Saturday, April 09, 2011

Dollar: Faltering Foundation of US Economic Strength

I wrote this article back in Jan of 2008 in an attempt to shed light on the past history and likely future of the US Dollar as the World's reserve... Bottom line, dollar hegemony will eventually end and when this happens our standard of living will fall precipitously.

Since the end of World War II, the central foundation of US Economic Strength has rested on the US Dollar. Many of our strategic plans, geopolitical strategies, past and future wars--the entire global chess board if you will, has been played out by trying to maintain our undisputed economic power, based primarily through ownership of the World’s Reserve Currency.


Throughout the history of the world, there have always been strong currencies, usually held by the economic powerhouses of the day. Theses currencies were primarily called Reserve Currencies. The Pound Sterling was the primary reserve currency for much of the world in the 18th and 19th centuries. But perpetual account and fiscal deficits, financed by cheap credit and unsustainable monetary and fiscal policies used to finance wars and colonial ambitions eventually led to the pound sinking (sound familiar?).

Post World-War II, the US dollar took over the sterling’s dominant position and became the world’s newest reserve currency. The Bretton Woods Accord, the first major economic transformation toward the end of World War II, established the International Monetary Fund (IMF) and a way to value the various currencies of the world relative to each other. All foreign currencies would trade in relationship to the US Dollar and only the US dollar (as the reserve currency) would be tied to a gold standard (meaning the value of dollars circulating must be backed by gold reserves).

The gold standard caused major problems in the 1960’s when France (under the London Gold Pool) called America’s bluff and demanded gold for payment of debt, rather than US dollars (they understood that we were printing more money, to finance the Vietnam conflict and fund new social programs, than we had available in gold reserves).

Due to the rapid loss of US gold reserves, President Nixon had no choice but to abolish the Bretton Woods accord in August of 1971 and he took the US dollar off the gold standard (it was $35 per ounce then; today it is ~ $900).

This Nixon shock of August 1971 caused a swift devaluation of the US dollar (gold doubled in price by 1972) and numerous efforts followed (by U.S. leadership) to develop a new system of international monetary management. They felt they must find another way, as currencies around the world were in turmoil and were now floating among one another…

The year 1974 provided the much needed answer. In June of 1974, Secretary of State Henry Kissinger established the US-Saudi Arabian Joint Commission on Economic Cooperation. One of the major components of this commission stated that OPEC would officially agree to sell its oil only for dollars—meaning any country purchasing oil from OPEC had to pay in U.S. dollars. This agreement enormously increased the demand for the floating dollar, as oil importing countries now had to earn or borrow dollars to pay for their oil.

OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks.

Bottom Line: this 1974 act reestablished the dollar as the global monetary instrument and oil now replaced gold as basis for a strong dollar. Countries competed for dollars and they accumulated huge dollar reserves to sustain their own currencies.

Please allow me to shift gears a bit—we’ll get back to the dollar in a moment:
Post WWII, the US was the world’s manufacturing powerhouse, as our continent was unscathed by the ravages of war and the military industrial machine was running at maximum efficiency.

That however has changed over time, as thousands of corporations succumbed to the pressures of improving their bottom lines. Entire sectors were outsourced: U.S. Manufacturing, Steel, Technical services, Administrative call centers, Research & Technology and numerous others are now gone. Heck, you can’t even find a pair of Levis (the American Trademark) made in the good ole USA anymore.

Why did this happen? It’s all related to profits… A U.S. company can pay a worker overseas $1-2 bucks an hour to do the same job requiring $15-30 hour in the US... Either they outsource or they end up like the rest of our troubled U.S. home bound corporations (below).

Many of the home-bound US companies still trying to compete in the Global marketplace are reeling from high labor costs, pension plans, union benefits, health care costs and the like. Delphi, General Motors and Ford are prime examples of the growing trend of companies feeling the pressures. I expect to see more US corporate and worker problems in the future…

Outsourcing however did have its benefits. For many years we Americans were able to export inflation through the import of cheap manufactured goods and recycled dollars. Foreign manufacturing allowed Americans to purchase many things that otherwise they could have never afforded had they been made in the USA (e.g. $20 Jeans, $29 DVD players, $50 Microwave ovens, $60 cell phones, $100 TV’s; $200 computers, the list goes on and on). Our standard of living rose, but we eventually became a service-based economy dependant upon 1) selling each other foreign made goods and 2) foreigners recycling their excess dollars back to the US.

This foreign recycling of dollars provided Americans with low interest rates, plenty of available credit and it allowed us to live far beyond our means through cheap debt.

On the negative side, foreign governments built up huge dollar denominated holdings that they could use to secure long-term energy agreements, purchase Global assets/corporations, etc and these massive holdings realistically (it will never be admitted) tied our hands geo-politically, as foreign governments could now threaten to dump dollars into the world market as retribution for disliked policy.

Back to the dollar:

Once removed from the gold standard in 1971, the US dollar became a fiat currency (tied to nothing tangible and it was backed only by the word of the US government). The Fed Reserve Banking System could now print money at will -- and they did. Take a look at the chart below and the growth in M3 money supply since 1971. This chart ends in 2006, but (in case your wondering) today’s figure is ~ $12.5 Trillion.

As the world’s reserve currency, the US has been able to, year after year, import goods from the rest of the world (for consumption) and pay for it with dollars that were created from nothing. These dollars are then used by foreign central banks to purchase US assets (corporations, land, properties, etc) or debt instruments from the Fed, or they amass these excess dollars to keep inflation tame within their borders, as many have their own currencies pegged to the exchange rate of the US Dollar.

It is currently estimated that foreign governments (OPEC Nations, China, Japan, India, Great Britain, Korea, Russia, etc) have amassed ~ $4 Trillion of US dollar holdings. China alone is sitting on ~ $1 Trillion (Pretty scary stuff).

Over the last several years, foreign Central banks have started to become leery with the huge debt levels, massive trade deficits and unsustainable fiscal policy of the US and they are quietly working to diversify their dollar holdings.

Additionally, for decades now, many foreign countries have pegged their currencies to the US Dollar, but recent inflation increases, internal to their domestic economies, has become far too severe for them to handle (with the dollar peg, they have to print money as fast as we do, and it is stoking domestic inflation), therefore several countries have started a new trend of depegging. Recently, Vietnam, Qatar and Kuwait have all depegged while a host of others (Russia, and other OPEC Nations) are questioning whether or not they should do the same… When this currency de-peg happens on a larger scale (not if, but when) inflation within our borders will SCREAM. Why? Well, as they de-link from the dollar, their currencies become stronger causing our import costs to increase commensurately (e.g. Oil, consumer goods, etc)

Lastly, governments such as IRAN no longer want to accept dollars for oil. This was also the case with IRAQ back in Saddam Hussein’s day, but we all know what happened there. Anyway, the point is: There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar. If that happens on a larger scale, the artificial foundation for the World’s Reserve currency will be removed and all hell could break loose.

Bernanke: Rather than try to shore up foreign confidence in the dollar, Helicopter Ben Bernanke has made matters worse by officially sacrificing the dollar to save our faltering, sub-prime like, US banking/financial systems… By lowering rates at a time when the dollar is already at its weakest point in history, there is no other explanation to his actions.

Bottom line: Demand for the World’s Reserve Currency (dollar) has been kept artificially high for many years through oil pricing agreements and US inflation was held in check by importing cheaper goods. These were both net benefits for the US in times past, but are quickly moving towards being detriments.


The US was once an economic powerhouse who earned the right to own/maintain the World’s Reserve currency, but we’ve squandered this luxury through massive debt loads, poor foreign policy decisions, excessive monetary printing, outsourcing our industrial base, making too many future promises and by living way beyond our means.

Foreign Governments are now growing tired of subsidizing our opulent lifestyles, and the recent fact that we put the world financial system in peril by offloading our toxic securitized garbage was (I believe) one of the final straws to break the dollar’s back. In another ~ 10 years, dollar hegemony will probably be a thing of the past. Our central foundation of US Economic Strength (dollar) is faltering and there is little we can do about it.

With that said, I think the Fed and our government officials are already aware of this and without any viable solutions to our current financial problems (baring raising interest rates and initiating a massive depression) they have made the best choice they can (cut rates and inflate).

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. 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 un-funded) obligations through devalued payouts.

As our standard of living drops more in-line with the rest of the world due to loss of purchasing power and a massive economic slowdown, it will (over time) become much cheaper to employ American workers again and this will slowly bring jobs back into our borders. Eventually, 20-30 years from now, our country will become competitive in the world again and we will do more than just sell each other cheaply made foreign goods--we will actually manufacture them again. BUT, we will (most likely) no longer own the World's Reserve Currency nor will we be the World's main economic power.

Ultimately, I believe massive currency devaluation and a much lower US standard of living is our country's only way out of this financial predicament...

The only wildcard I can think of is Oil. How in the world do we survive without cheap oil?
Guess we'll need to work out some new strategic plans and geopolitical strategies -- and I'll bet they lead to:


Wednesday, October 27, 2010

Las Vegas #1 Again! - The Dumbest City in U.S.

If you haven't been hiding under a rock over the last few years, you're probably already aware of some of the various #1 records Las Vegas has attained during this period - records to include:

- The highest unemployment rate in the nation (15% )
- Top city for personal debt (link)
- The highest bankruptcy rate in the nation (link)
- The highest foreclosure rate in the nation (link)
- The most stressful city in the nation (link)
- City where > 80% of homeowners are upside down (link)

Well, as of today - beep, beep, beep... Breaking news!!! Hot off the press - Another #1 label can now be added to the lineup:

Las Vegas is #1 - The Dumbest City


The site analyzed the nation's 55 metropolitan areas with 1 million or more residents, evaluating those markets based on nonfiction book sales tracked by research firm Nielsen BookScan; the number of libraries per capita; the ratio of colleges and universities; and the percentage of residents older than 25 with bachelor's and master's degrees.

If you tally all of those factors, Las Vegas ranks dead-last among the country's big cities. Of its 1.9 million residents, 14 percent earned bachelor's degrees, and 7 percent hold master's degrees. Las Vegans have bought 1.1 million adult nonfiction books year-to-date, or fewer than one tome per resident. (But hey, we'll go head to head against anybody on adult-video sales!)



Case-Shiller Housing Chart

S&P Case-Shiller housing data was released Tuesday (report).

Bottom line up front: The report noted a deceleration in home price growth rates in most of the areas surveyed. Take a look at the circled area in the chart below - notice anything? Hmm, could this be the beginning of another leg down for the housing market?

Report Excerpts:

“A disappointing report. Home prices broadly declined in August. Seventeen of the 20 cities and both Composites saw a weakening in year-over-year figures, as compared to July, indicating that the housing market continues to bounce along the recent lows,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Over the last four months both the 10- and 20-City Composites show slowing growth, after sustaining consistent gains since their April 2009 troughs.

“The month-over-month growth rates tell the same story. Fifteen of the 20 MSAs and the two Composites saw a decline in the month of August as compared to July levels. The 10- and 20-City Composites fell 0.1% and 0.2%, respectively. Indeed, the housing market appears to have stabilized at new lows. At this time, it does not seem that any of the markets are hanging on to the temporary momentum caused by the homebuyers’ tax credits.”

Thursday, October 07, 2010

U.S. Deficit $202 Trillion

"Enron Accounting" Has Bankrupted America: U.S. Deficit Really $202 Trillion, Boston University economics professor Laurence Kotlikoff says.

As the deficit grows so does the national debt, which is currently more than $13.3 trillion, according to official figures.

But the situation is actually much, much worse.

“Forget the official debt,” he tells Aaron in this clip. The “real” deficit - including non-budgetary items like unfunded liabilities of Medicare, Medicaid, Social Security and the defense budget - is actually $202 trillion, the professor and author calculates; or 15 times the “official" numbers.

“Congress has engaged in Enron accounting,” says Kotlikoff, who recently penned an op-ed for Bloomberg entitled: The U.S. Is Bankrupt and We Don't Even Know It...

Yahoo link

Wednesday, October 06, 2010

Dollar, Silver and Gold Charts

Before looking at the charts below keep in mind the following: No country in the history of the world has ever been successful in printing their way to prosperity, and the outcome will be no different for the US in this most recent attempt to do so.

Bottom line: Though short term corrections are called for in the charts below, the dollar will most certainly continue to fall while precious metals rise over the mid/long term.

Daily Dollar Chart - oversold (look at the Full STO and MACD) - a short-term bounce is due.

Weekly Dollar Chart - oversold (look at the Full STO and MACD) Again, a short-term technical bounce is overdue, but we're definitely headed lower for the mid to long term.. Note that 75-74 will be key support levels on the downhill slide followed by MASSIVE SUPPORT at 72-71 (If we fall below 71, the USD will be in completely uncharted territory - and at the LOWEST LEVELS EVER - all being relative of course because it's a global race to the bottom now)

Daily Silver Chart - Severely overbought (look at the Full STO and MACD) - a short-term pullback is certainly due. Note that historically when silver pulls back, it usually does so all the way back to its 50 or 200 Day Moving Average (DMA) - will we see the same upon the next pullback (~ $19 an oz)?

Weekly Silver Chart - Further confirmation of an overbought condition (look at the Full STO and MACD) - correction is due. Note silver's recent parabolic rise above it's 50 week Moving Average; also note that historical pullbacks show silver usually falls back to its 50 week MA (~$19 oz) - will this time be any different?

Daily Gold Chart - overbought (look at the Full STO and MACD)- a short-term correction is due. The nearly parabolic rise above the 50DMA is unsustainable, baring a looming currency collapse - but I don't think we're there yet

Weekly Gold Chart - further confirmation of an overbought condition(look at the Full STO and MACD)- a short-term pullback is due.


The currency and PM markets are leaning forward quickly - trying to factor in Helicopter Ben's looming QE2 monetary carpet bombing campaign - but they can't continue on like this in perpetuity and they will eventually undergo a short term reversal (always do).

Question of the day:

Should you enter here with a PM purchase?

Personally, I wouldn't, I'd wait for a nice pullback to the 50DMA, but that may take some time and patience, because as John Maynard Keynes stated: "the market can stay irrational longer than you and I can stay solvent" (Not saying I'm a proponent of his economic philosophy - merely that it's a wise comment)



Tuesday, October 05, 2010

Las Vegas Housing Charts

I've been writing about the Las Vegas housing market for years and have even stated for the record (on several occasions) that this market will eventually fall to a level where the median home price is ~ $60SF.

Note: some of my older posts can be found here:

Charts Feb 2010

Charts April 2009

$60SF Prediction - 2008

Las Vegas Economic Downturn Archives (thru 2008)

Las Vegas: A House of Cards - March 2006

Well, rather than trying convince you with additional verbiage that we've yet to hit bottom, I'll let the charts below do the talking - as each chart is worth a thousand words.

A few key points to keep in the back of your head while reviewing the charts however:

- Las Vegas has the highest unemployment rate in the nation
- Las Vegas has the highest bankruptsy rate in the nation
- Las Vegas has the highest foreclosure rate in the nation
- > 80% of Las Vegas homeowners are upside down
- The Homebuyer tax credit has expired
- Banks are holding back tens of thousands of homes
- The Las Vegas economy is completely dependent on a DEAD BUSINESS MODEL - consumer discretionary spending - something that is no longer available to the masses who are desperately trying to keep a job, a roof over their head and food on the table

Bottom line:

The bottom IS NOT IN for Las Vegas and home prices will likely continue to fall for several more years... Though considered a long-shot losing bet at the time, when we take into consideration all the gloomy (current and future) aspects of this city's economy, even my $60SF median price forecast now seems optimistic.

Sunday, October 03, 2010

Gold price @ $1500 by end of year 2010

Bloomberg Interview w/Jeffrey Nichols (Sr. Economic Advisor to Rosland Capital). Jeffrey: "Great chance of $1500 by EOY"; the gold market is very small market compared to world equity, currency and bond markets and just a small shift in portfolio preference (into gold) will significantly impact this market. Additionally, Asian hunger for the yellow metal is a big plus... Other issues discussed - Weaker dollar, Central Bank purchases, Stagflation, etc

Wednesday, September 29, 2010

77% of Americans now living paycheck-to-paycheck!!!

The employment company CareerBuilder, in partnership with Harris Interactive, conducts an annual survey to determine the percentage of Americans living paycheck to paycheck.

  • In 2007, 43 percent fell into this category
  • In 2008, the number increased to 49 percent
  • In 2009, the number skyrocketed up to 61 percent
  • In their most recent survey, the number exploded to a mind-shattering 77 percent

Yes, 77 percent of Americans are now living paycheck to paycheck. This means in our nation of 310 million citizens, 239 million Americans are one setback away from economic ruin.

link to report here

Tuesday, September 28, 2010

New Trend: Top US grads heading to India for employment

Breaking tradition, top American graduates are heading to India to find jobs and opportunity. Many believe that having experience in India is an important addition to their resume in this increasingly globalized world. Some say that its easier to find a good job in India than in the United States, as India's economy is growing while the US economy is predicted to shrink within the next year.

Saturday, September 25, 2010

Weekend Funnies - 25 Sept 2010

Click any image to enlarge - Enjoy!

My Depression (a closing funny):

Over five thousand years ago, Moses said to the children of Israel, "Pick up your shovels, mount your asses and camels, and I will lead you to the Promised Land."

Nearly 75 years ago, (when Welfare was introduced) Roosevelt said, "Lay down your shovels, sit on your asses, and light up a Camel, this is the Promised Land."

Today, Obama has stolen your shovel, taxed your asses, raised the price of camels and mortgaged the Promised Land!

I was so depressed last night thinking about Health Care Plans, the economy, the wars, lost jobs, savings, Social Security, retirement funds, etc., I called a Suicide Hotline where I had to press 1 for English. I was then connected to a call center in Pakistan. I told them I was suicidal. They got excited and asked if I could drive a truck.....

Thursday, September 23, 2010

Jim Rickards- Gold Standard is Plan B - Revalue Gold at $5000+ (Dollar is Collapsing)

Jim Rickards on CNBC talks about gold, the dollar and their relationship.

Baring hyperinflation, $5K gold sounds about right: Gold How high? (a Jan 2008 post)

News from early Friday Morning: Gold Climbs to $1,300 on Dollar Concern; Silver at 30-Year High

Excerpt: “Gold is showing there is no confidence in the dollar,” said Bernard Sin, head of currency and metal trading at bullion refiner MKS Finance SA in Geneva. Recent “data has been showing signs of a troubled economy. That’s why we’ve seen this huge buying for investors as a safe haven.”

Monday, September 20, 2010

The Curious Case For $936 Ounce Silver

GATA's Adrian Douglas makes the case for bullion bank metals price supression, and for the TRUE value of one ounce of gold and silver.

Wednesday, September 15, 2010

Nightline: The Modern Gold Rush

Should you invest in it? Is it in a bubble?

Ha! I think the better question would be: Should you stay in bubblicious dollar-denominated paper investments (someone else's liabilities)?

six minute video at link: (embedding was disabled):