Posts Tagged ‘dollar crash’

Mainstream media is even picking up on yesterdays news. When the central banks that run the country don’t want our dollar and just shred it, it is something the private citizen should take notice. Buy silver, buy gold and pass this along to a friend.

Morning Note: Gold Replacing Dollar as World’s Reserve Currency?

By: CNBC Producer Catherine Holahan /

$105 per barrel oil. Cotton prices at record levels. Food prices at 2008 highs. Typically, such commodity price increases would send central banks running to the U.S. Dollar to secure the value of their savings. After all, the dollar has been the reserve currency since World War I.

But not this time.

Central banks are shedding dollars [DXC1  76.395    -0.09  (-0.12%)   ] , reducing their holdings by about $9 billion in previous quarter, according to Nomura Securities’ Jens Nordvig, global head of G10 FX Strategy.

What are they buying instead? Gold [GCCV1  1419.30    -6.90  (-0.48%)   ] .

The yellow metal hit a fresh record high this morning, while the dollar index dropped to a 15-month low. The news had Fast Money’s Brian Kelly looking to add more gold and silver longs to his portfolio Thursday morning.

“What is working is gold, silver [SICV1  37.15    0.101  (+0.27%)   ] and oil [CLCV1  103.96    -1.44  (-1.37%)   ] ,” said Kanundrum Capital’s Kelly. “I wish I had more.”

Gold and silver have become the inflation hedges of choice for some investors. Gold hit an intra day high today of $1,448 per ounce. Silver is trading at 31-year highs, hitting an intra day high of $38 per ounce


Best article yet abuot the end of the US dollar. Every Empire has it’s day and just like the Roman Empire, USA is facing the same issue. It is imploding financially because of it’s expansive military based empire. The issue is USA no longer has real jobs to support the tax demand from the IRS and FED Gov’t. It has no real natural resources it is producing either. Instead it is a military industrial complex type of empire which produces no real return nor product to be reintroduced into the economy. Eventually the machine runs out of steam, and this is what we are witnessing.

The End of the US Dollar?

By: David Chapman | Wed, Feb 23, 2011

The turmoil across North Africa and the Middle East is threatening not only to overthrow aging dictatorships, autocracies and monarchies, but also to upset the geopolitical balance between the countries of that region and the Western powers that has existed since at least the 1950s. For the West, the issue has always been the security of oil. For the US there is a second issue, and that is the security of Israel. Now both are under threat.

Some 56 per cent of the world’s oil reserves are in the Middle East, with another nine per cent in Africa. Therefore, unrest in the region could be the catalyst that sets off a global monetary-oil shock. The unrest in Libya has sparked a sharp rise in oil price. Libya holds the world’s ninth-largest reserves and is the twelfth-largest exporter, providing about two per cent of the world’s daily oil supply. Not large and it is possible that Saudi Arabia could pick up the slack but it sends out a wave of uncertainty and it is unknown where the next outburst might occur.

Saudi Arabia is the world’s second largest producer, behind Russia. Saudi Arabia exports roughly 75 per cent of its production. If the unrest spreads to Saudi Arabia then all bets might be off the table as to how high oil prices can go.

Saudi Arabia is governed by an absolute monarchy which rules by decree. While its people are generally well-off, it has a minority Shia Muslim population (about 20 per cent), largely employed in the oil-producing regions, who are at the margins of the society. Saudi Arabia has a poor human rights record and its Wabbabi brand of Sunni Muslim religion has often been noted to be behind alleged terrorist organizations. Unemployment is high at just under 11 per cent, although that is better than most Arab countries.

The US is the world’s largest consumer of oil, at roughly 19 million barrels per day. It imports almost 10 million barrels per day. China is now the second-largest consumer. Among the top 15 consumers we also find Japan, Germany, France, Canada, Italy and the UK. Yet outside of Canada and China (which, like the US, produces roughly half of its daily consumption and is also the world’s third-largest producer), none of the others are in the top 15 for production. And amongst the Western economies, only Norway and Canada are listed in the world’s top 15 exporters.

It has often been said the US dollar is a petrodollar. That is to say, it is earned through the sale of oil. Oil-producing countries such as Saudi Arabia and Venezuela, which peg their currencies (within a band) to the US dollar, are as result quite dependent on the value of the US dollar. These countries and many others earn large amounts of US dollars because of their oil production.

The US dollar is also the world’s reserve currency. All commodities are priced in dollars – not just oil. It is the most marketed currency in the world and it is owned more widely than any other currency. One would therefore believe that a strong dollar is not only in the interest of the United States, but everyone else as well.

But the US dollar is also a fiat currency. A fiat currency has value only because the government says so. The Latin word fiat translates as “let it be done”. Thus, the value of money is dictated by government decree.

Today, all national currencies are fiat currencies. The trend began in August 1971 when President Richard Nixon took the US dollar off the gold standard thus also taking the world off of the gold standard. Increasingly from then on, money was whatever a government said it was. As such it has no real value except being declared legal tender.

Fiat currencies have a long history, mostly of failure .The Romans didn’t have paper money but they developed an early form of fiat by constantly decreasing the amount of silver used in the denarius, their main medium of exchange. They continued this debasement until the coinage became intrinsically almost worthless.

The Chinese were the first to issue paper currency in around the tenth century but eventually they printed so much that hyperinflation occurred and their currency became worthless, even though its usage lasted close to 400 years.

History is respite with the failure of fiat currencies. The most recent example was collapse of the Zimbabwean dollar, and a famous example was the Weimar Republic of Germany in the 1920s.

Fiat currencies have a history of ending in hyperinflation – if a country starts printing money excessively, it is often on the road to ruin and hyperinflation. And this is the United States today. The US has unparalleled deficits and debt; it has increasing expansion of its money supply, using a fiat currency; and it is being misleading about its true economic situation through its published economic statistics.

But it also has the world’s reserve currency, and international trade is carried out in US dollars. Any country buying oil, for example, must first convert its currency into dollars to pay for it. The selling country receives those dollars, which are often recycled right back into purchasing US debt, so that the selling country does not adversely impact its own currency.

But the US dollar is a declining currency. In the last 100 years it has lost over 96 per cent of its purchasing power (this process accelerated after 1971). The chart below shows the long decline. The second chart shows how public debt and money supply exploded after cutting the link with gold, and how a fiat currency can be expanded at will, with nothing to prevent it from being issued.

The third chart shows the decline of the purchasing power of the US dollar when using inflation numbers based on the way inflation was calculated up until the early 1990s. At that time the US began to change the way of calculating inflation, the net effect being to lower the reported rate of inflation.

Many items, including Social Security payments, are tied to the reported rate of inflation. With a much higher rate of inflation, many items would have increased in price faster and the US Treasury would have had to pay out far higher entitlements.

The recalculation of the inflation numbers were provided by That chart suggests that the US dollar has lost over 98 per cent of its purchasing power over the past 100 years.

Chart 1

Chart 2

Chart 3

Many would say that it doesn’t matter, that society today is far better off than it was 100 years ago. And it is, and more appear to be joining the middle class. But technological advances have changed society in a dramatic way from 100 years ago. That and lots of money provided by a rapidly expanding money supply and debt all courtesy of a fiat currency. With nothing tangible to back money, money intrinsically has no value – except what the government says it is.

But with the explosion in debt and money and the decline in the purchasing power of the US dollar, society has become more divided. Income and wealth is increasingly concentrated in fewer and fewer hands. During the financial crisis of 2008 the bailouts went to the financial institutions (and corporations) that were either indirectly involved or directly involved as the cause of the crisis. The taxpayer (public) footed the bill.

Meanwhile the housing market collapsed with tens of thousands (millions?) losing their homes to foreclosure and tens of thousands lost their jobs. General wages have been stagnant for at least the past two decades and those living on fixed incomes (pensions) have seen a constant decline in their living standards. Meanwhile, those involved in the creation of money particularly at the banks and investment management companies have seen an explosion in their wealth and pay packages.

The unemployment rate soared and while the headline unemployment rate (U3) in the US is at 9 per cent, the Bureau of Labour Statistics U6 number is closer to 17 per cent and have calculated that based on calculating unemployment as it was it was done in 1990 the actual rate may be closer to 22 per cent. The current U3 number leaves out longer term unemployed, part time workers looking for full time work and very long term unemployed. If your unemployment insurance runs out the person falls out of the U3 number to the U6 number.

Today, with the future liabilities of Social Security, Medicare and Medicaid estimated (conservatively) to be about US$50 trillion or (more liberally) at upwards of $200 trillion, the US, with a debt at over $14 trillion and rising, has little chance of ever recovering or ever being able to pay it back. It has been said that the US could tax 100 per cent of income and still not be able to cover its commitments.

Further, the world is rife with imbalances. The US is the largest consumer in the world and imports heavily, creating huge trade deficits. It also runs huge budget deficits to finance entitlements and the Pentagon that finances the war machine. The US dollars circulating throughout the world, either because of general imports or because of oil, are recycled back into the US to purchase their debt. All of this appears to have worked reasonably well over the years but now the model is coming under severe stress. These global imbalances are not only causing problems for the US they are causing problems for other countries as well.

If the US were any normal country, its currency would now be in complete collapse and it would be arranging for IMF bailouts such as Greece and Ireland saw recently. But because it is the world’s reserve currency, the US has one big advantage: it can just print more dollars.

This strategy has unnerved the holders of US debt, led by China, which is estimated to hold almost $900 billion as of December 2010. Japan also holds almost as much. The UK has over $500 billion. Almost 60 per cent of the US debt held by foreigners is in the hands of just those three plus the oil producing nations led by Saudi Arabia. Of the total US debt of over $14 trillion, over $9 trillion is held by the public and roughly half of that is held by foreigners.

No wonder there are calls for an end to US dollar hegemony and a new Bretton Woods agreement to determine a new world reserve currency, and possibly even bring back a gold standard. The calls have ranged from the IMF, the World Bank, and many countries including France and Germany and of course China, the country that has the most to lose, given its large holdings of US dollars. Even Saudi Arabia has joined a group of countries seeking an alternative for the pricing of oil solely in US dollars. China and Russia are now conducting trade between themselves in Yuan and Roubles.

US debt is vulnerable to a downgrade as well. The IMF and the rating agencies have issued numerous warnings about the US debt situation. The effect of the US losing its AAA rating could be a financial earthquake. The US is also approaching its legal debt limit and, with the rift in Congress, the Republicans have threatened not to grant a new, higher debt limit. This could in the worst case result in the shutdown of government and a US debt default. This is not to predict that any of this will happen, but only to point out that it could.

Some are also saying that the so-called quantitative easing, or QE, could spiral the US into hyperinflation. While there are currently few signs of it, an event such as an oil shock in the Mid-East could trigger severe inflation which in turn could trigger further QE and start an acceleration in monetary inflation. Sharply rising oil prices have a history of causing recessions so it could stop the current feeble recovery in its tracks. An economy reeling from higher oil prices plus rapid monetary inflation could soon spiral out of control.

In the midst of all of this it is no surprise that gold has soared over 450 per cent in the past decade. Although relatively flat thus far in 2011, gold is up almost 28 per cent since the end of 2009. It is becoming an alternative currency. The world’s central banks still hold some 30,000 metric tonnes of gold, and investment demand for it has brought investment holdings in line with what is in the world’s central banks. In many countries, particularly in Asia, gold is seen as a savings vehicle rather than the speculation it seems to be viewed as in North America.

It is not so much that gold prices are rising but that fiat currencies led by the US dollar are declining. The chart of gold shows the stair step action that has taken place since the double bottom lows of 1999 and 2001. The action since that time has seen a series of triangular patterns form that continually break to the upside. And gold is rising not only in dollars but in all currencies, as the series of charts below attest.

Finally not only is the US Dollar Index declining the trade weighted Dollar Index is also falling. The trade weighted Dollar Index called the Broad Index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. In some respects this more fairly reflects the value of the US dollar then does the more broadly watched US Dollar Index. The US Dollar Index is a weighted valuation against a basket of 6 major free trading currencies. Notably the US Dollar Index excludes the Chinese Yuan.

Chart 4
Chart created using Omega TradeStation 2000i. Chart data supplied by Dial Data.

Gold in Euro

Gold in Euro

Gold in British Pounds

Gold in British Pounds

Gold in Cdn$

Gold in Cdn$

Gold in Yen

Gold in Yen

Gold in Chinese Renminbi

Gold in Chinese Renminbi

US Trade Weighted Dollar

US Trade Weighted Dollar

Since the founding of the US Republic over 200 years ago there have been numerous periods of gold standards. The current period of fiat currencies is not the first. But every time the world has moved to fiat currencies, it has eventually come back to a gold standard. The periods are summarized below.

1785-1861: gold standard. The founding fathers of the US were concerned about unrestrained money supply.

1862-79: fiat currency (known as Greenbacks). The shift to fiat was to accommodate the huge costs of the civil war (1860-64). A severe depression in the 1870s brought back a gold standard.

1880-1914: gold standard. A long period of monetary stability.

1915-25: floating fiat currency. A lack of gold with which to back paper currencies (brought on by the printing of money to finance WW1) brought another period of fiat currency.

1926-31: gold standard. The world pegged its currencies to the US dollar and British pound, both of which were convertible into gold.

1931-45: floating fiat currency. The global imbalances brought on by the Great Depression and WW2 took the world back to another period of fiat currencies.

1945-71: gold standard. As fixed by the Bretton Woods agreement, the world pegged itself to the US dollar which was convertible into gold at $35/ounce. In 1965 the US and Canada stopped issuing coins in silver. In 1968 the US$ was no longer convertible into silver.

15 August 1971: President Nixon took the world off the gold standard. No currency was now backed by gold.

1971-73: fixed dollar standard. The Smithsonian agreement pegged world currencies to the US dollar rather than gold, for the first time.

1973-today: floating fiat currency. The Basel Accord established the current system of floating currency rates with the US dollar as the world’s reserve currency.

As the above summary shows, there is no law saying that the US dollar cannot cease to be the world’s reserve currency. Nor is there any law that says the world could not go back to a gold standard. It emphasizes the importance of hedging oneself with gold.

This brings us full circle, back to the potential oil crisis brought on by the unrest in the Mid-East and North Africa. An oil shock could bring on a monetary crisis. Sharply rising oil prices would set back the current feeble recovery in the western economies. Worse, if supply were curtailed because of the outbreak of war or civil war in the region, then shortages would loom along with sharply rising oil prices.

The US is the world’s most indebted nation and is trying to bail itself out by printing money, thus monetizing the debt. The world knows it and many are concerned because of their large holdings of US securities. The printing of money would force up interest rates (long bond rates are already rising), thus putting more strain on the US and global economies. A debt downgrade of US debt could follow, and the looming debt battle in Congress could see a US debt default in the worst case. Any or all of these events could lead to chaotic conditions in the US and a break down in the social, political and economic order.

Oddly, nobody has stated it more succinctly than Fed Chairman Ben Bernanke, who noted that “Meeting these challenges will require policy makers and the public to make some very difficult decisions and to accept some sacrifice”. Even he seems to recognize that this cannot go on forever. All of this leads to the conclusion that the US despite the consequences will probably continue on a path towards hyperinflation despite Mr. Bernanke’s musings. But it is a lose-lose game as history has shown us, and could lead to the end of US dollar hegemony and a breakdown in society.

Great Article by

Posted: February 28, 2011 in Finance, Stock Market

2011 Tipping Points

Throughout my 2010 article series “Extend & Pretend” and “Sultans of Swap” I stressed that we were rapidly moving from the Financial Crisis of 2008, through the Economic Fallout of 2009 -2010, towards a Political Crisis in 2011 -2012. We are now clearly beginning to see the early emergence of the final part of this continuum.  From North Africa to Wisconsin all are fundamentally based on the single insidious underlying problem – excessive global debt and credit levels.

The global macroeconomic environment appears to be rapidly unraveling. The situations in North Africa through the Middle East are blatant proof of social unrest and accelerating political instability. Food shortages and inflation pressures are now driving people into the streets. When you feel the hunger in your stomach and see it in the eyes of your children, it quickly erupts and motivates people to action.

It is now time to revisit our Tipping Points framework to see where this is leading. A framework that is clearly pointing to a global fiat currency failure and an emerging new world order which is detailed in our “2011 Thesis – Beggar-thy-Neighbor“.



Our Tipping Points which are outlined below are adjusted continuously based on daily news flow analysis.  Through a proprietary ‘Process of Abstraction’ news is tracked and consolidated around these potentially critical flash points.

    IS WAS Diff.
SOVEREIGN DEBT – PIIGS Insolvency and Inability to stimulate economies 1 1 Same
EU BANKING CRISIS Bank Ratios of 50:1 and toxic debt on and off the balance sheet 2 2 Same
RISK REVERSAL Historic level of financial market participation and dependency (i.e. pension entitlements) 3 5 +2
US STATE & LOCAL GOVERNMENT Unprecedented budget shortfalls & funding problems 4 4 Same
FOOD PRICE PRESSURES Production shortages, distribution break-downs with growing Asian demand 5 15 +10
RISING INFLATION PRESSURES & INTEREST RATES Reversal in Interest rate and impact on government financing budgets 6 14 +8
SOCIAL UNREST Public rallies, protests and rioting against the government. 7   NEW
CHRONIC UNEMPLOYMENT Historic Unemployment rates in G7 8 9 +1
CHINA BUBBLE Real Estate & speculative bubbles 9 22 +13
GEO-POLITICAL EVENT A sovereign country overthrow, rebellion or insurrection 10   NEW
RESIDENTIAL REAL ESTATE – PHASE II Shadow Inventory, Strategic Defaults, Looming Option ARMS ‘python’, LTV levels. 11 6 -5
COMMERCIAL REAL ESTATE Market Values are down 45 – 55% with little write downs as of yet being taken by banks, insurance or financial holders.  12 7 -5
PUBLIC POLICY MISCUES Impact of Obamacare, Dodd-Frank Bill and others in reaction to present environment. 13 13 Same
OIL PRICE PRESSURES Shortages, Peak Oil & Asian Growth demand. 14 30 +16
BOND BUBBLE Historically high Bond Prices 15 3 -12
PENSION – ENTITLEMENT CRISIS Unfunded Pension Liabilities – > $100T in US 16 11 -5
CENTRAL & EASTERN EUROPE The Sub Price of Europe – Level of borrowing in non sovereign currency (EU loans) 17 8 -9
US BANKING CRISIS II Deferred accounted write-downs for Real Estate, Commercial Real Estate & HELOCS 18 10 -8
CREDIT CONTRACTION II Bankruptcy & Mal-Investment Catalyst 19 18 -1
JAPAN DEBT DEFLATION SPIRAL Ability for Japan to continue to fund national debt with shifting demographic patterns. 20 18 -2
FINANCE & INSUR. BALANCE SHEET WRITE-OFFS Accounting for Commercial Real Estate market values, loan loss reserves 21 17 -4
US STOCK MARKET VALUATIONS Over-Valuation and unrealistic earnings estimates. 22 16 -6
GOVERNMENT BACKSTOP INSURANCE Fannie, Freddie, Ginnie, FHA, FDIC, Pension Guarantee backstop funding. 23 23 SAME
SHRINKING REVENUE GROWTH RATE Slowing Corporate Top-Line revenue growth rates 24 27 +3
GLOBAL OUTPUT GAP Global Overcapacity & Underutilization 25 29 +4
US DOLLAR WEAKNESS Domestic Inflationary Pressures 26 28 +2
US RESERVE CURRENCY Emergence of alternative solutions such as SDRs. Inflationary repatriation impact 27 20 -7
PUBLIC SENTIMENT & CONFIDENCE Growing social unrest and public rage 28 26 -2
SLOWING RETAIL & CONSUMER SALES Impact of slowing consumer sales and increasing savings rate on 70% consumption US Economy 29 25 -4
NORTH & SOUTH KOREA Geo-Political tensions – Escalating 30 12 -18
US FISCAL, TRADE AND ACCOUNT IMBALANCES Inability of the US to finance imbalances 31 21 -10
CORPORATE BANKRUPTCIES Reverse Gearing & margin pressures 32 24 -8
TERRORIST EVENT Unknown black swan 33 35 +2
FINANCIAL CRISIS PROGRAMS EXPIRATION Withdrawal of Financial Crisis Triage Programs and interest rate normalization 34 24 -10
IRAN NUCLEAR THREAT Israeli attack on Iran  – Middle East escalation 35 33 -2
NATURAL PHYSICAL DISASTER Presently: Gulf Oil Spill Economic fallout and possible hurricane impact 36 31 -5
PANDEMIC /EPIDEMIC Unknown black swan 37 32 -5


The Tectonic Shifts from 2007 to 2013 are best shown in the following illustration which is closely tracking our expectations and projections from the early stage of the financial crisis.


We need to carefully watch:

1) The increasing & accelerated contagion of social tensions. Watch for Asia demonstrations in places such as North Korea.

2) How and if the Central Banks actually do unwind their  crisis ‘triage’ programs or are they realistically now permanent and necessary to maintain the illusion of financial stability?

3) New government public policy initiatives to combat growing inflation and price pressures

4) The financial sectors abilities to continue to hide massive nonperforming commercial and residential real estate loans through Federal Reserve endorsed accounting gimmickry.

These events will allow us to determine if our roadmap is still valid or if we are going to see even sooner and possibly poorer financial outcomes than we predict in our free Monthly Market Commentary and Market Analytics reports.

The public will soon wake up to the magnitude of money printing that is going on to support the economic recovery fallacy. When the public does become aware, “Money Velocity” will accelerate. When this happens, the likelihood is that the markets will dramatically rise, not because economic conditions are improving, but rather because of a depreciating US dollar.  We believe this expectation is presently being priced into the market. We are truly exposed to the potential of a “Minsky Melt-Up” or more correctly from an Austrian perspective, a Von Mises “Crack-up Boom”. 

The risks are presently towards a SHORT TERM corrective consolidation. The Intermediate Term calls for higher market highs into June 2011 – then it gets ugly – fast!

“The Federal Reserve historically was the lender of last resort in a crisis;

Today, the Federal Reserve is the buyer of first resort in a crisis

….. and every day for that matter”

Video about the dollar coming this year from effects of PISS POOR FINANCIAL MANAGEMENT by the Federal Reserve, Wall Street, and Federal Government

James Turk on King World News begins to speak about the dollar crash that is not being talked about. The dollar crash that is inevitable. He goes into areas that highlight some current events and their effect on an already very weak dollar. I predict anything 72 or below on the DXY it will crash. Turk uses the limit of 77 on the DXY. Either way, we will know soon enough.

Turk – Dollar Ready to Collapse, Silver Squeeze to Continue


With gold higher and silver up almost $1.30, King World News today interviewed James Turk out of Spain.  Turk had this rather frightening warning about the dollar, “The dollar right now is hanging on the precipice.  If we break below 77 on the dollar index, look out below.  I don’t think people really appreciate how scary the dollar chart is here, or how ominous the implications really are.  There’s no predicting how far the dollar could plunge if confidence breaks.”

Turk continues:

 “You’ve got civil war breaking out in North Africa and you have rebellions happening in the Middle-East.  In this kind of geopolitical situation, in the past the US dollar would always rally, but this time it can’t even bounce.  You know Eric the other side of this coin is that if the dollar falls off the edge of a cliff, precious metals are going to skyrocket.” 

 When asked about silver Turk stated, “During the most illiquid time of the trading day, somebody decided to take out all of the stops in silver.  If you were not following during business hours in the Pacific Ocean you missed it.  I woke up this morning and looked at the chart and couldn’t believe what happened while I was sleeping.

 The important point Eric is that no technical damage was done and in fact the situation has become even more bullish because that little smack down overnight took out all of the weak hands. 

With this month’s important options expiry now behind us, I’m looking for higher prices next week.  Even though the March/May spread has flattened a little, the backwardation continues to grow to 2015 and has ballooned further to $1.16.  The short squeeze is continuing to develop.  The shorts are trapped and whether the trap springs this week or in a month or two I don’t know, but we are getting very close.”

 When asked about gold specifically Turk remarked, “While silver did get hit in overnight trading, gold hardly moved and then snapped right back.  Remember I said last time that the gold chart is beginning to look really strong, that is what the event last night displayed. 

 Gold is incredibly resilient and looks coiled for an explosive move higher.  We started our initial probe of the all-time high this week closing in on $1,430 before backing off.  Look for another probe of that $1,430 level very soon.  It won’t be long Eric before we take out that all-time high, particularly if the dollar falls off the edge of a cliff.”

 It is worth noting that in his King World News interview today Art Cashin also warned about the US Dollar being on the verge of serious trouble.  KWN readers globally should keep a close eye on the dollar next week to see if it begins to break down.  If that happens it will increase bids in both the gold and silver markets.

 Eric King