveys this August. The reading is misleading. The money is only temporarily out of the system. It will shortly return, if it hasn’t already, to generate inflation. Innocent third parties will suffer a few billion worth of losses on the instruments, as the dollar falls back down in value. The third parties, of course, are unaware of the shenanigans, and they have bought control over the derivatives as part of either a hedge against other bets, or in the expectation that the dollar will be stable or will continue going up. When the dollar starts going down, again, they will be forced to sell them back to the writers, at a loss, and the episode will be closed. The consortium of writing banks will be richer, the U.S. ESF will get most of its investment back, and, the third party financial institutions will take losses, but they won’t know why, so, who cares about them, right?

The end game is a hope, on the part of the central banks that, in a matter of a few months, market psychology can be materially altered. Losses to the innocent third parties is considered inevitable “fallout” of war – something like friendly fire and collateral damage in real war. This mentality is fundamentally flawed. The lessons taught by Adam Smith, in his Wealth of Nations, are ignored, in favor of a type of financial “fascism”. Central bankers are essentially copying the type of bankrupt micro-management that caused the downfall of the former Soviet Union. The IMF, and these same central bankers have often condemned emerging market countries, like Venezuela, Argentina and India, for practicing the same type of financial fascism, and rightfully so. Yet, now, they are involved in it too.

Back in 2000, central bankers engaged in an intervention to save the euro, but they had more assets at that time to work with. The newly born euro was collapsing because of the irrational fears of a population that was about to lose money they were familiar with – well known national currencies, like the franc, lira, peseta and mark. Central bankers from the G7 intervened and heavily propped up the euro. That intervention changed the psychology, and was so successful that, subsequently, the euro embarked on an upward trajectory that lasted for years. In fact, the upward euro movement didn’t stop until the recent massive dollar intervention. Clearly, they are hoping for the same result, now. This intervention, however, in the long run, is doomed. Unlike the euro, the U.S. dollar is not the subject of irrational fear. All fears about the dollar are entirely rational and correct. In fact, not being fearful about the dollar’s future is irrational. Indeed, it is very probable that there was an earlier stealth dollar intervention back in 2005. The effect lasted a long time, but not forever. But, in 2005, we did not have the currency crisis on our hands. Nor did we face the prospect of massive bank failures.

To illustrate the availability of derivatives that could be purchased with 6 billion euros or less, here is the most recent statistical table, published by the Bank of International Settlements, in Switzerland, which shows that, at the end of 2007, over $14 trillion nominal dollars worth of currency swaps were available to carry out the intervention. As you can see, it would be easy to take a trillion or so dollars temporarily out of circulation by using locking up just a small portion of these derivatives with the 6 trillion euros sold by the U.S. ESF.

click to enlarge

So, now you have a burning question. If big shot central bankers are supporting the dollar, why shouldn’t you get in on the fun? You are probably a bit too late for the party. If you get in, now, you’ll stand a very good chance of losing money, unless it is a day or hour by hour play. Buying dollars might have been a good short term play in mid-July. But, it isn’t anymore. The hope of the central bankers, that anti-dollar sentiment can be changed in the long term, through concerted currency intervention, is a foolish one. We would all love it if the dollar were a sound, well managed, currency that we could rely on.

But, no amount of playing with derivatives will change that simple fact of life. The dollar’s fundamentals are terrible. The fall of the dollar is a rational reaction to a massively mismanaged paper currency that has no inherent value, and is no longer linked to anything that does have value. When currency intervention ends, people will want out of the dollar, again, for the same reasons as before. The dollar surge will come to an abrupt halt when all the derivatives are sold back to the writers. At this point, most of them probably are, already, or soon will be. Left on its own, the dollar will tank.

While private manipulation of the gold market is a felony, government intervention in worldwide currency markets, unfortunately, is perfectly legal. Though it contradicts basic principles of capitalism, it is considered a “sovereign right”. Nevertheless, the impending nationalization of Freddie Mac and Fannie Mae will add about $6 trillion to the Federal deficit. If we are lucky, the loss rate from defaults on GSE related bonds will not exceed 4-8% overall. The U.S. government, therefore, will be forced to print from $250 - $500 billion new dollars to offset losses in the next 2-3 years.

As you know, from a glance at the table of derivatives supplied by the BIS, this means tens of trillions of new nominal dollars will be floating about. In addition, it is very likely that a few hundred billion more dollars will need to be printed to bail out the FDIC insurance fund, as noted in my previous writings, with similar end results, due to fractional banking principles. In short, the nominal U.S. dollar money supply is about to increase by exponential amounts, which will inevitably lead to incredible levels of inflation. According to the calculations of economist, Nouriel Roubini, from $1 to about $2 trillion worth of “value” (prior production of goods and services) will be have been removed from the system, by the people who eventually default.

In other words, the subprime borrowers, ARM mortgagees, and the others who don’t pay their bills as promised, will not be doing the nominal “work”, within the economy, that they “promised” to do, in order to compensate for the huge benefit they took, prior to filing bankruptcy or otherwise defaulting on debt. This must result in a severe recession even though the price of everything will be rising, at the same time, from the shortages that result. It is a mathematical relationship that we can try to hide through Orwellian double-speak, as our government is keen on doing, but, in truth, there is just no way out.

Prior to the credit crisis, the Federal Reserve balance sheet amounted to about $940 billion worth of treasury bills. This was the fundamental support for the “Federal Reserve Note” that we affectionately talk about as the U.S. dollar. That is also now polluted with about $450 billion worth of default prone mortgage backed securities, thanks to efforts to bail out big banks from their business mistakes. This leaves the U.S. dollar with less than $500 billion in solid support. Of course, with each additional new Treasury bill that Congress is forced to issue, to support printing more money, the remaining “solid support” becomes more shaky.

In other words, let us not delude ourselves. The U.S. dollar is a medium and long term sell, with capital letters, not a buy.

Comments

[Brian A. Davis:]

More than likely an accurate assessment. However, I believe this charade will continue as long as:
1. The U.S. government appears to support all government and quasi-government institutions...FDIC etc. (Pledged by the Full Faith of the U.S. Govt.)

2. Foreign Bond holders are happy receiving returns that for all intensive purposes are worth less the money invested.

3. G8 continues to pump the dollar...

But I would tend to agree with your long-term assessment

2008 Sep 07 03:45 PM

[Philly Jim:]

The economic environment is more attractive in the United States than any other nation and the rest of the world is not doing as well as the media & hedge funds would have you believe. The Germans are the only drivers of EZ economy and they are getting fed up with being a part of the E.U.. As for Asia, you can still buy kids wholesale in throughout the region, women are a commodity and despite their adaptation of the iphone and skyscraper, don't kid yourself, they will never be America - and the financial crisis has barely begun in Asia, they are still selling the idea of credit and when those debts are called in, the ceiling is gonna fall in on that region of the world; the only money supporting them has been burned up by subsidies and speculative smart money investors have figured this out, just check out the outflows - the rest will be stuck on the squat toilet.

There's no place like home, no place like the U.S.A.. Even the idea of hedging that bet with commodities is subject to extreme volatility. The dollar should fundamentally be inverted to the pound, loonie, aussie, etc... but because they are an allies and we need them to be strong, their currency and economy are allowed to inject with financial steroids every now and then. Stay with the dollar long-term, ride the speculative waves but in the end, you know where it is safest.

2008 Sep 07 03:57 PM

[Errol:]

Its funny that people can not conceive a financial disaster happening here, but if you think that the dollar is not in trouble you are delusional. Central Banks have collapsed many times in the past 100 years at it is not unlikely that this one will not. True the dollar has the backing of the U.S. government but with our spending spiraling out of control, savings being depleted if not negative and transfer of wealth in the form paying insanely high prices for oil because our government is too stupid to realize the importance of a true energy PLAN in which you can not create a new infrastructure that has been based on fossil fuels overnight, the dollar will continue to decline in the long term. This dramatic rise will only show how piss poor an economy based on massive credit extensions and spending truely is when the dollar begins to falter and then fall.

2008 Sep 07 05:28 PM

[ZgartZ:]

Elsewhere on Seeking Alpha I posted a comment "Unintended Consequences" and I could write another here. Mr. Conrad is bang on and all we have to do is look back to 1971 and 1973 when the US dollar was revalued twice. It will happen again as an unintended consequence of all these bailouts.
Central banks that are supporting the $US charade have to do so by expanding their own money supplies. The consequence? Inflation in their own backyards.

2008 Sep 07 10:59 PM

[MarvinMBA:]

I predict that the FNMA and FMAC bailout will be the bottom of the housing bubble. This is just what we need to start getting our financial
house in order. Its also obvious that investing in US Mortgage Instruments from the above institutions are going desirable...looking for the Dollar to continue its rise as the rest of the world rushes to bail us out because in the long run we have the best investment paper.

2008 Sep 08 12:40 AM

[Philman:]

User 118015, are you joking! Are you a believer in socialism?

This takeover is an unmitigated disaster, proving that the credit crisis is far from over. The U.S. government will be forced to print up to $500 billion, as noted by James Conrad. That is extremely inflationary.

Do you believe that Soviet style communism is an efficient way of handling the economy? That is what we've now got, complete with Orwellian double-speak from the Soviet days. Except it is in America! Who would have ever believed it would come to this?

Capitalism is the best system, not socialism. Fannie and Freddie should have been forced to file Chapter 11 bankruptcy. Did you know that their former Presidents are going to get over $10 million in severence pay from the government? Incredible! All of us will pay for this, big time.

Socialism will sink us, just as it sank the former Soviet Union. Freddie and Fannie's bailout by taxpayers, after all profits were sucked out by executives, is the worst example of how socialism has taken over in America. It will put us into a Wiemar Republic style inflationary depression. Look forward to real inflation (not the baloney statistics coming out of Wash DC) of 30-40% two years from now, or much more.

2008 Sep 08 01:15 AM

[Kelly Liebe...:]

At this point, anybody not moving into Gold and Silver have to be crazy. As this plays out we are moving into some desperate times. Most people just seem so relieved that "the government is fixing the mortgage crisis" - forget that they caused it in the first place. Forget that we will end up paying 200-300 billion to fix this mess. Money we will have to print since we are broke!!!

2008 Sep 08 09:23 AM

[David Martin:]

A very illuminating article.
I have one question though:
The ECB has probably also swapped toxic debt of a similar order to the Fed for bonds, so perhaps the drop of the dollar will be less than projected, although inflation etc will be just as bad?

2008 Sep 08 09:46 AM

[David Roskoph:]

Jim this is a logical result when you understand that the supply of US dollars has diminished through the collapse you are referencing. The combined real estate, equity and auto deflation (credit destruction) is around 6 trillion. The countervailing fiat injections, even with this bailout, have yet to reach 2 trillion. Dollars are more scarce, hence more valuable.

2008 Sep 08 10:16 AM

[tinman:]

Why has no one pointed out the egregious typo in here? "As you can see, it would be easy to take a trillion or so dollars temporarily out of circulation by using locking up just a small portion of these derivatives with the 6 trillion euros sold by the U.S. ESF."

I think I know, alas.

2008 Sep 08 10:21 AM

[tinman:]

Why has no one pointed out the egregious typo in here? "As you can see, it would be easy to take a trillion or so dollars temporarily out of circulation by using locking up just a small portion of these derivatives with the 6 trillion euros sold by the U.S. ESF."

I think I know, alas.

2008 Sep 08 10:21 AM

[Coelacanth:]

9/7 Strategy:

EUR/USD: Buy dollars in to weakness.

GBP/USD: Sell Cable in to strength.

Mission Accomplished.

2008 Sep 08 01:30 PM

[PCScipio:]

BTW, the Brit equivalent of Wall Street is The City; Main Street is High Street. Good article.

2008 Sep 08 04:26 PM

[TheRabble:]

droskoph, how did the tightening of credit take dollars out of circulation? If someone defaults, that just mean the banks don't get money back (which only really accounts for 10% of the reserves they had to begin with). On the other hand, the builder of the home, or car, or whatever, got to keep every penny of the loan... a loan that was basically created out of nothing.

Just because they are now tightening credit does not remove the inflationary pressures... Not to mention the FNM and FRE who held so much of these mortgages on leverage need to get bailed out by the government, creating even more inflation... Also other banks who invested in the mortgage market may soon need bailouts as well.

And what is truly the worth of all these dollars? What goods do we have that we can trade with the rest of the world in exchange for them taking these dollars? Our economy is clearly in terrible shape.

The dollar is done... it's just a matter of time.

2008 Sep 08 04:33 PM

[xsuddensam:]

Great article!

Why am I not surprised by the underhanded dealings of the banking industry. There has been no logical reason for the dollar to rocket up in the past two months other than currency manipulation. Government participation and intervention along with gross mismanagement of our banking and financial institutions are ruining the free market.

2008 Sep 08 05:57 PM

[DontWorry:]

Once there was a country A who owed another country B $10.
Country A hadn't the money so they made a paper $10 bill which was a fake.
Country B accepted this $10 even though it was a fake and used it to pay country C which they owed $10 dollars.
Country C accepted the fake $10 and used it to pay Country A.
On receiving the $10 Country A immediatelt recognised it as the fake $10 they had created. So they tore it up and threw it in the bin.
All the countries were happy as they had all paid their debts.

2008 Sep 08 06:58 PM

[brianoh:]

Trouble is, the Fed controls the fawcet, and the Fed is run by bankers and Keynesian-economists. They rely on asset-inflation to boost the economy, and ignore the fundamental signs of the performance of the economy. If any other country was performing like the US, it's currency would be devastated. Gold was once the valve controlling the M3, and now there is no valve. It is obvious that the actions of the Fed have had major adverse consequences for the US economy. Trouble is, noone can stop them other than themselves. Forget congress, forget the Treasury, they are only interested in short-term results. Where will it all end? The housing bubble and bust is a sign that asset-inflation cannot continue. The Fed needs it to continue to support other overpriced assets such as stocks - trouble is, real US incomes have not risen in 30 years. If traditional CPI calculations were used, the story would be much worse.

2008 Sep 08 07:21 PM

[David Roskoph:]

TheRabble Please read - seekingalpha.com/artic...

2008 Sep 08 08:32 PM

[StevenBHorse:]

$500B, that's a rose colored view IMO.

I would look for more to the $1.5-2.0T range. House prices have 20-30% further to fall.

For the bulls, when in history has a government been able to print an infinite amount of a paper medium without destroying it.

NEVER. America is no different.

Stop taking your xanax/ambien/mind control drugs and wake up!!!!

Socialism. Tisk Tisk, this is corporatism, Mussolini's definition of fascism. THink about how many laws have been written in the past 2 decades that have helped business/hurt consumers.

MBNA re-writing the bankruptcy laws in 2003 comes to mind. So does the repeal of the Glass-Steagal Act in 1999.

2008 Sep 08 10:34 PM

[madasiwannabe:]

Problem is, company A actually owes everyone $100's and no one owes company A anything. There's going to be a point very soon that companies no longer accept Company A's monopoly money. World banks are converting to Euro's at breakneck pace and recently some OPEC countries announced they will no longer accept Dollars as payment. The run up of the dollar is great for world banks that want to convert without losing money.


On Sep 08 06:58 PM DontWorry wrote:

> Once there was a country A who owed another country B $10.
> Country A hadn't the money so they made a paper $10 bill which was
> a fake.
> Country B accepted this $10 even though it was a fake and used it
> to pay country C which they owed $10 dollars.
> Country C accepted the fake $10 and used it to pay Country A. <br/>On
> receiving the $10 Country A immediatelt recognised it as the fake
> $10 they had created. So they tore it up and threw it in the bin.
>
> All the countries were happy as they had all paid their debts.

2008 Sep 09 07:37 AM

[Check_Your_Ego:]

Sorry, but the use of the word manipulation has disqualified this article from entering my sphere of analysis. Stop making excuses for your own mistakes!

2008 Sep 09 08:37 AM

[Umm, yeah:]

Good article. Thanks!

2008 Sep 09 09:18 AM

[Alex Filonov:]

It's deflation, stupid. Banks fail, economy tanks, dollar appreciates. For more information, search for 'Great Depression'. I hope we won't get there, but our chances are good.

2008 Sep 09 11:44 AM

[elgrego:]

There is a small missprint here.
the 6 billion becomes 6 trillion before the table 19.

2008 Sep 09 01:26 PM

[ng:]

Listen... I shorted the euro at 1.55 for two simple reasons.

1. Our fed fund rate had nowhere to go but up (even a severe recession whould not have created any more easing... we are at the least effective part of the curve). Euros equivalent had nowhere to go but down (they were clearly overplaying the inflation bogey man).

2. Asset values are badly distorted. Any commonsense measure will do. $10 Lattes in France, for example. Commercial real estate in large cities. The PE's of the stock markets...

Hot money chases the carry trade and cheap assets. Cold money chases the account imbalances.

At $1.40 neither of these factors is different than at $1.55, so I am not closing my position.

2008 Sep 09 07:54 PM

[cromag:]

Great Article! Thanks for the eye-opener!

I wonder how the Gold Carry Trade and spiking Gold Lease Rates play into this.

www.gata.org/node/4608
www.kitco.com/lease.ch...

2008 Sep 09 08:37 PM

[Philman:]

NG, the only place you will pay $10 for a latte in France is at the airport, or in a fancy cafe in the center of Paris. Try buying a latte at a fancy restaurant in Manhattan. It is quite expensive. Most of France is still cheaper than the USA.

The dollar has a long way to fall, but, I admit, so does the euro, pound and a lot of other currencies. Basically, paper money will fall in value, everywhere, because they are printing too much. Gold and silver would fall in value (in more than a temporary way) only if the central banks could print it...but they can't. They can only use the futures market to manipulate the price in the short and medium term.

Mr. Conrad began the discussion of futures market price manipulation, and still leads the discussion, with the clarity of his reasoning, and the excellence of his writing -- but others are following the lead, and making discoveries beyond where Conrad leaves off.

Check out this article on Bloomberg. Apparently, everything that Conrad has been saying about corruption on the futures markets is slowly being proven to be true.

www.bloomberg.com/apps...

2008 Sep 10 04:21 AM

[Socialism c...:]

Philman - spot on regarding the snowballing socialist effect! The "bailouts" continue to mount, and the effect is going to crush us. I can't believe we are putting up with this garbage! Meanwhile CEOs walk with golden parachutes.

2008 Sep 10 03:54 PM

[phdinsuntan...:]

Conrad, I like conspiracy theories too, but this is much simple,
there is fear, and all want to be liquid, so all assets including
commodity, currencies , real state are being sold against liquidity.
US dollar is liquidity, thats all. No more fear, assets up and inflation concerns, not now.

2008 Sep 10 04:08 PM

[huangjin:]

As with all these articles, anyone claiming a conspiracy loses stature in my eyes. Yes, central banks manipulate markets, but there are no conspiracies. Everything is in the open and made in official statements. It's all there in black and white for all to see.

As for the facts of the case, if you think the dollar will fall versus the euro, I hope you can sustain 30 percent losses. The euro is headed to parity. Their economy is weaker, their debt is larger, their demographics worse, and the currency may not even survive—some Germans already refuse to accept euro notes from Italian central banks.

If you're a precious metals buyer, I think the pain will be longer than most expect, but in the long-run you're in the right trade versus the dollar.

I will not short precious metals, but I am short the euro.

2008 Sep 10 05:48 PM

[dlaw:]

HAHAHAHA!

Folks: B.U.B.B.L.E.

The Ron-Paulite/goldbug/Ol... Left consensus is dying. That's right, Ron Paulites, if you knew any old-time socialists you'd know that Ron Paul's vision of dollar inflation is straight out of Marx.

You have to realize that your models are ancient and no longer work. How fast does gold have to go down before you realize you're wrong?

Predictions (and I have been making the same one for weeks and months) EUR/USD $1.30 is a mortal lock. Oil is headed for $70 and gold is headed well-through $700.

2008 Sep 10 06:50 PM

[Shadowcaster:]

1. intensive purposes

A misuse of the phrase "intents and purposes", meaning "reasons and motivations". Ironically, when an uneducated person wants to seem articulate, they often butcher common phrases, thereby revealing their airheadedness.

2008 Sep 20 02:18 PM

[chzwiz:]

The Fed is trying to fight a contraction in the money supply. Losses on assets have a huge impact on bank reserves. There is nothing they can do other than some huge Trillion dollar bailout of their Wall Street buddies.

This just shifts the burden of all the losses to the tax payer and the institutions they decide not to bail out. Think of the power the Treasury will have. If a bank does not contribute to their political party they will just cut them out of the bail out money.

I am not really sure what is going to happen in the long run. I am afraid we are going to see hyper inflation and/or the Treasury having to default on the national debt. Once all trust in the government and the dollar is gone we could plunge into something much more brutal than the great depression.

2008 Sep 21 04:41 PM

[Reticon:]

WOW, and by now the things mentioned in this article are now doubled just to maintain a fractional percent increase every few days. How can it continue this way?

2008 Oct 06 09:31 PM

[User 155569:]

i don't understand why the central banks tried to temporarily tighten the money supply. it is obvious to me that by doing so they caused the failure of LEH, AIG, FNM, FRE because banks accelerated their hoarding of capital.

2008 Oct 09 11:14 PM

[albeit:]

The government should be doing two things IMHO:

- stabilizing the dollar with respect to gold or a collection of stable commodities. Look at the price graph for god over the last ten years to see the inflation that created the housing bubble and recent deflation that's starving credit markets

- slashing spending on Iraq and any pork barrel, earmark, corporate welfare spending so we can begin backing away from the precipice

The folks in charge have failed. Its time for someone smarter and less delusional. Neither McCain nor Obama cut the mustard though. Both have stood by watching this train wreck.

blog.reinventdemocracy...

2008 Oct 10 12:42 AM

[albeit:]

If we keep the currency stable, cut spending and taxes, I see no need to experience a Great Depression.

The depression was created and maintained by government. The Smoot Hawley Tariff Act crushed trade and the Fed raised interest rates.

FDR did many other things to keep it going, with each many new initiative causing the stock market to drop.

The current situation seems similar, except now our debt is massive. But the situation is still salvagable if we return to sane policies.

2008 Oct 10 12:48 AM

[Cess:]

So what does a guy having $1 million liquid to do? Where do you put it? If the dollar tanks so will all other currencies? The whole world is centered around the dollar, therefore, the whole world would fail. SO WHAT DO WE DO?

2008 Dec 20 01:02 AM