Tag Archives: Dollar

The dollar’s debt trap, by Alasdair Macleod

How debt kills fiat currencies, from Alasdair Macleod at goldmoney.com:

On the fiftieth anniversary of the Nixon Shock, this article explains why fiat currencies have become joined at the hip to financial asset values. And why with increasing inevitability they are about to descend into the next financial crisis together.

I start by defining the currencies we use as money and how they originate. I show why they are no more than the counterpart of assets on central bank and commercial bank balance sheets. Including bonds and other financial issues emanating from the US Government, the individual states, with the private sector and with broad money supply, dollar debt totals roughly $100 trillion, to which we can add shadow banking liabilities realistically estimated at a further $30 trillion.

This gives us an idea of the scale of the threat to asset values and banking posed by higher interest rates, which are now all but certain. The prospect of contracting financial asset values is potentially far worse than in any post-war financial crisis, because the valuation base for them starts at zero and even negative interest rates in the case of Europe and Japan.

I focus on the dollar because it is everyone’s reserve currency and I show why a significant bear market in financial asset values is likely to take down the dollar with it, and therefore, in that event, threatens the survival of all other fiat currencies.

Introduction

Dickensian attitudes to debt (Annual income twenty pounds, annual expenditure twenty pounds ought and six, misery) reflected the discipline of sound money and the threat of the workhouse. It was an attitude to debt that carried on even to the 1960s. But the financial world changed forever in 1971 when post-war monetary stability ended with the Nixon shock, exactly fifty years ago.

Micawber’s aphorism was aimed at personal spending. It was advice given to a young David Copperfield, rather than a recipe for life. But since money’s transmogrification into pure fiat and as soon as youngsters in the fiat-currency world began to earn, Micawberism no longer held. Figure 1 shows the decline in purchasing power of fiat currencies in which earnings are paid relative to the sound money (gold) that had underpinned the post-war Bretton Woods agreement.

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The Real Russian Threat,by James Rickards

Slowly but surely, the dollar is losing clout, and eventually it will lose it’s place as the world’s reserve currency. From James Rickards at dailyreckoning.com:

I’ve written for years about different nations’ persistent efforts to dethrone the U.S. dollar as the leading global reserve currency and the main medium of exchange.

At the same time, I’ve said that such processes don’t happen overnight; instead, they happen slowly and incrementally over decades.

The dollar displaced sterling as the leading reserve currency in the twentieth century, but it took thirty years, from 1914 to 1944, to happen. The decline started with the outbreak of World War I and the UK’s liquidation of assets and money printing to finance the war.

It ended with the Bretton Woods agreement in 1944 that cemented the dollar’s link to gold as the new global standard.

Even after the gold link was broken in 1971, the dollar standard remained because there was no good alternative. Then the 1974 deal with Saudi Arabia (along with other OPEC cartel members) to price oil in dollars created increased global demand for the dollar.

Because of the deal, dollars would be deposited with U.S. banks, so they could be loaned to developing economies, who could then buy U.S. manufactured goods and agricultural products.

This would help the global economy and allow the U.S. to maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need dollars to buy oil.

By the way, behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force.

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Peter Schiff and Tucker Carlson: The Financial Crisis Will Be Worse Than the Pandemic

Much of the official coronavirus response, particularly lockdowns and closing businesses, has done irreparable harm to an already ailing economy and will help usher in a gargantuan economic crisis. From Peter Schiff and Tucker Carlson at schiffgold.com:

Consumer Price Index (CPI) data for April came in much hotter than expected. Year-on-year, inflation is up 4.2%. The big number even prompted Federal Reserve Vice Chairman Richard Clarida to say, “We were surprised by higher than expected inflation data.”

Peter Schiff appeared on Tucker Carlson’s show to talk about the consequences of more printed money chasing fewer goods. Peter said inflation is going to hit the middle class harder than the pandemic.

Peter said this hot CPI print is a cause for concern and ultimately it is a tax.

It is the inflation tax. And if you look at how much the cost of living went up, measured by the CPI in the first four months of this year, it’s 2%. So, if you triple that to annualized it, we have consumer prices rising at 6% annually. But if you look at the monthly numbers, every month it accelerates. So, if you extrapolate the trend of the first four months of this year for the entire year, you’re going to get a 20% increase in consumer prices in 2021.”

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A Rising Dollar Sinks All Boats, by Tom Luongo

When somebody borrows dollars, they’re essentially short the dollar (they would like to pay back with dollars that are worth less in other currencies). Given the huge amount of dollar-denominated debt out there, the world is short dollars, which is a problem if it’s value against other currencies goes up. From Tom Luongo at tomluongo.me:

Every day I open up my web browser to see yet another example of the basic functions of society breaking down.  Last week it was the vaporization of Archegos capital. I told you what I thought of this in a post that I hope, got people thinking.

Previous to Archegos, over the past two months we’ve seen the electrical grid collapse in Texas, hedge funds blown up over a meme stock.  Bitcoin is screaming that the national fiat currencies are all hyperinflating at the same time.

In the case of the recently solved Suez Canal incident, it doesn’t matter if it was incompetence or malicious behavior which caused the Ever Given to stick in the mud, in a world this fragile the smallest mistake can have outsized consequences.

The few days the canal was blocked caused an enormous pile up and re-routing of basic supplies and fundamentally important goods to Europe and North America that, to me, is a harbinger of where we are headed.

An overly complex world is an inherently fragile one.  Global trade is dependent on a handful of chokepoints remaining clear, like the Suez or the Straits of Malacca.  Jam up one of them and watch our everyday life we take for granted collapse.

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Here Comes the Bretton Woods Choo-Choo, by Jeff Thomas

Since Nixon freed the US dollar from any link to gold, US monetary policy has become a derailed train. From Jeff Thomas at internationalman.com:

Bretton Woods

Since the announcement of Klaus Schwab’s Great Reset, many people have become increasing aware of and/or increasingly concerned over the prospect of a New World Order.

Although it’s been in the works for over a century, in recent decades, preparations for the actual implementation have become increasingly apparent, and now that the rollout has begun, the reality of its tyrannical intent is coming home more than ever before.

Interestingly, most all people who comment on the coming of a New World Order seem to treat it as a foregone conclusion. Not only that, they tend to assume that it’s certain to live up to its title: a dominant oligarchy that will blanket the globe.

But is that dark prediction a certainty? Let’s back up a bit here and look at this from above the treeline of all the hoopla and see it as it really is.

First, where did the concept come from? Certainly, sociopaths have always existed, and they tend to wish to be omnipotent. And we know from history that there are no lengths that they will not go to, to achieve their power.

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Willful Blindness, Societal Rift & Death of the Dollar, by Michael Lebowitz

History is replete with governments who borrowed themselves to ruin, but not one that borrowed its way to prosperity. From Michael Lebowitz at realinvestmentadvice.com:

“It was assumed, even only a decade ago, that the Fed could not just print money with abandon. It was assumed that the government could not rack up huge debt without spurring inflation and crippling debt payment costs. Both of these concerns have been thrown out the window by large numbers of thinkers. We’ve seen years of high debt and loose monetary policy, but inflation has not come.

So the restraints have been cast aside.”

– David Brooks- New York Times-  Joe Biden Is A Transformational President

Regardless of whether you agree or disagree with David’s politics, he makes an incredibly bold statement above. In no uncertain terms, he argues, massive amounts of monetary and fiscal stimulus can be employed with no consequences, no restraints.

We fear this naïve mindset is not just David Brook’s, but a rapidly growing school of thought among economists, politicians, and central bankers.  We all want unicorn-like solutions to what ails us, but the truth, grounded in history, is there is no such thing as a free lunch.

Since David shrugs off any consequences of aggressive monetary and fiscal policy, we bring them to the forefront.

Who Is Funding Stimulus?

Someone must pay for rampant Federal spending.

Ask your spouse, neighbor, or friend who that might be, and they are likely to tell you the taxpayer is on the hook. To some degree, they are correct but increasingly less so.

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Taking Aim at the U.S. Dollar, the World Builds a Multipolar Trade-and-Payments Order, by Bill Campbell

The world is slowly but surely moving away from US and dollar dominance From Bill Campbell at DoubleLine Capital via zerohedge.com:

For every action, there is an equal and opposite reaction. In the case of international trade and global payments, the U.S. made aggressive use of sanctions and tariffs. With some merit, Washington has argued that these actions level the playing field for global trade or punish bad global actors. But a series of equal and opposite reactions are occurring as nations move to remove the role of the U.S. dollar at the center of global trade and finance.

This will have a long-lasting structural impact in ending the dominance of the dollar as the world’s reserve currency.

Over the past years, the U.S. set out to address inequities in the global trade environment by imposing tariffs and sanctions on various countries from China to Mexico and Canada with the rewriting of the North American Free Trade Agreement into the United States-Mexico-Canada Agreement. Even the countries in the European Union were affected. In addition, Washington implemented sanctions against Russia in 2014 in response to Moscow’s annexation of Crimea, and more recently against Iran and Venezuela, effectively using the dollar’s role at the center of global trade and finance to force compliance of other nations. These actions impacted nations beyond those directly targeted by the U.S. action, and today many governments around the world are taking countervailing steps to remove their reliance on the dollar-based global trade and finance system that has reigned since 1944.

In November, 15 Asian countries, comprising 30% of global GDP, signed the Regional Comprehensive Economic Partnership (RCEP), creating a free-trade zone among the signatories. This agreement attempts to provide gains to trading within the regional partnership through reduction of trade and investment barriers, and increased incentives for economic integration. It is noteworthy that RCEP came about without participation of either the U.S. or Europe, and has effectively created the world’s largest trading bloc, according to the Rand Corp. Beyond the obvious benefits for economic growth in the region, a more-subtle byproduct of this agreement is to focus on bilateral settlement of trade, effectively removing the dollar as the standard unit of transaction for regional trade, according to economist and geopolitical analyst Peter Koenig, a veteran of more than 30 years with the World Bank. Liu Xiaochun, deputy dean of the Shanghai New Finance Research Institute, recently furthered this idea, stating, “Under RCEP, currency choices for regional settlement in trade, investment and financing will increase significantly for the yuan, yen, Singapore dollar and Hong Kong dollar.” Liu’s comments were posted to the China Finance 40 Forum, a think tank comprising senior Chinese regulatory officials and financial experts.

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The next dollar problem has just arrived, by Alasdair Macleod

You can tell something is dramatically wrong just by looking at Alasdair Macleod’s charts. From Macleod at goldmoney.com:

Abstract

It is not for no reason that cryptos are roaring, and precious metals are playing catch-up. In the last month there have been developments that point to a new phase of accelerating monetary inflation for the dollar, and fiat money is only just beginning to be exchanged for these inflation hedges at an increasing pace.

Hyper-inflation of the dollar is now becoming obvious to a growing cohort of investors. It is driven by factors on both sides of bank balance sheets, with evidence that large depositors are reducing their term deposits and increasing their instant access checking accounts. This appears to be behind the increase in M1 money supply fuelled out of a shift from the M2 statistic, which includes savings deposits.

It amounts to a hidden run against bank balance sheets. Meanwhile, increasing supply chain problems against a background of covid lockdowns are leading to the withdrawal of bank credit from non-financial businesses, potentially imploding bank balance sheets as a bank credit contracts.

Foreign support for both the dollar and dollar-denominated fixed interest assets are being withdrawn, which is sure to lead to rising bond yields and dollar interest rates in the New Year, undermining the equity market bubble.

The Fed is now faced with not only financing ballooning federal budget deficits, but underwriting US supply chains in their entirety, which is corroborated by ongoing global logistical problems, tying up an annualised $34 trillion of intra-business payments in America alone. The Fed’s unwavering commitment to Keynesian monetary policies will lead the Fed to attempt to offset these supply chain problems, to rescue banks that fail to survive the inevitable contraction in bank credit, and to defray the bad debts that will arise.

It is a momentous task encompassing the whole US economy, requiring even faster money-printing, and is impossible without destroying the unbacked dollar.

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Digital Money Is Coming to America, by Bill Bonner

Inflationary regimes have often swapped the old, depreciated-to-next-to-nothing currency for a brand new, nominally revalued and reset currency that soon sinks to next to nothing. Right now the world’s inflationary regimes are scheming to replace currencies, especially that hard to track paper money, with digital, easy to monitor, currencies. From Bill Bonner at rogueeconomics.com:

Week 28 of the Quarantine

SAN MARTIN, ARGENTINA – For half a century, America’s greatest export has been the dollar. So much so that there are now more physical dollars outside the U.S. than in it.

Overseas, people use dollars as an alternative to their own money. Foreigners are more familiar with Ben Franklin than Americans. In many places, people cling to U.S. dollars like a drowning man to driftwood.

Here in Argentina, for example, inflation is already running at about 50% per year. People think it will get a lot worse. So they prepare by trading their pesos for dollars – now at a rate of 150-to-1.

Sinking Dollar

But what happens when the dollar sinks?

The question is premature. Almost naïve.

For the present, the dollar is as buoyant as an empty plastic bottle. The velocity of money – a key component of consumer price inflation – is actually going down.

Americans are happy to get dollars from the government. And foreigners are happy to get them any way they can.

But soon, everyone will see that the U.S. feds are acting like the people who run sh*thole countries. They stifle the economy with laws and regulations – shutdowns, moratoria on evictions, $1,200 checks for everyone – and try to finance it with printing-press money.

We have no superpowers here at the Diary. We cannot climb walls, fly through the air, or see through concrete walls. So we cannot tell you when or how the dollar fails.

But today, we will explore the question of what you should do about it.

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On the Verge of an Incredibly Chaotic Period That’s Nothing Short of Revolutionary, by Chris MacIntosh

Chaos is coming (actually, it’s already arrived). From Chris MacIntosh at internationalman.com:

Doug Casey’s Note: There aren’t too many newsletters that I can recommend wholeheartedly. Chris MacIntosh’s is one of the few. It covers the entire investment waterfront, it’s thoughtful and well-written.

Let me add I’m completely on the same page with Chris and his views. I urge you to read what he has to say.


International Man: First, I’d like to introduce Chris MacIntosh.

After working for many top-tier investment banks, Chris left the corporate world. He has since built and sold multiple million-dollar businesses, built a VC firm allocating $35m into early-stage ventures, and become a full-time trader.

He now manages money for clients of Glenorchy Capital; a macro focused hedge fund. Chris is the founder of Capitalist Exploits, with its flagship investment subscription letter called Insider.

Alright, let’s get into our discussion.

Chris, the government’s response to Covid-19 has unleashed an unprecedented amount of economic destruction around the world.

In the US alone, tens of millions of people are now unemployed. The government-ordered shutdowns have decimated many businesses. The Fed has printed more money out of thin air in just the last couple of months than it has for its entire 107-year existence.

From your perspective, what’s going on here, and what trends do you see taking shape?

Chris MacIntosh: There is quite a bit to unpack on that.

If we go back to before the global lockdowns began in February, Western governments were in debt to an extent where it would have been impossible to repay. That’s just a fact that can be proven with mathematical certainty.

So, we went into this crisis—and this is not a crisis, as it is currently being portrayed as an existential threat. For anybody who looks at the data, you can understand that this is largely a big “nothing burger” for what the virus itself is.

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