I got a question from a friend today and I thought I’d share it with you here on my blog:
Question: The value of the dollar has gone up recently and it seems to be holding steady. Why is that so?
My short answer is this:
First, the derivatives and equities markets are highly leveraged. This means that fund managers borrow cash, with stock or other assets as collateral, to buy even more stock.
The more they borrow the worse their credit rating gets and the more interest they have to pay on their loans, their “leverage”. How do they get a better credit rating? They call AIG and purchase a “credit default swap”, insurance from defaulting on loans, and they borrow even more…
Now, when the value of the stock invested fall, they get a “margin call” from the bank or institution that provided the borrowed cash. This means that the fund manager by contract is forced to sell.
The loan for the cash is taken in USD, but the stock bought with the cash is often purchased on a stock exchange outside the US in the currency of that market. When the stock is sold, due to the margin call, this sale is also done in the local currency. But since the loan is denominated in USD the fund manager first have to sell the local currency and buy back USD to pay back the loan to the issuing institution (paying back the loan is called “deleveraging”). This creates a temporary demand for USD which causes it to go up compared to the local currency.
Also, the second point to be made is that US government bonds are considered to be a “safe haven” in times of turmoil. This is because the USD is still the preferred reserve currency of central banks. This is about to change as inflation kicks in due to the expansion in the money supply and the mega borrowing from the Fed. When the deleveraging is over, and the central banks around the world realize that the USD is no longer a safe haven, the USD will drop like a stone – game over. The other currencies will then shortly after collapse as well. Only gold and silver will preserve your purchasing power at that point.
In late 2009/2010 the USD has been rising again. This is caused by the massive short on the Euro in connection to the crisis in Greece. The financial industry will hammer the Euro, Sterling and eventually the USD again. Remember, all fiat paper will go down to its true value Zero. It’s not how high gold will go, it’s how low paper will fall.
As many of you know Peter Schiff is now running for Senator in the State of Connecticut. Schiff is an American economist of the Austrian School, author, commentator and popular video blogger who regularly appears in the role of a bearish pundit on numerous financial news networks. He predicted the Dotcom crash of 2000 and the Housing crisis of 2007/2008 and like the author of this blog he belives that the US Dollar is heading for hyperinflation. He is a licensed stock broker, the president of Euro Pacific Capital with a 100 employees who successfully protect their clients wealth by moving out of the US dollar and into real money such as gold etc.
If you want a crash course in the problems with the US economy, watch this. A good hour well spent with a lot of information and humor. Enjoy.
Disclosure: I have no vested interest in Euro Pacific Capital nor do I receive any payment for writing this.
“Yes, Medvedev and Jintao is moving away from the US dollar and will settle this 20-year-deal in their own currencies. You should also move away from fiat paper of the west and move into your own currency: gold. Be your own banker, as a friend of mine says.”
“Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans,” Putin said.
Now that the Fed is buying almost all the Treasury bills since the demand from foreign buyers is almost gone, the only thing that keeps the US dollar from going down the tube is the petrodollar: Currently buyers of oil, natural gas and other commodities have to first buy US dollars to make their purchases. When these commodities are available in other currencies, the End of the Dollar is here.
This video post is almost a month old by now, but the content is timeless. Canadian economist professor Michel Chossudovsky is the author of “The Globalization of Poverty” and “America’s ‘War on Terrorism’”. He is also the Director of the Centre for Research on Globalization. In this video he sits down with The Corbett Report to discuss the real meaning of the “bank bailouts”. A very well summarized overview in just under 8 minutes.
Dear readers. Here’s an interesting, though very technical, article on the USD collapse and it’s implication for commodities as well as the panic based temporary USD climb since the collapse of -08. Some interesting observations… The key one being that the 200 day moving averages of both the US Dollar Index (USDX) and the Continuous Commodity Index (CCI) have now reached its daily trading level - this should mean that the trend will be reversed during the summer and later this autumn. However(!) another stock market panic could again temporarily give the USD fuel even though the Fed have increased the monetary base by (at least) 111% during the last year!
…So, this article is interesting, even though I don’t agree with everything… The author believes the US stock indices will continue climbing for the rest of this year… Maybe in nominal terms, not likely in real terms… We’ll see…
Johnny Mellgren is a Swedish entrepreneur with a keen interest in macro economics and macro politics. This is his web site where he blogs about the economic collapse of our time, what to do about it and the economic future we create together. Contact Johnny Mellgren.
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I provide advice on investment portfolios for private and corporate clients. I also hold lectures in the history of money and the current economic collapse and how to protect your wealth in a time of transition.
