Home / The Dollar is Living on Borrowed Time, No Pun Intended

The Dollar is Living on Borrowed Time, No Pun Intended

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It seems that the title of this article is a cheap attempt to attract as many readers as possible. However, anyone who is aware of current trends affecting the greenback’s future value knows that the title is more prophetic than cliché. Yes, recently, the dollar has gotten relatively stronger against other currencies. But, due to a combination of events (past, present, and future) this won’t last. As a matter of fact, at some point in the future the dollar may need life-support to survive.

Life support? Those are fairly harsh words you might say. Well consider this, the standard definition of inflation is too many dollars chasing too few goods. This week it was reported that unemployment hit a 25 year high at 8.1 percent. If you include all the discouraged workers who have given up looking for work, like the government use to include in the rate, the number balloons to between 14 and 20 percent!. We have not seen numbers like this since the 1930s. It makes sense that this many unemployed workers will generally reduce national production of goods. Combine this reduction due to unemployment with the trillions of new dollars the Fed and Treasury have injected into the economy in the last year and you have a recipe for a strong decline in the value of the dollar and much higher prices.

So, where has all that new money the government and central bank has injected into the economy gone? The answer is into savings accounts and bank balance sheets. Government figures show that the household savings rate jumped to 5 percent in January from 0 percent last spring — the highest rate since 1995. Back in December, the cash reserves of banks in the U.S. increased to $774.4 billion from $604.7 billion in November and an incredible $2.39 billion in December 2007. Thus, the new money along with trillions pulled out of the stock market sits on the sidelines and not in circulation where it would be making for higher prices. At some point, when banks resume lending and consumers spend their savings on fewer goods, the deluge of cash into circulation will significantly debase the value of the dollar and cause an inflationary depression the likes of which we have never seen.

History tells us this scenario is not far-fetched. Strapped for funds because of huge debts incurred by spending for World War I, the Weimar Republic experienced a deflationary collapse in the early 1920s. As the German government printed new money to stimulate the economy, the mark actually appreciated against other foreign currencies for a while. However, as additional debt mounted and the economy refused to improve, the German people lost faith in their currency and began spending billions of hoarded marks in the marketplace making for one of the most severe episodes of hyperinflation in modern economic history. Sound familiar? Replace spending for World War I with spending for a general warfare state and we have fulfilled three-quarters of the above scenario. The only part left is the deluge of huge amounts of dollars back into circulation making for some level of hyperinflation.

Of course, Fed chairman Bernanke claims the Fed will be ready when recovery hits to sterilize the money supply and bring it down to an appropriate level. But, how does he know what that level should be? Will it be commensurate with the smaller economy we will have then? The above scenario only takes into account domestic economic factors. What about the foreign countries and nationals who hold dollar reserves? Can it not be assumed they will act in their own self-interest? Countries will spend dollars to stabilize their currencies and individuals will dump dollars to preserve their savings and spending power. Lastly, the Fed induced Treasury bond bubble will burst expanding the Fed’s balance sheet and unleashing more dollars into the economy. With all of these events working together, Bernanke will have a complex, high risk, long and drawn out job bringing the money supply into line with market needs. At the end of the day, Fed policy caused our patient (the economy) to get sick; the Fed’s cure (spending) is killing it. It won’t be long before our patient needs life support.

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About Kenn Jacobine

  • Arch Conservative

    We need to euthenize the FED.

    I think we had a guy that told us that during last year’s election. His name was Ron Paul.

    But being that there are so many stupid clueless dolts in this nation they laughed at they bought into the hope and change mythology.

  • The people who bought into the hope and change mythology didn’t get the chance to weigh in on Paul. You should blame the many stupid clueless dolts who voted in the Republican primaries.

  • Bing,

    I just hope that people do not start turning to Ron Paul to provide “change they can believe in”. Unfortunately, Paul appears to hate Jews as much as he hates dishonesty and the CFR and buys into the worst crap written about us.

    The only good someone like Ron Paul can do (from my parochial viewpoint) is to scare Jews into leaving America and coming home.

    But what Mr. Jacobine is writing here about the dollar has been obvious for quite some time, at least since the Americans started spending like drunks in a bar with the boss’s roll of cash in their pockets. That has been for a while now, at least five years.

    The longer the blowup takes to occur, the worse it will be.

  • Clavos

    Ron Paul turns out to be the champion earmarker of the Texas delegation in the current congress, with 22 earmarks valued at more than 96 million.

  • Ron Paul turns out to be the champion earmarker

    Nu? Even the gods have feet of clay! Dr. Paul does bring home the bacon for the Texas 16th C.D. after all.

    Alright, Bing, where is your next savior?

  • Arch conservative

    You should blame the many stupid clueless dolts who voted in the Republican primaries.

    I do.

    They’re called Democrats.

  • You should blame the many stupid clueless dolts who voted in the Republican primaries. I do. They’re called Democrats.

    No saviors, eh, Bing? Just people to condemn? Get used to that thought. Hammer it into your mind. There are no saviors for y’all.

  • Clavos

    We don’t need no stinkin’ saviors…

  • frzngds

    [Personal attack deleted by Comments Editor]

    Anyone who speaks of earmarks as a negative is ignorant! The money (taxes) has already been stolen from the people, the earmark is there to make sure the people get some of it back to spend locally, not the small group of bureaucrats in DC.

    If every Congressman had a voting record like Ron Paul’s there would be no earmarks. period. Heck we would have no national debt and the Federal Gov’t wouldn’t be completely ignoring the 10th amendment.

  • Clavos

    Anyone who speaks of earmarks as a negative is ignorant!

    Where did I speak of earmarks as a negative?

    Now what was it I said about congressman paul that got your dander up? If bringing home the earmarks is good, then commending him for being the TX champ at it is good too, no?

  • We don’t need no stinkin’ saviors….

    Don’t worry Clavos – none are coming your way – stinkin’ or otherwise.

    If every Congressman had a voting record like Ron Paul’s there would be no earmarks. period. Heck we would have no national debt and the Federal Gov’t wouldn’t be completely ignoring the 10th amendment.

    I see we got out first paul-bot on the thread (bless their li’l hearts)….

  • Arch Conservative

    No saviors, eh, Bing? Just people to condemn? Get used to that thought. Hammer it into your mind. There are no saviors for y’all.”

    Well Ruvy….unlike the weak minded fools who voted for king Barry I never claimed there was a savior.

    I merely stated that his economic policies would have been light year’s better than Barry’s. Hell we’d have been better with that chimp in CT running the economy than king Barry.

  • Actually, a very good and concise analysis, Kenn, of the monetary situation. Even a layperson can understand. Good job, especially the comparison to the Weimar Republic.

  • The problem I seem to be having – trying to understand your account of such an increase in the savings rate for the households. I realize that some people may be “hoarding” money in light of their 1) refusal to spend and 2) absence of sound investment opportunities. But still . . .

    In other words, if we accept the fact that because of layoffs and the ever increasing rate of unemployment, many households are therefore living from hand to mouth as an equally valid thesis, then the increased savings rate you’re arguing for might have to modified, or at least restricted to a rather small group, rather than representing (as you say) the population at large.

    Your thoughts?

  • Kenn Jacobine

    The 5 percent is a government figure. Car sales are way down and Walmart is thriving. I suppose these are two ways for the savings rate to jump. But, wouldn’t investments be considered savings also? A lot of folks are putting money into what they consider safe havens – T-bills (yea right), CDs, and money market funds with banks and credit unions.

    As for myself, I am hoarding money in my credit union money market in order to pay off my mortgage at the end of next year. I think a lot of Americans are doing similar things – I hope anyway.

  • Idaho

    Just in defense of Republican primary voters, I voted for Ron Paul.
    As for saviors, if insisted the government follow our own Constitution, we could be our own saviors.
    A bit much to ask though, that these clowns keep the one promise they accept office with.

  • Arch Conservative

    And I voted for Chuck Baldwin in the general so I guess when it gets really bad (as we all know that’s where we’re headed thanks to Barry) all the hope and change morons can kiss our asses Idaho.

  • Sceptic

    The Bank for International Settlements says that European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts.

    The report, entitled “US dollar shortage in global banking”, helps explain why there has been such a frantic scramble for dollars each time the credit crisis takes a turn for the worse. Many investors have been wrong-footed by the powerful rally in the dollar against almost all currencies, except the yen.

    British banks had accumulated a dollar “funding gap” of $300bn by mid 2007. The latest BIS data up to the third quarter of 2008 shows that this exposure has been trimmed by “deleveraging” but it still largely hanging over the UK financial institutions.

    Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral.

    The BIS said the total “funding gap” in dollars was around $2.2 trillion at the peak, when money market liabilities are included. This had fallen to around $2 trillion by the time of the Lehman Brothers collapse. The data is collected with a lag but it appears that there are still huge dollar liabilities to be covered.

    In other words for the short term you’ll see the dollar rallying.Europe which not too long ago was giving America lectures appears to be just as leveraged if not more.

    For the longer term the dollar is going down no doubt.

    I’d like to quote a few words by “Dr.Doom” Nouriel Roubini.

    He says…”
    The Anglo-Saxon economic and financial model is wounded and the role of the US as the leading global economic, financial and even geo-strategic superpower is reduced.

    Even without this crisis, the relative and absolute power of the US would have been reduced by the rise of the fast growing economies of Brazil, Russia India and China and by the emergence of the European Union.

    But the policy mistakes of the US that perpetuated twin fiscal and current account deficits and triggered the worst financial and economic crisis since the Great Depression has accelerated this shift in the economic and financial power balance of the world.

    Economic and financial superpowers or empires tend to be net creditors and net lenders (running current account surpluses) such as the British Empire at its peak. But such empires decline – the British pounds role as the world’s leading reserve currency was lost during World War II when the UK became a large net debtor and net foreign borrower (running current account deficits) and had large domestic fiscal deficits.

    The US is now the largest net borrower in the world (running huge current account deficits) and the largest net debtor in the world while its domestic fiscal deficits are surging too.

    And unlike the 1980s when the US twin deficits were financed by the its friends and allies (Japan, Germany and the rest of the EU) this time around the largest lenders and creditors of the US are either its strategic rivals (Russia, China, etc.) or a bunch or relatively unstable petro-states.

    So this balance of financial terror makes the US vulnerable to the kindness of strangers. This growing weakness of the US suggests a paradigm shift in the economic and financial – and eventually even geostrategic – power balance of the world.
    This system of vendor financing – with US creditors providing both the goods being imported and the financing of such deficits – has led to a balance of financial terror: if these creditors were to pull the plug on the financing of the US twin deficits the dollar would collapse and US interest rates would go through the roof.

    While it is unlikely that China, Russia and other powers would suddenly pull the rug from under the US feet – as such action would lead to a sharp appreciation of their currency and negatively affect their export led growth model – relying excessively on the kindness of strangers – especially that of your strategic rivals – is extremely risky.

    And the foreign financing of the US current account deficits has also become more risky: less FDI and equity, more debt, more short term debt, more debt held by official political actors – central banks and sovereign wealth funds – , less debt held by foreign private investors, and more debt held by politicals rivals rather than allies of the US. This change makes the US vulnerable to such rivals using the financial terror weapon – dumping US assets and or reducing their financing of the US twin deficits – in situations of geostrategic tension.

    Fourth, the foreign creditors of the US are getting tired of financing the US in the form of low-yielding US Treasuries.

    The ensuing decline of the US dollar as the main reserve currency will take time and will not occur overnight; but it is inexorable given the relative fall in US economic, financial and geopolitical power.

    A tsunami of new public debt issuance may lead by the end of 2009 to a significant increase in long government bond rates as most countries in the world will now run budget deficits and thus the global supply of public savings will shrink.

    With US fiscal deficits likely to be about $2 trillion in 2009 and $1.5 trillion in 2010; who, outside the US, as most of the financing of US fiscal deficits is done by non-residents, is going to buy such debt and at what dollar value of and level of interest rates?

    Eventually, large and persistent fiscal deficits may even lead to a downgrade – in a few years – of the AAA rating of the US government.

  • Here’s a link to his home page.

    Looks like a very thorough and deep analysis.

  • Sceptic

    Roger your link is not working…try this…Nouriel Roubini’s Global EconoMonitor

  • No, I got that, because I posted some of his pieces earlier on another thread, Nalle’s article.

  • STM

    Not sure about this one. The dollar seems to be holding up very nicely against other countries, although given the state of the US economy, that might be on the back of some serious wishful thinking.

    Nevertheless, the US dollar will hold up OK for one simple reason: as a result of the global financial crisis, other currencies are buggered as well, so it’s relative.

    So the US dollar will maintain its position.

  • “other currencies are buggered as well, so it’s relative”

    This may be the key – very wise observation. Thank God for small blessing.

  • Of course, if they all go down the drain, will it make any difference then?

  • blakmira

    “Unfortunately, Paul appears to hate Jews” — Is that the best smear you can come up with?

    Does he wear T-shirts that say “I hate Jews”? Do you have videos of him saying “I hate Jews” or interviews of him even mentioning the word “Jews”?

    You appear to know nothing about Ron Paul and apparently have some sort of ulterior motive why you feel compelled to malign him. Ron Paul is a good-hearted man that doesn’t hate anyone, so take your pathetic smears elsewhere.

  • Blakmira,

    Take your obvious ignorance about Dr. Ron Paul elsewhere.

    I would have been happy to support the man for president; he advocated, or seemed to advocate a hands off policy in the Middle East, which would have meant getting American interference in our affairs here gone. The thing that infuriates me most about American policy is their unwarranted interference in our policy – all to our detriment.

    Then I ran across this hatchet job on him in the New Republic. Note that I said the article was a hatchet job. But the sources from which the article was drawn were not hatchet jobs. They were the words of Congressman Paul, or people he paid to write them.

    Let’s have a look, shall we?

    The rhetoric when it came to Jews was little better. The newsletters display an obsession with Israel; no other country is mentioned more often in the editions I saw, or with more vitriol. A 1987 issue of Paul’s Investment Letter called Israel “an aggressive, national socialist state,” and a 1990 newsletter discussed the “tens of thousands of well-placed friends of Israel in all countries who are willing to wok [sic] for the Mossad in their area of expertise.”

    In an undated solicitation letter Dr. Paul says, “I’ve been told not to talk, but these stooges don’t scare me. Threats or no threats, I’ve laid bare the coming race war in our big cities. The federal-homosexual cover-up on AIDS (my training as a physician helps me see through this one.) The Bohemian Grove–perverted, pagan playground of the powerful. Skull & Bones: the demonic fraternity that includes George Bush and leftist Senator John Kerry, Congress’s Mr. New Money. The Israeli lobby, which plays Congress like a cheap harmonica.”

    I wouldn’t support such a man. Such a man, eviscerating such hatred for Israel, eviscerates a hatred for its dominant nationality – JEWS!

    Now do the right thing and apologize for your insulting remarks.