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Wednesday, April 27, 2011

What's so bad about an orderly decline in the dollar?

Yeah - So what is so bad about an orderly decline in the dollar?

Ben Bernanke reiterated the orderly dollar decline theme today. His defenders point out that the recent lows are just marginally below the lows of 1997 at the peak of the US "Proseperity" before the banking collapse. It doesn't seem to occur to them that the prosperity and the collapse were in any way related. It's as if they were two completely separate events. It's like the guy on cocaine who has tons of energy for a year, then has a heart attack, and his doctor can't see that the energy and heart attack were related.

Here's the actual problem:

It is only through the dollar's reserve status the we are able to resist dramatic inflation and eventual hyper-inflation.

How so?

Because the Reserve status means we can settle our external debts in dollars. And we can print dollars to buy oil and food and other goods internationally.

This allows us to buy CHEAP GOODS from our developing trading partners in China, India, Brazil etc. And they, in turn take our dollars and use them to buy our debt, so that their own currencies don't appreciate. This keeps both prices and rates artificially low in the U. S. And it keeps our partners economies expanding while they develop internal markets. Everyone's a winner. Especially us. (despite the protestations of idiots like Shumer and Donald Trump. Yes, Trump's an idiot, he ran hid Dad's real estate empire into the ground. and now he's a TV reality star - like snooki.)


As the dollar declines the value of our debt declines. As our trading partners accumulate mountains of our debt, the value of selling us cheap goods is offset by their losses - and the inflation that gets exported to their own countries in the form of rising oil and food prices (which are currently settled in dollars).


This is the first step of the Dollar Crisis, when the dollar begins to lose its reserve status.

What then?

Well, we're in the process of finding out. The Fed has now become the major buyer of all new US debt (70 percent last quarter.) So far, so good, everything is holding together. But as the dollar drops its Reserve Status becomes compromised as Central Banks rebalance their reserves by selling dollars for Gold. This is happening, See the World Gold Council figures for last quarter (posted below.)

Still, the process is orderly. What could change that?

When US citizens begin to behave like Central Bankers and start selling their dollars for gold -for stocks of food - and for any commodity perceived to have intrinsic value. This is the culmination of a Crisis of Confidence in the dollar. People get scared. Ordinary people don't want to hold dollars. They spend them on stuff as soon as they get them. This creates a negative loop where prices keep rising, and the dollar keeps falling.

What could provoke that? The next economic slump. Salaries and paper assets drop as prices for necessities rise. People get scared and start to turn over dollars for stuff at alarming rates.

When will that happen? Tomorrow. In three months. In a year. Whenever. Recessions always happen. They're part of the natural economic cycle. Only this time it will happen with rates at zero, with a deficit that's already out of control, and on the back of Two massive Quantitative Easing programs and a Multi Trillion dollar Bank bailout. And with the average citizen indebted, jobless (or underemployed), scared, and angry.

And the only available response for the Government is to keep printing money like crazy (QE 3,4,5 etc.)

But what about the Tea Party, they won't allow that, right? The Tea Party will be leading the charge, they'll be begging the Fed to print more money when the next recession hits.

Still, hard to imagine a full blown Crisis of Confidence in the dollar, right? That could never really happen, right? Somehow, we'll just muddle on through.

Yeah, sure. It's hard to imagine any crisis until it occurs. Then it's too late.

If it does happen - and it will - whether it's simply run-away, persistent inflation or hyperinflation - the only thing that will protect your assets is gold.

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