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.
—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.
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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