-- Published: Wednesday, 8 October 2014 | Print | Disqus
By Bill Holter
The dollar has broken higher and over the 80 level by 7-8% recently versus foreign currencies. Is "King Dollar" back and what would it mean if it was? First off, I do not believe King Dollar is anything more than a "less dirty shirt" in a pile of dirty clothes meaning the U.S. economy right now is not as bad ("reportedly") as either Europe or Japan. Notice I included the phrase "right now", the U.S. is just as upside down and broke as either Europe or Japan and of course on a much grander scale. Please keep the term "broke is broke" in the back of your mind as this is the case for all of the West's financial system.
So why has the dollar rallied? You must remember there is huge leverage in the system and the bulk of the debt is in dollars and must be paid back along with interest ...in dollars. As the global economy has weakened, this has put stress on the ability to pay back loans. This has happened along with (maybe because) the Fed trying to stop QE. They now only pump an extra $10 billion per month into the credit markets whereas they were pumping $85 billion per month last year, the credit markets were "used to" and comfortable with all this extra cash floating into them. This (for now) is ending.
Japan and Europe began to pick up the slack from the taper and began increasing their loose monetary policy, the Fed "passed the baton" so to speak to Japan and Europe and thus weakening their currencies. With the yen and the euro weakening, their currencies now buy less goods than they did before. This can also be looked at as the inflation rate going higher in both Europe and Japan, the money supplies are increasing, their currencies are dropping in value and "stuff", all stuff costs more. The problem is that both central banks (as is also the Fed) are pushing on a string and cannot get already overlevered borrowers to borrow more or spend much of the credit the central banks are creating.
There are also other problems the strong dollar brings with it. It makes our production of goods (what's left of it) more costly and thus less competitive, it makes dollar denominated debt more difficult to carry and it also lowers any profits made by U.S. companies as the foreign currencies earned are worth less. A stronger dollar that moves as fast as it had recently also has the potential to set derivatives off balance and as derivatives are now larger than the system itself ...a danger to the system itself. Remember this, ANY big moves in a short period of time have the ability to bankrupt holders of derivatives and the "chain" is only as strong as the weakest link. Should a large Japanese, European, U.S. or other bank become insolvent because of losses in the FOREX market, they ALL will become insolvent in a very fast "financial virus" or chain reaction type of event.
Another thing (mentioned above), a strong dollar makes "stuff" more expensive, food is a big part of this. When the necessity of life, food, becomes more expensive then the common man is affected. If food becomes "too" expensive for the common man to afford, this is when you see unrest and violence erupt. This is simple and why so many other countries are now trying to move away from dollars and have anger toward the U.S., food priced in dollars becomes more expensive when dollars become more expensive.
I also want to mention one other aspect to historical dollar movements. Part of the U.S. playbook for many years has been to weaken opponents currencies prior to wars. This playbook works both to U.S. advantage and opponent disadvantage. "Stuff" as in oil, supplies and equipment gets cheaper in dollars while more expensive in foreign currencies. In the current saga with Russia, a cheaper oil price in dollars and a MUCH lower ruble value mean Russia gets pinched or starved for cash flow. Their rubles now buy less internationally and their oil revenues are also lower, exactly the recipe to weaken an opponent prior to any military action. I believe this is an important clue as to whether we will push for "conflict" or not, I believe we will.
To answer the question whether or not King Dollar is back to stay, I don't believe there is ANY chance at all and the current strength will be very transitory. The U.S. is broke on too many levels to count from financially to morally, ethically and everything in between. The dollar is a fiat currency as is every other on the planet. It is based on confidence alone and foreigners know this. This is why the BRICS have set up a bank and a proposed clearing system. It is also why several metals exchanges have been set up, the foreign community will attempt to bring fair dealing amongst trading partners back to where it was "pre 1971".
As I wrote Monday, the U.S. economy and financial system have become a mirage and as such we will see another round of new, bigger and badder QE once the realities begin to set in. Creating new dollars via credit is the only tool left in the Fed's bag of tricks. Can they actually withdraw any of the credit they have already supplied? Can they ever raise interest rates again? Ever? Can they ever shrink their balance sheet and actually sell off some of their assets? The answer of course to all of these questions is "no". Should you be worried about a "stronger currency" issued by a bankrupt entity over anything other than the very short term? The answer again is a very big "NO".
BILL HOLTER, Associate Writer, Miles Franklin Precious Metal Specialists
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Prior to joining Miles Franklin in 2012, Bill Holter Worked as a retail stockbroker for 23 years, including 12 as a branch manager at A.G. Edwards. Later, he left Wall Street to avoid potential liabilities related to management of paper assets. In 2006 he retired and moved to Costa Rica where he lived until 2001 when he moved back to the United States. Bill was a well-known contributor to the Gold Anti-Trust Action Committee (GATA) commentaries from 2007-2012.