Dollar Trouble

by Mike Whitney / October 21st, 2009

The dollar is not going to crash. In fact, many economists believe that the dollar will rally when the Fed ends its quantitative easing program (QE) sometime in early 2010. The Fed is on track to buy nearly $2 trillion dollars of mortgage-backed securities, US Treasuries and agency debt. In other words, the Fed is printing money and pumping it into the housing market to keep the market from collapsing. This keeps interest rates low, but it also weakens the dollar. When the program ends, long-term interest rates will rise and the dollar will strengthen.

There is also a correlation between stock prices and the dollar which should be considered. As equities have soared, the dollar has plunged. That’s because investors have become less risk-adverse than they were after Lehman Bros. collapsed. Now they have resumed speculation. Still, the S&P 500 is up over 60 percent since March 9, (which prices in a full three year recovery) which is “too much too fast.” According to John Hussman, “90% of stocks (are) suspended above their 50- and 200-day moving averages for as sustained a period as we have now observed.” (Hussman Funds Weekly Market Comment) That suggests that stocks are wildly overbought and that the market will soon correct, perhaps, violently.

Also, there is no shortage of investors and central banks willing to buy US debt which supports the greenback. Consider this report in last week’s Bloomberg:

Investors can’t get enough Treasuries even as the U.S. budget deficit climbs beyond $1 trillion, the government sells a record amount of debt and the dollar declines to the weakest level since August 2008.

Foreign buyers increased their holdings for a fourth consecutive month in August, to an all-time high of $3.45 trillion, according to Treasury Department data released Oct. 16. U.S. demand is being spurred by a rising savings rate and concern the economic recovery may falter. Fixed-income funds have attracted 18 times more money than stock funds this year, according to data compiled by Morningstar Inc. and Bloomberg.

Long-term, it is likely to be tough-sledding for the dollar, as government spending increases and fiscal deficits keep piling up. But in the short-term, investors believe that deflation is the biggest problem facing the economy. The surge in US Treasuries proves that point.

The notion that the dollar will crash, has become an article of faith among doomsayers, Libertarians, survivalists, leftists and goldbugs. (I’m as guilty as anyone) But is the theory supported by the facts?

First of all, “crash” is an ambiguous term. I take it to mean a plunge in the value of the currency to a hyper-inflationary range. What we are seeing now, however, is the Fed managing the value of the dollar downward to increase exports and reduce the real value of household and financial sector debt. That is not a crash; it is a planned demolition with the intention of improving the US’s position vis-a-vis its main trading partners. It is a type of currency warfare which is making the dollar more competitive at the expense of people who save. It’s exactly what Bernanke wants.

All the Zimbabwe talk is pure nonsense.

The reserve currency system is inherently unfair and invites all kinds of abuses. It gives the United States greater access to credit and elevates the dollar above all the other currencies. The dollar should be dethroned as the de facto international currency so that there can be greater parity between the currencies.

Those who believe that a “dollar crash” will bring the government to its senses or change the system, are mistaken. It won’t happen. Real structural change requires political activism and a vision of a system that is more equitable then the one presently in place. There’s no substitute for hard work.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com. Read other articles by Mike.

This article was posted on Wednesday, October 21st, 2009 at 9:00am and is filed under Economy/Economics, Housing/Homelessness.

9 comments on this article so far ...

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  1. Michael Kenny said on October 21st, 2009 at 2:14pm #

    “First of all, “crash” is an ambiguous term. I take it to mean a plunge in the value of the currency to a hyper-inflationary range.”

    Of course! If you give “crash” an absurd definition, then there certainly isn’t going to be a “crash”! Nobody but Mr Whitney has been howling and shrieking about this kind of “crash”! What is happening is simply the process, which has been ongoing for several years, whereby those who hold dollars slowly sell them off. That causes the dollar to drop slowly but steadily. That is not an economic choice but a political one: the world understood a long time ago that the power of the American Empire to bully them stems from the role of the dollar. What seems to have changed is that the American elite now seems to accept that the dollar’s role must end. That probably means that the elite has recycled enough of its investments out of dollars that such a change no longer matters to them.
    For once, the interests of the elite and the little guy coincide. A slow but steady progression of inflation causes wages and prices to rise, while debts stay the same, which means, in practice, that they lose value in real money terms. Equally, a fall in the dollar makes outsourcing uneconomic because American consumers will no longer be able to pay for the imported products. companies will therefore have to produce in America if they want to sell in America. That will probably be the final blow to already dying globalisation.
    It sounds like the world is reaching an equilibrium in which nobody loses (other than the diehard defenders of the American Empire, both left and right)! What could be wrong with that?

  2. russell olausen said on October 21st, 2009 at 10:30pm #

    All of these cause and effect ruminations are no better than listening to untrained numerologists and astrologers. Now if a Rothschild trained numerologist or astrologist happened to be handy and IF said person could be persuaded to quaff a good sized swig of truth serum, then enhanced interrogated; thats the advise to act on. Currency is a function of interest rates, economic, political, and military power. My guess is, once the masses are brought to heel, excess liquidity will be vapourized by double digit rates. I am acting in eight months but if the jitters get me maybe a couple of months sooner. Best to remember, the dice are loaded and your hated when your broke.

  3. Max Shields` said on October 22nd, 2009 at 4:54am #

    This is a solid article. It deals with one of the cornerstones of power and the underpinnings of non-sovereignty in a colonalized world view vis-a-vis the American Empire. It allows invasion and occupation to happen at will, whenever and for whatever reason is trumped up.

    This Empire may be sunsetting, but unlike others, it aims to bring the rest of the world with it.

  4. Erik said on October 23rd, 2009 at 12:45am #

    The only thing that I really have to add to the article is that I highly question the statements that say thet there is this undying interest in our treasury notes. That they keep buying our dollars. Well, they do…Apparently with dollars the Fed “prints” out of thin air. There have been articles, which I could find if asked, that talk about how the FED “buys” agency notes from foreigners and then says, “We’ll see you in the morning so you can buy our treasuries with the money we just gave you right?” They don’t want the dollar to tank either and it doesn’t cost them anything. So, essentially the FED uses one credit card to pay off his other one. They even redefined what “Foreign Purchasers” has to mean. It’s all pitiful but maybe it’s working.

  5. Mladen said on October 23rd, 2009 at 2:35am #

    Huge national debt and hige amounts of dollar in circulation overseas should bring the value of dollar down against other currencies especially if dollars are returned back to US.

    BUT, Forex is so unpredictable that as Erik said, rather listen to numerologists and astrologists than to me.

  6. Cal said on October 23rd, 2009 at 6:40am #

    If us readers loved Mikey as much as Mikey loves Mikey, Mikey would actually make sense.

  7. Annie Ladysmith said on October 23rd, 2009 at 7:31am #

    CRASH! CHASH you say, do you know that whole families across America, and Washington state , are living in their cars because they got EVICTED from their homes?

    Do you not realize that in reality, which you may not neccessarily be in,the speed that they are getting that paper money off the presses decreases the ‘value’ of those dollars EXPOENTIALLY!

    This, Sir, is not a slump, it is a man-made diaster of monumental and global economic catastrophy without precedent. You may use denial as long as you like but there is a flood coming and building a boat to weather this storm would be advisable to whomever is able.

    WAKE UP! and see that this clearly planned destruction of the monetary system as we know it, is being blown to bits, and it will be put to rest inFlander’s Field, where so many other victims of a world gone mad lie. But, Flander’s dosn’t lie, it tells the brutal, unadorned truth of the goals of a global government under the kingdoms of this world’s ruling elite–the Illuminati. Their game is on, and it is to rid the world of most of us.

  8. Adalhelm Buerger said on October 31st, 2009 at 1:52pm #

    What would happen to the “godly dollar” if all Americans stopped paying on their debt? I just don’t understand how the coming student loan crisis and continued housing collapse, hotel defaults, etc. are not going to bring down the entire system. Not to mention the massive population growth (projected to hit 438 mill in 2050). We havbe no jobs now, so where are all these tens-of-mills going to work?

    Can someone please enlighten me? I mean, do most Americans really believe that students and young people making minimum wage are going to pay their loan debt? Come now, we’re talking Gen X and Gen Y here.

  9. Logan said on November 23rd, 2009 at 2:49pm #

    I just wanted to point out the most important – which happen to be the MOST overlooked aspect of this article…”Real structural change requires political activism and a vision of a system that is more equitable then the one presently in place. There’s no substitute for hard work.” Hello, America, I’d like to introduce you to a new concept…..MAKE DECISIONS THAT WILL FIX PROBLEMS, NOT BAND-AID SOLUTIONS!!!!! We elect people that have posed clear left-ist intentions, and somehow surprise finds itself as an emotion in homes across the country….. Can we please take a look at CHANGING THE RIGHT THINGS? Ever heard of Rick Green?? There’s a guy making a difference, educating the youth of today so there will be a different tomorrow. We need new blood if there is to be a new government.