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
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

If you Debase the U.S. Dollar, you Debase them all…

Currencies / Fiat Currency Sep 02, 2011 - 02:45 AM GMT

By: Aftab_Singh

Currencies

Best Financial Markets Analysis ArticlePraise the deposit. If only one thing in this world is to be guaranteed, let it be the holy financial instrument that is the commercial bank deposit. — Prayer 3:23, The Book of State-Banking

In recent years, the above prayer has been answered by the oh-so-benevolent monetary authorities of the West — we were ‘saved’ by the self-sacrificial debauchery of Western central banks. Alas, the commercial banker that owed what wasn’t his’n, wasn’t faced with the unappetizing prospect of buying it back or going to pris’n! Consequently, the question that repeatedly presents itself is: ‘Who got stiffed then?’


Who Got Stiffed Then?

The scenario where you would have gone to the bank to find that; ‘Poof! It’s gone…‘ was averted by the actions of the monetary authorities of the West. Resultantly, in the spirit of recognizing that one cannot have one’s cake and eat it too, one is compelled to ask; ‘Who got stiffed then?’. Indeed, what price was paid for the supposedly noble ideal of preserving the status quo of the banking system?

The distress that was not felt between the depositor and the writer of the deposit (i.e. the commercial bank), has been transferred to the realm of the central bank note owner and the central bank note issuer. So, in particular, the price of preserving the status quo in ownership titles relating to the US banking system was to disrupt the lives of all owners of Federal Reserve notes. Given that Federal Reserve notes are held throughout the world and that they are held against many fiat currencies, this price includes disruption to virtually all currencies.

It was the central bankers with significant dollar reserves that faced (and face) the unpalatable circumstance depicted in the above cartoon from South Park. The archetypal, grade-A central banker who had built up a small pile of gold and a big pile of dollars (just as he was ‘supposed to’) is now facing that sickening scenario where; ‘Poof, it’s gone…’.

And yet, for engineering this transfer (of troubles in the US banking system to the collapse of the entire structure of global currencies), the monetary authorities have been praised. Wow! Aren’t people smart!?

Debase the Dollar, Debase the World…

Our regular readers will recognize the following chart:

Gold Covering the Dollar - Click to enlarge. Source: St Louis Fed, World Gold Council

It shows an estimate of the degree to which the dollar is ‘backed’ by gold at market prices. It is calculated by dividing the market value of the Federal Reserve’s gold by the total size of the Federal Reserve’s balance sheet. This chart is updated every week on the ‘Long-Term Charts’ Page.

Increases in the size of the Fed’s balance sheet imply that a greater dollar price of gold is required for the dollar to maintain (or increase) the degree to which it is ‘backed’ by gold at market prices. The large balance sheet expansions that begun in 2007/2008 represented a profound debasement of the dollar — meaning, amongst other things, that the dollar price of gold would have to increase dramatically to get back to the previous ‘backing by gold’ (at market prices). But here’s where it gets really interesting; global central banks have lots and lots of dollars (and promises for dollars in the future). Hence, this balance sheet expansion-spree represented a big fat ‘POOF!’ for many of the world’s central bankers (and thus their respective currencies).

Let’s look to the ECB for a benign example: The ECB had (and has) a reserve of gold that is wholly inadequate relative to its colossal balance sheet. However, they also have foreign exchange reserves; which we might optimistically assume to be mostly dollars. (This is an optimistic assumption because other currencies are also backed by piddly amounts of gold and mostly dollars — which would make things worse.)

Prior to 2008/2009, the market price of gold and the size of the Fed’s balance sheet implied that the ECB’s foreign exchange reserves represented an important backing to the Euro. However, the debauched policies of 2007-2009 meant that — all of a sudden — the Euro price of gold would need to (basically) double just to get back to the former ‘degree to which it was backed by gold‘!

The Degree to which the Euro is backed by gold. You can see that the ECB's reserves are converging to their gold holdings. - Click to enlarge. Sources: ECB, World Gold Council, St Louis Fed

In fact, the ECB represents a relatively benign example of this evaporation of the ‘gold backing’ in dollar reserves. We present it here because we happen to have the data ready (as its part of our usual analysis). We intend to make lots of charts like this for many more central banks over the months and years ahead. Many emerging market central banks would undoubtedly display even more horrifying collapses in ‘the degrees to which they were backed by gold’. Analogously speaking, other central banks (in particular, emerging market central banks) had larger stocks of reserves that went ‘POOF!’:

Ironic, ain’t it?

The investment implications of the above may seem rather ironic. In this world where central bankers had been convinced of the merits of keeping dollars on their balance sheets, they have become — in a sense — levered to the dollar. Counterintuitively then, a super profligate Federal Reserve can bring about a rising dollar! The destruction involved with profligate Federal Reserve policies is doubly bad for currencies that maintain large dollar reserves. Hence, it becomes necessary for such currencies to depreciate against gold to greater degrees than the degree to which the dollar must depreciate against gold. The mechanism of reconciliation — if you will — is an appreciation of the dollar against those currencies! Therefore, insofar as this monstrous dollar reserve standard lingers on, we should be wary of periodic short-term appreciations in the dollar. In fact, we have reason to believe that they may continue to arrive at bizarrely paradoxical points in time!

Aftab Singh is an independent analyst. He writes about markets & political economy at http://greshams-law.com .

© 2011 Copyright Aftab Singh - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 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