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The Parameters of the Coming U.S. Dollar Collapse

Currencies / US Dollar Jan 10, 2014 - 12:42 PM GMT

By: Dr_Jeff_Lewis

Currencies Hyperinflation is a dynamic process - much like a positive feedback loop that, once entered, is almost impossible to exit.  The process can go on for years. In the feedback cycle, the more central banks print money and buy bonds, the less other entities want to hold bonds.

Simultaneously, the less others choose to hold bonds, the more the central bank is forced to buy so that the government has enough money to spend.


Deficit Spending

In Bernholz's "Monetary Regimes and Inflation", it was found that in a study of 29 cases of hyperinflation, the best predictor of hyperinflation in a country that prints its own money is government debt over 80% of GNP and a deficit over 40% of government spending.

Note that 50% deficit spending would mean spending twice what was collected in taxes.

We are edging closer to this number but not quite there yet. A major war or natural disaster could potentially put us over this mark.

The U.S. is over the debt number and not far from the deficit number, so the danger of hyperinflation is real.

Interest Rates and the Bond Market

what causes bond yields to begin rising?

An unexpected bond market sell off could spark a collapse that would make the fear of lower housing prices look like a walk in the park. The triple threat of a simultaneous equity, housing, and bond sell off cannot be ruled out.

The global bond market is at least $100 trillion dollars. The great majority is being kept alive by a massive race to debase the currencies underlying.
 
The U.S. is more than 60% of the total. Nothing begets selling like the selling triggered from falling bond prices.

As short term debt matures, new buyers are not coming back. China was the buyer when the FED began its Operation Twist program in September of 2011. They bought debt far out into the long term portion of the curve. They needed to sell the short end. This was done in attempt to stabilize the yields across the spectrum and signal to the markets
that they had control over rates.

As China backs away (in essence, letting short-term bonds mature) they are not coming back. In addition, the official announcement from the PBOC came at the end of 2013 that they would not be buying anymore U.S. debt.
 
Obviously, this does not mean they are selling debt - it's just a signal.
 
Higher yields are not in complete control. Most major market participants have factored that interest rates are under control of the FED into their risk models. They have also surmised that the bond vigilante is dead. The bond vigilante has been temporarily usurped by the same mechanism that has suffocated most every market.
 
Dollar Alternatives Worldwide
 
Central banks around the world are increasingly diversifying their currency reserves away from the U.S. dollar.
 
Even as overall holdings soar to a record $11.4 trillion, the U.S. dollar accounted for 61.44% (down from well over 65% at the peak of the crisis in 2008).
 
With China outspokenly concerned at the future of the status of the U.S. dollar, we suspect this will only become more 'diversified'.
 
It has been widely reported that 58% of the trade transactions were in dollars.  Again, that's down from 67% five years ago.
 
Bi-lateral currency swaps are being announced worldwide involving the Yuan. Russia and China just signed a huge gas/oil agreement denominated in their currencies.
 
The United States government’s foreign policy, i.e. Syria and Iran, seem to be pushing the Saudis to seriously reassess their relationship with the U.S.  They have announced this publicly on more than one occasion.
 
The Syrians could become a serious nail in the petrodollar coffin. Then again, there is no shortage of hot spots around the world that could potentially sharpen the focus toward the heart of the matter - currency and debt.
 
At that point would it be so hard to imagine foreigners not accepting Federal Reserve notes.
 
Do the Saudis start accepting (or demanding) payment in Yuan, Euros, Yen…gold and silver?
 
Do the circling (derivative) black swans land in January 2014?
 
Do Americans eventually wake up to what has happened to their country and the enormous fraud that controls all markets?
 
The problem, of course, is that all of these potentialities exist in the moment. They are short fuses attached to an explosion that, by definition, is non-linear in nature.

For more articles like this, and/or for a breath of fresh silver market reality amidst the stench of denial and technically meaningless short term price obsessed madness, check out http://www.silver-coin-investor.com

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com

    Copyright © 2013 Dr. Jeff Lewis- 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.

Dr. Jeff Lewis Archive

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


Comments

peterpalms
10 Jan 14, 20:54
Parmeters of Dollar Collapse

As China backs away (in essence, letting short-term bonds mature) they are not coming back. In addition, the official announcement from the PBOC came at the end of 2013 that they would not be buying anymore U.S. debt. They are also spending all there trillions of Federal Reserve Notes world wide by buying natural resources, ownership of utilities, water, energy, chemicals, ownership of countries in order to strengthen their currencies


peterpalms
10 Jan 14, 21:23
US Dollar collapse

Prices based upon Federal Reserve Notes meaningless for fiat currency

We are deceived when we consent to think about the "price of gold." At the very outset of our thoughts regarding gold, we are wrong, just as astronomers prior to Copernicus were wrong in thinking about the solar system as geo-centric, with the Sun, Moon and planets describing perfect circles around Earth. Gold is − to follow the astronomical simile − the center of the monetary universe, and the planets − the currencies − circle the Sun, which represents gold.

The correct starting point is the price of a currency expressed in terms of gold, and not the other way around.

When the price of the dollar was fixed at $20.67 per ounce of gold, up to the time of FDR, the price of the dollar was $1/20.67 = .0483782 oz. of gold, or 4.84 hundredths of an ounce of gold.

When FDR "raised the price of gold" he actually lowered the price of the dollar: $1/35 = .028574 oz. of gold, or 2.86 hundredths of an ounce.

Thus, FDR lowered the price of the dollar from 4.84 hundredths, to 2.86 hundredths of an ounce.

This was done in the Depression of the '30s, when FDR was anxious to get the unemployed back to work. The purpose of devaluing the dollar by lowering its price in gold was to cheapen labor costs (without telling Labor what he was doing!) and put more people to work by getting them to accept working for lower wages, without their understanding what was going on. Cheaper labor meant cheaper American products and more exports.

At 2.86 hundredths of an ounce, the price of the dollar was below market value, and gold became overvalued in terms of dollars.

It is a principle of economics that undervalued money is exported from the country where it circulates, and overvalued money flows into the country where it is overvalued.

In 1934, with the dollar at 2.86 hundredths of an ounce of gold, gold was overvalued on the world market, and for that reason enormous quantities of gold began to flow into the US from all corners of the world. At the outbreak of WWII, the gold stock of the USA was gigantic as a result of inflows of foreign-owned gold.

At a "price of gold" of $1388/oz, more or less where we are today, the price of the dollar is $1/1388 = .00072 oz. of gold.

Gold is leaving the USA and the West, which is dollar-centric, because at .00072 (7.2 ten-thousandths) of an ounce the price of the dollar is overvalued, and gold is undervalued. There will come a moment when the managers who control the price of the dollar in gold will find that they have run out of gold to sell, and are powerless to support the price of the dollar. That moment is approaching; before the dollar controllers run out of gold to sell, the world will devalue the dollar and there will be nothing that the US will able to do about it.

This is already happening in the countries of the East − the Middle East, India, Pakistan, China and Southeast Asia, where gold trades at premiums to the undervalued "price of gold" which the Anglo-American Axis insists on maintaining.

The premiums effectively devalue the dollar just enough to ensure that the gold travels from West to East. Russia, the remaining Western power not subject to the Anglo-American Axis, is also sweeping up gold. The Axis is auctioning off its gold to the highest bidders, and the highest bidders are taking it off the market.

When the Anglo-American Axis can no longer rig the gold auction and support the price of the dollar by selling gold, because they have none left to sell, then the rest of the world will bid for gold, not only against the US dollar but against all other currencies. The prices of currencies will fall like stones, tending to a new world equilibrium, where the flows of gold seek to eliminate both under-valuations and over-valuations wherever they present themselves.

If no one nation or block of nations can manage to establish its currency as the world reserve currency and thus supplant the dollar, then, since no one currency will be supreme, supremacy will devolve to the legitimate monarch once again: gold will be the international monetary language of business once again, as it has always been. Thus, the price of gold will become extinct, as Professor Antal E. Fekete has predicted. All prices will be gold prices, or silver prices at various ratios around the world.

The pertinacity of the Anglo-American Axis in auctioning off all its gold, down to the last available ounce, shows the world that the Axis is betting everything it represents on the ability of the dollar to dethrone gold: this is the Church excommunicating Galileo and insisting on the central position of Earth in the Solar System. A very big mistake!

Gold cannot possibly lose its central position as the pre-eminent money used by the world for thousands of years. The aggressive measures of the Anglo-American Axis with regard to gold are absurd and they will lead to total disaster both for the Axis, and for the world which has been forced to follow its lead for over 40 years.

In the worst case, as the rest of the world devalues the dollar by purchasing all the gold available in the West, the partisans of the dollar may find themselves corralled into a devastating total war as a last desperate measure to support their outlandish pretention to supplant gold with a man-made fiat currency, the dollar. Once again, nemesis will follow hubris, with mankind as the tragic figure.

In my view, the wise (always a small minority in all ages) will squirrel away some ounces against the day of the ignominious collapse of the Anglo-American Axis' attempt to reorder the world's monetary system around a paper and digital currency


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