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Has the dollar started to collapse?
Howard Richman, 5/1/2011

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:

DollarStrengthThruMay11.gif

I explained why QE2 might cause a dollar collapse in a November 15 commentary (Will QE2 End in Disaster?). I wrote:

2. Disastrous Effect. If foreign central banks don’t buy dollars, then the dollar will collapse, producing a severe cut in American living standards. The United States would experience inflation. Interest rates would skyrocket. The prices of foreign goods, including oil, would skyrocket.

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:

  1. Balanced trade.
  2. Balanced budgets.
  3. Balanced monetary growth.

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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:
Unemployment is up because we longer are the once industrialized nation of the past, and a large percentage of the country relies on our government for free handouts.  Everything you buy says, "Made in China," or "Made in Mexico."  More people are on food stamps, aka the EBT card, then ever before.  The dollar collapsing is imminent.  It's only a matter of time.  The U.S. has been bankrupt since 1914, which was one year after the Federal Reserve was signed into action.  Most people don't realize that the so-called federal reserve is no more federal than Federal Express.  People are too worried about reality TV and all the distractions the mainstream media reports instead of real life.  Just be prepared for when it does happen because SWHTF.  Good luck.


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.  

http://www.ritholtz.com/blog/wp-content/uploads/2011/04/dollar-index.png

Response to this comment by Howard Richman, 5/2/2011:
Tom, I apologize for changing my post after you had written your comment. In the first version, I emphasized Bernanke's short-term thinking. But then when I reread what he had said, he was basically arguing that he was thinking "middle-term" not short-term. Some people have been urging him to raise interest rates in order to support the dollar in the short-term. He is claiming that his actions will support the dollar in the middle term.  


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


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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:
China is heavily reliant on export to their number 1 trading partner.  The US.  In order to have competive advantage china most devalve its currency and use basically slave labor for consumer goods.  Why ??? more dollars they always want more dollars.  To buy big things: a company, land, resources.  Example Congress blocked the sale of unical to China.  They are new to game but they know how to play.




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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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