Dollar Death in May?

Quick snippet of brain food and a prediction from George Ure over at Urban Survival:

The Plan: We Buy Our Own Debt?
Ben BernankeBen Bernanke’s recent comments that the Fed will Deploy all tools‘ to push along the economic revival plan may, or may not, be read as a ‘good’ thing.  Legendary commodities trader Jim Rogers tells Bloomberg that among the ‘all the tools’ might be the Fed buying Treasury securities which, he figures, will delay the inevitable.

Snake Eats Its Own Tail, Or…
All of which might work for a while, just like the shoemaker buying the all the bread the baker can bake, while the baker buys all the shoemaker’s shoes.  The problems arise when, at the end of such a circular reference, the shoemaker or baker wants to sell product to a third party having bid up prices amongst one another.

It’s then that the truth slips out, that the circularly referenced deal was a sham, and prices of shoes and bread collapse in a heap.  Or, if we go down that slippery slow of buying our own debt from ourselves, how that will be viewed by the only folks that are keeping the world together right now: China.

Beware May 2009
dollar-drowns70x112The moment the Chinese wake up and proclaim:  We want something of real value, not just more paper, then the U.S.A. has a serious problem on its hands. 

That’s when our currency collapses, China becomes the world economic superpower and we drop to nth place as a third world country.  But not to worry; the linguistics on this indicate it won’t get underway until [mid] May of this year and the workout will run from late summer out through 2010 and beyond.

Related:
George is not the only one predicting a dollar collapse in May. Consider the Think Tank’s 2009 Predictions.

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9 Responses

  1. Something very scary about the federal reserve buying into this bailout. I heard was $1trillion an this isnt even a official goverment agentcy. With all this bailout money lent to banks into a fractional 10 to 1 banking system. They can turn 1 trillion dollars into 10 trillion dollars of money to lend to the american people. And this is only a small part of the bailout money. I thing this money is going some place else. the bank are not lending

  2. Here is an interesting read. Its a bit long, but IMO worth the time spent.

    Hope you enjoy it. Please follow the link provided. Copy and paste in your browser.
    http://www.informationliberation.com/?id=25196

  3. Nice job Corpus. It’s a calculated approach. The burning question is to what level of normalcy will the world economy return? It seems highly unlikely that it will be anywhere close to pre crisis levels of transactions hence a new calculation cannot be made.

    The formula doesn’t seem applicable as a forecasting tool because the values are in such flux.

    The Fed is manipulating the values of the M for sure. The V part seems to have sustained a mortal wound as the major banking instituions (at least the Western) are broken beyond repair.

    Perhaps the coming stock market rally (if there is one)will be the V expolsion that ignites the inflationary fire or will it be a flight from Treasuries that starts the V galloping.

    Its a mystery to me.

    • Yes, you are correct, V will not reach it’s previous high pitch, nor does it need to. I wrote, “When you see business picking up again, that means V is on a course back to it’s equilibrium state. It also means that it will amplify all of the new money and the dollar will collapse.”

      The truth is, once business starts picking up (it doesn’t need to go anywhere near it’s previous pitch), the slight increases to V associated with that “recovery” will instantaneously push C into record territory. Of course, what that will mean is that the stock market will rally very strongly (because there is so much more effective money in the system at a time when consensus is that a recovery is occuring), but we won’t feel the inflation in the real world and in consumer prices for months. By the time we feel that inflation, the momentum of the rally will have forced V up quite a bit. The train will have left the station. The dollar will be forced into a catastrophic collapse. Once that starts, everyone will sell off the dollar and a chain reaction will occur.

      Or, at least, that appears to be what will happen. I hope I’m wrong, but to be wrong, there would need to be a way to extract 2.5 trillion (or more) dollars from the system AS the recovery progresses.

      • Corpus,

        Your two posts strike me as probably the most brilliant ones I’ve seen on this site.

        I love using math to quantify what’s happening and, even better, it seems to “fit” with observable facts. Thank you!

        Do you think Richard Mayberry (who’s been tracking both US and World dollar velocity) is close with his latest graph?

        Dollar Velocity, March 2009

  4. The quantity theory of money ( http://en.wikipedia.org/wiki/Quantity_theory_of_money ) and the equation of exchange ( http://en.wikipedia.org/wiki/Equation_of_exchange ) can teach us when the coming currency crisis will occur.

    P = M * ( V / Q )

    P = The average price of goods
    M = The money supply
    V = The velocity of money (number of times money changes hands per unit time)
    Q = The total number of transactions (expenditures)

    Or, equivalently,

    C = M * V

    Where C = ( Q * P ) = Number of transactions * Average price of goods = Effective monetization of the system.

    When the banks stopped lending in 2008 as a result of the mortgage crisis, V (the velocity of money) radically fell off. This decrease in V threatened to cause a massive drop in C, which would have led to massive effective deflation (the dollar would have soared), because for all intensive purposes, there were LESS dollars in the system since each dollar was doing less work. To offset this problem, our wise leaders and their federal reserve handlers began dumping dollars into the system, increasing M (the money supply). This stopgap measure balanced the equation and kept the currency within a sane range and this is where we stand today; Our new wise leaders and their federal reserve handlers are continuing to pour in new M to offset the losses of V. It appears, preposterously, as if our currency is stable and strong even while the number of transactions occurring in the system per unit time has collapsed.

    The math tells us what will happen next. What is next? V is the variable to watch; it will not stay stalled forever. Eventually, V will begin to raise again. When this happens, our equation for the effective monetization of the system kicks in and amplifies the new money that was added to the system when V was low. C = M * V. If V increases 10 fold, two trillion in real dollars becomes 20 trillion in effective dollars. If V increases 20 fold, two trillion becomes 40 trillion in effective dollars, and so forth.

    How much will V raise? A first approximation would be that it will raise back to where it was before the mortgage crisis began, it’s equilibrium state (e.g the number of transactions carried on by people and businesses will return to normal). In reality, that is likely to be too high, perhaps by a factor of 2 or so.

    How do we determine the change in V from before the crisis until now? A simple method would be to compare the money supply before the crisis to the money supply now and do the math to see. This I leave as an exercise for someone to look into (the fed has added about 2.5 trillion in new money, so if we know how much money existed prior to that, we can calculate the change in V from equilibrium until now and then use that change in V to calculate the new effective monetization of the system when V returns to it’s previous value). We can use this to discover how badly the dollar will depreciate once business begins again (late 2009, early to mid 2010?).

    From this equation, we can make a prediction; When you see business picking up again, that means V is on a course back to it’s equilibrium state. It also means that it will amplify all of the new money and the dollar will collapse. How badly it collapses can be derived from these equations as well.

  5. I believe the factors that are impacting dollar strength right now are so broad in scope and so complex that only the powerz really know when this will happen. There are currency swap agreements in place that nobody has effectively explained. My understanding is that it goes something like this: I lend you dollars, you lend me some Euro’s. You buy US treasuries & I buy Euro Treasuries. Basically monetizing of debt, Nice & clean. Looks good on paper. Other entities are buying our debt, we must be a good investment. I could be wrong, hopefully someone has an article or a reference to post.

    The big dogs are out on the street. China is rattling its saber. They are positioning themselves to aquire the natural resources it needs (Rio Tinto deal) and the rest will be done on internal consumption. Their factories wont be building toys and other nonsense for the soon to be extinct western consumers.

  6. Patrick,

    Just so you know, the Dollar Death piece is written by George Ure over at UrbanSurvival.com. They’re not my words but I do think they’re worth considering.

    George’s predictions, based in part on what he calls “predictive linguistics”, are sometimes dead on, sometimes not. One of the ones he got right: in Jan 2008 he correctly predicted the collpase that ocurred fall 2008. He actually predicted the worst would center around the specific day of Oct 7, 2008.

    In the week following Oct 7 we had these milestones:
    – Russia, Brazil, Peru, & Iceland shut down their stock markets.
    – Iceland goes bankrupt after its 3 largest banks collapse.
    – US & European Central Banks *coordinate* massive worldwide rate cuts (never happened before).
    – In just 8 trading days the DOW lost 22% of its value.
    – On Oct 10 Britain was 3 hours away from bankruptcy. (This not revealed until Jan 24, 2009.)
    – Top 9 US banks nationalized.
    – The Fed authorized “unlimited dollars” to stabilize Europe.

    Please see my History of the Meltdown page for details and links: http://meltdown2011.com/history-of-the-meltdown-so-far/

    So George does have some credibility.

    Will it happen in May? I don’t know. Last fall I honestly thought by this month, March, we would have already seen double-digit inflation and a dollar index below 70.

    Inflation is -0.3% right now (gov’t figures) or +3.3% (ShadowStats) and the dollar is soaring at 87 or so.

    Obviously my timing is wrong, but I’m not selling my gold yet! I think the collapse of Europe has indeed propped up the dollar short term.

    But China doesn’t seem impressed:
    http://www.msnbc.msn.com/id/29675114/

    The thing about dollar “strength” is this: how accurate is it when it’s measured against the euro and other fiat currencies? When measured against gold (history’s currency) it’s near all-time highs in USD and recently hit all-time highs in euros and pounds. It looks to me like you couldn’t really trust any fiat currency long-term.

    I’m still expecting inflation to return with a vengeance as the dollar resumes its long-term decline.

  7. Can you cite more concrete references regarding the timing and severity of your dollar outlook? There´s no doubt that the dollar index will reach new lows, probably sometime this year, but to be so precise and absolute about it seems like prognostication tinted with doomerism. For instance, the current Eastern European crisis suggests that the dollar will gain a lot against the Euro, and the Japanese crisis suggest the dollar will similarly gain against the yen. Therefore, the dollar index may have quite a leg left to go, even while deflating against gold and silver.

    Just curious about how you´re reading these clues to the trigger point. Last year I predicted a major bust up in Sept. based on the quarterly cycles of derivatives clearing. I need more facts to go on, my entire future rests on the timing and trades made in this interval. Thank you.

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