Axel Merk: Why Is Anyone Still Waiting to Sell the Dollar?

Friday, April 22, 2011, 8:13 PM

"The Fed can buy billions, even a trillion or so, but if and when the market is moving against the policymakers, then there is no stopping. The Fed cannot stem that tide. There is only so much that they can manage and so it is something that they have to watch very carefully. At the same time, they are not terribly concerned. If the bond market is falling, you do not know whether it is because of more economic growth or because of more inflation, and you really only know after the fact.

So for now people think “We have economic growth kicking in,” until the next economic numbers are not as great as expected, and so it is a bit like a "boiling-frog" syndrome. You print in all this money, you think everything is great, and you have some warning signs, but you think, “Things are moving along.” And by the time that you really see the damage you have created, it is quite late to undo this damage and it is going to be very, very expensive and painful."

So remarks Axel Merk, currency specialist and founder of the Merk Mutual Funds, who is perplexed by those waiting for additional warning signs to sell the dollar. In his view, we have all the evidence we need. He and Chris discuss the inner workings of the Fed and the course it is determinedly charting - and the looming dangers ahead for the US dollar.

Click the play button below to listen to Chris' interview with Axel Merk (runtime 40m:55s):

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In this podcast, Axel explains:

How currencies mutal funds can responsibily reduce their risk exposure to the US dollar while offering investment gains

Axel Merk is president, chief investment officer and founder of Merk Investments. Axel is a noted expert on world currencies and manages several mutual funds that manage currency risks for investors. For years he has been an outspoken critic of US monetary policy, warning investors that the current course risks seriously devaluating the dollar. The past few years have proven his warnings to be accurate. He is also the author of Sustainable Wealth, a very readable guide to understanding our macro economic environment, the risks today’s investors face, and how they can mange their finances to achieve financial stability .

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pnielsen's picture
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Joined: Feb 9 2011
Posts: 1

Super insights, thanks.  Always appreciate the "I could be wrong" disclaimer -- because, can't we all be wrong?  YES.


Mark_BC's picture
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Joined: Apr 30 2010
Posts: 533
Thanks for the good

Thanks for the good discussion. I do, however, somewhat disagree that we can't really be sure of what's going to happen in the future economically, and that we are all by necessity speculators. Over the short term, I agree, who really knows what the Fed is going to do, or how capital is going to race around the world motivated by both fear and greed, or what natural disaster we will have to face next. But over the long term, we can be almost certain of what's going to happen.

Economic growth is going to stop; in fact it will probably significantly retract, and real world things of value, especially energy and productive land, are going to greatly increase in value. Along with this, ecological degradation will continue to worsen and the overall human predicament which is dependent on the health of the planet's ecosystems will too.

When our economic models haven't really advanced beyond the Middle Ages, and purport to directly violate the laws of thermodynamics, I can indeed be 100% certain of the inevitable outcome -- no speculation required. That economic system will end, one way or another. The continued functioning of our economic systems literally depends on the existence of perpetual motion machines (these were disproven centuries ago). To put this absurdity into perspective, our economic leaders not only believe in, but actively manage our economies based upon, the premise that perpetual motion machines not only exist, but permeate every corner of our world. This is laughably absurd, yet this is what our leaders are actually operating on.

I have taken up learning about economics a little bit later on in my academic and practical career. I come from a background in ecology, biochemistry, and mechanical engineering. I am finding that I come from a unique place, since I am able to analyze economic theories and policies from the "ground up" in a way that very few economists can. This is also why I think Chris is such a good analyst, because he comes from a similar background.

I have made a few intereating observations about economic theories that seem blatantly obvious to me, but seem to be missed by 99.9% of economists out there -- things so obvious that they are virtually unarguable, but to which most maintream economists would just give you blank stares or shifty diversions as a response.

Firstly, is the observation that labour has no productivity. What?!?!? That's the most fundamental tenet of economics! But yes, it's true, labour produces absolutely nothing. So when economists talk about trying to boost labour "productivity", this is a misunderstanding on their part, because labour doesn't "produce" anything. Labour doesn't "make"; what labour does is "take". And then transform. The only things we "produce" are the following: body heat;  various noises and substances from different bodily orifices; forces from moving our muscles; and ideas. That's about it. We could go a little deeper and say that we make things like love or spirituality or similar things but let's keep it to physical things for now. And interestingly, all of these noises, substances and forces our bodies produce first require that we "take" other things from the world.

So if labour produces absolutely nothing, then how do our economies work? What we do is we take and transform. This "take and transform" is what economists erroneously term "productivity". How do we "take and transform", and from what do we take? Well, from the natural world, of course.

From this revelation follows the next eureka observation. Since labour only takes, not makes, and if labour "productivity" ultimately forms the basis of our economies, then it follows that if what labour takes from is a pool of limited finite resources (actually, rapidly dwindling resources) on Planet Earth (energy and minerals is what it basically all boils down to), then economic growth cannot continue indefinitely. This is essentially what Chris explains in his course, but it goes beyond just oil. It extends to every single thing that we can buy, touch, take, see, feel or hear, because it ALL requires energy.

From this, I am going to make a bold statement -- that I can be virtually 100% certain that the US, and I think pretty much the whole world's financial system as well, will not be able to grow its way out of its problems as it has been able to do in the past. Therefore, our economic systems which require perpetual growth to function, which Bernanke has faith that he is stimulating to grow, will not grow. They will crash and burn. How can I be so certain? Because I have the Laws of Thermodynamics on my side, and these have been demostrated through trillions of observations of every corner of the universe, to be unviolatable (well, quantum mechanics says that they can be violated for short times on microscopic size scales, but not on any macroscopic scale of relevance to our economies).

It is possible that I may be proven wrong if nuclear fusion or some other fission process suddely jumps to the forefront, but based on the likely near-term economic environment I do not see this happeneing, and even if it did it would still only be extending the inevitable.

So then, the next inevitable conclusion stemming from all this is that we really ought to now be actively pursuing developing an economic system that can fuinction in a zero-growth environment. Is that what we are doing? Doesn't seem so. Economists are still arguing about how to best stimulate further economic growth to tackle our out of control debt burdens. Of course, none of this is working for the reasons described above. That seems to me to be like trying to fix the propane burner on your hot air balloon after the balloon bursts. So, no, economists are doing a tremendous disservice to future genrations (actually, current ones too) in their failure to accept the biophysical realities imposed on us by the real world, and in their rabid adherence to these outdated, Medieval economic models.

In my opinion, no one should be allowed to be a practicing economist setting policy decisons unless they have extensively studied and mastered the topics of energy flow, energy "production", ecological productivity, and biochemistry. The fact that we can currently see such divergent opinions amongst "professional" economists regarding how economies actually work just speaks to the fact that it really isn't a legitimate field of study.

Without such knowledge, economists are basically nothing more than textbook theorists, without having gone through any kind of remotely scientific experimentation to validate their theories. Actually, they may now indeed be engaging in some more legitimate scientific experimentation with observeable results -- we are currently their guinea pigs. I can predict right now what the results will be.

KugsCheese's picture
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Joined: Jan 2 2010
Posts: 1471
Relative Worth or No Worth At All?

2 years ago I thought the relative play would work.   But with the actions of the central banks I think there is a real possibiltiy that paper money around the globe could go up in a massive synchrozined devaluation fire.   Europe exports much to America and so does Canada (no need to mention China).   If rates are forced up to 3,4 5 %, how do local US governments pay off revolving debt? (if you thought main street had too many closed storefronts just wait)  I first thought the fire would start in Europe (i.e. Soveriegn Debt Crisis Round 2).   But I am thinking now it could be America and spread outward (Europe probably has more gold/silver metal).   With the 70% of US GDP being Consumer and Manufacturing only 10-15%, this could take down Europe (Euro), and others, even China as the Vendor-Finance scheme finally comes to an end.   I will be reading Mr. Merk's wihite paper's this weekend.   I am just finding it hard to believe Bernanke is going to raise rates and force local governments into a much tighter corner.  Much easier to keep printing money (keypress-money today).

SteveW's picture
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Posts: 490


Regarding your comments on labour I recently read somewhere that wealth is taken either from the environment, some other region or the future which I thought was a good summary.

With your biochemistry background you've likely come across the idea that life itself violates the second law of thermodynamics. As is true for the economy, the reality is that the Earth is not a closed system and depends upon the Sun for energy input that we all exploit. Admittedly the Sun is not sustainable but basically irrelevant.

KugsCheese's picture
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1471
EFT Bond Funds with Long Duration?

Apparently most of the new money flowed into EFT stock and bond.   The EFT bond with long duration bias could result in a big price surprise as many of those bonds trade sparingly.   Did the EFT Bond Fund Investors understand what they were buying?   I like EFT's for stocks and hedging but for long duration bond funds they add a layer of opaqueness that may be the ticking time bomb.  The weekend WSJ mentioned this problem.

Seeker45's picture
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Posts: 10
Reactions to Merk Funds?

I wonder what people think of the Merk Funds as a way to preserve some wealth as the dollar declines? In the short and medium term? And whether an investment in these funds should wait until the Fed sorts out it's next steps after QE2 ends?

Mark_BC's picture
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Joined: Apr 30 2010
Posts: 533
Steve, yes I've heard the

Steve, yes I've heard the idea that life violates the laws of thermodynamics but as you say the Earth is not a closed system. Thermodynamics says that over time everything in a closed system (or the universe as a whole, since the universe is a closed system), must decrease in order, or in other words, entropy must increase. But 4 billion years of evolution has resulted in increasing (apparent) order. But as you say, the Earth is in no way a closed system, so it does not violate the laws of thermodynamics. You'd have to consider the 4 billion light year wide space-time sphere to encapsulate the closed system represented by the Earth.

How the mechanism of evolution fits into thermodynamics is much more intriguing and goes beyond the realm of this discussion of economics. In my opinion no one has it figured out yet, and it necessarily invokes a whole bunch of ideas and spirituality and philosophy as well as biology and physics, beyond what is appropriate here.

But here is why economics violates the laws of thermodynamics. Yes, it's true that we have constant and essentially endless energy shining down on us (on a huge scale). This is what drives the world. But only a very small portion of this energy is available for use in our economies. Here is the interesting part. Chris explains that all money is a claim on human labour. But we can take this further and ask then, what is it that human labour requires? Well, as the old saying goes, we need food, clothing and shelter. I think the important one of those three is food. Food is energy, but a particular type of energy -- "biological" energy contained in carbohydrates (sugars produced by plants). We do not require gasoline energy but we do require food energy. Where does food energy come from? From sunshine of course, but the intriguing part is that ALL of the food energy we need is funnelled through plants, via photosynthesis. You can analyze any food you can think of and you will come to the inevitable conclusion that ALL food which has any nutritional and energetic value for our bodies is produced by plants. So food factories do not "produce" food in any way. As I said before, they "take and transform" food and package it up to make it appealing for consumers at the store.

So it follows that if all money is a claim on human labour, and all human labour is made possible by food energy, and all food energy comes from sunshine via ecological productivity in plants, then it follows that ..... all money is a claim on "biological" energy, or ecological productivity ..... not just any old type of energy, but the energy contained within carbohydrates (and to a lesser extent proteins) in plants that we use to power our bodies.

From this we can analyze the sustainability of our wonderful perpetually growing economies. For our economies to continue to grow by necessity implies a perpetually increasing ecological productivity of the planet. Is that what we are seeing? This is where it gets frightening because the answer to that is a definite NO. We have temporarily and artificially boosted productivity through mechanized industrial agriculture (the "Green Revolution"). The Green Revolution significantly increased per-hectare crop yields, but it does so by using (wasting) large quantities of irrigation and fertilizers. Where does that fresh water come from? A lot of it comes from groundwater, and the world over, groundwater supplies are drying up. And where do those fertilizers come from? Why, from natural gas of course! And what is the status of Peak Natural Gas? From what I have seen, it's not too far behind Peak Oil!

So is the overall productivity of the planet increasing? When you subtract out the unsustainable inputs from the "Green Revolution", and factor in our continued ecological degradation of the world's ecosystems which are what produce food, then the answer is a definite NO. The planet's total ecoological productivity is DECREASING. But I just explained that all money is a claim on ecological productivity. That makes no sense. If our supply of real "money" is decreasing then how will we be able to power a perpetually growing economy? (Gold is not real money; it is merely a token, a proxy for real wealth, which is ecological productivity) Well, our economies WON'T be able to grow, unless something magical happens like nuclear fusion which allows us to desalinate sea water and irrigate the Sahara and play the extend-and-pretend game a little while longer.

What's going to happen when we reach Peak Agriculture because we have reached Peak Fresh Water and Peak Fertilizers? With ecological degradaton we cannot count on the natural ecosystems to take up the slack and continue to provide even current quantities of food for us (the oceans are being dramatically overfished and cannot maintain current catch rates). And we cannot count on fantastic new strains of plants to save us which will be able to produce more and more food using less and less inputs. Genetic engineering has so far produced the opposite -- plants which can produce more and more food .... but by using more and more inputs. Biochemistry is imposing some real limitations there.

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