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Is the dollar really going to collapse?

From Rex Nutting at MarketWatch:

U.S. banks are reducing their lending at the fastest rate on record ... According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace...

... if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks' balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans.

Banks have completely shirked their obligations under the TARP bailout and are refusing to lend more money to individuals and businesses. They have simply taken this money and deposited it with the Federal Reserve or invested it in equities markets for superior returns. Regardless, we see that credit is diminishing rapidly. Over the summer, consumer credit plummeted by over $40 billion and credit card spending fell by over $30 billion.

As more and more people lose their jobs, the pool of creditworthy borrowers is dwindling. Salaries are no longer increasing. The demand for credit is actually decreasing because fewer and fewer folks are in a position to borrow for investment projects. There is almost no internal growth in our economy right now.

Unemployment is rising and the pool of creditworthy borrowers is declining. When credit recedes in an economy where salaries have stagnated and joblessness is increasing, demand falls and recession deepens. That is, unless government spending takes up the slack in excess capacity. The so-called recovery is a result of fiscal stimulus and the Fed's extraordinary liquidity injections into the financial system. True growth and prosperity do not come via the printing press. The Fed's actions are just putting more and more pressure on the dollar.

The Federal Reserve seems committed to the idea of inflating our way out of this enormous debt. By drastically diminishing the value of the dollar, our actual debt can be managed... or so they seem to believe. Those holding dollar debts are at a huge disadvantage.

What should the average citizen do right now? It seems most prudent to go out and purchase things. Many people are rushing out to buy gold and silver as hedges against a plummeting dollar. Longer-term investors are actually going out and snapping up devalued real estate. While the credit crunch will suppress real estate values in the short term, the number of buyers is ridiculously low right now and creating an extremely favorable market. Regardless of what one decides to purchase, the bottom line is that simply sitting on money is the wrong way to approach this crisis as our dollar will likely be terribly devalued five years from now.


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Comments (13)

Another zinger. Kevin, keep... (Below threshold)
bobdog:

Another zinger. Kevin, keep this guy around. He gets it.

Just last week, I finally paid off my credit card debt, which is tough to do in a shrinking economy. For the first time in two years, I've got no mortgage payment, no car payment, no credit card debt.

My ass now belongs to me for a while, and it's a liberating moment. I'm one of the people responsible for the decline in consumer credit, and I'm fortunate to be able to pull it off.

There was a documentary by David Faber from CNBC about consumer credit a few months ago, and I remember a segment about people taking out second mortgages on their houses to pay off credit card debt. After waiting until the market value of their houses went up even further, they repeated the process all over again, as if property values would go up forever. Banks were all too happy to go along with the idea, and they got rich on it.

What struck me was how anybody would be willing to bet their home on short term consumer spending. It's the ultimate sucker bet, especially considering the interest rate on credit card debt.

All that's needed is a major life change, like a job loss or a major illness, a fire, a divorce, or a Democratic congress, and life turns into a highly personal painting by Hieronymus Bosch.

Like many others, I'll start spending again when I feel financially safe and I don't feel like my pocket's being picked by my own government. That's gonna be a while.

Banks have completely sh... (Below threshold)
wolfwalker:

Banks have completely shirked their obligations under the TARP bailout and are refusing to lend more money to individuals and businesses.

Have they now? Legally, a bank's obligation is to its owners (usually its shareholders) first, and its existing customers second. TARP didn't change that, as far as I know. Right now, small banks are failing in record numbers, and large banks are showing themselves as "profitable" only by means of accounting trickery. Given those two facts, I think that most of the TARP money has gone into offsetting existing bad loans, because otherwise the banks in question will show as legally insolvent and be shut down. In pure business terms, most banks can't justify any new lending that has a high risk of default. Not without breaching their legal obligations to their owners/shareholders.

There has been a steady dru... (Below threshold)
MightyJimbo:

There has been a steady drumbeat of the dollars demise, from many different financial and general news sources, foreign and domestic. All the Fed can do is try to make it as slow as possible. Congress and the administration seem to be compounding this event either by incredible ignorance or actually doing it on purpose. Scary stuff. You think people wold have waken up to this by now. God help us.

Here's an animation about j... (Below threshold)
bobdog:

Here's an animation about job creation. It takes about a minute to watch.

http://tipstrategies.com/archive/geography-of-jobs/

Watch what happens after Katrina hits NOLA. It's like the spread of an epidemic. Watch what happens when congress starts stimulating the economy - absolutely nothing.

Chilling stuff indeed.

The money supply has grown,... (Below threshold)
Mac Lorry:

The money supply has grown, but no where near by the amount of personal wealth the public lost, and thus, there's still deflationary pressures domestically and that's why you see falling prices.

Also the whole idea that the government printing money causes inflation is an obsolete idea, at least to the extent it has been done. In this age of virtual money, vast sums were created during the run-up to last year's bust. These virtual dollars work just like paper dollars, but they only exist as numbers in accounts. When they disappeared last year the total money supply shrunk by more than 4 trillion dollars swallowing up the entire stimulus bill and far more. That's evident by the continued pressure to lower wages and prices.

The reason the dollar is taking a beating in money markets is because of the near zero interest rate the Fed is currently enforcing. No one wants to invest in dollars when there's no reward, and banks can make more money investing their capital then making loans. The Fed is holding the interest rate low to spur economic growth, but they are coming to realize they have go too low for too long. If the Fed changed the prime rate to 7 percent the price of gold would drop 30% in a month, banks will be willing to lend, the dollar would gain against other currencies, and all serious talk of inflation would go away.

The Fed won't do that because theory says increasing that rate hurts business. That's only true because of the huge regulatory burden standing in the way of any business wanting to go public. The solution is to put what's left of the stimulus money into low interest loans for small businesses such that the interest rate is partly determinate by the number of employees they add in the next two years. That would free up the Fed to increase the prime interest rate to even 8 or 9 percent. The price of gold would drop by 50% if the prime rate went to 9%.

Don't worry if you are holding gold. Doing something like I described requires out-of-the-box thinking and the Obama administration is hopelessly stuck in the box. Then again, the Fed is independent and could increase rates on their own.

Gold does not increase or d... (Below threshold)
JustRuss:

Gold does not increase or decrease in value the way some people think it does. All that gold does is secure your money at the current rate.

There is an old saying the "An ounce of gold will buy a rich mans suit." It was true a hundred years ago and it is true today. That suit that costs $1000 today would have cost $10 back then. When you hear that the price of gold has gone up 300% in the last few years or something to that effect, that is actually the inflation of our dollar at work.

Now: As for the entire world wanting to see the dollar fail and move to a new currency. It seems unlikely to me that it will actually happen unless the United States is a major player in the idea.

Countries like China and others that hold large amounts of debt would NOT want to see the dollar completely lose its value. Likewise in other countries if our dollar goes down then the price of things like automobiles will go down as well meaning that products made locally will cost more than those imported from the US. Once again, other countries do NOT want this to happen. They enjoy the high prices they can get by exporting to the US and the trade deficit that currently exists in their favor.

If however the dollar does collapse (remember my comment about the US being one of the major players?) then we are in serious sh**. I don't think it will actually happen (Don't attribute to malice what is more easily attributed to stupidity) but if it does we are all screwed anyway. At that point we will be the USSA already and ready to join an American Union, possibly with an Amero as the new currency shared by Canada, US, Mexico and maybe even countries further south like...Honduras, Venezuela, Guatemala, Brazil...

Aren't conspiracy theories with just enough reality to make them scary FUN????

A link to the sources of yo... (Below threshold)
Victory is Ours:

A link to the sources of your facts and quotes would would be helpful.

Vic

When you hear that... (Below threshold)
Mac Lorry:
When you hear that the price of gold has gone up 300% in the last few years or something to that effect, that is actually the inflation of our dollar at work.

Gold is like any other commodity and it's price is set by market forces. We saw how irrational exuberance inflated housing prices all out of proportion to market fundamentals. What we are seeing in the gold market is irrational gloom about the U.S. economy and it's currency. The dollar certainly hasn't undergone 300% inflation in the last three years. If anything, it's suffering deflation within domestic markets and imports from China, which has once again pegged their currency to the dollar.

If you look at the total money supply including virtual money, it's shrunk by 3 trillion dollars in the last 18 months, which is what's causing deflationary pressure on the dollar (lower prices and lower wages). If the Fed starts increasing interest rates people who have purchased gold based on irrational gloom pricing will take a blood bath. As soon as the numbers show the economy is growing you can expect the Fed to start that process.

I always get a kick out of the guy trying to sell gold on TV when he says gold has never been worth nothing. Well that's true for dirt as well.

I admit to my numbers being... (Below threshold)
JustRuss:

I admit to my numbers being fudged but the basics I stand behind. I do agree that demand for gold can also cause the price to go up, however it will not be worth Zero until you can produce it for free. Hell people buy bottled water when there is a water fountain in the store.

There is probably a demand factor in the current price, and I fear another Government gold grab to get themselves out of this mess but then again, having the currency backed by gold instead of by the word of some guy at the Treasury sounds good too.

Either way there needs to be a massive reset in this country, it can either happen slowly, or it can happen quickly. Over 10 years they could reduce the supply of paper money in the system in a managed defaltion scenario. Or they can let the dollar die or be crippled and reset to some new global currency.

I doubt China would accept the US going bankrupt on its Trillions in debt though.

Yeah, I want links and proo... (Below threshold)
Victory is Yours:

Yeah, I want links and proof! You know, stuff I don't actually provide, myself, unless I can find it on a whacko left-wing site that fabricates their own "quotes" and "facts".

Over 10 years they... (Below threshold)
Mac Lorry:
Over 10 years they could reduce the supply of paper money in the system in a managed defaltion scenario. Or they can let the dollar die or be crippled and reset to some new global currency.

As I've been explaining, the concept that the idea that the money supply is "paper" money plus demand accounts is obsolete. In this age of stock based 401k retirement accounts, home equity credit lines, and the rapid electronic transfer of funds in and out all these forms of wealth we have to think in terms of virtual money. When irrational exuberance resulted in soaring home prices, which owners accessed through equity loans, that increased the virtual money supply just like the government printing money dose. It's the same when irrational exuberance increases the value of stocks far beyond what the market fundamentals support. Here's a link to an article that explains some of this and puts dates on it.

Before the stimulus bill was passed that virtual money supply contracted by over 4 trillion dollars. Even if the government printed up 1 trillion dollars (40 billion $100 dollar bills) and put them in circulation, the virtual money supply would still be down by 3 trillion dollars. That's puts deflationary pressure on the dollar. That's why there's been near zero inflation this year. People don't have as much money as they had 18 months ago.

The reason the dollar is down against other currencies is because of the unprecedented near zero interest rate the Fed has set. The reason gold is up so much against the dollar is because of this record low interest rate and the irrational gloom fostered on the public by the sellers of gold and other's looking to make a quick buck. The Fed is waiting for a signal that the economy is growing before they increase interest rates, when they do, depending on how quickly they raise it, you'll see gold prices decline slowly at first and then crash as the market fundamentals take over from irrational gloom.

Then you'll hear stories about people who took what was left of their retirement savings after the stock market crash and invested it in gold only to have it crash on them again.

Of course, I could have it all wrong, so everyone needs to do their own research.

Banks have completely sh... (Below threshold)
James Cloninger:

Banks have completely shirked their obligations under the TARP bailout and are refusing to lend more money to individuals and businesses. They have simply taken this money and deposited it with the Federal Reserve or invested it in equities markets for superior returns. Regardless, we see that credit is diminishing rapidly. Over the summer, consumer credit plummeted by over $40 billion and credit card spending fell by over $30 billion.

Hope they enjoy that influx of cash. I paid off one of my credit cards last month and closed it, and the other one will be paid and closed by the end of the year, and I moved my money from Chase to a credit union.

Enjoy that TARP money, guys.

A link to the sources of... (Below threshold)
James Cloninger:

A link to the sources of your facts and quotes would would be helpful.

Vic

Why hello, Mr Pot, this is Mr Kettle. What colour am I today?




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