Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Price Drops Amid Stimulus and Poor Data - 21st Jan 21
Protecting the Vulnerable 2021 - 21st Jan 21
How To Play The Next Stage Of The Marijuana Boom - 21st Jan 21
UK Schools Lockdown 2021 Covid Education Crisis - Home Learning Routine - 21st Jan 21
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

USD Bearish Clamour, The Dollar Won't Go Quietly

Currencies / US Dollar Sep 09, 2009 - 09:29 AM GMT

By: Christopher_Laird

Currencies

Best Financial Markets Analysis ArticleAs gold tries to break and hold $1000 it brings up the larger question of how long the USD has to last. At the very least, after the markets digest the debate over deflation which is USD bullish, the question becomes: how long can the USD hold together before it falls in value drastically.


Big drumbeat out there

I am sure that you know about China vigorously complaining about the abuse of the USD, most loudly complaining about the Fed’s quantitative easing (buying any and all bad assets from banks and putting them on their balance sheet – called monetization, which is printing the money to replace the losses). The Fed had to back off this Summer from that plan and significantly reduce those policies, said in large part due to China’s vigorous complaints.

No, we cannot

Or, in other words, the Fed is finding it cannot just print its way out of its problems, it cannot just ‘drop money from helicopters’, Bernanke does not have the latitude he thought he would have when he made that infamous statement, the bond markets won’t tolerate that without crashing the USD and skyrocketing interest rates. Skyrocketing interest rates would totally stop any remaining credit growth, which will strangle the remaining life out of the economy.

If you agree with that, then the prognosis for the US and Western economies will be a second round of credit deflation, and must result in much lower stock markets. Without going into a whole paper on how that will work, basically, if credit growth falls further, the Western economy will contract faster than its -3% rate at this point. That will cause stocks to have a second big down leg crash, akin to the second down leg of the stock crashes following the first 1929 stock crashes. The second stock down leg took stocks down eventually to 10% of their 1929 highs by the early 1930’s.

But a recent development just out, that the UN stated that a new world currency not dependent on the USD must be created:

“In a radical report, the UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises.

It added that the present system, under which the dollar acts as the world's reserve currency , should be subject to a wholesale reconsideration. Although a number of countries, including China and Russia, have suggested replacing the dollar as the world's reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion…” Telegraph.co.uk

And of course we heard that the IMF is using SDRs (special drawing right – a quasi reserve currency that central banks share, a sort of basket currency made up mostly of USD consisting of the Euro, Yen, USD, British Pound). China for instance just bought $50 billion worth of SDR denominated bonds from the IMF. Not a whole lot of money in the scheme of things, but this shows what is beginning to happen. The IMF has now about $500 billion of SDR out (rough guess). It is growing. As a true quasi currency, the SDR is an alternative to the USD if the world wanted to push it. Still it’s a drop in the bucket now though.

But, without going into an SDR subchapter, the point is, the USD will not go down quietly. Now, I don’t just mean that the Fed or the US treasury will balk and stop it. What will work against any new USD alternative is the fact that everyone is dependent on the USD and also the Fed’s massive bailouts of the credit system worldwide. It has been said that it’s wrong for the world to rely on the US Fed, the BOE, ECB etc, the Western deficit countries, to bail out the financial system. The Fed alone has carried more than 2/3 the total cost of the many costly bailouts not only in the US but also the related troubled financial problems in the EU and UK.

As a side note the UK fiscal and Pound bear close watching as a next possible flash point in the evolving global financial mess.

So while China and others complain the US Fed is monetizing the bad debts, if not for that the entire world financial system would have collapsed on two occasions. Remember the near bank runs in the UK and the US in latter 07 and 08 especially?

But the USD won’t go down quietly either because someone like China will force the Fed to stop the bailouts, or else trying to wean the world off the troubled USD will prove so painful that  the world will scream when it happens. Not only would there be tremendous economic damage and contraction if the USD were to crash, but also there will be a wave of currency crises as the world tries to readjust all the major currencies to that event. It’s not an easy situation for anyone. The demise of the USD will have vast unpredictable results. And in our present fragile financial world, unpredictable is bad.

Nevertheless, the USD must revalue down. But how is this to be done?

Gradual devaluation scenario

One problem is that China, Germany and Japan and the other major trade partners with the US will try to co devalue with the USD unless they make a major change to their export driven currency policies. They co devalue to keep their currencies cheap for exports. So, a gradual USD decline, which is what most people hope for, is likely to lead to competitive devaluations, not only with the USD but among each other trade partner. Everyone wants to export their way out of this economic contraction. But exports have crashed 30%. It’s the shrinking pie problem.

Bond revolt scenario

If competitive devaluation proves to be a big impediment to a USD revaluation down, then the only other alternative appears to be a bond revolt, which causes interest rates to spike and thus a turn of sentiment negative on the USD, and a rapid USD revaluation down, before the competitive currency devaluations can happen.

It is not in China’s nor Japan’s nor Germany’s interest for any big once off USD devaluation to take place. The US still exports a great deal and will capture a lot of business from the rest of the exporting world. Just consider what Japan’s cheap yen policy has done for Japan for the last 20 years. They were able to export their way out of the worst part of their deflation since 1990 exporting to the US. OF course that gravy train is now running off the track, seeing Japanese exports down as much as 30% to the US by some measures in 2009 year over year.

This is the dilemma for all concerned. Getting off the USD is not exactly easy after the USD spent 50 years after WW2 ended sopping up most of the world’s trade, and wealth. The USD won’t go quietly.

But, putting aside the deflation arguments which will help to keep the USD stronger for longer than it might be, revalue down the USD must.

Now this devaluation transpires, either with a bond revolt and hard revaluation down, or gradual slow death by a thousand cuts. The outcome will be some post USD world.

Is this big USD revaluation near? Or far (10 years or more away)? At the moment, we leave that ‘when’ question for another day. But the USD days are numbered. The question is where will your retirement savings be then, your pensions, your savings CDs, bonds, insurance policies?

In short all of them will likely be cut in half in purchasing power, and that is for starters. And that is IF the USD does not collapse outright, which is a distinct possibility. That is because the US fiscal situation is so bad that only a real economic recovery will give it some breathing space, if not fix everything. Just some more time at that. Not a real fix.

Therefore, we feel that it is imperative, regardless of the USD having rallies during deflation, to have about 25 to 50% of your savings in real things, such as gold, gold stocks, or some paid off farmland, or a small farm, or a nice piece of choice property that you buy when the real estate market bottoms.

Our newsletter analyzes these questions on an ongoing basis. We have anticipated many of the major market moves in the USD, stocks, gold, and other currencies, and helped our subscribers to understand what is happening, and in many cases anticipated what will happen within weeks or days.

Our newsletter is 44 issues, and we have mid week market alerts when something big is developing. We invite you to stop by and have a look.

By Christopher Laird
PrudentSquirrel.com

Copyright © 2009 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

Christopher Laird Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules