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.
The Chinese continue to move out of the US fiat paper currency and into real money, gold. India purchased 200 tones last year. As the saying goes “he who owns the gold makes the rules” this furthers the process already in the making for decades - the financial center of the world will move from the US to China and Asia. http://english.pravda.ru/business/finance/25-02-2010/112369-china_gold-0
“There’s this huge debate between the inflationists and the deflationists… I belong more to the camp that looks at inflation and deflation from a different perspective. In the sense that in every system you can have some prices going down up and some prices going up. Say if you have a glut in consumer goods, then consumer goods prices can go up. But if you print money and have a zero interest rate, then home prices theoretically could go up, or stocks, or commodities. In any event your cash purchasing power goes down, that’s a symptom of deflation.”
“The worst investments in an inflationary period, when you print money and have large fiscal deficits are, of course, long term bonds and then cash. The best is to have foreign currency and commodities… also equities can protect you to some extent because they adjust upward as the currency goes down.”
“Regarding the dollar he says, “well, it will go to a value of exactly zero eventually.” When pressed for a timeline he explains, “Looking at Mr. Obama and his administration it should already be there, but I think it will take roughly ten years until people really realize that the fiscal position of the US is a complete disaster.”
My personal favorite from this clip:
On Bernanke: “He’s a money printer. He does that well.”
This is another nail in the coffin for the US Dollar.
27 October 2009 - TEHRAN - The Iranian Oil Bourse was inaugurated on Monday in the Persian Gulf island of Kish as a venue to export oil and petrochemical products.
National Petrochemical Company’s Managing Director Adel Nejad-Salim said in the opening ceremony that all petrochemical products will be gradually offered on the market, IRNA news agency reported.
The oil bourse is intended as an exchange market for petroleum, gas, and petrochemicals in various currencies, primarily the euro and Iranian rial, and a basket of other major currencies.
On February 4, 2008 the Iranian Cabinet approved the creation of the oil bourse in two stages - first for crude and second for oil byproducts transactions.
The US has been building commercial properties since the early 90s somewhere along the lines of 5 times the rate of population growth and up until today Capmark has been lending out money to about 2/3 of all building projects in the US. As you understand, this is a huge event.
The next big thing after this is of course all the derivates based on these loans like “Mortgage Backed Securities” etc. The derivatives bubble is currently about 20-30 times the global GDB depending on who you ask. Yes, in the Quadrillions. It’s such a huge number its almost impossible to grasp. This is one of the many reasons this blog is called “Economic Collapse”. We will need an Economic Paradigm Shift to get out of this one. The system we have now based on dept, fiat currency and Fractional Reserve Banking is proving not to work. Likely we will see an interesting line of events shaping from today and for the rest of the year. By early november the main stream news will probably start talking like they did one year ago when Lehman Brothers went bust. Hold on to your hats, folks, there is a storm coming. Interesting time to be alive…
If the Obama Administration decides that Capmark is too big to fail and bails this institution out, the Quantitative Easing program of the Federal Reserve has to gain momentum. This will further the downfall of the US Dollar, which will mean gold goes further up.
“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.
I’ve been more busy than usual with projects and clients for a few days, so here’s a recap of what has been going on in the last few days:
A lot of things are happening on world currency markets right now. What we are seeing now is a move away from the US dollar, a diversifying by Central Banks as well a move into the only currency with no counter-party risk: gold. The Metal of Kings rose to a new high at 1.060 USD/Oz during the last trading days and today almost 1.070 for a few minutes. Here is a Gold chart from today (14 October 2009): Read the rest of this entry »
Here’s an interesting TV-interview with Max Keiser on the latest developments in The demise of the dollar released by The Independent that I’ve written about here at Mellgren.com. As I wrote earlier I believe the collapse of the US dollar will happen a lot faster than 2018 as The Independent suggests, and Max Keiser agrees on that as well:
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.
