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Why the dollar rally is going to fail

Saturday, October 11, 2008, 2:25 PM

Through all of this crisis, as regulators and politicians and bureaucrats have labored to inject needed funds back into failing financial institutions, few are asking the harder questions.

Such as:

  • Does this crisis represent something deeper, like a general and unavoidable failure of our entire monetary system?
  • Are the failing institutions worth saving?
  • Will it work?
  • Can the government afford it?

I understand the desire and urgency to "get something done," but I worry that a failed effort will be worse than no effort.  Why?  Because our monetary system is, to put it bluntly, somewhat of a Ponzi scheme, and therefore depends more thoroughly on trust than other systems.

After all, when a currency is backed only by a taxing authority, it is critical that the legitimacy and omnipotence of that authority not be called into question.

People are beginning to ask questions.

This next article is a real doozy and directly calls into question the last two questions I posed above: Will the rescue efforts work, and can the government afford it?

Quote:
The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

Link (Bloomberg) 

Back in August, which seems like another lifetime ago already, I was calling for a US government deficit of between $1 trillion and $2 trillion and leaning towards the high end of that range.  Now it seems that others are ready to publicly admit to the same range.

This is the most remarkable of all the possible data because it is a staggering proposition.  More than twice the old record.  12.5% of GDP.

For the boom years of 2003-2007, the US was borrowing 80% of the world's entire pool of savings to fund its deficits and excess consumption.  We borrowed between $600 billion and $800 billion during those years.

Now, in a world of declining prospects, the US finds itself in need of 200% to 300% more than that.  While I recognize that people tend to save more during downturns, there are also fewer profits to save, so we might expect that the "plan" at this point is for the US to assume it can borrow more than 200% of next year's savings.  The entire world's savings.

I flat out do not think this is a workable plan.

There is no way to pull this off legitimately.  Which leaves us with the illegitimate option - direct money printing by the Fed.  I am sorry to say it, but I simply do not see any other mechanism by which the needed amounts can be secured by the US government.

This means that the dollar is at severe risk of decline, and certainly borrowing costs (interest rates) are going to rise, which will only exacerbate the borrowing needs as higher interest rates enforce higher payments.  The first signs are appearing that this dynamic is already in play (from the same article as above):

Quote:
That means a lot more borrowing by Treasury, which will push up interest rates, said Greenlaw. "The Treasury's going to be ramping up supply dramatically over the course of coming months to meet this enormous federal budget obligation,'' Greenlaw told Bloomberg this week. "The supply will trigger some elevation in yields.''

Treasuries have fallen the past four days even as stocks sank, a sign investors are preparing for bigger U.S. government borrowing.

Now the reason this gets really dicey is that the US government, in its infinite wisdom, has been engaged in a form of ARM financing of its own.  Over the past decade, as interest rates have fallen, the US Government has slowly turned more and more to shorter duration T-bills as the means of financing its operations.   This made sense, in a short-term way, as the T-bills came with the lowest interest rates and hence the lowest interest costs.

But, and here's the big thing, these T-bills need to be "rolled over" every time they come due.  This means that if a billion dollars of T-bills mature, a fresh offering of another billion dollars must be made. 

The total amount of T-bills now stands at $1.48 trillion, representing another $1.48 trillion that MUST be "rolled over" twice a year, at a minimum, but more likely three times, when we average out the three- and six-month issues.  That is, 28% of all outstanding "debt held by the public" is basically an adjustable rate mortgage that needs to be refi-ed three times per year. 

Plus, there are whatever Treasury notes and bonds and TIPS are coming due as well, and that pool is $3.7 trillion in size, so we might guess that $0.5 trillion of those come due in any given year.

So even as the US is seeking to borrow another $1.5 - $2 trillion this next year, there's another $1.5 - $2 trillion that must be "rolled over" in open market auctions.  What this means is that somebody has to willingly buy those bills and bonds when they come due.  If not, then we could face the mother of all catastrophes, the failure of a US government debt auction, which also goes by the very unpleasant name of "sovereign default."

This will not happen, though, because the Fed would almost certainly step in and buy those bonds.  A US government default would basically light up the "tilt" indicator on the global financial game, so it would be avoided at any cost.  The Fed, of course, would use its magic checkbook and create the needed money out of thin air, the most inflationary of all possible actions.

I just don't think that there's $3 to $4 trillion of extra cash lying around the world right now, ready to be deployed in the US. 
So there it is, that's the reason I think the recent dollar rally is the biggest suckers rally of the year. 

This is certainly part of the G7 discussions that are ongoing right now.  Each country has enormous borrowing needs of its own, and I can only imagine how tense the situation is in that room right now. Germany must be having a fit right about now, seeing that the US is actively lobbying to unleash the inflationary monsters.

So, to answer my own questions:

  • This crisis represents a generalized failure of the monetary system, and the sooner we get to that  conclusion, the sooner we can begin to talk about solutions that treat the cause, not the symptoms.
  • The failed institutions are not worth saving, because they represent a model that is now broken beyond repair.
  • The current bailout plan cannot work, because it is too small and it is directed at the symptoms, not the causes.
  • The government cannot afford the cure.  But even worse, the US government is already insolvent (when factoring in entitlement liabilities), and nobody is asking how borrowing an additional 12.5% of GDP does anything but make that problem worse.
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87 Comments

joe2baba's picture
joe2baba
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Re: Why the dollar rally is going to fail
chris how long do you think social security and medicare will last?
xraymike79's picture
xraymike79
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Re: Why the dollar rally is going to fail

So what does this mean as far as the price of commodities, i.e. oil, natural gas. Will the price of oil go up once again? When you talk of inflationary monsters, describe this in more detail.

 

Ray Hewitt's picture
Ray Hewitt
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It is only a matter of time before the dollar is worthless

Anybody who understands Austrian Theory knows the script. Without exception, every nation that took the path towards inflationary money debauchery had disastrous results. Deflation is certainly the strong force now. Give housing and stocks a year or two to bottom out and unemployment to rise to levels not seen since the 30s (14% now). When commercial activity drops to a crawl and there is nothing left to absorb these massive amounts of money being injected into the system. Then we get the hyperinflationary blowoff in commodities and a certain collapse of probably every fiat currency in the world.The government dons are working hard to coordinate the demise of their interdependent currencies. I thought the Russians and the Chinese might break from the dollar and form a metal based currency, but now I'm not so sure. They all had the same Keynesian education.

That said, I'm not so sure a Weimer hyperinflation is possible. Germany was one nation among healthy nations, similar to Zimbabwe. Then, the Germans were getting paid twice a day in a cash only economy. I don't see wages going up with prices. It'll be ugly, but it is too far into the future to contemplate with any certainly. I'm counting on being ahead of events as I've been so far. 

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xraymike79
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Re: Why the dollar rally is going to fail

Jim Rogers agrees with you:

Jim Rogers says rescue plan will create massive inflation, buy commodities

Author: BI-ME staff
Source: BI-ME and media reports
Published: 11-10-2008

INTERNATIONAL. The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems, Jim Rogers CEO of Rogers Holdings, told CNBC.

"We're setting the stage for when we come out of this of a massive inflation holocaust," he said.

And the plans are unlikely to fend off a severe economic downturn, as the crisis starts affecting all walks of life.

"We had the worst excesses we had in credit markets in world history. We're going to have to take some pain," Rogers said.

"Many people bought 4-5 houses with no money down and no job… you think we'll just say well, that's too bad, we'll start over and nobody loses their job? Be realistic."

"What about all the people in countries that minded their manners, saved their money, didn't get overextended and now all of a sudden they're being asked to bail out a bunch of guys on Wall Street who were incompetent at best and some of them crooks?"

"I thought it outrageous that anybody has to step in a bail out a bunch of 29 year olds driving Maseratis," he said.

There are not many safe havens in the volatile markets, he said.

"I have an enormous amount of cash and I've been using it to buy more Japanese yen, more Swiss Francs, more agricultural products… there's a liquidation phase going on, where everything is being liquidated. They're selling everything in sight."

"In a period like this the way you make money coming out of it is to own the things were the fundamentals have not been impaired," Rogers added.

"I've been buying agricultural commodities. I bought some a couple of days ago. It's down today. It did not matter, I bought them. I covered shorts yesterday," Rogers said on CNBC.

Rogers told CNBC's Maria Bartiromo that the financial markets are in a liquidation phase. "Commodities are only thing that I can see that will not be impaired.

"The way to solve this problem is to let people go bankrupt," Rogers said.

"Then you will hit bottom and then you start over. The people who are sound will take over the assets from the people who aren't sound and we will start over. This is the way the world has worked for a few thousand years."

 

 

joe2baba's picture
joe2baba
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Re: Why the dollar rally is going to fail

sorry forgot what about inflation/deflation? short term deflation followed by zimbabwe?

i have been following ebay to try to gauge prices of gold and silver coins. silver eagles appear to be selling at about a 60% premium and gold eagles about 80%. not a very scientific report just a thumbnail.

there seems to be a good suplly so far.

Davos's picture
Davos
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12.5% of GDP

12.5% of GDP is Enron Math. I'm sure it is higher since uncooked GDP is smaller.

Sounds like a massive chapter 7...

 Does anyone know how much gold the Vatican has? 

dpquinn's picture
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Re: Why the dollar rally is going to fail

Is the failure of the auction that represents the "Sovereign Default" or the failure of the US government to redeem maturing instruments that is the default?

  

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Re: Why the dollar rally is going to fail

I don't know which e-bay your talking about.  The E-bay I was just on for the next six hours has less than 5 American Eagle gold coins up for bid, all sizes.  6 months ago on a saturday and sunday afternoon you would have dozens, if not hundreds.  There is a lot of "junk" gold plated coins for sale, perhaps thats what your refering to.  There are alot of 1 gram pieces that are selling for about $1500 per ounce.  It is about as bad for silver.  The best so called "deal" appears to be 10 ounce silver bars on e-bay.  that's about it.  I live in the Portland, Oregon metro area and have a bullion dealer that I have purchased from since 2000.  He is wiped out.  He did have American Eagle 1/2 ounce coins for $50.00 over spot, but everything else was gone.  No tenth ounce, no quarter ounce and definatly no 1 ounce.  absolutly no silver.  I am just thankful I beat the rush.  If you can find it, BUY IT. 

good luck!

Ray Hewitt's picture
Ray Hewitt
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Why the dollar is doomed

This quote is attributed to Bernanke

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. 

In other words, he thinks that these massive injections of money now will have a positive effect in the future. Most probably, the money masters in his circle think the same way. 

Ray Hewitt's picture
Ray Hewitt
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Retail gold and silver

Yes the retail market in gold and silver is practically out of stock. I believe commercial gold and silver is available if you can afford 1,000 oz bars. With this stuff, you don't take delivery. You leave it at the warehouse and get a certificate of ownership with the serial number of the bar you own. Another source is http://goldmoney.com/en/commentary.php Or you can buy numismatic coins. If I had no gold and silver at this stage, I wouldn't worry about the premium of numismatic coins.

I know these sites to be reputable.

http://www.investmentrarities.com/

http://www.goldline.com/

Here's why not to worry about the numismatic premium.

Richard Russell's Dow Theory Letters dated October 6, 2008 noted: "Can the dollar hold up in the face of a probable series of trillion dollar deficits? Improbable. How long will our creditors be willing to hold and continue to take in dollars in the face of monster US deficits? Remember, the US is the only nation on earth that can manufacture (out of thin air) the fiat currency to pay off its debts. We won't be able to print our way out of this bear market -- our creditors won't allow us to do it. At some point, I believe, our creditors will demand gold instead of Federal Reserve Notes. At that point, it will be to the US's advantage for gold to be as high-priced as possible -- What will we do? The US will cut loose the price of gold FROM ITS CURRENT ridiculous official price of $35 an ounce and give gold to our creditors at a price of $30,000 an ounce".

 

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Re: Why the dollar rally is going to fail

I've actually had quite a bit of luck finding silver. I stopped going to coin shops and started going to pawn shops. The couple I have been to have had quite a bit. I even got the owner of a newer one to give me dibs before he sold junk coins to his usual metal guy. Of course, this was because I offered to pay more, but not much over spot.

 I've also had success at area garage and estate sales. There's nothing like finding a whole bucket of old silver that some old ladies grandkids are trying to get rid of so they can clean the house out. Less than face value!

 My point is, you just might need to look in places you're not used to looking.

Denny Johnson's picture
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Re: Retail gold and silver

Hewittr quotes Richard Russell: "Remember, the US is the only nation on earth that can manufacture (out of thin air) the fiat currency to pay off its debts."

Is that a true statement by Russell?

What prevents other countries from doing the same?

Ray Hewitt's picture
Ray Hewitt
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Re: Retail gold and silver
What prevents other countries from doing the same?
As things stand now, other nations can expand their money supply according to how  many dollars they have in reserve. The US got its legitimacy as the world's reserve currency after WWII from the Bretten Woods Agreement when the US owned something like 60% or more of the world's supply of gold. Any nation could trade dollars for gold until 1971 when Nixon  refused any more redemptions. By that time, every nation on the world was locked into the dollar standard.

So the answer is yes some nation could try it on domestic debts, but no foreign government would accept it as payment. Zimbabwe is the latest example.
robbie's picture
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Re: Best way to buy physical gold and silver...

Okay.....so I've decided that it's probably a prudent idea to have a position in gold coins so I'm not having nightmares about the dollar vaporizing rapidly.  I've read most of your notes on these boards, and Chris' primer on buying gold.  Normally, I'd take a few weeks learning the ropes to make sure I was getting the best deal possible, but I'm hoping the board can expedite my learning curve to avoid paying the rising premium that will likely come with further delay. A few questions:

 1.  I live in Boston where there are dealers in town whose businesses I can easily drive to.  Is it generally advisable from a cost standpoint to purchase in person rather then through the internet? I thought smaller shops would have larger margins compared to the large internet businesses, but after calling around I'm not so sure.   

2.  Any reason not to use a credit card?  I see some of the internet dealers listed above do not charge a surcharge for VISA purchases, whereas the dealers in town do. 

3.  Advantages and disadvantages to purchasing smaller denomination coins?  Is it better to have a mix of large and small? I realize if I have to purchase food, smaller denominations may be preferred. Chris says in his primer that he can't envision having to do much direct trading in gold. Does this still hold? In that case is it better to purchase gold in 1 oz denominations and plan to pay for bread with low denominarion silver i.e. quarters?

4.  Disadvantages to buying just gold?   I haven't seen a scenario postulated yet where it's likely to go down long term. 

5.  Lastly....does dollar cost averaging at say $1000.00 increments over a number of weeks/ months while building a position still make sense, or has the train already left the station since there are more enlightened people buying that are driving up the price daily? Any votes for buying it in one fell swoop?

 

Thanks for your time, experience, and comments in advance. 

 

 

 

  

 

odorsey's picture
odorsey
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Re: Why the dollar rally is going to fail

Chris,

 All of the articles that I have been reading have been about the G7 and G20 offering a "world solution" and the presidents comments this morning were specific about " doing no harm to other nations".  Can I have your thoughts on the emergence of the Amero or a single world currency?

 

Thanks,

 Tax Slave

Xflies's picture
Xflies
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Can someone explain why the US$ won't remain strong
at least in the short term (6 months - 1 year) if currencies is a relative value game?  If the EU or the rest of the world is doing just as badly or worse, why would the USD fall?  It is still the largest economy with the most amount of 'tools' to handle stress.  If I look at other smaller economies which are in just as much debt, where money supply is on the exponential part of a curve etc. but these economies are not only smaller but are less diversified and don't have as many ways to wiggle their way around the messes, then why wouldn't the US$ remain the global currency?  There is value to being the world currency, and just like how the 800 lb monkey in industries trade with premium multiples, so should the world's 'goto' currency.  Unless everyone is going to base their currency or foreign investments on something else like gold or oil (problem is storage), then the fiat currency is here to stay.  What if EVERY country wrote down the value of their currency by 50%?  The US$ would still be strong since everyone else takes a much needed devaluation.
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where to buy Physical gold or silver
I don't think people have a way of looking back to older posts but I've been telling people that there's NO conspiracy theory here... there isn't a market being developed for physical gold and paper gold certs... at least there isn't in Canada.  Gold can be bought physically here at any Scotiabank branch and I believe they have branches in the US as well.  The premium over market that they charge is just the result of a 2-sided market that is wider than the actual financial market because the volatility is so high that by the time they sell physical gold and want to buy back their financial hedges, the market could have moved... so on the financial futures markets, you will often see a spread of just $.50 but in the real physical market you will have a spread of around $10.  That's just the cost of doing business and getting physical gold and that spread has ALWAYS been there, maybe not as high as $10 but it has been there and is dependent on the VOLATILITY of gold.  If gold isn't that volatile, the spread will be much less than $10.  So no whining or conspiracy theorists here... you want your gold?  Goto any Scotiabank branch and get it.  When Scotiabank stops selling phsyical gold, THEN tell me and we can all re-assess the new data point.
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jdownie
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Biggest government?

I heard yesterday our clueless treasurer down here in Australia, Wayne Swan, talking about uniform global rules for markets. This was before he attended some G(insert number) meeting. Sounds ominously global government to me, though I'm not surprised to hear it from him. The closet socialists running this country must be salivating at the prospect.

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Re: Best way to buy physical gold and silver...

robbie i checked on availability and prices on wed. there was plenty at good prices, on friday i was scramblig to find anything.

your paradigm of taking your time and making the right choice in my opinion has gone the way of the dinosaurs.

the train has left the station and it has all the gold and silver on it. if you can find any buy it period IMO. you may be able to run after it and pick up a few pieces that fall off

be at the pawn shops when they open monday morning. use your gps to map out the quickest  route around town to hit as many as you can. i like cash myself but i have used a credit card over the net

i have had very good luck at a mom and pop pawn shop. you may want to get out in the country a little to some smaller rural towns. just ideas mate . buying in large quantities and leaving it in a vault might be your ticket. lots of links here for tha. one the other day suggested a valut in canada which has the worlds best banking system(whatever that is worth these days)

ted butler believes the upside is bigger in silver than gold. so good luck. see ya in zimbabwe

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pir8don
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Re: Why the dollar rally is going to fail

Chris, I found you two months ago and immediately felt no longer alone. I don't want to understand money like you do but I do want to thank you from the bottom of my heart. I am down under and what I would most like to do is to "buy" you a beer one day. The highest praise down here and never used by me before.

I guess we are going to lose the world as we know it next week and I wanted to say thanks before it happens because I expect a lot more will be trying to say it afterwards.

All the best

Don

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Xflies
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before you goto your local pawn shop, have you tried Scotiabank?
I think Scotiabank has branches in the US and you can always call them up... I noticed you can even start accounts online which means that you should be able to fund it with whatever money you want and buy gold or silver through them. 
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Re: Can someone explain why the US$ won't remain strong
at least in the short term (6 months - 1 year) if currencies is a relative value game?  If the EU or the rest of the world is doing just as badly or worse, why would the USD fall?  It is still the largest economy with the most amount of 'tools' to handle stress.  If I look at other smaller economies which are in just as much debt, where money supply is on the exponential part of a curve etc. but these economies are not only smaller but are less diversified and don't have as many ways to wiggle their way around the messes, then why wouldn't the US$ remain the global currency?  There is value to being the world currency, and just like how the 800 lb monkey in industries trade with premium multiples, so should the world's 'goto' currency.  Unless everyone is going to base their currency or foreign investments on something else like gold or oil (problem is storage), then the fiat currency is here to stay.  What if EVERY country wrote down the value of their currency by 50%?  The US$ would still be strong since everyone else takes a much needed devaluation.
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Re: Why the dollar rally is going to fail

I agree that ultimately the USD is doomed to fail, Chris is right.

When though is the question? As a USD Forex trader, my answer is not soon, 2009 at the earliest. The USD Index began a 5 wave rally in mid-July, and is just entering the explosive '3rd of 3rd wave' stage. As a Canadian I watched on Friday as the USD/CAD was moving furiously higher.

In a few months, the USD will peak and climax with a destructive and metoric fall. 

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Re: Why the dollar rally is going to fail

Don, you should take the time to understand money, it is a very important subject, even for us 'down under'.

The level of credit expansion here in the last 10 or so years has been massive, our 'economic boom' has followed much the same pattern as anywhere else and we will suffer the same consequences of it. I am shocked by the lastest rate cuts of the Reserve Bank in the face of rapidly rising money market rates, this is more credit expansion i.e. inflation.

Ok, so maybe the Australian dollar may not burn up completely, like the US dollar, because we do produce some real stuff but get used to prices rising as the AUD depreciates against anything you want to use it to buy, except maybe presently overpriced real estate.The purchasing power of us savers is being ruined by the government!

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Re: Why the dollar rally is going to fail

Thanks jdownie  for taking the time and trouble to respond. I was born there but am now over the ditch and a confirmed kiwi.

I have taken a bit of time lately but I have always resented the attention money demanded of me. I understand that most people on this site think that money will continue in some form or other but I found Chris through looking for "the end of money" which conclusion I had come to on my own. I am as uncertain of the future as any of us. Maybe it will continue but I know that we have been eating oil and the planet has to shed most of it's people very quickly. I've regarded it lately as a race between money and oil and I now see money as winning. I'm already in my mid 50's and I am certain I will not see out my allotted lifespan by purchasing my sustenance. Money is to me a fictional aberation that has consumed us. 

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Re: Can someone explain why the US$ won't remain strong
at least in the short term (6 months - 1 year) if currencies is a relative value game?  If the EU or the rest of the world is doing just as badly or worse, why would the USD fall?  It is still the largest economy with the most amount of 'tools' to handle stress.  If I look at other smaller economies which are in just as much debt, where money supply is on the exponential part of a curve etc. but these economies are not only smaller but are less diversified and don't have as many ways to wiggle their way around the messes, then why wouldn't the US$ remain the global currency?  There is value to being the world currency, and just like how the 800 lb monkey in industries trade with premium multiples, so should the world's 'goto' currency.  Unless everyone is going to base their currency or foreign investments on something else like gold or oil (problem is storage), then the fiat currency is here to stay.  What if EVERY country wrote down the value of their currency by 50%?  The US$ would still be strong since everyone else takes a much needed devaluation.
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Re: Best way to buy physical gold and silver...
I think Joe2Baba is right and the train has left the station. I have been buying for 30 years as a numismatist and more recently (8 years) as a bullion hoarder. I have ordered from many different internet sites and none to my knowledge accepts credit cards for bullion purchases but perhaps for numismatics they will. I have gone to coin stores, gun shows, estate sales, etc but find the best place to buy a diverse grouping of coins at reasonable prices are the many coin shows that occur in most major cities every few months. There will be scores to hundreds of dealers and invariably 10-20% will have some offering of bullion whether it is junk silver coins, silver eagles and other silver bullion, and every manner of gold coin and bullion. I make a few recon. passes around the booths and then figure out where the best price is. One can usually bargain for a better price with bulk purchase as well. Unfortunately, today we had a coin show in Austin and the offering was the poorest I had ever seen. There was less than a handful of gold bullion and the only silver was a bowl of 2008 silver eagles going for $25firm. All of my dealer friends told me it is hard to come by and on backorder. My internet purchase last month is on a 12-14 week delivery timeline and this is from one of the country's bigger sellers. Today I ended up purchasing some numismatic dollar pieces for only a few dollars over spot so I was happy for that .              I   think the above recommendations are helpful too. Start with what you can sleep with at night, i.e. start small if you have any trepidation because of the anti-goldbugs or deflationists.
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Re: Why the dollar rally is going to fail

Hi again Don, was just going to add to my previous post; It's as if the government want us all to become speculators, to speculate on the stock market etc in an attempt to maintain the purchasing power of our savings. Leaving it in the bank and earning a low rate of interest won't make up for this continuing loss of purchasing power. Of course, speculating on the stock market you could lose the lot.

Money will continue in some form, it has to, as long as people wish to trade. The problem today is that what is considered 'money' today is not really money at all but cheques written by the government, it is government debt. True money is a commodity, something you will trade with someone for his/her goods and services, thus obtaining value for value, many commodities have been money in past times; gold, silver, tea, salt, cattle,......

As you probably realise, cheques can have monetary properties, you will accept a cheque as payment for your goods &/or services because you expect it will be redeemable for 'money' within a short period, you accept a cheque you are effectively a creditor of the person who wrote it. Modern banknotes are just irredeemable cheques, the only reason they are accepted as payment at all, is because the governmnent says so, so you have to i.e. legal tender. Australian (and probably NZ) banknotes used to have printed on them the words 'The treasury promises to pay the bearer the equivalent in gold coin'. The gold coin was the money, the banknote was the promise to pay money i.e. the cheque.

What happens to a cheque that cannot be redeemed (bounces)? It becomes worthless. Ever wonder how the government continues to grow ever larger and more powerful while giving us 'tax cuts'? They just give us back dollars that are worth less!

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pir8don
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Re: Why the dollar rally is going to fail

I think/ believe I understand what you are saying. I have made a post over to "what to say to the next generation" that is partly in response to your reply too. Summed up; Anyone can trade for what they want but only fools trade for what they need.

We are coming from very different perspectives. You are right in there with money and I don't want to go too far there because it becomes unreal for me by my criterea - I can only fill my head with so much detail without developing tunnel vision.

Your perspective is no doubt much more informed than mine if we are only talking money. But we have population, energy and the environment in there with it all.

I come from philosophical and anthropological backgrounds. I can't see money just in it's own terms.

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kiwidave
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Re: Why the dollar rally is going to fail

Hi All, I've always thought it a little strange that the biggest economy in the world has been borrowing money from folk that earn $6.00/day. That's not how it should work! Anyway, looks like those days are gone now, despite the 'all in this together' talk I can see some big fractures opening up in that cosy club. Thanks from New Zealand for your great work Chris.

Cheers,

David 

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Fogle
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No gold or silver in my neck of Europe
Here, in the Netherlands, all the traders I used to visit are clean out of gold and silver. And this started about three weeks ago. One internet dealer did manage to get his hand on some silver. But charged 60% over spot price before adding tax. This lasted about four days and he was cleaned out again.

The only places I think I could get my hand on some metal, would be old dusty coin shops. And only junk silver and 6 gram 10 guilder pieces. But this would be the last opportunity.

When I bought my first metal about a year ago, the dealers would look strange that someone like me, blue collar worker (I entered the shop in a boiler suit), buying gold and silver. Till that moment only lawyers, ceo’s and other expensive looking folk would buy metals.

Another thing is that we are getting mailings from scrap metal dealers. They are looking for old coin and old rings etc. Paying about 20% above the spot-price! This is all the proof I need for price manipulation. Any trading being done is for much higher prices than the spot-prices. Even for junk and scrap.

 

 

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machinehead
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If the dollar was strong, how would we know?

"What if EVERY country wrote down the value of their currency by 50%?  The US$ would still be strong since everyone else takes a much needed devaluation." -- xflies

Xflies alludes to the distinction between relative strength and absolute strength. If the US$ rises 10% vs. the euro, but falls 50% vs. gold, which is more important?

Currently, we don't see this phenomenon very often, because central bankers are acting in collusion (as evidenced by last week's coordinated rate cut). When the heavily euro-weighted dollar index rises, metals tend to weaken in dollar terms (which may imply that Europe and Asia are the primary markets for gold, rather than the US).

Nevertheless, if all fiat currencies continue depreciating together, gold is likely to carry on rising in all of them. There's no perfect absolute reference standard, as shown by gold's 21-year, 70% drop  (1980 - 2001) during a mildly inflationary period. But over the long term, it's the only one we've got. An ounce of gold during Julius Caesar's reign would buy you a fine toga, and it will buy a good semi-custom suit today (or maybe two of them, at a store that's going out of business).

Agricultural prices go back to ancient times as well. But since agriculture was animal-powered and firewood was gathered locally "for free," records of energy prices are very recent. Yet they are critical in a world whose population is projected to peak at 9 billion in mid-century.

Designing Bretton Woods III is tough job, but somebody's gotta do it. Laughing

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Ray Hewitt
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Why fiat money is destined to fail

It's looking like the banksters think that if they all inflate within prescribed limits of each other, everything will be hunky dory. The fatal weakness of that conceit is that they can't print commodities. A worldwide drop in consumption has had the effect of lowering commodity prices now, But as to the future, if they do manage to ward off a credit collapse with massive injections of money, they are laying the seeds of a credit collapse caused by a hyperinflationary blowoff - a far worse scenario. I've gotten into the habit of expecting government authorities to take the worst actions possible and I'm rarely wrong.They are static thinkers without ability to imagine the consequences of their actions. Hence, they always blame the free market.

There is a point where the banksters are going to be forced to go on a precious metal standard. Otherwise even governments won't be able to function. When that day comes, precious metals will have a value we can't imagine today. Meanwhile follow Greshem's law which states that bad money drives out good money.Save your precious metals for the day when fiat currencies are useless. 

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capesurvivor
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Re: Best way to buy physical gold and silver...

Robbie,

I  live on the Cape; no pawn shops here. Years ago I bought a Martin guitar from a Boston pawn shop. The neighborhood was somewhat risky; I asume that they have gotten worse. If you want a fellow gold/silver seeker to accompany you, email me [email protected]. I don't like to go to Boston for the hell of it but if this has a good chance of success, will consider it.

Are you old enough to have watched
Paladin?

 

SG

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CEdwards
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Re: Why the dollar rally is going to fail
What about diamonds or other precious stones?  Will they hold value in a fiat-less economy?
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Ray Hewitt
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Posts: 458
The derivative financial weapon of mass destruction

Here is a picture of the main source of our monetary problems. Practically every financial entity in the world is infected with them to various degrees. Notice that the total of derivatives exceeds total world wealth by four times. 

As Jim Sinlair defines derivatives:

  1. Without regulation.
  2. Without listing on public exchanges.
  3. Without standards.
  4. Therefore not in the least bit transparent.
  5. Therefore without an open market of the bid/ask type.
  6. Dealt in by private treaty negotiations.
  7. Without a clearinghouse
  8. Unfunded without financial guarantee of any kind.
  9. Functioning as contracts of specific performance.
  10. Financial character or ability to perform is totally dependent on the balance sheet of the loser in the arrangement.
  11. Evaluated by computer assumptions made by geek, non market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions.
  12. Now in the credit and default category alone considered by accepted authorities as totaling more than USD$20 trillion in notional value.
  13. Notional value becomes real value when the agreement is forced to find a real market for ending the obligation which is how one says sell it.

 

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rlee
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Re: Why the dollar rally is going to fail

While we are all in agreement that the dollar is doomed, and that some form of something is needed for trade - be it gold or widgets, or whatever - the story in the US is the story EVERYWHERE.  We cannot deny the facts that the rest of the worlds 'widgets' are in as poor a state as ours, and it's not just the US whose money will fail, but all money.  The G7 meeting has no alternative but to make reservations at the Bretton Woods Motel 6 ballroom.  The questions to be answered there will be quite more complex than those posed before though.  This time decisions will be made not just about the rules, but how many players are going to be allowed in the league, and who the head coaches will be.  The central banks have been in this thing as a team themselves since the beginning - that will not change!  I would suggest that the future brings new and a limited amount of tradable currencies, even more centralized control of the money supplies, and a wiping of HUGE levels of government debt across the planet.

Hey, it might sound far-fetched, but we need to remember the far-fetched minds of the folks who are making these decisions.

Bob 

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Re: Why the dollar rally is going to fail

I won't answer for Chris, but here's my opinion.

Social Security and Medicare are programs tied to approximately 80 million retiring American voters.  These voters will act in their own self-interest and refuse any political 'solution' which eliminates these programs (at least in their present form).  Our government will not formally "default" on these programs or any other 'entitlement' or debt obligation.  They've already repeated the mantra.

The obvious "solution" (practical way to address the issues) is to pay both entitlements and debt obligations with debauched dollars--dollars which are "monetized" (created by accounting book entries of the FRS) into existance.  Thus, any and all holders of $dollars$ and dollar-denominated assets suffer a decline in purchasing power (falling standard of living) together.

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DanS
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Re: Why the dollar rally is going to fail

There are a number of fundamental 'forces' which effect the pricing (valuation) of commodities.

  1. Supply and demand (think globally)
  2. Value (stability) of the fiat currency used to price the particular commodity
  3. Actions of commodity speculators
  4. Actions of various hedge funds, central banks, and who know what else

The trend line for all commodities is UP.  The reason for this is that mankind can't counterfeit physicals like governments can counterfeit fiat paper currency.  Over time, all goods and services are "repriced" using the larger pool of currency.  The only counter is greater or more efficient productivity...which creates genuine "wealth" that didn't previously exist.

The goal of monetary policy, which began under Volcher, was to pair monetary growth (money) with economic productivity (growth), thus maintain a constant value for the dollar.  Greenspan appeared to follow Volcher, but the economic growth was an illusion.  Bernanke has been forced to move away from a policy of maintaining dollar value. 

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DanS
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Sovereign Default

Chris wrote, "If not, then we could face the mother of all catastrophes, the failure of a US government debt auction, which also goes by the very unpleasant name of "sovereign default." This will not happen, though, because the Fed would almost certainly step in and buy those bonds."

US government debt auctions are never 100% successful.  The Treasury attempts to strike a balance between yield and volume sold.  If they come up short (need to refinance more), they raise the stated interest rate on the next round of instruments for sale.  That's why you get daily fluctuations in rates:  http://www.federalreserve.gov/releases/h15/update/

The reason T-bill rates are so low at this time is the capital flight from the stock market into US governments as a "safe haven."  When these dynamics change, and the flow of capital reverses, the Treasury will be forced to raise the stated interest rates on their debt to attract/maintain capital or as Chris points out, the Fed will have to buy it up (direct monetization).  However, the financial world closely monitors these actions AND when the Fed directly monitized US debt, the value of the dollar declines (generally speaking) relative to other currencies and commodities.  

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DanS
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Re: Best way to buy physical gold and silver...

4.  Disadvantages to buying just gold?   I haven't seen a scenario postulated yet where it's likely to go down long term.

a) The world's central banks will continue to surpress the paper price.  See http://www.gata.org

b) The G20 will collectively announce personal ownership of gold and silver "illegal" and confiscate it--like EO-6102.  http://en.wikipedia.org/wiki/Gold_Confiscation_Executive_Order

We can all run, but we can't hide. 

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DanS
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Re: Why the dollar rally is going to fail

To pir8don

Cheer up, chap.  You've got great soil and climate to grow a big garden, great meat at the local market, and great scenery for taking holidays on you bike.  Cool

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machinehead
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Posts: 1077
Treasury borrowing, the raw material for "dollars"

According to Bloomberg, Morgan Stanley chief economist David Greenlaw projects that Usgov's 2009 cash-basis fiscal deficit could be $2.0 trillion, with a 'T.' That would be 12.5% of GDP, or twice the 1983 record of 6.0% of GDP.

But the "deficit" is the difference between income and spending. In February, the OMB projected $2.7 trillion in 2009 receipts. I'm going to guess that the revenue picture has darkened, such that 2009 receipts may be only $2.5 trillion ... about the same as 2008.

So a $2.0 trillion deficit means that Usgov takes in $2.5 trillion, but spends $4.5 trillion -- 80% more than its income.

Wow ... does anyone think that interest rates might go up, if they hit the debt market that hard? They sure did in 1983, with T-notes topping out at 14% yield in 1984. That happened to be a period of dollar strength as well. But Paul Volcker was chairing the Fed, and he didn't monetize much of that prodigious output of government paper. The private sector and foreigners had to eat it.

This time round, Weimar Ben is at the helm. He's padded his balance sheet by $0.6 trillion since this summer. Only $2.0 trillion to go, Ben! As Burger King used to plaintively ask ... "Aren't you hungry?" Money mouth

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DanS
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Re: Why fiat money is destined to fail

"There is a point where the banksters are going to be forced to go on a precious metal standard."

Not if they (G7 to G20) devise an collective electronic system of exchange, out of the ashes of the current system(s).

Hide and watch.

"He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, so that no one could buy or sell unless he had the mark..."  Rev. 13:16,17

 

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Ray Hewitt
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Re: Why the dollar rally is going to fail

Chris says:

Now, in a world of declining prospects, the US finds itself in need of 200% to 300% more than that.  While I recognize that people tend to save more during downturns, there are also fewer profits to save, so we might expect that the "plan" at this point is for the US to assume it can borrow more than 200% of next year's savings.  The entire world's savings.

I flat out do not think this is a workable plan.

I remember a similar analyses early last year regarding the 2008 budget deficit from an excellent newsletter, The Privateer. Well as we all know now, the other central banks made the money to finance the American deficit. This is not to say they can do it again, but it's something to watch for.

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reistr
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Re: where to buy Physical gold or silver

I'm from Calgary (in Canada) and agree 100% with Xflies points regarding Gold availability.

 

T

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Doug
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Posts: 3125
subtraction error

machinehead

2.5 trillion from 2.7 trillion is .2 trillion, not 2 trillion.  IOW, $200 billion.  Not an inconsequential amount, but not as catastrophic as $2 trillion.  Unless I'm missing something.

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DavidLachman
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Posts: 153
Re: Why the dollar rally is going to fail
Deflation 2008, then inflation 2009, then hyperinflation 2010, then what?
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DavidLachman
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Re: Why the dollar rally is going to fail
Oh, is there anything that can be done to help reduce the suffering that this will cause?
pir8don's picture
pir8don
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Posts: 456
Re: Why the dollar rally is going to fail

Thanks DanS - you may be right - I've got used to them. What I have that I think I don't want is 50 thousand other people within walking distance.

Somewhere in the northern hemisphere is someone because of money pumping oil into a tanker that gets turned in to food on my supermarket shelves. If that stops I starve. Do you?

We are all at different stages in this at the moment and consequently will have varstly different perspectives.

I find black humour is holding me as steady as I can be.

The consumers are becoming the consumed

I can't touch, see, hear, taste or smell any of you out here. No wonder we talk past each other.

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