Best of the Week
Most Popular
1.BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - Nadeem_Walayat
7.Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - Michael_Noonan
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.Gold And Silver: Security, And BREXIT - Michael_Noonan
10.BrExit Vote - "The Trend is Set" -- And What You Should Pay Attention to Next - EWI
Free Silver
Last 7 days
UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - 1st July 16
Michael 'Little Finger' Gove Slays Boris 'Baratheon' Johnson in Game of Thrones for Next Tory PM - 30th June 16
Gold, Silver, Bonds and Stocks Path Towards Inflation - 30th June 16
Stock Market SPX Rally Nearing its End as DB Gets Slammed - 30th June 16
Brexit & The Precipice - 30th June 16
Gold and Silver Precious Metals Bull Market Update - 30th June 16
14 Signs the World Is on the Verge of Generational Chaos - 30th June 16
BrExit Stock Market Upwards Crash as FTSE Recovers 100% of Friday Plunge - 30th June 16
Stock Market Rally Runs Out of Steam - 29th June 16
Rapid Growth:The Financial Trends Of Online Gaming - 29th June 16
FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - 29th June 16
Stock Market Bounce May be Over - 28th June 16
Stock Market Meltdown Likely to Drive Gold Towards $1,500 - 28th June 16
Brexit Victory over the EU Globalists - 28th June 16
Brexit Psyop: Greenspan Falsely Blames the Brits for the Crash and Chaos to Follow - 28th June 16
Greenspan Calls Brexit a ‘Terrible Outcome’ as Euro Area Tested - 27th June 16
Stock Market SPX Below Mid-Cycle Support - 27th June 16
Best Holidays for Summer 2016 - 27th June 16
Another Stocks Bear Market? - 27th June 16
BBC EU Referendum Result Highlights - YouGov, Markets, Bookmakers, Pollsters ALL WRONG! - 26th June 16
Investors Map Post-Brexit Strategies Amid Global Market Upheaval - 26th June 16
Gold Price Weekly COT Update - 26th June 16
First the UK, then Scotland ... then Texas? - 26th June 16
Stocks Bear Market Resumes or Just More Noise - 26th June 16
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Market Volaility

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

© 2005-2016 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

Catching a Falling Financial Knife