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Fed primes printing presses, U.S. dollar skids
Email story


Thomas Walkom

Think of the world economy as resting on a three-legged stool. The first leg, representing the financial system, is riddled with termites. The second, representing the real economy, is sawn half through. And now the third leg, the international currency system, has begun to wobble.

That's the significance of yesterday's abrupt slide in the U.S. dollar. It fell against the euro, the Japanese yen, the British pound and the Canadian dollar.

In fact, it slid against just about every major currency.

The reasons were fairly straightforward. Currency is like anything else. Its value depends largely on scarcity. If a central bank prints a lot of dollars, the value of those dollars falls – both against goods (that's called inflation) and other currencies.

These days, the U.S. Federal Reserve, that country's central bank, has been printing a lot of dollars. Using what it calls quantitative easing – that is, printing dollars to lend money to worthy borrowers – the Fed has more than doubled its so-called monetary base over the past year.

Two days ago, the Fed announced it was ramping up its printing presses in order to buy about $1 trillion (U.S.) more in assets, including $300 billion worth of U.S. Treasury bonds.

When a central bank starts lending its own government large amounts of newly minted cash, it's getting perilously close to what economists call monetizing the debt – paying for public spending by printing money.

Given the massive, $1.75 trillion deficit that U.S. President Barack Obama is proposing to run this year, it's not surprising that his country's central bank would want to help out. For governments, monetizing the debt is much cheaper than borrowing. And, at times, it's the right thing to do.

Both Britain and Japan have announced that their respective central banks are pumping up the money supply in part to monetize government debt. Yet their currencies remain relatively strong.

The problem for the U.S. is that the value of its money rests on a slender reed. Using normal economic criteria such as the current account balance (the difference between inflows from abroad and outflows), the greenback is already significantly overvalued.

Indeed, until the financial markets began to unravel last fall, the American dollar was in decline.

But last fall's financial meltdown sent investors scurrying for a safe place to park their funds. To most, the safest assets in the world appeared to be U.S. Treasury bills denominated in U.S. dollars. That sent the greenback up again.

Now, it seems that at least some of these investors are changing their minds about the dollar. They fear inflation and depreciation, both of which would lead to losses for U.S. dollar holders, and are searching out new safe havens.

Yesterday, the price of gold – the world's traditional hedge against inflation and dodgy currency – hit a six-month high.

Probably matters will stabilize, at least temporarily. We're not talking Germany 1923 here. Americans are not about to require wheelbarrows full of cash to buy one potato.

But the writing is on the wall. The most widely traded currency in the world is wobbly. At a time when everything else is under attack, this doesn't help.

Indeed, a precipitous decline in the American dollar could set off a round of competitive devaluations as other countries try to protect their industries from what would then be cheaper U.S. imports. That's the currency equivalent of a trade war.

world wakes up to AMERICA and what it stands for.

Gregg: 'This country will go bankrupt'
Posted: 03:41 PM ET

From CNN Associate Producer Martina Stewart


GOP Sen. Judd Gregg warned Sunday that the country might be headed for a fiscal crash if spending isn't controlled.
WASHINGTON (CNN) – Even though he was almost a member of the new Obama administration, New Hampshire Republican Judd Gregg Sunday slammed President Obama’s approach to handling the country’s fiscal outlook.

Watch: Gregg warns of fiscal 'crash'

“The practical implications of this is bankruptcy for the United States,” Gregg said of the Obama’s administration’s recently released budget blueprint. “There’s no other way around it. If we maintain the proposals that are in this budget over the ten-year period that this budget covers, this country will go bankrupt. People will not buy our debt, our dollar will become devalued. It is a very severe situation.”

Gregg, known as one of the keenest fiscal minds on Capitol Hill, also told CNN Chief National Correspondent John King that he thought it was “almost unconscionable” for the White House to continue with its planned course on fiscal matters with unprecedented actual and projected budget deficits in the coming years.

“It is as if you were flying an airplane and the gas light came on and it said ‘you 15 minutes of gas left’ and the pilot said ‘we’re not going to worry about that, we’re going to fly for another two hours.’ Well, the plane crashes and our country will crash and we’ll pass on to our kids a country that’s not affordable.”


Despite his criticism of Obama’s approach to the long-term finances of the country, Gregg praised how Obama’s top economic lieutenants are trying to get the sick banking system back to health.

“They’re doing the right things,” Gregg said about embattled Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers. “They haven’t done it as definitely as they should have . . . but they are moving in the right direction and the Fed is moving in the right direction,” Gregg said on CNN’s State of the Union.

Gregg broke ranks with some of his fellow Republicans and said he did not think Geithner should step down from his Cabinet post.

On the recent scandal of more than $150 million in bonuses paid to the AIG employees whose work pushed the financial giant to the brink of collapse, Gregg criticized the plan afoot on Capitol Hill to tax those bonuses at very high rates. But, Gregg pointed out that the Obama administration and, to some extent, the Bush administration before it failed to “discipline” the bonuses paid out by AIG, which is now 80 percent owned by the federal government.

The Republican senator was appointed to be Obama’s Commerce Secretary but then bowed out unexpectedly, citing policy differences with the Democratic administration.

ol skool...great article

like my new thread of America being the next banana republic, exporting only one thing....worthless dollars, this to shall come to pass...be it a few months from now or early next yr.

Two things to keep in mind, the assination of Obama, and increased conflict with china, highly probable outcomes and something to think about.,

GOD BLESS "BANANA REPUBLIC"

goodluck

Sorry .......what's the default risk?

its really sad to watch 300 million americans buying power vanish right before there eyes and 90% of them dont even know its happening

This guy is so proud of his "degree" I doubt that he ever heard about the “rule of diminishing returns”. It’s ok to use leverage to expand the economy, but only to a certain point. After you breach this point your interest eats your growth. It does not matter if we are talking about country, corporation, or single individual.
Excess of debt will force anyone into bankruptcy. Once they will inject another trillion into the economy things might start look better until inflation start rising, so is the interest rate. Whoever will be having lots of debt will collapse.
The only reason why US dollar is still strong is because other countries cannot allow it to fall, because they are going to lose TONS of money. That’s why China, Russia, Middle East etc is trying to get rid of the US currency. Terrorist won’t destroy US, their own politics and people will.
I know people driving Mercedes, BMW’s and other nice cars here, who are barely making ends meets. Many should ask themselves, would they be able to sustain their lifestyle if credit system was removed, and they had to pay back all the money that they owe (exclude mortgages at least.) If you can, then you are in a good financial shape, if not, you better start working towards reducing debt levels.

_________________
Dmitri Ivanov
Mortgage Broker
Lic # M09000265
Office: 905 876 4751
Cell: 905 691 6706
Fax: 905 693 1858
email: dmitri.ivanov@migroup.ca
www.home-mortgage-advice.com

I'm looking for advice and I think you guys are totally on the money in this thread with your predictions. Let's say you had 50K in non registered funds that has really not grown over the past 8 years. What would you do?Redeem and use to partially pay off mortgage, invest in something else, keep it safe in a GIC?

Thx

I don't know about others, but I find this scary and disgusting.... Socialism ruined USSR, destroys Europe as we speak and USA falls into the same trap.

_________________
Dmitri Ivanov
Mortgage Broker
Lic # M09000265
Office: 905 876 4751
Cell: 905 691 6706
Fax: 905 693 1858
email: dmitri.ivanov@migroup.ca
www.home-mortgage-advice.com

socialism didnt kill russia, greed did as it has ruined america.....true socialism works....compassion for the poor and raising thier standards of living is what we need for survival....capitalism is a failed model....look in your own backyard in the medical industry where kick backs and bribes are being thrown at doctors for preferential treatment....when greed and selfiness enter the equation....then its everyman for himself....

w

take a peek


http://www.europac.net/commentaries/whom_bell_tolls

death tax is disgusting. Your estate gets slashed in half instead of working for your children to give them something when you die for them, their family, and their children.

great interview on capitalism.....

http://www.youtube.com/watch?v=ynxNjE_9ivg&NR=1


stern and moore

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What is scary is the fact that U.S. Debt is worthless. China has figured this out. U.S will create conflict in order to wipe the slate clean

W.W III is the end game


Goodluck to us all

SO, what did I decide to do? Run and hide? or BUY BUY BUY???
The same index closed today at 13,402. that's roughly a 67% gain since your post.
or an annualized ROI of over 30%.

Moral of the story?

Shout about the end of the world all you want, and at one point you might actually be right, but in the meantime, you're going to miss out out every upswing that happens while you're waiting for the sky to fall.
By not making 67%, you basically lost 67% [ok 40.3% if you want to get technical], worse than any investment loss most of us will ever have in our lifetimes.

I understand and respect your viewpoint, as I assume you do mine - we both have valid points somewhere in our arguments but I'm smiling about my investments, and selling them off to move them into something else.
67%.. on a market index in 2 yrs. That's AWESOME
.
If world war 3 is indeed the end game, and a fallout cloud looms overhead someday, I would hate my last few days to be spent running around saying "I told you so!" - I'd much rather be enjoying my family and investments that have paid off while it lasted.

Word of the day. "Unhinged"

The only folks unhinged from society are our fellow political hacks.
The people will be heard in any society especy the totalitarian state of the U.S.
People will revolt and you are witnessing it first hand down south.

Its a wake up call to all politicians.

Let us pray.mmmmmm. Sorrry can't do that anymore,
How about a moment of silence.


W

Meanwhile back at the ranch, ROberttGates,the. U.S. Secretary of defence

Happens to be talks with chinese leaders in Beijing.

WHy is he there.? To create conflict and no other reason


Now all of a sudden the U.S. Is "concerned" about china and there capabilities

Creating conflict is there only purpose

I know that most of you can see beyond the spin and ficticious numbers governments ram down your throats

Who here actually thinks the rate rate of infation is 2 percent plus minus.


W