Tuesday, October 13, 2009

The Dollar Crisis is Here

Of course the biggest news right off the top last week was the headline released on Thursday that Saudi oil producing regions were launching a push toward using non-dollar based transactions.

Whether this happens this month, six months from now, or a year from now does not matter. What is important is that it will happen. The rest of the world is moving away from the United States currency, and it is an all out retreat across the board.

Even more important than the Saudi/dollar article was the news a few weeks ago that China has begun to sell bonds denominated in Yuan currency.

China does not need to raise money. They have close to $2 trillion in dollar reserves and they run a massive surplus every year.

This bond issuance serves another purpose. It serves as another outlet for US dollars that have for the last 20 years been recycled back into American assets such as bonds, stocks, and real estate.

When money now leaves the United States it can find a new home in Chinese debt, in a currency that will soon become the world's safe haven.

That is only the beginning of the massive tectonic shifts happening all around us. It seems like we are hearing endless deals between China and Russia for oil contracts moving forward in the future. Both sides seem to have a common goal in the transactions: non-dollar exchanges.

Meanwhile, back in the States, helicopter Ben has our interest rates set at 0%. That means free money for anyone who will take it. Unfortunately, it is having the exact opposite effect. Something called a "dollar carry trade" has formed with our reckless leaders free money policies.

What this means is that someone can borrow dollars to raise money. They can then take that money and invest it in another country, currency, or more recently gold.

Lets say you walk into the bank and ask them for $100 at 0% interest. They say sure. You then take that money, convert it into Australian currency and invest in an Australian company that will pay you 5% per year on your money.

What happens if the Australian dollar doubles in value compared to the US dollar? Your $100 is now worth $200, and in the mean time you've been earning 5% on your money.

The problem for the US dollar is that this transaction is the equivalent of shorting a stock. You must sell the dollars, collect the money, and invest it elsewhere.

Other than the rate you earn, (currently 0%) the other reasons you would invest in a currency would be the strength of the underlying economy supporting it and the likelihood of default from their government.

I don't need to go into details on the strength of our economy. We have unemployment approaching 25%, we have close to 40% of all homes underwater, and we have an economy which is based over 70% on consumption which is just about to completely collapse.

The likelihood of the government defaulting on the debt? They already have. Our government has told the world that they plan on running $1 trillion deficits for the next ten years. They have told the world that they plan on financing the debt with a printing press. They now owe just under $100 trillion including all unfunded liabilities.

No one will get paid back.

Of all the reasons just listed for the coming dollar collapse I'll give you one more, and this is the absolute most important:

Our leaders could care less.

Their actions have shown that not only do they not care, they are doing everything in their power to create the worst possible scenario for American citizens.

So as the financial markets and our economy cause our politicians to make these horrific mistakes, it causes the downward pressure in the value of our currency. This downward pressure is like pushing down on a see saw. So what lies at the other end of the see saw? What is the effect?

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