Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Has the dollar started to collapse?
At the moment, Bernanke's huge expansion of the monetary base to buy long-term US Treasury bonds (QE2) is bringing the dollar perilously close to a collapse. In fact that collapse may have already begun, as shown by the near vertical line shown at the tail end of the chart below:
I explained why QE2 might cause a dollar collapse in a November 15 commentary (Will QE2 End in Disaster?). I wrote:
With the U.S. trade deficit sending dollars abroad at a $571.5 billion per year pace, the crash is inevitable unless private investors or foreign central banks step in to stop it. But what central bank is going to step up its dollar purchases at the moment? The European Central Bank is tied up with the upcoming default in Greece, possibly followed by defaults in Portugal and Spain. Japan has a recovery from an earthquake and tsunami to take care of. And due to QE2, the emerging market countries, including China, are already facing high inflation, which increased dollar purchases would aggravate.
If the dollar crashes to about 25% of its current exchange rate, the American standard of living would be cut dramatically, gasoline would be rationed, inflation would surge, U.S. interest rates would reach unprecedented highs and the world economy would slow dramatically. Bernanke would be forced to resign in disgrace and Obama would be trounced in the next election.
On the positive side, the crash would reduce the U.S. unemployment rate, balance trade, revive the American manufacturing sector and force U.S. federal government leaders to do some real belt tightening. The United States would be given a new chance to get things right. Hopefully, our future economic leaders will have learned to protect the three pillars of long-term economic stability:
Comment by Fred Fischer, 5/2/2011:
It seems to be the plan of our Gov to doso for some miss guided beliefe in the fall of democracy and the united states.
Comment by slp, 5/2/2011:
Bernanke is right, need to tackle unemployment first, the rest will simply follow into place. On the other hand, if unemployment continues to increase then we're in serious trouble, who will be bying the chinese goods?
Response to this comment by DG, 5/4/2011:
Comment by Tom, 5/2/2011:
Speaking of short term thinking. The dollar already did crash 25%. In fact it crashed 40% in the previous adminstration. The dollar is about where it was when Obama took over.
Response to this comment by Howard Richman, 5/2/2011:
Comment by zoot, 5/2/2011:
i simply don't agree, interest rate will have to raise to combat high inflation. "the cat is coming out the bag" and we will have to slash dod spenting by a 1/3 and impose small reforms on ssn and medicare. The trade deflicts that we have enjoy for decades are going to reverse or narrow significantly. As europe burns down from all the debt problems that it faces with pigs. America will still be a safe haven for investors not to grow an investment but just to preserve their money's.
Comment by Francis Bart Bertholic Jr, 5/2/2011:
let's hope that it doesn't come to that
Comment by DREW, 5/3/2011:
Pizza is really yummy
Response to this comment by Advance SEO, 2/25/2012:
Comment by Rob, 5/4/2011:
What happens if the dollars does go south and nearly everything we buy is made in China (iPhone, iMac, computers, printers, house hold goods etc. etc.)? Doesn't it hurt China too? It seems to me that we this would cause us to produce our own goods again and seek other ways of obtaining oil (South Dakota, Alaska, and the Gulf of Mexico).
Response to this comment by zoot, 5/4/2011:
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