The Almighty Dollar

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After
last week’s thumping at the hand of all its major counterparts,
the dollar is looking to me like Charles Atlas’ 98-pound weakling
from the old comic book ads. Sand is getting kicked in its face
from every bully on the beach. Even the lowly yen, with its pacesetting
negative GDP (a negative 250% of the United States), is kicking
the dollar’s bootie.

When this rot
began to be exposed, I often reported that things had been turned
on their head in the currency world. Bad news for the U.S. economy
became good news for the currency. Why?

Basically,
risk aversion settled over the market. People and governments were
fearful. And since currencies tend to be considered risky investments,
investors avoided them. In short, the worse the news for the U.S.
dollar was, the more money flowed into it.

But you cannot,
under any circumstances, run contrary to the law of supply and demand
forever. It’s just impossible. Therefore, at some point, a
return to fundamentals reverses the current perverted trends.

And as of last
week, fundamentals have showed back up on the stage. For the first
time in a long time, investors are treating bad news for the dollar
as bad news for the dollar. So let’s take a peek here and see
what we have.

Initial jobless
claims rose again last week. This time to 637,000, which was higher
than forecast, and the previous week’s number was revised upward.
In addition, continuing claims for unemployment came in higher as
well – 16 straight weeks of increases.

The Federal
Open Market Committee also hung the markets out to dry. You see,
the Fed heads discussed the weakened condition of the economy at
their meeting. They also revised their economic projections for
2009 and 2010 lower.

Here was the
key. They DID NOT PURCHASE as many Treasuries as the markets believed
they would – part of the infamous quantitative easing. Now,
at first blush, we would be happy about that. But once we lift the
Feds’ curtain on this act, things are not what they seem. The
market’s reaction assumed that a less-than-stellar bond purchase
number portends that the Fed will have to purchase more later on.

At this point
all factions are feeling the squeeze.

The Feds know
they cannot continue to inflate as they have indicated. While runaway
inflation remains a threat, the bigger problem is whether or not
traders and investors (including the sovereign states who buy our
debt and support our spending addiction) will pull the plug on the
dollar.

If such massive
selling occurs, that only leaves them the option of perpetually
inflating the currency, since borrowing becomes out of the question.

Nobody wants
to be the last one out the door once that begins. As of now, the
Fed still has a little opportunity to actually control the hyper-inflation
scourge, but if they tip the scale just a bit too much and the selling
begins full force, control will be out of their hands entirely.

Interestingly,
the whole tenor of the minutes from the Fed meeting indicates that
the worst is still ahead. Yet Ben Bernanke and company are still
telling the public about “green shoots” – small signs
that things are improving.

Bill Bonner
shares a headline from Politico last week: “Obama Would
Regulate New ‘Bubbles.’”

Oh, the sheer
absurdity of it all! We have a government that doesn’t even
seem to know where bubbles come from. They don’t know how they
work. They don’t know why they keep inflating. They don’t
understand why you can’t deflate them slowly. In short, an
administration with a rudimentary understanding of economics is
confident it can regulate the next bubble – whatever it might
be.

But I suppose
that is the plan of all governmental types. Whatever doesn’t
work needs more regulation.

What we need
is to be left alone. The market has been, and remains, the most
efficient system for regulating itself. Is it perfect? Not in a
moral or theological sense. Not even in a fairness sense. The market
will make some men rich while impoverishing others. Many people
do not consider that “fair.” But it doesn’t matter.
The market does what it does, because it is the most efficient way
to do things. Regulation be hanged, the market will undo regulation
and tyranny, because free markets create free men. And on its way
to undo the foolishness of men, it will cause great inequalities.
Why? Because of the foolish restraints that governmental do-gooders
have foisted upon it in the name of “fairness.”

The ironic
thing is, bubbles are created by regulation. You can’t undo
them with more of the same.

Since the government
has had such a great track record with spending and credit, now
they want to get their greedy little paws into the credit card business,
too. Apparently, it’s not enough for them to control the major
banks, or the once monstrous auto industry. The heady days of markets
free from governmental interference are going the way of the dinosaur.

Our Senate,
by an overwhelming majority, passed a new bill that would dramatically
impinge on the credit card company’s policies to alter rates
and fees.

Now, I am not
going to bat for the credit card companies. Frankly, they have abused
people for years. As a younger man, I, too, enjoyed the pleasures
of free money being offered by these benevolent giants. Every time
my wife and I got a new card, we treated it like a raise.

Before long,
the handwriting was evident on the wall, and I didn’t like
what it said. So we got out. Don’t get me wrong, I still use
my credit cards. But they no longer own me. Yet the number of my
friends and relatives who are slaves to these things is atrocious.
In sum, I have no love loss for these companies and how they try
to enslave people.

But I will
stand and declare their right to do it as a free market entity as
long as people will keep applying. The fact is, if and when the
credit card companies get “out of hand,” the market will
rein them in. We don’t need the government to do it. They won’t
do it well anyway.

Meanwhile,
the Federal Deposit Insurance Corporation (FDIC) suffered its biggest
bank failure of 2009 last week. BankUnited FSB, Florida’s biggest
regional lender, performed its final curtain call. Having over $20
billion in assets and deposits, it’s the biggest flop of the
year, and the second biggest of the whole credit crunch (IndyMac
still has that award).

BankUnited’s
failure will take a $4.9 billion chunk out of the FDIC’s checkbook.
It is the 34th bank to fail in the first five months of this year
alone, compared to 25 for 12 months last year. A green shoot? Not
hardly…

So on the edge
of this knife, Big Ben and the Fed have to balance. That is, the
Fed has to sell $3.25 trillion in Treasuries to fund this years’
obligations between now and September.

If the markets
can absorb the U.S. issuance over the next 90–120 days…and
if it is done without driving up interest rates…and if the
economy begins to show signs of positive growth… then the stage
is set for a wonderful second act. (And Bernanke might win an Oscar!)
The dollar will return to strength. The market will continue, or
resume, a climb to the top – sensing that “everything
is coming up roses.” Refinancing will surge ahead. We may even
see significant job creation into the end of the year.

At that point
the Fed must begin to worry about inflation. Will the infantile
recovery be strong enough to fight off a bout with interest rate
increase flu?

I wouldn’t
bet the farm on that.

On the other
hand, if Treasury rates continue to rise as they already are, and
the Fed is forced into extensive quantitative easing to contain
them, then it may very well be curtains for the dollar. And the
critic’s reviews won’t be kind.

Earlier this
month, the dollar index fell below its 200 DMA for the first time
since July 2008, and has been falling ever since. Not long after,
the euro and sterling popped above their 200 DMA.

Of course,
there’s probably a good reason why. The world is beginning
to notice the U.S.’s monetary policies. Our rising deficits
are eclipsing Mount Washington. Those deficits are going to need
financing. And right now, the government doesn’t care –
it’s still behaving recklessly because it thinks people will
always be ready to buy its debt.

I wouldn’t
be so sure. Consider the credit rating of Great Britain. Standard
& Poor’s changed the outlook on the United Kingdom from
stable to negative. Now, that’s not the same thing as a rating
cut. But it does betray that the rating agency sees the nation on
the wrong path. Continue on that path, and the outcome is guaranteed.

It doesn’t
take an advanced degree in logic to apply the same principle to
the United States. Indeed, I have wondered if all this was orchestrated
for that purpose alone. It is far less damaging to downgrade a substantial
nation like the United Kingdom than it is to downgrade the world’s
reserve currency economy… the very definition of value.

But if it can
happen in the United Kingdom, the United States had better be prepared.
To that end, we heard Bill Gross, from PIMCO, the world’s largest
and most influential bond-trading firm, say that he believed the
United States would eventually lose their AAA rating.

That’s
scary stuff – but not all that surprising. After all, the administration
is predicting a $1.8 trillion budget deficit. Perhaps more.

And where is
GDP going? How much will it grow this year for all that fuel being
added to the fire? It’s like adding a cast of thousands to
a one-man show, just to try to give it a bigger billing. The expenses
become monstrous, but no more people show up to pay the admission
fee.

But
the directors just want to keep adding more actors. At that point,
the expenses of the show run absolutely in the opposite direction
of the income. Until soon, the producers default on their lease,
the curtain falls on the show and the affair is over.

When will the
U.S. show be over?

Hard to say.
But when your expenses are 650% of your income, it can’t go
on for long. Not only is the curtain falling, the whole theater
is collapsing around us. Better make sure you have a clear shot
at the exit.

In fact, some
U.S. businesses already are.

My home county
has a few decent-sized towns, but for the most part is still rural.
Our biggest claim to fame is a section of famous U.S. Route 1 –
the first route to run from New York to Miami along the East Coast.
On our section of Rt. 1 has an abundance of auto dealers. But recently,
the largest one put out one of those fancy electronic message boards.
The advertisement read:

“NOW TAKING
GOLD AND SILVER FOR YOUR VEHICLE DOWN PAYMENT.”

I’m pretty
sure they’d be just as happy to take it for the entire payment
as well. So who needs the U.S. dollar after all?

March
29, 2009

Bill Jenkins
is a church minister and owns his own contracting business.

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