Could the U.S. Dollar Rise 50%?
by ilene - January 13th, 2011 3:33 am
Courtesy of Charles Hugh Smith, Of Two Minds
Conventional wisdom is that the Fed wants the U.S. dollar lower, so it must drop. But the dollar seems to be lacking proper obedience to the Fed’s grand commands.
Before you shout that all fiat currencies go to zero, let’s stipulate that the U.S. dollar has already proceeded 95% of the way to zero. According to the handy BLS inflation calculator, the 2010 dollar is roughly worth 4.5 cents of the 1913 dollar. Put another way, it now takes $22.10 to buy what $1 purchased in 1913.
(Interesting that the BLS inflation calculator only goes back to the birth of the Federal Reserve….)
So a 50% rise in the dollar would register as a mere blip on a 100-year chart. I mention this to put a 50% rise in perspective. It will seem like a large move in the present, but on a longer timeline it wouldn’t be that big a deal.
How could the dollar rise when the Treasury and Fed are moving Heaven and Earth to drive it down? Let’s turn to the Fed Flow of Funds for some perspective: what happened from 2007 (pre-recession) to the present?
Household Real Estate Assets: $22.7 trillion to $16.5 trillion: -$6.2 trillion
Corporate Equities: $9.6 trillion to $7.8 trillion: -$1.8 trillion
Mortgage debt: $10.53 trillion to $10.12 trillion: -$ .41 trillion
Household/non-profit Net Worth: $64.2 trillion to $54.9 trillion: -$9.3 trillion
And this is after a tremendous run-up in both bonds and stocks since early 2009. Add in whatever estimates of commercial real estate losses you reckon are semi-accurate and other impaired enterprise assets currently valued at "historical cost," i.e. marked to fantasy, and you get a number well north of $12 trillion even at conservative estimates.
The Fed has fought off this mass devaluation of assets by expanding its balance sheet by $2 trillion. First it sought to stem the collapse of the housing market by buying $1.2 trillion in impaired mortgage backed securities (taking garbage off the banks’ balance sheets) and now it is trying to suppress interest rates by buying $1 trillion in Treasury bonds (recall that QE1 already loaded the boat with T-Bills, so QE2 is simply adding another $600 billion to an already heavy cargo.)
In both cases the Fed’s campaigns are mere rear-guard actions: housing continues to slip, and the tides of higher yields and rates have started rising despite the Fed’s…
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DiggWE ARE NOT REPEATING THE MISTAKES OF JAPAN….YET
by ilene - December 21st, 2010 2:44 pm
Pragcap explains why "WE ARE NOT REPEATING THE MISTAKES OF JAPAN….YET".
Courtesy of The Pragmatic Capitalist
When confronted with a balance sheet recession the math regarding economic growth gets relatively simple – either the government spends in times of below trend private sector spending or the economy contracts. For several years now I have maintained that we are in a balance sheet recession – an unusual recession caused by excessive private sector debt. Although this balance sheet recession created the risk of prolonged weakness I have been quick to dismiss the persistent discussions that compare this to anything close to a second great depression - as I showed in 2009 the comparisons were always ridiculous. The much closer precedent was
Over the last year I have consistently expressed concerns that the USA was going to suffer the same fate as Japan, which consistently scared itself into recession due to austerity measures. At the time, most pundits were comparing us to Greece and attempting to scare us into thinking that the USA was bankrupt, on the verge of hyperinflation and general doom. I wrote several negative articles in 2009 & 2010 berating public officials who said the USA was going bankrupt and that the deficit was at risk of quickly turning us into Greece, Weimar or Zimbabwe. Nothing could have been farther from the truth. The inflationists, defaultistas and other fear mongerers have been wrong in nearly every aspect of their arguments about the US economy.
US government default was never on the table, the bond vigilantes were not just taking a nap and now, with the passage of the most recent stimulus bill it’s likely that we’ve (at least temporarily) sidestepped the economic decline that was likely to accompany a decline in government spending. Richard Koo, however, believes we are repeating the mistakes of our past. In a recent strategy note he said:
“The situation in Europe is no different from that in the US. I therefore have to conclude that the western nations have learned nothing from Japan’s lessons and are likely to repeat its mistakes.”
I have to disagree here. The most important factor impacting economic growth in the prior year…
Post Mortem for the World’s Reserve Currency
by ilene - December 15th, 2010 2:34 pm
This is a thoughtful analysis by Mike Whitney showing what a financial mess we’re in – the proverbial rock and a hard place scenario. – Ilene
Post Mortem for the World’s Reserve Currency
Courtesy of MIKE WHITNEY, originally published at CounterPunch and Global Research
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Paul Volcker is worried about the future of the dollar and for good reason. The Fed has initiated a program (Quantitative Easing) that presages an end to Bretton Woods 2 and replaces it with different system altogether. Naturally, that’s made trading partners pretty nervous. Despite the unfairness of the present system--where export-dependent countries recycle capital to US markets to sustain demand—most nations would rather stick with the "devil they know", then venture into the unknown. But US allies weren’t consulted on the matter. The Fed unilaterally decided that the only way to fight deflation and high unemployment in the US, was by weakening the dollar and making US exports more competitive. Hence QE2.
But that means that the US will be battling for the same export market as everyone else, which will inevitably shrink global demand for goods and services. This is a major change in the Fed’s policy and there’s a good chance it will backfire. Here’s the deal: If US markets no longer provide sufficient demand for foreign exports, then there will be less incentive to trade in dollars. Thus, QE poses a real threat to the dollar’s position as the world’s reserve currency.
Here’s what Volcker said: “The growing sense around much of the world is that we have lost both relative economic strength and more important, we have lost a coherent successful governing model to be emulated by the rest of the world. Instead, we’re faced with broken financial markets, underperformance of our economy and a fractious political climate…..The question is whether the exceptional role of the dollar can be maintained."
This is a good summary of the problems facing the dollar. Notice that Volcker did not invoke the doomsday scenario that one hears so often on the Internet, that China, which has more than $1 trillion in US Treasuries and dollar-backed assets, will one day pull the plug on the USA and send the dollar plunging. While that’s technically possible, it’s not going to happen. China has no intention of crashing the dollar and thrusting its own economy into a long-term slump. In fact, China has…
Unemployment Weaker Than Expected
by ilene - December 3rd, 2010 3:31 pm
Courtesy of Bondsquawk
The November employment report came in weaker than expected with a 39k gain in payrolls after an upward-revised 172k increase in October. Private hiring increased 50k after a 160k gain, the weakest reading since the spring although it would appear there are some seasonal adjustment issues as retail hiring rose 13k in October and dropped 28k in November. The October reading appears to have been firmer than the underlying trend while the November reading is likely below trend, smoothing through this the 3-month average of private hiring slowed to 107k from 138k but has been tracking just above 100k since August. The report also highlights some of the seasonal adjustment problems that have led to a downtrend in initial jobless claims. These difficulties have meant that claims have been providing unreliable signals throughout this year. The household survey has been considerably weaker than the payroll survey showing a loss of 173k jobs in November after a 330k loss in October. With labor force participation steady at 64.5% the job loss in the household survey led the unemployment rate to jump to 9.8% from 9.6%, the highest since April highlighting the underlying slack in the economy that motivated the Fed to initiate QE2. The U6 unemployment rate held steady at 17.0%. Average hourly earnings were flat leading the annual pace to slow to 1.6% from 1.7% and aggregate hours worked ticked up 0.1% after a 0.4% gain suggesting slower gains in wage and salary income. The report highlights the headwinds facing the US economy as the boost from inventories fades and other sectors are slow to pick up the slack.
Courtesy: BNP Paribas
Terms of Enslavement; Irish Citizens Say “Default”; Agreement Violates EU and Irish Laws; 50 Ways to Leave the Euro
by ilene - November 29th, 2010 3:06 pm
Mish writes about selling Ireland down the river in Terms of Enslavement; Irish Citizens Say "Default"; Agreement Violates EU and Irish Laws; 50 Ways to Leave the Euro. - Ilene
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Courtesy of Mish
ANY Ireland bailout terms are onerous given that it is not Ireland that is bailed out but rather banks in the UK, Germany, US, and France (in that order).
Moreover and unfortunately, the exact deal foolishly agreed to by Irish Prime Minister Brian Cowen is not only amazingly bad for Ireland, but one of the provisions violates EU and Irish law.
Terms of Enslavement
Please consider these terms as outlined in EU agrees on $89 billion bailout loan for Ireland
- Ireland gets Euro 67.5 billion ($89.4 billion) in bailout loans
- The 16-nation eurozone, the full 27-nation EU, and the global donors of the International Monetary Fund each commit euro 22.5 billion ($29.8 billion).
- Interest rates on the loans would be 6.05 percent from the eurozone fund, 5.7 percent from the EU fund and 5.7 percent from the IMF.
- Ireland will have 10 years to pay off its IMF loans.
- The first repayment won’t be required until 4 1/2 years after a drawdown.
- Prime Minister Brian Cowen said Ireland will take euro 10 billion immediately to boost the capital reserves of its state-backed banks
Comparison to Greece
For comparison purposes Greece has three years to repay its loans at an interest rate of 5.2 percent.
Debt Slave Entrapment
The key to understanding how quickly Ireland is made a debt slave can be found in this not so innocuous paragraph.
Ireland first must run down its own cash stockpile and deploy its previously off-limits pension reserves in the bailout. Until now Irish and EU law had made it illegal for Ireland to use its pension fund to cover current expenditures. This move means Ireland will contribute euro 17.5 billion to its own salvation.
The last sentence in the above paragraph should read "Ireland will contribute euro 17.5 billion to its own destruction"
Moreover, once all of its own funds have been deployed, Ireland would be dependent on the IMF for life.
Salt Onto Open Wounds
Like pouring salt onto an open wound, the EU finance ministers agreed on a permanent mechanism, starting in 2013, that would allow a country to restructure its debts once it has been deemed insolvent.
One aspect of that
…
The Key to Understanding “Recession” and “Recovery”: The Wealth Pyramid
by ilene - November 24th, 2010 9:46 am
Charles Hugh Smith, Of Two Minds discusses "The Key to Understanding "Recession" and "Recovery": The Wealth Pyramid."
pic credit: Thomas Hawk via Flickr (H/t Jr. Deputy Accountant)
The top 20% are prospering and spending money; the bottom 80% are not, but thanks to vast wealth disparity, the top slice of households can keep consumer spending aloft. This provides an illusion of "recovery" that masks the insecurity and decline of the bottom 80%.
There is statistical and anecdotal evidence supporting both a "we never left recession" and "the economy is recovering" interpretation. The key to making sense of the conflicting data is to understand that there are Two Americas.
Roughly speaking, we can divide the U.S. economy into "Wall Street"--the financialized part of the economy which encompasses the FIRE (finance, insurance and real estate) economy and its bloated partner in predation, the Federal government--and "Main Street," the looted, overtaxed remainder of the "real economy" which isn’t a Federally supported corporate cartel (i.e. the military-industrial sector, the "healthcare"/sickcare sector, Big Agribusiness, etc.)
Main Street is small business, entrepreneurs, shopkeepers, small property owners (independent motels, vineyards, truck farms, etc.) and local service providers (dentists, accountants, etc.). This class of small business and their employees is in decline: Few Businesses Sprout, With Even Fewer Jobs (WSJ.com)
Needless to say, the Federal/financialized/corporate cartel tranch of the economy is doing very, very well, thank you. The number of Federal employees pulling down $150,000 annually is skyrocketing, hundreds of billions in revenues slosh into National Security and sickcare cartels, and Wall Street bonuses are in the tens of billions.
A thin, overhyped tranch of the tech economy is also doing well--Google employees just got a 10% raise, for example--but this overhyped tranch includes a razor-thin share of the 130 million person U.S. workforce. Google’s global workforce is about 23,000, Twitter has a staff of roughly 300 and Facebook employs about 1,500 people.
There are two Americas in terms of wealth and income: In terms of income, the top 10% earn about half the total income, and in wealth, the top 5% own roughly 70% of all financial wealth.
I have prepared a Wealth and Income Pyramid of the U.S. to illustrate this reality. Notice that the "middle class" is mostly a…
Ireland’s “String and Sealing-Wax Fix”; Irish PM Loses Confidence of Own Party; European Sovereign Default Risk Hits All Time High
by ilene - November 23rd, 2010 4:53 pm
Mish reports on Ireland’s "String and Sealing-Wax Fix"; Irish PM Loses Confidence of Own Party; European Sovereign Default Risk Hits All Time High.
Courtesy of Mish
News in Europe regarding Ireland, Spain, and Portugal is ominous. Credit Default Swaps (CDS) are soaring in Spain and Portugal. European sovereign risk jumped to an all-time high.
Lloyds TSB says "Ireland’s debt woes may spread because investors have lost confidence in policy makers".
Members of his own party are calling on Irish Prime Minister Brian Cowen to resign.
The quote of the day goes to Bill Blain, a strategist at Matrix Corporate Capital LLP in London who said "“Bailouts are nothing but a short-term string-and-sealing-wax fix”.
With that let’s take a look at some specific news.
Zero Confidence in Irish Solution
Lloyds says Ireland’s Woes May Spread on ‘Zero Confidence’
“The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis even though fiscal austerity measures in both Portugal and Spain have been severe and prima facie, sufficient to ease market concerns,” Charles Diebel and David Page, fixed-income strategists in London, wrote in an investor note today.
“With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole,” they wrote. That may also raise “valid questions about the prescriptive policy measures being sufficient to deal with issues of such magnitude.”
Credit Default Swaps Soar in Spain, Portugal
In spite of the Irish bailout, Spain, Portugal Bank Debt Risk Soars as Traders Look South
The cost of insuring Spanish and Portuguese subordinated bank bonds soared as traders of credit-default swaps turned their focus to southern Europe following Ireland’s bailout.
Swaps on Portugal’s Banco Espirito Santo SA rose to a record while contracts on Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender, climbed to the highest in more than five months. The benchmark gauge of European sovereign risk also jumped to an all-time high, while two indexes tied to bank debt surged the most since June.
Ireland’s rescue “achieves completely the opposite of what it allegedly tries to achieve, namely to calm markets,” Tim Brunne, at UniCredit SpA said in a report.
“Instead, the credit profile of both the sovereign and the impaired financial institutions has been weakened,” the Munich-based strategist wrote.
…
WHAT’S REALLY BEHIND QE2?
by ilene - November 23rd, 2010 2:44 am
Ellen Brown, taking a uniquely positive view of QE2, argues that it is not about saving the banks, in WHAT’S REALLY BEHIND QE2? - Ilene
Courtesy of Ellen Brown
The deficit hawks are circling, hovering over QE2, calling it just another inflationary bank bailout. But unlike QE1, QE2 is not about saving the banks. It’s about funding the federal deficit without increasing the interest tab, something that may be necessary in this gridlocked political climate just to keep the government functioning.
On November 15, the Wall Street Journal published an open letter to Fed Chairman Ben Bernanke from 23 noted economists, professors and fund managers, urging him to abandon his new “quantitative easing” policy called QE2. The letter said:
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. . . . The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
The Pragmatic Capitalist (Cullen Roche) remarked:
Many of the people on this list have been warning about bond vigilantes while also comparing the USA to Greece for several years now. Of course, they’ve been terribly wrong and it is entirely due to the fact that they do not understand how the US monetary system works. . . . What’s unfortunate is that these are many of our best minds. These are the people driving the economic bus.
The deficit hawks say QE is massively inflationary; that it is responsible for soaring commodity prices here and abroad; that QE2 won’t work any better than an earlier scheme called QE1, which was less about stimulating the economy than about saving the banks; and that QE has caused the devaluation of the dollar, which is hurting foreign currencies and driving up prices abroad.
None of these contentions is true, as will be shown. They arise from a failure either to understand modern monetary mechanics (see links at The Pragmatic Capitalist and here) or to understand QE2, which is a different animal from QE1. QE2 is not about saving the banks, or devaluing the dollar, or saving the housing market. It is about saving the government from having to raise taxes or cut programs, and saving Americans from the austerity measures crippling the Irish and the Greeks; and for that, it…
Large Companies Hiring, Small Companies Not; Federal Hiring Strong, States Cutting Back; Proposed Solutions; Bright Side of Fed Policies
by ilene - November 22nd, 2010 5:45 pm
Unfortunately, after reading Mish’s article "Large Companies Hiring, Small Companies Not; Federal Hiring Strong, States Cutting Back; Proposed Solutions; Bright Side of Fed Policies," most of us are not going to be happy about what Mish calls the bright side. – Ilene
Courtesy of Mish
A recent Gallup survey suggests Larger U.S. Companies Are Hiring; Smallest Are Not
Gallup finds that larger companies are hiring more workers while the smallest businesses are shedding jobs. More than 4 in 10 employees (42%) at workplaces with at least 1,000 employees reported during the week ending Nov. 14 that their company was hiring, while 22% said their employer was letting people go. At the other extreme, 9% of workers in businesses with fewer than 10 employees said their employer was hiring, and 16% said their employer was letting people go.
This Gallup question about company size is new, so it is unclear whether this pattern is a continuation of, or a change from, the past.
Hiring Also Much Higher at the Federal Government
The federal government is hiring more employees than it is letting go, while the opposite is true for state and local governments. More than 4 in 10 federal employees (42%) say their organizations are adding people and 21% say they are letting workers go. In contrast, state and local government employees report a net loss of workers.
Pitfalls, Flaws, Observations
There are huge flaws in the survey as well as a potential for additional flaws in analyzing the survey results. Nonetheless there are some important observations that can be made.
For starters, it is nice to see large corporations hiring, but there is no indication of by how much. Is the total headcount hiring 1 or hiring 2,000? Is the number up or down from last month?
Compounding that lack of information, we have seasonal flaws. Many retailers are now ramping up hiring for the Christmas season. So… is the hiring temporary or permanent?
The survey does not say. Moreover it does not say why they are hiring. Is business expanding or is this a short-term need?
That aside, the survey is not useless by any means. If this expansion was getting stronger, the number of companies hiring would be going up. It is not. Worse yet, small businesses which are the lifeblood of job creation, have not participated in the hiring…
Robert Prechter Explains The Fed, Part I
by ilene - November 19th, 2010 3:19 pm
Robert Prechter, Elliott Wave theory expert, examines the Federal Reserve. – Ilene
Via Elliott Wave International, Robert Prechter Explains The Fed, Part I
The ongoing financial crisis has made the central bank’s decisions — interest rates, quantitative easing (QE2), monetary stimulus, etc. — a permanent fixture on six-o’clock news.
Yet many of us don’t truly understand the role of the Federal Reserve.
For answers, let’s turn to someone who has spent a considerable amount of time studying the Fed and its functions: EWI president Robert Prechter. Today we begin a 3-part series that we believe will help you understand the Fed as well as he does. (Excerpted from Prechter’s Conquer the Crash and the free Club EWI report, "Understanding the Federal Reserve System.") Here is Part I.
Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert PrechterAn argument for deflation is not to be offered lightly because, given the nature of today’s money, certain aspects of money and credit creation cannot be forecast, only surmised. Before we can discuss these issues, we have to understand how money and credit come into being. This is a difficult chapter, but if you can assimilate what it says, you will have knowledge of the banking system that not one person in 10,000 has.
The Origin of Intangible Money
Originally, money was a tangible good freely chosen by society. For millennia, gold or silver provided this function, although sometimes other tangible goods (such as copper, brass and seashells) did. Originally, credit was the right to access that tangible money, whether by an ownership certificate or by borrowing.
Today, almost all money is intangible. It is not, nor does it even represent, a physical good. How it got that way is a long, complicated, disturbing story, which would take a full book to relate properly. It began about 300 years ago, when an English financier conceived the idea of a national central bank. Governments have often outlawed free-market determinations of what constitutes money and imposed their own versions upon society by law, but earlier schemes usually involved coinage. Under central banking, a government forces its citizens to accept its debt as the only form of legal tender. The Federal Reserve System assumed this monopoly role in the United States in 1913.
What Is a Dollar?
Originally, a dollar was defined as a certain
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