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Preparing for a Lengthy and Unpredictable US Dollar Crisis

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Posted by Eric Fry

on Tuesday, 01 May 2012 14:18

“On the threshold of a crisis,” we observed in our essay “Investing Ahead of the Curve” in the July 19, 2011 edition of The Daily Reckoning, “a fertile imagination can be an investor’s most valuable asset.”

“During normal times,” we continued, “investors can focus only on buying quality stocks one by one from the bottom up, without also trying to envision what tragedies might befall them from the top down… But it may be time to begin imagining the unimaginable.

“It may be time, in other words, to begin considering that the next phase of the global monetary system might not include the US dollar as its reserve currency…or that the next two decades of life in America might not look anything like the last two decades.”

Here in the US of A, life is still pretty good, even if the economy isn’t perfect. A true crisis seems unimaginable. After all, even the 2008 crisis wasn’t that bad. Today, the Apple store in the mall is always packed, most of the restaurants in town are full…and the dollar is still strong enough to buy a nice vacation almost anywhere in the world.

A currency crisis that triggers an economic crisis — or vice versa — just feels like a bunch of wacky doom-and-gloom stuff. And it may well be. In the context of America’s legendary resilience and economic might, a catastrophic currency crisis seems almost unimaginable… But the time has arrived to begin imagining it…not because it is certain, but because it has become less unimaginable.

The best way to defend against a currency crisis is as obvious as it is emotionally difficult: Don’t hold the currency that is hurtling toward a crisis.

There is nothing mechanically difficult about this remedy, but it can be very difficult emotionally…and tactically. An individual who trades dollars for some sort of “safer” currency, for example, risks looking like a fool for a long period of time. Not even gold is a sure bet over short-to-medium-term timeframes. This safe-haven asset tumbled about 40% against the dollar during the 2008 crisis.

In short, being “safe” can sometimes feel very dangerous…and foolish. And no one wants to look as foolish as Noah building his Ark…unless, of course, it starts raining.

When the rain started falling on Brazil in 1990…or Thailand in 1997…or Russia in 1998, investors who had traded their local currencies for US dollars or gold were able to sail through the crises relatively unscathed. As their economies tumbled into deep recessions and asset values collapsed, the folks who had parked their wealth in dollars or gold were able to preserve their wealth…and also to take advantage of the resulting bargains.

To Read More CLICK HERE

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Currency

It seems Ben Proves me wrong!

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Posted by Jack Crooks

on Thursday, 26 April 2012 07:18

By Jack Crooks

“Beam me up Scotty.”  

- Star Trek                                               

Once again it seems the Fed Chairman Bernanke didn’t disappoint the stock bulls.   I expected otherwise.  Wrong again I was.  I continue to be amazed by Ben’s logic here.   

He says he wants to produce some inflation through monetary policy so the US economy doesn’t get caught up in a Japanese-like deflationary spiral.  But in the process of creating inflation, which is in commodity prices primarily, thanks to the implicit weak dollar policy (driven by the Treasury and deftly executed by the Fed), he hurts consumers and businesses with many of these policies even though he tells us he is really saving them.   

So, let me see if I get his right:  

    Pay those who save nothing on their deposits

    Then further reduce their purchasing power by creating inflation

    Continue to punish the interbank lending market (because of zero interest rates); therefore, banks have no incentive to lend to other banks that may actually have real economy lending opportunities.

    Pretend the US labor market is healing, when it is now starting to weaken again, and unofficial unemployment and under-employed rate is off the charts, proving that something is very wrong with existing policy.

    Then proceed to tell us how much this policy is working, and just in case there is a slowdown, tell us we will get more of this same policy that is working so well.

My head hurts after writing that.   

But we do know who this policy helps—the financial economy; which consists of some very smart people who know where their bread is buttered and just so happen to have a lot of extra money lying around to make campaign contributions. Hmmm…   

So Ben, you are telling us to forget about: 

To Read More CLICK HERE

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Currency

So Long, US Dollar

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Posted by Marin Katusa

on Wednesday, 25 April 2012 18:37

By: Marin Katusa
There's a major shift under way, one the US mainstream media has left largely untouched even though it will send the United States into an economic maelstrom and dramatically reduce the country's importance in the world: the demise of the US dollar as the world's reserve currency.

For decades the US dollar has been absolutely dominant in international trade, especially in the oil markets. This role has created immense demand for US dollars, and that international demand constitutes a huge part of the dollar's valuation. Not only did the global-currency role add massive value to the dollar, it also created an almost endless pool of demand for US Treasuries as countries around the world sought to maintain stores of petrodollars. The availability of all this credit, denominated in a dollar supported by nothing less than the entirety of global trade, enabled the American federal government to borrow without limit and spend with abandon.

The dominance of the dollar gave the United States incredible power and influence around the world… but the times they are a-changing. As the world's emerging economies gain ever more prominence, the US is losing hold of its position as the world's superpower. Many on the long list of nations that dislike America are pondering ways to reduce American influence in their affairs. Ditching the dollar is a very good start.

In fact, they are doing more than pondering. Over the past few years China and other emerging powers such as Russia have been quietly making agreements to move away from the US dollar in international trade. Several major oil-producing nations have begun selling oil in currencies other than the dollar, and both the United Nations and the International Monetary Fund (IMF) have issued reports arguing for the need to create a new global reserve currency independent of the dollar.

The supremacy of the dollar is not nearly as solid as most Americans believe it to be. More generally, the United States is not the global superpower it once was. These trends are very much connected, as demonstrated by the world's response to US sanctions against Iran.

US allies, including much of Europe and parts of Asia, fell into line quickly, reducing imports of Iranian oil. But a good number of Iran's clients do not feel the need to toe America's party line, and Iran certainly doesn't feel any need to take orders from the US. Some countries have objected to America's sanctions on Iran vocally, adamantly refusing to be ordered around. Others are being more discreet, choosing instead to simply trade with Iran through avenues that get around the sanctions.

It's ironic. The United States fashioned its Iranian sanctions assuming that oil trades occur in US dollars. That assumption – an echo of the more general assumption that the US dollar will continue to dominate international trade – has given countries unfriendly to the US a great reason to continue their moves away from the dollar: if they don't trade in dollars, America's dollar-centric policies carry no weight! It's a classic backfire: sanctions intended in part to illustrate the US's continued world supremacy are in fact encouraging countries disillusioned with that very notion to continue their moves away from the US currency, a slow but steady trend that will eat away at its economic power until there is little left.

Let's delve into both situations – the demise of the dollar's dominance and the Iranian sanction shortcuts – in more detail.

To Read More CLICK HERE

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Currency

Fire-eaters are the death knell for Club Med ... unless the scales begin to balance.

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Posted by Jack Crooks

on Tuesday, 24 April 2012 08:08

What do William Lowndes Yancey, Edmund Ruffin, and Geert Wilders have in common? Even though the first two owned black slaves in the 1800s and the last of that trio has spoken out against the spread of Islam across Europe in recent years, no – they’re not all racists.

They’re all secessionists. Or at least wannabe secessionists.

Yancey and Ruffin were known to be part of the “fire-eaters” who devoted themselves to Southern independence as the Northern states sought to undermine the Southern economy by eradicating slavery.

Wilders, who has vehemently opposed the “immigration of Islam” from Muslim countries into Europe, now looks ready to defend The Netherlands, and the North, on a different front ...

Over the weekend Wilders refused to engage Brussels in budget talks aimed at austerity. Now the EU faces a political commotion from The Netherlands as it tries to bring the region together and mitigate recession. Wilders has said he wants The Netherlands out of the euro and wants to bring back the Dutch guilder. He’s tired of the constant patchwork responses from EU and Eurozone leaders.

Of course, this is just one guy who doesn’t have the clout to really pull strings at any given moment; but he is loud enough and prominent enough to be heard and seen. And we know how much the status quo hates dissent, no matter where you are.

Yesterday, the ruling Netherlands government fell over disagreement about ongoing Eurozone austerity measures.  Hmmm ...  Timely for Mr. Wilders – he is putting the big question on the table: can the euro survive in its current form?

My view – it doesn’t seem so.

To Continue Reading CLICK HERE

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Currency

WWRRD -- What Would Robert Rubin Do?

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Posted by Jack Crooks

on Monday, 23 April 2012 13:00

He roller coaster
He got early warning
He got muddy water
He one Mojo filter
He say one and one and one is three
Got to be good looking
Cause he's so hard to see
Come together right now
Over me

Come together, yeah
Come together, yeah
Come together, yeah
Come together, yeah
Come together, yeah
Come together, yeah
Come together, yeah
Come together, yeah
Come together, yeah
Come together, yeah

-The Beatles

It seems the European Central Bankers didn’t read the latest issue of Institutional Investor. Had they perused the pages, they may have stumbled on an acceptable strategy from former Goldman Sachs managing partner slash US Treasury Secretary slash Citigroup chairman, Robert Rubin. In the words of writer Ben Baris, speaking on the subject of restoring the US economy Rubin said, “A potent combination of political will and the legislative agenda must come into alignment and rejuvenate Washington in order to achieve any goals.”

Funny, later in the article Rubin criticized the Europeans for how they were handling their crisis (implying their stop-and-go tactics should be avoided in the US.)

I would have liked to have been sitting with Sir Robert around an infinity edge pool at some Caribbean getaway this weekend when the European Central Bank tore away their metaphorical WWRRD bracelets in protest of added bureaucratic pressure from “above.”

The G-20 met this weekend to approve additional funding of the IMF that could backstop, particularly with respect to Europe, any nation that might come under pressure during a critical period of economic reforms. Member countries were heard to be singing a cappella to The Beatles hit song, Come Together, which explained comments after the meeting that suggested most finance ministers were on board with this move to bolster IMF resources.

That is except for two relevant parties: the US (who did not want to ask Congress for any more money) and the European Central Bank.

The IMF expressly asked the ECB to cut interest rates back further and ready the liquidity spots in hopes of further relieving economic pressure. And the US’s reluctance to probe Congress didn’t stop Treasury Secretary Geithner from laying responsibility on the back of the ECB. Even though the IMF’s stated goal of raising an additional $400+ billion was achieved this weekend, there is plenty of negativity surrounding the ECB’s discretion.

    ECB executive board member Joerg Asmussen

"We think we have done our task in the last months by quite a number of standard and non-standard measures we have taken,"

    ECB Vice President Vitor Constancio

"The stance of our monetary policy is fully appropriate ... It's appropriate to the situation and the prospects that we (face) right now."

    ECB's Jens Weidmann

"You cannot solve structural problems in the economy with instruments of the monetary policy."

"Higher interest rates are also an incentive to restore lost confidence. The common monetary policy must not be used to compensate for shortfalls in reforms."

The euro is under pressure this morning. [A major slump in German PMI manufacturing – 46.3 vs. expectations of 49.0 – is not helping, especially since recent sentiment numbers out of Germany have been cause for optimism.] 

To Read More CLICK HERE

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