The US Dollar is Doomed

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Austerity be damned, at this rate Mr. Bernanke will go down in the history books as one of the greatest money creators ever to have walked this planet!

Never mind sky-high deficits and a crushing debt overhang, at its most recent FOMC meeting, the Federal Reserve all but guaranteed another round of quantitative easing.

While the American central bank did not officially expand its quantitative easing program last month, it did reiterate its willingness to institute more aggressive monetary policy measures in order to combat the risks of deflation. Furthermore, Mr. Bernanke did officially downgrade the Federal Reserve’s outlook for inflation.

The truth is that the US is insolvent and its policymakers will stop at nothing in order to avoid sovereign default. So, it should come as no surprise that at its latest meeting, the Federal Reserve downplayed the risk of inflation, thereby setting the stage for another round of money creation.

Make no mistake; Mr. Bernanke has already created copious amounts of money. Granted, the Federal Reserve’s previous monetisation was highly secretive, but you can be sure that it did occur. Allow us to explain:

You will recall that during the depths of the financial crisis, the Federal Reserve expanded its own balance-sheet and bought all sorts of toxic assets from the financial institutions. By doing so, Mr. Bernanke created money out of thin air and bailed out the major banks.

Thus, the banks were able to dump their garbage assets on to the Federal Reserve and once they received the newly created cash in exchange for these securities, they loaned this money to the US government by purchasing US Treasuries. In summary, in the previous round of quantitative easing, the Federal Reserve created new money and instead of lending it directly to the US government, it used the banking cartel as its conduit. Back then, not only did the Federal Reserve create more than a trillion dollars, it also dropped its discount rate to almost zero; thereby allowing banks to borrow money cheaply! It should be noted that since the banks were able to obtain such inexpensive funding from the Federal Reserve, they had absolutely no qualms about re-investing this capital in US Treasuries.

At first glance, the Federal Reserve’s stealth monetisation plan seemed flawless. The banks offloaded their toxic assets on to the Federal Reserve, they made fortunes by investing in US Treasuries and the American government got access to a cheap source of funding. Magic!

Despite the fact that this financial wizardry was a lifeline for American policymakers and their banking cronies, let there be no doubt that it was an unmitigated disaster for the American public. Not only did the Federal Reserve nationalise the banks’ losses but more importantly, Mr. Bernanke’s money creation efforts have seriously undermined the viability of the US Dollar.

It is noteworthy that since bailing out the major banks and orchestrating the stealth monetisation, the Federal Reserve has been busy purchasing US Treasuries. Furthermore, it is now almost certain that in next month’s FOMC meeting, Mr. Bernanke will unleash yet another round of quantitative easing. In other words, in order to fund Mr. Obama’s out of control spending, Mr. Bernanke will create even more dollars out of thin air! Allegedly, this new round of money creation will drive interest-rates lower, thereby helping the US economic recovery. Or so the story goes.

Unfortunately, as any serious student of economic history knows, there is no such thing as a free lunch. By adding trillions of additional dollars to the monetary stock, Mr. Bernanke may succeed in bailing out his friends in high places but he is seriously jeopardising the US Dollar. In fact, bearing in mind the recent developments, it has become clear to us that the Federal Reserve wants to debase its currency. In our humble opinion, the US Dollar is a doomed currency and there is a real risk of an abrupt plunge in its value.

If our assessment turns out to be correct and Mr. Bernanke unleashes the second phase of quantitative easing, you can be sure that the US Dollar will slide against most un-manipulated currencies (which are few and far between) and hard assets. In fact, monetary inflation is the prime reason why we believe that the ongoing bull-market in stocks and commodities will continue for several more months.

Look. The US economy is swimming in debt and the total obligations (including social security, Medicare and Medicaid) now come in at around 800% of GDP! Furthermore, this year alone, Mr. Obama’s administration plans to spend another US$3.5 trillion, meanwhile the US Treasury will raise roughly US$2.2 trillion from issuing new government debt! Clearly, these numbers are unsustainable and you can bet your bottom dollar that the Federal Reserve will end up buying a large proportion of the newly issued US Treasury securities. As the American central bank funds more and more of Mr. Obama’s spending by creating new money, it will trash the value of its currency. In fact, given the growing imbalance between the government’s spending and tax receipts, very high inflation is inevitable and even hyperinflation cannot be ruled out.

For the sake of their financial well being, it is crucial that investors understand that inflation or even hyperinflation is a monetary phenomenon and a strong economy is not a pre-requisite for the debasement of a national currency. Whatever the reason, if a central bank decides to significantly increase the quantity of money in the system, that currency’s purchasing power will always diminish. This is how fiat-money regimes have operated since the beginning of time and this era is no different.

It is interesting to note that throughout recorded history, the worst excesses of inflation occurred only in the 20th century. Undoubtedly, this was a direct consequence of the adoption of fiat-money.

The following chart highlights all the hyperinflationary episodes in recorded history and as you can see, with the exception of the French Revolution (1789-1796), all of the other disasters occurred in the last century. In fact, it is an ominous sign that 29 out of the 30 recorded hyperinflations in human history occurred during the 20th century!

Hyperinflations in History

Let there be no doubt, a paper money system usually ends in the reckless destruction of money and it is no coincidence that all hyperinflations in history have occurred in the presence of discretionary paper money regimes. Furthermore, it is important to understand that a political system based on democracy is inherently inflationary and political leaders have been responsible for all major inflations in the past. Conversely, history has shown that monetary systems binding the hands of political leaders are essential for keeping inflation in check. If history is any guide, metallic monetary systems have shown the largest resistance to inflation and this is due to the fact that currencies anchored by a tangible asset cannot be inflated ad infinitum.

It is our conjecture that the current monetary system is absolutely pathetic; a system designed to enslave society. Unfortunately, the vast majority of humans do not understand the endless inflation agenda and this is why the perpetrators get away with this crime. Furthermore, let it be known that the Federal Reserve is largely responsible for the incredible inflation we have experienced over the past century.

The chart below plots the cost of living in Britain, France, Switzerland and the US. As you will note, the cost of living in these nations was relatively stable for over 160 years (1750-1913) but once the Federal Reserve came to power in 1913, everything changed. Suddenly, the cost of living exploded in these nations, so it should be clear that the Federal Reserve’s covert policy of currency inflation and debasement is solely responsible for this mind numbing inflation.

Cost of Living in Various Nations

Unfortunately, the Federal Reserve and its allies have not finished inflating and over the following years, they will create even more confetti money. Under this scenario, cash will continue to lose purchasing power and the asset poor middle-class will get even more impoverished. If our assessment is correct, cash will prove to be a disastrous ‘asset’ over the next decade and once the Federal Reserve’s manipulation ends, fixed income securities will also depreciate in value.

Bearing in mind our grave concern about high inflation and the very real possibility of hyperinflation, we continue to favour hard assets such as precious metals and energy. At present, we have allocated roughly half of our clients’ capital to these sectors and it is our belief that this should be an adequate inflation hedge.

Regards,

Puru Saxena,
for The Daily Reckoning Australia

Puru Saxena
Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Puru Saxena is the founder of Puru Saxena Limited, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.
Puru Saxena

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Comments

  1. Simple question – with predictions of doom for the US dollar – is buying US dollars now for a trip nexT year tothe US a good thing or a bad thing. ie if it fails then would we lose an equivalent aussie dollar amount?

    Reply
  2. We’re OS half 2011 and buying nothing yet, Alan. Mine dew we’re strong on Oz;
    and we figure that DR has pretty much summed-up the US situation… .

    Reply
  3. where’s zimbabwe on that list?

    Reply
  4. If the DOW, ASX 200, Euro indicies, US housing re foreclosure risks are all over valued and due for a correction – which would include stocks in commodities, precious metals etc wouldn’t that mean cash (and maybe a spread of AUD, USD currencies etc) is actually the investment of choice over the next 10 years rather than commodities and precious metals?

    Richo (the Second)
    October 26, 2010
    Reply
  5. @Comment by Alan Morel on 25 October 2010:

    Simple question – with predictions of doom for the US dollar – is buying US dollars now for a trip nexT year tothe US a good thing or a bad thing. ie if it fails then would we lose an equivalent aussie dollar amount?

    For the most part it is not as big an issue as people think.. THe main reason…
    How much physical cash in USD are you prepared to carry?

    At any point around parity or maybe a little better is a “good” buy for US dollars. No one knows how far the USD will drop, or when (not if) the Aussie will drop.
    Most airfare/accomodation is cheaper if you book in advance.. Those early bird rates COULD well outweigh waiting for the AUD to get stronger against the USD and booking later only to find your paying more anyway.

    Same goes for someone travelling using reward points and staying at friends/relatives.. How much physical cash are you willing to take with you?

    If your a currency trader or heavy on the carry then yeah sure watch the dollar like a hawk..

    If your an intending tourist (like myself) be happy in the knowledge that the dollar currently is as high as it has ever been in nearly 30 years and that in itself is a bonus that you would not have otherwise had.. You go on holiday to relax and have a good time and not worry about whether cash component of your trip is going to vary +/- 10%

    Me personally.. I am carrying $5000USD with me when I leave for my holiday next year.

    Stillgotshoeson
    October 26, 2010
    Reply
  6. $10K is the max you can bring in to the US without scrutiny, anyway; and that same ceiling applies to a couple travelling together, … ie., $5K each.

    One place cash is essential is Italy. We were hit twice by dud ATMs riding between Capri and Tirano. Would have been very, very expensive, but for ANZ Visa… .

    Reply
  7. My contribution today will be a shameless plug for gold.

    “Russia’s Central bank has reported adding 700,000 ozs (21.77 tonnes) to its FX Reserves in September. In a development certain to boost gold’s popularity in influential circles, the Iranian Central Bank Governor has boasted the country’s gold holdings are “unprecedented”. ”

    …extracted from Harvey Organs site.

    Reply
  8. Goldies on ASX consolidating their move up on the back of carry flows.
    RSI appears to have broken a declining trend line similar to AUD and other carry items. Cant see any bear attacks happening for a good while yet..lets hope.
    http://goldoz.com.au/83.0.html

    Reply
  9. I’m half tempted to suggest to Shoes, Biker, Ross et al that we pool our capital to buy Ag land and ask you to manage it Lachlan?

    Stuff gold for mine though – If you want to buy it that’s fine by me. But I simply don’t have any great personal use for it.

    Reply
  10. None of my posts are going through…testing..

    Reply
  11. must have been a link…heres a part of it
    by News.com.au | 17/10/2010

    Blank auction boardBy Turi Condon

    AUSTRALIA’S rising dollar has halted the rush of overseas money into Australia’s residential property market, with the country’s biggest private apartment builder, billionaire Harry Triguboff, saying sales at his Meriton Apartments have fallen 60 per cent since the dollar’s surge.

    Reply
  12. linked from a realestate site…property bulls hoping Swanny/RBA will do something to devalue the AUD ?

    Reply
  13. In my opinion Ned, Ag land, PMs and even PM shares will only possibly go down in nominal terms but should increase in value in real terms ie if the powers that be allow a massive crash or if they fail to avert one then these will be priced down but less so than other assets…leaving you with the same or more purchasing power.

    Nice offer Ned but…only there is already that option available to me through the family…yet I just gotta do my own thing…I’m a hard case maybe?….having good time but ;)

    Reply
  14. No use for it Ned?…buy a cute blonde bank teller mate… they like shiny stuff..been thinking about it myself ;)

    Reply
  15. Ag land or shares are, I feel, good longer term plays for investing. The shorter term play for me is still copper/gold/platinum group metals/tin/silver.

    These I feel will out pace ag growth in the shorter term.

    I have been trying to post a link too Lachlan and can not…

    I see upside to the ASX and DOW over the next few months with the US QE assured now.
    5200 maybe even 5500 for the ASX
    Gold $1500USD Q1 or Q2 2011

    The big four banks should do a little better as well in this time but I would still be inclined to short them over a 12 month period.

    I do not trade puts/options. I set a buy and sell price and a stop loss for some protection and that’s it. Has served me well so far. Sometimes I have bought to soon, sometimes sold to soon.

    QE will be a stay of execution for the American economy, not a pardon, maybe 12 to 18 months

    Stillgotshoeson
    October 26, 2010
    Reply
  16. Comment by Ned S on 26 October 2010:

    Stuff gold for mine though – If you want to buy it that’s fine by me. But I simply don’t have any great personal use for it.

    I have no use for gold either Ned, Other than to increase my personal financial position.
    Gold is generally considered to be a store of wealth, however there are periods that gold goes up by considerable amounts in a short period of time (in investing time) I believe now (or damn soon) is one of those times.
    I invest in gold mining companies to give me even greater leverage to the gold price and raise stops on those stocks to protect my position. All my gold mining stocks are now at stops above purchase price which means initial investment is now protected.. It is now no longer a speculative play it is a profit play.

    Stillgotshoeson
    October 26, 2010
    Reply
  17. “a cute blonde bank teller” – While I’m sure you know my feelings about Au mate, I’d personally recommend sticking with that yellow haired bullion alternative for now? ;)

    Reply
  18. “…property bulls hoping Swanny/RBA will do something to devalue the AUD?”

    Nope. Media hints that very few of you blokes will come west to work our mines, so Labor will probably be forced to bring in more 457s. Where these people have critical skills, citizenship is being fast-tracked. Their rellies follow quickly, Lachlan.

    I’d really prefer to see Aussies get this highly-paid work, but most of the 457s we know will make great Aussies… even the Kiwis, who don’t need visas!
    :D

    Reply
  19. One thing is for sure Shoes…I want to own at least some gold shares for a long period of the gold bull market…hopefully to catch a parabolic move. So its hard but I will resist trading them or at least some of them. Who said buy and hold was dead. Night mate.

    Reply
  20. Comment by Biker Pete on 26 October 2010:

    Nope. Media hints that very few of you blokes will come west to work our mines, so Labor will probably be forced to bring in more 457s. Where these people have critical skills, citizenship is being fast-tracked. Their rellies follow quickly, Lachlan.

    I’d really prefer to see Aussies get this highly-paid work, but most of the 457s we know will make great Aussies… even the Kiwis, who don’t need visas!

    I have a comment awaiting moderation but this reminded me of another friend whom lives in Florida, he got retrenched 3 weeks ago and is looking to come out here on a 457.. He is a Civil Engineer.. I told him his best chances for work are QLD or WA.. Waqes are good, however cost of living is quite high compared to what he is used to.

    Stillgotshoeson
    October 26, 2010
    Reply
  21. Fair point BP. I will be buying land further west when I do (4hours from coast). I’ll base my work there for weekdays rather than roughing it. Its where all the action is at for me. I can understand why you live where you do of course.

    Reply
  22. Comment by Lachlan on 26 October 2010:

    One thing is for sure Shoes…I want to own at least some gold shares for a long period of the gold bull market…hopefully to catch a parabolic move. So its hard but I will resist trading them or at least some of them. Who said buy and hold was dead. Night mate.

    Buy and hold does not suit me yet.. Shares to me are real wealth creation, that is their purpose.. later on when I switch to income protection I will adopt a buy and hold position on dividend shares.
    Is why property is not my thing.. I do not see it as wealth creation.. Income producing.. no doubt about it.. If I was Bikers age I would seriously consider property in my investment portfolio.. Shares/Super/Property and some Cash are my ultimate position in retirement.. I feel shares and super (with shares) is going to far outperform property for me so that is my investment strategy, as I get older “performance” will be less critical and Income will become my focus, property then will play a part of my portfolio.

    Stillgotshoeson
    October 26, 2010
    Reply
  23. Comment by Biker Pete on 26 October 2010:

    “…property bulls hoping Swanny/RBA will do something to devalue the AUD?”

    Nope. Media hints that very few of you blokes will come west to work our mines,

    Training is an issue though Biker… Many of the miners do not want to train people, there are some whom apply for jobs but can not get them due to lack of skills/experience..

    Stillgotshoeson
    October 26, 2010
    Reply
  24. Good time to buy a new car with high AUD. $45k, 4wd utes now 31 to 35k. Granted trade in values have suffered. Can I ever win :(

    Reply
  25. I looked and saw there were long lists of unskilled workers who could not get jobs in mines. Don?

    Reply
  26. Training – I know that English isn’t necessary these days and that 1 + 1 equals whatever one’s accountancy dept says it does and that being almost as smart as your boss is a guaranteed route to unemployment; Unless you are 24 years younger than her and think that it’s really cool she’s bi! :D !!! Is there an icon on the internet that makes me tongue poke out sideways a long way? ;)

    Reply
  27. I think I’m growing tired of the ‘human condition’ – Hmmm …

    Reply
  28. “Many of the miners do not want to train people, there are some whom apply for jobs but can not get them due to lack of skills/experience…”

    That may well be true.

    Also read that 90% of our WA city-dwellers would decline work in a rural area, regardless of pay.

    The most successful ‘stayers’ appear to be husband-and-wife teams, whether Aussies or overseas workers. Probably that sense of a shared goal, maybe end-dated, to get set-up, is what holds it all together… .

    Reply
  29. Yeah, family structure is important Biker. But ‘we’ are way too stupid to have figured that out obviously. So we get what we deserve I guess? Offset by having some minerals in the ground – Yee Hah! :)

    Reply
  30. Marc Faber is expecting a sharp sell off on the QE11 announcement coming up soon (early Nov)
    “….Faber responds that anything under a trillion will “disappoint.” And with Goldman now throwing out bogeys as high as $2-4 trillion, it is almost inevitable that a sell the news type day will be virtual certainty on mid-term election day. “The markets are stretched: weak dollar, strong PMs and strong equities – I think a correction is overdue. But I wouldn’t think that a bear market is around the corner.” In fact the opposite: “Maybe we will have a crack up boom in stocks and commodities like between the end of 1999 and March 2000 when the markets went up very strongly.”
    Seems like a logical bet too…the butterflies in my stomach are telling me. They love their shakeouts this mob do.

    Reply
  31. “Family structure”..crumbs Ned , where ya been mate. Printing press welfare means we dont need that chain around our ankle..
    and the “human condition” .. scientists are testing new drugs to abolish emotions..”Benny and th Inkjets” pay them too so no need to stress.
    The future is bright Ned ..chin up ;)

    Reply
  32. HaHa… Benny and the Inkjets. Love it!

    Reply
  33. Comment by Lachlan on 27 October 2010:

    “Maybe we will have a crack up boom in stocks and commodities like between the end of 1999 and March 2000 when the markets went up very strongly.”
    Seems like a logical bet too…the butterflies in my stomach are telling me. They love their shakeouts this mob do.

    This is my “feeling” for will transpire post QE.. maybe a minor fall as shorts go to longs, then a run up… How high? Pick a number between 11000 and 15000 and your guess is as good as any one elses…

    Stillgotshoeson
    October 27, 2010
    Reply
  34. came across this one today. some investment advices for folks with yolks.
    Trade of the Decade: The Power Elite’s Grand Strategy
    Charles Hugh Smith.

    http://www.oftwominds.com/blogoct10/grand-strategy10-10.html

    me, I beggs for eggs.

    Reply
  35. Thanks for the link, peterg.

    The article starts logically and well and I was along for the ride until I came to two flawed conclusions:

    1. “…the idea that those owning most of the financial and property assets would welcome inflation makes little sense. If inflation eats away the value of debt, it also eats away the value of debt-based assets (i.e. the mortgage I owe you).

    Inflation, rents and tax claims have reduced our debts immensely over three decades. The assets’ worth is only reduced by inflation to the extent that one purchases commodities. Rents rise, debts fall…
    One’s financial ‘worth’ rises steadily.

    2. “When premium real estate properties and equities are selling for 10%-20% of their pre-crash valuations, I will begin buying. I won’t buy long-term bonds until the yields skyrocket; then I will jump in with all four feet.”

    Now we’re in wishful-thinking Cloud Cuckoo Land.
    He means four hooves. He’s a donkey!~ :D

    Reply
  36. actually, I would personally would benefit from massive house price inflation, as I would downsize/downgrade. any excess of my existing to my replacement goes into my pocket.
    and he can jump in with all feet and buy detroit houses for 10c to the dollar, and wait for the Council bulldozers to raze the whole block. anyway, i tend to play pin the tail on…. still if anyone had all the answers, they’d be richer than everyone else, and there are such, but, like the article said, its a power game, not a free market, the way its rigged.

    Reply
  37. Comment by Biker on 27 October 2010:

    Thanks for the link, peterg.

    Bottom line: expect a crash in commodity prices and other asset bubbles, a much stronger dollar and rapidly rising interest rates. I am playing it as it lays, and this is precisely what I expect to unfold between 2010 and 2014.

    The above closing statement is my take on things as well… Our dollar is going to have it’s time in the sun but a darkness will fall on it again..
    Depending on how big QE is and the strength of India and Chinese economies, I think closer to year end 2011 or early 2012 at least before we start to see it fall apart.

    Stillgotshoeson
    October 27, 2010
    Reply
  38. 80 – 90%?

    HaHa… Dream on, Shoes.

    (And I thought you had a _plan_! :D )

    Reply
  39. My sincere apologies for bursting into laughter online.
    Hope I didn’t wake you.

    Reply
  40. Where the f**k did you get 80 or 90% from my post you f***ing moron!!!!

    The ONLY reference to the blog I have made is to his closing statement.. which is what I agree with. The rest of the comment I have made no comment on one way or the other…. this is why you infuriate so many bloggers to this forum.. YOU DO NOT READ WHAT IS WRITTEN>>> YOU READ WHAT YOU WANT TO READ F**K WIT!!!! TOTAL AND UNEQUIVOCAL F**KWIT IS WHAT YOU ARE

    Stillgotshoeson
    October 27, 2010
    Reply
  41. What? No smart “a_r_s_e” response… As you know I am right…

    Not even a comment on my Grammar and Punctuation… I am impressed.

    Stillgotshoeson
    October 27, 2010
    Reply
  42. Your response was anticipated. Grumpy when woken, aren’t you? ;)

    Reply
  43. Don’t wake The Don, kids!~
    You’ll find a bloody horse head under your pillow if you do… .

    Reply
  44. No need for a horse head – he has already made an ass of himself with all those expletives……

    Reply
  45. c’mon shoes, you know what Biker is like, he’s just having a dig, dont feed the troll aspects – unless you want to have fun.

    anyway, I’m relaxed and comfy about Oz for the next few decades. I think theres enough demand for resources (ours) in the development of the rest of the world (China, India, etc). that growth is very real and economically sustainable. Some sag out of the bubble (I actually feel for the Chinese having to pay premium prices for our stuff. I think they will remember), but not the basic levels of demand. US will fall apart for sure but China can grow domestically, which is what should be happening. until Chinas wages grow comparable, then its everyone off to Africa. then we think about space travel. all this presumes no huge wars or pestilence or environmental backlash or civil unrest. on the positive side , any amazing techological breakthroughs (anity gravity, good power and storage, +’ve alien help, peace and 1/5 of the expenditure on wars). still, Im just generalising and long term commenting.
    as for the dollar, we all know its not all good news – for exporters, feeds our boom aspects, slackens our need for reform and effort.
    heres Gittens last week on the $
    http://www.smh.com.au/business/why-our-econocrats-reckon-the-high-aussie-dollar-is-such-a-good-thing-20101017-16p5y.html

    Reply
  46. If you were to run with that thought about managing Ag land on behalf of DRA readers, I’d suggest you insist on a structure that specifically precludes the holding of stakeholder AGMs Lachlan? :)

    Reply
  47. Might be hope for the Brits yet – I see their most common boy’s name is Mohammed. Bring in some of that Sharia Law stuff where thieves and other miscreants get their various appendages chopped off just could be the making of them and the Yanks! :D

    Reply

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