The last couple of weeks have been quite eventful for economists and world leaders. First, Ben Bernanke announced the much anticipated next phase of US strategy to get the economy back on its feet, even though the recession has been over for many months and recovery is purported to be in full swing. The Bernanke Plan, to no one’s surprise, entails more monetization of US debt and further injections of liquidity into the system. To the chagrin of Nobel Prize winning economists like Paul Krugman, the announced $600 billion just isn’t going to be enough.
To world leaders in countries like China, Brazil and Germany, $600 billion is just the next round in what promises to be unfettered monetization of US debt until either the US economy is back to the boom times of exponential expansion and asset price growth , or goes completely bust. President Obama and Ben Bernanke are betting on boom times.
China and the rest of the world, on the other hand, seem to think that the likely outcome is a bust – a bust for the multiple trillions of dollars they hold in US debt. They have put serious pressure on US leaders to reverse their policies, with China implying that it is the US, not them, that are the currency manipulators. They’ve already taken steps to curb inflows of cheap US money into their economies in an attempt to prevent further bubble creation. The Chinese have even gone so far as to say that they and other Asian nations will act in unison to counter the threat of a depreciating US Dollar. The head of the world bank has even proposed that gold, a relic of empires past, be considered as part of a new global reserve currency system.
In a nutshell: The international community is putting massive public pressure on US policy makers. Whether the show being put on by the G20 and other influential organizations and individuals is real or not is yet to be determined.
Let’s assume that the surface level mainstream news is what it is for a moment, meaning that the international community really does want the US to strengthen the dollar and they are prepared to take steps to protect their economies through various means.
Naturally, in an environment like this, we can’t expect Ben Bernanke or President Obama to admit that they made a mistake, or that they intend to take steps to strengthen the dollar. In this global pissing contest, the last thing Earth Idol Barack Obama wants to do is lose face.
Plus, the only way to strengthen the dollar significantly would be to find a funding source for US debt.
The powers that be must come up with a simple solution to strengthen the dollar, fund US debt (at least in the near-term), and make our foreign creditors happy because their dollars aren’t losing purchasing power to wheat, oil and other commodities as they have for the last year.
In March of this year we wrote that Europe Goes First, Endgame Will Be Collapse of the Dollar:
For the time being and since March of 2009 the place to put money for growth has been the stock market. With sovereign debt issues in Europe coming to the forefront and the potential for a massive real estate meltdown starting later this year the next phase of the crisis will likely involve a transfer of capital wealth from stock markets (including China) back into the US dollar via the purchase of US debt instruments like bonds, bills and notes. After this short-term dollar pump, the severity of the crisis will set in as US job losses continue to mount, US GDP goes negative, real estate prices spiral downward and US government spending continues to expand unabated. This is where the endgame will take place â€” when domestic and foreign investors lose all confidence in the US governmentâ€™s ability to manage the crisis.
Of course, nothing is set in stone, but this scenario is becoming much more plausible given recent events.
The dominoes seem to been lined up, and in the next few days, someone might tip the first one over (if they haven’t already).
According to reports funneling in today and leading the Drudge Headlines:
‘IRELAND MESS: INVESTORS DUMP BONDS, BANK DOOM’
We turn to Karl Denninger for further insight and analysis:
So for those who believe that Europe “avoided” an explosion in Greece by coming up with their “bailout’….. have you looked at Irish Bond Spreads lately?
They blew through 600bps today.
That’s beyond the event horizon.Â The singularity is somewhere around 800bps.Â At the present rate we’ll get there in another few days, and we might get there at a greatly “accelerated” rate.
I strongly recommend that you pay close attention to this.Â The Irish banks were basically carpeted-over much like ours, except that this is a much smaller economy and the lies are harder to maintain.Â Now the dead fish has rotted the floor joists, and the creeking noises are getting louder.
Should the ECB intervene, and I expect them to, it will not fix anything.
The possibility of a monster move – southbound in equities, northbound in the dollar, southbound in the Euro – is definitely on the table here.
In coming days and weeks this is going to play out in full swing (unless, of course, the mainstream can distract us with another random missile launch off the US coast or a printer cartridge scare from Yemen) and we may see a total reversal of recent trends, or in Denninger’s words, a “monster move.”
If Ireland blows up, and investors get scared, it could cause a sell-first-ask-questions-later style sell off panic, forcing lots of capital to safety assets.
The prevailing wisdom will quickly become that the US dollar is, once again, the safe haven asset of choice. As the dollar strengthens, we may experience a repeat, or close to it, of what we saw in late 2008, with an appreciating dollar driving prices in stocks, commodities and perhaps even precious metals to new lows for the year.
I am now “officially” calling/predicting that a asset bubble is forming and/or has formed.
“Near” term prediction – dollar reversal…and significant pull backs in all commodities…except maybe gold.Â Stocks will get hit too…eventually.
I say this because EVERYONE is talking about inflation/devaluation of the dollar right now. I’ll go contrarian.
If for the last couple of months we’ve been played by the grand strategists of the global chess board, then everything we think will happen will happen exactly the opposite of how we’ve imagined it.
As we suggested in the aforementioned article, the scenario described above, if it were to occur, is nothing more than a detour to an eventual collapse of the US dollar. As Europe falls apart, the US may be looked to for safety temporarily, but when our fundamental economic problems become apparent to everyone on the planet (again) the same thing that may cause inflows into the US dollar in the near term, will cause them to expatriate as quickly as possible. Our long term trend forecast for eventual destruction of the US dollar remains intact and is best summed up by Rick Blaine:
Long term – all fiat currencies will eventually fail…not because there is anything inherently wrong with fiat currencies…but because the world’s central banks are run by jackasses.