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I Think Today Is The Day The Dollar Breaks Down

I could be wrong—hell, most of the time, I’m way wrong. But I do think that today is the day the dollar breaks down.

Get used to it.

Consider the evidence:

The Bank of Japan managed to keep the yen down following last Friday’s Sendai quake. It was trading in an eerily placid 81-to-82 band on Monday, Tuesday and Wednesday—but then Thursday (Japan time), someone at the BoJ must’ve prematurely decided that it was all over, because they let go of the gas.
What happened? It all went south—huge. As I write this morning (8:12am EST), the yen is trading at 78.50 to the dollar.
Meanwhile, on the eastern side of the Pacific pond, the Producer Price Index numbers came out yesterday—and they weren’t pretty. During February, PPI rose 1.6%, against a consensus estimate of 0.7%. For the year ending February 28, the PPI rose 5.6%. (report here)
Tomorrow, the Consumer Price Index numbers come out—and if the PPI numbers are any gauge, they do not look promising.
But Ben Bernanke and the Tools of the Fed are cavalierly dismissing any notion of incipient inflation. They keep insisting, “Core inflation is all that matters! Forget fuel and food and commodity prices! It’s Core Inflation!” As if people bought more of this magical “core inflation” at the supermarket than food, and filled their cars with “core inflation” rather than gasoline.
Anyway: Bernanke and The Tools need to keep interest rates artificially, sickeningly low. Their rationale is that their Zero Interest Rate Policy (ZIRP) and Quantitative Easing 2 (QE-2) are necessary so as to kickstart the economy. But they also recognize that if they raise interest rates, the Federal government would not be able to finance itself—

—in other words, the Federal government will go broke if the Fed raises rates.

This is really the crux of the matter: The Federal Reserve is in a position where they realize that if they raise rates, they bankrupt the Federal government. So they have to stand pat, and pretend to the public and to themselves that there is no inflation, it’s all just a mirage.

As it is, the Fed debt monetization policy otherwise known as QE-2 is buying up 50% of the Federal government’s deficit for FY 2011. And though QE-2 is supposed to end in June, Treasury funding requirements are so huge—and the Treasury bond market is so weak, especially now that Japan is in crisis mode and will not be able to buy up its regular share—that Quantitative Easing will have to be extended.

But that’s a side issue: For now, the markets all have the fim expectation that the Fed will not raise rates, no matter what the inflationary provocation, precisely because of the reality of the Federal government’s de facto bankruptcy.

Now, a couple of weeks ago, I wrote a piece called “The Dollar and the Next Ten Days”, where I argued that the dollar was at a crossroads: I argued that, off a three year trend, the dollar was at a crucial juncture of either breaking down, or bouncing back up, and that it would all happen over the next week and a half of trading—hence the caveat “the next ten days”.
I used the following chart:
The next ten days came and went, and the dollar essentially moved sideways: A little flirting upstream, a little more flirting downstream, but it just couldn’t seem to make up its mind.
Here’s the chart, the fortnight circled in red:
Then Sendai happened. On the Monday, Tuesday and Wednesday after the earthquake, the BoJ managed to control the situation, and keep the yen from rapidly appreciating.
But today, it’s slipping—big time. I woke up this morning and saw the overnights: As I write (8:19am EST), the yen is at 78.56, the euro at 1.402 and rising, gold smartly up, silver sort of up—
—and the dollar index is off nearly a percent, at 75.970.
I think this is it: I think this is the point in time when the dollar is going to break decisively lower—the next 48 hours. And if the Consumer Price Index numbers that come out tomorrow (Friday) are as bad as the PPI numbers would lead one to believe, then I think the dollar will fall harder over the next week.
I could be woefully wrong—like I said, I often am. It’s not just that the Fed and the other central banksters could finesse the situation—prop up the dollar one last time. It’s not just that the Bank of Japan might flood the markets with massive yen liquidity, forcing a scurrying to the dollar. It’s that I could just be wrong: The dollar might somehow—all on its own—muddle through.
But the thing is, if I’m wrong about the timing, I’m not wrong about the outcome. If the dollar doesn’t break down now, then it’ll break down the next time, or the time after that. And not next year or next decade—this year. Now.
The reason the dollar will break down now is because the Federal Reserve is out of options: No matter how you look at it, the dollar is on the path to oblivion—the egregious Federal deficit and the unpayable debt guarantee this outcome.

The Federal Reserve decided on a couple of policy option—ZIRP and QE—that they thought would prop up the U.S. economy. But instead of propping up the economy, these policies have only served to undermine and destroy the dollar.

My sense is that today and tomorrow are a turning point in the dollar’s road to hell. My sense is that either today or tomorrow, the dollar will break through the 75.63 floor—and then all bets are off. That’s what I think.

Of course, the road to destruction is not an immediate outcome: It takes a while for it to happen. But we have been seeing it happen. The rise in commodity prices to record-breaking highs. The inability of the Federal government to function without Federal Reserve monetization. The box the Federal Reserve has maneuvered itself into.

So no matter how much magic the Federal Reserve deploys to save the dollar this time, ultimately—like all magic tricks—it’s all smoke and mirrors: The Fed is merely postponing the inevitable—an inevitable outcome brought about by their own policies.

Update, 3/18/11 in the early a.m.: On Thursday, 8:00 pm EST (Friday 9:00 am Tokyo), the G-7 deliberately tried to make me look foolish, by intervening in the Yen. (I take currency manipulation personally, especially when I go out on a limb with a prediction.)

According to the Financial Times:

The Group of Seven industrialised nations have agreed to co-ordinated currency intervention for the first time in a decade to help Japan recover from its devastating earthquake, tsunami and nuclear crisis.

Authorities in Japan, the eurozone, the UK, Canada and the US agreed on Friday to help weaken the yen in a rolling intervention that began at 9am in Tokyo, which immediately pushed the yen down from above Y79 against the US dollar to below Y81.

It is the first time the G7 has agreed to intervene as a group since it propped up the euro in 2000 and shows the extent of international sympathy for Japan.

Of note: Though the dollar rallied up above 76.4 immediately after the intervention, it is now as I write this (6:41 am EST) back down to 76.053, and looking soft.

On a philosophical note, I whole-heartedly agree with the Bank of Japan’s efforts to soften the yen during a crisis like this—that is part of a central bank’s inherent mandate: To protect the people from currency volatility, most especially during times of crisis. In such times of crisis and currency volatility, only traders (and foolish bloggers) stand to win big—while everybody else loses. That is simply not moral, or acceptable.

However, propping up a currency—the dollar—not because of a natural disaster, but rather because it has been mishandled to death, is just postponing the inevitable. Postponing the inevitable, and adding to the misery when the end finally comes.

The Federal Reserve has been mishandling the dollar since 1987, by keeping it artificially cheap—basically subsidizing the cost of money, with all the distortions that price subsidies naturally bring about. Now, they’re trying to prop it up, when it’s too late.

What I’m doing: In case you missed it, read about my own game plan to prepare and invest for the coming dollar collapse in the United States.

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