Let me try to explain my thoughts in language that is understandable while not trivializing what is a very serious issue. We all know that the U.S. dollar has been rallying sharply in recent months. Huge sell offs in global capital markets have created huge demand for the dollar and so its value has gone up.
At the same time interest rates have been falling on Fed funds, and the interest rates paid on T-bonds have headed to record lows. That in itself ought to be a warning to dollar bulls.
For most savers T-bonds are not attractive any more. They pay low interest rates, while banks are paying much higher rates on deposit accounts and in many countries there is now a state guarantee on those deposits.
Bond conundrum
Why would you hold a fixed-rate instrument like a bond - which can both fall and rise in value - when you could be earning more on a simple deposit account with a state guarantee, and have your capital at zero risk?
Individual savers have made this calculation and dumped bonds. Institutional investors and sovereign wealth funds have so far not done so, perhaps because bank deposits of this size would not be accepted.
However, the same investment logic applies to sovereigns as individuals. And this argument moves to being acutely important as soon as the T-bond’s currency starts to devalue.
Devaluation coming
Now with all these trillions of dollars being thrown into the global economy - and I saw $7.2 trillion as one figure for the total U.S. bailout which I don’t think included yesterday’s $800 billion - devaluation cannot be far away. Just as soon as these notional trillions enter the money supply as real trillions the impact will be huge.
That $7.2 trillion is half the annual GDP of by far the world’s richest country - how can you possibly inflate that much without impacting the currency’s value? Obviously you cannot - and surely that means a strike by the buyers of T-bonds can not be far off. Who wants to buy a share of an asset that is collapsing in value? And once the T-bond buyers go on strike this is self-fulfilling.
So enjoy the strong U.S. dollar while you can, it cannot last and its fall will compound an already dreadful global economic situation. I hope that is understandable. I hardly need to add that the only currency of choice in such an environment is precious metals.
Disclosure: None
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This article has 21 comments:
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Buffett Jr
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16 Comments
Nov 26 07:13 AM-
buyitcheap
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435 Comments
Nov 26 07:42 AM-
Asbytec
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230 Comments
Nov 26 08:37 AMWell soon need a money sucking-up machine and shut off the presses. Timing will probably be critical. I will be watching the Fed for signs it will fight inflation as aggressively as it created it...kind of like an out of control car swerving around a light pole. Hard to one side, hard back to the other...
Or, we could just sit back and let the inevitable come...hit the pole.
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User 30121
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336 Comments
Nov 26 09:01 AM-
EUARTE
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61 Comments
Nov 26 10:15 AMThe dregs are mostly from the Clinton administration. Remember, they oversaw the tech bubble-Crazy Al-Fannie Mae-Freddie-excessivel... low interest (read foundation for housing bust). Yeah! New team by rear. Same old dregs.
We are in for it. Devaluation will be nasty nasty.
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Tradesense
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8 Comments
My Website
Nov 26 10:41 AMThis will only help shore up balance sheets - I hope.
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usslbcgn9@earthlink.net
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163 Comments
Nov 26 12:11 PMI have been busy trying to get my realitives to be perpared,& its no easy job! They think because I am a coin collector,that its my hobby cloulding the way I think,but when I gave them a list of web site to read, they all started to call me more,requesting info on how to get more PMs without paying the high markups over Spot! They should have taking my advice in 2001,but you still can get PMs with some effort & Luck at almost fair prices! Those holding dollars will see hyperinflation lay waste to their buying power & it will happen & it will be ugly! So CLH,I hope you read this, & weap!
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Bengunnscave
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8 Comments
Nov 26 12:37 PMA classic example was the interview of Steve Forbes by Michael Eisner a few days ago. Of course when asked about the dollar, Steve answered that we need to strengthen and stabilize our currency. When asked how?, his answer proved my point. His answer was in two parts. First, he said that we "tell everyone that it is strong". Second, he said that we need to "get all of our foreign friends to buy and prop up the dollar". Now, I am paraphrasing the quotes, but he did slip up and use the word "prop". When asked about gold, he of course said "it needs to go down"...cart or horse???
The point is that these views/comments are very typical of the main stream and indeed for the masses become "the trash collected by the eyes and dumped into the brain"....which is exactly where the system wants us just prior to cratering the dollar.
Anyone want in on my pirate island...
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Bengunnscave
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8 Comments
Nov 26 12:57 PM-
sbenard
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237 Comments
My Website
Nov 26 01:35 PMThe Mother of all Bubbles is building. It is U.S. government debt. When it pops, it will be mayhem in the markets!
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User 197175
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27 Comments
Nov 26 04:30 PM-
zanardm
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42 Comments
Nov 26 04:31 PMOn Nov 26 01:35 PM sbenard wrote:
> The Fed has become the world largest and most leveraged hedge fund.
> The Fed's balance sheet as of todays stand at about $3.25 trillion.
> The leverage is almost infinite.
>
> The Mother of all Bubbles is building. It is U.S. government debt.
> When it pops, it will be mayhem in the markets!
amen.
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TechGuy
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2 Comments
Nov 26 05:58 PMI have doubts that the Treasury will issue trillions of new debt in 2009 to address all of the money they've handed out so far. Much of the new debt has been issued through the Fed which not provided any transparency of the money they have lent, and the Fed can print money without issuing bonds to balance its books.
The bond market almost always responds to the inflation figures published, not the money supply or gov't lending commitments (ie not very foward looking). Since the economy is still falling, all this new money isn't going to impact inflation for a while. When it does it could cause a nasy spike inflation and cause a very quick collapse of the bond market.
My point is that shorting Treasuries may not pay as quickly as some may believe, and it may not pop because the supply of debt increases beyond supply of cash. It may pop because of a dollar collapse. What good are profits paid in USD if its devalued by 70% to 90%? Shorting Treasuries using a index fund may end up be a lose-lose investment, since your profit is paid in USD.
Best of Luck
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The Rookie
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36 Comments
Nov 26 07:06 PMOf course I agree with the author of this aritcle about our dollar becoming worthless very soon, but as long as this country is in dept, do you think our loaner nations will let us pay them 5 cents to the dollar? If not our interest rates and taxes will go sky high. I may be wrong about that but I am a rook and Im learning as I go.
Dave
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Kunst
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750 Comments
Nov 26 09:45 PMWell, the Emperor has no clothes. Thanks for finally saying it.
There is no way we are ever going to pay off all this government debt in any honest way. I think Bernanke, Paulson, Bush, and now Obama and team have just given up on worrying about the future. They're trying to stop massive bleeding so the patient doesn't die right here and now. What happens afterward -- well, we'll deal with that then.
Devaluation of the US dollar is inevitable. Fortunately or unfortunately (depends on whether you are the debtor or lender, respectively), our debts are in our own currency. Did you note that Japan is now suggesting we issue bonds denominated in yen? Fat chance! We can't print yen. But we sure can print dollars, and that we will.
The US needs to sell around a trillion dollars of new treasuries in the next six months or so. There aren't enough dollars floating around to meet that need. Traditionally, interest rates would rise to pull the dollars out of other assets (bye, bye, stock market), but that would just make the deficit even worse. I've been quoting $400 billion a year in interest, but I think that's out of date. I saw someone refer to $500 billion the other day, and that's probably right. Between mushrooming debt and skyrocketing interest rates, can you imagine the US paying $1 trillion a year just in INTEREST on the national debt? That' close to half the annual federal budget!
There comes a time when the debtor reaches the end of the line, and the US is getting close. Then comes bankruptcy, when creditors lose some portion of their investments. The US won't default directly. Instead, we will just write electronic checks for new dollars to pay off whatever debt we must. I expect the dollar to lose at least half of its current value.
It looks like this is already starting. "Quantitative easing" is the word du jour. It's a euphemism for monetizing the debt, meaning the government buys bonds from itself (with newly created electronic dollars). It boils down to devaluation via inflation. Lots more dollars, each worth lots less.
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hyperinflation
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2 Comments
Nov 27 12:56 PMOn Nov 26 07:42 AM buyitcheap wrote:
> I like the TBT as well, UDN, and commodities also not bad. DGP/GLD
> good too.
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hyperinflation
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2 Comments
Nov 27 12:57 PM-
SM_PG
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8 Comments
My Website
Nov 28 12:27 AMIn the long run it’s impossible for dollar to continue with the current strength considering the massive deficits on all accounts US is currently running.
The only reason currency is not down yet is that china holds trillions in US currency reserves and they would not want or allow it all to become worthless overnight – but in some time, we’ll see…
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MurrayR
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30 Comments
Nov 28 02:32 PMwww.contrarianprofits....
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NCPL
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34 Comments
My Website
Dec 03 02:57 AMThe MD said gold is gonna double to $2000 coz of hyperinflation.
www.youtube.com/watch?...
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Del Ojo Zafado
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24 Comments
Dec 27 10:16 AM