Charles Hugh Smith - the US & USD will still be kings. Discuss.

Q

quarterounce

New Member
Here's an article with a different opinion from ones of most gold&silver bugs. I really like to challenge my current beliefs to be more prepared for what's coming.

That Grand Narratives based on short-term trends are often wrong should not surprise us.

Two of the most durable and least-questioned narratives of the past 15 years are:

1. The world is becoming multipolar, meaning that rising power centers such as the BRIC nations (Brazil, Russia, India and China) are expanding their share of the global economy, at the expense of the U.S. and to a lesser degree, Europe and Japan. In sum: the U.S. is no longer the dominant superpower, but merely one power among many.

2. The U.S. dollar is in a long-term decline due to money-printing by the Federal Reserve and the world's desire for an alternative to the dollar as the world's default reserve currency.

Having written extensively on the complex dynamics of currencies (in particular, the strength of the U.S. dollar) since 2011, I am skeptical that these two narratives are correct for the simple reason that the dynamics do not align with these results.

Why the Rising U.S. Dollar Could Destabilize the Global Financial System (November 13, 2014)

What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012)

Could the U.S. Dollar Rise 50%? (January 12, 2011)

I suspect the exact opposite is about to unfold: the dollar (USD) will rise another 40% to 50% (if not more) in the coming years, and as a result the U.S. will be left as the unrivaled superpower, financially, economically, militarily and geopolitically as its rivals suffer the consequences of the destabilizing dynamics that are just starting to unfold.

Preparing to pen this essay on currencies was a painful exercise, because I had to read numerous commentaries to get all the threads aligned.

Here is the basic dynamic that is currently playing out globally:

Rather than address the structural problems revealed by the Global Financial Meltdown of 2008-9, central states/banks responded by increasing the supply of credit and money, and lowering interest rates to near-zero.

Since writing down all the bad debt in the system would have taken down the big banks that were central to the world's financial systems, the central banks enabled debt to be rolled over at lower rates and new credit to expand.

But these policies created an enormous global carry trade, in which financiers and institutions borrowed trillions of dollars and yen on the cheap and invested the borrowed money in emerging-market periphery economies with much higher yields.

As long as the Fed was issuing money to invest in peripheral nations and the dollar was declining, this trade was low-risk and profitable.

But, once the Fed tapered its $1 trillion-a-year QE money issuance, the emerging market/periphery nations' economies suddenly took a nose-dive, as the flood of money into their financial systems started drying up.

As the USD started rising, the carry trade became less profitable and threatened to become a losing trade.

Japan's 40% devaluation of the yen introduced another risk, as the yen's decline cut profits when converted to dollars. This matters because 2/3 of the emerging-market debt is denominated in USD.

Here's what's happened beneath the surface: the central bank policies that have fueled "risk-on" global carry trades since 2009 have not addressed any of the structural problems that led to the 2008 global meltdown; all they've done is transfer the risk to the foreign-exchange (FX) market, which dwarfs the global stock and bond markets.

In effect, the central banks have inflated a new risk bubble in currencies, and these risks are only now becoming visible as the dollar's rise starts destabilizing commodities and periphery currencies.

There is a powerful positive feedback to this risk-off dynamic: as emerging market currencies decline and the USD strengthens, the incentives to convert periphery assets and cash into USD only increases. As the periphery currencies weaken, the urgency to preserve capital by selling periphery assets and buying dollars greatly increases.

In response, the periphery's central banks are forced to drastically raise interest rates to offset the drop in their currencies. This constriction of lending will push their economies into recession, further depressing their currencies and increasing the flow of capital into dollars.

This dynamic will increasingly lead to currency crises, which quickly blossom into political crises that then led to geopolitical crises as governments are delegitimized by the sharp decline of their currencies.

There are no winners in this domino-like destabilization of the global economy except the U.S. Japan is obsessed with importing inflation by devaluing the yen, which is in turn destabilizing Asian exports and currencies. China's currency is pegged to the dollar, so it rises along with the dollar, crushing Chinese competitiveness. China has little room to maneuver within the peg to the USD, and ending the peg introduces a new set of uncertainty and risk.

Europe cannot be the winner as Germany's exports crumble, and the carry trade turns against everyone borrowing in dollars and investing the money in other currencies.

That Grand Narratives based on short-term trends are often wrong should not surprise us.
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After reading the article, I was left with some questions. I'm interested how the US will cope with let's say 50% stronger dollar. The payments from the 18 trillion debt become 50% heavier, the tax revenues consist of 50% less dollars, which in combination is a knockout for the budget. The US companies become way less competitive on global market. And, when amidst global havok the derivatives blow up and the too big to fail banks will have to pay up (remember the 303 trillion the US taxpayers are on the hook for since dec 2014?), how will the dollar keep strenghtening if the fed will have to print money to fill ten/hundred trillion $ holes?

Does this guy have a point? What do you think?
 
Ummmm.

No.



Courtesy of Sovereignman.com

... introduced in the US House of Representatives last weekResolution no. 41.


Whereas the Federal Government is operating at an annual deficit and is increasing its outstanding debt every year;

Whereas the Federal Government, as of January 2015, is carrying more than $18.0 trillion in debt, of which $13.0 trillion is owed to the public and $5.08 trillion is owed to Social Security and other trust funds;

Whereas foreign governments, individuals, and corporations as of October 2014 own 47 percent of Federal debt held by the public;

Whereas Social Security's unfunded liabilities in 2014 are $10.6 trillion over 75 years and $24.9 trillion over the infinite horizon;

Whereas the Federal debt held by the public is expected to increase by more than $7 trillion from 2014 to 2024 according to the Congressional Budget Office;

Whereas more than 16 percent of the entire Federal budget goes directly to States and local governments;

Whereas more than 22 percent of total State and local government general revenue comes from the Federal Government according to Census Bureau's latest Annual Survey of State and Local Government Finance;

Whereas several State and local pension plans are expected to fully exhaust their funds within ten years.

Resolved, That it is the sense of the House of Representatives that
(1) the Federal Government should not bailout State and local government employee pension plans and other post-employment benefit plans; and
(2) State and local governments should immediately institute reforms to their employee pension plans, including replacing defined benefit plans with defined contribution plans.

http://www.gpo.gov/fdsys/pkg/BILLS-114hres41ih/pdf/BILLS-114hres41ih.pdf
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A stronger dollar would not affect tax receipts 50%. A stronger dollar would make imports much cheaper and the consumer is 70% of the US economy. Cheaper oil is also helping the US consumer. To paraphrase Mark Twain, the reports of the USDs & US economy's deaths have been greatly exaggerated.
 
As long as China do not become the new super power i'll be happy for the U.S to keep their heads above water.
 
TheEnd said:
As long as China do not become the new super power i'll be happy for the U.S to keep their heads above water.
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China cannot be a superpower without a strong military and they don't have one yet.
 
The current obsession with U.S. debt and its likely effect completely overlooks what is going to happen before that little chicken comes home to roost.
It is true that the U.S. dollar is going up, up and up simply because the debt of a lot of other countries is insanely higher than U.S. debt, combined with dead currencies walking, means the flood of capital is going to hit the U.S. shores like a tsunami.
The net effect of this rise is a skyrocketing stockmarket which the government will try to tame by raising interest rates to try stem the flow of capital. This flow of capital is what will eventually turn the U.S. economy downwards as its exports are going to be hit hard. It is the exporters that will pressure the government to raise the interest rates to try gain some advantage from a weaker currency. This will amount to nothing because the point that will be completely overlooked is the fact that it is external forces that will drive the currency through the roof and the stockmarket. Too many focus on the domestic conditions....i.e. debt, unemployment etc, etc but they have been blinded by what is actually happening.
 
tolly_67 said:
The current obsession with U.S. debt and its likely effect completely overlooks what is going to happen before that little chicken comes home to roost.
It is true that the U.S. dollar is going up, up and up simply because the debt of a lot of other countries is insanely higher than U.S. debt, combined with dead currencies walking, means the flood of capital is going to hit the U.S. shores like a tsunami.
The net effect of this rise is a skyrocketing stockmarket which the government will try to tame by raising interest rates to try stem the flow of capital. This flow of capital is what will eventually turn the U.S. economy downwards as its exports are going to be hit hard. It is the exporters that will pressure the government to raise the interest rates to try gain some advantage from a weaker currency. This will amount to nothing because the point that will be completely overlooked is the fact that it is external forces that will drive the currency through the roof and the stockmarket. Too many focus on the domestic conditions....i.e. debt, unemployment etc, etc but they have been blinded by what is actually happening.
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I agree with a lot of what you wrote, but consumer spending is 70% of the US economy and cheaper oil will offset a lot of any export weakness. Raising interest rates strengthens a currency, so raising interest rates would be the last thing exporters would want.
 
ryan71 said:
The bigger they are, the harder they fall.
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The bigger they are, the more momentum they have. But when they do eventually fall, they leave a giant crater. Maybe future generations will be digging up the economic dinosaurs of today and wondering about the tiny brains that controlled these massive, lumbering beasts.

hmmm... started to ramble on a bit there :)
 
I also hear a lot of talk about 2% inflation lately. The lead up to QE4?....... Why not make QE4 at consumer level? Rather than handing out money to banks they could just give it to consumers, this would directly increase spending and inflation thus avoid the deflation.
 
How long will the price of oil stay at such a low price?

Will the low price of oil mean that a lot of oil companies will not be able to keep fracking for oil in the USA because it will not be economically viable and the banks that have lent billions of $$$ scramble to get their money back.

IMO the price of oil is likely to go up fast again by the end of the year.

If oil doesn't rise, it will mean that the world is in a recession and that will include Australia.

What do SS MEMBERS THINK, up or down by the end of 2015??

Regards Errol 43
 
The reason I brought up this topic, is that there are mainly two ways the global crisis can go money-wise:

1)USD gets hyperinflated, BRICS bring up an alternative: Yuan/Gold-backed something/Yuan-powered SDR/whatever. Extremely favorable to PMs.
2)The USD remains the last man standing. Capitals flee to the dollar. Bad for PMs.

Judging by recent american geopolitic moves, I believe they want to carry out the same trick they did in 1944 - be the only man standing, (or the last one to fall) to keep their domination. Destablilization of the Middle East, Europe (through Ukraine), Central Asia is probably next. If the dollar keeps strenghtening, it will force the foreign capital to flee to the USD and the US, it won't be a walk in a park for the US though, b/c big deflation soars debt payments, shrinks taxes etc, but maybe, there is a possibility of the US still feeding itself at the expense of the world for some time (nothing new) when the world capitals flee to them from shattering emerging markets, Europe, etc. How viable is that possibility? That's the question.
 
Not sure for how long, but the USD will be the last man standing. That much has become obvious in the last year. Capital is already fleeing to the USD
 
This last man standing thing is something I have been slowly coming around to. For so long I expected the hyperinflation senario........ untill I realised how a tiny number of decision makers direct a huge % of global wealth. Not just in the sense of the top 1% having over half the worlds wealth, but more in the aspect of the investment bankers entrusted with people's savings, pension funds etc, not to mention the CIA's meddling and its effects on foreign economies.

If the USD can hold its own against the other currencies while printing at full steam then surely there is more wealth moving into USD than dollars coming from the printing presses. And its not like interest rates and QE are their only tools, surely with the US military and economic dominance they shouldnt even need to talk about jobs? Why not just have the FED and CIA work together to scare the money from any country who's currency threatens to rise back to good old safehaven USD's, re-label their QE program's as welfare.... hand it out to every level of the US economy from banks to importers, retailers to individuals and openly pillage the world with no need to work outside the consumption sector.
 
I wrote above that the scenario with the USD still standing will be bad for PMs. On second thought, after a lot of currencies fall victims of the supercrisis (imagine lots of currencies actually being destroyed, not like the walk in a park in 2008), even if the USD will stand its ground, mistrust in fiat currencies and fear of USD falling for the same reason other currencies will be dying (mad debt) will push some people to PMs. And the 'last man $tanding' won't be able to stand for long, in the next step, the USD hyperinflation scenario, PMs will be way more valuable.
 
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