Tag Archives: Dollar

The US Government Debt Crisis, by Alasdair Macleod

There’s no way out if the debt hole the US government has dug itself. From Alasdair Macleod at goldmoney.com:

This article explains why the US Government is ensnared in a debt trap from which there is no escape. Its finances are spiralling out of control. In the context of a rapidly slowing global economy, the budget deficit can only be financed by QE and bank credit expansion. Do not draw comfort from trade protectionism: it will not prevent the trade deficit increasing at the expense of domestic production, unless you believe there will be an unlikely resurgence in personal saving rates. We can now begin to see how the debt crisis will evolve, leading to the destruction of the dollar.

Introduction

At the time of writing (Thursday April 24) bond yields are crashing, the euro has broken down against the dollar and equities are hitting new highs. Obviously, equities are taking their queue from bonds. But bond yields are crashing because the global economy is sending some very worrying signals. Equity investors will be hoping monetary easing (which they now fully expect) will kick the can down the road once again and economies will continue to bubble along. They are ignoring some very basic economic facts…

Regular readers of my Insight articles will be aware of strong indications that the expansionary phase of the credit cycle is now over, and that we at grave risk of falling headlong into a global credit and systemic crisis. The underlying condition is that economic actors and their bankers accustomed to credit expansion are beginning to realise the assumptions behind their borrowing commitments earlier in the credit cycle were incorrect.

That’s why it is a credit cycle. It is driven by prior credit expansion which corrals all producers into acting in an expansionary manner at the same time. Random activity, the condition of a true laissez-faire economy, ceases. Instead, credit conditions act on profit-seeking businesses in a state-managed context. Entrepreneurs take the availability of subsidised credit to be a profit-making opportunity. The same cannot be said of governments because they do not seek profits, only revenue.

If a government acts responsibly it should never have to borrow, except perhaps in an emergency, such as to defend the country against invasion. The evolution into unbacked fiat currencies has changed all that by permitting governments to finance themselves through the printing press.

There is only one way a government funds the excess of spending over tax revenue without it being inflationary, and that is to borrow money from savers. There is a downside to this. The government bids for existing savings, including those held in pension and insurance funds, diverting them from other borrowers. In the 1980s this was described as “crowding out” other borrowers and had the effect of increasing interest rates to the point where these other borrowers stop borrowing. In the post-war years, this has been the consequence of spendthrift socialism.

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Will Globalists Sacrifice The Dollar To Get Their ‘New World Order’? by Brandon Smith

Globalists will sacrifice whatever needs to be sacrificed, including you and your family’s lives, to get their new world order. From Brandon Smith at alt-market.com:

Trade is a fundamental element of human survival. No one person can produce every single product or service necessary for a comfortable life, no matter how Spartan their attitude. Unless your goal is to desperately scratch an existence from your local terrain with no chance of progress in the future, you are going to need a network of other producers. For most of the history of human civilization, production was the basis for economy. All other elements were secondary.

At some point, as trade grows and thrives, a society is going to start looking for a store of value; something that represents the man-hours and effort and ingenuity a person put into their day. Something that is universally accepted within barter networks, something highly prized, that is tangible, that can be held in our hands and is impossible to replicate artificially. Enter precious metals.

Thus, the concept of “money” was born, and for the most part it functioned quite well for thousands of years. Unfortunately, there are people in our world that see economy as a tool for control rather than a vital process that should be left alone to develop naturally.

The idea of “fiat money”, money which has no tangibility and that can be created on a whim by a central source or authority, is rather new in the grand scheme of things. It is a bastardization of the original and much more stable money system that existed before that was anchored in hard commodities. While it claims to offer a more “liquid” store of value, the truth is that it is no store of value at all.

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The biggest of big pictures, by Alasdair Macleod

Here’s a pretty good overview of what’s going on in the world. From Alasdair Macleod at goldmoney.com:

I have had a request from Mrs Macleod to write down in simple terms what on earth is going on in the world, and why is it that I think gold is so important in this context. She-who-must-be-obeyed does not fully share my interest in the subject. An explanation of the big picture is also likely to be useful to many of my readers and their spouses, who do not share an enduring interest in geopolitics either.

That is the purpose of this article. It can be bewildering when a casual observer tries to follow global events, something made more difficult by editorial policies at news outlets, and the commentary from most analysts, who are, frankly, ill-informed. Accordingly, this article addresses the topic that dominates our future. The most important players in the great game of geopolitics are America and China. But before launching into an update, I shall lay down the disciplines required for an informed analysis.

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The Distortions of Doom Part 2: The Fatal Flaws of Reserve Currencies, by Charles Hugh Smith

Why reserve currencies come and go. From Charles Hugh Smith at oftwomind.com:

Part 1

The way forward is to replace the entire system of reserve currencies with a transparent free-for-all of all kinds of currencies.
Over the years, I’ve endeavored to illuminate the arcane dynamics of global currencies by discussing Triffin’s Paradox, which explains the conflicting dual roles of national currencies that also act as global reserve currencies, i.e. currencies that other nations use for global payments, loans and foreign exchange reserves.
The four currencies that are considered global are the US dollar (USD), the euro, the Japanese yen and China’s RMB (yuan). The percentage of use in each of the three categories of demand for the reserve currencies–payments, loans and foreign exchange reserves–are displayed below.
Many observers don’t seem to grasp that demand for reserve currencies extend beyond payments. Many of those heralding the demise of the USD as a reserve currency note the rise of alternative payment platforms as evidence of the USD’s impending collapse.
But it’s not so simple. Currencies are also in demand because loans were denominated in that currency, so interest and principal payments must also be paid in that currency. There is also demand for the currency to be held as foreign exchange reserves–the equivalent of cash to settle trade imbalances and back the domestic currency.
Notice the minor role played by the yen and yuan, despite the size of the economies of Japan and China. There’s a reason for this that’s at the core of Triffin’s Paradox: any nation seeking to issue a reserve currency must export its currency in size by running large, permanent trade deficits (or an equivalent mechanism for exporting currency in size).
The reason why the yen and yuan are minor players is neither nation runs much of a trade deficit, and neither exports its currency in size via loans or other currency emittance mechanisms.
Triffin’s Paradox is the tension between a currency’s domestic role and its global role. The nation’s issuing central bank prioritizes domestic concerns–bolstering employment, tamping down (or generating) inflation, supporting the private banking system, etc.–but the rate of interest, etc. set by the issuing central bank has enormous impacts on nations using the currency for payments, loans and reserves.
No currency can serve two masters at the same time. If the issuing central bank raises interest rates for domestic reasons, the increase in rates may be ruinous to offshore borrowers who must convert weakening home currencies into the strengthening reserve currency to make interest payments.
Higher yields strengthen reserve currencies and weaken emerging market currencies. This increases the costs of servicing loans denominated in reserve currencies.
The question for any wannabe reserve currency is: how do you export enough currency into the global system to support the demand for payments, loans and reserves? If the issuing nation runs a trade surplus or modest deficit, trade doesn’t export enough currency into the global financial system to meet the demands placed on a reserve currency.
The alternative mechanism is debt. If the issuing central bank issues lines of credit to banks, then institutions can make loans denominated in the reserve currency to offshore borrowers.
The EU banks have issued loans in euros, and the fatal consequence of this is now becoming clear. Emerging market borrowers will be forced to default as their currencies weaken against the euro and the USD, driving the costs of servicing their debt denominated in euros and USD higher.
Loans denominated in USD and euros will bring the periphery crisis home to the core’s banking sectors as these loans default. It was all fun and games when the USD was weakening thanks to the Fed’a ZIRP (zero interest rate policy), because it became progressively cheaper to service loans in USD as USD weakened and emerging market currencies strengthened.
Now that dynamic has reversed: every click higher in U.S. yields vis a vis other currencies will only push the USD higher.
The system of reserve currencies is dysfunctional for everyone, creating and incentivizing fatal imbalances in trade, yields and debt. Some look to a basket of currencies (SDRs) as the solution, but all this does is tighten the coherence of a system that’s already dangerously hyper-coherent, i.e. highly susceptible to contagion.
There is no perfect reserve currency. Even gold has its limitations. As a result, the best available solution is a world of multiple currencies, some of which are not borrowed into existence, i.e. gold and bitcoin. Given a transparent range of options, nations, borrowers and lenders could choose whatever mix of currencies best suited them.
Some years ago I proposed using bitcoin as a reserve currency: Could Bitcoin (or equivalent) Become a Global Reserve Currency? (November 7, 2013)
The way forward isn’t to replace the USD with another dysfunctional reserve currency– the way forward is to replace the entire system of reserve currencies with a transparent free-for-all of all kinds of currencies.

The World Is Quietly Decoupling From the U.S. – And No One Is Paying Attention, by Brandon Smith

The world is finding ways to get around the US’s currency and its payment mechanisms. From Brandon Smith at birchgold.com:

Blind faith in the U.S. dollar is perhaps one of the most crippling disabilities economists have in gauging our economic future. Historically speaking, fiat currencies are essentially animals with very short lives, and world reserve currencies are even more prone to an early death. But, for some reason, the notion that the dollar is vulnerable at all to the same fate is deemed ridiculous by the mainstream.

This delusion has also recently bled into parts of the alternative economic movement, with some analysts hoping that the Trump Administration will somehow reverse several decades of central bank sabotage in only four to eight years. However, this thinking requires a person to completely ignore the prevailing trend.

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The Tyranny of the U.S. Dollar, by Peter Coy

The world sends us goods, we send the world pieces of paper (or computer entries). Sounds like a good deal for the US. It is, but it may be coming to a close. From Peter Coy at bloomberg.com:

The incumbent international currency has been American for decades. Is it time for regime change?

There’s a paradox at the heart of global finance. The U.S. share of the world economy has drifted lower for decades, and now President Trump is retreating from the American chief executive’s traditional role as Leader of the Free World. Yet the U.S. dollar remains, as the saying goes, almighty. “American exceptionalism has never been this stark,” Ruchir Sharma, head of emerging markets and chief global strategist for Morgan Stanley Investment Management, said at a Council on Foreign Relations symposium on Sept. 24.

By the latest tally of the European Central Bank, America’s currency makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are priced in dollars, not euros or yen. When Somali pirates hold up ships at sea, it’s dollars they demand. And threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia. It’s no exaggeration to say that the dollar’s primacy is at least as valuable to the U.S. as a couple of aircraft carrier strike groups.

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Destroying Trump Destroys More than America, by Tom Luongo

If the world loses confidence in the soap opera that is the US government, will it also lose confidence in its currency, economy, and financial markets? From Tom Luongo at tomluongo.me:

The “Resistance” has morphed into the “Lynch Mob.” Having successfully been gaslit into believing Donald Trump is everything from a bad joke to a Russian spy, the Progressive left in the U.S. are embracing all the totalitarian impulses their grabby little hands can find as they climb the Cliffs of their Insanity to remove him from office.

This putsch is orchestrated by a now open conspiracy of members of FBI, CIA, MI-6, DNC, the U.S. corporate media and Trump’s own staff in the Oval Office as evidenced by the recent and infamous New York Times op-ed.

This expose from a Trump staffer reads like a cross between the Neoconservative Manifesto and a Little League parent complaining his kid doesn’t get enough play time.

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