The Day the Dollar Falls...Comes Closer

In 2005 a program named Backlight (on Dutch TV) aired a documentary about the growing risk on the dollar currency: The day the dollar falls. Recent articles in the media are giving me the creeps that the end of the dollar era and the US empire might be close to an endgame scenario.

Although the dire situation surrounding the fundamentals of the US economy was hardly visible in the real economy during the boom years 2003 - 2007, a few bright minds like e.g. Ron Paul (Rep. Congressman Texas) as early as late 1970's and Peter Schiff (EuroPacific Capital) saw that the deficit path was unsustainable and should be reverted as soon as possible before it to be irreversible. Many believed (Asia, Europe) that the newly elected President Obama (D) would change the destructive Bush (R) fiscal policies to a more sustainable path. This graph clearly indicates that Democratic presidents are more fiscally prudent than their Republican counterparts.

This time, that notion turned out the be an illusion as US gross national debt was 9.5 trillion dollars when Bush left office and increased to 11.9 trillion dollars over the first 6 months of the Obama presidency, supposedly necessary to again stave off a (more severe) recession, to create 1.4 million jobs (better: cushion the depression-like job losses) and to get the 70% consumer driven economy spending again (again better: keeping GDP at level in an obvious secular deflationary private sector).

A year after the collapse of Lehman Brothers in September 2008 followed by a period of 6 months of uncertainty in global markets resulting in a new low for the markets in March 2009, we are currently experiencing a (sentiment) recovery in the global stock markets following a near propaganda campaign from the US government and media as if the US economy is recovering in full swing. The policymakers hopes are based upon a Keynesian debt-induced V-recovery but are anxious the rally may be short-lived.

The enormous amounts of money being borrowed daily from creditor nations like China, Japan and oil rich Gulf States, aswell as the monetization of debt (quantitative easing) by the Federal Reserve Bank is spurring a new boom/bust cycle of malinvestments and phony gains aswell as a growing uncertainty in debt markets. With the dollar recently dropping a percent in a week, the growing concern is a major loss of confidence in the dollar being able to serve as a worlds reserve currency. Rumors and talks are indicating that holders of dollar reserves are accelerating their efforts for diversification out of the dollar. The past weeks are showing alarming reports, so lets summarize the smoke abit:

1. Article from the Independant by Robert Fisk: The demise of the dollar, one of recent alarming articles talking about secret meetings of finance ministers from China, Russia, France, Japan and several Gulf States about abandoning the dollar in oil trading. Reports of this happening were broadly denied by parties, which would seem obvious, as noone is aiming at panic, but rather a slow diversification to protect their assets and investments without too much market interference.

2. Today Bloomberg comes up with an article: The dollar Reaches Breaking Point as Central Banks Shift Reserves, reporting - nations reporting currency breakdowns put 63 percent of the new cash into euro's and yen in April, May and June, the latest Barclays Capital data show. That's the highest percentage in any quarter with more than an $80 billion increase. -

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

3. Stockhouse.com published an article today from Sy Harding, President of Asset Management Research Corp.: What The Heck Are Central Banks Up To?, questioning why Central Banks policymakers are appearing to be spreading uncertainty in the markets, following an article in the Economist talking about Fed governors not singing the same tune in public comments.

One of the reasons I think this uncertainty is being spread, is to convince (uncertainty equals fear) markets that there might be a shift in US monetary policy ahead, indicating that the economy might be on a turn around to growth and inflation (in nominal terms perhaps, definitely not in real terms). This uncertainty is fueled to induce a continued interest in US bonds and treasuries to support the dollar currency and stave off its possible accelerated selloff, which might be close to breaking point in my opinion.

Bill Gross, who runs the $186 billion Pimco Total Return Fund, the world’s largest bond fund, said in June that dollar investors should diversify before central banks do the same on concern that the U.S.’s budget deficit will deepen. Clearly there is a growing conviction that this path of US fiscal imprudency is the wrong way to go. The dollar value will suffer immensely if even Central Banks are diversifying away from the dollar currency.

Gold stands at an alltime high today at $1055 (2009 dollars). Obviously, this whole dynamic that I see happening is coming close to a point where some big players are nerving to pull their money out of dollar denominated assets. When that moment happens, possible at the end of a Friday afternoon in a certain week not very far away (a hunch? perhaps instinct? I can't tell)...the markets will tumble, liquidity will dry up once again and a cascade of investor actions in the week ahead fleeing out of dollar denominated assets will finalize the collapse of the worlds first reserve currency, the US dollar.

As history shows us time and time again, fiscal prudence is key to a viable economy and its currency. Since the creation of the Federal Reserve in 1913, the dollar has lost 95 percent of its value. So far for a stable currency, the main task of the FED.

Lets take a short look at what the Fed has accomplished in 96 years of civil (private) service. In 1913, total broad money supply M3 was $20 billion on a total of 97 million American citizens. Fast forward to 2009, M3 money supply (US gov. stopped reporting it for dodgy reasons) is approx. $15 trillion on a population of 305 million people. Thats an average inflation of 7.8 percent a year! The money supply doubles every (T,2 = 100ln2 / growth rate per year) 9 years!

The keynesian theory justifies an increase in the money supply equal to the growth in population (zero growth), which is around 1.2% since 1913. Conclusion, instead of real organic growth the FED has been taxing the American an additional 6.5 percent a year by inflation, halving the purchasing power every decade...now consider the gain in nominal terms of the S&P 500 and you basically had a lost decade just like Japan did...

One arithmatic lesson I would recommend to Ben Bernanke and his policymakers (albeit somewhat late) is based on the greatest shortcoming of the human race: That is our inability to understand the exponential function.

Learn and listen to Professor Emeritus Dr. Albert A. Bartlett, Department of Physics at the University of Colorado at Boulder:

To end this dire expectation with a core line from a well-known social philosopher H.L. Mencken; "It is the nature of the human species to reject what is true but unpleasant and to embrace what is obviously false but comforting"...

I say 'be smart and think for yourself before another one thinks for you'. RdG.