It now appears that the United States has finally succeeded in its efforts to destroy confidence in the U.S. dollar. Given the currency's reserve status, its ubiquity in financial markets, and the economic power and political position of the United States, this was no easy task. However, to get the job done Washington chose the right man: Fed Chairman Ben Bernanke. Thanks to Bernanke's herculean efforts, investors across the globe have now been fully weaned from their infantile belief that the U.S. dollar will remain the ultimate safe haven currency.
The proof of Ben's success can be seen in comparing how the foreign exchange markets reacted to the recent crisis in the Middle East with how they reacted to the financial crisis of 2008. Back then, investors looking for safety abandoned their foreign currency positions and piled into the U.S. dollar (the market for U.S. Treasury Bonds in particular). As a result of these fund flows, the U.S. dollar surged 20% from August to November 2008.
However, during this latest round of global destabilization the dollar experienced no such rally. In fact, the greenback shed about 5% of its value since the Tunisia revolution began in December of 2010. The reason should be clear; the Fed has placed international investors on notice that it will unleash even greater doses of dollar debasement at the first whiff of additional economic weakness, deflation threat, or dollar appreciation. Just this week, Bernanke once again made clear that despite what he considers to be a better growth outlook at home and abroad, and spreading global inflation, the United States will not pull back from monetary accommodation, even as other nations conspicuously do so. The architect of U.S. monetary policy has stated explicitly that dollar debasement will continue for the indefinite future.
Knowing this, why would any international investor seeking a "safe haven" choose to park assets in U.S. sovereign debt? If Bernanke is to be believed, continued economic weakness in the U.S. will cause low-yielding Treasuries to lose value due to inflation while the weakening dollar erodes the underlying value of the bond in real terms. This is a one-two punch that sane investors will seek to avoid. It is no coincidence that a record percentage of U.S. Treasury auctions are now being bought by central banks, for whom sanity is a lowly consideration.
But in reality, the Fed has about as much influence over the dollar's value as do central bankers in Beijing. There is little disagreement among economists that without Chinese support, the dollar would be a dead duck. But for the last twenty years or so the monetary arrangement that pegged the yuan against the dollar served the interests of both countries. The U.S. enjoyed a flood of cheap imports, the benefits of ultra-low interest rates, and a strong currency. The Chinese received a booming export economy, which accounted for about a third of the country's GDP, and the ownership of a significant portion of the future of the United States. To maintain this peg, the People's Bank of China had to print trillions of yuan and perpetually hold more than $1 trillion U.S. dollars in reserve.
But recently, having led to rampant money supply growth and inflation in China, the peg has become more trouble than it's worth, particularly from the Chinese perspective. The latest reading on YOY money supply growth has China's M2 increasing by 17.2%; which has helped send their reported CPI up 4.9% YOY.
Inflation in China is pushing up the prices of its exports. According to the latest survey released February 14th from Global Sources (a primary facilitator of trade with Greater China), export prices of various China products are likely to increase in the months ahead, especially if the cost of major materials and components continues to soar. The survey of 232 Chinese exporters revealed that 74% of respondents said they boosted export prices in 2010. The U.S. Bureau of Labor Statistics reported in early January that its China import price index rose 0.9% in the fourth quarter after holding steady for the previous 18 months. And Guangdong, the biggest exporting province, said recently that it would increase minimum wages by around 19% this March.
But here is the rub; China maintains its peg in order to keep export prices from rising in dollar terms. But the peg is now causing export prices to rise anyway. As a result, the policy is a dead letter. The simple fact is that the threat to China's exports will exist whether they let their currency appreciate or not. But a strong currency offers the benefit of greater domestic consumption, while a weaker currency offers nothing.
The Chinese government will take the path that preserves and balances their economy while enriching their entire population, rather than go down the road to never ending inflation. For China the realistic hope is that the greater purchasing power of a strong currency will enable their growing middle class to supplant U.S. consumers as the end market for China's own manufacturing efforts. However, for the U.S. the challenge will be to develop a diversified manufacturing base in an expeditious manner before surging interest rates, a plummeting dollar and soaring inflation overwhelm the economy.
The dollar's recent reaction to the turmoil in the Middle East and China's inflation problem illustrate that we have come to a watershed moment in American history. The decade beginning in 2010 should prove to be the decade in which the U.S. dollar loses its status as the world's reserve currency. As bad as that blow may be, the loss may provide the shock needed to get our economy back on a sustainable path. The real danger lies in refusing to adapt to the changing environment. Our current economic stewards are acting as if the dollar's status is written in stone, when in fact it's hanging by a thread.
Michael Pento is the Senior Economist for Euro Pacific Capital
There are historical precedents folks. Its happening incrementally now, but the main adjustment will be a sudden big hit. Stirling used to be fancied too. Their bluff got called in the sixties and more recently by soros.
Even the mighty US of A cant bluff forever.
At a wild guess, ~30% of $ on the globe are being used as a store of value. Lose that credibility, and the $ is worth 30% less. I dont know the numbers on Stirling, but they may have been similar.
Think about it. Lets just say USA owes a mere trillion and creditors demand payment nowish.
Do they really have the assets. Maybe yellowstone could pull 5 bil assuming it is a federal asset. Does DC really have much collateral? Most land seems private or native american.
OZ on the other hand, is the reverse. Private land is a small proportion.
My advice, hold anything but $US.
We are also seeing a new mood in china. Yes the us & china have each other by the tail re china propping up the dollar because it is owed so many of them, but they have grown rich lending the money to be spent on chinese goods, so they can afford a loss.
What they have fought hard against, now looks attractive. Revaluing the yuan to curb inflation, raise living standards and go on an; infrastructure, foreign asset and military spending spree.
People give the market mechanism more credit than its due. Most participants are sheep.
The impact of US debasement has yet to impact. Inflation seems under control, but wages have deflated (which is the same as inflation to most), and hidden the extra costs of other inputs. Many goods such as electronics would otherwise have reduced, but have remained static. Interest is low, but try getting a loan, unless its ultimately from fannie/freddie (DC). Try some foreign travel and see what the dollar buys these days.
When americans have to pay normal prices for fuel, much of their infrastructure will be redundant, and nothing in the kitty to replace it. DC must give detroit and its customers one product development cycleS notice that it is going to seriously start hiking fuel taxes and investing it in post oil infrastructure.
Bernanke has no morals, and is still doing everything in his power to pay bankers at the expense of the rest of the world.
I hope history sees through Bernanke's lies and shows what he has really done. Instead of embracing austerity which we should have done in 2000, we have continued to destroy the one thing we should have held dear the dollar.
Enjoy the debasement of the dollar Mr. Bernanke, you will regret it.
Interest rates will go higher. When the real slide in the dollar happens you better watch out, it will be like an avalanche.
Enjoy your page in the history books. Bernanke will go down in the history books as the man that broke the dollar.
He or she is "a businessman," not "an ignorant fool."
He or she was born, but not yesterday.
Indeed, jobs WILL be "promoted in the US," by the very simple expedient of disconnecting the linkages of the US Dollar to "currency that is worth something."
The only thing that makes a nation's currency "worth something" is ... what that nation does, or in the case of the United States at the present moment, what it doesn't choose to do, which is, "make something."
And as we all (should) know, if YOU "make something," you don't have to import it. If you concentrate your national efforts upon what should never have been abandoned in the first place, you rebuild your entire "fiscal fitness." Yeah, it means going to the gym. It means breaking out into a sweat. But it's also a cure for national atherosclerosis and national arthritis.
And if things go wrong and inflation gets nasty, what the heck? Sees off the debt.
http://www.imf.org/external/np/exr/facts/sdr.htm
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5z7pjiZoYpg
http://news.xinhuanet.com/english/2009-04/01/content_11109506.htm
http://www.telegraph.co.uk/finance/currency/8316834/International-Monetary-Fund-director-Dominique-Strauss-Kahn-calls-for-new-world-currency.html
For one thing, this drives even further the notion that "money is an abstract thing," and that it somehow "transcends" nations instead of acknowledging the fundamental reason why we have always found it necessary to have "nations" in the first place.
Money is: a tool for the denomination of trade. "The trade's the thing," not the money. But what we are seeing from these (international) clowns is, "the money's the thing, and who really cares if we trade or not, as long as we (i.e. the clowns) have money."
Well, I have heard those words before, in a fairy tale. Specifically, the fairy tale of Rumpelstiltskin.
Today I brew, tomorrow I bake;
And then the Prince child I will take;
For no one knows my little game
That Rumplestiltskin is my name!
Oh, but we do know "your little game." Yes, we know it well indeed.
The "money" that these people have hungered for and lusted for ... does not exist at all ... and one of the mightiest of all industrial nations on this planet today "sits," rather stupidly I might add, "idly by."
When this thing finally hits the American conscience, Mr. Buffett's quiet investment in a railroad might suddenly become yet another one of his prescient and well-timed moves. :-) If this nation suddenly realizes that it must produce for itself, and if it goes about that tooth-and-tong, "American style," better hold on to your hat...
Americans are resilient, and state-by-state (or commonwealth) each will find a way to become solvent once more, but the foreign bankers who have undermined the US since 1913 may well be on their way out...which would be a tremendously GOOD thing!
We talk of many things, and I assert they are related: Energy, Economy, Environment, Education, etc. Household by household, we cannot continue to export our economic resource, which means home-based energy systems to energy independence and cleaner environment leading to household economic inputs through energy exports (energy market formation). It is important to note that "solutions" being proposed by these subversive financial interest neither take into consideration their consumers' health nor economic value, but rather look to exploit the existing "status quo" to drain the taxpayers, ultimately weakening the US in myriad ways.
Bumpy roads are sure to follow, but if we look past short-term "withdraw" from markets falsely-inflated through corrupt government subsidy, our long-term prospects need not be so gloomy.
Opportunity in Adversity.
Yes, do away with welfare.
But the readers of HP won't believe it.
There is a point past which this will lead to collapse greater than the ones we have experienced and no bail out possible. Ben Bernanke did not help prevent the earlier collapse and he is not doing a thing to deal realistically now with the situation. Obama keeps him there. The public is too busy surviving to take action to correct their political mistakes.
If we elect Republicans to everything in the next election cycle then what? That would not be change either. Maybe we could change our currency to the Yen or the Euro or some new scheme. The wealthy have their ways to exchange currency and gold and other assets, so they (wealthy people) have less incentive to see real change they have the ability to keep the change to themselves.
It is the rest of us that will suffer for this failure.
It comes down to a Katrina like action. How many in NO were prepared, how many demanded the govt show up?
One should know how to take care of their family first. The govt isn't big on people being prepared. What stops you from preparing for the future?
http://www.wtffinance.com/2011/01/historic-lessons-of-inflation/
http://www.wtffinance.com/2011/01/historic-lessons-of-inflation/