We have watched, even marveled at how the U.S. dollar has strengthened since last September. All sorts of theories have been put forth as to “why”. Some have proffered the dollar is the cleanest dirty shirt of the bunch. Others believe the interest rate differential is kicking in where dollars at least have a positive interest rate versus negative rates elsewhere. Another theory and one which I have written about in the past and believe to be the main reason for dollar strength is the “margin call” aspect. In other words, the “carry trade” which was used to leverage all sorts of trades is unwinding and dollars are needed to pay back the loans. A synthetic dollar short being covered in other words.
Looking back to my writing yesterday regarding the impossibility in my mind of the Fed actually raising rates, the strong dollar also supports this argument. If the Fed were to raise rates, wouldn’t this exacerbate an already immense currency cross problem with (for) the rest of the world? Wouldn’t higher U.S. rates explode the dollar higher (short term) versus foreign currencies? The answer of course is yes, but with a stronger dollar comes other obvious problems.
The two biggest problems are A. we still have a trade deficit of close to $500 billion per year, a stronger dollar will only exacerbate this AND destroy what little manufacturing we have left. And B. the very problems we just saw with a soaring Swiss franc will be seen in many multiples throughout the dollar lending market. I might add, as the dollar moves higher and foreign currencies drop, more and much stronger inflation gets exported to foreign soil. High and rising inflation and its effects on living standards and the human psyche will create massive unrest across Europe and elsewhere.
This last point is an important one, foreigners who have borrowed in dollars have already seen their “loan balance” expand because the dollars cost more to pay back. Higher U.S. interest rates will only make matters worse. The strong dollar has had the effect of slowing the global economy as companies (and individuals) are cutting back (employment and consumption) to make ends meet.
The above is only half of the equation, the other half is described by Alan Greenspan himself. I personally watched Mr. Greenspan speak in New Orleans last October. He used the word “tinder” for a coming inflation several times and spoke of the money supply and reserves of dollars that have been created and parked away on bank balance sheets. I could only think back to the Texas wildfire as he spoke of “tinder”. The amount of dollars created is like some nutcase piling dry leaves, branches and dead trees in a huge pile, then pouring gasoline on it …and thinking to himself, “this will keep me warm in winter”. In other words, the “fuel” is there and has already been created for a bonfire of inflation and the financial system blowing up on itself. But don’t worry, it will never catch fire?
Tying these two phenomena together, not enough dollars, yet too many, here is the likely scenario I can see unfolding. The stronger dollar is putting pressure on the financial system all over the world, something (someone), somewhere is going to “fail”. Our financial system is so interconnected and over levered, it will only take one strategic institution’s failure to break the derivatives daisy chain. Let’s call this the “spark”. This spark causes further failures which I am convinced will circle the globe in less than two days. The forest (economy and financial system) is very dry (weak, fragile), any spark (failure) will create an out of control forest fire which will not be put out until all the fuel is burned and blackened.
Please remember this, the dollar (and Treasuries) are now “backed” by the full faith and credit of the United States. This was not the case back in the 1930’s, dollars were backed by gold. The Treasury did not have enough gold to back all of the dollars but for a very large percentage of those outstanding. This is not even close to the case today. It remains to be seen if there is any gold at all left but, assuming the gold is left untouched, gold would need to be priced at $100,000+ per ounce to cover our debt and money supply. I bring this up because “gold will still be gold” no matter what happens financially. Hold this thought, it ties in with the final logic.
The stronger dollar is beginning to cause stress both financially and economically. It is not “official” yet but even with bogus reporting, the West is already in recession while the East is markedly slowing down. This brings up a few questions. With a slowing or declining economy, will the Treasury have the tax revenues to pay total interest and support all of the other largesse? Of course not, we will just borrow whatever is necessary to keep going on down the road. What about higher interest rates, will this exacerbate the problem? Of course. Tax revenues will drop, “benefits” or spending will rise as will the deficit…and now the federal debt is almost double what it was last time around in 2008. Do you see where this leads? Is the “issuer” of dollars stronger, or weaker than it was in 2008? It’s OK, you can admit it. Weaker. In this scenario where a higher dollar (the spark) puts so much pressure on financial counter parties who are short the dollar, what will be the Feds reaction to derivatives or other sovereign currency crises? Does the Fed have to quintuple their balance sheet again? Or the federal debt double again? Or will another secret $16 trillion or a multiple thereof be lent out all over the world by necessity?
Looking at this in the real world, there have already been many markets thrown into upheaval. The two most important being the FOREX crosses and the oil market. Oil without a doubt is the largest and most all encompassing market on the planet with the exception of dollars themselves. Oil has crashed well over 50% in less than 6 months, dollars have risen 25% over this time frame. Do you think that these percentages when applied to $10’s of trillions might add up to a tad more than a tidy sum? Remember, derivatives is a zero sum game so anything “won” is also “lost”. I believe the spark has already created a fire behind the scenes and some have already been consumed and are dead, but hidden. Can I know this for sure? No, but common sense and the amounts involved tell me this is 100% dead on! And there you have it folks, there are too may dollars outstanding …which were created by too much borrowing of dollars … This pushed asset values higher until the world reached debt saturation and led to assets being sold to pay back the debt, asset prices dropped which is causing a global margin call…this synthetic short has created dollar demand to pay these dollars back. In essence creating a dollar shortage. Are you still with me after that long and horrible string of sentences? If you are, then here we are …facing the global margin call which can ONLY be met by central banks printing more dollars, euros, yen etc. because liquidity is again drying up. The alternative of course is to let the margin call run its course and take all banks, brokers and insurance companies down. Oh yes, don’t forget the sovereign treasuries and central banks themselves. It is the solvency of these institution that will ultimately be challenged.
And no, I didn’t forget I told you to “hold that thought” for the end. What I have described to you is the world running around and fetching as much wood and pouring as much gasoline on the pile as possible. The thought is this, without a spark this is harmless right? Without going into static electricity, spontaneous combustion, a “gun” or even a BIC lighter for that matter, is it even sane? Gold and silver do not and will not burn. Whether it be a wildfire, a derivatives core meltdown, or even a central bank (like the Fed) or a sovereign treasury going upside down, gold will remain money and remain the benchmark against which currencies are measured. Fiat currencies by definition are “terminal” at their inception. The “deflation/inflation” debate is a moot point unless argued in terms of real money.
Bill… thanks and you are absolutely correct. Sovereigns holding dollar assets would be wise to flip that asset into gold while they can trade the two at the opposite ends of the valuation seesaw. That’s clearly happening in the case of China and Russia. With gold production down, and the hunt carrying on for more gold supply… I was interested to see the following in zero hedge yesterday.
Venezuela Begins Liquidating Its Gold
http://www.zerohedge.com/news/2015-03-11/venezuela-begins-liquidating-its-gold
“Venezuela’s central bank is in talks with Wall Street banks to create a gold swap that would allow it to monetize some $1.5 billion of the metal held as international reserves”
Given the need to find gold anywhere possible, this was more than predictable. Lets follow the bouncing ball
– US imposes sanctions against Venezuela (2009)
– Venezuela retrieves 160 tonnes of gold from London (Jan, 2012)
– Chavez dies (March 2013)
– Financial squeeze is on
– Oil prices increase financial squeeze
– US increase sanctions against Venezuela (Mar 9, 2015)
– US Banks agree (!!) to swap gold from Venezuela at ….. $1070 per oz. (you know… all those extra handling charges!) (Mar 11, 2015)
because they have nothing else to sell …since oil has been smashed over 50%.
How strong is the US dollar versus gold? Lets have a peak.
Using August 15, 1971 when Nixon cut loose the dollar from gold as a baseline, The US dollar to gold ratio was 8:1
This is using the Fed’s own stats of monetary base (AMBNS) versus price of US Treasury.
The current US dollar to gold ratio is 57:1
Resulting in a supposed gold value of $68,400.00 per ounce!
Strip away all the ‘fooferall’ and just keeping it simple, the amount of dollars circulating (AMBNS) devided by the current US dollar price of gold per ounce.
Looking from this angle, the US dollar does not look good.
not sure about the math part but this is ASSUMING we have the gold we say we do.
Granted, the math is rough (to say the least) but the premis is sound and “ASSUMING” the gold is there, $68,000 bucks an ounce to cover the amount of bucks out there is astounding!
I went back and looked, your math is sound also.
Dear Sir,
thank you for the precious work, you are putting out daily.
I apreciate it very much!
Just one question, to which timeframe you personality expect SHTF?
Just to know, cuz caring for family.
The money to invest in PM is trickling in just to slow …. 🙁
should have been several years ago.
Bill,
Excellent article.
Yes, there are way too many dollars, but not near enough in the hands of the middle class.
The middle class has been shrinking day by day, and with no middle class in a “consumption” economy, this whole game is over.
There are not enough dollars in the hands of the middle class and I don’t see that changing, so folks might want to start planning on a bananna republic and might want to get a little gold and silver.
I think it has been “GREED” that has screwed up the whole game, but now that the USA is bankrupt (worse shape than Greece) it’s time to own up to reality.
For those in la la land, please just ignor what’s going on and I think American Idol is coming on soon.
Happy days will NOT be here again, in my opinion.
thank you Farrell.
RF – The middle class is being squeezed between reduced real income, inflation and a heavy debt load, with no reserves to fall back on. They are living pay-check to pay-check, hand-to-mouth.
The middle class is not guilt free. They have lived beyond their means (compliments of cheap money) for many years. Now its time to face the music which has stopped and there are no chairs!
it has finally caught up.
Bill, thanks for addressing this most pressing topic. Another reason for the dollar’s rise might be one we cannot even conceive of…the rise and its velocity has ‘panic’ written all over it though.
it reeks of a short squeeze caused by a global margin call.
Thanks again, Bill. I’ve been reading along. First comment in a while…
I am thoroughly convinced that the Fed Res Note, like all other fiat currencies, will eventually crash. I also believe precious metals will have to replace all those “too many dollars” for us to return to normal.
What I can’t see in my crystal ball is how I buy gasoline or a box of cereal someday with some suddenly appreciated (by the general public) 90% coins.
Will everyone who is ignorant today get educated in an instant and be willing to accept my worn out 90%? What in the world would they think if I pulled out a 1986 Christmas art bar of .999 purity?
Have you written an article on how we go from Point A (no acceptance of silver/gold in the marketplace) to Point B (no acceptance of FRNs)?
what makes you think gasoline or cereal will even be for sale? Going from point A to B will be very difficult and dangerous.
Time to get some more precious metals of the copper-coated lead variety.
Bill another great interpretation and extrapolation to the “End Game”. Gold/Silver = Money – All else is “Tinder”. Beautiful!!! The real thing is always beautiful. Great article Bill and thanks.
thanks Richard.
Bill
Why do the banks and derivatives have to fail, can’t “they” just “mark to fantasy” or change the rules in some other way? We don’t have the most principled crowd in DC.
Love your column. Keep it coming.
“margin calls” so to speak.
Bill, do you recommend a certain percentage of personal assets to put into PMs?
Would this be any different if you weren’t associated with a company that sold PMs?
What do you say to those you took your prior advise and bought at $1400/20, $1300/18, $1200/16?
Finally, at what point to do just fold and advise everyone to put available,remaining funds into seeds, a garden, water sources and protection?
You should already have prepped. Maybe you don’t know but I was writing for 5 years prior to Miles Franklin for free and publicly. I was saying the exact same things I am now and was one of the first to talk about the Treasury and Fed bankrupting themselves. If you are trying to diss me by asking “when I will fold”, then I have to laugh. I know “why” I own precious metals and have been all in since late 1997, do you know why you own precious metals?
BILL,
ANOTHER GREAT ONE. BUT A QUESTION THAT KEEPS COMING TO MY MIND IS BASICALLY THE SAME AS WHAT RM ASKS ABOVE. WE KNOW THE RULES AND FUNDAMENTALS ARE LONG GONE AND SO ANY ATTEMPT TO CALCULATE WHERE THINGS ARE HEADED IS THWARTED BY THE LACK OF FUNDAMENTALS. SINCE THE FED IS FUELING THE FIRE IN THE FIRST PLACE AND CREATING ALL OF THIS CORRUPTION AND GAMBLING,(THE DERIVATIVES),THEN WHY WOULDN’T THEY ALSO JUST SUPPLY THE GAMBLERS WITH THE CURRENCY TO PAY THE MARGIN CALLS AND ADD DEMAND TO THE DOLLAR AT THE SAME TIME THUS PROLONGING THEIR PONSI SCHEME? OR IN OTHER WORDS CHANGE THE RULES YET AGAIN.
Thanks Lenn, because the margin calls are just TOO BIG!
Assuming The Greeks leave the EU.
What do they do for money, and I mean like tomorrow?
My idea: go to the US Dollar and buy all of them from North Korea. Go into a bank in Costa Rica with a $100 bill and out comes the book. It lists thousands of serial numbers of fake $100 bills, most counterfeited by North Korea. I have taken some from Iowa only to find out the magic marker test is meaningless, and the fakes are almost identical to the fakes being put out by our Fed.
Don’t ever go to Costa Rica with a “CB” bill as these are not accepted anywhere. Greece could simply use roubles, end of story.
But Bill, the Russian money would cost much more than the “dollars” the Greeks could buy from the North Koreans. The “dollars” are for sale for 3 cents per dollar. Paper money gets real ugly where the rubber meets the road. A trillion here,…….
Isn’t this about what ALL dollars are going to fetch?
Good work, just a little note…
The dollar and Bonds are backed by the full faith and credit of the U.S. Gov. However, the credit most use and call a dollar, is not. This means that the multitude of trillions in credit used as dollars that circulates around the globe has nothing but the value of the assets that created them, backing them and when that starts to unwind, the paltry amount of actual dollars and whatever amount of bonds that could be converted in a timely manner, well, let’s just say it will get really, really interesting, really, really fast….
yes, exactly, like over night?
some of my “dollars” will never be worthless for intend to have a nice linen and cotton suit made from those rectangles,perhaps a comforter also
I can think of better, more comfortable and “longer lasting” material.
Bill thanks again! This is correct 100%. Remember there was a currency swap back in 2010 also where the euro and dollar were being swapped when the first Euro crisis started. By the dollar rising, this is because that trade is unwinding. There is a margin call on the dollars for that trade now that the dollar is stronger.
Another thing is this, the reason we see commodities going down is because, anything that uses the dollar as a mechanism of pricing will be affected. This has nothing to do with true value, but the pricing mechanism. This actually shows that the system we use to price all things completely flawed!
@ Jack you do not fold on any table when you are the one holding the chips. Why would anyone who plays on a table fold when the rest people have already shown their cards? If you are holding the chips, does it really matter when you bank on them? Nope! It matters what is banked for and with them.
thanks Marco, good point.
Bill,
Dollars here, dollars there, dollars every-frappin-where! But when is a dollar a dollar? As I type this, next to my keyboard lay 3 objects. The first is an 1884 Morgan dollar. It is a beautiful coin in near-BU quality and yes, it does in fact contain 371.25 grains of fine silver, so it IS a dollar. The next object is a 2014 American Silver Eagle coin containing a full Troy ounce of fine silver and it too is denominated as a “dollar”, even though it contains a whopping 480 grains of fine silver. Last, and most definitely least, is a Federal reserve note in the $1 denomination. This neither contains 371.25 grains of fine silver nor can it be traded for it, yet it supposedly is a dollar too. Now, which of these 3 things is NOT a dollar? Clearly, it is the piece of paper with some ink on it. So, why get all worked up over that which is not a dollar and which is MUCH more akin to Monopoly money? 😉
yes.
Hi Bill,
The following is offered in a somewhat irreverent and satirical vein:
Regarding your title of “TOO MANY DOLLARS AND YET NOT ENOUGH…AT THE SAME TIME?”, the answer is both yes and no to both the first and second parts. The real problem is the transmission vehicle the Fed uses to feed new dollars (called FRN from here on) into the system.
Currently the Fed is stuck with an old system where the new FRN go to a limited number of primary dealers/brokers/ banks plus the US Treasury department. Those rascals in the first group just can’t be trusted to put the FRN into areas the Fed perceives as needing them, at least not in the quantities desired. So the Fed is stuck making up many more FRN hoping some spill over into the “correct” areas. This problem is summarized as the Fed can create FRN but it can’t direct where they go.
Jimminy Crickets, what a crazy system. I mean the wise old Fed has done the homework on where its product is supposed to go, creates and gives it away for free but has no say in where it is to be used? How 20th Century (the latter half when it went full fiat).
So since it can’t directly put the FRN where it is supposed to be we have the most recent case of Hypo Alpe Adria Heta bank going bust and taking down one ninth of Austria for a measly 10 billion. Now in knock on effect, Duesseldorfer Hypothekenbank AG is going under just for holding a really measly 365 million FRN worth of that Austrian banks’ debt. That little loss puts DHAG into receivership and threatens its assets worth 10.9 billion Euro. (See http://www.zerohedge.com/news/2015-03-15/austrian-black-swan-claims-its-first-foreign-casualty-german-duesselhyp-collapses-be . For want of 10 billion FRN in the right place at the right time we are already up to over 20 billion FRN in losses and counting.
So the real problem isn’t too few or too many FRN, the real problem is getting the pesky things going to where they are supposed to be. I mean really, they are the Fed’s FRN, why can’t they be spent where and when they need to be?
Respectively submitted in as irreverent a manner as possible.
like a car with no steering wheel, only a gas pedal!