Why the dollar rally is going to fail

Through all of this crisis, as regulators and politicians and bureaucrats have labored to inject needed funds back into failing financial institutions, few are asking the harder questions.

Such as:

  • Does this crisis represent something deeper, like a general and unavoidable failure of our entire monetary system?
  • Are the failing institutions worth saving?
  • Will it work?
  • Can the government afford it?

I understand the desire and urgency to "get something done," but I worry that a failed effort will be worse than no effort. Why? Because our monetary system is, to put it bluntly, somewhat of a Ponzi scheme, and therefore depends more thoroughly on trust than other systems.

After all, when a currency is backed only by a taxing authority, it is critical that the legitimacy and omnipotence of that authority not be called into question.

People are beginning to ask questions.

This next article is a real doozy and directly calls into question the last two questions I posed above: Will the rescue efforts work, and can the government afford it?

[quote]The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley's chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion. [/quote]

Link (Bloomberg)

Back in August, which seems like another lifetime ago already, I was calling for a US government deficit of between $1 trillion and $2 trillion and leaning towards the high end of that range. Now it seems that others are ready to publicly admit to the same range.

This is the most remarkable of all the possible data because it is a staggering proposition. More than twice the old record. 12.5% of GDP.

For the boom years of 2003-2007, the US was borrowing 80% of the world's entire pool of savings to fund its deficits and excess consumption. We borrowed between $600 billion and $800 billion during those years.

Now, in a world of declining prospects, the US finds itself in need of 200% to 300% more than that. While I recognize that people tend to save more during downturns, there are also fewer profits to save, so we might expect that the "plan" at this point is for the US to assume it can borrow more than 200% of next year's savings. The entire world's savings.

I flat out do not think this is a workable plan.

There is no way to pull this off legitimately. Which leaves us with the illegitimate option - direct money printing by the Fed. I am sorry to say it, but I simply do not see any other mechanism by which the needed amounts can be secured by the US government.

This means that the dollar is at severe risk of decline, and certainly borrowing costs (interest rates) are going to rise, which will only exacerbate the borrowing needs as higher interest rates enforce higher payments. The first signs are appearing that this dynamic is already in play (from the same article as above):

[quote]That means a lot more borrowing by Treasury, which will push up interest rates, said Greenlaw. "The Treasury's going to be ramping up supply dramatically over the course of coming months to meet this enormous federal budget obligation,'' Greenlaw told Bloomberg this week. "The supply will trigger some elevation in yields.''

Treasuries have fallen the past four days even as stocks sank, a sign investors are preparing for bigger U.S. government borrowing. [/quote]

Now the reason this gets really dicey is that the US government, in its infinite wisdom, has been engaged in a form of ARM financing of its own. Over the past decade, as interest rates have fallen, the US Government has slowly turned more and more to shorter duration T-bills as the means of financing its operations. This made sense, in a short-term way, as the T-bills came with the lowest interest rates and hence the lowest interest costs.

But, and here's the big thing, these T-bills need to be "rolled over" every time they come due. This means that if a billion dollars of T-bills mature, a fresh offering of another billion dollars must be made.

The total amount of T-bills now stands at $1.48 trillion, representing another $1.48 trillion that MUST be "rolled over" twice a year, at a minimum, but more likely three times, when we average out the three- and six-month issues. That is, 28% of all outstanding "debt held by the public" is basically an adjustable rate mortgage that needs to be refi-ed three times per year.

Plus, there are whatever Treasury notes and bonds and TIPS are coming due as well, and that pool is $3.7 trillion in size, so we might guess that $0.5 trillion of those come due in any given year.

So even as the US is seeking to borrow another $1.5 - $2 trillion this next year, there's another $1.5 - $2 trillion that must be "rolled over" in open market auctions. What this means is that somebody has to willingly buy those bills and bonds when they come due. If not, then we could face the mother of all catastrophes, the failure of a US government debt auction, which also goes by the very unpleasant name of "sovereign default."

This will not happen, though, because the Fed would almost certainly step in and buy those bonds. A US government default would basically light up the "tilt" indicator on the global financial game, so it would be avoided at any cost. The Fed, of course, would use its magic checkbook and create the needed money out of thin air, the most inflationary of all possible actions.

I just don't think that there's $3 to $4 trillion of extra cash lying around the world right now, ready to be deployed in the US. So there it is, that's the reason I think the recent dollar rally is the biggest suckers rally of the year.

This is certainly part of the G7 discussions that are ongoing right now. Each country has enormous borrowing needs of its own, and I can only imagine how tense the situation is in that room right now. Germany must be having a fit right about now, seeing that the US is actively lobbying to unleash the inflationary monsters.

So, to answer my own questions:

  • This crisis represents a generalized failure of the monetary system, and the sooner we get to that conclusion, the sooner we can begin to talk about solutions that treat the cause, not the symptoms.
  • The failed institutions are not worth saving, because they represent a model that is now broken beyond repair.
  • The current bailout plan cannot work, because it is too small and it is directed at the symptoms, not the causes.
  • The government cannot afford the cure. But even worse, the US government is already insolvent (when factoring in entitlement liabilities), and nobody is asking how borrowing an additional 12.5% of GDP does anything but make that problem worse.

This is a companion discussion topic for the original entry at https://peakprosperity.com/why-the-dollar-rally-is-going-to-fail-2/

chris how long do you think social security and medicare will last?

So what does this mean as far as the price of commodities, i.e. oil, natural gas. Will the price of oil go up once again? When you talk of inflationary monsters, describe this in more detail.

Jim Rogers agrees with you:

Jim Rogers says rescue plan will create massive inflation, buy commodities

Author: BI-ME staff
Source: BI-ME and media reports
Published: 11-10-2008
INTERNATIONAL. The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems, Jim Rogers CEO of Rogers Holdings, told CNBC.
"We’re setting the stage for when we come out of this of a massive inflation holocaust," he said.
And the plans are unlikely to fend off a severe economic downturn, as the crisis starts affecting all walks of life.
"We had the worst excesses we had in credit markets in world history. We’re going to have to take some pain," Rogers said.
"Many people bought 4-5 houses with no money down and no job… you think we’ll just say well, that’s too bad, we’ll start over and nobody loses their job? Be realistic."
"What about all the people in countries that minded their manners, saved their money, didn’t get overextended and now all of a sudden they’re being asked to bail out a bunch of guys on Wall Street who were incompetent at best and some of them crooks?"
"I thought it outrageous that anybody has to step in a bail out a bunch of 29 year olds driving Maseratis," he said.
There are not many safe havens in the volatile markets, he said.
"I have an enormous amount of cash and I’ve been using it to buy more Japanese yen, more Swiss Francs, more agricultural products… there’s a liquidation phase going on, where everything is being liquidated. They’re selling everything in sight."
"In a period like this the way you make money coming out of it is to own the things were the fundamentals have not been impaired," Rogers added.
"I’ve been buying agricultural commodities. I bought some a couple of days ago. It’s down today. It did not matter, I bought them. I covered shorts yesterday," Rogers said on CNBC.
Rogers told CNBC’s Maria Bartiromo that the financial markets are in a liquidation phase. "Commodities are only thing that I can see that will not be impaired.
"The way to solve this problem is to let people go bankrupt," Rogers said.
"Then you will hit bottom and then you start over. The people who are sound will take over the assets from the people who aren’t sound and we will start over. This is the way the world has worked for a few thousand years."

sorry forgot what about inflation/deflation? short term deflation followed by zimbabwe?

i have been following ebay to try to gauge prices of gold and silver coins. silver eagles appear to be selling at about a 60% premium and gold eagles about 80%. not a very scientific report just a thumbnail.

there seems to be a good suplly so far.

12.5% of GDP is Enron Math. I’m sure it is higher since uncooked GDP is smaller.
Sounds like a massive chapter 7…
Does anyone know how much gold the Vatican has?

Is the failure of the auction that represents the "Sovereign Default" or the failure of the US government to redeem maturing instruments that is the default?

I don’t know which e-bay your talking about. The E-bay I was just on for the next six hours has less than 5 American Eagle gold coins up for bid, all sizes. 6 months ago on a saturday and sunday afternoon you would have dozens, if not hundreds. There is a lot of "junk" gold plated coins for sale, perhaps thats what your refering to. There are alot of 1 gram pieces that are selling for about $1500 per ounce. It is about as bad for silver. The best so called "deal" appears to be 10 ounce silver bars on e-bay. that’s about it. I live in the Portland, Oregon metro area and have a bullion dealer that I have purchased from since 2000. He is wiped out. He did have American Eagle 1/2 ounce coins for $50.00 over spot, but everything else was gone. No tenth ounce, no quarter ounce and definatly no 1 ounce. absolutly no silver. I am just thankful I beat the rush. If you can find it, BUY IT.

good luck!

This quote is attributed to Bernanke

By increasing the number of
U.S. dollars in circulation, or even by credibly threatening to do so,
the U.S. government can also reduce the value of a dollar in terms of
goods and services, which is equivalent to raising the prices in
dollars of those goods and services. We conclude that, under a
paper-money system, a determined government can always generate higher
spending and hence positive inflation.

In other words, he thinks that these massive injections of money now will have a positive effect in the future. Most probably, the money masters in his circle think the same way.

Yes the retail market in gold and silver is practically out of stock. I believe commercial gold and silver is available if you can afford 1,000 oz bars. With this stuff, you don’t take delivery. You leave it at the warehouse and get a certificate of ownership with the serial number of the bar you own. Another source is http://goldmoney.com/en/commentary.php Or you can buy numismatic coins. If I had no gold and silver at this stage, I wouldn’t worry about the premium of numismatic coins.

I know these sites to be reputable.



Here’s why not to worry about the numismatic premium.

Richard Russell’s Dow Theory Letters dated October 6, 2008 noted: "Can the dollar hold up in
the face of a probable series of trillion dollar deficits? Improbable. How long will our
creditors be willing to hold and continue to take in dollars in the face of monster US deficits?
Remember, the US is the only nation on earth that can manufacture (out of thin air) the fiat
currency to pay off its debts. We won’t be able to print our way out of this bear market – our
creditors won’t allow us to do it. At some point, I believe, our creditors will demand
instead of Federal Reserve Notes. At that point, it will be to the US’s advantage
for gold to be as high-priced as possible – What will we do? The US will cut loose the price
of gold FROM ITS CURRENT ridiculous official price of $35 an ounce and give gold to our
creditors at a price of $30,000 an ounce".


Anybody who understands Austrian Theory knows the script. Without exception, every nation that took the path towards inflationary money debauchery had disastrous results. Deflation is certainly the strong force now. Give housing and stocks a year or two to bottom out and unemployment to rise to levels not seen since the 30s (14% now). When commercial activity drops to a crawl and there is nothing left to absorb these massive amounts of money being injected into the system. Then we get the hyperinflationary blowoff in commodities and a certain collapse of probably every fiat currency in the world.The government dons are working hard to coordinate the demise of their interdependent currencies. I thought the Russians and the Chinese might break from the dollar and form a metal based currency, but now I’m not so sure. They all had the same Keynesian education.

That said, I’m not so sure a Weimer hyperinflation is possible. Germany was one nation among healthy nations, similar to Zimbabwe. Then, the Germans were getting paid twice a day in a cash only economy. I don’t see wages going up with prices. It’ll be ugly, but it is too far into the future to contemplate with any certainly. I’m counting on being ahead of events as I’ve been so far.

I’ve actually had quite a bit of luck finding silver. I stopped going to coin shops and started going to pawn shops. The couple I have been to have had quite a bit. I even got the owner of a newer one to give me dibs before he sold junk coins to his usual metal guy. Of course, this was because I offered to pay more, but not much over spot.

I’ve also had success at area garage and estate sales. There’s nothing like finding a whole bucket of old silver that some old ladies grandkids are trying to get rid of so they can clean the house out. Less than face value!

My point is, you just might need to look in places you’re not used to looking.

Hewittr quotes Richard Russell: "Remember, the US is the only nation on earth that can manufacture (out of thin air) the fiat
currency to pay off its debts."

Is that a true statement by Russell?

What prevents other countries from doing the same?

What prevents other countries from doing the same?
As things stand now, other nations can expand their money supply according to how many dollars they have in reserve. The US got its legitimacy as the world's reserve currency after WWII from the Bretten Woods Agreement when the US owned something like 60% or more of the world's supply of gold. Any nation could trade dollars for gold until 1971 when Nixon refused any more redemptions. By that time, every nation on the world was locked into the dollar standard. So the answer is yes some nation could try it on domestic debts, but no foreign government would accept it as payment. Zimbabwe is the latest example.

Okay…so I’ve decided that it’s probably a prudent idea to have a position in gold coins so I’m not having nightmares about the dollar vaporizing rapidly. I’ve read most of your notes on these boards, and Chris’ primer on buying gold. Normally, I’d take a few weeks learning the ropes to make sure I was getting the best deal possible, but I’m hoping the board can expedite my learning curve to avoid paying the rising premium that will likely come with further delay. A few questions:

  1. I live in Boston where there are dealers in town whose businesses I can easily drive to. Is it generally advisable from a cost standpoint to purchase in person rather then through the internet? I thought smaller shops would have larger margins compared to the large internet businesses, but after calling around I’m not so sure.
  2. Any reason not to use a credit card? I see some of the internet dealers listed above do not charge a surcharge for VISA purchases, whereas the dealers in town do.
  3. Advantages and disadvantages to purchasing smaller denomination coins? Is it better to have a mix of large and small? I realize if I have to purchase food, smaller denominations may be preferred. Chris says in his primer that he can’t envision having to do much direct trading in gold. Does this still hold? In that case is it better to purchase gold in 1 oz denominations and plan to pay for bread with low denominarion silver i.e. quarters?
  4. Disadvantages to buying just gold? I haven’t seen a scenario postulated yet where it’s likely to go down long term.
  5. Lastly…does dollar cost averaging at say $1000.00 increments over a number of weeks/ months while building a position still make sense, or has the train already left the station since there are more enlightened people buying that are driving up the price daily? Any votes for buying it in one fell swoop?

Thanks for your time, experience, and comments in advance.


All of the articles that I have been reading have been about the G7 and G20 offering a "world solution" and the presidents comments this morning were specific about " doing no harm to other nations". Can I have your thoughts on the emergence of the Amero or a single world currency?



Tax Slave

at least in the short term (6 months - 1 year) if currencies is a relative value game? If the EU or the rest of the world is doing just as badly or worse, why would the USD fall? It is still the largest economy with the most amount of ‘tools’ to handle stress. If I look at other smaller economies which are in just as much debt, where money supply is on the exponential part of a curve etc. but these economies are not only smaller but are less diversified and don’t have as many ways to wiggle their way around the messes, then why wouldn’t the US$ remain the global currency? There is value to being the world currency, and just like how the 800 lb monkey in industries trade with premium multiples, so should the world’s ‘goto’ currency. Unless everyone is going to base their currency or foreign investments on something else like gold or oil (problem is storage), then the fiat currency is here to stay. What if EVERY country wrote down the value of their currency by 50%? The US$ would still be strong since everyone else takes a much needed devaluation.

I don’t think people have a way of looking back to older posts but I’ve been telling people that there’s NO conspiracy theory here… there isn’t a market being developed for physical gold and paper gold certs… at least there isn’t in Canada. Gold can be bought physically here at any Scotiabank branch and I believe they have branches in the US as well. The premium over market that they charge is just the result of a 2-sided market that is wider than the actual financial market because the volatility is so high that by the time they sell physical gold and want to buy back their financial hedges, the market could have moved… so on the financial futures markets, you will often see a spread of just $.50 but in the real physical market you will have a spread of around $10. That’s just the cost of doing business and getting physical gold and that spread has ALWAYS been there, maybe not as high as $10 but it has been there and is dependent on the VOLATILITY of gold. If gold isn’t that volatile, the spread will be much less than $10. So no whining or conspiracy theorists here… you want your gold? Goto any Scotiabank branch and get it. When Scotiabank stops selling phsyical gold, THEN tell me and we can all re-assess the new data point.

I heard yesterday our clueless treasurer down here in Australia, Wayne Swan, talking about uniform global rules for markets. This was before he attended some G(insert number) meeting. Sounds ominously global government to me, though I’m not surprised to hear it from him. The closet socialists running this country must be salivating at the prospect.

robbie i checked on availability and prices on wed. there was plenty at good prices, on friday i was scramblig to find anything.

your paradigm of taking your time and making the right choice in my opinion has gone the way of the dinosaurs.

the train has left the station and it has all the gold and silver on it. if you can find any buy it period IMO. you may be able to run after it and pick up a few pieces that fall off

be at the pawn shops when they open monday morning. use your gps to map out the quickest route around town to hit as many as you can. i like cash myself but i have used a credit card over the net

i have had very good luck at a mom and pop pawn shop. you may want to get out in the country a little to some smaller rural towns. just ideas mate . buying in large quantities and leaving it in a vault might be your ticket. lots of links here for tha. one the other day suggested a valut in canada which has the worlds best banking system(whatever that is worth these days)

ted butler believes the upside is bigger in silver than gold. so good luck. see ya in zimbabwe