us dollar Archives

The US Fed prints a lot of money. This devalues the US dollar. The devaluation of the US dollar increases in US dollar terms the foreign-earned income by US companies. This is reported as higher revenues and higher profits by US companies.

But here’s the problem. Those US dollars are actually worth less than before. While the immediate impact shows an increase in revenues and earnings, when those same US companies need to reinvest in their business – buy more supplies, machinery, etc – they’ll find costs have risen.

Even if they pay out an increased dividend, shareholders will find the higher income won’t match the increased costs of goods and services.

By the time investors spend the money or businesses reinvest it, the windfall they thought they’d gained has gone.

And when your costs increase, especially raw materials which remember are up 73% in US dollar terms, odds are businesses will have to get by without hiring more workers. They may actually have to fire workers if costs have risen.

Pity those businesses that have been fooled into increasing investment in their firm in the false belief that the good times are back. They’ve paid out higher costs thinking customers will spend… only they won’t… or not enough to justify the increased business investment.

The fact is central bank money printing isn’t helping the US economy. It’s damaging it. It’s creating inflation. Inflation that gives the impression of increased wealth and increased profits.

Courtesy Money Morning Australia

What Does a Global Dollar Standard Actually Mean?

Just how did the dollar come to be so central to the global system? Why is its status now in doubt? And if the dollar standard of the last 50 years falls, what will replace it and what will that mean to you as an Australian investor.

First, let’s clarify what a global dollar standard actually means. Currently, if the Chinese want to buy Middle Eastern oil, they have to buy US dollars and then buy the oil with those dollars. The same goes for other internationally traded goods. That creates an artificial and powerful demand for US dollars. If you want to buy things, you need dollars.

But why, then, is this alchemy? Under a gold standard, where gold forms a nation’s monetary reserves, any nation that prints too much money or consumes more than it produces (runs a trade deficit) will lose its gold to other nations. How exactly does that work?

In the above example, let’s say the the Chinese are trading for oil under a gold standard and not a U.S. dollar standard. To buy their oil, they would provide money backed by gold to their Middle Eastern trading partners instead of pure paper U.S. dollars. The key is that the paper money is backed by an redeemable for gold upon demand. Whomever accepts the paper can trade it for gold if they’re worried about the value of the paper (or simply more paper).

In China’s theoretical case, if China bought oil and also ran up a huge trade deficit, it would probably see a net outflow of gold from its bank vaults. Why? Debtor countries tend to pay off debts the easy way, by inflating the paper currency. Holders of the paper currency under a gold standard can prevent this effective devaluation by simply asking for gold.

In this way, during the first “golden age” of globalisation in the late 19th and early 20th century, the gold standard enforced sound fiscal and monetary policies over the world. It prevented large structural imbalances in the global economy because debtor countries always risked losing their gold if they accumulated too much debt and tried to inflate it away.

By taking the world off the gold standard and making US dollars an unbacked global reserve currency, you have a new revelation. Nations other than the US need to buy US dollars to trade. They’d agree to this (or have so far) because everyone else used the dollar to. It was convenient (liquid) and with the largest economy in the world for many years, the U.S. currency was also the most stable and reliable store of value.

The flaw in the design of the dollar standard system is that the US Federal Reserve can simply print more dollars to pay for its overseas spending sprees. This is convenient, as it costs nothing to create US dollars. The American economy cannot run out of what needs to be handed over when it runs trade deficits. It simply prints more dollars. Charles De Gaulle is said to have called this an “exorbitant privilege”.

Of course, other nations can simply create more of their currency too. But when they do, those currencies usually lose purchasing power. No one wants to own money that’s declining in value as its supply increases.

But dollars have been able to retain value despite the increasing supply because of the artificially high demand for them. They are used not just for trade in the US, but trade on international markets too. The US is not punished for printing too much money in the same way that other country’s would be.

However, that doesn’t mean that price inflation from printing US dollars doesn’t occur. All the dollars flooding the system can cause inflation of the internationally traded goods. That’s exactly what is happening now. And it’s why many commodities – especially food – are making new highs.

Crucially, then, Americans can print money without necessarily experiencing the inflation themselves. Because export economies prefer weak currencies to spur their growth, many of them offset any decline in the value of the dollar by printing their own currency. The Chinese peg their currency and are forced to print money to maintain this peg. By doing so, they fuel inflation in their own nation. They import the US’s inflation. That’s why inflation in nations other than the US continues despite attempts to slow it.

Of course, the artificial demand for US dollars as the reserve currency extends to dollar denominated assets for the same reasons. Many internationally traded goods can be paid for using US Treasuries, for example. That in turn creates an artificial demand for US Treasuries. This allows US politicians to run the deficits they do.

Nickolai Hubble
The Daily Reckoning Week in Review

Well, yes. The dollar is falling in value relative to tangible goods. But you have to keep in mind that rising commodity prices are also driven by countries with appreciating currencies using their newfound purchasing power to purchase scarce natural resources. Buy ‘em while you can, before they go up in price again.

–If the weak U.S. dollar keeps undermining political stability in the developing world because of rising food and oil prices, then the developing world will have another reason to hate America. To be fair, maybe the Bernanke Fed is trying to protect American jobs by driving Chinese labour costs higher.

But that’s probably not how the rest of the world will see U.S. currency policy. They’ll probably see it as a tool for producing involuntary regime change in countries where food and fuel prices are out of control. The Arab world can probably keep oil prices low in OPEC member countries. But do you reckon they’re a bit nervous about what’s happening in Tunisia?

One country that’s not nervous is China. It’s gaining more confidence, in fact. Yes, China is worried about inflation too. On Friday, the People’s Bank of China announced it would raise reserve ration requirements at banks by 50 basis points, effective January 20th. China is trying to prevent excess liquidity from driving prices out of control (house prices, food prices, stock prices).

–In fact, China’s President Hu Jintao understands perfectly that too many dollars are bad for everyone. China included. In written answers to questions posed by the Wall Street Journal and Washington Post, Hu wrote, “The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level.”

It’s too late for that. But Hu knows that too. He added that, “The current international currency system is the product of the past.” That has a faint resonance with the famous quotation from John Maynard Keynes that the gold standard was, “a barbarous relic.”

The problem with the gold standard is it imposed fiscal discipline on the 20th century Warfare/Welfare State. It had to go. The problem with the current global fiat dollar standard is it unleashes political and social mayhem. It has to go to.

–But what will replace it? China hopes to internationalise its currency so it will become a new global reserve currency. But it was hoping to do so by about 2015, when the IMF is scheduled to re-weight the currencies that make up its special drawing rights (SDRs).  In with the Yuan, down with the dollar!

By our reckoning, 2015 is about four years from now. And that’s a long time to tolerate/endure higher oil, energy, and food prices. These well-laid plans may not be good enough. In the meantime, investors can speculate on higher commodity prices. But if high prices lead to increased political instability, even that will be a risky bet.

Dan Denning for The Daily Reckoning Australia

Check out the chart of the US dollar index

US dollar

The dollar has rallied strongly since Bernanke announced his money printing scheme in early November. Things haven’t exactly gone according to plan for Ben. He’s trying to lower the value of the dollar to generate inflation and boost export competitiveness.

But he’s forgetting the minor point about the US dollar being the world’s reserve currency. In times of economic stability, the US dollar will generally trade according to domestic fundamentals. In times of turmoil though, it retains its safe haven status.

Because the euro is under all sorts of pressure, capital is now flowing back to the US dollar. It’s all relative in the world of currencies and as bad as the US dollar looks, it’s not as bad as all the other major currencies.

If there’s one lesson to be learned from the euro crisis it’s that problems begin at the core. The US dollar is at the epicentre of the global economy. The peripheral currencies (euro, yen) will likely come under major pressure before the greenback faces its day of reckoning.

But one thing is for sure, the dollar is not as good as gold. Gold is in a consolidation phase at the moment and just doesn’t seem to want to put in a decent correction. Dips are bought with gusto. It’s a sign of a powerful bull market when everyone seems to be waiting for a correction and it doesn’t happen.

The bull market in gold is the mirror image of the bear market in government policymaking and fiat currencies. The trend has a long way to run yet.

Greg Canavan in Sydney for The Daily Reckoning Australia

Dollar Ditched by China and Russia

“Russia and China Ditch the Dollar,” says the headline.

It was inevitable, wasn’t it? The two said they didn’t need no stinkin’ greenbacks to do their bi-lateral trade. They can work it out perfectly well in yuan and rubles.

Besides, with the Fed undermining the value of the dollar, who wants to hold it? You could have a few hundred billion one day. And then, the next day you discover that you’ve lost $200 million – just from holding the wrong currency at the wrong time.

No thanks.

The Russians and Chinese won’t be the first. And not the last either. Gradually and suddenly, the world will drop the dollar.

Eventually, Americans will drop it too.

*** “I don’t know if I want to be a doctor,” said Henry, back from college for Thanksgiving.

“I like the theory and the science of it. But now it’s extremely regulated and controlled. And nobody seems to know what the new health care system will mean or where it will end up. I don’t know if I could live with the paperwork.

“I’m thinking about sticking with physics.”

Regards,

Bill Bonner,
for The Daily Reckoning Australia

Confidence in Ireland’s Banking Sector is Waning

Bond vigilantes and depositors alike realise that the banks are stuffed and the government will stuff itself by agreeing to help the banks, which stuffs everyone else in Europe. There’s a whole lot of stuffing going on—and it’s not even Thanksgiving yet.

–The Financial Times reports that customers of Irish Life and Permanent bank withdrew nearly €600 million in August and September—11% of deposits. There’s a crisis of confidence in the banks because there’s no confidence that the banks have adequate capital to withstand losses on the many bad loans they are carrying.

–Yesterday’s action on the Ireland story was mostly political. Teams of lawyers and bankers from the IMF and ECB converged on Dublin to try and force a deal on the Irish government before a failing bank in Ireland puts pressure on struggling banks elsewhere in Europe. And the Europeans are keen to prevent Ireland’s problems from undermining confidence in the Sovereign Debt of countries like Spain and Portugal and Italy and Greece.

–Jeez. And we thought the U.S. dollar had it bad. The Euro’s woes have stabilised the dollar’s plunge into currency ignominy. But more importantly, the weakness of the world’s two large reserve currencies (and the underlying debt woes, sovereign and household, that plague both) is causing investors to take their money and run to places where it’s treated better.

–One place investors think money might be treated better is China. But there is no easy way for capital to find its way into China at the moment (arguing for a speculative punt on countries at the periphery of China’s growth). And China, meanwhile, is suddenly facing its own inflationary crisis, having imported the Bernank’s policy of inflation.

–Today’s Asian Wall Street Journal reports that, “A statement from the State Council on Wednesday pledging to use administrative measures to tame rising prices of food and energy, and to cushion the poor with higher welfare payouts, appeared mainly to reflect government concerns that inflation could trigger social unrest.”

–Just to be clear, these are old-fashioned command economy style price controls. Just last week the Chinese were laughing at U.S. Treasury Secretary Timothy Geithner for recommending to G-20 finance ministers a command economy style cap on national trade surpluses of 4% of GDP (bad for Brazil and China, good, maybe, for America). Chinese Vice Foreign Minister Cui Tiankai said, “The artificial setting of a numerical target cannot but remind us of the days of planned economies.”

–He probably said that without any sense of irony, since China sets a GDP target roughly commensurate with the need to keep employment growing in China and avoid social unrest. But meanwhile, the numerical target whereby China fixes its currency to the value of the U.S. dollar has unleashed a rash of undesirable consequences in China’s economy which we like to call “higher prices.”

–The Journal says that, “Accelerating food prices—the biggest single component of China’s inflation, now running well above the government’s target of 3% for the year—are hurting China’s neediest households, and their plight could get worse as the country heads into what is forecast to be an unusually cold winter that threatens to disrupt transport and bring new fuel shortages.”

–At last week’s Gold Symposium in Sydney we suggested that higher food and fuel prices—the things that hit ordinary people every day—would force the world to decouple from the dollar standard more quickly than it had planned to do. This dislocation in markets would produce volatility, bigger capital flows, are larger asset price swings as investors try to buy assets which aren’t losing value in one currency or another.

–Which brings us to yesterday’s action in Mt. Gibson. The Western Australian Business News is reporting that, “Chinese corporate shareholders in Mt Gibson Iron have seized board control of the local iron ore producer at a sensational annual meeting in Perth today.” The article continues:

Steel group Shougang and Hong Kong-listed APAC Resources, which indirectly speak for around 40 per cent of the company’s shares and are its biggest iron ore customers, today seized a majority of positions on the seven member board.

The two Chinese groups, which were declared associated parties by the Takeovers Panel in relation to another matter involving Mt Gibson in 2008, today used their combined votes, and those of Shougang-associate Fushan Energy, to prevent the re-election of independent director Peter Knowles.

–And now it gets interesting. There are $2.6 trillion reasons why China Inc. would seek hard assets instead of owning U.S. Treasury bonds. But the key issue here is whether the customers of a company—Shougang and APAC Resources—are the best people to maximise profitability of that company on behalf of Australian shareholders. Customers typically seek the lowest prices possible—which is exactly what you’d expect customers do.

–Herein lies the dilemma of having open and free capital markets where your assets are for sale to anyone with cash. Will those assets be run to maximise shareholder value? Or will they be run, in this case, to guarantee price certainty and iron ore supply to Chinese customers? If the answer to the second question is no, will Australia get the most benefit from its mineral reserves?

–Our thoughtless answer is that the projects which the Chinese are allowed to invest in or takeover might not find capital from Aussie investors anyway, so there is a net benefit in jobs to Australia (if not profits to Mt. Gibson’s Aussie shareholders). The government is going to block the takeover of all the mining sectors crown jewels (Oxiana’s assets in SA, Chinalco’s bid for Rio). The lower quality iron ore deposits (lower quality ore and smaller deposits) are perfect for the Chinese and otherwise might not get developed at all. Capital should be welcomed.

Dan Denning The Daily Reckoning Australia

–Maybe that missile off the coast of California was fired by Ben Bernanke as his first big blow in the currency wars. Maybe it was filled with dollar bills and on its way to China. Sneak attack or not, the U.S. IS exporting inflation to China faster than you can say “I’ll have General Tso’s chicken.” The task of today’s Daily Reckoning is to put the last weeks’ monetary events into a bit of strategic perspective.

–To begin with, let’s turn to a master strategist. Military theorist Carl Von Clausewitz reportedly once said that, “No military plan survives its first contact with the enemy.” We got to thinking of that this morning when looking at the huge price swings in the gold and silver futures markets over the last 24 hours. The Bernanke Fed’s plan to suppress U.S. interest rates and float U.S. asset markets has not survived its first contact with reality. Asset markets have scattered and surged.

–Note that we’ve replaced “the enemy” with “reality” because the Fed’s real enemy is itself, not China. They may be blackhearts and villains, but are central banksters really stupid? Do they not know that their actions fundamentally weaken the dollar and lead to lower of standards of living for everyone through competitive devaluation?

–Well, they’re probably not stupid. But they are acting stupidly, which tends to happen when you act like you have a God’s eye view of the marketplace when, in fact, your vision is rather limited. If you want to continue with the military terminology, the banksters (including General Ben) are operating in a closed-loop decision cycle. They act as if every Fed action has an equal and predictable reaction in the asset markets (stocks higher, bond yields lower). And they act in a methodical, plodding way.

–But if you can unleash a lot of water on a herd full of horses, you still can’t predict where the liquidity is going to run. In the current situation, the Fed hasn’t even really entered into the market as an active bond buyer yet (it plans to buy $150 billion over the next month).

–But it HAS caused an obvious change in global capital flows. Things you can’t print—gold, silver, food, fuel, and metal—are going up in value against the declining dollar. Global investors realise that if the Fed intends to buy up all the new U.S. debt issued (monetise it), the policy is clearly inflationary. And by crowding everyone out of shorter-term yields, the Fed forces everyone to speculate on other asset classes.

–That’s the primary trend and that’s what’s animating the melt-ups in stocks and hard assets. There may be secondary and counter-cyclical trends. But in the last week, it sure does seem like the primary trend has picked up speed.

–And no, it does not feel like a blow-off top in precious metals, although the “feeling” is admittedly subjective. It “feels” like a mortal body blow to the dollar standard that has left everyone a bit staggered and unprepared for the sooner-than-anticipated transition to a world currency system without the dollar the centre.

–But we’ll save commentary on all that for tomorrow. The Gold Symposium was a resounding success and left your editor with a lot to think about. We’re back at our post in Melbourne and dutifully scratching our chin…thinking. In the meantime, our old friend from London Adrian Ash has something he’d like to get off his chest about a gold standard. So Ade, what is it you have to say?

Courtesy The Daily Reckoning Australia

All Doom and Gloom for US Dollar

The US Dollar is Doomed
By Puru Saxena

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!

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.

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

Plaza II
By Bill Bonner

Keynes was right about one thing…

Peace talks broke down last weekend. Observers had expected the IMF meeting on the weekend to result in the equivalent of the Peace of Amiens or the Surrender at Appomattox. But Treasury secretaries and central bankers went home, unpacked their bags, and resumed their premeditated mischief.

The dollar went down. Why would anyone pay 100 cents for an old, worn out greenback when the Fed promises to create trillions more of them, brand spanking new? Europe and Japan resumed firing with their new QE guns. Asian nations sent out snipers to intervene in the currency markets directly. And China and the US resorted to “trench warfare,” reported The Financial Times, neither apparently ready to give up an inch; that is, neither was prepared to allow its currency to buy more today than it did yesterday. In America, China has become an election- year bogeyman. The electorate seems convinced that any nation that stockpiles $2 trillion worth of America’s I.O.U. greenbacks must be up to no good.

So, the war goes on. But it is an ersatz war. All the combatants really want the same thing – to debauch their currencies at the expense of savers and creditors. Sooner or later, they’ll conspire to get the job done. A full 93% of US financial professionals believe the Federal Reserve Bank is on the case. It is expected to launch major debauch in November. Investors have run up almost all asset classes in anticipation. The Dow passed 11,000 on Friday. Soft and hard commodities hit new highs. And if, on a given day, gold does not set a new record, it is probably because the markets are closed.

What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this:
There is no subtler, surer means of overturning society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose.
And we get to see it live. And probably dead. The US dollar fell under the control of the debauchers, partially, in 1913…when America’s central bank was formed…then fully, in 1971, when gold backing for the dollar was completely eliminated. In the 100 years before the Fed was formed, the dollar lost not a penny of its value. In the almost 100 years since, it has lost almost all of them. If the greenback were to lose another 5% of its 1914 value, there would be nothing left at all.

Such slow larceny bothered no one. As long as the dollar slid gradually, and peacefully towards worthlessness it seemed almost natural, even healthy. Central bankers could mix with polite company and hold their heads up. None was arrested, as far as we know. None was so tormented by his crime that he had to be restrained or sedated. But now central banks are committing their felonies in broad daylight. Economists argue for more. But investors are confused and worried. Today, they buy gold. Tomorrow they may buy shotguns.

But what else can the managers do? After increasing for 61 years, the volume of credit in the US – and hence, the volume of sales – is no longer expanding. This leaves householders with debt to pay down and exporters with no alternative but to fight for market share. What to do about it? Lower the value of the currency! But in a correction, the natural thing is for prices to go down with a decline in demand. So, money tends to become more upright just when the managers would most like to see it slouch.

The poor central bankers. They are victims of their own delusions of competence. They have never actually managed anything successfully. When the economy is expanding, they exacerbate the boom. When it is contracting, they slow down the correction. And now, they fight a currency war not of their own choosing, but of their own making. The war is their response to the correction, which results from the bubble, which was caused largely by the managers themselves.

And now they’re looking for a hotel where they can do it again. It was at the Plaza Hotel in New York in 1985 that they managed their Treaty of Versailles. It ended the currency war of the early ’80s…and prepared the way for an even bigger war later on. Back then, Japan was the go-go economy. Like China today, Japan was the world’s leading exporter. It wanted to keep the yen low. The US meanwhile, was losing market share. James Baker and the other US managers threatened sanctions. Japan gave in. By early the following year, the yen was 40% higher against the dollar and Japan’s GDP growth rate had been cut in half. But the managers fixed that problem as they fix them all. In Japan, they cut rates 4 times in 1986, creating a flood of hot money. Four years later, Japan was the envy of the entire world. In January of 1990, the Nikkei Dow hit a new record – 4 times higher than it was when the Plaza Accords were signed. Then, the bubble popped. You don’t need to be reminded of wh at happened next. The Nikkei crashed. Real estate crashed. Everything crashed. The economy went into a 20-year tailspin, failing to create a single new job in two decades. Neither stocks, nor real estate, nor the economy ever recovered.

No one wants to follow the Japanese down that road. Ben Bernanke manages the dollar, desperately trying to avoid it. And Premier Wen of China said it would be “a disaster for the world” if Western nations tried to force China in that direction. He’s right. But he needn’t worry about it. Disaster is coming anyway. The managers will make sure of it.

Regards,

Bill Bonner,
for The Daily Reckoning Australia

We’ll stay on the theme of Japan for today. And we may even stay on a similar subject for tomorrow after we heard this quote, “All the signs look like we’re [the US] going to follow the Japanese scenario.”

But more on that – perhaps – tomorrow.

Until then, we had to laugh. Yesterday’s Wall Street Journal wrote, “Japan’s government offered a modest stimulus package Monday and the central bank took steps aimed at curbing the rising yen which – oops! – resulted in the

Japanese Yen

rising further. As you can see from the chart below:”

The mighty Yen

The mighty Yen

Source: Yahoo! Finance


To put things in perspective. To see just how, erm, successful the Japanese government and central bank have been in manipulating the

Japanese Yen

weaker, take a look at the longer term chart:

Yen bubble?

Yen bubble?

Source: Yahoo! Finance


During the past two years the

Japanese Yen

has strengthened by around 20% against the US dollar. Moving from 110 Yen to the dollar to just 85 Yen to the dollar today.

And if you look even further back the Yen has moved from over 130 Yen to the dollar just eight years ago.

As we’ve written a gazillion times before, it’s just not possible to minutely or massively manipulate the market. The market always wins and the manipulators always lose – eventually.

But barely a month goes by without the mainstream printing a story about how the Bank of Japan is going to intervene in the currency market or that the government will take measures to weaken the Yen.

Yet all the time the Yen keeps getting stronger and stronger.

And all the time we’re told that by the likes of Jesper Koll from JPMorgan Chase in today’s Australian Financial Review that “There is no magic bullet that will fight the spectre of deflation.”

It seems the mainstream may have forgotten that the reason there’s no magic bullet is because there’s no “spectre”.

As we wrote yesterday, deflation isn’t the baddie the mainstream economists and bankers would have you believe. It’s only portrayed as bad because deflation is the ultimate magic bullet that will kill off the over-leveraged and bankrupt Western system of banking.

For everyone else deflation is fine.

I mean, let’s take a look at some other numbers. Yesterday I showed you the Japanese consumer price index (CPI) that had “painfully” subjected the Japanese consumer to a 0.4% fall in prices over the last fifteen years.

In contrast Australian consumers had seen a 50% increase in prices. Seriously, which would you prefer? Come on, don’t tell me you’re happy paying 50% more for your groceries today than you did fifteen years ago…

But what about those other numbers? We’ve been told that Australia is a great and vibrant economy for having near full employment. That the unemployment rate is a miniscule 5.2%. Aren’t we good, and up yours to the United States with their 9.9% unemployment rate.

But what about our pals in Japan? You know, the economy that’s moribund, the economy that’s struggling against the “spectre of deflation”?

Erm, well, apparently, according to the Japanese Ministry of Internal Affairs and Communications, as of July 2010, the unemployment rate was a whopping… 5.2%: while the Japanese Yen gets stronger

Source Money Morning Australia