Best of the Week
Most Popular
1.UK General Election Exit Polls Forecast Accuracy - Nadeem_Walayat
2.What's Next for the Gold Price? - Axel_Merk
3.UK House Prices Correctly Forecast / Predicted Conservative Election Win 2015 - Nadeem_Walayat
4.15 Hours to Save England from SNP Scottish Nationalist Dictatorship - Election 2015 - Nadeem_Walayat
5.Exit Poll Forecasts Conservative UK Election 2015 Win - Nadeem_Walayat
6.Gold And Silver China’s Pivotal Role: More Questions Than Answers. Not So For Charts - Michael_Noonan
7.Conservative Win 2015 UK General Election, BBC Forecast of 329 Seats - Nadeem_Walayat
8.Investing and the Lollapalooza Effect - Niels C. Jensen
9.Gold Price Target - Rambus_Chartology
10.Gold Price Nearing An Important Pivot Point - GoldSilverWorlds
Last 5 days
UK Immigration Crisis Could Prompt BREXIT, Propelling Britain Out of EU Despite German Factor - 22nd May 15
America Superpower 2016 - 21st May 15
Stock Market Secular Versus Cyclical Investing - 21st May 15
Banking Stocks Break Out with Higher Bond Yields - 21st May 15
The Tech Portfolio Built to Beat the Market - 21st May 15
Gold “Less Sexy” Than Bitcoin … For Now - GoldCore on CNBC - 21st May 15
The Russia-West Rivalry in the Balkans - 21st May 15
The US Dollar and the Precious Metals Complex - 21st May 15
Gold GLD ETF Drawdown Continues Unabated - 21st May 15
Who’s Killing the Stock Market? - 21st May 15
Your Best Way to Profit from the Narrowest Market in 20 Years - 21st May 15
Government Regulation and Economic Stagnation - 20th May 15
It’s Time to Hold More Cash and Buy Gold - 20th May 15
Choppy Asian Stock Markets - 20th May 15
Countdown to Global Financial Collapse - 20th May 15
Will Interest Rates Ever Rise? - 20th May 15
How to Cash in on Amazon Stock’s Amazing Cloud Success - 20th May 15
Three Hidden Forces Pushing Crude Oil Price Back Up - 20th May 15
U.S. Housing Market Strong Numbers in Perspective - 20th May 15
Greece Debt Crisis - Obama Has A Big Fat Greek Finger - 20th May 15
Now Is the Time to Own the Oil & Gas Leaders - 20th May 15
UK Deflation Warning - Bank of England Economic Propaganda to Print and Inflate Debt - 20th May 15
Trading Gold and Silver along with the Pros - 19th May 15
Gold Ticks Higher as London Housing Market Crash Looms? - 19th May 15
Global Stock Market, Commodities Group Analysis - 19th May 15
How Stock Investors Could Profit from the Dark Net Pattern That Few Others See - 19th May 15
The Patriot Act is now USA Freedom Act - 19th May 15
Investing in Europe? 5 Critical Insights to Boost Your Portfolio Now - 19th May 15
Gold Price Trend Forecast - 19th May 15
Stock Market Continues Defying Gravity, Dow New All Time High - 19th May 15
Are Gold and Interest Rates About To Take Off Higher? - 18th May 15
Nikkei Japanese Stock Index Set To Get Smashed - 18th May 15
Silver Price Projections For 2020 - 18th May 15
The IMF Leaks Greece, Institutions Forcing a Debt Default - 18th May 15
Europe's Stocks Bull Market Continues After Correction - 18th May 15
European Banks Vulnerable Today As 2008 Financial Crisis - 18th May 15
Payments, Currencies, and Broken Money - 18th May 15
Learning to Trade Markets - Dealing with Losing Trades - 18th May 15
Stock Market Sell in May and Go Away - Last Hurrah - Take2 - 18th May 15
The No. 1 Reason Stocks Will Climb Higher - 17th May 15
Gold, Silver Distorted Markets, Financial Sophistry, and Moral Hazard - 17th May 15
Stock Market CAC40 Trend Forecast - 17th May 15
Stock Market Diagonal Pattern Nearly Complete - 16th May 15
Gold And Silver - Elite's Game Of Jenga In Place. Your Move - 16th May 15
You’ll Never See a Better Moment to Invest in China - 16th May 15
Are Gold and Silver Stocks Breaking Out? - 16th May 15
War On Cash - Why the IRS Seized All the Money from a Country Store - 16th May 15
Is China Economy a Fire-Breathing Dragon or a Dragon on Fire? - 16th May 15
Silver Buying Only Starting - 16th May 15
Why Opinion Pollsters Got UK Election 2015 Badly Wrong - 15th May 15
Double Black Diamond - What a Bond Bear Market Looks Like - 15th May 15
This “Bubble” Is Set to Kick Off New Energy Profits - 15th May 15
German Gold Demand "Spikes"- Investment Demand Surges 63% - 15th May 15
How GDP Metrics Distort Our View of the Economy - 15th May 15
McDonald's Future Is Hard to Digest (NYSE: MCD) - 15th May 15
Dry Bulk Shipping Index Chart Analysis Update 2015 - 15th May 15
Economic Expansion Ahead? World Stock Markets Analysis - 15th May 15
Why Not Tell Greece How To Run A Democracy? - 15th May 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Biggest Debt Bomb in History

US Dollar Devaluation is a Supply and Demand Problem

Currencies / US Dollar Nov 17, 2007 - 02:03 PM GMT

By: Andy_Sutton

Currencies

Best Financial Markets Analysis ArticleDollar falls to all-time low against the Euro"
"Canadian dollar hits all-time high versus US counterpart"
"Australian dollar at multi-year high"
"British Pound crosses $2 threshold"

These are just some of the headlines that have emerged during the past year concerning the ails of the US Dollar. There have been hundreds, perhaps thousands of explanations for why this is a good or bad thing. Thousands more questions asked, but never answered. At the end of the day though, it is really about our old friend: The law of Supply and Demand.


The Demand Side

There are three major areas of demand for US dollars. The first is the domestic US economy, which needs enough dollars to run smoothly. This includes the broader categories such as mortgages, credit cards, various consumer loans, corporate credit and circulating specie (printed dollar) currency. We have seen waning demand for dollars in the area of mortgages, and an overall flattening in terms of consumer spending. If the consumer spending numbers were adjusted honestly, we would likely be seeing real declines in consumer spending.

This all translates into a decreased demand for dollars. One point worth mentioning in this case is that it explains on several levels the Fed's decision to drive their target interest rates lower. They are attempting to induce borrowing through lowered costs of money. This is a classic response to diminished demand. The Fed was clearly at a crossroads. They could have saved the dollar or the debt-reliant economy. They chose to save the economy. Given the hyper-dependent condition of our society, it was the only choice really.

There is a tug of war going on with regard to decreased demand for dollars and the perceived counterparty risk when loaning dollars. Those lending want to be compensated for the risk they take when making loans. However, their desired rate of return doesn't match the rates at which borrowers are willing to take on more debt. The result? Turmoil, volatility, and eventually, panic in even the shortest-term money markets.

The second is the foreign demand for dollar denominated assets to soak up their accumulated dollars. The below diagram is a graphic representation of the flow of dollars around the globe:

The Dollar Cycle

As can easily be seen by the chart, the demand for dollars exists only so long as there is profit to be had from re-enabling US consumers to buy products they could otherwise not afford. For decades now we have not been able to pay for our consumption with production. This is the reason for our persistent trade deficits. Our overconsumption fuels the dollar cycle. When enough of our wealth has been transferred to foreigners, they will no longer need us to purchase their products since they will be able to afford to purchase the products themselves. Headlines screaming of the fact that Chinese automobile, retail and household electronics are increasing at a rapid pace fuels speculation that the fuel for the Dollar Cycle pump is beginning to run out.

The third source of demand is for petrodollars. Since the dollar is still used as the medium of exchange for many (although a slowly shrinking) number of oil transactions, countries that are net importers of oil need to keep a stock of dollars around for financing their oil habit. Smaller examples of oil-producing nations demanding something other than dollars for purchase of their oil have been emerging recently. These actions while individually small, in aggregate, serve to erode demand for the dollar. When the combined effect of petrodollars, flattening US consumption, and the drying up of the Dollar Cycle are considered, it is easy to understand the concept of diminishing dollar demand.

The Supply Side

There are several mechanisms by which the supply of dollars may be manipulated. First, the Fed can create electronic digits and infuse them directly into the banking system. Secondly, they can purchase assets of compromised value at par (near what they used to be worth). Third, they can purchase bonds directly from the Treasury, thereby monetizing our debt. In effect, what the Treasury is doing is robbing Peter (future generations of Americans) to pay Paul (current and prior deficits). The Treasury takes the dollars they get from the Fed in exchange for the debt they sold to the Fed and spends them into the economy causing inflation. There is a common misunderstanding among many individuals.

They think that the Fed is part of the government. It is not. The Fed is a private banking cartel whose ownership is divided up among the world's largest banks. Every dollar they create is a debt that is owed them with interest. In addition to the Fed, the banking system itself can create money out of thin air with fractional reserve banking by using ridiculously low reserve requirements. Combined, our money supply growth is accelerating at an alarming rate.  One look at the reconstructed M3 chart from www.nowandfutures.com tells the story:

M3 Reconstruction

In summary, the demand for dollars is beginning to wane while the supply is clearly growing at an ever-increasing rate. The results are predictable: The price (value) of the dollar will go down against other types of currency and real money. One caveat to this analysis is that it is not safe to assume that the Euro et al are ‘hard' currencies just because they are appreciating versus the dollar. Nothing could be further from the truth. While it is true that many of these other currencies have implicit backing by natural resources or strong productive economies, none of them have the one true hallmark of a stable money system: an indestructible link to tangible value.

For those individuals who are interested in specific companies and recommendations, please contact us. Due to a growing number of requests, we are going to begin offering, among other services, a paid newsletter that will profile specific recommendations on companies and industries. For a nominal fee, subscribers will receive a monthly newsletter that will discuss current issues in personal finance, investment, macroeconomics and related strategies designed to navigate today's difficult financial landscape. All interested parties should visit www.my2centsonline.com for forthcoming information or email us at info@my2censtonline.com Tomorrow's investments…Today

 

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. He currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar.

Andy Sutton Archive

© 2005-2015 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

Biggest Debt Bomb in History