If you haven’t already heard, a 3-day dollar rout has caused the US Dollar index to drop to its lowest levels EVER—breaking through KEY DOWNSIDE SUPPORT. Today it would have cost $1.523 to buy a Euro (Side note: the US dollar has now fallen > 60% against the Euro since just 2000).
So what happened and why the rout?
1. Durable Goods Orders fell 5.3% this week
2. January New Home Sales fell much more than expected
3. Initial Jobless Claims came in higher than expected
Despite this bad news and bad timing (possibly because of the timing?):
1. Alan Greenspan urged OPEC to abandon their dollar peg--why would he do this if it weren’t pre-coordinated with the PPT?
2. Helicopter Bernanke telegraphed further rate cuts despite rising inflationary pressures--why would he signal new cuts so far in advance and with bad dollar news all around?
What was the overall impact?
1. US Dollar Index hit a record low of 73.625 today, and was en route to post its biggest weekly loss in more than two years—without Plunge Protection Team (PPT) interference
2. Oil topped $102 + Barrel w/o PPT stopping the rise
3. Gold, Silver and numerous other commodities all hit new highs without PPT interference
My thoughts on the issue:
Personally, I have a very hard time believing that all the negative Fed “dollar talk” this week was completely coincidental. I think the bashing was an orchestrated attempt to keep equities in the green, lest they fall back into bear territory and through key downside support levels. (Note: lower dollar usually brings higher equities markets)
Rationale for my thoughts: tomorrow several KEY economic reports are due and equities will likely take a significant hit: (Due tomorrow: Personal Income; Personal Spending; Core PCE Inflation; Chicago PMI; Mich Sentiment Revision). Could this have been an attempt to beef up equities prior to?
Fed success in orchestrating dollar’s fall?
Yes, possibly too much! This three day orchestrated dollar fall was too successful even for the actors… Things got so out of hand, President Bush took to the airwaves today in an effort to restore dollar confidence. Said: “We Believe in a strong dollar policy.”
What next?
We may soon see a short term bounce in the dollar, but as I’ve stated before: I believe it has now become a matter of (unwritten) policy to try to hyper-inflate our financial system out of its current and future insolvency crisis -- Dollar routs help this cause.
In their attempt to inflate, the world will experience significant dollar devaluations which will (over time) allow the United States to 1) eliminate much of its foreign debt and 2) pay for future (currently $60 Trillion in un-funded) obligations through devalued payouts--it's our only way out of the mess we're in--aside from default!!
Long-term impact of Falling Dollar:
Our standard of living in the US will drop significantly--No if's and's or but's about it!
Ultimately, I hope we Americans finally wake up (after the fall -- because it won't happen until we feel significant pain) and press to get rid of all the crooked slime running our government and economy. It's about time we restore a government of the people for the people vs a government for big business, bottom lines and special interest groups.
Regards
Randy
15 comments:
The US dollar is dropping as planned taking the Canadian dollar with it.
http://www.xe.com/
Looks to me like the Canadian government doesn't want the Canadian dollar to go up vis-à-vis the US.
My feeling is that we're headed for a depression. My aunt says whatever is coming we're not going to like it.
anonymous at 9:41 is 45north, rules are a little different than thehousingbubbleblog
It certainly seems the Fed is feeding the inflation but I don't understand how this helps pays down our huge deficits. With my rental properties which, are secured by fixed rate mortgages, the inflation does help me and hurts the bank. But what is the reasoning that purposefully hyper-inflating the dollar, which I do agree is happening, helps the gov't pay down the debt?
Todd,
Currently there are > $12 Trillion Dollars circulating around the globe and M3 Growth (US Money Supply) is increasing at an annual 16% rate. Inflation typically lags M3 Growth (those with new dollars first can buy more than those who receive dollars later in the game), but we know inflation in the US is currently running ~ 12% today (by measuring w/metrics long ago abandoned – abandoned to understate inflation, reduce entitlement payouts over time and to overstate GDP).
With that said, let’s now assume it has become official Government policy to inflate our way out way out of debt and a master plan exists to bail out numerous banks/financial institutions and rescue the bond and housing markets. Let’s then go on to assume there will also be a plan to eventually ramp up numerous government infrastructure projects to promote US job growth (in the midst of our deep/dark recession).
To keep the math easy, and assuming all the above takes place, let’s presume M3 Growth will average ~ 20% over the next 5 years… Therefore, in 5 years time, M3 (worldwide US money supply) will be ~ 25 Trillion US Dollars. However, inflation will be raging and the dollar’s purchasing power will be halved (if not more by then).
By understating inflation (as they currently do), the government will continue to pay all of their obligations (Social Security, Pension Benefits, Military Pay/retirements, Medicare obligations, etc), but these obligations will actually cost the Gvt less because they are being paid out with significantly devalued dollars.
In other words: Everyone will still get their entitled (currently unfunded) Gvt benefits -- like a $1,200-1,400 monthly Social Security Check, but if our utility bills have doubled and we now have to pay $8 a gallon for Gas, $7.50 for a gallon of Milk, $5 for a loaf of Bread, $4 for a pound of Chicken and $10 for a kids happy meal at McDonalds, our purchasing power has been reduced substantially – while the Gvt pays out less.
Thus: Inflation (monetary growth of printed dollars) has eroded unfunded Gvt debt/obligations, but our purchasing power and standard of living has dropped significantly.
Same goes for foreign Debt--We repay foreign debt with newly printed, yet devalued dollars
I hope this makes sense.
Thanks for posting up
I understand what your saying. Makes sense. But what do we do with the the steel worker who had his pension cut in half and is now 62 and will start getting his 600 or so a month (my father) and inflation is going crazy and they can't afford to make ends meet? If the real plan is to get the gov't out of debt what happens to society as a hole? What happens to the to the welfare recipient when his welfare check doesn't buy as many 40 oz beers and his power is cut off. Or better yet, what will happen to society in general when this guy becomes desperate? If all of our money is not worth what it was a year ago people may become very desperate.
What I'm saying is I don't think our gov't can let this happen. They have to have a plan B. Maybe a totally socialist shift.
Todd,
The steelworker (your father--along with millions of others in the same boat)WON'T be able to make ends meet and will have to pull back on spending/lifestyle.
Possibly he will sell the house (or move to a smaller apt) and find a roomate to share expenses with -- maybe even move in with you (pooling money helps everyone out and you will most likely be feeling the pinch too).
Most Americans will eventually downsize (much smaller house or apartment -- to reduce utilities/costs; get a room mate or rent out a room, purchase a more fuel efficient car; Drive MUCH less; eating out will stop--it will only be for the well-off; families will eat cheaper foods at home, clothing will be used until completely worn out, churches and aid agencies will become much more involved in the struggling/average American's life, etc...)
Bottom Line: life will become much more difficult and we may even see another WAR to 1) ease the pain and take our minds off the dire economic conditions 2) boost jobs/manufacturing to support the war effort 3) claim/secure badly needed energy resources 4) Food could also be a War wildcard --World food stores are currently at a 50-60 year low with no relief in sight.
Anyway, you ask: What happens to society?
Read the following links for some thoughts on the issue:
Social Implications of a Significant Economic Downturn
Maslows Hierarchy of Needs and the US Economy
Regarding Socialism: Socialism costs money -- where does this money come from (Printing presses)? If Socialism is the case, then hyperinflation (Hyperstagflation may be a better term) may still apply as it requires money that we don't currently have -- all we have is debt.
Ultimately however, there is potentially very good news that will follow this EXTREMELY Difficult time in America:
A much lower US standard of living and a significantly devalued US dollar will make it much cheaper to manufacture in the US, and 10-20years from now our massive debt loads will have subsided and all those outsourced jobs will eventually come back home -- we will do more than sell each other cheaply manufactured goods --we will make them again.
If you can think of a "Plan B" I'd be very glad to hear it.
Bottom Line: I think our day of reckoning has finally arrived.
We've lived too comfortably for far too long by sucking up 80% of the world's savings and then wanted more, so we racked up ENORMOUS personal and Gvt Debt loads that must be paid -- paid through monetization and massive dollar devaluations.
Regards
Randy
BTW: Regarding my comment in this Blog post yesterday -- "Rationale for my thoughts: tomorrow several KEY economic reports are due and equities will likely take a significant hit":
I don't like to toot my own horn but (Ok yes I do), DOW was Down 315, NASDAQ Down 60 and S&P Down 37 today.
Was I spot on or what?
Another Prediction: We'll see a DOW 9,000 on/before end of year.
Randy,
I've been following this kind of information for about a year and your blog for about 1 month. Yes, you've been pretty much on target and I think that's what scares me the most. I live in a pretty depressed area so I never thought these economic downturns would affect me and my family. Like to get your opinion on one more thing. I own about 60 rental units here (just SW of Pittsburgh). They are mostly low income properties, about 1/3 gov't subsidized. I feel there will be increased gov't programs as the number of poor increases and there becomes less and less of the middle class. I'm trying to put together some type of game plan and your earlier comments were extremely helpful. You just seem to have a good feel for what's going on. Thanks for all your input.
Not a problem and I'm glad to be able to share my thoughts with others. I really do hope that my studied comments/opinions are beneficial w/regard to helping others see what's going on and to help them prepare as best they can.
Regarding your comment: "I feel there will be increased gov't programs as the number of poor increases and there becomes less and less of the middle class."
My opinion only:
I would have to agree and believe there will be numerous gvt housing programs available to help those in need of assistance.
Randy
Randy,
A couple comments earlier you predict DOW at 9000 this year or by the end of the year. Wouldn't this reflect a deflationary scenario rather than an inflationary economy?
Zac,
Yes, it is deflationary but as I've stated several times in the past, the PPT is trying to fight DEFLATION (collapse of Housing markets, credit markets, reduced spending, etc) with inflation (new money @ reduced rates).
Due to the lagging effect of Inflation, it may take a couple of years to feel the real Hyperinflationary impacts of their policy (we are merely at the beginning stage here). We will therefore probably experience concurrent deflation and inflation -- until the deflationary forces are won over.
As Stated in previous post: Will Bernanke Cut Rates
Back in 2002, Ben Bernanke highlighted what he would like to do if faced with the problem of deflation. Well, his test has just begun and deflation is now standing at our doorstep. Thus far, with consumer price inflation raging and the dollar tanking around the globe, Ben and the Boyz have been working overtime in an attempt to bail out our banking/financial sectors. They see the approaching financial train wreck, barreling downhill at ever increasing speed, and although they would really like to back Treasury Secretary Paulson’s Smoke and Mirrors “Strong Dollar Policy”, it is far too late for that. They are now stuck between a rock and a hard place (Deflation/financial collapse is the rock; Hyperinflation is the hard place) and they have chosen the hard place--Hyperinflation
With bank losses mounting, Ben and the Boyz know that they are waay behind the power curve in their rescue attempts and that deflation is setting in.
As an aside, If we are fortunate enough to evade a complete systemic banking failure, I think the tools used (printing presses and helicopters) will force us into a Hyperstagflationary environment (Hyperinflationary consumer price inflation combined with slow-to-no output growth, rising unemployment, and recession) This should allow us to muddle through until ~ 2010, but unfortuantely I don't think the "Big D" can be avoided forever. My bet is: 2011/2012.
From Inflation or Hyperinflation:
Inflation or Hyperinflation
The problem right now is: The largest speculative bubble in our world’s history is beginning to deflate (Housing Bubble) and its reverberations are being felt across the entire globe: Hedge funds are collapsing, bank write-downs are massive, toxic waste marked-to-model Commercial Paper (CP) sitting in off-balance sheets cannot be offloaded (and will soon have to be accounted for), credit markets are drying up, and home foreclosures (the catalyst to all these problems) are just now getting started.
The Fed and US banking systems understand that deflation is setting in and are now operating in crisis mode... In a brazen attempt to prevent a collapse of the entire banking/financial systems (and hence the US Economy) “Helicopter” Ben Bernanke (under severe pressure from Treasury Secretary Henry Paulson and the many heads of leading financial institutions) has sacrificed the dollar in the hopes of printing/inflating our way out of this mess.
BOTTOM LINE: To prevent deflation, the US Fed is creating inflation at the fastest pace in history and the dollar gig is nearly up! See chart of M3 Money Supply Growth below (Recreated by Shadow Government Statistics): M3 is growing by >15%
From Not looking good for the Dollar
What's next? The Fed will almost certainly cut rates again on the 31st of this month (in a futile attempt to rescue the banking and financial systems from the deepening credit crisis (actually it's an insolvency crisis--but that's for another day) and this issue (falling dollar/rising inflation) will become even more pronounced... The Fed is scared shitless right now... If they are unable to fix/reinflate the credit markets, we could have a DEFLATIONARY event (which leads to a Depression). In a panicked attempt to stave off this potential deflationary crisis, they will continue to lower short-term rates, print more money and pump liquidity into the banking systems (the very same banking systems that control the credit markets, which are completely seized up--due to all the toxic waste Asset Backed Commercial Paper products they can't seem to offload to some other sucker).
Bottom Line: Inflation will soon be out of control and there is absolutely nothing the Fed can do about it without crashing the economy ( Note: they should be raising short term Fed rates now to prop up the dollar, but that would lead to a major recession {ultimately the cure to our ills} but Gvt officials are unwilling to do this while the housing markets are cratering and with an election year right around the corner). Regardless, they are now pushing on a string in their attempt to reinflate the credit markets and their efforts will probably induce a HYPERINFLATIONARY event that will be followed by or experienced simultaneously with a MAJOR Recession. In several years the dollar will probably be worth 50-60% its current value and its fate as the defacto "World Reserve Currency" could soon be brought to question.
I hope this helps to answer your question.
Randy
one thing we're leaving out right now...CHINA is helping keep inflation in check, so long as they continue to keep their currency pegged to ours. This is a huge hedge, as we can do more business with them, they will do more with us (EU becomes more expensive), and we still get cheap consumer goods, all the while ramping up exports. With a looming energy crisis, it appears we have a lot of not so good options, and while we wait for technology to catch up (plug-ins, ett.), where would you rather be while all this goes on? HERE!
The dollars is falling.
The dollar is down.
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